The Stock Market Is About To Snap

Hey Graham, it's our final attempt to reach you regarding your car's expiring warranty. Guys, here. So anyway, we need to talk.

If you've recently checked your stock prices and wondered why they've been violently dragged down for seemingly no reason at all, keep watching. I say this because anytime you go online and search why aren't my attendees printing, you're redirected to some very alarming headlines leading to article after article after article all blaming the exact same reason: bond yields are going up. Watch out for rising bond yields!

Bond yields are slamming tech stocks. Bond yields request to market an angry customer demands refund after ordering a dozen masks and receives only 12. Okay, I'll cover the last one at the end of the video because I've lost all faith in humanity.

But before we talk about that, we gotta discuss what's going on in the stock market and why so many people are paying very close attention to what's about to happen with bond yields. Because this has the power to influence not only the stock markets but every other investment out there as well. Plus, when it comes to this topic, it's almost never explained in a way that people can actually understand, and there's so much vague information out there about how this works. So we should clear this up and talk about what's really going on and whether or not this is actually something to be worried about.

That way, you'll be better prepared in terms of how this is going to affect you, the stock market, your savings account, and your free stock worth all the way up to 50 when you deposit 100 on the free stock trading app Public using my link down below in the description. But really quick, before we start, I have a quick message from Elon Musk.

Hey guys, it's Elon Musk and definitely not Graham Stefan just voicing over me in iMovie. I would be over the moon if you did Graham a quick favor and smash that like button for the YouTube algorithm. If this video gets 420,000 likes, I'll force Graham to buy a Tesla Roadster. Thanks so much and now let's begin.

All right, so in order to break down exactly why the stock market is suddenly having a tantrum and how this has the potential to be a major influence on how high or how low prices will go, we need to talk about what a bond is. And no, I'm not talking about this Bond, even though that would be kind of cool. Instead, a bond is a way of lending or borrowing money, much like an IOU.

Corporations or governments will give you the opportunity to lend them money and they'll pay you back plus interest. In this case, the bond we care about, in the topic that everyone is worried about, is called the Treasury bond. These are the bonds issued by the government that allow you to lend them money for who knows what, and in return, they will pay you back plus interest.

And the interesting thing about this is that the interest rate they pay you is entirely determined by supply and demand. See, the government isn't out there telling people, "Hey, I'll pay you 5% interest, just give me some of those sweet, sweet tendies. Come one, come all." Instead, those Treasury bonds are sold at auction where the market dictates how much interest those bonds pay.

How this works is kind of like this: The government says, "Yo, yo, yo, famalama ding dongs! Here's an IOU worth a hundred dollars to anyone who wants to lend me money for 30 days. Who wants to make an offer?" The first investor says, "Sup J-Pow? I'll pay you 95 for that IOU worth a hundred; that'll be more than a five percent return." The second investor says, "Wait, I'll pay you 98 dollars for that IOU worth 100; that'll be a 2% return." The third investor says, "Nah, that's weak. I'll pay you 99 for that IOU worth 100. I'm cool making just 1%." And the fourth investor says, "Get out of here! I just want a safe place to hold my money. I'll pay 99 and 50 cents for that 100-dollar IOU, and that way I could just make half a percent of interest."

Then, the government says, "Sold!" And that is how the market value is set for bond yields, which determine how much interest is paid. Now on the other hand, if the government goes to auction and no one wants to buy those IOUs, the interest rate has to go up to incentivize more people to go and buy them. It's really no different than me putting a hundred dollars cash up for auction with the condition that you have to pay for it today, but you won't actually get this hundred dollars for 12 months. So if you could buy this for fifty dollars, it's a no-brainer because you will have doubled your money in a year. But if you pay ninety-nine dollars for a hundred dollars cash, most likely that doesn't make a lot of sense because during that time inflation is going to eat away at this money, and by the time you actually receive it, it's going to be less than what you initially paid.

So now that you understand how this works, let's talk about why people are so worried about this and why this might have the potential to crash the stock market. All of this starts with one spooky word, and that would be inflation. Like, remember when your grandparents would sit you down and tell you a story about how a movie used to cost a nickel, or how a brand new car used to be a thousand dollars? Well, that doesn't exist anymore, largely because of inflation.

This is the rate that products and services go up in price over time and lower the value of your money in the future. It's why a house used to be 7,400 back in 1950, a dozen eggs used to be 62 cents in 1970, or a gallon of gas was a dollar nineteen in 1980. It's generally thought that the more money gets printed into our economy, the more it devalues the money existing in the system and the more it costs to buy the exact same thing.

But over the last forty years or so, something interesting has happened. The rate of inflation has consistently been going down since the early 1980s, and now inflation has struggled to even reach 2 percent. So what's the problem then? Because shouldn't that be a good thing? Well, investors are now worried that there will be inflation—in fact, way more inflation than usual—caused by trillions of dollars of new money being poured into the economy that hasn't yet had a chance to be spent, only because the economy has been temporarily shut down.

Because of that, those investors are not buying 10 to 30-year Treasury yields because why would they ever want to loan their money to get 1.66% interest if they think inflation is going to be way beyond that? It makes absolutely no sense. Of course, by now you're probably thinking, "All right, we get it then! Just don't buy those 10 to 30-year Treasury yields anymore. Problem solved!" Why should we even care about this?

Well, young grasshopper, it's now going to start to all piece together when investors don't go and buy those Treasury bonds. The interest rate those bonds pay has to go up to entice people to actually go and buy them. Since January 1st, those rates have gone from 1.6 all the way to two and a half percent. Now that in itself is not that big of a deal until you begin to realize that nearly everything is influenced by how much those Treasury yields pay.

If those yields go up, then mortgages get more expensive, loans get more expensive, margin rates get more expensive—literally, all debt starts to get more expensive—just because investors are not buying those Treasury bonds because they believe inflation is going to be higher than what those bonds are paying.

And now, of course, the moment you've been waiting for: how this clashes with the stock market. When interest rates go up, then corporate debt costs more to pay for, which lowers profit margins, which lower stock prices. In addition to that, the valuation of growth stocks like tech, solar, and EV are incredibly sensitive to any increase in interest rates. That's because those companies are valued on their future growth potential, and when interest rates are really low, investors could afford to pay a higher price for the stocks because they aren’t losing out on much money compared to what they could be doing in a Treasury bond instead.

But when interest rates go up, then those Treasury bonds start looking awful nice in comparison, and when debt starts costing more to maintain, tech stocks begin selling off, bringing down the entire stock market alongside with it. So now, of course, the ultimate question: how likely are interest rates to continue going up and is that going to actually drop the market?

Well, that really depends on who you listen to. On the one side, we have the head of the Federal Reserve, Jerome Powell. He's gone on record multiple times to say that he has no intention of raising short-term interest rates, and he plans to keep them near zero percent. He also said that we should expect to see an initial spike of inflation as people finally leave their houses, go on trips, go to travel, go eat at restaurants, and otherwise spend their money as they try to get it out of their system. But long-term, he says inflation is not a worry and don't be concerned about it.

He also warns that we'll soon start to see higher than normal inflation over the next few months, but that's only because of how the metrics of inflation are calculated. It's currently analyzed on a year-over-year basis where we track the price of an index of a year prior and then compare it with today. But since March and April of 2020 saw a temporary anomaly of low inflation due to the shutdown, when we measure again exactly one year later, it's going to look much higher than it really is.

And so he is telling us not to panic and that everything is fine. But investors don’t believe this, and they think that we're going to see much more inflation much faster than what the Fed anticipates, and that is going to force them to raise interest rates much quicker than they expect. But that expectation also comes at a very real cost, and that would be actually higher interest rates.

In the last few weeks, mortgage rates have moved suddenly higher. In fact, this is the fifth straight week of a rate increase, and they've just reached their highest level in nine months. Now, the good news still when it comes to this is that historically, mortgage rates are still unbelievably low. But the concern is really how quickly those rates started going back up, and whether or not that momentum will continue to pull us even higher.

And now as far as where we go from here, this is the current plan. Jerome Powell has made it clear that he won't be changing his current outline based on the expectation of maybe seeing future inflation without seeing actual data of inflation being an issue first. He said, "I think it'll take people time to adjust to that and to adjust to that new practice, and the only way we could really build the credibility of that is by doing it."

But at the same time, the Fed also delivered another blow to the stock market by deciding not to renew a bailout for banks, which allowed them to keep less cash on hand while the markets were going down. That regulation was first put in place in 2009 after the Great Financial Crisis, and that required banks to keep a certain level of cash on hand just as a reserve in case something were to happen.

But in 2020, Jerome Powell suspended that requirement for a year in hopes that that would allow banks to have more cash on hand to lend money more freely. Well, that year officially ends on March 31st, 2021, and when he made the announcement that that provision is not going to be renewed, that sparked fears the banks would have to go and sell off their Treasury bonds to raise more cash, and that in turn would cause Treasury yields to rise even higher.

But I have to say, based on my own opinion and no factual data whatsoever, just give this a week and everyone will have forgotten and moved on to something else. I really believe this regulatory requirement is going to make no difference whatsoever in terms of interest rates. Though yes, I do think this is something worth keeping an eye on, and it's probably going to be the next hot topic for the coming few months.

The biggest concern here for investors isn't so much that interest rates are going up, because let's be real, we all expected them to go up at some point. But instead, the worry is how quickly they're going up and how that might shock the entire market before it has a chance to properly adjust.

So basically when it comes to this, even if you have no idea what's going on and you're just listening to this video in the background while you sort through the kitchen to try to figure out what to eat, this is everything you need to know: big investors think that we're going to see more inflation than expected. That's driving down the price of bonds, which drives up the yield of those bonds. And when bond yields go up, interest rates get more expensive, and that causes the stock market to go down.

Not to mention, the faster this happens, the more media coverage it gets, which starts the cycle all over again. Generally though, here's what I've noticed when it comes to investing: it's a lot like a pendulum. The middle represents the true market value of an investment. But as we all know, a pendulum never just stays still. It tends to swing too far in one direction of optimism and euphoria and then we swing too far in the other direction of fear and panic.

What's going on right now is really no different. Bond yields are worrying investors, and perhaps there's an overreaction that inflation is soon gonna be out of control. But whether or not that's actually the case is yet to be seen. And because inflation data comes out every month, it's likely gonna take us through summer to figure out what's actually going on.

My thinking is that most likely we will end up seeing higher inflation, we'll see slightly higher interest rates, and that will have an impact on the real estate and stock market. However, once true inflation data starts coming out and getting more consistent, I think everything will begin to return back to normal, and things will move along. It's only scary right now because it's the unknown. We have no way of truly figuring out how high inflation will be or how high interest rates will go or exactly what impact that's going to have.

So usually in times of uncertainty, we price in the worst possible case scenario. And whether or not that scenario actually plays out is a whole other story. But until then, we'll probably see a lot of volatility. The truth is interest rates are still historically low, and even if we return back to three and a half percent mortgage rates, that’s something we would have dreamed about just two years ago.

I think we've gotten too accustomed to free money, and that's distorted our views in terms of what's normal, and this is not it. With that, I also wouldn't panic about a 10 to 15% swing in prices throughout the stock market. I think that's just the market adjusting to what might happen, and the best thing for you to do is just keep buying in. And I know I say that every video, but it's the truth, and sometimes it helps to be reminded that what we're seeing right now is nothing out of the ordinary.

Even if you lose money in the short term, it doesn't matter. Keep buying, keep holding, keep smashing the like button, and long term it's going to be okay.

Oh, and finally, we got this angry customer demands refund after ordering a dozen masks and receiving only 12. Now apparently, the customer was upset over the wrong order and wanted a refund. Now the owner responded by saying that since a dozen means 12, the quantity of the masks she sent out was correct and she would not be able to offer a refund. She even apologized for disappointing the customer and offered a five dollar discount coupon.

The customer, of course, rebutted back with, "I must have missed it on the invoice. I needed 20. I never heard of it being listed as 12." Well, that exchange was posted on Twitter, where it went viral, and thankfully it ended up helping out their business. So if you're interested in ordering masks from them as well, I will link to them down below in the description because we may as well help out a small business. Just be aware that if you're going to be ordering a dozen masks, you will only be receiving 12.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, subscribe button, and notification bell. Also, feel free to add me on Instagram, I post pretty much daily. So if you want to be a part of it there, feel free to add me there. As my second channel, The Graham Stephan Show, I post there every single day I'm not posting here. So if you want to see a brand new video from me every single day, make sure to add yourself to that.

And lastly, if you want a totally free stock worth all the way up to fifty dollars, use my link down below in the description and Public is going to be giving you a free stock when you deposit a hundred dollars on the platform. Plus, you could follow me on Public and see my updated stock trades, what I'm investing in, and everything else like that. You may as well do it because it's like free money. So enjoy that free stock down below. Let me know which one you get. Thank you so much for watching, and until next time.