馃攳
Here's Why The Stock Market Is At An All-Time High - YouTube
Channel: Economics Explained
[0]
so we are past the halfway point but the
[2]
wild ride of 2020 is not
[4]
letting up the news cycle is filled with
[7]
horrifying headlines day in
[9]
and day out an outside observer could be
[11]
forgiven for thinking that we are
[13]
genuinely living through the apocalypse
[15]
but amongst all of this in complete
[18]
defiance
[19]
or perhaps complete ignorance to the
[20]
goings-on of the world
[22]
the s p 500 an index that measures the
[25]
stock performance of the largest
[26]
companies in the usa
[28]
closed out this week at its highest
[30]
level
[31]
ever this is a collection of stocks and
[34]
companies that have been
[36]
impacted by the fallout of the
[37]
coronavirus as well as
[39]
all of the other nasty stuff that's
[40]
going on in the world right now so what
[42]
is going on here
[44]
people could be forgiven for thinking at
[46]
this point that an
[47]
extinction-level media strike would
[49]
qualify as a strong buying sign
[52]
and you know what they may not be wrong
[54]
the usa releases its worst gdp figures
[57]
in history
[58]
the stock market rose the next day
[60]
research is released that this whole
[62]
ordeal may not be over until 2022
[64]
1 rally in the markets to a rational
[67]
viewer
[68]
this is verging on insanity but
[71]
is there method to this madness a quick
[73]
note is that of course we have actually
[75]
explored this issue on the channel
[77]
but since that video a full recovery has
[79]
taken place
[80]
a big takeaway of that video is that
[82]
there might not be any better place to
[84]
keep money at the moment
[86]
and we will actually expand on that
[87]
point here so
[89]
call this a part two if you will but
[91]
this entire issue
[92]
definitely deserves further exploration
[95]
and there are a few
[96]
key points that have surfaced since then
[98]
to give some remarkable insights into
[100]
how this broken system
[102]
might have been right all along to
[104]
determine this
[105]
we need to decide on a few things
[108]
what is the actual role of stock market
[111]
investors
[112]
does the stock market have any
[114]
relationship to the economy
[116]
is this potentially a sign that things
[118]
are not as bad as we are led to believe
[121]
and since the market has now rallied 50
[124]
percent
[125]
in four months is it fair to say that we
[127]
are right back
[128]
in another market bubble this episode of
[131]
economics explained was made possible by
[133]
our sponsor trends
[134]
which is in my opinion one of the most
[136]
valuable and undiscovered knowledge hubs
[138]
on the face of the internet
[139]
trends is part of the hustle which if
[141]
you guys are not already subscribed to
[143]
he's hands down one of the best daily
[144]
email newsletters for everything tech
[147]
and business when trends reached out to
[148]
the channel to see if we'd be interested
[150]
in having them on as a sponsor i
[151]
genuinely got really excited because one
[153]
thing i get asked a lot on patreon is
[155]
advice on starting a business
[156]
and how to network with smart people
[158]
which is exactly what trends is all
[160]
about
[160]
with a subscription to trends you have
[162]
exclusive and private access to a
[164]
community of industry thought leaders in
[166]
virtually every field
[167]
even better trends makes it super easy
[169]
to digitally network with over 5000
[171]
entrepreneurs
[172]
investors and startup ceos it's truly a
[175]
community at heart and i can't say
[176]
enough good things about it i'd also be
[178]
remiss if i didn't mention that trends
[179]
also has an incredible content library
[181]
if you guys like watching these videos
[183]
you are going to love reading exclusive
[185]
articles that are only available to
[186]
subscribers of trends
[188]
just like the ones that you see on
[189]
screen thanks to this sponsorship you
[191]
can get a two week trial for just one
[193]
dollar by going to trends
[194]
dot co slash ee the link is on the
[197]
screen now and in the video description
[199]
below it is often taught that markets
[203]
are
[203]
efficient that since something is only
[205]
worth what someone is willing to pay for
[207]
it
[208]
prices are gospel but humans are dumb
[212]
and the machines haven't completely
[213]
overtaken wall street just yet
[215]
so maybe the best way to understand this
[217]
market craziness
[218]
is to understand the crazy people that
[221]
make it possible
[222]
so at its core what is the role
[225]
of an investor this might sound like a
[228]
simple question with an easy answer
[230]
an investor is someone who puts money or
[233]
capital towards a promising idea or
[235]
business venture to get it off the
[236]
ground
[237]
or to make it more efficient an investor
[240]
might invest
[240]
two hundred thousand dollars into a farm
[242]
for a fifty percent stake in the
[244]
business
[245]
the farm can then use that money to go
[247]
and buy a combine harvester and an extra
[249]
few acres of
[250]
fields which will triple the output of
[253]
the farm sure
[254]
the profits now need to be split 50 50
[256]
but with three times the output
[258]
everybody is better off the farmer
[261]
increases his income by 50 percent
[263]
the investor is getting a good return on
[265]
his investment and
[266]
even the wider economy is winning off
[268]
this employees at the john deere factory
[270]
get to sell an extra piece of equipment
[272]
that they wouldn't have otherwise been
[273]
able to
[274]
and of course there is more food for
[276]
everyone to consume
[278]
now this is of course very
[279]
oversimplified and
[281]
actually quite divorced from reality
[284]
if today you go out and buy shares in
[287]
apple that money is not going towards
[290]
the company
[291]
it won't be invested into research and
[293]
development or building new factories
[295]
instead it will just go to some other
[297]
investor who used to own those apple
[300]
shares
[300]
companies very rarely raise any money
[303]
from selling shares
[304]
after their initial public offering or
[307]
ipo
[308]
and the trading volumes of shares that
[310]
are part of an ipo
[311]
are a tiny tiny fraction of the total
[314]
trading volume on exchanges like the
[315]
nyse
[316]
or the nasdaq in fact once a company
[319]
lists its shares after its initial
[321]
public offering
[322]
that's kind of it for them it's really
[324]
unlikely they are ever going to be able
[326]
to raise money from investors ever again
[329]
if they do need money to put towards
[330]
productive ventures then their options
[332]
would be to take on debt in the form of
[334]
a company loan
[335]
or to turn a profit if that's something
[337]
that companies still do these days
[339]
what this means is that in principle the
[342]
stock market amounts to people playing
[343]
hot potato with securities that don't
[346]
actually ever go towards anything useful
[348]
right well actually sort of people with
[351]
vast share portfolios
[353]
shouldn't really be patting themselves
[354]
on the back as the guiding force of
[356]
modern industry
[357]
but they are more so the holders of
[360]
contributions
[361]
that have been now full disclosure
[364]
i am saying this as a proud holder of
[367]
these
[367]
has been contributions to society but
[370]
perhaps this
[370]
isn't entirely fair the role of an
[374]
investor into the stock market isn't
[376]
completely
[377]
useless it's just very let's call it
[380]
abstract real genuine investment as we
[384]
saw in our lovely little farm example
[386]
takes place primarily as funding rounds
[389]
into younger businesses well before
[392]
an initial public offering these will be
[395]
called
[395]
investment rounds where the owners of a
[397]
company will sell off shares to
[399]
qualified investors companies like
[401]
wework are not yet publicly traded or
[404]
listed anywhere
[405]
and depend a lot on investment funding
[407]
to make them possible
[409]
these investments don't come from
[410]
regular households but
[412]
rather from large investment funds in
[414]
this case
[415]
softbank and a collection of venture
[417]
capitalists now most
[419]
modern venture capitalists are not at
[421]
all interested in sharing in the profits
[423]
of a company
[424]
but rather they want to buy in on the
[426]
ground floor
[427]
and then work on exiting the business an
[431]
exit basically amounts to them selling
[432]
off their shares that they got from a
[434]
very early and therefore
[436]
very risky investment into the company
[438]
these exits are normally done
[441]
after a company goes public so in
[444]
reality
[445]
an ipo actually serves two purposes
[448]
the first is the standard capital raised
[450]
to make money to put towards the growing
[452]
business yada yada yada but perhaps the
[454]
more
[455]
important component is that these gives
[457]
these early investors a platform to sell
[459]
their once volatile investments
[461]
to regular investors with less of a risk
[464]
tolerance
[465]
these early investors will then get a
[467]
nice big pool of cash so they can go out
[470]
and do it
[470]
all over again the role of a standard
[473]
household investor into the stock market
[475]
is not to fund
[476]
a young business in need but rather it
[479]
is to fund
[480]
the people that fund the young business
[481]
in need or
[483]
depending on how many times a particular
[485]
share has been traded back and forth
[486]
since its listing
[488]
it might be to fund the person that
[490]
funded the person that funded the person
[491]
that funded the young business in need
[493]
but you get the idea so this all
[495]
actually begs the question
[497]
why do people care about the stock
[500]
market
[501]
obviously investors want their
[503]
investments to go up in value or at
[504]
least return some nice fat dividends
[506]
but outside of people with direct
[508]
ownership does this even matter
[510]
if companies don't rely on shares to
[512]
raise capital and the stock market is
[514]
not directly contributing towards making
[516]
a happier wealthier world
[518]
then why does it dominate headlines for
[521]
starters of course
[522]
people conflate the economy with the
[524]
stock market
[525]
it might sound silly to you someone who
[528]
would sit down to watch an economics
[529]
video
[530]
but remember most people don't know and
[532]
or don't care
[534]
at least until they see headlines with
[535]
big alarming figures that make it sound
[537]
like the world is coming to an end
[539]
and of course a stock market crash can
[542]
be a sign of an economy in turmoil
[544]
but it's not always the case the stock
[547]
market and the economy are
[549]
two different entities a strong economy
[552]
will almost always lead to a healthy
[554]
stock market
[554]
but the opposite is not necessarily true
[557]
a strong stock market
[559]
doesn't necessarily mean a healthy
[561]
economy as we can see
[563]
right now so a company executive
[566]
and especially a politician for that
[567]
matter being overly focused on stock
[569]
market performance
[571]
doesn't sound that logical right well no
[574]
there is actually a very good reason for
[575]
both
[576]
to the corporate executive the stock
[578]
price might not have much bearing on the
[580]
company's actual financial performance
[582]
but shareholders own the company that
[584]
means that they can elect a new board of
[586]
directors and replace ceos on a whim
[588]
if they are not happy the best way to
[590]
keep them happy keep that stock price
[593]
high this sounds sensible enough but it
[595]
is actually one of the big
[597]
disadvantages of having a public company
[600]
since investors want strong returns and
[602]
the investors control the board who in
[604]
turn control the executives who run the
[606]
whole business
[607]
the whole operation can become ultra
[609]
focused on stock price
[611]
this is made even worse when c-suite
[614]
level compensation
[615]
is tied to stock options which it almost
[618]
always is executives may elect to do
[621]
something that is not necessarily
[623]
in the best strategic interest of the
[625]
company if it will bump the stock price
[627]
up a bit
[628]
like say taking on massive debt to do
[630]
sweeping stock buybacks
[632]
these decisions give them a nice fat
[634]
bonus and keeps most stockholders in a
[636]
happy state of complacence
[638]
now to politicians it's all about optics
[641]
the media loves to scream and shout
[643]
about a stock market crash
[645]
in reality and in isolation these
[647]
headlines won't
[648]
impact most of the people reading them
[650]
but if people see
[652]
the dow didn't ow and connect that last
[654]
time this happened they lost their job
[656]
they may be very very angry at whoever
[658]
is in charge
[660]
what this means is that while the stock
[661]
market might not be that important for
[663]
business managers politicians or regular
[666]
folk
[667]
investors have a way of making it
[669]
relevant
[670]
but this all sounds like it is skirting
[672]
around the 27 trillion
[674]
dollar question why is the market at an
[676]
all-time high
[678]
in the midst of armageddon now of course
[681]
one of the big reasons that we mentioned
[682]
in the last video
[683]
is fiscal stimulus leading to inflation
[687]
but that is worth exploring in more
[689]
detail
[690]
of course the money printers have gone
[692]
bro and this has introduced
[694]
trillions of dollars into the economy
[696]
some of this went to regular households
[698]
to cover the cost of living for people
[699]
that may be out of the job through no
[700]
fault of their own but a good majority
[702]
of this went to
[703]
businesses and their wealthy owners one
[706]
side effect of this has been a spike in
[708]
lamborghini sales
[710]
but for the more prudent millionaire
[712]
they might put this money towards the
[714]
stock market
[715]
this has increased demand for shares and
[717]
hey presto this has pushed up the price
[719]
but this isn't the whole story the other
[722]
side to this
[723]
is that when we are assessing the price
[725]
of something be it a house or a roll of
[727]
toilet paper or
[728]
company stock we will look at the price
[731]
of alternative goods
[733]
if rent doubled overnight the price of
[735]
houses would likely shoot up too
[737]
because more people would be desperate
[739]
to get out of rentals and into a
[740]
property that they
[741]
owned if the government gave a free b
[744]
day to
[744]
every household in the nation the price
[746]
of toilet paper
[747]
would fall and if interest rates were
[751]
lowered to zero percent on treasury
[753]
bonds or large bank holdings
[755]
then the stock market is the next best
[757]
alternative
[758]
howard marks a billionaire investor has
[760]
noted that he
[761]
and his company are just happy to accept
[763]
a significantly lower price to earnings
[765]
ratio in this crazy crazy world
[768]
a price to earnings ratio basically
[770]
notes how much an investment returns as
[772]
a multiple of how much it costs
[774]
so a price to earnings ratio of 16
[778]
would mean that the price of an asset is
[779]
16 times
[781]
what it returns per year which is
[783]
coincidentally what investors normally
[785]
expect out of a relatively safe
[787]
investment like a
[788]
s p 500 index nowadays
[791]
that expectation is more like 24 times
[795]
and it is only getting worse as
[797]
investors continue to lower their
[799]
expectations around their expected
[801]
returns
[802]
in the short term these lowered standard
[804]
means that investors can bag some quick
[806]
wins
[807]
like a 50 rally in stock prices which
[810]
kind of sounds like a great success
[812]
but think of it like this the stock
[814]
market is a market like any other
[817]
it has things that offer value to the
[819]
buyers and those things trade for what
[821]
people think is a fair price
[823]
if the price of groceries went up by 50
[827]
in the space of three to four months
[829]
that would be seen as an
[830]
absolute disaster verging on
[834]
hyperinflation and it's not necessarily
[837]
different to the stock market
[839]
the actual value of the market is lower
[842]
than it was this time last year
[844]
it is a rotten banana it's just that
[847]
people are starving
[848]
and they will pay whatever it takes to
[850]
get something to chew on
[852]
so with what could amount to a
[854]
multi-trillion dollar market failure
[856]
is this a bubble the last consideration
[859]
in the trillion dollar bubble dilemma
[861]
is where this recovery has come from the
[864]
so-called
[864]
fang companies that is facebook apple
[868]
amazon netflix microsoft and google
[871]
all have very sore backs at the moment
[874]
that's because
[875]
they have been carrying the entire
[877]
market
[878]
these companies are collectively worth
[880]
over five
[882]
trillion dollars which is 25 of the
[885]
capital valuation
[886]
of the s p 500 to give you an idea of
[889]
their weighted influence
[890]
amazon and apple alone have a larger
[894]
market capitalization
[895]
than every publicly listed company in
[898]
australia
[899]
combined and australia is not a small
[902]
economy
[903]
what this means is that these companies
[905]
dictate the market
[906]
every other industry be it oil
[909]
pharmaceuticals
[910]
retail minerals the automotive industry
[913]
hospitality
[914]
they are all suffering as you would
[916]
expect it's just that the success of the
[918]
massive tech industry has made this
[920]
stagnation
[921]
completely invisible in the context of
[923]
the broader market
[924]
which leads to one big final scary
[927]
consideration
[929]
we have spent this entire video looking
[931]
at the s p
[932]
500 which is an index and index
[936]
basically means a collection
[937]
in this case it's a collection of the
[940]
505
[941]
biggest companies in the usa but indexes
[943]
are actually
[944]
really popular as investment classes
[947]
where instead of buying
[948]
one share or a group of shares people
[951]
will invest into an index that has a
[953]
pool of
[954]
hundreds of shares this gives an average
[956]
investor
[957]
in-built diversification and exposure to
[960]
lots of companies without having to
[962]
spend
[962]
millions of dollars to buy all of these
[964]
and weigh them individually
[966]
this is great for easy investing but it
[968]
means a lot of misguided capital
[970]
is being issued directly towards these
[973]
companies that are listed in these
[974]
indexes
[975]
these companies are already very very
[978]
large
[978]
and very established and potentially
[981]
very overvalued
[983]
dr michael bury yes that michael bury
[986]
the one that predicted the 2008 subprime
[988]
mortgage crisis
[989]
has made similar predictions about
[991]
exchange traded funds
[993]
just because you bundle something up
[996]
call it diversified
[997]
and then feed it into huge pools of
[999]
capital does not necessarily mean
[1001]
that it's a good investment what is a
[1004]
good investment
[1005]
is in yourself and i can't think of a
[1006]
better place to start building out that
[1008]
portfolio than with trends
[1010]
trends is home to a wealth of exclusive
[1012]
articles that i know you were going to
[1013]
absolutely love
[1014]
like this guy that went from being three
[1016]
days away from insolvency to building a
[1018]
400 million
[1019]
a year business what's also really neat
[1021]
is that you can rsvp for exclusive q a
[1023]
live streams with famous startup ceos
[1025]
and so much more
[1026]
if you want to support economics explain
[1028]
and help make these videos possible
[1030]
while also getting a really great deal
[1031]
check out trends.co
[1033]
ee which will give you access to trends
[1035]
for two weeks for just one dollar
[1037]
the link is on the screen now and in the
[1038]
video description below as always
[1041]
thanks guys bye
Most Recent Videos:
You can go back to the homepage right here: Homepage