Servias Ministries Blog

You cannot grow without energy.  You cannot sustain growth without a sustained energy source.  This is true for an individual as well as a nation.  Our current paradigm of economic growth is based on the past surplus of hydrocarbons, specifically oil.  The population of the U.S. is in denial.  We are discovering 1 barrel of new oil for every 4 barrels we consume on a worldwide basis.  The Chinese know this and are negotiating deals around the world to insure energy supply to fuel their massive growth.  The U.S. is spending money on warfare and welfare rather than focusing on energy efficient infrastructure creation.

The current alternative energy sources will not offset the decline in oil supplies.  We need three new “Saudi Arabia’s” to offset the decline, yes, three!  In 2008, 42 of the 50 largest oil producing countries have passed their peak oil production.  The global decline rate (depletion) of reserves is about 9% per year and exploration companies are not finding enough to offset this decline rate.  If and when shortages begin, economic destruction ensues.

The current economic system is based on an infinite monetary growth debt-based paradigm.  This system is based on fiat currency, fractional banking, compound-interest debt based growth.  Those with unlimited access to the currency or financing extract wealth from the producers of goods and services- you and me.  This system requires those in control to keep our faith in financial instruments positive.  Perception is more important than reality in this system.  Credit default swaps is an instrument that allows you to make more money by destruction of the underlying asset than to invest in its growth.  The increase in CDS’s for state and local government bonds means that the big money is betting on the destruction of these entities.  Uh oh.

What do UK Energy Agency (Jan),  UK Task Force (Feb),  Oxford University & University of Kuwait (Mar), U.S. Military (Apr), and Lloyds of London (Jun) all have in common?  They have all warned of coming shortages in supply of oil versus demand or Peak Oil.

Consumers are stretched to the limit and the cost of oil above $84 assures us of increasing the tension on the ability of the consumer to financially cope with the monthly cost of survival.

State governments are moving toward a 30% shortfall of revenues versus expenditures.  There are two ways to make up the difference: cut services and jobs or raise taxes… or both.  The tax burden of the average citizen is already moving up.  The Bush tax cuts are set to expire this year but I suspect they will be renewed to some degree.

There is no way for the U.S. to cover its total obligations except by printing exorbitant amounts of money.  With no restraint of a Gold standard, you can expect this to happen.  The only question is “when”.  More costly energy will only serve to force action sooner rather than later.

As a business traveler a/k/a “road warrior”, I am extremely sensitive to travel costs.  After all, the money is coming out of my pocket, not some corporate treasury in the sky.  Actual airfares and rental car costs are up substantially, much higher than government based inflation numbers.  I am paying 50% for auto rentals than the best priced rentals of 24 months’ ago.  Airfares are up roughly 20%.  In the meantime, savers are making 3/10 of 1% for savings.  What a disconnect!

Economic indicators are decelerating with housing tanking.  The economic stimulus package has run its course and did not produce a sustained recovery and a new stimulus is in the works.  Obama signed an extended unemployment benefits package this week.  You can be sure that incumbents will be funding anything that will convince voters that the current politicians should be retained.

The private sector is losing jobs whereas the government sector has been adding jobs.  Even though the net effect to unemployment reveals minor decreases, the private sector creates value, the government creates nothing but only consumes.  Welfare and warfare currently describes the government’s expenditures.  In the 30’s, government jobs built assets around the country and thus increased overall value to the economy.

The current politicians are delaying the budget numbers until after the election.  With a deficit expected to be over $1.5 Trillion, Washington is talking about a VAT tax.  When I visited England for the first time in the 1980’s. I discovered the VAT(Value Added Tax) tax.  When I went to pay for a souvenir, the cashier added about 15% to the total- the VAT.  What???  We’ve been hosed, Davey!  The VAT tax will be in addition to the income tax we already pay.  Did Main Street receive any of the bailout money?  Nope.  We simply keep funding the economic experiments and Wall Street shenanigans.

The stock market is confusing hedge funds which causes them to move toward a greater cash position, mostly in U.S. Dollars.  The Dollar is the “least bad” currency versus the Euro.  This is true for individuals as well.  The small investor has shifted out risk-based stocks and moved to bond funds which may be risky as well.  The bull market in bonds is 29 years old and the cycle normally does not last beyond 37 years.  When bonds head south, interest rates will rise and governments will fall.  The cost of borrowing will exceed their ability to repay.

The banking crisis is not over nor will be for some time.  Seven more banks failed on Friday bring the count to 270 since 2007.  The FDIC is selling the banks and guaranteeing asset purchases thus increasing its own liabilities substantially.  By digging down into the transactions, it appears that the bank’s’ assets were overvalued by 40% on their balance sheets.  Since I believe that these banks are not isolated cases, I would assume that other banks around the country are under the same plight.  It would be prudent to keep your balances under the FDIC insurance limit at any one financial institution.  They’re not going to broadcast their imminent failure to the average depositor.  With all of the government based guarantees in place, the Fed cannot allow deflation to take over for it would further erode the value of assets now guaranteed by the U.S. Government.

The complexity of the global system will reach a point of collapse.  As individuals, we need to move away from complexity and toward simplicity.  Can we do this in a day?  Most of us would have to say no, but the goal is to move in that direction.

The following excerpt is from one of the most successful investment letter advisors in history, Harry Schultz.  He confirms what I have been preaching for years about technology but views it from an investing point of view:

Daily Bell: You’ve been successful for a very long time – and you may be, indeed, the oldest active investment writer and consultant around. How has the world changed in your opinion?

Harry Schultz: It’s gotten unpleasant morally, as everyone now realizes – but it’s too late for the wakeup call. It’s gotten speedier, but not better because of speed. There is scant benefit to speed, whether by car, plane, email or market facilities. Speed has forced people to act before they can think things through. Often speed means you don’t weigh the risk/reward factors – as there doesn’t seem to be time for it. High tech makes things easier in many ways, but causes more stress, partly because it keeps breaking down. You see this with computer glitches, crashes and viruses. Also, hi-tech goads you into making fast decisions.

When big corporations must keep a full-time team of techies on-hand to fix computers that fizzle daily, then tech is not, repeat not, working. Private citizens can’t afford the cost or the time-loss to keep tech working. For every hour technology saves us, we lose 75-90 minutes. The stress is not measurable.

Typewriters don’t break down, yet we are forced to accept computers that do. Autos no longer break down. The computer nerds only want to sell them (Microsoft, Dell, etc) and promote updates (which cause new problems). They aren’t interested in making them as efficient as cars and TVs have become. They’ve had decades to get it right but have made near zero progress toward reliability.

Speed is not a worthy goal, nor is the size of the mega bites your computer can handle. Dependability should be the goal. The same goes for banking, rating agencies and derivatives. Everyone wants profits, not dependability. It’s a new form of fraud, masquerading as progress. Morality, where art thou? End of soapbox.

http://www.thedailybell.com/1204/Harry-Schultz-on-the-Power-Elite-Free-Markets-the-Internet-and-Why-Gold-Is-Going-Much-Higher.html

3 out of 8 people on earth live in China or India.  Both countries are growing whereas the countries of the “West” are having severe economic difficulty.  With the arrogance of ignorance displayed by leaders, economic stimulus tactics are not working.  But wait,  Stimulus Package 2 is in the works.  At the same time, a massive tax increase will kick in next year- the kiss of economic death.  Politicians can’t seem to figure out that a tax increase hurts job creation.  Ronald Reagan figured that out and cut taxes.  The result was substantial job creation.

The Federal Reserve will continue printing money a/k/a quantitative easing.  The President’s Budget Director resigned in June.  The new budget will be withheld until after the November election.  Look for a budget with huge deficit in the $1.4-2.0 Trillion category.  If made public before the election, incumbents would lose more seats than currently projected.

The Economic Desperation Index is increasing.  On a recent trip to Padre Island, the local economy was at risk of loss from Hurricane Alex.  The mayor decided against a mandatory evacuation even though the brunt of the storm would hit the island.  I am sure his decision was economic based, not safety based.  Beaches were closed, businesses were closed, the one and only bridge to access the island was closed, but no mandatory evacuation was mandated.  Money vs. life… focus on life, lost.

Worldwide conventional oil production declined 2 million barrels declined last year.  Expect the same this year.  Natural gas inventories are down from last year and the storage levels no longer appear to be at a surplus level.  This bodes well for natural gas prices in the coming months.  The export market from OPEC is shrinking due to more internal consumption and countries like China are tying up the export oil through contracts.  At some point, the spot price for oil will be pressured in an upward direction.  Higher energy costs dampen any attempt of recovery in the West.  Those in power will attempt to suppress energy prices in the short run which will ultimately hurt us in the long run.

We’re on borrowed time.  Gold has increased in value nine years in a row.  The financial storm clouds continue to build in the sovereign debt crisis.  History shows us that when countries accumulate substantial debt, hyper-inflation follows.  The problem is that nobody pays attention to financial history.  We were close to hyper-inflation in the 1980’s but Paul Volcker, the former head of the Fed, was able to raise interest rates and arrest the inflationary pressures.  Asset inflation is occurring in the commodities.  It precedes price inflation.  China is using U.S. Dollars to buy commodities around the world and is reducing its supply of Dollars through this conversion to hard assets.

On top of all of this is the “Cardinal Climax” occurring August 1st, 2010:

Arch Crawford, financial technician states: “On August 1, give or take a week, we’ll have the most five-planet alignments in perhaps thousands of years. Known as the “Cardinal Climax,” this is the meanest, nastiest, most challenging and most transformational of any planetary phenomena in all of written history!”  If planetary alignments do indeed affect the emotional energy state, this could signal a catastrophic fall in global markets.  Will this happen?  Only Our Heavenly Father knows!  If this does happen, food will be the most valuable commodity.

Crawford:

How bad is bad?

“Well, when something is worse than the Revolutionary War, World War I, the Great Depression, and World War II, that’s bad – it’s the worst I’ve seen the charts in over 200-years.

As he explains it, there’s Mars conjunction Saturn which will be in opposition to Jupiter conjuncting Uranus all squaring Pluto.

Do I believe this?  I don’t have an answer but I am led to share those views that show past success.  Crawford’s investment newsletter rank #1 between 2007 and 2009.  He has 50 years of investing experience.  It’s better to be prepared and wrong than unprepared.