Servias Ministries Blog

A fundamental expression in nature is a wave.  The following image provides a simple expression of a measurable wave:

However, waves can also rotate as shown below:

Cycles are a reality of life and at the most fundamental level we observe expansion and contraction.  Muscles are developed by expansion and contraction, stress and rest.  Our sleep patterns are cycles to allow us to be restored on a daily basis.  Economies work the same way.  Men do not make perfect decisions on expanding their business.  Some ideas simply fail.  Financial capital is directed toward those ideas and pursuits and they don’t produce the expected fruit.  Just as with a plant, you must prune away the unproductive branches for they are using resources the fruitful branches need.  It is also true with a nation’s economy.  Extended expansion needs an offsetting contraction.  However, politicians in their quest for power try to keep the economy in an expansionary mode in order to get reelected.  Since most citizens don’t understand the need for contraction, they oblige by reelecting the politician who promises them a rosy future.

As an entrepreneur for the past 27 years, I have grown accustomed to the cycle.  There have been lean years and there have been exceptional years.  Throughout those years, we have learned to live below our means.  It is easy to live up to a higher income but it is brutal when you attempt to contract your family budget.  However it can be done.

America has over-expanded for the last few decades and the piper wants to be paid.  The only question will be how much economic carnage will occur.  Historically, other economies crashed and burned after they attempted to do the same thing.  The world did not end but there was extreme pain.  This time looks no different.  Those who have followed this blog have been encouraged to downsize their needs and budget, get out of debt, and minimize financial risk (if possible).  Only Our Heavenly Father knows the timing when the unraveling will be in full swing.  That is why I encourage readers to seek HIS Face.  HE can and will guide each of us through the tumultuous times.  Love and peace will sustain us individually as the contraction gets into full swing.

Warren Buffett recently posed the question, “Would you rather own all the farmland in the U.S. or own gold?”  Most of us would say farmland since we know that it would produce food to be consumed by society.  However the better question to ask is, “Would you rather sell your farmland for gold or a fiat-based currency that was printed out of nothing?”  Would you rather auction off a scarce commodity and receive gold or US Dollars or Euros?  Since the US Dollar has lost over 90% of its value in the last 50 years, why would you want to sell a producing asset for a declining asset?

The recent drop in gold, silver, and related stocks is a buying opportunity for those who believe the above paragraph.  With the long term decline of a fiat currency, gold becomes a productive asset in its relative rise in value.  Gold and silver mining companies will soon return to the “utility company” status they once held during the Great Depression.  Their dividends will be similar to utility companies.

There is total denial that the Greek default will have a substantial impact on the global banking system.  The Euro is in deep crisis.  Portugal and Spain are the next targets for this contagion.  The losses are a real threat to the banking system.  Youth unemployment in Greece is at 51.4%.  80,000 Greeks attempted to storm the government buildings recently.  Greece has contracted by 15% and is contracting by 7% this year.  How many countries can contract by 25% and reasonably recover in the short term?  The Rule of Law is disintegrating in Southern Europe.  People are now terrified of the unknown.  The mainstream media would have us believe that all is well.

Now that one bond group of Greek obligations has defaulted, we must consider the other groups that have yet to experience a cash transaction requirement.  Until a bond is at redemption or an interest payment is required, it has not legally defaulted for nonpayment.

Bank bonds, Hellenic Railway bonds, Urban Transportation bonds, etc. will all be impacted by default.  How big will the line be tomorrow as all Greek bondholders seek to make their insurance claim?  This reminds me a slow motion train wreck.

In recent blogs I have reported that the ISDA had attempted to redefine the Greek default.  Yesterday afternoon, their tune changed, by necessity.  Moody’s has stepped in and called the event a default.  The ISDA responded that a “credit event” had occurred:

“LONDON, March 9, 2012 – The International Swaps and Derivatives Association, Inc. (ISDA) today announced that its EMEA Credit Derivatives Determinations Committee resolved unanimously that a Restructuring Credit Event has occurred with respect to The Hellenic Republic (Greece).”

“The Committee determined that an auction will be held in respect of outstanding CDS transactions on March 19.”

An auction?  Huh?  I look for the buyers at the auction to receive funds for settlement that would trace back to a Central Bank.  It will be interesting to watch this play out.  The stakes are high and will potentially affect everyone no matter where those losses are absorbed.  The current system is crumbling and the Emperor really has no clothes AND he is standing next to the elephant in the room.

Greece averted bankruptcy be convincing their bondholders to take a 53.5% loss on the face value of their existing bonds.  See: http://finance.yahoo.com/news/greece-secures-biggest-debt-cut-132152251.html   The ISDA will not have to honor their default swaps for now.

Let me get this straight.  Last week I had a bond worth let’s say $10,000, and this week it is worth $4,650.  Am I suppose to believe that someone didn’t default on their original obligation and my insurance won’t cover this loss?  Man’s laws have been so perverted that anything goes in the financial arena.  Soon, the general population will wake up and realize that their retirement funds may not be worth what they thought.  How long can this continue?  Haman in the Book  of Esther thought all was well the week before he was hung.  Happy Purim!