Archive for October, 2008

Honesty in Uncertain Times

Thursday, October 30th, 2008

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 difference between the economy and the Titanic is…they had a band!"

Saturday, October 25th, 2008

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!

How to become an Oracle in the world of structure

Thursday, October 23rd, 2008

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!

Great Depression II & Devaluation of the Dollar

Thursday, October 23rd, 2008

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

I was wrong…

Thursday, October 16th, 2008

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: Earned or Lost

Monday, October 13th, 2008

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.

Value Disconnect

Sunday, October 12th, 2008

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.

The Liquidity Trap

Friday, October 10th, 2008

In the 1970′s I worked at a large bank.  At that time long term Treasury securities were yielding about 7% and savings rates were 5%.  I thought "how could I get some of that 5% money and invest in those 7% Treasury Bonds and make the 2% spread?"  On a million dollars that would yield $20K per year.  Times were stable then but I was too young to be a credible player and raise enough money to make it worth the time.  I figured out that the only way I could be assured of a "guarantee" was to have long term investment dollars corresponding to the Treasuries and that was the problem.  I needed to "hedge" my bet.

I have often said that "Cash is king".  Why?  Because cash has no liability attached to it (except the macroeconomic view of currency devaluation).  For 25 years we have been told that "Cash is not king" because investments would yield higher returns than cash sitting on the sidelines.  To a degree that is true.  Historically, real estate has been a good investment.  Classical man’s thinking suggests that you take your cash and buy up real estate.  There IS a caveat!  You must have the cash flow to support the payments.  What would happen if you lost your source of cash flow?  You must maintain a reserve to handle those unforeseen circumstances.  There is where the problem lies today.

Investors got greedy.  The Federal Reserve sustained the credit bubble long enough that those who have never experienced a severe economic downturn became lax in maintaining sufficient cash reserves.  They were lulled into increasing their leverage with the false assumption that the profits would continue forever.  They were wrong!

Investment banks sold risky securities (Collateralized debt obligation CDO) and then sold insurance (Credit Default Swaps CDS) to get them classified as investment grade securities.  All parties "winked" and deemed them good.  The problem with this scenario is "cash".  The investment banks classified the insurance as "Swaps" rather than insurance.  Why?  Cash.  If they called these instrument "insurance" then they would have to maintain cash in the form of "capital" to assure repayment if the "insured" (the buyer of the CDO) lost money.  They did not put any cash back to cover the CDS liquidity trap.  Now that the underlying security (all those sub-prime mortgages) are going bad, the "insured" want their money.  The cash is gone hence the bailout.  All the bonuses paid by the investment banks over the last 10 years were pumped up by the revenue generated from these transactions.  Treasury Secretary Paulson enjoyed bonuses paid by Goldman Sachs during this time.

To date, Americans have lost over 2 Trillion Dollars in retirement accounts.  With this reduction in liquidity, many will not retire as planned.  The government was lobbied by big business to steer the country away from "defined benefit" plans where the company was required to put money in retirement accounts and guarantee retiring employees a consistent cash revenue stream at retirement.  They moved the investment decisions from professionals managing the retirement funds to millions of individual investors managing their own accounts.  Who do you think would do the best job of investing?  With increased investment in the stock market, liquidity suffered.

Most people lived during the Great Depression tended to invest in liquid investments such as bank CD’S.  They understood the liquidity problem.  You may be wealthy on paper but if you can’t make your house payment, you’re broke!  As those who lived during the Depression die off, the values of the time tend to die with them.  The Federal Reserve punished those savers by reducing the interest rate to unrealistic levels.  This had the effect of promoting cheap credit and encouraging the masses to general "illiquidity" and increased leverage.  What were they thinking?

Money is departing the market in epic proportions.  Everyone is raising cash.  The stock markets around the world are in the midst a fire sale.  Too many sellers and not enough buyers cause a precipitous drop in stock prices.  How long will it last?  Until all of the excess credit that has been extended over the last 25 years returns to normal levels, the markets will be volatile.  If the market must swing to the opposite extreme, a global recession will result

Once again, "Cash is King".

Revelation versus Risk

Thursday, October 9th, 2008

For the purpose of this discussion, there are three levels of understanding in the universe-

1. Cause (highest level of understanding, divine understanding)

2. Cause and effect (structural understanding or men’s understanding)

3. Effect (survival- without understanding)

Effect-

When we are born into this world we have little or no understanding of cause and effect.  We simply respond to stimuli.  When we are hungry, we cry.  When we have soiled diapers, we cry.  When those issues are removed, we quit crying… usually.  As we grow, we begin to understand the significance of "cause and effect" in some areas.  In the areas of immaturity, adults still only understand effect.  In the financial realm, 50 year old couples will make poor financial decisions because they don’t understand "cause and effect".  They are still in the "effect" category.  Investors in this category are gambling.  Effect is "time bound".

Cause and Effect-

Most adults understand the structure of the universe which operates in the "cause and effect" realm.  Physical laws are in place to assure us that the same effect happens each time certain events occur.  Chemical reactions occur consistently throughout the earth.  The seasons occur each and every year without man’s intervention.  Structure is persistent in maintaining the "cause and effect" dynamic.  However, structure decays but its building blocks do not.  Most men spend their lives within the level of understanding.  Most investors invest their money based on "cause and effect" understanding.  This is where risk resides.  "Cause and effect" are time bound.

Cause-

In the beginning God created the heaven and the earth.  "Cause" resides with Our Heavenly Father.  HE created structure and "cause and effect".  HE created the laws of physics, the mathematical truths, and the consistent responses of all "God particles", the building blocks of atoms. Men are just now beginning to comprehend the subatomic structures of atoms.  (See http://en.wikipedia.org/wiki/Higgs_boson)  This highest realm of cause supercedes the realm of "cause and effect".  It is above men’s understanding and we only gain understanding by revelation from Our Heavenly Father.  "Cause" works outside the limitation of time.

Jesus pointed us to this realm of "Cause".  He gave us a critical commandment:  Mat 22:37 Jesus said unto him, Thou shalt love the Lord thy God with all thy heart, and with all thy soul, and with all thy mind.  God is love.  That is the highest realm we can live in.  Love defies cause and effect.  It is a higher level than "cause and effect".  This is where GOD’S grace and mercy reside.  HIS grace and mercy supercede the "effect".  How many times has His mercy pulled us from the deserved "effect" of our actions?

We have a tendency to only structurally define GOD and HIS actions.  We consistently look for formulas to predict what HE will do next.  If we could only find the Holy Grail formula to predict the future.  This is EXACTLY what investors are searching for.  There are countless technical indicators and formulas used by the investment population today.  With the advent of PC’s and computing power, technical analysis of the stock market is a huge industry and preferred methodology.  The demise of the current environment is being facilitated by man’s attempt to find the master formula of successful investing.

Warren Buffet is called "The Oracle of Omaha".  People flock to Buffet hoping to get a revelation of  the perfect investment.  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.  Men know there is a higher power.  If only they could tap into that higher power for the next stock tip.

At 5:00 A.M Friday, October 16th, 1987,  The LORD awakened me and told me to buy $25,000 of IBM Puts (a time-sensitive, leveraged derivative of the stock with the expectation of the stock value declining).  We had the cash but not much more.  I thought it was the devil attempting to extract what funds we did have.  I was 36 years old at the time.  HE had done the same thing a few months earlier but only $2,000 was involved and it was successful.  I did not have the confidence that I had "heard" the LORD.  I did nothing.  Black Monday is the name given to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short period.  That night on CNN Lou Dobbs commented with the following example, "if you had invested $25,000 in IBM Puts on Friday the 16th, they would be worth $1.2 million tonight.  What a lesson!

Mat 6:19-21 Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also.

Jesus was redirecting our focus to being in Our Heavenly Father’s presence and love, that is where the revelation is.  Entering our prayer closets is where each of our gifts and callings will flourish.  When we hear The Father’s voice, we will recognize it and respond accordingly.  Our investment in time, money, or any other resource will be guided by revelation and not by risk.  We will be given the tools to carry out our calling… simply!

The Misbehavior of Markets: The Financial Tsunami

Thursday, October 9th, 2008

The following provides us a picture of the complexities of the financial market now being dealt with.  The world was warned in 1998 of the current crisis scenario as explained below.  This equates to the Hezekiah Factor of a 10 year delay.  As you read this summary, it is more important to understand the big picture than the details of the tangled web of men’s understanding.  Rather than seeking the Wisdom from above, men created formulas which appeared to be right in their own eyes.

2Ki 20:10 And Hezekiah answered, It is a light thing for the shadow to go down ten degrees: nay, but let the shadow return backward ten degrees.

Let’s begin:

The multi-trillion dollar US-centric securitization fiasco began to unwind in June 2007 with the liquidity crisis in two hedge funds owned by Bear Stearns, one of the world’s largest and most successful investment banks. The funds were heavily invested in sub-prime mortgage securities. The damage soon spread across the Atlantic to a little-known German state-owned bank, IKB. In July 2007, IKB’s wholly-owned subsidiary, Rhineland Funding, had approximately €20 billion of Asset Backed Commercial Paper (ABCP). In mid-July, investors refused to rollover part of Rhineland Funding’s ABCP. That forced the European Central Bank to inject record volumes of liquidity into the market to keep the banking system liquid.  The intervention of KfW, rather than stopping the panic, led to hoarding of reserves and to a run on all commercial paper issued by international banks’ off-books Structured Investment Vehicles (SIVs).  Asset Backed Commercial Paper was one of the big products of the asset securitization revolution promoted by Alan Greenspan and the US financial establishment. They were the stand-alone creations of the major banks, set up to get risk off the bank’s balance sheet. (You may not understand the details, be assured that most of those making the decisions affecting the U.S. don’t either.)

A structured investment vehicle (SIV) is a fund which borrows money by issuing short-term securities at low interest and then lends that money by buying long-term securities at higher interest, making a profit for investors from the difference.

The risk that arises from the transaction is twofold. First, the solvency of the SIV may be at risk if the value of the long-term security that the SIV has bought falls below that of the short-term securities that the SIV has sold. Second, there is a liquidity risk, as the SIV borrows short term and invests long term; i.e., out-payments become due before the in-payments are due. Unless the borrower can refinance short-term at favorable rates, he may be forced to sell the asset into a depressed market.

In the case of IKB in Germany , the cash flow was supposed to come from its portfolio of sub-prime US home mortgages, mortgage backed Collateralized Debt Obligations (CDOs). The main risk faced by investors was asset deterioration—that the individual loans making up the security default—precisely what began to cascade through the US mortgage markets during the summer of 2007.

The problem with CDOs was that once issued, they were rarely traded. Their value, rather than being market-driven, were based on complicated theoretical models.

When CDO holders around the world last summer suddenly and urgently needed liquidity to face the market sell-off, they found the market value of their CDOs was far below book value. So, instead of generating liquidity by selling CDOs, they sold high-quality liquid blue chip stocks, government bonds, precious metals.

That simply meant the CDO crisis led to a loss of value in both CDOs and stocks. The drop in price of equities triggered contagion to hedge funds. That dramatic price collapse wasn’t predicted by the theoretical models built into quantitative hedge funds and led to large losses in that part of the market, led by Bear Stearns’ two in-house hedge funds. Major losses by leading hedge funds further fed increasing uncertainty and amplified the crisis.

That was the beginning of colossal collateral damage. The models all broke down.

Lack of transparency was at the root of the crisis that had finally and inevitably erupted in mid-2007. That lack of transparency was due to the fact that instead of spreading risk in a transparent way as foreseen by accepted economic theory, market operators chose ways to “securitize” risky assets by promoting high-yielding, high-risk assets, without clearly marking their risk. Additionally, credit-rating agencies turned a blind eye to the inherent risks of the products. The fact that they were rarely traded meant even the approximate value of these structured financial products was not known.

Ignoring lessons from Long Term Capital Management (LTCM)

With that collapse of confidence among banks in the international inter-bank market, the heart of global banking and which trades in Asset Backed Commercial Paper, the banking system stared a systemic crisis in the face. A crisis now threatened of a domino collapse of banks akin to that in Europe in 1931, when the French banks for political reasons pulled the plug on the Austrian institutions. Greenspan’s New Finance was at the heart of the new instability. It was his Age of Turbulence, to parody the title of his ghost-written autobiography.

The world financial system had faced a systemic crisis threat as recently as the September 1998 collapse of the Long-Term Capital Management (LTCM) hedge fund in Greenwich , Connecticut . Only extraordinary coordinated central bank intervention then, led by Greenspan’s US Federal Reserve, prevented a global meltdown.  That LTCM crisis contained the answer of all that is going wrong with the multi-trillion dollar asset securitization markets today. Curiously, Greenspan and others in positions of responsibility failed to take those lessons to heart.

The nominal trigger of the LTCM crisis was an event not foreseen in the hedge fund’s risk model. Its investment strategies were based on what they felt was a predictable mild range of volatility in foreign currencies and bonds based on data from historical trading experience. When Russia declared it was devaluing its rouble currency and defaulting on its Russian state bonds, the risk parameters of LTCM’s risk models were literally blown out of the water, and LTCM with it. Sovereign debt default was an event that was not “normal.”

Unlike the risk assumptions of every risk model used by Wall Street, the real world was also not normal, but rather highly unpredictable.

To cover their losses LTCM and its banks began a panic sell-off of anything it could liquidate, triggering panic selling by other hedge funds and banks to cover exposed positions. In response, the US stock market dropped 20%, while European markets fell 35%. Investors sought safety in US Treasury bonds, causing interest rates to drop by over a full point. As a result, LTCM’s highly leveraged investments started to crumble. By the end of August 1998, it lost 50% of the value of its capital investments.

In the summer of 1997 amid the hedge fund-led attacks on the vulnerable currencies of Thailand , Indonesia , Malaysia and other Asian high-growth “Tiger” economies, Malaysia ‘s Prime Minister Mahathir Mohamad openly called for greater international control on the murky speculation of hedge funds. He named the name of one of the largest involved in the Asian attacks, George Soros’ Quantum Fund. Because of US pressure from the Treasury Department by Secretary Robert Rubin, the former head of Goldman Sachs, and from the Greenspan Fed, no oversight of opaque offshore hedge funds was ever undertaken. Instead they were let to grow into funds holding more than $1.4 trillion in assets by 2007.

Fatally flawed risk models

The point about that LTCM crisis that rocked the foundations of the global finance system, was who was involved and what economic assumptions they used—the very same fundamental assumptions used to construct the deadly-flawed risk models of the asset securitization debacle.

At the beginning of 1998, LTCM had capital of $4.8 billion, a portfolio of $200 billion, built from its borrowing capacity or credit lines loaned from all the major US and European banks hungry for untold gains from the successful fund. LTCM held derivatives with a notional value of $1,250 billion. That is one unregulated, offshore hedge fund held a portfolio of options and other financial derivatives nominally worth one and a quarter trillion dollars. Nothing of that scale had ever before been dreamed of. The dream rapidly turned into a nightmare.

The major global banks who had poured their money into LTCM hoping to coattail the success and staggering profits included Bankers Trust, Barclays, Chase, Deutsche Bank, Union Bank of Switzerland, Salomon Smith Barney, J.P.Morgan, Goldman Sachs, Merrill Lynch, Crédit Suisse, First Boston, Morgan Stanley Dean Witter; Société Générale; Crédit Agricole; Paribas, Lehman Brothers. Those were the very banks that were to emerge less than a decade later at the heart of the securitization crisis in 2007.

Speaking to press at the time, US Treasury Secretary Rubin declared, “LTCM was a single isolated instance in which the judgment was made by the Federal Reserve Bank of New York that there were possible systemic implications of a failure, and what they did was to organize or bring together a group of private sector institutions which then made a judgment of what was in their economic self interest."

The source of the awe over LTCM was the “dream team” who ran it. The fund’s CEO and founder was John Meriwether, a legendary trader who had left Salomon Brothers following a scandal over purchase of US Treasury bonds. That hadn’t dented his confidence. Asked whether he believed in efficient markets, he once modestly replied, "I MAKE them efficient." The fund’s principal shareholders included the two eminent experts in the "science" of risk, Myron Scholes and Robert Merton. Scholes and Merton had been awarded the Nobel Prize for economics in 1997 for their work on derivatives by the Swedish Academy of Sciences. LTCM also had a dazzling array of professors of finance, doctors of mathematics and physics and other "rocket scientists" capable of inventing extremely complex, daring and profitable financial schemes.

Summary:

1. Long Term Capital Management was the precursor to the current financial tsunami- the warning shot.

2. Mathematical models were developed by man to attempt to analyze the behavior of investors, markets, countries, hence the universe and ultimately GOD.

3. They were wrong.

4. GOD defies mathematical definition.

5. The idols of man’s heart will rationalize anything including incorrect assumptions contained in mathematical models.

6. These idols will ultimately be the downfall of the current economic/financial system.

7. Man will turn from his wicked ways out of desperation.

8. The party is just about over.