Stock Market Crash Ahead, Bubble POP, Economy - Grantham's Investing Truths Explained with DATA

good fellow investors we live in really amazing times because today given the internet we have all the knowledge in the world at our fingertips you can enjoy interviews from amazing investors that have been around for more than 60 years buffett the recent interview that we're going to discuss here jeremy grantham on bloomberg front row where they tell you exactly what do you need to know when it comes to investing and the current market situation in the 1960s finding a buffett interview or something was impossible for some time stocks have been rising at uh rather rapid rates corporate earnings have not been rising dividends have not been increasing and it's not to be unexpected that perhaps a correction of some of those unusual factors on the upside might occur on the downside however here we have everything and as always i want to discuss and add data data points and charts to the interview so that the interview is even more educational for you the link to the interview as always will be in the description below and the key topic is of course are we in a bubble or not i recently made a poll on my community here on youtube and you can see that the answers are here and there so half of our value investing community thinks that this time is different low interest rates while the other half thinks that we are in an epic bubble jeremy grantham is giving us essential investing truths that we are going to cover in this video dig deeper a little bit than in the interview so about the economy about the environment that's crazy about what really matters when it comes to long-term investing about how these bubbles end and how you can position yourself so that no matter what you do well over time which is the key message also of this channel so i really urge you to set aside the time to watch this video and also jeremy grantham's interview you can use just your headphones for jeremy grantham's as there are no charts there here there are a lot of charts if you enjoyed this video please click that like button it means a lot for the youtube algorithm thank you and supports the channel the key question he has is what's going to push the market higher because stocks as we know either go up or go down flat is something not in the mindset of the stock market so first we have retail trading growth that has exploded in 2020 that signals a bubble so more than 200 growth on retail brokerage daily trades which means that probably now the cab driver and the shoeshine boy are talking about stocks bubble indicator further exuberance new issues everybody is trying to go public because now it's a great time to go public with the abundance of exuberance and money and promises net sum of u.s ipos with negative net income in past year has gone to minus 80 from a positive net sum in the 2000s and then down down and we are now at record high so if you have a business let's ipo let's make nysa sven and make a lot of money that's how the system works now and then he also compares otc trading in 1969 where it when it increased 12 times in volume and look at the total option call volume now so really exploded in 2020 what is this four times even five times up of course casinos are closed so the stock market is the next next best thing for betting also margin ratios as the market goes higher are at extreme levels but when those margin calls turn around it's the same force that push the market higher that will push it lower you can see here the increase in margin that that is higher than 2006 and even higher than 99 of course i don't have to tell you how it looks when this margin eventually reversed that has happened every time and will likely happen again well there was uh undoubtedly some force selling the uh the week when the stock market hit the news the previous week prices have declined about six percent for the week on average and there was some stock that uh was forced upon the market both by margin calls from brokers and uh some that was forced out by in improperly secured bank loans and this in turn set up a self-generating mechanism on the downside for a while which we may have seen the last of in which we may not have seen the last of so the bubble rationale one of the fundamentals of the bubble is the fed will save us all by printing money government will give us stimulus so that we can increase our option betting or betting on various stocks but jeremy says that that there is always a fundamental reason that pushes the market higher but at some point the party is over and to put this into a fundamental perspective let's look at the asset distribution percentile in 2016 for the united states and in 1989 and if you look at the wealth of americans the average you have here what is this let's say from five to 23 20 is in financial assets in the market plus there is another 17 so we can say 30 percent of wealth is in financial markets or financial retirement so 35 of the wealth is in stocks we can say bonds financial markets the other part the big part is 40 is in housing financial markets and housing all the values there are extremely correlated to interest rates so as interest rates are low as the expected yield is low and people chase yield all these assets like stocks and bonds especially long-term bonds as yields go down increase in value and real estate prices so we have a situation where more than 65 of us wealth is in financial assets depending on the fed when the fed loses control the bubble pops and why that because no amount of fat liquidity as jeremy grantham says will save the reversion to the mean will save us when things change and then again what will count then again dividends earnings book values and long-term value counts again so we see these companies i will do a video on neo soon so subscribe to get notified and click that notification bell and these companies simply explode in valuation 94 billion market capitalization that's more than i don't know daimler bmw but if we look at the total revenues this is reminbi so let's say 20 billion remember that's what three billion dollars in revenues for a car company and losing 1 billion remember 4 billion half a billion dollars per year another indication of the bubble but we'll make a deep fundamental analysis perhaps this time with neo it is different we'll see i will be open-minded about that jeremy grantham called the dot-com bubble the housing bubble he's now calling for the tech disruption bubble or fed bubble or whatever and he also called the japanese stock market bubble in the 1980s the only problem was he was just three years too early this is very interesting with bubbles we have low interest rates then the japanese central bank increased interest rates and then all hell broke lose from 48 000 points it went down to what is this six seven thousand points so really a terrible performance but jeremy called the bubble already here only to see it double over the next three years and go to a price earnings ratio of 65 for the nikkei index and this can happen again valuations don't matter again so we can see another double up in the stock market if valuations go from the current 35 to 70 as it has been the case for japan but the long-term result for investors doesn't change much and this is perhaps the best example that shows you about the confidence people have in these growth stocks in the future in the promises and that makes really a bubble this is from jim cramer okay notorious person about investing his winners of the world in year 2000 he was already famous there look at the returns for all those winners that had to change the world perhaps we'll have something like this in five to ten years from arc investing perhaps not but this just shows you okay these are the risks the only still alive is very sign that is still 75 down so it's not just about the amazons it's also about all the others that were hoping to become the next amazon amazon is just one in the thousands and when you see something like this you might get the idea okay let's go short well shorting is not that easy and jeremy grantham says that's only for superstars and i want to add here definition of investing if you invest into something as a business owner all you need to guess right is the long-term direction of the business if the business grows over the long time is sustainable lives over the long time you will probably do very very well however if you are going short you add a level of complexity so you multiply it you square it by thinking about direction but also adding a timing to that direction you need to know when it's going to go up and down further if you play with options you need to know the direction when it's going to happen and also the magnitude of the move how much is it going to move and we here leave that to superstars if there are any out there we have seen einhorn and channels getting pounded by tesla very very badly on the bubble bursting grantham says you can't maintain this level of near ecstasy it can't be done because you've put in your last dollar you're all in what are you supposed to do beyond that point you can't borrow any more money you can't take any more risk of course then the question was what about the stimulus and as the government is giving you the money to print and that could according to jeremy very smartly be the final leg up of the bubble market because all the paper in the world that they can print will not change the long-term flow of dividends and capital and that is key when it comes to investing to the economy to your wealth to your success everything else is just fake paper money that leads to moral hazard that we'll discuss at the end part of the video in the economic part and the economic overview as dividends and earnings are the only thing that you can end up eating and once again the stock market will sell on the boring boring future flow of dividends for those who are interested more in such a kind of investing with the future flow of dividends and cash flows and earnings we have this intrinsic value i'll put the link to the download of template here and you can play around with a lot of companies here these are two coming up in a video around in addition to 11 more here so that's i already prepared but let's put the market capitalization of tesla into an intrinsic value so we have now cash flows of 2 billions and if it grows at 40 per year over the next 10 years we use a discount rate of 5 and the terminal multiple to the cash flows in 2029 or 30 then we have an intrinsic value that's justified for a five percent expected return five percent discount rate but these numbers that justify something like this or a higher or lower market capitalization are really what makes the bubble and the exuberance we'll see where it end it will be very very interesting of course then the argument is but interest rates are so low and stocks are cheap in comparison with interest rates at zero with the five 10-year treasury bond below one percent if you look at stocks if you look at the s p 500 dividend yield you see it at one point five percent which means that it's 50 percent higher than what you can get in long-term government bonds and it can go to one percent can go even lower because then the market would increase 50 or 100 because stocks have earnings stocks are real businesses stocks give you protection for inflation and that's what's priced in the market however look at what was the case just 30 40 years ago dividend yields of 6 even higher in history where we to use these artificially made interest rates as benchmarks for real investors that want to be safe we have to use average long-term interest rates because when the fed loses control this will revert to the mean and we might see this what happened from the 1950s till the 1980s this has been a bonanza for financial assets but it might revert in time and of course the prediction is it will end like this for most of the bubble stocks financial crisis ended pretty shortly because the fed intervened with more and more money and we have a special situation because usually bubbles were with great economic times the situation in japan in the 1980s was amazing economically companies were dominating globally like it is the case with u.s tech stocks then things changed for japan of course things always change that's also something to keep in mind we are now in a specific situation because the economy is actually bad it has been bad for a decade and more since the financial crisis or before that and that's again something that's let's say kicking the can down the road to forget about the real pain of the economy for example the last four or five years the stock market has been booming along and presumably forecasting better business which is really not materialized corporate profits are are not any better than they were five years ago but stock prices are 50 percent higher thereabouts before the economy just show a company that grantham is invested as he is a green nut case as they say so he has seen 1 000 up and then again down for his quantum scape corporation that he says it's insane that's valued more than panasonic even if it doesn't produce anything that's really really crazy with these specs plus when a company crashes you immediately see negative sentiment and also lawsuits filed because yes the company is the culprit because the stock went up 10 times and now it crashes 50 immediately investor alerts and crazy things like that so you might ask in this crazy world how to invest well jeremy grantham has three options you can sell everything which is a very interesting option because we know that cash is trash but he feels that if you sell everything you will do okay over time especially if you sell the stocks that you are in a bubble or the other option is and perhaps he's telling people to sell everything if they are only exposed to u.s stocks so there are many that have this u.s stock bias that they can only own u.s stocks the other options is to look across the world as we are doing now so emerging markets especially slow growth stocks in emerging markets and i've now started looking at the high shares emerging markets index funds to see what are the possibilities around the world and where we can find perhaps interesting investments i just did taiwan semiconductor later i'll do others but as he said we'll do slow growth stocks which are the interesting ones and i'll also look at the emerging market value index and the key investing truth when it comes to investing and now is so exuberant because stocks keep going up is that the higher the stock goes the lower is your investment returns that's the only investment truth in this bubble as the stock went up what is this three times your long-term return will be 30 of what it was two years ago that's a given when it comes to investing how big your return will be that depends on a lot of factors but one thing is sure the higher the price the lower the return and this is another very important investing truth everybody is talking about value versus growth but value is not price to book in price to earnings or price to cash flows or price to sales value is the long-term discounted value of future stream of dividends or cash flows so if you want to look at value then this is a way to look at value you have to calculate the future cash flows and then you can see okay what are the assumptions baked into the price and then see okay how does this fit your investment risk and reward because low price to earnings ratios means that the company is in trouble low price to book values means that the assets of the company will be impaired and are worth less less and less that's a message the market is giving and sometimes the market is wrong sometimes the market is right but it's also wrong to think just in numeric numbers and compare value with growth growth is an essential part of value so i would not differentiate i would say that value is both growth and value but you have to understand the business you are buying and if you buy value stocks like for example berkshire i cannot guarantee you that when the tech stock started falling berkshire actually went up what is this 50 60 70 80 percent this is no guarantee we don't know what the market will do of course when all tech stocks went up berkshires went down but this is investing and we have to see how it's going to affect also berkshire went down strongly in 2008 but it went also significantly up prior to that so we don't know how this short term stock prices will move in a bubble but if you buy value in the form of future cash flows then you are relatively sure that somewhere in the future you will get rewarded either with capital appreciation or with higher dividends and dividends is what you use for eating so they are a key component of investing when it comes to where to hide of course emerging markets cash is printed but the economies of the developed worlds are not looking good on other ways to escape bitcoin he says that it's all about faith and all about just finding the greater fool that will bite i think that most of the channel viewers here know that it's just a greater full theory because it has no dividend and when fate is as minimum as we have seen with all the bitcoin cycles we know how this ends too when nobody knows when can bit can go into 100 000 yes it can even higher because it's all about fate but there is something more important in these situations this is an email that i got yesterday sven would you do this blah blah blah for this new asset backed coined and we have seen these guys from the youtube channel blah blah blah they make 200 000 a day in commissions just with their selling whatever coin based assets they are selling this is insane but this shows another topic that jeremy discussed and those are incentives for the industry and he clearly says it you make your money in the industry by having the bubble keep going that's insane and that explains also the industry let's go to jp morgan jp morgan says bitcoin could rise to 146 000 boom boom boom jp morgan predicts bitcoin price reaching as high as 650 000. jp morgan jamie dimon labels bitcoin a fraud in 2017 and then the company goes buying big because the incentive the incentive is there to just get as much commission or the whole industry is just about commission on the trades on everything while the real economy is on people working capital spending education and productivity not on the debt printing money there is no free lunch in economy printing now is making your kids and grandkids pay there is no other way i'm sorry it has been like that forever since ever it's always short-term benefits versus long-term health politicians that are picked by the people will always choose short-term benefits versus long-term health of course who cares about the long term going to be dead anyway the main mantra of the population and if we look at the key factors when it comes to economy which is productivity population growth and capital investments look at the growth in private non-residential capital stock it's going down if we look at the growth in working age population it's going down extremely fast and of course it's happening also in china but if you look at the whole of asia it's going up and it's covering for the decline in china and the drivers of gdp growth if you look at the growth in workers and growth in real output per worker productivity you see how it's going down from the golden ages it's a constant downward slope and this is the key of the economy and you can fake it as much as you want but if you don't go to school if you don't improve your productivity and if people keep buying stupid things instead of investing and increasing their productivity simply we're going to get overrun by others another topic who is responsible for all of this ellen greenspan in stating the moral hazard so how the fed can save the market but not coming back when the market crashes in the end it's a real world even after greenspan saved the market the sap was still down 50 nasdaq 86 in the 2000s market mean reverting and you just have the bad when you don't need it and to finalize with grantham something very interesting if you say as an individual my only interest is to maximize my advantages which is what they say at the corporate level you are a sociopath and we also see this also on youtube everywhere everyone's interest is just to maximize his profits so we see in the 200 000 boys that make in commission one on a day just by selling something that jamie dimon called the fraud the same that jp morgan then sells around for commissions so it's a really crazy world you see where do you want to position yourself in the long term watch the video with these essential investing truths i hope you enjoyed this looking forward to your comments and click that like button

Channel: Value Investing with Sven Carlin, Ph.D.

Views: 74,977

Rating: 4.9426422 out of 5

Keywords: stock market crash, stock market crash 2021, jeremy grantham, jeremy grantham bloomberg, stock market crash ahead, stock market bubble to pop, stock market bubble 2021, stock market bubble to burst, economic collapse, stock market crash coming

Id: kBpL2WwGiw4

Length: 26min 9sec (1569 seconds)

Published: Wed Jan 27 2021