Servias Ministries Blog

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? 

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.