Our Mission, Our Vision, and How We See Things
At Ernharth Group we believe it is our duty to our clients, and our Mission - to think for ourselves. And thus quite literally, our Vision is based upon a reliance on our own perception, judgment, and opinions – and not those of others.
In other words, the “conventional view” does not autopilot our ship.
In 2008 many of the largest investment banks were so misinformed about the true nature of the economy that they were blindsided, requiring $trillions in bailouts (the largest in history) to rescue them.
The Federal Reserve itself (which had to create $trillions to bail out the financial system, including said large banks) and many mainstream financial “experts,” were also caught completely unaware by the 2008 financial crisis.
Since 2008, the Federal Reserve has created an out-of-thin-air $3.41[1] trillion it has used to purchase longer-term United States Treasury securities (debt) and agency mortgage-backed securities (also debt) to artificially suppress interest rates (along with the borrowing costs of the United States), and to artificially stimulate (prop up) the increasingly low interest rate-dependent economy, equity markets, and bond markets.[2][3][4][5][6]
Collective world central bank balance sheets have grown from $2.1 trillion in 1995, to $8 trillion in 2008, to $21.7 trillion today – all via previously non-existent, newly-created currency by said central banks.[7][8][9]
As we see it, since 2008 the stock and bond markets, as well as housing, automotive, and the rest of the cheap credit-dependent economy have been resuscitated and driven predominantly by the Federal Reserve’s (and other world central banks’) artificially low interest rate policies. We believe markets and economies have become addicted to these historically low interest rates.
Artificially low interest rates that we believe are grossly unnatural, and unsustainable – and have led to record levels of Global,[10] Federal,[11] Corporate,[12] Consumer,[13] Student Loan,[14][15]Motor Vehicle,[16] and Margin[17] Debt FAR SURPASSING 2008 Financial Crisis[18] levels - along with Mortgage Debt[19] approaching 2007 record levels.
Artificially low interest rates that have facilitated record levels of corporate borrowing, as companies repurchase/buy back record amounts of their own shares - to the point where corporations have collectively become the largest buyers of stocks.[20][21][22][23][24][25][26][27]
We believe that a loss of control of Federal Reserve-created artificially (and historically) low interest rates by said Federal Reserve - sending interest rates back to historic norms alone - could have significant negative implications for the low interest rate/cheap US economy; could have significant negative implications for the low interest rate/cheap credit-dependent stock and bond markets; and could have significant negative implications for conventional stock/bond portfolio allocations - that have benefited from generally declining interest rates since 1981.[28][29][30][31]
In other words, if the Federal Reserve (and other world central banks) lose control of interest rates - and decades-long declining interest rates reverse and climb meaningfully upward - to just 2010, 2005, or 2000 levels (or higher) - it may be revealed that supposedly “diversified” conventional stock/bond allocations are, in reality, highly undiversified (diversified in name only) and are instead highly correlated to (and vulnerable to) rising interest rate risk; currency devaluation risk; and central bank-caused market distortions risk - and may thus carry far more inherent risk than conventionally believed.
Rising yields/interest rates on US Treasuries (i.e. rising interest rate borrowing costs for the US Government) to 2010, 2005, or 2000 levels could also send the Federal Budget Deficit - and correspondingly the Debt of the already massively-indebted US Government - to significantly higher levels.[32][33][34]
It is our opinion that in 2018 there remain extremely large levels of systemic and interconnected risk among the “too big to fail” banks that nearly collapsed the financial system in 2008.
As we see it, in 2018 the latest artificially-massaged economic data[35][36][37][38] is less-than-stellar, and indicates to us that despite the Federal Reserve’s unprecedented multi-$trillion currency (aka debt)[39][40] injection into the financial system over the past ten years, the debt-addicted economy is once again in danger of rolling over as it did in 2008.
With $21.4 trillion in debt[41] and a fiscal gap of $210 trillion,[42][43] we believe the United States no longer has the luxury of considering its increasingly untenable fiscal scenario an abstraction. Yet Congress abysmally exhibits ZERO political will to address the United States' skyrocketing indebtedness (and growing insolvency).
And thus we believe it is becoming increasingly likely that in an attempt to once again prop up the financial system, and to monetize/inflate away the United States’ massive debt - the Federal Reserve (along with other world central banks) will be forced to initiate another even-larger round of Quantitative Easing (QE) via newly-created record $trillions in currency-debasing dollars.
The same dollars American investors’ hard-earned savings are denominated in.
And thus, we continue to help our clients plan accordingly.
[1] http://research.stlouisfed.org/fred2/series/WALCL
[2] http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm
[3] http://www.heritage.org/research/reports/2014/08/quantitative-easing-the-feds-balance-sheet-and-central-bank-insolvency
[4] https://www.youtube.com/watch?v=7nuzT3rchPU&feature=player_embedded
[5] http://video.cnbc.com/gallery/?video=3000474362
[6] https://www.youtube.com/watch?v=ecFyOZ-nwXM&feature=youtu.be
[7] http://www.zerohedge.com/news/2015-12-26/everything-central-banks-have-tried-has-failed-according-citis-buiter-just-one-thing
[8] http://davidstockmanscontracorner.com/weve-seen-this-picture-before-global-markets-down-13-trillion-already/
[9] https://www.bloomberg.com/view/articles/2017-12-07/the-risks-in-central-bank-balance-sheets-is-clear-mark-grant
[10] https://www.bloomberg.com/news/articles/2018-04-10/global-debt-jumped-to-record-237-trillion-last-year
[11] https://www.treasurydirect.gov/NP/debt/current
[12] https://www.sifma.org/wp-content/uploads/2017/06/cm-us-bond-market-sifma.xls
[13] https://fred.stlouisfed.org/series/TOTALSL
[14] https://fred.stlouisfed.org/series/SLOAS
[15] https://www.brookings.edu/wp-content/uploads/2016/07/ConferenceDraft_LooneyYannelis_StudentLoanDefaults.pdf
[16] https://fred.stlouisfed.org/series/MVLOAS
[17] https://www.finra.org/investors/margin-statistics
[18] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
[19] https://fred.stlouisfed.org/series/MDOTHIOH
[20] https://www.wsj.com/articles/record-buybacks-help-steady-wobbly-market-1525950001?ns=prod/accounts-wsj
[21] https://www.forbes.com/sites/stevedenning/2018/03/25/why-its-raining-share-buybacks-on-wall-street/#66ae9a6b3346
[22] https://www.vox.com/policy-and-politics/2018/3/22/17144870/stock-buybacks-republican-tax-cuts
[23] http://fortune.com/2018/04/20/stock-market-buybacks-nervous/
[24] https://www.zerohedge.com/news/2018-06-05/q1-results-are-and-spending-share-buybacks-hits-all-time-high
[25] https://charleshughsmith.blogspot.com/2018/05/taking-pulse-of-weakening-economy.html
[26] https://www.barrons.com/articles/stock-buybacks-are-driving-companies-into-debt-1470459686
[27] https://www.bloomberg.com/gadfly/articles/2018-02-16/add-stock-buybacks-to-the-causes-of-the-market-downturn
[28] https://fred.stlouisfed.org/series/FEDFUNDS
[29] 303 https://fred.stlouisfed.org/series/DGS10
[30] http://www.businessinsider.com/10-year-us-treasury-note-yield-since-1790-2012-6
[31] http://stockcharts.com/freecharts/historical/marketindexes.html
[32] https://fred.stlouisfed.org/series/DGS10
[33] https://fred.stlouisfed.org/series/FYFSD
[34] https://www.treasurydirect.gov/NP/debt/current
[35] http://www.shadowstats.com/alternate_data/unemployment-charts
[36] http://www.shadowstats.com/alternate_data/inflation-charts
[37] http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
[38] http://www.shadowstats.com/alternate_data/dollar-index-charts
[39] https://www.federalreserve.gov/faqs/currency_12770.htm
[40] https://www.foreignpolicyjournal.com/2012/08/04/yes-virginia-banks-really-do-create-money-out-of-thin-air/[26]http://treasurydirect.gov/NP/debt/current
[41] http://treasurydirect.gov/NP/debt/current
[42] http://www.kotlikoff.net/sites/default/files/Kotlikoffbudgetcom2-25-2015.pdf
[43] https://www.forbes.com/sites/kotlikoff/2015/05/13/17-nobel-laureates-and-1200-economists-agree-with-ben-carson-re-u-s-fiscal-gap/#3ded9d9b4d17
The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by LPL.
