Servias Ministries Blog

There should be no question that Wall Street with the aid of the last two Administrations (both political parties) and Congress have sowed seeds of financial mass destruction.  Bill Clinton promoted sub-prime lending and strong armed banks to comply, Congress wrote law omitting credit default swaps (CDS) from being classified as insurance thus promoting exorbitant leverage and reckless financial instruments to be distributed globally, and the Bush Administration kept the party alive.  The party is over and there is a mess to clean up.  The decision has been made to sacrifice the taxpayer rather than the corporations that were complicit in creating the problem.  Where were the independent thinkers?  Why did no one pay attention to Warren Buffet’s warning about the financial weapons of mass destruction when he bought a company and analyzed the problem on March 4th, 2003?

The U.S. Treasury and the Fed will create new money to deal with the evaporation of capital and it will create a tsunami of oncoming US Treasury debt. This will 1) crowd-out private sector funding of debt, 2) force the US Treasury yield curve to steepen, 3) put downward pressure on the real economy, 4) undermine the US’ AAA rating, 5) and weaken the US dollar.

Other countries really want out of a dollar denominated world.  They have been bamboozled by the U.S. and Wall Street.  We have seen the repercussions of a poor monetary policy in other countries never considering it could happen to the U.S.  The seeds of greed, power, and the love of money have been sown.

Last week, the morning after the election (November 5th), I started a blog titled "666" but kept delaying its completion.  Later I read a blog at http://www.gods-kingdom-ministries.org/weblog/WebPosting.cfm?LogID=1229 where the number popped up in Barak Obama’s home state of Illinois.  If you have been reading my earlier blogs you may remember that I am focused on 1/11/11 as being a "watch date" for an economic event, the culmination of the perfect storm, or the beginning of a new era.  We shall see.  We are 25 months away from this date and it currently appears that the perfect storm may happen then based on the actions being taken by world leaders.  It is time to get your house in order.

Consider and ponder the following words of Jesus:

Luke 6:35-38

"But love your enemies, do good, and lend, hoping for nothing in return; and your reward will be great, and you will be sons of the Most High. For He is kind to the unthankful and evil.

"Therefore be merciful, just as your Father also is merciful.

"Judge not, and you shall not be judged. Condemn not, and you shall not be condemned. Forgive, and you will be forgiven.

"Give, and it will be given to you: good measure, pressed down, shaken together, and running over will be put into your bosom. For with the same measure that you use, it will be measured back to you."

Our Heavenly Father created a global equilibrium.  The Spirit resides everywhere, there is no void or nothingness on earth.  Each of us prays to The Most High God without regard of time or space knowing that He hears our prayers.  Jesus commanded us to give and assured us that the giving would be fruitful.  If you sow judgment, you will reap judgment, if you so condemnation, you will reap condemnation.  However, if you sow love, you will reap love.

The funds my wife and I have represent our fruit of working, saving, giving, and discerning what and where to distribute.  There is a tendency to dwell on the bad news and hoard, an act of fear.  Our Heavenly Father promoted buying and selling of goods.  Jesus spoke of this in the Parable of the Talents.  Jesus also promoted giving motivated by love.  In recent decades the "church" has misused the Scriptures in order to extract and exploit the congregation.  Frankly, it left a bad taste in everyone’s mouth.  Further, it gave people an excuse not to give, due to the abuse.  It is time to shed that mentality.  There are people hurting and in need.

Servias Ministries was set up as a conduit for giving and receiving, often anonymously.  We have people and projects that need money.  We distribute 100% of all contributions received.  Our Officers and Directors pay for all administrative and operational costs.  We are not interested in exploiting the poor and hungry, we give to those in need.  We have a special heart for children as did Jesus.  If you are interested in sending your tithe and/or charitable contributions to us for distribution, we would welcome your participation.  Sowing in Love produces good fruit.  To send a contribution of any amount, mail it to:

Servias Ministries, Inc.

PO Box 1471

Bethany, OK 73008

At yearend we will send a summary contribution letter for tax purposes.

The coming era will be motivated by love, not lust.  The lust of the current era will be judged by Our Heavenly Father and be corrected in the appropriate fashion.  We will continue to give in love expecting love to grow and consume the earth.

November 15th, 2008 may go down in history as the beginning of the end of the U.S. Dollar’s global supremacy.  The G20 nations will meet and discuss the global financial crisis.  Since the Bretton Woods Accord, the Dollar has operated as the global reserve currency, the currency of business.

In 1944, the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.  Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.  Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

The Russian Rouble has depreciated in value and the Russian Central Bank has raised its key lending rate to 12% to strengthen the currency.  The U.S. cannot do that without thrusting the U.S. into a deep depression.  What is the alternative for the U.S.? A devaluation of the Dollar.  As the world’s reserve currency the Dollar needs to show stability.  This was accomplished by pegging the Dollar to gold for 25 years until Richard Nixon took us off the standard.  Without a firm relationship with gold, a fiat currency is destined to depreciate which causes the economy to hyper-inflate.  Your dollars will be worth less. 

What is the solution?  The U.S. Dollar should be pegged against gold again.  The equilibrium price is currently between $3,000 and $5,000 per ounce.  However, that will change as the Federal Reserve continues to create money out of thin air… mighty thin air!  The Gold Ratio would then create stability and other currencies would begin to reach an exchange rate equilibrium.  I don’t see any other acceptable solution for all parties holding U.S. Dollars.  Other alternatives are failing thus the need for a "G20" meeting.  The following graph provides a perspective of the Fed’s actions:

What do the following have in common:

Freddie Mac, Fannie Mae, AIG, GM, Ford, Chrysler, American Express, Wall Street Investment Banks?

They all need cash and are going to the Fed’s begging bowl.  The following graph provides a look at Greenspan’s crisis vs. Bernanke’s.  What a difference in the magnitude.

Gold and silver are both depressed from the de-leveraging and selling of assets to raise cash.  Let us not forget the continued manipulation efforts to keep the true barometers of financial health from skyrocketing.  Once the general public has figured out that the only solution left for the leaders is to devalue the U.S. Dollar, there will be a buying tsunami of gold and related gold stocks.  The manipulation, illusion, and deception will cease.

The term "addiction" is used in many contexts to describe an obsession, compulsion, or excessive physical dependence or psychological dependence, such as: drug addiction, alcoholism, compulsive overeating, problem gambling, computer addiction, etc.

The global economy led by the Americans are pursuing an addiction to complexity and the end game of complexity is total collapse.  With over 35 years of technology expertise I have seen many aspects of the technology revolution: mainframes, 80 column card readers, 96 column card readers, mini-computers, Apple II and IBM DOS systems, 8" floppy disks, 2.5 MB removable hard drives, etc.  Each advancement was seen with excitement.  Miniaturization of components added to an expectation of improving our lives, reducing the work week, and providing for a more stable environment.  The problem with that expectation is an increase in technology breeds and increase in complexity resulting in an exponential increase in energy to support this type of ecosystem.

An increase in complexity moved to the balance sheets of global financial institutions.  Computer models have replaced rational thinking.  The IRS code is so complex that there is no one person who could claim full understanding of the tax law.  Current tax returns must be done by "tax software" if they contain any sophisticated investments at all.  Stock trading can be done by a click of a mouse now.  This eliminates "dwelling" on an investment prior to the act of investment and that is why that 90-95% of day traders lose money.

Don’t get me wrong, proper use of technology is beneficial just as a glass of wine is in line with Scripture.  Excess is where the problem lies.  Who determines excess?  The one in authority.  How should the determination be made?  By seeking revelation from above.  I met a man who was a CEO of a Minneapolis manufacturing company.  At lunch, he shared that all of his major decisions came in the early morning as he was seeking the Lord’s perfect will for the company.  He was highly successful and retired at the top of his game.

Wall Street is preparing to hand out bonuses.  Those bonuses are based on performance, creativity, and impact to the bottom line.  Everybody is looking for an edge and they think additional technology is the answer served up as new financial models, faster computers, more monitors, and quicker communications lines.  It has been shown that an investor could have made 3 or 4 major investments in minutes at critical points in the last 40 years, and would have outperformed all of the major investment strategies publicized today which utilizes computer modeling trading strategies scrutinized hourly for years.

At various times throughout history Our Heavenly Father has placed society into an intervention program.  Withdrawal can be tough.  People have become "addicted" to idols, power, conquests, quail, murmuring to name a few.  Judgment became necessary as the children of Israel continually looked away from their relationship with Jehovah and pursued other avenues.  The Book of Judges provides a great example of this recurring problem.

Addiction requires intervention to break the cycle.  The enablers must be removed from the equation for an interruption to occur.  Frequently the addicted person (or society) must hit bottom in order to come to the realization of exactly what got them to the place they are at.  Up cycles are balanced out by down cycles both in length and severity.  Seven years of plenty are followed by seven years of famine.

It appears that most economic thinking about the current crisis assumes we want to retain the current status quo or way of life.  I believe a paradigm shift must occur to rid ourselves of this system destined to fail.  People think they are entitled to things and services without working for them in an honest manner utilizing the gifts they have been given by our Creator.  A reduction in complexity and an increase in revelation will solve the problem!

Phl 4:8  Finally, brethren, whatsoever things are true, whatsoever things [are] honest, whatsoever things [are] just, whatsoever things [are] pure, whatsoever things [are] lovely, whatsoever things [are] of good report; if [there be] any virtue, and if [there be] any praise, think on these things.

Honesty is the human quality of communicating and acting truthfully.  If there is anything we learned from the recent financial crisis is that there appears to be no honesty at any level of leadership.  Men have perverted the definition of honesty by replacing "truth" with "sanitized facts".  Truth contains revelation, facts may not.  Leaders use double speak to tickle the ears of the listener and utilize the deep imbedded fear of appearing stupid to restrain the listener from asking for clarification to what he or she just heard.  For example, Alan Greenspan was giving a report to Congress and was known for his "double speak".  He used the word "conundrum".  Why didn’t he just use one of the words: puzzle, riddle, or problem?  Isn’t communication about mutual understanding of the subject being conveyed?  He did not inform Congress in an open and honest fashion but hid the truth hoping that the Fed’s theories would just work out.

What mankind needs now is honesty but most really don’t want it.  What most people want are answers that are in line with their beliefs and motives, right or wrong.  In Ezekiel chapter 14:4 "Therefore speak unto them, and say unto them, Thus saith the Lord GOD; Every man of the house of Israel that setteth up his idols in his heart, and putteth the stumblingblock of his iniquity before his face, and cometh to the prophet; I the LORD will answer him that cometh according to the multitude of his idols;", Our Heavenly Father reveals to us that He will allow the perpetuation of idols as a judgment.  This is critical to our understanding and growth.  The sub-prime mortgage crisis had people with idols on both sides of the transaction- the mortgage banker with money as an idol and the borrower with the bigger house as an idol.  Ego was at the center of the problem.  The ego promotes idols in one’s life.  Be careful what you pray for.  Check your heart.

The world leaders are trying to restore confidence in the market but confidence requires honesty.  Scriptural Laws require equal weights and measures which are attributes of honesty.  The current financial system was originally founded on equal weights and measures called "the gold standard" but removed it in 1971 because leaders believed it hindered their ability to control the system.  That was the beginning of the current financial crisis.  Once the creation of money had its "governor" removed, men couldn’t resist being dishonest.  Dishonesty is so prevalent that it is difficult to naturally discern who is telling the truth.  Society has allowed dishonesty to permeate every level of government and the current crisis has caused this reality to be exposed.  With subtlety Hank Paulson wanted no judicial review of the bailout participants.  Why?  He knew that regulators would expose the magnitude of dishonesty inherent in the system.  Investment banks used dishonesty and deception to spread toxic paper around the globe.

There is a dramatic shift coming.  In Isa 28:17 "Judgment also will I lay to the line, and righteousness to the plummet: and the hail shall sweep away the refuge of lies, and the waters shall overflow the hiding place." we are told that hail (truth) shall expose the lies.  Honesty is coming soon!

The disconnect continues.  Today, the real price of silver is $17.03 whereas the paper market price is $8.94.  Something has gotta give!  The U.S Congress, Paulson, and Bernanke need to reread the story of the Great Depression.  They are effectively paralleling everything done in the 1929-1934 time frame.  The increase in market volatility adds to the fear spreading around the globe.  The Bernanke helicopter drop of money did not work.  The staging area is now being prepared with a squadron of B-52’s to drop enough cash into the global economy which will guarantee an eventual devaluation of the U.S. Dollar.

All prices are in decline as a full paper asset liquidation is at hand.  There will be no asset left untouched by this mass liquidation.  Investors are running for the door and the music has stopped.  I believe that once the liquidation is complete, hard asset prices will skyrocket.  Oil in the ground is a real liquid asset.  Gold bullion has no liability.  The premiums for bullion are unbelievable.  Dealers cannot get the product at the stated paper price.  Nobody is selling!  Gold and silver prices will reconnect with supply and demand soon.

The next president will have monumental problems to deal with.  If the next president raises taxes, the economy will dip deeper than currently projected.  Just as in the Book of Judges, people repeat history because they continue to do what is right "in their own eyes" rather than seek Our Heavenly Father’s Wisdom.

The Ten Commandments, Laws, and Statutes were given to us for our safety.  Those laws, if followed, would ensure a peaceful and productive society.  The basis of the entire 613 commandments, laws, and statutes is Love.  Society has departed from love.  Technology has promoted separation and isolation of relationships.  Face to face communication has been replaced by the telephone, email, and text messages.  Complexity has replaced simplicity in business.  Everyone is just too busy!  Customer service is "history" and technology is a pathetic attempt to replace the needed human assessment in problem determination.  Market traders have based their views on computer programs, technical indicators, and an abundance of facts.  They were wrong!  Technology is to serve man but man seems to be serving technology.  Alan Greenspan was grilled by legislators this week and he called the current crisis a "financial tsunami".  (Hmmm!  I wonder if he has been reading our blogs?  Our view is based on the Laws of GOD, not man.)  His excuse was that none of the Fed’s sophisticated computer models predicted the crisis.

From a macro view, the U.S. is heading towards default.  Next year the U.S. deficit will exceed $1 Trillion.  The U.S. cannot guarantee everything under the sun. Only our Heavenly Father could do that.  The global market is larger than any government.

What is the solution?  A paradigm shift in thinking must occur and it will.  As in the Book of Judges, the people will repent and turn back to The Lord.  Fear and greed are alternatives to Love.  Love will be sought by the repentant heart.  Peoples’ eyes will be opened to understand what is really important.  McMansions will no longer be the focus.  Technology will lose its luster as people finally realize that technology will not solve the core problems confronting them.  Less will be more.  Anything classified as "high maintenance" will be purged.  People will look back in disbelief as they ponder their failures in nurturing relationships with family and friends.  The good news is that Love forgives and wipes the slate of history clean.  As Love sweeps through a country, Heavenly Wisdom will provide solutions to those "unsolvable" problems.  I believe the revelation of unlocking "free energy" will be given to those who will not exploit it but as an expression of love, they will propagate the technology for all to enjoy. 

The medical field will embrace the revelation of "Biological Conductance" methodology as a core strategy for improving overall health of the population thus reducing their reliance on pharmaceutical protocols.  Removal of toxins and other interferences from the human body will promote health and reduce the need for an ever increasing healthcare infrastructure.  Anyone who has been healed by the anointing of GOD of a disease can appreciate the fact that disease responds to other external, non-pharmaceutical factors.  In 1984, I was healed of hepatitis in 7 days versus the 6 to 8 weeks projected by my physician.  He could not understand the miracle of healing.  Researchers are discovering the "GOD" particle and will be given further revelation as they pursue love rather than exploitation.  The ultimate result will be a dramatic decrease in health insurance and related healthcare costs.

Our debt based society will experience a jubilee but it will not occur as most predict.  Cursed time is followed by a time of cleansing ultimately resulting in a jubilee.  The temple must be cleansed of the unrighteousness and lawlessness.  However, the temple cannot be left empty.  Love will fill the temple and the Glory of The Lord will shine forth!

With all of the volatility in the market, people are looking for an oracle.  What is an oracle?  An oracle is a person or agency considered to be a source of wise counsel or prophetic opinion; an infallible authority, usually spiritual in nature. 

To become an oracle to a select group of people, do the following:

Step 1.  Select 10,000 people and send half of them a letter stating the the stock market will end up next week; to the other half, send a letter stating that the market will be down during the same time period.  Keep track of which people get the letters.

Step 2.  Once the projected time has passed, divide the group of 5,000 who received the successful prediction in half.  Once again send half of them a letter stating the the stock market will end up next week; to the other half, send a letter stating that the market will be down during the same time period. 

Step 3. Repeat step 2 with the remaining 2,500.

Step 4. Now with the remaining 1,250 recipients, tell them it is time to pay for a $1,000 investor newsletter subscription since you have proven to them you were right 100% of the time in calling the last 3 market moves.

The media is constantly quoting pundits who were correct in calling tops and bottoms of various markets.  If Warren Buffet was right in every investing decision, he would have all the money in the world.  He simply looks at fundamentals and trends, puts money in, and then waits for success.  He jumped out of silver way before it hit its recent peak.  He made money, just not as much as he could.

In a structured eco-system, the structure itself defends its borders.  Our goal should be to pursue GOD’S Will and Plan.  We should seek a Word from Heaven to help guide us in this structured world.  HE created this world of structure but is not limited by it.  Our Heavenly Father is not restricted to time and thus has revelation directly relating to our future.  HE speaks to His people called by HIS Name.  Those people who have been given eyes to see and ears to hear are able to hear revelation specific to their callings.  A true Oracle will be motivated by love, not money!

This term "Great Depression II" is getting more publicity in the general media.  It would appear that the U.S. Government is falling into the same trap as they did in the 1929-1933 time frame.  The U.S. is teetering on what might be called the "Great, Great Depression".  The reason is that the U.S. is a different country now.  Contraction is ahead!

Back in 1929 we were a creditor nation, not a debtor nation, and this allowed us to buy gold and prop up our Dollar.  Until the early 70’s we were an exporter of energy whereas now we are the largest importer of energy with a coming energy crisis on the horizon.  In 1929 we were a manufacturing/agricultural based economy and now we are a services oriented economy.

In the last six weeks, the Federal Reserve has doubled its balance sheet.  This is hyper-inflationary.  Eventually, the result of this dramatic increase in money supply will result in higher prices.

Tax increases will occur.  Federal, State, and Local governments will see a shortfall of tax receipts with the decline in the Gross Domestic Product (GDP).  Housing price declines will lower real estate tax receipts and the downward spiral will cause the various agencies to request higher tax rates.

Loose Credit has ended.  Banks will return to historic lending practices requiring cash flow, good credit, and good character, the 3 C’S.  These lending practices were sidelined in recent years.  What were they thinking???

The consumer is re-trenching and the sentiment will promote reduced credit requests.  As consumers get increasingly pessimistic about the economy, their jobs, their retirement, their ability to generate cash, they will move into "protect mode".  Only conservative and necessary purchases will be made.  The good times are over for most consumers.

Investors will seek out "insurance" to park their money.  It is becoming increasingly difficult to retain value.  The Federal Reserve has double its balance sheet in record time.  This will ultimately lead to a devaluation of the U.S. Dollar within 12 – 18 months.  Where do you park your money, the storehouse of value?  They keep attempting to "fix" the problem by throwing more U.S. Dollars at it.  As the world’s reserve currency, the U.S. inflationary measures affect the entire globe. 

In my opinion, gold is the only viable insurance. There are too many dollars being created for the US dollar to be a viable insurance option.  Clearly equities (with the exception of precious metals shares) are not a viable option especially with all the volatility.  Am I saying to sell your equity positions? No.  You must decide if your stocks fit your long term plan.  US Treasury bills are not viable insurance because they might get downgraded due to this huge influx mentioned above.  General commodities have been viable, but they are too volatile.  Banks cannot offer insurance as they are insolvent in some cases.  Insurance companies cannot offer sound insurance as AIG has proven.  Money market funds are not insurance. They are being propped up by the U.S. Government on a temporary basis.  Retirement programs are no longer insurance, corporations are attempting to remove any and all responsibility to retirees.  Jobs are no longer insurance since many companies are run by lawyers and accountants who have no interest in the individual employees, only the bottom line.  Equity in your home is not insurance because in many cases, it simply does not exist.

Once the masses figure this out, gold and silver will move up in notable fashion.  In the meantime, I expect consumer credit to contract and major purchases will be delayed to protect cashflow.

On the lighter side, New Stock Market Terms:

CEO –Chief Embezzlement Officer.

CFO– Corporate  Fraud Officer.

BULL  MARKET — A random  market movement causing an investor to mistake himself for a financial  genius.

BEAR  MARKET — A 6 to 18  month period when the kids get no allowance, the wife gets no  jewelry, and the husband gets no sex.

VALUE  INVESTING — The art  of buying low and selling lower.

P/E  RATIO — The  percentage of investors wetting their pants as the market keeps  crashing.

BROKER — What my  broker has made me.

STANDARD &  POOR — Your life  in a nutshell.

STOCK  ANALYST — Idiot who  just downgraded your stock.

STOCK  SPLIT — When your  ex-wife and her lawyer split your assets equally between  themselves.

FINANCIAL  PLANNER — A guy  whose phone has been disconnected.

MARKET  CORRECTION — The day  after you buy stocks.

CASH  FLOW– The  movement your money makes as it disappears down the  toilet.

YAHOO — What you  yell after selling it to some poor sucker for $240 per  share.

WINDOWS — What you  jump out of when you’re the sucker who bought Yahoo @ $240 per  share.

INSTITUTIONAL  INVESTOR — Past year  investor who’s now locked up in a nuthouse.

PROFIT — An archaic word no longer in  use.

See Disclaimer: http://www.servias.org/?p=56

In a previous blog I had set the bottom for oil at $100-110.  I was wrong.  I had not anticipated the size of the unwinding of positions by the hedge funds.  On a relative basis, I was right.  However, the actual low is yet to be determined.  We are on the brink of an energy crisis independent of the financial crisis.  To sell a barrel of crude at these prices is an injustice to the imminent crisis of energy.  High prices evoke a response of conservation.  These prices send a false signal that "everything is back to normal".  The Far East will continue to increase its consumption as the overall supply continues its decline.  The Presidential election will lull us to sleep on the energy front.  Airlines should lock in their futures prices for fuel as Southwest did on the last round prior to sizable energy price increases.  They will look as smart as Southwest.

There will be continued volatility in the market.  As margin calls are satisfied, cash will replace energy "positions".  As redemptions occur in the mutual funds, quality assets will be sold to raise cash.  For those who understand fundamental supply and demand, there are some great opportunities for discounted stocks and related assets.  When people are afraid, guys like Warren Buffet are investing.  I expect oil back up over $100 in the next few months.

Trust is a relationship of reliance. A trusted party is presumed to seek to fulfill policies, ethical codes, law and their previous promises.  We are told hundreds of times in Scripture to "trust the Lord" and to put our trust in the Lord.  Why?  We can rely on Our Heavenly Father to look out for our best interest in the big picture even when we don’t comprehend the big picture.  Man is a different story.  Mankind will fall short in the area of trust due to the fallen nature of Adam inherent in our physical bodies.  Most of us strive to be trustworthy but have failed to be trustworthy at some point in our lives.  Man’s carnal nature is at odds with "trust".  Men rationalize their actions away to justify the seeds of untrustworthy acts.  In the Book of Romans, Chapter 7, Paul speaks of the conflict.

I recall specific times in my life when I lost the trust of others.  I did not intend to do so, hindsight is 20/20.  It took time to gain that trust back by consistent acts of love and firm commitments of consistent actions to promote relationships shaken by mistrust.  Grace, mercy and forgiveness were the key ingredients encompassed by love.  The world does not currently operate that way.  Men have used the public’s trust to gain access to vast sums of wealth.  Through manipulation and control they have exploited the world’s financial system and it is now on the brink of disaster.  Trust (or lack of) will be found at the center of this crisis.

The Financial Accounting Standards Board (FASB) adopted new guidance on fair-value accounting in illiquid markets.  Most of us had never heard of the FASB prior to this crisis.  They are the entity that provides the accounting rules that corporations use to report their earnings and financial state.  Effectively, they administer "equal weights and measures" in the current financial system.  There is an old saying: "liars figure and figures lie".  There is another corporate saying: the president asks the chief financial officer "What are our earnings for the quarter?", and the CFO answers, "What do you want them to be?"

At the center of this crisis are derivatives to the tune of over one quadrillion dollars ($1,000,000,000,000,000).  Yes there are 15 zeros!  Once the U.S. Government let Lehman Brothers collapse, Pandora’s Box was opened.  Why?  Until then, holders of derivative could internally value their derivatives rather than using a market value.  The bankruptcy of Lehman forced a liquidation of derivatives in an auction.  "The auction set a price for Lehman bonds of 8.625 cents on the dollar. Financial firms that sold credit default swaps, therefore, owe 91.375 cents on the dollar – more than Wall Street had been factoring in."   See: http://www.independent.co.uk/news/business/news/traders-worst-fears-realised-as-lehmans-auction-begins-957953.html.  This auction confirmed the worthless value of derivatives.  The market value was established.  How can you value the derivatives at "face value" when the market value is 90% less?  They are flirting with fraud.  You and I are expected to accurately report our financial states which are meager when compared to this multi-trillion dollar environment.

Over the weekend the FASB decided to relax the rules for valuing derivatives on balance sheets.  See: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081010/REG/810109977/1028.  This will surely cause or promote "mistrust" among the financial institutions holding these weapons of mass destruction.  This is why the credit markets have frozen up.  Who can they trust?  Which banks will return "inter-bank" borrowed funds once loan maturity has arrived?  This lack of trust is why U.S. Treasury Secretary Paulson is suggesting that the U.S. Government should guarantee inter-bank loans.  He is attempting to restore trust among the large banks.

Once the FASB starts "tinkering" with asset valuations, trust is lost.  Lack of trust causes bank runs.  Government leaders have lost public trust.  They assured the public that "all is well" as this financial crisis was brewing.  The FASB has played into the hands of the politicians.  How can we believe any numbers on financial statements and balance sheets?  I guess Enron was not an isolated event after all.

There is currently a serious disconnect between the value of silver bullion and the "paper" market of trading silver contracts.  On Friday silver closed at $10.17 per ounce.  The physical silver is backordered 4-16 weeks and 1 oz. silver coins on EBay are going for $20.  What’s the deal?  Central Bankers and Investment Banks (which have historically been used by Central Banks) have continued to suppress the price of gold and silver.  Many articles have been written on this topic and there is no question of intent.  Fiat currency is based on perception rather than reality.  The reality is that the Federal Reserve will hyper-inflate us out of this financial crisis.  Ben Bernanke studied the Great Depression and is convinced that they should have "turned on the printing presses".  If government manipulation is removed, gold and silver would immediate move to $1,600 and $20 respectively.

Another looming disconnect issue is the value of derivatives on the books of all the players involved in the financial crisis.  The Financial Accounting Standards Board (FASB) sets the ground rules of balance sheet reporting by all corporate entities.  See: http://www.forbes.com/reuters/feeds/reuters/2008/10/10/2008-10-10T222949Z_01_N10520600_RTRIDST_0_FINANCIAL-FASB-FAIRVALUE.html .  The problem lies in how derivatives and related securities are valued.  I have heard arguments on both sides.  If you paid $10 million for a security with "insurance" wrapped around it (a Credit Default Swap), it has been reported as being worth $10 million on the books.  However, if the same instrument is sold in the market for $2 million then should your books reflect the $8 million loss?  If an individual were borrowing money from a bank on the asset, you can be assured that the bank would value the collateral at "market" value, not purchase value.  There is the rub!  Who is to say whether the investment will ever regain its original value.

In the Scripture, we are given warnings about using "unequal weights & measures":

Lev 19:35 Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measure.

Lev 19:36 Just balances, just weights, a just ephah, and a just hin, shall ye have: I [am] the LORD your God, which brought you out of the land of Egypt.

Proverbs 20:10  Diverse weights and diverse measures, They are both alike, an abomination to the Lord.

Valuations should be fair to all.

How do stock brokerage firms handle value disconnect issues for the brokerage clients who have margin accounts?  What are margin accounts?  They are accounts where customers can borrow money from the broker firm to buy additional shares held in their brokerage account.  The stock broker charges the client interest on the amount borrowed.  That interest is calculated daily on the outstanding balance.  How does the broker protect himself from loss?  The broker loans money based on the daily value of the margined stocks.  As the stock’s price declines, the amount that the broker will lend goes down.  In private accounts, the broker will lend up to 65% of the value of the stock thus requiring you to come up with 35% in cash or other securities that are marginable.  If the stock price is under $6 then the broker will only loan 50%.

Stock Price                            Margin Requirement

Over $6                                            35%                     

$5 – $5.99                                         50%

$4 – $4.99                                         75%

Under $4                                         100%

This sliding scale is fueling the cascading decline in the market.  When the stock price declines, the broker issues a margin call:

Margin Call:  A request for additional funds resulting from a decline in the equity percentage or from purchases in the account. A margin call can be met by selling stock, depositing fully paid for stock into the account or by depositing funds.

If the borrower is low on cash, he will sell stock to meet his margin call.  If the stocks he owns depreciate rapidly, he must sell more shares and more stocks.  He will typically sell his worst performing stocks first and his best performing stocks last.  If the decline is too quick and too steep, he will unload all of his stocks at any price.  That is what happened last week.

The following is a notable example of this reality.  A slumping stock market forced Aubrey McClendon, the high-profile head of one of the nation’s most dynamic energy companies, to sell "substantially all” of his 33.4 million shares of Chesapeake Energy stock, he disclosed Friday.  See: http://newsok.com/market-slide-wipes-out-ceos-chesapeake-holdings/article/3310107

I’ll bet he wished he could tap into that $700 Billion bailout money!  My stockbroker told me on Friday that he had been working from 7:30 AM to 9:30 PM on "margin" paperwork the entire week.  Each day the market declines generate more margin calls.  The decline evokes further decline until all the leveraging is forced out of the system.  This de-leveraging causes all prices to go down: stocks, metals, and energy because the borrower must sell everything to raise cash.  Hard asset prices will recover quicker than paper assets.  People still need energy.  They may not need those exotic financial services anymore.  People will be forced to "simplify".  One day soon the general public will wake up to the fact that gold and silver represent real money.  When that happens, their demand and price will shoot up and the gold and silver stocks will enjoy a parabolic rise in price.  At that time, unequal weights & measures will be corrected.