20 factors why the stock market will crash! If you look at factors from a historical perspective, a stock market crash looks inevitable.
Here are the reasons why stocks will crash:
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1) The poor credit market can't survive and a liquidity crisis will crash corporations, governments and consequently stocks.
2) Buybacks will be cut in half in 2020 and therefore less buying activity will crash stocks
3) Slow economic growth
4) Consumer debt is high and people can't spend more
5) The stock market PE ratio signals a crash ahead or low returns
6) Yield curve inverted signals recession
7) M3 money is low
8) No corporate earnings growth signal a stock market bubble
9) bond market is in junk territory
10) Worst economic recession since the great recession
11) Debt to GDP 150%
12) 5 stocks making 20% of S&P 500 index
13) March 2020 30% stock market crash
14) technicals - Fibonacci
15) Bear markets last 15 months on average
16) baby boomers selling
17) Buffett is selling stocks
18) There is deflation, not inflation
19) Buy stocks
20) There is no vaccine
20 Factors For A Stock Market Crash Ahead!
Good day fellow investors. I received an amazing comment. Well, not a comment, practically a book with 20 factors why the stock market will crash. And those 20 factors perfectly summarise what's going on in the market. What are the fears that plague investors at this moment? And therefore, I decided to go through all those 20 comments, reasons, to give you a perspective on what investing really is, what matters and how does it fit you, what decisions can you make in this environment?
Number one: 330 trillion of dollars have very poor credit markets, that needs to be deleveraged. So, needs to be delivered, that implies that you need to repay that debt. But there are other ways to repay that debt. That's very important to understand. Inflation is man made Warren Buffett and just the 4% inflation rate over 10 years. Over the next 10 years with ease that concerns and cancel large parts of government debts. Anything can happen. It will be definitely volatile. But I somehow feel we see if I'm right or wrong, what will happen, that the government's will go for currency sacrification, higher inflation, like it was the case in the 1970s. If you look at the inflation rate in the US and globally, also, the 1970s. This was really, really staggering, something we haven't seen for a very, very long time. So nobody's thinking inflation, but it was there 40 years ago. However, if we think of that as a bad negative period, it's actually not that bad. The thing is that economic growth rates were pretty good 5% a little bit of recessions, but then again, again, great growth rates, real growth rates, then again recession, so to solve this debt problem, it can be engineered with inflation, sacrificing a little bit of currencies. And through this 20 topics that we'll discuss, we'll discuss a lot of inflation and things that can be solved, managed by the Fed and by the government.
One thing that can't be managed that quickly or might not be the focus, especially in this environment are buybacks. And buybacks are expected to fall 50% in 2020, this is from JPMorgan, the expectations, so really with it, those will be hit, but that will be the level of 2012, 2013, 2017, 16. So don't be that bad according to current, let's say positive expectations. And if we look at how the cash the S&P 500 companies use their cash, so buybacks are just 29% of their usage of cash. Capital expenditures rule, research development, acquisitions, dividends and then buybacks. So if you cut buybacks, there will be a cut of dividends, but it's not about what happens in 2020. It is about what will happen over the next 10, 15, 20 years. That's investing. Investing is the discounting the future cash flows from today to judgement day at the present interest, at the present discount rate, which is also alongside inflation, the key when it comes to assessing whether the stock market will crash or not. And you'll see that through this video. On buybacks, of course, buybacks were very, very high in the last few years similarly to the situation in 2007. We'll see how those will go now. But there are buyers so there is a lot of money on the sidelines that is coming in because other options like treasuries have very, very low interest rates. And that's what's going on.
And then number three, low economic growth economy for over a decade barely growing at 1% average, despite all the endless rounds of quantitative easing. Well, that's not really correct the global economy still growing at 3% and it even accelerated from the 1980s with the emerging market crisis etc. Historically, it grew extremely slowly so we are still in a good environment. But if you look at the expansion average over the last 10 years was 2.1%, compared to an average expansion average of 2.7% for the United States. However, this is on much shorter periods of expansions while this was a 10 year expansion. So, longer expansion with slower growth, giving more perceived stability, which can be one way of looking at this.
Number four, consumer debt ratios are unsustainable. Well, those were more higher in 2007 2008. And then what Ray Dalio would call a beautiful deleveraging. They have declined, especially as interest rates go down the debt cost, the servicing cost of that debt goes down. Here is the debt service ratio cost compared to disposable personal income and we see that it's actually below the rates that it was when interest rates were higher over the past 40 years and much lower than the 13.2% in 2007. Also, if we look at the total liabilities, households, those are 80% of GDP, 16.6 trillion, but those are very little compared to total assets of 134 trillion. Yes, a lot of these assets are from low interest rates, like real estate prices that go up pension funds that go up values and other financial assets that go up, but that's what it is.
Also, if we look at number five, high stock market indicators that totally right, in history, there have been only actually there has been only one time where stock market ratios in this case, the Shiller price earnings ratio, that takes into account 10 years of earnings was up close to 40. So average 10 year earnings price earnings ratio is close to 30. And that was also only the case in 2000, during the dotcom bubble and we know how that ended with the 50% crash. So when you look at it from that perspective, okay, that's what we have. And also the average over the last 25 years was 16.48. We are now to the upper ball border of that also above 20, for the normal price earnings ratio, so price earnings ratio should be around 22 now. And will get even worse if stocks keep going up and earnings will get decimated due to the situation. But this is what we have to focus on, earnings for the price earnings ratio on average over the last 10 years using 10 year earnings that will lead to a 3% earnings yield plus 2% growth due to inflation economic growth, that's a 5% earnings yield.
If I look at what's the alternative, the 10 year Treasury concept maturity rate, I see that it gets a yield of 0.68% per year. So stocks will likely deliver a return that's up to 10 times better than the current return on the Treasury. Therefore, if you put it in that perspective, stocks are still extremely cheap. And that's something we will see how it will evolve in the future. Also, if we look at real yields on the 10 year Treasury. So you take the zero point 68 minus 2% of inflation, and you get the negative yield each time in history when there were negative yields, like 2015, 2012, 1970s, 1980s. Those were great times, especially in the 1950s. Those were amazing times to invest in stocks. So, again, another perspective, bond market recession, the yield curve, inverting when the yield on the long term treasuries higher than the short term Treasury that we say it signals a recession and we can see that each time it reverts. It signalled a recession, and it reverted in August of 2019. And it signalled the current recession, which we are already getting out of. So we might have seen it already. But if we look at recessions and stock market crashes, this is the greyer, darker greyer is the stock market crash, you see that the bottoms this case not, but the bottoms are usually in the midst of the recession here we didn't evenn have a recession, here recession, bottom end of recession bottom, middle of recession bottom, end the recession bottom, end of recession bottom. So if we are already over the recession, then the current stock market crash was at the bottom of that recession, which was 24th of 22nd Of March 2020. So, that's also a perspective. Yes, we have had the yield curve inverting. Yes, we already had had a recession and a crash. So now we're on to the next cycle.
Also, no more money, M3, but we see M3 money that includes M2 plus savings, longer term deposits in banks and everything is going up because of the feds intervention. Little corporate earnings expansion over the five last five years, actually it was over the last 15 years because earnings didn't go far over the last 15 years. But that's how earnings work, you have this long periods of stable earnings, and then boom, spikes, spikes, spikes. So it goes in shifts, it doesn't go linearly. So who you never know when we're learning spike, but it's likely due to inflation to grow due to productivity, that those will spike sometime in the future. And that's what you are investing in.
Also doesn't really matter earnings didn't go far from 1969 to 1995. But those that invested in 1982, without earnings growth did extremely well. So it's the earnings that matter, not that much the earnings growth and then the interest rates to which you compare those earnings alongside of course, inflation, which are also the topics that are counter weighing all these 20 amazing topics that I found in this comment.
These are all well thought well placed comments and I wish there were weren't there so that we can invest all with more fees, those are all there. So it's not an invention. But we also have to give a different perspective, just to put things into, let's say, a more rational perspective and then you can make your own decision.
90% of bonds close to junk. Well, 41 trillion in the US dollars, the Fed is buying us bonds. So okay, the Fed can buy anything they want. Similarly, in developed markets, Europe, Japan, they can buy whatever they want. So actually, the only issues are emerging markets. And then again, emerging markets have much, much higher yields. So this is a normal market for bonds, these are already compromised by the ECB intervention, Bank of Japan intervention and US intervention. So if they keep intervening, then that isn't an issue, it might lead to inflation. But we'll see that in the future. Also, if you look at the corporate debt levels, the average duration went up because companies want to take advantage of lower interest rates.
And then worst recession since the Great Depression, yes, but also the biggest intervention since like, ever. So that's something that counter ways the recession that we will see over this quarter and over the past quarter, but also, it's counter ways that it creates also the rebound that we are already seeing within the economy is recession might or might already be over and we have seen the crash that everybody was anticipating the question whether we'll see a next one is now hanging but it might take some time. There will certainly see you next time, but probably not because of the current reasons we'll see.
Then debt to GDP 150% to 300% range. Okay. Keep in mind that the US can't go bankrupt, the Fed can print money, they can borrow that money that they print, and they cannot go bankrupt. They can sacrifice the value of the currency, they can debase the currency, the dollar can lose value will probably lose real value, but they can't go bankrupt. And if they allow for some inflation, little inflation over time, then it's not such an issue.
Now on the how many stocks represent the S&P 500 like all the other stocks are crashing, just the 5 top stocks are growing. Well that's investing. If you just have a few winners, then you grow. I used Microsoft to make this presentation, Apple to film and edit this video, Amazon to order my lights and all the books that we are reading here on the channel, Facebook, you can also watch this video on Facebook. If you're watching this on YouTube, then you're using Alphabet. J&J, I'm not using I had short that. Berkshire is there. Visa, while you can use that to buy my stock market research platform, if you are a sophisticated investor interested in specific investments and research reports, you can also use MasterCard. So all these companies are always something that we use and therefore the way in the S&P 500 index, it's all about most of these companies will not be there, but some will be much bigger. And that's normal when it comes to investing.
March 30% stock crash, it's not normal for healthy markets to crash 35% and swing back up in a matter of a month. Well, if you look at what happened in markets, if you look at low yearly jumps, normal, it's normal for yearly returns to be 20, 20, 30%. It's also normal to see declines of 30%, especially intra year declines. So I wouldn't say this is not something normal.
Fibonacci level 3,000. Head and shoulders, well, my left shoulder was a little bit lower than the right shoulder in high school. We fixed that up a little bit. And that's all I can say about head and shoulders, technicalities.
Now, bear markets on average the last 15 months. Well, that's the average we have seen bear markets of 16 months of six months, seven months, three months in 1987 and now one month. Then, if the bear market is already over, I can also say that the bull markets last 30, 40 on average, 54 months so five, six, what's that? Four or five years, so we might have been the next four or five year bull market. That's also something you don't want to miss. The key here is, let's say doom and gloom perspective is that wall street will be soon shorting the market to drive it down and buy it later much cheaper. So the key is to buy stocks. And that's also my message at the end, they will say that everybody wants to buy them. So all those that hope for a crash might just want to buy them cheaper, they're out they have missed the train or something like that. So you never know whether it will be six months, one month, 120 months, but that's what investing is. And this is the confirmation that even those that hope for a crash, they hope to buy again the stocks to again be investors.
Retired baby boomers pulling money out of the stock market, like there is no tomorrow. Well, let's deselect this. These guys the top 1% don't need to sell anything, they live off dividends, top 10% also they live off dividends, investments, businesses, whatever, these guys, okay, they might need to sell their pension entitlements to fund their pensions, or their equities, perhaps also their homes, but there will be leveraged to buy their home.
This is just the trillions of dollars that we might see selling over the next 10, 20 years. That's what about $15 trillion from 20 million people, okay, baby boomers, it will have an impact, and it already has an impact, but there are buybacks covering up for this. However, if I look at this, we are currently seeing and we will see over the next 10, 15 years 1.2 billion people added to the middle class. 2015, 20 million, 1.2 billion.
So this is the driving force that will drive higher earnings, sales and everything, buy more cars, buy more homes, use even J&J. So we might not want to short that. But that's what investing is. And this is what's going on in the world. Don't forget that. I don't know whether it will lead to a stock market crash or boom. But we have to put things into perspective.
Now Berkshire Hathaway solved 8.6 billion effect but they only bought 4.4 billion of equity in 2020. Warren, would you mind taking this question?
I have actually been a personal net buyer stocks ever since I was 11. Every year there's been 15 American presidents in my lifetime, more than a third, I've lived under a third of the life. I didn't buy stock is under Hoover. I was only about six months old and but there have been seven republicans after that. And seven Democrats. I bought stocks under every one of them. Now I'm bought stocks every day. There have been a few times I thought stocks were were really quite high. And I've even written an article once or twice, but that's very seldom
But you wrapped up your partnership at one point?
I wrapped up my partnership once.
Because you thought it was too expensive.
Let's continue number 18. For those that are screaming inflation, they are dead wrong. It will be deflation. Well, that again depends on what you focus on. There is inflation in financial assets as those are going up so that we are seeing as an investor's, we have to focus on that. If there is no statistical inflation, they can keep printing and saving our as assessments. And that's what they are doing. And even better if there is no inflation, they can keep doing that without risking hyper inflation.
What are we going to focus on when it comes to investing to your long life cycle investing the last few months, the last few years or the real long term?
Let me show you this. This is US house median house prices, sale prices over the last 57 years. It was the home price was 17,800 in 1963. Now it is 327,000. That's an increase of 18 times. Why? Because of inflation, economic growth. So yes, we I'd see periods with no world declines. But this is the long term trend if you are investor, you focus on the long term trend.
Also market pundits are telling you to buy the market buy, invest in stocks. Of course, Ray Dalio went short the market in 1982 because all these indicators told him, oh, it's time to go short. It will crash. It will be terrible. And then he lost everything. He was so broke that he had to borrow 4k from his father.
On the other side when I wrote, Ray Dalio, 1982, this video came out in Google, which is my video of Buffett buying stocks big in 1982, countering to Ray Dalio going short. And if we look at what Warren Buffett is actually saying there is always trouble coming.
There was trouble coming in 1942 when I bought that first stock, all kinds of trouble, the Philippines, we're going to fall pretty soon, there's all kinds of trouble, there will always be trouble. And as in 2008, there was a lot of trouble. He wrote, trouble is coming. But I said, buy stocks because you are an investor, you invest in businesses. That's his message, despite all these negative situations that we will have, and we'll have even more trouble.
Then to conclude number 20 is the reason is no vaccine. I'll touch that in a moment. But here there is a really, really nice part about capitalism on the way up and socialism on the way down. And even if this is unfair, disagreeable, this is what we are living in. And there is always the market might be irrational. This might be irrational. But as Keynes said, the market might remain irrational much longer than you can remain solvent. So if you want to read this, pause the video, it's pretty right.
But then again, it concludes like everybody wants to buy stocks. So again, biassed on okay, let stocks go down so that I can buy them cheaply. On the vaccine. Well, this is where I live, Slovenia did my hair, beginning of May I have to do it again. Now, open daycare, bars were open all the time, terraces.
And this is the situation with new cases. So really, really 000 so we are free. We have been to Germany, people are travelling already for the last weeks and we have seen no new outbursts, which is a positive so we might not even need the vaccine if things are resembled this also in other parts of the world.
So the key takeaways, this is investing as Warren Buffett said, this is trouble. There will be ups and downs there will be crashes. But Bill Gates didn't sell Microsoft because it was in a bubble and took is money.
He invested in businesses earnings, earnings growth, and that's what made him who he is now. Despite all the issues, market issues, and then individual stocks issues from monopoly issues, etc. and if we go and quote Tolstoy, all happy families, this is all the happy issues you have when you have to invest.
All happy families resemble each other, but each unhappy family is unhappy in its own way. And if you invest in individual stocks, you'll have a lot of unhappy in its own way. family's stocks, but the positives usually outweigh the negatives over the long term.
That's investing, climbing wall of worry. And this is normal, this crashes are normal. We'll see many more crashes but also look at the positives. The positives will also be there great years like we had a great year of 2019 there will be more crashes, more great years. Welcome to the world of investing.
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