Servias Ministries Blog

The following graph provides a stark reminder that the worst is ahead and not behind us:

The sub-prime loans will wash out by December 21st, 2012.  Just in time for the Mayan celebration.  Continue the defensive posture necessary to weather the volatility ahead.  Washington has no incentive to provide the raw facts now facing legislators.  Managing perception is their only hope to keep the consumer from totally shutting down discretionary spending.  The following graph provides another view of the relative weakness of sovereign debt:

The fact that the U.S. is even being considered of having vulnerability is new to many of us.  With the advent of the Internet, money will move away from vulnerability much quicker than in times past.  This will reduce the time frame in which a country arrives at a crisis level.  Years turn into months, months turn into days.  Be prepared for “suddenly”.

There are $600 trillion worth of derivative contracts worldwide according to the Bank of International Settlements. In simple terms, derivatives are debt bets between two parties that are very hard to collect on.  According to the Office of the Comptroller of the Currency, the nation’s five largest commercial banks held 95 percent of the $291 trillion derivatives portfolio of the country’s 25 largest bank holding companies at the end of the first quarter. More than 90 percent of those derivatives were in unregulated trading.  See: http://www.huffingtonpost.com/sen-maria-cantwell/wall-street-has-a-gamblin_b_340252.html

Public pensions in the U.S.have a record $2 trillion deficit.  The U.S. debt load now at about $12 trillion will be at least $14.3 trillion by the end of the year.  This does not include unfunded liabilities in excess of $60 trillion.  Forty of the states are in fiscal deficits as well as municipalities within the states. 

Seven states of the forty are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each has a population above 8 million people and has had to borrow more than a billion dollars, so far, to pay unemployment insurance claims. Each state currently suffers with unemployment levels above 15% as measured by the U-6 measure for the States.  Also, each state is a large net importer of either oil, natural gas, electricity, or all three of these energy sources.  If you consider that true money is “production of human labor and resources”, these states will not fare well in the coming months.

Benjamin Graham’s (Bio) distinction between investment and speculation: investment is the discipline of buying any asset at a good price which protects you from an unknown future, buying with a margin of safety, while speculation, or trading, is the discipline of correctly predicting the future.  Speculation has taken over the markets.

Those in control promise to ‘fix the problem tomorrow’.  Finance ministers and central bankers are exhibiting the behavioral phenomenon of “overconfidence in their future self-control”.   Oscar Wilde said, “I can resist anything but temptation”.  Doing something you know you shouldn’t is easier if you can convince yourself that this will be the last time you indulge, that you won’t do it again.  So we convince ourselves that since we’ll be strong in the future, we can still indulge today thus we delude ourselves into thinking that we will take the more difficult path next time.  The current delusion of the debt problem becomes exponentially more complex when you add in the concept of dependence and addiction, not so much to a substance, but to an idea that we can always print more money.

Our Heavenly Father compels us to decide a direction TODAY, not tomorrow.  We live in the “now” and our actions today determine the direction or our lives.  All of this fiscal irresponsibility will produce death and destruction and the only question is how it will play out and affect each of us on the planet.  The arrogance and ignorance of those in charge believe their own “press”.  As they walk out their “god complex” in their minds filled with illusions of grandeur, the average person is placed in immediate peril without any knowledge or understanding.  Only by repentance will nations return to blessing and sustainable prosperity.

Joshua 24:15  And if it seem evil unto you to serve the LORD, choose you this day whom ye will serve; whether the gods which your fathers served that [were] on the other side of the flood, or the gods of the Amorites, in whose land ye dwell: but as for me and my house, we will serve the LORD.

Credit Suisse issued a report identifying those countries it determined to have the highest risks of default on their sovereign debts. Number 16 on the list was the United States, based primarily on its 2009 budget deficits and government debt.  In Scripture, 16 represents “Love”.  Does this mean that the rest of the world now loves us?

See abbreviated listing (click on picture for larger view):

The world is moving to two global currencies:  Gold and SDR’s.  The value of SDR’s (Special Drawing Rights) is determined by a weighted basket of currencies and is accounted for by the International Monetary Fund (IMF).  The U.S. Dollar is expected to become more of a regional currency like the Euro and Yen.  Gold has an absolute value whereas the SDR has a relative value, sort of like Divine Nature versus human nature.

The crisis is deepening:

1. PIIGS  (Portugal, Italy, Ireland, Greece, Spain)

These countries have serious economic problems and will cause a drain on the rest of the Euroland countries.  See: http://online.wsj.com/article/SB10001424052748704182004575055292744721172.html

2. States

“The mire facing California, for example, makes Greece’s woes look somewhat manageable. California, staring at a $20 billion budget gap over the next 17 months, accounts for about 13 percent of the U.S. economy. Greece accounts for just 3 percent of the economy of countries that use the euro.”  See:  http://www.businessweek.com/news/2010-02-08/u-s-losing-aaa-is-way-to-rein-in-pelosi-reid-david-reilly.html

California, New York, Michigan, and 37 other states are all facing serious fiscal shortfalls.  They are trying to increase taxes in an election year so you can imagine how this will turn out.  Municipal bonds of many municipalities will be downgraded, possibly forcing bankruptcy at the municipal level.  Once a few take the path and dilute the stigma of bankruptcy, many will follow.

3. Federal Deficit

The U.S. is on an unsustainable course with deficits rising, the national debt soaring, and Social Security and Medicare preparing to go bust. At 10 percent of gross domestic product, the $1.6 trillion budget deficit for 2010 forecast by the Obama administration ranks as the highest such ratio since World War II.   The administration predicts that this ratio will fall to about 4 percent by 2015.  Who are they kidding?  Debt is expected to climb to 77 percent of gross domestic product by 2019, according to Moody’s.  I wonder what the worst case scenario might be?

3.  Unemployment

There were 6.1 unemployed workers in December, on average, for every available position, according to Labor Department data released Tuesday.  That’s a sharp increase from 3.4 jobless workers per opening in December of 2008, and much worse than the 1.7 unemployed people per opening in December 2007, when the recession began.  This number does not count the students who are looking for a job but unable to find one since older, more mature unemployed workers are snatching up those positions normally filled by students.  Is this a better job picture?

4.  Home Equity

More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.  Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.  When you see your largest asset dwindle in value, what makes the government think that you are going to go on a shopping spree and initiate a recovery?  See:   http://www.bloomberg.com/apps/news?pid=newsarchive&sid=at6VKvccpCzs

5.  Iran

Iran continues to keep the nuclear stakes in the forefront of the Middle East dilemma.  Their threats may provoke an Israeli response soon.  See: http://www.telegraph.co.uk/news/worldnews/middleeast/iran/7193935/Iran-warns-it-will-punch-the-West-on-Islamic-revolution-anniversary.html

With the complexities of the issues around the world and the growing globalization that eliminates the protective economic walls around countries, Our Heavenly Father is the only one who can truly get us out of this mess.  World leaders would have to be in one accord as well as their citizens to navigate out of this monetary and fiscal crisis that just won’t go away.  The banksters have finally crossed the rubicon and have no way to undo the damage they caused over the last few decades.  The average citizen does not want to pay for what the wealthy and privileged have done.  Most of the population operates on the assumption of “entitlement” even if they are only entitled to water at the local stream.  Who is personally willing to give up any hard earned assets or access so that the wealthy can escape this crisis?

The only true solution is for Our Heavenly Father raise up HIS elect to solve these problems by hearing HIS voice and only acting according to HIS Word.  Otherwise, we’re toast!

Warning!  This may be somewhat complex but it is important to understand the big picture: complexity  and formulas exploit the masses.

In the stock market as well as the commodities market, the current problem is that there are so-called technical analysis “experts”.  These people are guided in their investment decision-making by technical chart patterns. These patterns or “signs” have become a mini-industry of the brokerage firms to suck unsuspecting, intelligent people with a PC and an Internet connection into investing in an arena of sharks.  There are hundreds of technical indicators that have all at one time or another led people to believe that they were the “Holy Grail” of generating huge profits.  The huge profits were made by authors who sold the formula in newsletters or books, PC programmers/investors, and the brokerage houses that handled the trades.  It has been estimated that 95% of the technical traders lose money.  The big boys simply and quietly say “thank you”.  Have you ever noticed the huge trading volumes in recent years?

This reality is the reason the Goldman Sachs and JP Morgan Chase can achieve such profits with relatively little cash targeting strategic price levels and times.  Their tremendous treasuries allow them to “paint” charts giving the illusion to the technical traders that it is time to buy (or sell) the investment target.  By creating the illusion with the use of tremendous computing power and investing capability, they use the emotions of the traders to their benefit.  Once they create the perception that the stock is getting ready to make a move, then the usual group of “experts” tell us why something is moving on the chart when more often than not, the action on the chart is in contradiction to the fundamentals of the underlying investment value.  The emotion of fear kicks in and the trader dumps his position and takes a loss.

Short term technical patterns will always overrule longer term fundamentals due to the amount of money at stake. Undercapitalized traders cannot afford to let a position move against them for any period of time. Margin calls (A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker’s particular formula) dictate how much capital an investor can lose before they must abandon their position.  This reinforces the technical move and this continues until the bigger, well capitalized, long term fundamentalists move in and put an end to the technical play. It happens repeatedly in markets and always will as long as the current system exists. This is the reason that fortunes are made in the markets and why only a few succeed. Only those who actually understand the markets and realities of the big players’ manipulation will reap the big profits as well.  The regulators either don’t know how to identify this manipulation or don’t care to address it.

This last week, the US dollar has gained in strength sending gold downward.  Do you really think that with the massive creation of US dollars that it is the investment of choice.  The charts and technical indicators say “Yes” but the fundamentals scream “NO”!  The boys are at it again.  Management by Perception and public apathy is alive and well in the US.  As long as we are promised to by taken care of and receive some more tax credits, everything will be OK.  In a previous post, I directed you to the youtube presentation of exponential curves and their ramification on society.  We are crippling the next generation with a crushing burden of exponential debt and at some point it becomes mathematically impossible to realistically pay it back. All that is left becomes either a default or a currency devaluation.  The interest alone will become unsustainable.

The borrower (on margin) is servant to the lender.  The sharks will continue to sucker the technical traders in releasing their wealth to them.  Once again, the ego will cause you to give up hard earned cash in quest of being that one trader who finally uncovers the “Holy Grail” of technical indicators.  Faster computers, newly developed technical indicators, more complex environments will not make you money over the long run.  The best way to trade is to be still, listen to Our Heavenly Father who is well aware of the entire picture, then act if and when HE says to invest.

The title should tweak your interest, it did mine.  I receive a few  Christian monthly newsletters by mail.  In recent years I must confess that many of them were not personally relevant to me but nonetheless I scan the newsletters for topics of interest.  Last Thursday morning (early) I opened one newsletter and this was the first article, “America’s Coming Super Depression”.  The writer had a prophetic dream in early 2009 and in it, he was speaking to a financial expert who told him in mid-August of 2010, wheels would be put into motion to abandon the US dollar.  After this, everything was going to change!  On August 15, 2009, he had a confirming dream.  In the second dream, he found himself at a food court in a shopping mall.  The only restaurant still open was labeled “School Cafeteria”.  The food should be cheap, maybe $2 for a meal, but a plate of food was $30.  He protested and walked out and suddenly a Chinese restaurant appeared.  He ordered coffee and the Chinese waiter said “Coffee – $10”.  Again he was shocked and angry that it cost so much money and walked away.   The dream ended.  In a third dream, he was hungry and was in the cafeteria of an actual school.  All of the other people in line were adults.  “What is the special?” he inquired.  “It’s Thanksgiving dinner.  It is five meals for $99 and if you want that price, you need five people in your group”.  He protested.  The dream was over.

I must admit that after reading this, I wasn’t sure if I was to react to it.  After all, I have heard hundreds, maybe thousands, of prophetic words over the years.  Christian TV has had prophecy teachers proclaiming the demise of most every nation for years.  However, this time is different.  Two hours after I read this newsletter, my lovely wife awoke and came into the office and greeted me with a question, “What?’  She explained that she just had a dream where she and I were in a Chinese restaurant having dinner.  I leaned over to her and said, “There’s something I want to tell you, guess what?”.  She awoke and The Lord told her to ask me “What?”.  I showed her the article in the newsletter that had the “Chinese connection”.  We asked Our Heavenly Father about the article and the dream.  HE indicated to us that I was to share this on the blog thus I have now done so.

Any good businessman hopes for the best, prepares for the worst.  Our Heavenly Father issues warnings not to scare us but to prepare us.  If violence is coming, we should be prepared to go through it by faith, not by fear.  The attitude of entitlement and arrogance of the U.S. has set itself up for lamentations.  Our Heavenly Father will evoke a corrective judgment on nations who move toward godlessness.  The adversaries of the U.S. have been empowered by this attitude.  Homeland Security has spent billions and still cannot keep airplanes safe.  Another homeland attack is inevitable since the covering of THE LORD has been lifted.  These prophetic warnings are to be heeded even though we all know that Our Heavenly Father may evoke mercy at any time and avert the judgment.  Unless this happens, lawlessness will be dealt with by righteous judgment and the “books” will be reconciled.

We have been led to buy glass storage containers to hold staple foods.  As you may know, plastic leaches into the food and is a toxin so those baggies are not the best to store food in.  Many foods do not have a long shelf life so a 90 day revolving food supply would be a good investment.  The current national food distribution chain assumes about a 20-25 day inventory of food.  Local vegetable gardening will flourish as will the art of canning.  Maybe its time to assess your food pantry and begin accumulating to a 90 day supply.  Seek out a local food co-op and join it.  Calamity occurs for a season and we should prepare for that season knowing that judgment will not be eternal.  Remember HE loves us.

I wish that I could write only about pleasant topics but the marketplace demands our focus and it is not good news.  Our Heavenly Father is orchestrating an interesting drama that will affect the lives of the entire globe.  It looks like the tipping point is within 15 miles of the Boston Tea Party.  The people of Massachusetts elected Scott Brown, a Republican, to replace Ted Kennedy who held the Democratic Senate seat for five decades.  What???  This totally unexpected event will have global repercussions.  How?  President Obama and his administration are losing their perceived power at breakneck speed and they are now moving into the self-interest survival mode.  Things were looking pretty good 6 months ago but now the liberal state of Massachusetts has begun throwing tea overboard.  Obama immediately went after Wall Street and immediately the Dow Jones dropped.

Rev 18:21  And a mighty angel took up a stone like a great millstone, and cast [it] into the sea, saying, Thus with violence shall that great city Babylon be thrown down, and shall be found no more at all.

The word violence comes from a root word hormē meaning:

1) a violent motion, impulse

2) a hostile movement, onset, assault

Violence in the marketplace (Babylon) means volatility, uncertainty, and destruction.  Volatility is a “violent motion” of impulses and I expect seismic swings in the stock market, gold market, and energy market.  As we say in cowboy country, cinch it up ‘cause it’s going to be a wild ride!  The “management by perception” methodology is giving way to the stark reality of the global economic tremors.

We could easily see $100 daily swings in gold.  The timid investor will lose money this year as he gets bucked off of the gold bull.  The mature believer has already seen turmoil at a personal level and has been prepared for the Babylonian violence that is coming.  The times in the wilderness requiring us to walk by faith and not by sight and base our direction on the word of THE LORD was well depicted in the movie “The Book of Eli”(Rated R for violence and language).

As the violence rages we must rest in our assurance that Our Heavenly Father will see us through this turmoil.  We must continue to take steps to shed ourselves of any unnecessary baggage that demands our servitude.  Invest in your relationship with Our Heavenly Father by spending daily time seeking His Face.

40 States are moving toward bankruptcy or insolvency and will need Federal assistance to stay afloat.  In Euroland, the focus is on Greece who only accounts for 3% of the Union’s GDP whereas California is equivalent to the 8th largest economy in the world.  Both Federal and State authorities have built an infrastructure base on an “optimistic” tax base and will look to the taxpayer to support this economy built on sand.  Expect more taxes, more fees, higher utility bill, and any other means for those authorities to extract your wealth.  Do you really think the Fed can raise interest rates with this mess ready to push us into the double dip recession or worse?  On the other hand, “big money” wants to be paid interest on their money, hence volatility and violence in the markets are expected.

The Democrats must figure out what to do before the November elections.  The Scott Brown victory has caused a cry to “abandon ship” because the incumbents don’t want to lose their job (and their healthcare).  Only the GOD OF HEAVEN AND EARTH knows how the next few years will play out.  Why not go to the Source?

The other word to expect to see is “treachery”, an act of deliberate betrayal of trust.  As self interest moves into survival mode, men will become desperate.  Their desperation will evoke treacherous acts that will be exposed for all to see as the “Light of the world” comes on the scene during the destruction of Babylon.  The lawlessness that has infiltrated the current system will be replaced by the righteousness of the Kingdom.  Truth will sweep away the refuge of lies.  People have trusted in the U.S. Dollar but will be betrayed by those in control of the value.  The Law of equal weights and measure will replace the subterfuge now in place.  Complexity will be replaced by Simplicity!

Peak Oil was projected to occur in 2005 and as of today, that projection is holding true.  Two thirds of the global population lives at or below the poverty level.  All of the energy use has been focused on the privileged one-third.  What about those people in the other category?  They want access to energy just like everyone else.  Their immediate goal is to become part of the “Middle Class”.  At the same time, the global population is growing on an exponential curve.  “Houston, we have a problem!”

You can use the following traditional French riddle to illustrate the nature of exponential growth:

Suppose a water lily is growing on a pond in your backyard. The lily plant doubles in size each day. If the lily were allowed to grow unchecked, it would completely cover the pond in 30 days, choking out all other forms of life in the water. For a long time, the plant seems small, so you decide not to worry about cutting it back until it covers half the pond. How much time will you have to avert disaster, once the lily crosses your threshold for action?

The answer is, "One day." The water lily will cover half the pond on the 29th day; on the 30th day, it doubles again and covers the entire pond. If you wait to act until the pond is half covered, you have only 24 hours before it chokes the life out of your pond.

What “day” will the global leaders wake up to this problem as it relates to resources?  People assume price to be the key factor in determining surplus of inventory.  A low price suggests a surplus of inventory whereas a high price would indicate a shortage.  Prices affect our decisions to consume energy.

Natural gas is heading for supply crisis.  Cheap natural gas has caused many drillers to suspend drilling operations because they can’t afford to drill when prices stay below $6 per mcf.  It’s simply uneconomic to drill a $6 million well and pay notable lease costs when you will be unable to recover the costs at $4 natural gas prices.  Traders point to the current inventory levels as the indicator of cheap prices in the foreseeable future.  However,

The following analysis provides a 12-24 month view of the natural gas situation in the U.S.

Areas of Supply Growth

Areas of Supply Declines

I believe we will see a net decline of US natural gas supplies of approximately 8.5 bcf/day.

Unless the economy collapses, expect upward pressure on natural gas prices and their related stocks.  This situation is not about reserves under the ground but extraction of those reserves at an economic equilibrium.  Shell gas needs a $6 breakeven and $7-8 price to really encourage drillers to ramp up their activity.  In the meantime, leases are beginning to expire and will need to be renewed to hold those reserves in place, further increasing the cost of drilling those properties.

Those with natural gas production in place will enjoy a wider profit margin once the market prices in this disparity in supply and demand.  This should make up for the underpriced natural gas being sold in 2009-2010.

I expect gold to hit $1,600 per ounce on or before 1/11/11 and expect silver to hit $22.

Oil should trade in the range of $40 to $100 range unless traders finally figure out the peak oil occurred in 2005 and move the price to “conservation” levels.  Iran could impact these numbers to the upside.  The U.S. economy could move the numbers to the downside.  The overall  average should be between $60-$80.  Natural gas has the biggest upside challenge.  $4.50 looks pretty good right now and the pricing pressure will continue to pull on the $6 level since all of the shell natural gas has a rough breakeven there.  Lower price will cause gas drilling to dry up in the shell plays and ultimately translate to lower supply.  States with natural gas revenues will suffer in 2010 at these lower prices.  High energy prices help the revenues at both Federal and State levels as we have shown in the past.  They receive the greatest windfall when energy prices are high even though they act sympathetic toward the consumer during those times.

The stock rally since March of 2009 was supported by the government stimulus package.  Economic collapse in the next 12 months has a 50% probability of happening.  If this happens, the Dow Jones Industrial Average could drop to 7,700.  The Fed will fight this risk, especially prior to the 2010 election cycle.  Congress will stimulate the economy with a jobs bill of at least $150 billion.  According to leading economic indicators, we will initially see an economic recovery but the risk remains.  With over 7 million unemployed workers not contributing to the economy, any recovery will be hampered.  State governments (about 40 of them) are in deep trouble.  Tax revenues are dropping rapidly and continued cuts will increase the unemployment numbers.  See: http://www.bloomberg.com/apps/news?pid=20601087&sid=a5OM27Cn39Yk&pos=4  California is the 8th largest economy in the world and is broke.  The Terminator may have some problems in getting Washington to print up some extra money for him.  Federal tax collections are down substantially and you can count on more stimulus to make the current members of Congress look palatable for the November elections.  These realities will have a negative effect on the deficit and future interest payments to support it.  On the bright side, corporate inventories are down and will need to be replenished which will help the GDP numbers, temporarily.

Inflation will continue to increase because the Fed will be unable to raise interest rates to fight inflationary pressure.  This will continue to hurt the savers who practiced fiscal discipline while reckless borrowers were not required to fully pay for their actions.  Bond yields will put pressure on interest rate policy and will impair the recovery, a catch 22.  It will benefit savers who have not been sucked into riskier investments since by waiting, they may see their interest checks rise as the bond market wakes up the Administration with a forced increase in yields.  On the other side, a broad recovery needs low rates.  The net result: someone will not be happy.

Management by Perception from Washington will continue to create noise and misdirection.  Cooked numbers and rhetoric mask the underlying realities which you and I have to deal with at a personal level.  Who represents us? Our Heavenly Father!  This is why it is necessary to focus on HIM and not trust or rely on Washington to see us through this.

What can I do to protect myself against this volatility?

1. Continue de-leveraging- pay off debt.

2. Simplify and change your buying habits.  Do without by choice and see how you do.  “Act your wage” as well-known talk show host Dave Ramsey says.

3. Give.  This is contrary to your natural inclination.  Our Heavenly Father open rewards those who meet the needs of others in a genuine fashion.  HE loves a cheerful giver.

4. Fellowship.  Face to face time with family and friends is a great, inexpensive alternative to other time consuming entertainment alternatives.

5. Dwell and meditate on the Word of GOD and HE will direct your ways through the turbulence.

6. Analyze ongoing expenses and look for ways to reduce those expenses or eliminate them.  Why pay for storage when most of what is in it will be eventually thrown away.  Get aggressive on utility bills and figure out ways to reduce your usage.

7. Pursue your calling with renewed passion.  Each of us has a calling and Our Heavenly Father will bless that calling with the resources of Heaven and earth.  However, don’t expect to blessed in your ego-based direction outside your calling.  It’s just a waste of time, energy, and money which ultimately creates remorse. 

Management by Perception continues to assume the herd mentality will keep the wheels on the current financial system “wagon”.  Statistics have been cooked to support the belief that all is okay and we should start spending again.  The “too big to fail” banks have continued paying bonuses with taxpayer-based profits.  It has been said that if a banker can’t make money in this environment, he needs to get out of banking.  When you get money at 0% and invest it at 3-6%, you will make money.  Federal bailout money is designed to take value away from the taxpayer and reward large banks who took unnecessary risks then were rewarded with large bonuses.  There is all of this free money for financial institutions yet the credit card interest rates are on the rise.

There is a continuing ground swell of dissatisfaction with the current system.  Taxpayer revolts continue to surface.  Technology is enabling those who are becoming active in the quest for change to produce another view of how the system ought to work.  The following is an example of the coming confrontation of views: