Servias Ministries Blog

We have mentioned the precarious position the U.S. is in: high unemployment, artificially low interest rates, heavy use of stimulus dollars, and over-leveraged consumers.  Everyone in the investment community is expecting a “tipping point” to occur in the U.S. bringing forth the next financial crisis.  The only question is “when”?  Have you noticed the influx of movies about Greek mythology lately?  Could a U.S. sovereign debt crisis rise to mythical proportions?  This video is as much about the U.S. as it is the Greeks:

Before it’s over, people will once again seek Our Heavenly Father.  After all the promises of man have evaporated and there is nothing left, men will repent and seek the wisdom from Above.

A fundamental law of life is that growth uses energy.  This is true of an individual as well as a nation.  If you take away the energy supply of a person, they will cease to grow and begin to use any stored energy (fat) to sustain life until all the energy is gone.  Once the energy source is depleted, death arrives.  There are immense amounts of energy stored everywhere but the wisdom, knowledge, understanding, and skill to tap into those sources is not yet available to us.  “Atomic” energy is plentiful throughout the universe.  The sun is a great example.  However, mankind’s current paradigm depends on fossil fuels to support growth- oil & gas.  Current depletion rates of conventional oil fields is at an effective rate of 4 million barrels per day annually.  In three years, this is equivalent to Saudi Arabia’s total output.  We are not finding additional oil to offset this depletion rate.  Conventional oil peaked in May of 2005 and has never attained that level since.  Unconventional oil such as the tar sands in Canada have helped offset the decline.  Unconventional oil is much more expensive to extract than conventional sources.

Other sources of energy are being developed but the time it takes to bring them online is beyond the decline curve of the current energy consumption curve.  Price will make up the difference.  Increased energy costs will drag down economic growth and if the price spikes become severe, another recessionary dip is all but guaranteed.

World leaders continue to seek out “credible” sources that agree with their current view of an adequate supply of oil.  Those who do the research always seem to come to a different conclusion- peak oil.  Constituents do not want to hear “energy conservation”.  However, a shortage of oil will cause price spikes to occur and the oil companies will once again be demonized.  Let’s not be confused with the facts!

The U.S. will finally respond to the energy crisis by legislating less red tape for nuclear power.  Additional nuclear plants will be built and a bubble will form in the uranium mining sector.  Once again, the U.S. and China will be competing for resources.  With the world population anticipated at 9 billion by 2020, the resource wars will heat up to a fervor.  Legislators will give incentives for the citizenry to get rid of its gas guzzling SUV’s and further increase the deficits.  High speed rail powered by electricity will finally be at the forefront of national infrastructure spending while the airline industry will be focused on the wealthy and their travel plans.

The resource rich nations will draw the wealthy to their borders.  Those with depleted assets will see a dramatic shrinkage in their middle class populations.  in a paradigm shift of this magnitude, denial is the first phase of the shift and we are currently here.  I suspect another jump to $150 oil will bring us out of this phase.  The next phase is acknowledgement of the problem but people will attempt to operate under the old rules in an attempt to function using the previously successful methods of energy development thus wasting valuable resources. The third phase brings innovation and development of new ways of living and generating energy.  Embrace change, it’s coming.

Jesus brought a paradigm shift when He walked the earth.  Our Heavenly Father brought a paradigm shift when HE removed HIS glory from Shiloh, then Jerusalem.  The Scripture is full of paradigm shifts so we should not be caught off guard with the current shift in process.  This is one of the reasons for this website.

The following says it all:

John Smith started the day early having set his alarm clock

(MADE IN JAPAN )

for 6 am.

coffeepot
(MADE IN CHINA)

 
was perking, he shaved with his
electric razor
(MADE IN HONG KONG)

He put on a
dress shirt
(MADE IN SRI LANKA),

designer jeans
(MADE IN SINGAPORE)

 
and
tennis shoes
(MADE IN KOREA)

electric skillet
(MADE IN INDIA)

he sat down with his
calculator
(MADE IN MEXICO)

watch
(MADE IN TAIWAN )

to the radio
(MADE IN INDIA )

car
(MADE IN GERMANY)

 
filled it with GAS
(from Saudi Arabia )

and fruitless day
checking his
Computer
(made in MALAYSIA ),

He put on his sandals
(MADE IN BRAZIL),

poured himself a glass of
wine
(MADE IN FRANCE)

TV
(MADE IN INDONESIA),

 
and then wondered why he can’t
find a good paying job
in AMERICA

A ratings agency lowered its rating on Portugal by one notch to AA-.  In 2009, Portugal had a deficit representing 9.3 percent of its national income.  How does the U.S. compare?  The following charts would indicate that the U.S. is in worst shape than Portugal:

Our total government debt(excluding unfunded liabilities) is at 90%+ of our GDP and rising:

Expect the ratings agencies to lower the credit rating of the U.S.  I suspect there has been pressure by those in power to delay this eventuality.  This is no different than compelling the Financial Accounting Standards Board (FASB) to delay its rules concerning worthless debt on the books of banks carried at the original cost.

If sovereign debt’s rating is lowered, the interest costs increase.  The rating reflects risk.  The Federal Reserve has managed to keep the borrowing costs of the U.S. at an artificial low.  If the borrowing rate of the U.S. went up by 1%, the annual borrowing costs on the U.S. debt would increase by $140 Billion.  Last month alone, the U.S. deficit increased by $221 Billion, the largest monthly increase on record!  This will push the annual deficit above Portugal’s percentage.

Everyone knows that the globe is headed for another financial crisis, bigger than we have ever seen before.  Nobody knows when it will occur but once the music stops, the big money will quickly grab a seat and leave the rest of us standing.

U.S. bonds will have pressure placed on them by the bond market.  Inflation will  ramp up with commodity prices heating up.  Wages will not keep up since the unemployed workers will give up increases just to keep their job.

The Administration is inadvertently helping those of us investing in hard assets.  Their inflationary spending policy increases the price for commodities at a faster rate than other sources of income.   This is reflected in stock prices, dividends, and the price of the commodity itself.  All gold producers are making money at $1,100 gold.  $17 silver generates notable profits for the producers as well.  What other sector is receiving a premium for its product?  If you bought gold 265 days ago, your investment is up 17%

Sovereign debt downgrades will act as a warning signal of the impending crisis.  Be vigilant.

If Milan is successful, this could be the beginning of the domino effect:

You are a 62 year old baby boomer and buy a home in 2006 for $385,000 and today it is worth $200,000.  Your payments are now $2,333 per month (principal & interest) and probably $500 per month in taxes and insurance or a $2,833 house payment.  The following table shows the disparity:

(Assume a 5% annual increase in house value from 2010)

You will be 79 years old before your house is possibly back to its original value… if all goes well.  On the other hand, if someone else bought your house at its current value, their mortgage loan would be almost $900 per month less than your payment.  With rising healthcare cost for a baby boomer and the stress of a house payment of this size, expect defaults to continue to rise.  You are 14 years from a breakeven on the original cost of the house.

See: http://www.latimes.com/business/la-fi-walkaway17-2010mar17,0,2149033,full.story

The ego is a dangerous thing.  So is mass delusion.  We all saw it happening but greed prevailed at all levels.  People who thought they were “entitled” to a higher standard of living without the resources to pay for it were duped by Wall Street into thinking they could afford this new standard of living.  Wall Street bonuses were more important than understanding the underlying worthlessness of the instruments they were peddling.  What a tangled web!

Our Heavenly Father knows best.  If you are going to purchase sizeable assets such as houses and cars, ask Our Heavenly Father and don’t buy until you hear from HIM.  If you can’t hear him, it’s simple… don’t buy.  Isn’t it more important that you buy the right house or car than to buy the wrong one and live with the consequences?

“I can’t hear THE LORD.”  Well, seek and ye shall find.  Don’t think that a 30 minute quiet time is the essence of seeking.  Study, meditate, ponder, immerse yourself in the Word of GOD and be “baptized” in HIS Word.  HE created you and will honor your intent.  Your ego will fight you on this, expect it.  Your mind is suppose to be your servant, put it where it belongs.  Let your spirit take the lead for once and for all.  When this happens, you won’t be one of those in the “default” category.

Debt deflation is occurring in the residential and commercial real estate sector.  For most, the house is their largest asset AND their largest liability.  In the U.S., the residential market is dismal.  In our neighborhood, houses typically sell in weeks but there are a couple of listings in immaculate shape that are not moving.  The mood of borrowers as shifted from reckless expansion to fearful contraction.  The days of “flipping” a real estate property are over.  Those that did not get out before the summer of ‘08 are watching their gains wither away.

On the other hand, monetary inflation is alive and well.  Since there are no forced restrictions on monetary expansion, the Fed is using its one tool to slow the economic slide in the U.S.  The one disrupter is time.  Over 700 banks are on the FDIC watch list and more failures are on the way.  The FDIC itself will be bailed out by the U.S. Treasury.  Time allows banks to invest their cheap money and make a spread that flows to net income and ultimately capital.  The Financial Accounting Standards Board (FASB) has been accommodating and relaxed its requirement to properly value the loans on the balance sheets of banks to their realistic lower value.  In the strictest sense, this is fraud.  Allowing this misrepresentation to occur in publicly traded entities puts the investing public at risk.

Ben Bernanke will do everything in his power to keep deflation from occurring.  This sets the stage for higher commodity prices thus I have included the following for informational purposes only.

Gold has been in a trading range of consolidation.  I believe this is good for this will provide a good base for the next leg up.

As you can see by the chart, the long term trend is up.  Gold and silver are the only investments without an attached liability.  China continues on the prowl to increase its gold reserves and will ultimately become the largest government holder of gold.  Stability is best achieved by having substantial gold reserves backing a country’s currency as history has shown us time and time again.

Gold producers are booking substantial profits whereas many other sectors are in the red.  The general investing public will figure this out soon and will cause the gold stock to achieve new highs.  Overall gold production is down thus the senior producers will focus on quality junior producers’ reserves and will open the checkbook to acquire them.  For those with patience, the reward will be substantial.

The silver chart shows more volatility but tracks well with gold.  The silver producers are also producing notable profits and time IS on their side.

I’m asked “I don’t have much money so how can I protect myself if the financial crisis worsens?”  I’m not a financial advisor but I will share with you what I did for my kids.

1. I opened up an Internet trading account with Scottrade. (There are others out there as well)

2. As our budget allowed, we put a $100-$150 in the account on a periodic basis. (50 Bucks will do as well)

3. We bought gold and/or silver stocks with whatever money we had in the account.  We did not worry about the price of the stock on the day of the purchase, this is “dollar cost” averaging.

4. If the stock pays dividends, we included that cash in our next purchase

What stocks did I consider?  (See Disclaimer below)

Goldcorp (Symbol: GG) has been a favorite of mine for some time.  It is a senior producer and pays a dividend.  I like dividends, they beat the 0% the bank pays for your money.

Silvercorp (Symbol: SVM)  They pay a dividend as well.  These means their cashflow is sufficient to distribute money back to the stockholder.  Their cost per ounce of silver: Total cash cost for silver adjusted for by-product credits 2009: ($2.77)    2008: ($10.99)  2007: ($7.25)   Their byproducts pay for the cost of mining.  It is my understanding that they are the lowest cost silver producer in the world.  Gimme some of that lovin’!

Minefinders (Symbol: MFN) just announced their first profitable quarter in the company’s history.  See: http://finance.yahoo.com/news/Minefinders-Announces-2009-iw-1972541723.html?x=0&.v=1

U.S. Gold (Symbol: UXG)  I like Rob McEwen (CEO) who has put a sizeable portion of his wealth in the company: See: http://www.usgold.com/presentation/20100309_pdac/

Mag Silver (Symbol: MVG)  They have a lot of potential and are higher risk because they are mainly in the exploration phase.  See: http://www.magsilver.com/s/Home.asp 

Since gold and silver have been in a trading range, the stocks are priced accordingly.  I don’t worry about being unable to buy 100 shares at a time.  U.S. Gold closed at  $2.88.  30 shares plus the $7 commission puts the cost just less than $100.

Energy stocks with dividends include Chevron (CVX) and Penn West Energy (PWE).  These are higher priced stocks so one would need a little more cash to begin accumulating them.

Do I believe my kids should place all their savings in stocks?  NO!  You still need a savings account to handle unexpected circumstances that arise.  Investing in stock should be in addition to a saving plan not a replacement.  Stock investing will be emotionally challenging for most people.  Often, the day after I buy a stock, its price goes down.  However, I am investing for the long term, not the next day.  Are these stock guaranteed winners?  No, any investment has risk as well as reward.  Invest at your own risk. Caveat emptor!

Disclaimer:

The materials on this website have no regard to the specific investment objectives, financial situation, or particular needs of any visitor. This site is published solely for informational purposes and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

References made to third parties are based on information obtained from sources believed to be reliable, but are not guaranteed as being accurate. Visitors should not regard it as a substitute for the exercise of their own judgment. Any opinions expressed in this site are subject to change without notice and Servias Ministries, Inc. is not under any obligation to update or keep current the information contained herein.

Servias Ministries, Inc. and its respective officers and associates may have an interest in the securities or derivatives of any entities referred to in this material. Servias Ministries, Inc. accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a licensed, qualified professional before making any investment decisions.

“Complex societies in the ancient world could collapse when the marginal costs of complexity got to the point where the returns on that complexity had vanished: basically, the cost of civilization got too high.” J. Tainter

Having been in the finance and technology arena for 37 years, I am convinced that we are moving toward a tipping point of diminishing returns on investment in complexity.  The output will be worth less than the input.  Our Heavenly Father imparted the word “simplify” to me a few years ago.  That tends to conflict with my expertise in technology… but Father knows best.

The average American has been in an accumulation phase for the last 60 years.  We have built bigger houses, rented offsite storage, added vacation homes, etc.  If each of us were to clean out all items we haven’t used in the last five years, we could probably outfit the population of Mexico with a complete “home” makeover.  Americans have been seeking happiness with “things” and have failed to fill the void with all the toys, trips, and events.  True peace only comes in the presence of Our Heavenly Father.  The Holy of Holies is a great example of simplicity for it was not a cluttered room filled with artifacts gathering dust.  Can you image moving all of your household goods 42 times in 40 years?  Less is more.

The U.S. Government has continued to grow to the point where the sheer weight of the infrastructure is sure to collapse.  The Bernie Madoff scheme was uncovered ten years ago but the SEC could not or would not understand the complexity of the scheme thus they did nothing to stop the scam.  The whistleblower approached them four times with the financial analysis proving Madoff to be a fraud.  The lawyers at the SEC did not understand the analysis and failed to act.  Complexity creates a mysterious and superior illusion that intimidates that average person.  This complexity makes the uneducated person reluctant to challenge the assumptions the complexity was built on.  Therefore, the complexity is perpetuated.  Who wants to read a 1,200 page healthcare bill?  If it’s 1,200 pages, it must be right!  Explain those credit default swaps to me again?

Technology and complexity have failed to win the war against terrorism.  Bin Laden is still out there.  The complex resources of the U.S. have not been able to locate this man for nearly a decade.  If he would just wear that shirt with a red bull’s eye, it would help.

Throwing technology  at the health problems of Americans has done little to improve the “quality” of life.  Ask any chemotherapy patient who lost her hair, vomited up blood after one treatment and spent the night in an emergency room.  Someone yell “Uncle”!  Introducing pharmaceutical toxins or radiation simply forces the body’s immune system to overload.  Technology to remove anything alien to a healthy body would be a better use of investment dollars.  The body is designed to heal itself.  Our Heavenly Father who loves us did not design our body to torture our souls.  Jesus did not become an expert on pharmaceuticals in His ministry.  Tell me again, what is Naproxen sodium?

Funding complexity ultimately forces the government to get creative with our money.  As complexity grows in an exponential fashion, the value of money declines in an inverse relationship.  When I was a kid, my parents owned a drive-in restaurant and we sold five hamburgers for $1.  Cokes were ten cents with the larger ones being twenty-five cents.  Now, those same Cokes are $2 at a restaurant.  We gave you an environmentally friendly paper cup whereas now it is plastic or Styrofoam.  The government can inflate faster than your wage can increase thus you always lose out on inflation.  Retaining value in your savings account is now most challenging.

The speed of collapse may be breathtaking.  The potential financial meltdown of 2008 proved that a “black swan” event can happen without notice, especially to the general public- you and me.  Our sole warning mechanism is our relationship with Our Heavenly Father who is the only one who fully and completely understands the risk of collapse as well as the day of catastrophe.  As we move closer in our relationship with Our Heavenly Father, we position our self to be prepared for anything life throws at us.  Time is short.

Sometimes, it is best to get back to some foundational understanding about the current monetary system and where it went astray.  Man’s carnal desire to manipulate and control moved us off the gold standard.  The term “good as gold” was used for U.S. currency since you could exchange paper money for the equivalent value of gold bullion.  The problem for those in power, this fixed relationship kept them from manipulating the economy for their own interests.  Gold reserves can only increase about 2% per year from mining.

Gold has no liability attached to it.  What you see is what you get.  On the other hand, fiat currency has the liabilities of the issuing country attached to it.  If a country increases its money printing by 10% relative to the other countries around the world, their currency will be devalued by 10%.  So, if you live in that country, your savings loses 10% in purchasing power.  If you are a borrower, your debt will be paid back in cheaper currency.  Who are the largest borrowers?  The Federal Governments around the world.  Inflation is not measured by price increases but is defined as the increase in money supply.

Gold is anti-inflationary.  You cannot manipulate its value and you cannot increase its supply by the press of a button.  It provides a fixed measure of value and that is why it has been used time and time again as a nation’s currency.  It provides an inherent stability to the monetary system of the country and the globe.

The Genoa Conference of 1922 (April 10–May 19, 1922) was the cause of the Great Depression.  At this conference representatives of 34 countries convened to discuss the Gold Standard and decided to convert to a “Gold Exchange Standard” which effectively double the money supply.  We then had the bubble of the Roaring 20’s which burst, creating the Great Depression.

This was not enough.  The U.S. government decided to seize the gold held by the public and then immediately devalued the value of the U.S. Dollar.  Executive Order 6102 is an Executive Order signed on April 5, 1933 by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by U.S. citizens.  Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($166,640 if adjusted for inflation as of 2008) or up to ten years in prison, or both.  Once the gold had been confiscated, the value of the Dollar was changed from $20.67 to $35.00 per ounce.  That’s inflation!  Notice how they used another law redefined to fit their purpose and justification for the confiscation.  There are enough laws on the books to just about do anything imaginable.

The price of gold held steady until France decided it wanted to convert its dollars to gold.  On August 15th, 1971, President Richard Nixon ended the Gold Exchange Standard.  This allowed those in power to exert greater control over the economy without regard to retaining “value” for the common man.  This exploitation has continued and allowed unfathomable amounts of money to be created by the issuance of debt and credit.

We are now in a currency bubble and when you are in the middle of a bubble, you don’t know it.  From the inside of the bubble, you don’t see the reflections of light (revelation) defining the bubble’s size.  Only after the bubble bursts does the size and impact get fully revealed.  Light travels about 6 trillion miles in one year.  I suspect Congress will begin to use the term “light years of debt” instead of $60-70 trillion.  Doesn’t 10 to 12 light years of debt sound smaller and less ominous?