Servias Ministries Blog

In previous writings I have alerted you to the sequence of events that follows the bubble of greed.  Let’s review the cycle.  It all started in the 1980’s.  First, the economic system is growing at a slow and reasonable rate.  The Federal Reserve Bank (Fed) is expanding money supply at 3 to 4% to accommodate growth and expansion.  Fundamental principles of borrowing and lending are adhered to by both sides of the equation.  Chairman Paul Volcker had whipped inflation by raising interest rates into double digits.  This put the country into a recession.  The cleansing took place and all of the unproductive ventures were pruned from the system.  Ronald Reagan decided to reduce government and began to privatize.  The practice of defined benefit plans where the company supplies the worker with a pension was being dismantled.  IRA’s and 401K’s replaced those defined benefit plans.  The average Joe was expected to invest and produce a return equal to professional money managers.  The 80’s produced an unprecedented number of new investors.  New brokerage firms sprang up.  With the maturity of the internet, electronic brokerage firms flourished.  A new era began- technical trading.  In its early years, technical trading was accomplished by a specialized broker who set up multiple workstations in a trading room.  Traders would use charts and graphs to pick entry and exit points.  It worked for a while.  As more traders began to use technical analysis, the "big boys" with their high powered black boxes could determine what trading indices and formulas most traders were using.  Once they figured it out, they would set traps for the trading population.  They would force a stock up and lure traders in then sell it short and force the traders to take a loss.  Stocks are a zero sum game, a winner and a loser on every transaction.

The Big Boys are playing a game of perception.  The global financial economy needs to contract and de-leverage the excesses of investing that has occurred over the last 20 years.  Alan Greenspan will be found to be the perpetuator of this leveraging problem.  Most of the problem happened on his watch.  Bill Clinton’s era is where most of it started.  George Bush perpetuated it as well.  Big money wanted to keep the party alive.  Unchecked greed propelled this problem into the stratosphere.  U.S. Treasury Secretary Henry Paulson looks like an orchestra conductor.  Wall Street is the audience.  The average money manager is deep within the current paradigm.  The pension fund manager inherently believes that his portfolio will weather any short term problems.  His portfolio is designed to look out 50 years, not 50 months.  As long as Paulson can keep these people believing that all is well, the market may maintain a sideways movement.  However the chickens will come home to roost.

I view this time as a great time to add to your portfolio of hard assets.  With the recent $160 drop in the price of gold, I see this as a buying opportunity.  I hope that they can manipulate the price of gold to stay at this level for a number of months.  That will allow me to buy more gold and silver stocks as I can afford.  Energy prices remain strong.  The energy stocks have responded accordingly.

I believe the 15% drop in gold was orchestrated to settle down the markets.  Remember, gold is a barometer against the fiat currency health.  Gold goes up when the US dollar goes down.  It will be choppy ahead.  Rest assured that the powers that be will do everything necessary to "stay alive".

Some questions we have recently received:

Would you acquire the presidential coins that are being offered now in the newspapers or is this just a perception based offer?  No, I wouldn’t pay a premium for coins based on their rarity.

“I am not suggesting to hoard gold or silver.”
The quote above suggest to me that you are not investing in Silver any longer to protect yourself against the weak dollar. I took your advice in Oct 2003 and put all my cash into real silver. Do you now believe we should not do this now? My comment refers to the time when the possible collapse of the dollar.  At that time you should look to help people with the wealth you have acquired from my counsel.  Hoarding denotes fear.  Your current continued acquisition is based on a future need.  In Genesis, Joseph acquired assets for a future need.  Once the need was there, the assets were there to help others.  We’re doing the same thing.  Gold and silver are simply "tools", not to be worshipped.

I have a question about buying silver.  We have about $50K invested with E**** Jones because we know nothing about finances except there never is enough, and we were wondering what percentage of that 50K would be reasonable to buy silver rounds. And mostly, why? This is my wife’s idea and I do want to honor her.  I would own about $5,000 in silver rounds.  I would also consider buying a little each month.  In my investment account I would check to see exactly what the 50K is invested in.  I have invested in Chevron, Petrohawk, Pennwest Energy, Goldcorp, Yamana Gold, Southern Copper, etc.  See Disclaimer on the website.

In our previously posted "Brace Yourself"  http://www.servias.org/?p=48  posted on January 21, 2008, we specifically warned of the Domino Theory scenario.

Now the theory is now circulating among the mainstream media:

March 15, 2008

News Analysis

A Wall Street Domino Theory

By JENNY ANDERSON and VIKAS BAJAJ

The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.

Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

See: http://www.nytimes.com/2008/03/15/business/15risk.html?ei=5087&em=&en=385f57e170b3e482&ex=1205812800&pagewanted=print

Once the risk is published by the mainstream media in the U.S., it moves from "possible" to "probable" reality.  The mainstream media intimately understands that perception moves society.

In Code Red: International Banking Liquidity has serious problems  exactly three months ago (12/17/2007), we alerted you that perilous times in the financial system were ahead.  Do not delay in getting your house in order!  Investors in Bear Stearns had stock worth $30 on Friday only to wake up today with a $2 stock value.  The Federal Reserve will not protect the average person and will sacrifice anybody and anything to keep the current banking system alive.  That is their mandate.  The credibility of the U.S. Dollar abroad is tanking.  2008 will be a turning point in world history.  It appears that the party is over for the greedy who have been extracting wealth from the masses.  Their "secret" is out. 

Credit crisis reveals America’s secret financial market

Module body

Sun Mar 16, 12:18 AM

WASHINGTON (AFP) – The financial hurricane tearing through Wall Street has sparked vast losses at major banks, but it has also exposed a formerly secretive corner of America’s financial markets.

Millions of Americans track the Dow Jones Industrial Average and their stock portfolios on a daily basis, but the trillion-dollar trade in mortgage-backed securities, corporate and municipal bonds and other complex securities is mostly hidden and closed to amateur investors.

See: http://ca.news.yahoo.com/s/afp/080316/business/us_banking_stocks_finance

In a conference call on Friday Alan Schwartz, CEO of Bear Stearns, spoke about the substantial withdrawal requests by investors.  Customers wanted their cash.  Banks typically do not keep much cash on hand.  When they speak of cash on hand, they use the term liquidity.  If you are extremely liquid, you have most of your assets in cash or equivalents.  If you are illiquid, you may have sizable assets but little cash.  The assets cannot easily be converted to cash.  If you own a $100,000 house with no debt, you have an asset, but until you sell that house you are illiquid.  Cash is needed for immediate financial demands.  Schwartz admitted that Bear Stearns was in a liquidity crisis.

Bear Stearns is an investment bank and a PRIMARY DEALER IN U.S. GOVERNMENT BONDS. There are only a handful of Banks allowed to participate as a dealer. Although Bear Stearns is sizable, the bank is the smallest of the top U.S. government bond dealers.  Like all major bond dealers, they traded in mortgage bonds and derivatives.  This is where the problems arose.  You may have heard that Bear Stearns was in trouble last summer.  Their troubles have not ended.  See: http://www.iht.com/articles/2008/03/16/business/bear.php

The Federal Reserve cannot afford to let Bear fail.  If Bear Stearns were to fail, the whole global credit system would be at risk of a meltdown.  They will be merged with another investment bank.  What is an investment bank?  Investment banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt), as well as providing advice on transactions such as mergers and acquisitions. Until the late 1980’s, the United States and Canada maintained a separation between investment banking and commercial banks. (Wikipedia)

The fact that you and I know about this "run" is an indication that there will be more banks to experience this same reaction to the fragility of the system.  Implement your personal defense plan.  Live in moderation.  Prepare to help your loved ones who have failed to prepare… Love gives!

Within the last 48 hours, the International Monetary Fund (IMF) has issued a second warning to not only the United States but other countries as well.

IMF tells states to plan for the worst

By Krishna Guha in Washington

Published: March 12 2008 23:55 | Last updated: March 12 2008 23:55

Governments might have to intervene with taxpayers’ money to shore up the financial system and prevent a “downward credit spiral” from taking hold, the International Monetary Fund said on Wednesday.

John Lipsky, the IMF’s first deputy managing director, said: “We must keep all options on the table, including the potential use of public funds to safeguard the financial system.”  See http://www.ft.com/cms/s/0/ee21ddbc-f08b-11dc-ba7c-0000779fd2ac.html?nclick_check=1

Why didn’t this make the news in the U.S.?  The American Press is controlled by private, wealthy investors who have their own agenda.  The rich and powerful have an agenda that differs from the average person on the street.  The overall economic system has consistently deteriorated to the point of collapse.  If the average citizen understood the brevity of the current economic crisis, all of the current congressmen would be removed from office along with most of the staff of the other two branches of government.  Congressman Ron Paul is the only member of Congress that I am aware of that has been challenging the status quo.  Now that he has been eliminated from the Republican ticket, I can freely speak about his record.  Paul understands the problem.  He has been an irritant to the powers that be.  His questions to Ben Bernanke of the Federal Reserve (FED) have forced Bernanke to admit that monetary policy without a gold-backed currency would promote inflation and instability.

Why do you think gold traded at a price of $1,000 for the first time in U.S. history?  The U.S. dollar is declining in value worldwide.  The following chart shows the U.S. Dollar Index relative to other currencies:

As you can see, the Dollar is in a downtrend.  My expectation is that the Dollar will continue to downward trend to the .51 level. another 30% decline.  If all else is equal, gold would then trade at $1,425 to $1,650.  You can’t stop there.  Gold is the barometer that measures economic stability.  As the current system moves toward greater instability there will be a larger premium within the price of gold.  Gold retains value while paper currency loses value from inflation.  Silver has a similar nature.  Those in power have tried to convince the public that gold and silver were no longer money.  The prices of gold and silver have been rising against all currencies.  $3,000 per ounce is no longer unrealistic.

When a central bank has no restrictions tied to increasing the money supply such as a gold standard, they can issue as much money as they deem necessary.  By adding large amounts of cash to the system, they reduce the overall value of the currency relative to other countries.  This causes the decline in the value of the currency.  The Fed is injecting more and more cash into the system in an effort to save the banking system and will sacrifice the buying power of the U.S. Dollar to do it.  Holders of the dollar are losing value daily.  The only alternative to these holders is to trade their dollars for another asset.  This helps push the dollar to a lower value as well.  The U.S. authorities know that the dollar must decline but want an orderly decline, not a volatile free fall.  At some point, I expect a possible tipping point where large holders will run toward the exits.  If this happens gold will shoot up in a parabolic rise and at the same time the value of the U.S. Dollar will tank.  As I said earlier, the barometer is the price of gold.

Gold has consistently been a store of value throughout history.  I am not suggesting to hoard gold or silver.  All indications point to a gold-backed currency in the near future.  It will once again represent the primary medium of exchange.  Gold is a tool not to be worshipped.  It will be a medium of exchange allowing for the free flow of goods and services that we may flourish in an environment of "equal weights and measures".  Governments will not be able to manipulate "value" for their own agendas.  As former President Ronald Reagan once said, "Government takes from the needy and gives to the greedy."  Power without love as the motivating force is corrupting.  It will ultimately implode.

How would you like to be one of those who purchased the following stock in January of 2007 at $25.00 only to see it now worth $1.79?

Thornburg Mortgage is unable to meet margin call requirements by its lenders on $610 million.  Once the smoke clears this mortgage company will probably be out of business.  Another stock, Ambac Financial Group (ABK), is also in serious trouble.  Ambac is down 90% from its recent high.  However, Ambac’s problems have a greater repercussion than Thornburg.  Ambac is a primary insurer of financial instruments.  With this insurance "wrap", many securities were rated as "investment" grade securities.  This means that pension funds and other conservative investors could own these securities.  "Investment grade" is deemed to be highly secure.  However, if the guarantee by the insurer (Ambac) becomes worthless, then the "rating" of the security may fall below investment grade.  If that happens, then investors may have to liquidate their position and thus create a reduced demand for these securities.  The end result is the securities’ price is drastically cut.  Other holders of the security must then show unrealized losses on their balance sheets.  With additional losses, the holder must begin liquidating some of the assets to maintain financial stability.  This is a downward spiral.  Ambac is currenty insuring about $524 Billion of outstanding debt. See: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/07/AR2008030700657.html

The financial institutions and the Federal Reserve are intimately aware of this issue.  They will find a solution to further prop up Ambac or the securities Ambac insures.  With a much lower stock price and performance, AMBAC will have difficulty raising enough capital to stay in business.  It did raise $1.5 Billion but I suspect that amount will have a high "burn" rate in the coming months as more debt securities heads south and Ambac is forced to pay out claims.

Banks face "systemic margin call," $325 billion hit: JPM

NEW YORK (Reuters) – Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co, said in a report late on Friday.  See: http://www.reuters.com/article/ousiv/idUSN0832645120080308

Remember, when a bank loses money on a loan, the loss goes directly to the bottom line and forces the bank to contract its loans and investments.  If banks are leveraged 10 to 1 against their capital, this puts $3.25 Trillion into play.  Hopefully this isn’t the domino that causes all of the other financial dominos to fall.

Could it be that Our Heavenly Father is beginning the cleansing cycle?

I posted a writing on December 23rd, 2007 on "Fraud and Deception…" http://www.servias.org/?p=28.  We are starting to see the sharks circling their prey in the derivative insurance arena of collateralized debt obligations (CDO’s) contracts :

Johnson & Perkinson Announces Commencement of Class Action Litigation Naming Ambac Financial Group, Inc.
Monday March 3, 4:32 pm ET

SOUTH BURLINGTON, Vt., March 3, 2008 (PRIME NEWSWIRE) — Johnson & Perkinson hereby announces the commencement of a class action lawsuit naming Ambac Financial Group, Inc. (“Ambac” or “the Company”). Individuals, families, trusts or other entities that purchased Ambac securities between October 19, 2005 and November 26, 2007, inclusive, have the opportunity to participate as Lead Plaintiffs in the currently pending litigation. To do so, you must apply to serve in that capacity by March 17, 2008.

Johnson & Perkinson, a litigation boutique law firm based in South Burlington, Vermont, has extensive experience prosecuting investor class actions and actions involving financial fraud. Attorneys Johnson and Perkinson are both former employees of the Securities and Exchange Commission. Dedicated to maximizing shareholder return, members of Johnson & Perkinson have prosecuted complex class actions alleging securities or consumer fraud/deception on behalf of investors/consumers against numerous public companies since 1985, resulting in the recovery of many hundreds of millions of dollars, and have been singled out for excellence by various courts. The firm is litigating, or has recently resolved litigation, as Lead or Co-Lead Counsel in securities class actions against Xerox, Priceline, Wireless Facilities, i2 and Xchange, and serves on the Executive Committee in the Global Crossing case.  http://biz.yahoo.com/pz/080303/137505.html

This is just the beginning.  On the mortgage-backed securities front,  litigation is moving forth:

Swap Skirmish: Risks Hidden, Says Hedge Fund

By Susan Pulliam, Serena Ng and Tom McGinty

Word Count: 1,212  |  Companies Featured in This Article: Citigroup, Wachovia, MBIA, Ambac Financial Group, Bear Stearns, Morgan Stanley, Goldman Sachs Group, Lehman Brothers Holdings

As financial markets boomed in recent years, some Wall Street players began selling insurance against things going wrong, in what looked like prudence.

It wasn’t.

In separate lawsuits filed in a New York federal court, a $58-million-asset hedge fund alleges that Citigroup Inc. and Wachovia Corp., respectively, improperly required the fund to pay out more money from insurance derivatives contracts known as "credit default swaps" amid a steep decline in the value of mortgage-backed bonds. More… http://online.wsj.com/article/SB120459196434709061.html

Most of us don’t understand the complexities of these financial instruments.  The one thing we do understand- losing money.  We can be assured that this is just the tip of the iceberg.  The legal system will be extremely busy with the fallout of the greed-induced investing in these complex financial instruments.  Do you remember in March of 2003 when Warren Buffett called the derivatives "financial weapons of mass destruction"?  See http://news.bbc.co.uk/2/hi/business/2817995.stm

I hope you have implemented your "personal defense plan".

A recent article in Harper’s Magazine suggested that the next bubble would be "alternative energy" also known as "going green".  I would suggest that there has been a mother of all bubbles forming.  This bubble has a different set of rules.  This is the commodity bubble.  Commodities differ from other bubbles in that we all need commodities.  We must eat, travel, and replace failing infrastructure.  Commodities are generally consumed.  The beloved farmers are having their day in the spotlight.  This segment of the workforce must love the job.  Dealing with drought, insects, floods, etc. the farmer has many variables to deal with.  Their product has been in a "bear" (down/sideways) market for years.  Their time has come.  With the burgeoning economies of China and India, the worldwide demand for commodities is strong.  Five years ago I warned that China was an 800 lb. gorilla that would have a tremendous global impact.  Once China began to develop its resources (people) we would see a brave new world.  When I was a child, the cheaper toys were made in Japan.  At that time there was a stigma attached to foreign made goods.  That time is past.  Most products on the shelves are made in China, Vietnam, India, Mexico, etc.  We are importing about $500 Billion per year of energy products.  This transfer of wealth will surely cause a decline in the U.S.

The Federal Reserve is in a "no win" situation. Inflation is on the rise.  It is becoming serious.  Restaurant prices are up substantially, some by 10-15% in the last twelve months.  Expect to see price increases across the board- food, energy, utilities, vehicles, the list goes on.  Back in the late 70’s, early 80’s when inflation was moving to a hyper-inflationary status, Paul Volcker (Fed Chairman 1979-1987) increased core interest rates to 13.5% in 1981.  For people who had money to invest, those were the good ol’ days.  Banks were paying 14-16% on C.D.’S.  Companies were borrowing at similar rates.  Volcker knew that he had to contract the economy and purge the financial wastes that had accumulated.  This was a painful time for the U.S. economy.  Unemployment was at its highest level since the Great Depression.  Volcker was under political attack.  He held his position and rates subsided to 3% range in 1983.  The purging was completed.  This set the stage for the longest sustained economic expansion in the country’s history.  Ben Bernanke has a different set of circumstances to work with.  The debt to equity ratio of the private sector is much higher today.  The cost of housing in recent years has placed the consumer at risk.  Credit card debt in the 1970’s was insignificant compared to today’s levels.  The price of commodities was not being affected by China and India.  Now, the consumer is tapped out.  The real estate bubble has burst and housing prices are declining.  Consumers’ balance sheets are getting weaker.  Contraction of spending is ahead for most consumers.  At the same time, the financial crisis is in its early stages.  The Fed needs to cut rates to keep the banking system liquid.  Lower rates improve the profits of banks.  Higher rates reduce their profit margins.  The banks need profits to offset their investment and lending losses.  Can the banks recover before their losses must be booked?  That is the $64 Trillion question.  On the other hand, the primary inflation fighting tool of the Fed is "interest rate increases".  You have two opposing forces requiring opposite rate action.  What will Ben Bernanke do?  He wrote his Doctoral Thesis on the Great Depression and concluded that the depression could been avoided had the Fed pumped more money into the system.  This will reduce interest rates and at the same time increase inflation.  Remember, true inflation is defined by the increase in money supply.  Price inflation is the result of this increase in money.   There is more money chasing goods and services.  The Fed is also under pressure to keep the economy stable during the election cycle.  Rest assured that they will do everything possible to keep the stock market at its current levels through November.

Hyperinflation is ahead!  The Fed does not have the "guts" to raise rates and fight inflation.  Their mandate is to protect the financial institutions, not you or me.  At the same time the economy is in recession.  As inflation increases the consumer will continue to respond with reduced spending.  This will be observed as a downward spiral.  Consumer confidence (or perception) will determine the velocity of this downward spiral.  Global demand for commodities will provide a strong price base for commodities.  As the Fed injects more dollars into the system, the value of the dollar will decline relative to other currencies.  Any dollar denominated investments will decline in "global" value.  Since energy has been bought and sold in U.S. Dollars, international owners of this resource are losing money.  There will be continued pressure to move away from the dollar in pricing oil.  With less demand for dollars, inflation in terms of dollars will increase.  Ugly!!!

To summarize:

1. You have a housing bubble that has burst.

2. The Banking System has severe structural problems yet to be fully revealed.

3. The commodities are in a historic bull market which will affect the price of everything we buy.

4. The Fed cannot control inflation.

5. We are probably at "Peak" oil, thus a declining supply in a world of increasing demand.

6. The consumer has reduced ability to spend.

The true global currencies are gold, silver, oil, gas, water, grains, and other base commodities.  Your assets should include some of these or you will see your wealth evaporate.  Those who prepare for this perfect storm will be a blessing to those who failed to see the storm clouds forming.  Cleansing/purging cycles as mentioned in Scripture are necessary.  This may be the ultimate purge!

The International Energy Agency is projecting global oil demand at 116 million barrels per day by 2030.  Currently the global demand is approximately 88 million barrels per day.  China and India will continue to increase their demand for oil.  India is now manufacturing at $2,500 car.  As its exports grow, oil consumption will grow.  China is expected to overtake the U.S. in light duty vehicle sales by 2016-2017.  This alone will add about 10 million barrels of new oil demand by 2030.

Population:

With over 2.3 billion people and growing, China and India’s income growth will fuel auto sales, infrastructure spending, and commodity prices.  Sand, cement, copper, and other commodities are at record prices due to the infrastructure needs of these countries.  China is building new roads, gasoline stations, pipelines, and other infrastructure to support this increase in transportation requirements.

Peak Oil:

The U.S. 48 states experienced "peak oil" in 1970.  Overall production has been in decline ever since.  The North Slope of Alaska experienced peak oil in 1989.  Mexico’s Cantarell field (the 2nd largest field in the world) experienced peak oil in 2005 and has declined by 41% since.  OPEC countries have reported the same reserves for decades which is clearly not true.  Therefore we must assume that their fields are in decline as well.  The largest oil discovery in the world has been in production for over 60 years (Ghawar field in Saudi Arabia was discovered in 1948).  Considering the current decline curve of existing production, we will need to find over 60 million barrels of new oil by 2030. I do not expect this to happen. 17% of global crude supply comes from 10 super-giant oil fields.  The following table provides this breakdown:

In reviewing this chart, you can see that we would have to discover an equivalent of 14 new giant oil fields the size of Ghawar to meet the expected future demand.  There is no silver bullet of technology that will make up this difference in expected demand vs. supply.

Ownership of Reserves:

Who owns the oil in the ground?  The following chart shows that National Oil Companies (NOC) own most of the production:

U.S. Oil companies account for less than 20% of world production.  These companies do not have the ability to set prices.  OPEC is the major supplier of world oil and has pricing power.  Taxing U.S. oil companies for high prices produces no impact on pricing.  Oil companies are currently buying reserves by buying back their own stock in a repurchase program.  If there was a major probability in discovering huge reserves, they would be directing cash to those projects instead.

The Impact of Two Decades of Low Prices:

The last 20 years’ prices drastically reduced infrastructure investment and replacement.  The pipeline infrastructure is made of steel and is rusting.  This will force notable investment in infrastructure thus supporting high commodity prices.  In the U.S. alone, oil and gas employment was reduced by 50%.  The drilling rig count plummeted and rigs sat rusting away in fields.  A small drilling rig costs in excess of $500 thousand to build.  Oil field experience is at a multi-decade low.  50% of Exxon’s employees will be at retirement age in 5 years.  Low prices caused a "brain drain".  The IEA projects energy infrastructure cost to exceed $5 trillion for growth alone.

Alternative Energy- Ethanol

Ethanol is a poor substitute for oil.  It is corrosive to the existing pipeline infrastructure.  Its energy output versus energy required to refine it is low compared to oil.  Ethanol requires a feedstock and fresh water.  Both ingredients are in limited supply and are expected to be in shortage as well.  The current primary feedstock is corn.  Its price is at an all time high.  Although we all support the farmers in their effort to generate a profit, ethanol will lose its support as the impact of production is understood by the politicians.  Ethanol contains 84,100 BTUs per gallon and the replacement energy value for the other co-products is 27,579 BTUs. Thus, the total energy output is 111,679 BTUs and the net energy gain is 30,589 BTUs for an energy output-input ratio of 1.38:1. Oil ratio is much higher (8:1 to 23:1 depending on the logistics).

Alternative Energy- Wind

Wind is totally dependent upon geography and weather.  Although it will supplement the power grid in some states, the economics do not support a major infrastructure investment to solve the energy demands of the upcoming crisis.  Individuals living in windy areas might consider the use of wind to generate electricity.  Major population areas will not benefit from this technology anytime soon.

Alternative Energy- Solar

Existing technologies will not support the growth of the electrical requirements of the U.S.  Although a reasonable personal alternative for supplemental power, the solar solution will not be effective as a national solution.

Alternative Energy- Nuclear

Although 3 Mile Island reactor incident never caused a death, Americans have been afraid of nuclear power since.  France generates over 70% of its power from nuclear power plants.  Red tape and civil litigation contribute to 10 year construction cycles of new power plants.  If the U.S. power companies were to start plans immediately for new nuclear plants, it would take 10 years to become operational.

Alternative Energy- Electric

There are approximately 170,000 service stations in the U.S.  Building electric cars will necessitate a substantial infrastructure cost to ramp up service stations to handle increased recharging needs.  This will take time.  Early buyers of electric cars will be restricted in their driving range.  Another issue is that our electrical grid is growing and outpacing power plant construction.  Any additional burden on the grid will move it to a crisis sooner than later.  The U.S. commercial infrastructure is heavily dependent on oil for energy and thus the impact of electric cars would be minor for 15-20 years.  The U.S. has a 17 year inventory turnover rate of vehicles.  It would take at least 8 1/2 years to replace half of the country’s fleet if electric cars were available and could meet the transportation requirements of the population.

Alternative Energy- Coal

Coal is an abundant resource in the U.S.  However, the "green" direction of the U.S. will prevent new coal plants from being built.  New coal plant construction has been denied in several states.  Instead, natural gas plants are being considered as an alternative.  These plants will generate electricity at a higher cost versus coal.  Green is in, coal is out!

A comparison to oil:

To obtain in one year the amount of energy contained in one cubic mile of oil, each year for 50 years we would need to have produced the numbers of dams, nuclear power plants, coal plants, windmills, or solar panels shown below:

Summary

The energy crisis is here.  There is no alternative that could be developed in time to avert this crisis.  Wars have been fought over resources throughout history.  Unless we have a Divinely appointed intervention, energy prices will skyrocket and will support a global depression.  The response to the Great Depression of the 1930’s was a World War.  The NOC’S have no incentive to sell their inventory at lower prices.  In fact, their incentive is to slow production and receive a higher price for their product.  U.S. oil companies will enjoy the profits but have no ability to determine price.  Investing in well run energy companies will be the best defense against rising prices at the gas pump.  "You might as well buy the product from yourself."

The basic economic cycle is divided into four parts: boom, recession, depression, and recovery.  There is no absolute, firm definition in today’s environment of exactly what quantifies each aspect of the business cycle.  Economists continually increase the complexity of their trade by adding new formulas and statistics in an attempt to describe which part of the cycle we are in.  Complexity steers us in the direction of chaos.  Simplicity moves us to "order".

Tampering with the business cycle has disastrous consequences.  The natural business cycle allows for orderly expansion and contraction.  Contraction is designed to be a "cleansing cycle."  Entrepreneurs will eliminate waste created from bad business decisions during this period.  This is a time of reflection.  Do we really need this expense?  Did this sales program produce additional profit?  The list goes on.  However if the cycle is tampered with by delaying this cleansing cycle, the result will be a longer, deeper cleansing cycle.  A sustained boom will result in a sustained bust.

Those in control of the creation of money seem to be on a continual quest for the "Holy Grail"- a formula that will eliminate the business cycle and only produce sustained growth.  They study Economics and write theses to introduce their perspective of economic prosperity.  In the last 100 years, the Great Depression became a popular case study.  How can we eliminate another great depression.  Economists agree that a depression contains negative growth of the "Gross Domestic Product", high unemployment (10-20%+), and a lower standard of living for most of the population.  Those in control of the money supply have experimented with our livelihoods.  Interest rates were consistently higher in the 1970’s to fight inflation.  For years passbook savings accounts were paid 5% interest.  That rate rarely changed.  Mortgage rates varied from 7 to 10%.  The standard down payment on a conventional loan was 20%.  FHA loans required less but not the 0% allowed in recent years.  Fixed interest rates were the standard.  The gold standard was dismantled in the 70’s.  When inflation started rising in the early 80’s, Paul Volcker as Fed Chairman raised interest rates to arrest the boom cycle and force a recession and thus cleanse the waste out of the system.  During that time I was a Chief Financial Officer.  Our plans for expansion would take into account the cost of money and the expected return on investment (ROI).  If the ROI was not substantial we would axe the plan.  Only the plans with the greatest potential were implemented.  The high rates slowed our growth.  Those same rates minimized our mistakes by requiring greater scrutiny of each project before implementation.

Our current central banks around the globe are postponing the cleansing cycle.  By providing "easy and cheap" money, they have promoted poor economic decisions throughout the entire global population.  The average family has created substantial liabilities including excessive mortgages, credit card debt, and consumer loans.  At the same time creditors have successfully eliminated the bankruptcy alternative that eliminates the consumers’ mistakes (a jubilee).  Once again, we’ve been bamboozled!  At the same time, this easy money policy has fueled inflation.  Those that did not fall into the borrowing trap are having their savings eaten away by excessive inflation.

In college, we did not have an economics lab class.  A school laboratory was a place where you could experiment with the principles you learned during the lecture class.  Physics principles were validated in the lab class.  How do you validate economic principles?  In the biggest lab of all-the globe.  What happens when all of the economists are taught by a prevailing theory?  The result is a "cluster of errors".  Those in charge continue to operate under assumptions that may be invalid.  The gold standard was eliminated since it seemed to restrict growth.  Who decided that growth was being restricted?  Those in power motivated by greed.  Biblically, the gold standard has been used for thousands of years.  There was a reason for this.  It created a reasonable business cycle without the volatile changes.  The Lord God Almighty created the business cycle.  Man has decided to tamper with it.  The current "cluster of errors" will produce a well-defined view of economic depression in our economics lab.  After it is all said and done, we will have a close and personal view of the negative economic impact created by financial derivatives, selective regulation, investment bankers’ greed, and poor lending/borrowing practices.

I was recently asked what to do with funds contributed to a retirement plan.  This is difficult to say since I do not have the balance sheet/income statement of the individual.  However I can provide a plan that I believe will help a family weather the uncertain future economic reality.  Nobody but the Lord God Almighty can be certain of what we will face over the next five years.  We can only use the knowledge, wisdom, skill, and understanding (Daniel 1:17) to direct our loved ones and friends to what we believe is best in preparation.  Some of us are called to the financial arena, others are not.  They must rely on and trust the brethren who are called to look out for the best interest of the Body of Christ.  Every joint is to supply the others: Ephesians 4:15 but, speaking the truth in love, may grow up in all things into Him who is the head–Christ– 16 from whom the whole body, joined and knit together by what every joint supplies, according to the effective working by which every part does its share, causes growth of the body for the edifying of itself in love.

For the body of Christ to grow, people must give.  I am giving the following advice in order to help you defend yourself against expected economic downturns based on the global direction of the current system.  I understand the many people do not have enough assets to take advantage of the following steps.  Do what you can.  Most of us can afford to buy an ounce of silver weekly.  It’s a start.  Go to the local coin shop and start an accumulation plan.  Don’t worry about the daily price.

1. Buy gold and silver (the metals) as insurance.  I would buy one ounce coins.  I have no interest in rare coins because their value is perception based.  Consider having 5-10% of your cash in these two metals.  I expect gold to exceed $1,600 per ounce and silver to exceed $100 per ounce over the next 5 years (in U.S. Dollars).

2. Maintain 6-12 months’ supply of expenses in cash on hand or in the bank.  If you personally lose a job, you want to be able to meet monthly obligations while looking for employment.

3. Check your bank’s exposure to derivatives and profitability at: http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp  Look on Page 5 of the report for the derivatives’ exposure. Page 2 provides a 5 year comparison of net income.  If they are losing money you might want to find a new bank.

4. Spread CD’S over multiple banks if you have more than the insured limit.  CD rates are expected to decline over the next 12-24 months.  The Federal Reserve has historically supported the banking system’s profitability at the expense of savers.  This is done by lowering savings rates while the loan rates are lowered at a slower pace.  You ultimately pay for their investment mistakes.

5. Weight your stock portfolio to energy (oil & gas), gold, silver, & coppper stocks, and consistent dividend paying stocks.  Chevron, Petrohawk, Goldcorp, Yamana Gold, Silvercorp, GE, Southern Copper, Penn West Energy are all stocks for your review (see disclaimer).  There are other stocks but these have had some prior review.  I expect oil to trade over $150 per barrel.  I expect natural gas to exceed $10 per mcf.

6. Bonds may be good but I am concerned about the insurers going bankrupt thus having a negative impact on the bond market.

7. Eliminate any leverage you have been using in investing.  If necessary, sell stock to pay off the leveraged position.

8. Reduce/eliminate debt.  Its time to contract your liabilities.  If you use credit cards, pay off the balance each month.  If you are making credit card payments, quit using the cards.  If you can’t pay cash you probably don’t need it.  Debt consolidation only works if you have the discipline to refrain from creating more credit card debt.  Even though credit card usage is easy, start writing checks for purchases.  This reinforces your awareness of the impact purchases has on your cash position.  Credit card purchases seem to be "out of sight, out of mind" until that bill comes in.

9. Simplify.  Look at what is controlling you and your time.  Less is better.  A friend of mine had a large pickup because he used to pull horse trailers.  He doesn’t do that anymore.  Get rid of your "pickup".  It’s costing you money.  It is easier to obtain than to "maintain".  Calculate the 5 year cost of any asset that has an ongoing maintenance expense.

10. Eliminate on-going expenses if possible.  Review your budget.  If you don’t have a budget, create one.  Look at your last six months’ expenses to see if there is something unnecessary.  Don’t overlook the small expenses either.

These steps are intended to help direct your thinking, not eliminate your accountability in your financial affairs.  Each of us are called to be stewards.  If this website is helpful to you, share it with your friends.

Disclaimer:

The material on this website has no regard to the specific investment objectives, financial situation, or particular needs of any visitor. This site is published solely for informational purposes and is 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.  Servias Ministries, Inc. is not under any obligation to update or keep current the information contained herein.

Servias Ministries, Inc.’s officers, directors and associates may have an interest in the securities or derivatives of any entities referred to in this material and 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.