Speaker 1: One of the most popular questions that I get asked is when will the stock market crash? What are we talking 2020, 2021 within the next five years, 10 years? And it’s a great question. That’s what markets do. They go up and eventually they crash cycles of greed and then cycles of fear. But the question is, when will be the next cycle of fear, a.k.a. when’s the next market crash? And I’m going to be honest here. I do not know exactly when the next market crash will be. The only thing that I can do is look at history and past statistics to try and get a feel for when it might take place.
So let’s dig straight into this. The first thing and the most obvious thing that we should look at is the history of market cycles. So if we go back 150 years, there’s been a lot of momentous events that have resulted in huge market crashes. Black Monday, anyone investing in those days will never forget the day the market crashed by 22 percent in a single day, inflation mixed with the Vietnamese war. That would have been an extremely tough period to be in. And, of course, probably the most well-known one in history, the 1929 crash and the Great Depression. This literally changed a generation’s mindset to investing anyway. The main thing that we can take from this graph is that market crashes tend to occur on average around every eight to 10 years. Now, let’s test your memory. When was the last recession? That would be in 2008. The housing bubble crisis, which means let’s do a quick bit of math. It’s been 12 years since the last recession occurs, which says if you go by what history tells us, that we are around you for the next recession to come. But of course, it’s not like it occurs exactly every eight to 10 years on the dot. Unfortunately, there’s always room and leeway in the market is never something that can be perfectly forecasted, even if you look at history. But I will tell you one indicator that I think all of us investors should really be following when trying to think about when another market crash will occur or recession. And that indicator is the unemployment. Right now, this graph takes us back around 70 years and time. And if you have a keen eye, you would notice something out of the ordinary sticking out, and that is the unemployment rate in 2020, that massive spike that you can see at the end of the graph. We’ve never seen something like this before. Unemployment rising to such a high figure and literally that click of your fingers. So for those interested in what the economy and the stock market might do in the short term, keep a close eye on this figure, because if these unemployment rates remain at high levels, the economy is inevitably going to go down soon. Why? Because if you have so many people not working compared to previous years, you can’t sustain the amount of output that you had. That’s on the other hand, the opposite is also just as likely as we all know. Things are starting to get back to normal, businesses reopening, people starting to go out more. And hopefully this results and the unemployment rates going down. This will be a key figure to watch out for, to see if a crash will occur in 2020, 2021, or if it is a lot longer to wait. Now, the other thing that I’d like to do when trying to get a feel for the stock market is see what the billionaire investors are saying. Now, there’s definitely a few out there that, let’s just say are not bullish on the stock market in the short term.
Stanley Druckenmiller, the billionaire American investor, is one of these guys. He said the risk reward calculation for stocks is the worst he’s ever seen whilst working in equities and that the government stimulus programs won’t be enough to overcome real world economic problems. Here’s the quote. The consensus out there seems to be, don’t worry, the Fed has your back. There’s only one problem with that. Our analysis says it’s not true. While traders think there is massive liquidity and that the stimulus programs are big enough to solve the problems facing the U.S., the economic effects of the illness are likely to be long lasting and will lead to a slew of bankruptcies. If what Druckenmiller says is true, this will not look good as per the stock market in the short term. But it’s not just Druckenmiller with sentiments such as these ones. David Tepper, the billionaire hedge fund manager, he’s not too keen on what the stock market is looking like either. He thinks the stock market today. Is the second most overvalued and his memory trailing only that of 1999 during the dot com era crash. He said the market is pretty high and the Fed has put a lot of money in here. There’s been different misallocation of capital in the markets. Certainly you are seeing pockets of that now. And the stock market, the market is, by anybody’s standard, pretty full. Now, these guys, as with any smart investors, they never like to predict what’s going to happen in the short term. But it’s fair to say that at these prices, they are not bullish. So the question that we’re really trying to answer in this video is when will crash occur? Everyone knows that a crash will occur at some points in time. That’s just what the market does. But when will this be? And unfortunately, I cannot give you a definitive answer to that question, but I can give you one very important thing that you should keep a close eye on. And this indicator that I’m about to show you is the one thing that I believe is holding the stock market together, and that is interest rates. I mean, this is the famous quote that Warren Buffett made on them.
He said, you measure everything against interest rates, basically, and interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982, they had pulled down the value of any assets and quotes. And it’s the same when interest rates are low. There’s no gravity being put on the stock market. And this is key to why the stock market is so high and has been going up because there is no interest rate to hold them down. And let me explain this a bit further. So you understand the big investors have two key places where they can put their money in the stock market or in bonds, the bank, the amounts of return you get for bonds entirely depends on what interest rates are. If interest rates are low, you are not going to get much of a return. So most of your money will get put to work in the stock market. And it’s the same the other way round. If interest rates are high, you get more of a return elsewhere. So money gets pulled out of the stock markets. Now, if we take a look at what interest rates are at currently, they’re sitting at all time lows right now at zero point to five percent. So it’s close to pointless for a lot of investors to have their money in bonds and Treasury bills or in the bank because the return that they get is nominal. So what ends up happening is all of their money goes into the stock markets. But this will change if we see interest rates start to rise again, investors will have another option to put their money in. The stock markets will look less attractive. And this is why this is a key indicator that I’ll be keeping a close eye on when seen where the markets may go. The other thing that low interest rates do is it allows companies and people to borrow a lot of money and then use this money to invest. This, again, artificially pumps a lot of money into the markets. That’s why you have people like Craig Kissner not buying the long term validity of these stock prices because they said this. The low interest rates we’ve experienced have allowed companies to borrow a lot of money and a great deal of that money went into buying back their own company’s stock, he said.
As a result, stock prices surged higher, making consumers feel good about the economy and more willing to spend money and take on debt. We’ve seen this movie before, sky high real estate prices, sky high stock market prices and a giant debt bubble because they said we know how this movie is going to end, end quote. But, you know, let’s be honest here. There is no guarantee that the stock market will crash. And that’s why you get people like Warren Buffett who come out and they give no predictions on what they think will happen in the stock market over the short term.
But what we can do as investors is look at the key indicators that will directly affect the stock markets. We can look at unemployment rate to try and get a feel for how the economy will grow. And, of course, we have to be paying close attention to interest rates because at the end of the day, this is going to be one of the key factors that determines where the market will go.