As we have seen, there are 20 reasons why there could be a second stock market crash ahead. And we have also discussed whether the stock market is in a bubble or not. The 10 reasons stocks might not crash again and could even be dirt cheap are the following:
The latest Robinhood Investors Conference is in the books, and some hedge funds made an appearance at the conference. In a panel on hedge funds moderated by Maverick Capital's Lee Ainslie, Ricky Sandler of Eminence Capital, Gaurav Kapadia of XN and Glen Kacher of Light Street discussed their own hedge funds and various aspects of Read More
1) There sill be no stock market crash because low interest rates make stocks dirt cheap.
2) Plus, the FED is pumping so much money into the system, that money has to go somewhere
3) Inflation - there is measured inflation and financial asset inflation
4) Paradigm shift - it could be that currencies aren't worth much in 5 years
5) Given current valuations and the above, stocks are dirt cheap
Secular Mega Trends preventing the stock market from crashing:
6) Middle class growing fast and investing
7) Tech boom - not only tech stocks
8) A better world
9) Accumulate wealth all the time - compounding
10) Think of your life cycle and stock market crashes - does it really matter
Second Stock Market Crash Ahead - 10 Reasons Why Stocks Are Dirt Cheap!
10 reasons why stocks are dirt cheap. It's also even rumoured that the chain, store chain dirt cheap will start selling stocks on their shelves because those stocks or stocks are dirt cheap. Good day fellow investors. In this video, I'll discuss 10 reasons why it is possible that no matter where the market is, stocks are dirt cheap at the moment and should be bought with all ammunition. I did a video discussing whether we are in a stock market bubble. I did a few videos on stock market crashes.
And I thank you all for those views there, which means that it is a very important topic that people want to hear more about, especially now that we have had a crash and then a recovery that even made stocks go into positive territory for the year despite the terrible economic situation likely ahead.
In this video, I want to discuss 10 reasons why stocks might not crash and put those into three pillars. We're going to discuss monetary policy, which is likely key. But there are other forces that will drive the stock market in the long term like secular mega trends. And then also, the third pillar of everything that we do on this channel is the investing pillar.
What you can do over your lifecycle that's sustainable over the next 30, 40, 50 years, that leads you to your financial goals. That's something you have to keep in mind before thinking whether stocks will crash or not.
Let's start with monetary policy. The first key related to policy are interest rates. This is the five year Treasury rate. So if you give your money to the US government for five years, they will give you 0.4% return the yield per year. So 0.4% if inflation will be average 2%, you will be losing 1.5% on your money per year.
This is an investment that you are not likely going to like, if you like losing money, then this is not the channel for you and stop watching this video. So this is one reason, as long as interest rates are this low, and we can see that historically, interest rates on the 5-year Treasury have been much higher even about 15% in the early 1980s. And usually on average, I'd say around 5%, but we are in an environment with extremely low interest rates, which makes stocks cheap.
Also, if we look in Europe, I just received a letter from my Dutch bank saying how over a few million, they will be charging a 0.5 negative interest rate. So there are a lot of people with a lot of money sitting in banks. And those people now are getting nothing plus inflation are looking for other options.
So all the money on the sidelines is also looking for other options, because banks will start charging negative rates and have started charging negative rates. Where will that money go? Well, real estate stocks and other investment opportunities, and that's one reason why stocks will not crash.
Second reason related to the first reason is money printing. So interest rates make stocks look cheap. And then if the market is flooded with money, this is the balance sheet of the Fed. So they have increased their balance sheet to save us from the Great Recession. And they have increased their efforts even more now, to save the economy as much as they can from the COVID crisis.
So when the balance sheet of the Fed goes from less than 1 trillion to 7 trillion now and expected to go to 10-11 trillion, when the balance sheet goes 10X in what just 13 years, that money has to go somewhere and the fastest, the easiest place to go are financial assets.
And that's one reason why we're seeing stocks go to the moon despite the economic situation. Similar situation with the European Central Bank, their balance sheet was also below 1 trillion, and now it went to 5 trillion. This is 2019.
If we look at the situation at their balance sheet, recently, it's already 5.6 trillion and it will likely expand as the Fed expanded. So all central banks are doing whatever they can to increase the money supply to help financially the system and that is pushing financial assets higher.
Another key situation is inflation. So you have inflation measured by governments statistically and real inflation. If we look at inflation over the last 30-40 years, it has been, let's say, on average 2.5%, with higher inflation in the 70s. But then again, a lower before that, but this is measured inflation, let's say 2.5%.
Because they are measuring it in various ways. There is a lot to talk about it. But I'll give you a simple example. If we take a look at Big Mac prices, so according to inflation since 1993, a Big Mac should cost $3.78 according to the core inflation estimate. However, in reality, it costs 5.06. That's a huge difference.
That's a huge increase in prices. That is not counted in inflation, we have a similar impact on real estate, especially on stocks. So when it comes to these things, you have to see, okay, what really matters? How is my purchasing power going to be?
And if we check money, how the monetary base went 5x in just the last, what, 10 years, then we know that they measured inflation and especially inflation in financial assets is different than what they are telling us.
So if money goes 5x in my book money is worth much, much less. 20% of what is there and that's why you see the S&P 500 going up 4x since 2009. If they keep expanding if they keep pushing money into the system, I would not be surprised if the S&P 500 is worth 10 x from the bottom in March 2009. So at 7000 points
Further, if we listen to Ray Dalio, he has been warning us about the paradigm shift in this decade coming because of stimulus because of monetary policy because the Fed central banks and governments have exhausted the normal monetary policy measures.
They will have to start printing money. It can be that this already happened, the paradigm shift already happened even here in Slovenia in Europe, we will get tourism checks to go and spend in the country to boost the economy. So we have helicopter Money, money can be printed as much as they want to that we ease the debt burden.
So they went for a currency debasement so perhaps the paradigm shift in the common decade will be currency debasement new paradigm, worthless money over the next 10 years. And that's a big, big reasons to hold real assets.
All of this leads to the following that stocks in this perspective, are dirt cheap, no matter what happens to the economy, because when this happens, when interest rates are at zero, when there is plenty of money printing, inflation, hidden inflation, when there is a paradigm shift, you want to hold real assets or you want to be with a lot of debt, fixed interest rate debt to pay off so that you make a lot of money. And in that perspective, stocks are dirt cheap.
If we look at the dividend yield average in history for the S&P 500 it was four point 27% the dividend now is just 1.86% but compare 1.86% with 0.4%. So stocks are dirt cheap, compared to what you can get from the government. And if you look deeper, I've made a few videos on nutrient 5.2% dividend stock now it's 4.7.
But it's still a good video. You can watch that. Then I also discussed Berkshire, it's still a good company even if it went up a little bit 10% expected returns. When put into perspective, with government treasuries, stocks are dirt cheap.
Further, let's discuss secular mega trends. This is something that will blow your mind. This is the middle class population in 2009. Below 2 billion middle class is discussed, where people have between 11 and $110 a day, just below 2 billion then it almost doubled in 10 years. And we are expected to see another 1.5 billion people to enter the middle class in the coming 10 years. Can you imagine how much consumption will this lead to from houses, from cars, scooters, depending on the country, etc, etc. Internet, knowledge education, this is the driving force.
Can you imagine that of these people, 2 billion people buying stocks for 3.5 billion people buying stocks, 5 billion people buying stocks for the long term buying investing books, etc, etc. Learning. This is a force you can't fight. And no matter what you think this is probably the most important force when it comes to investing over the next decades. Then there are so many technological improvements that I don't even know where to start.
You are watching YouTube videos now. We have internet we'll have AI, virtual reality, whatever, shopping, everything that helps us live a better life. So that's something that we always have to keep in mind how the world will improve.
If we just go 30, 40 years ago, we had leaded the fuel to put in our cars that poisoned us, that was normal. We had half of the world under communist rules, the Iron Curtain in Europe, the Cold War. And then in the 70s, there were shortage of gases. Now today, people complain if they don't have fast internet access if the aerco is not doing well, or if they get cappuccino instead of a frappuccino. That's how the world changed in the last 50 years, I can't even imagine how it will change in the next 50 years.
If I show you something from my childhood. This is our city in the country where I come from looked like in 1991 when I was 8 years old. So this is where I come from. So excuse me for being an optimist. Then if we look at this incredible chart that shows 500 years of history, and the great powers fighting one another.
So practically in all the years they were fighting until just last few decades. So this is when where they stopped, I think, and this is the world we are living in. Probably, likely, surely the best period to live in the last 2000, 5000 10,000 millions of years is now. No matter what happens in the stock market or whatever, you and we are living in the best period ever.
And the third pillar is investing. I received so many comments, so many emails in the last years about people that are waiting for a stock market crash, they will take advantage of it and then when it actually happened a few months ago, then I started getting emails, okay, I'll put 2% of my cash 5% some went to 15%.
They never went big in because they said okay, this crash will last for the next 2, 3 years. It will get really, really ugly, and now stocks are back to where those were before. So if you have a crash mindset, you will likely never invest. You'll never pull the trigger.
And that's also something that you might see stocks crashing. Okay, if you see stocks crashing, you lead the last 5, 10 percent of the money you have, and you'll increase your long term returns. If you are a long term investor, you reinvest the dividends. So you're always hoping to see stocks lower so you can increase your long term returns. This is what investing is, not trying to time the market.
As we have seen in the last three, four months. Nobody can time the market, even the great guys like Stanley Druckenmiller, even the great ones like Druckenmiller have been humbled by the market action because it's not possible to time. The only thing we can do is be an investor. So really think about what sustainable over your lifecycle what you can do over the next 10, 20, 30, 40 years, and that will increase your wealth over time. It's not about timing the market.
It's not about buying at the bottom at here that feels good for what a day you made some money. No, you have to find ways to accumulate wealth over decades and that's, no matter what happens in the stock market, that's the way to invest. And when with that mindset, stocks will crash stocks will not crash doesn't really matter.
And let's put this into an investing lifecycle that lasts likely 40 to 50 years. As we can see here, the S&P 500 went up and down over the years from the booming 90s, crashing dotcom crash, then booming 2007, Gre. But who did well here?
Those that accumulated assets that fitted their portfolio and reinvested the dividends, built a great nest egg, invested, accumulated wealth, dividends, etc. Those did well. And those would have done well no matter what happens here with the S&P 500. That's investing. That's a life cycle. I'll just show you this.
So who will learn more somebody that invests in the first 10 years of their investing lifecycle and then stops investing, or somebody that invests for 30 years after assuming a similar equal interest rate, so those that start investing later can't reach this because of the power of compounding so the best is to invest ever add constantly money, and you will reach your financial goals in the long term. This is key when it comes to the investing cycle.
Before I give you the last takeaways please if you like this video, this mindset, this investing strategy, no matter what, where we accumulate wealth that will create new cash flow streams over the long term. Please subscribe to this channel. If you want to learn more about investing where I structure my videos, also write down reports and articles to teach you about investing about having the right mindset analysing stock, etc. Please check my free stock market course.
And then if you are a sophisticated investor that wants to see my portfolios, get new investing ideas, take advantage of my work, where I do stock coverage, stock analysis, please check my stock market research platform. And now with the three takeaways from this are, buy assets that will lead you to your financial goals, no matter what happens with monetary policy, inflation.
Nobody can predict interest rates nobody can predict stock market crashes, nothing, so please do that and you will see how over your life cycle, you'll be extremely happy. And it's also something that you can sustainably do year in, year out. Number two, be a business owner, okay, this is a great business.
I love owning that business, no matter what it is, whether it's Berkshire or something else, and just let the business do what businesses do, which is grow, pay dividend, some do reinvest that money, grow, grow, etc, compound over time, do the work for you, which is what's the nice thing about being a business owner. And lastly, as I said, keep accumulating wealth. Thanks for watching, please check some other videos and I'll see you in the next video.