The topic of the stock market news today is the extreme abundance of money in the economic and financial system. We have been enjoying 10 years of constant money printing and zero interest rates. The FED has restarted to print money and the ECB too.
In such an environment it is logical that stocks keep going up and there is nothing we can do about it. We should not even fight the trend, we should accept it, take advantage of it, no matter how irrational it is.
However, when it comes to investing, the key is to always keep it low risk, high reward so that whatever happens, you don’t lose, but if things go well you win big.
Q4 2019 hedge fund letters, conferences and more
Stock Market News - How To Invest With EXTREME Money Abundance
Transcript
Good day fellow investors. One of the topics that's extremely important for your financial lives is the current abundance of money in the system. And in this video, I really want to touch on that topic to show what's going on into the economic financial environment.
How does that affect the market? And how does that affect you, as an investor as someone that wants to build your financial future retirement, financial goals, and then how you can invest how what can be your investment strategy in this environment. So let's immediately cut to the chase and start by describing the environment.
A few years back, the Fed said, Okay, now we have had enough of financial stimulation, we're going to tighten things up a little bit, increase interest rates, and lower the balance sheet that after a year of tightening clearly didn't work, so they immediately lowered interest rates back down. to a level where it doesn't really affect the environment, if you're borrowing money at 1.5% in an environment where the inflation rate is 2%, it's free money. So the Fed lowered interest rates to make it free money. So we're living in an environment of free money, therefore the abundance of money.
ECB and Fed policy
Also on the balance sheet, they said, Okay, we're not going to repurchase treasuries anymore. So we're going to lower our balance sheet but that since this December, Eve didn't work, there was a liquidity tightening in the repo market, but it doesn't matter.
The balance sheet is going shooting up, which means they are buying more printing and printing and printing money to keep the economy where it is. Similarly in Europe, they tried a little bit, okay, we're going to cool off the purchases of bonds directly purchasing bonds from governments, and then they saw okay, this is not working, we have to give free money to go governments to companies to people, European companies, a lot of them borrow at negative interest rates, which means you borrow money and then you have to return less money in the future.
I want such a deal, don't you want it? And this is going on all over the world. We are really in a financially stimulative era. And that has current opportunities but also consequences when it comes to the economy and your investments on the economy.
You would expect huge growth with free money, but not not. That's not what's happening. The economy has been growing, but at the slowest pace for decades, globally developed markets mostly, and this is the longest economic expansions expansion in the United States, the longest expansion but not that high rates. However, stability is definitely what we have. The question is for how long can we have Such an artificially created money printed stability.
That's very interesting because we can check inflation again stable but depends where you're looking and from what perspective you are looking at that if we check inflation, the reported inflation 2% or 1%, or something like that, in Europe, 2% in the United States, not such a big consideration below the target of monetary policies.
But then when you look at more specific things, like shelter, inflation, try to buy a house in Amsterdam, London, Paris, compared to something else, compared to the inflation rate all those businesses that are highly competitive, where there is high competition where there is a lot of money coming in, they're lowering their prices, but all those assets that are in limited amounts, like real estate, things like that are going up, up, up and up in prices.
So depends where you are in life, what matters to you in life. It's a big difference between buying real estate, we'll see later, creating a pension fund, creating your retirement fund versus I don't know, buying chewing gum or I don't know, filling up your car or buying a secondhand used car. Health care is also something that has been going up and up and up and up in price. And those are the things that matter in the long term.
So you have to see okay, they are printing money, they are saying there is no inflation, but when you look at specific things, you see, okay, prices are going up. And that's something you have to take advantage of, and we'll see later about that in the investment strategy.
Now, when it comes to the markets, stocks are at record highs. And this is also important because we invest to get some yield back from our investments and that in the future. So you give up your money now to get more money back in the future. But if you buy something that's very expensive with a low yield, you have to put more and more and more and more money just to get to the same yield.
The s&p 500 went up four times from 2009, 10 years ago. So now the yield that you get is 25% of the yield that those get that they invested in 2009. So if you want to retire, even if stocks go up and make you happy, whoa.
If you retire, if you want to retire, you should be happy with stocks down and this is an impact that a lot of those that are saving now investing now will feel and will feel as a burden over the coming years because you feel are creating your retirement nest, then this is not that good. But there is so much money and as you borrow for zero low interest rates. Any yield investments, investors look for any yield pension funds, governments invest in anything build growth into nowhere, which is a common thing now in Europe try to improve, try to grow on that money.
And that will have positive and negative consequences in the long term and negative consequences that you have to put more much more money to retire, to get that yield, to get the passive income, in comparison to what you had to put, I don't know 10-20 years ago. Further, as we said, interest rates are low, which means that comparatively relatively on low interest rates that you get from bonds, zero percent in the bank, everything else looks very attractive.
If you invest in a stock with a dividend yield of 2-3%. It's much more attractive than a bond or a savings account with zero. Now it's going to be negative on your saving accounts. In Europe, we have seen already that becoming a reality, in the Netherlands.
So everything else is attractive 3%-4% is attractive, and therefore people more and more money goes into those attractive assets, but risky assets like stocks and that's what this abundance of money is creating in the market and we have seen an expansion in valuation. So valuation price to earnings ratio gives you the valuation of an asset what you pay in relation to the earnings of the price. And in 2009, the S&P 500 cyclically adjusted price earnings ratio that takes into account 10 years of earnings to give you to eliminate the ups and downs, the temporary ups and downs was at 15.
Now, it's above 30-31, which means that the valuation the assets doubled in price relation in relation to what they give, which is the earnings the business yield and if we look at from a historical perspective, the price to earnings ratio is double what it used to be historically. So if it just the valuations returned to historical average, then stocks will fall 50%, which is a risk, if they go to the minimum historical stocks for what 90%, which is insane.
And then we are not far from the maximum because relatively the changes from 30 to 44 that was dotcom bubble isn't that big. But because of the situation with low interest rate and there being abundance of money constantly being printed, stocks go up, up, up and up. And then if you're not investing you feel you're missing out on perhaps the best opportunity in history, where the Fed is printing money and making all those real assets like stocks and real estate go up.
So if you are not in the market, you really feel like for further this printing money, lowering interest rates that we'll see in the moment has created the 37 year bull market with huge bubbles like the.com bubble 2000s the real estate bubble 2009 and we'll see what will they call this bubble, perhaps the monetary policy bubble if it bursts. You can call something a bubble on after that it bursts.
The reason for stocks for the 37 year bull market is the abundance of money because one now they're printing it. They started printing it 10 years ago, but over the last 35 years, interest rates went constantly down down down down to stimulate the economy. And they started printing money when interest rates hit zero 10 years ago because going negative, it is possible but we haven't seen that territory for now. And lower interest rates, abundance of money create the situation where we are in the first Your treasure if you want to lend money to the US government over 40 years, your return will be 2.3% per year on a 2.3% inflation that we have seen.
So you make absolutely nothing for lending money to the US government. In Italy, that is one of the most indebted countries in the world with low bed demographics, low productivity and everything. And the government lands there for 1.4% on 10 years, which is something really, really insane especially as the currency is euro with where we see it has it is being printed, printed and printed, that creates an abundance.
Then if we see what this abundance what is creating the federal debt of the United States quadrupled over the last 20 years, corporate that also increased three times over the last 20 years. low interest rates, everybody's getting high high on that. And this is the in front of me.
This is the environment we live in, perhaps and that's it later we'll discuss it in the strategy you have take some debt to just to take advantage of the situation that is going on. global businesses are doing more and more buybacks. buybacks are at record highs. If you can borrow for one 2% you can buyback your stock that has a yield of 4%. You are in a relatively good deal and therefore corporations are forcing those buybacks.
If we look at how much corporations that are borrowing money and then buying stocks and are pushing stocks higher, we see that those with alongside ETFs are really keeping stocks and pushing them higher, higher and higher because pension funds due to the ageing process are already starting to sell to finance those retirement accounts. As the baby boomer generation is retiring, so thanks to the monoprinting thanks to the lower interest rates, that fills up companies pockets that they can borrow at very low interest rates, then buybacks really work. But if we look at the yield, the yield of the dividend and the buyback for the s&p 500 is now five point 19% above 5%.
But the earnings yield is 4%. So companies are spending more on dividends and buybacks than than what is they make, which means the difference is being borrowed. And when you borrow, you know, what does that mean? That means that you take money now and you have to give it back in the future. And that's again a risk when it comes to markets.
If we look at the current s&p 500 earnings yield is 4.4%, but the buyback and dividend yield is about 5%. Just the buyback yield is close to the earnings yield of what the companies make. And this article from the Wall Street Journal really explains the situation perfectly. Money losing companies mushroom, even as stocks hit new highs, the percentage of listed companies in the red losing money is 40% and Tesla is just one example of that situation. That's what has been losing money hand over fist for the last six, seven years, but it's growing and the market capitalization is growing, not going here into the earnings, the future potential earnings that are keeping the company up and getting it to get financing and growing. But over the last six, seven years, Tesla has survived because of the money printing.
The free money, the low interest rates and the abundance of money. It is doing good as low carbon emissions and new technologies are developed and this world is becoming a better place which is a great positive, but we have to also know the reason behind this. Just another example of what's going on the number of bankruptcies is really low over the last years, which means that even if the number of companies that are not making money is at year highs at 40%, the number of bankruptcies is not going higher.
Further, if we look at new initial public offerings, we are close to the dotcom bubble peak of new public offerings that are losing money it was 80% of the dotcom bubble peak and now we have reached that.
So new IPOs, 80% of new IPOs in the US is loss making companies hoping to break a profit.
And let me tell you something here if you are not making money in this economy with abundance of money with the abundance of money, then your business really sucks. And that's something we have to keep in mind also when it comes to investing, if there is so much companies that are not making money now what will happen if the environment changes in sooner or later the environment always changes. If we look at the proportion of us listed companies reporting losses for free hears, it's 27.2%, three years in a row of losses. And then what will happen?
Many expect that there will be a crash, like it has been the case in the 2000s, 2009, 50% down the s&p 500 twice and gold prices will soar. But when it comes to crashes, it is always uncertain.
Dotcom bubble, everybody expected the internet to change the world. It did change the world, but it just took a lot of time for those valuations. 2007 nobody was expecting a real estate crisis, it was all normal, oral securitized, and then it hit. So the next crash is again something that will come from the unknown. If you can predict it, you can solve it. They are printing money to prevent any crashes. But we'll see perhaps it will be an inflationary crash. And the s&p 500 will go to 6-10 thousand points, but nobody will be happy about it.
That's something I feel it might come. But it's just a crazy thing that might come that might take the market and everybody by surprise, we will see what you have to do is to prepare yourself for anything.
And when it comes to the investing strategy to apply, it's always a dilemma investing and everything in life is navigating uncertainty. I wish I would have now some conviction this will happen. It would certainly get me a lot of subscribers so not to forget, please subscribe to support the channel. Click that notification bell so that you get notified when a video comes out that is valuable to you.
We do here low risk, high return investments we try to do, well do well for our financial future no matter what happens. And going back to the s&p 500 I wish I knew what will happen but I don't know.
The only thing I can do is focus on the fundamentals, investing on the risk and reward as I said, what if look at all the scenarios that can happen and see how that fits you and what are your investment requirements. I'm focusing on businesses that can increase prices alongside inflation can take advantage of the money printing, when costs also don't increase that much, much.
Abundance of money: Conclusion
One example that we discussed this Visa if there is inflation, more money, more money printing technology development, Visa will simply skyrocket and continue to grow with the recent pace no matter what happens in the world, it has a moat it has everything.
Then another idea is take a real estate loan, buy some real estate, good real estate, you have a loan, fixed interest rate fixed everything fixed payment for 30 years, given the rate of the money printing, the rent that you get, or the value of the real estate will go up, but your payment will remain fixed. So those are ways that you can protect yourselves you from what might happen, inflationary crash or 50%, down crash, you never know what will happen.
But if you invest smartly, whatever happens happens, you'll do well then what this channel is all about focusing on earnings on assets on real values value investing over the long term, it's perhaps the boring side of investments. You don't watch stock prices go up and down.
You simply look at the business, the fundamentals the value, and you try to deploy your portfolio in a way that was Whatever happens, you do. Well, thanks for watching. Looking forward to your comments, subscribe and I'll see you in the next video.
