How The Stock Market Will Crash

What's up, Graham! It's guys here. So, as I'm sure we're all aware by now, every single week there's a new prediction that the stock market is going to come crashing down. It's time to sell everything, and this time it's for real. But this crash prediction, on the other hand, was something that I found particularly interesting because the reasons behind it aren't so far-fetched.

It makes sense once I started doing a little bit more research behind the claim that the market is in the biggest bubble of my career, according to the famed investor Rich Bernstein. And you know it's got to be good when his name is literally Rich! On top of that, the short seller Jim Chanos, who correctly called out both Luckin Coffee and Enron before their eventual demise, has concerns that the market is entering a risky phase and that investors could be left holding the bag once the cycle ends.

So, I thought it would be fun to put both of those theories to the test because, believe it or not, there is some merit to what they have to say, and that's backed up with factual data, research, and analysis that I spent the entire day working on—because science! Okay, but for real, let's talk about whether or not this market is indeed in a bubble, why this analysis could actually have some truth to it, and then, of course, most importantly, what you could do about it to make as much money as possible.

And then, just for fun, at the very end, I want to cover this story about a man who tried to rob a bank but failed because his handwriting was so bad. But before we start, I want to say a huge thank you to the sponsor of today's video: myself and my new program, "How to Get Rich by Smashing the Like Button for the YouTube Algorithm." For totally free, I will show you step by step how to make that like button turn blue or black depending on your settings.

And best of all, if you could do that in the next three seconds, I will show you this really cute picture of a baby yellow tank. So, thank you guys so much. Now, with that said, let's begin!

Alright, so before we go into a deep dive on exactly why some stock market experts believe we're in a bubble, we should first define exactly what a bubble is and then give some examples. So, we could see firsthand exactly what they look like.

Now, technically, the definition of a bubble is a thin sphere of liquid enclosing air or another gas. Wait a second, wrong bubble! A bubble generally refers to a situation where the price for something, whether it be a stock, a financial asset, or even an entire sector market or asset class, exceeds its fundamental value by a large margin.

And when it comes to this, it usually appears in five cycles as noted by Investopedia. The first is what's known as displacement. This is what happens when euphoria takes over and everybody is suddenly enamored by a new technology, innovation, or industry, which could potentially disrupt the entire economy as we know it.

And then number two, we have the boom phase. As prices begin to rise, more people pile in, and the more people pile in, the more people talk about it, which causes the price to rise even higher. Before you know it, FOMO takes over, and everyone wants to get in on the next big thing before it's too late.

Then third, we have euphoria. At this point, people go all in; the price keeps going higher, valuations reach a point where new metrics need to be used to justify the parabolic rise, like "This is unprecedented. Never before has this happened," or "This is the future." There's always the mindset here that no matter how high prices go, there's always going to be someone else willing to pay more.

But that does not last. Four, as prices begin to reach even greater highs, some people end up taking profit. This is the point when people begin looking at their accounts and thinking, "This is ridiculous. Why am I holding on to this? I've got more than enough money; I should probably start selling." The proper timing of this portion is extremely difficult because nobody knows how high it'll go. But once people start cashing out, that begins to be the tipping point.

Then from there, we enter the final phase of panic. This is the point where everyone starts selling all at the exact same time; the price goes down just as fast as it went up, and the bubble has been popped.

Now, as they say, history finds a way of repeating itself and throughout the last 100 years, there are a few major bubbles that everybody should be made aware of. The first, as most people know, is the famous stock market bubble and crash of 1929. During the 1920s, loose monetary policy allowed pretty much anybody to go and borrow money for the purpose of speculating in the stock market because that was a good way to build wealth.

However, once the market showed even the slightest glimpse of a peak, people began selling out and then cashing their money out from banks for fear that the banks would be going out of business. But banks had lent out all of their money to their customers and didn't have enough cash on hand to pay people back. That led to the markets dropping 83 percent over 2.8 years, and the market didn't fully recover until 25 years later.

And then we have one of the most common bubbles that people constantly compare us to, and that would be Japan's real estate and stock market bubble of the 1980s, which still to this day is trading below what it used to for Japan. This was caused by low interest rates, which fueled rampant speculation across real estates and stocks in the 1980s and rose prices into 100 percent.

This is bubble territory. In fact, their government became so worried about a bubble that they had to raise interest rates to prevent prices from rising even further. But shortly after, prices collapsed and everything dropped about 60 percent. The result now is the Japanese stock market that is lower today than it was 30 years ago.

But moving on, after that we got the dot-com bubble of 2001. This was caused by a frenzy of speculation towards internet-related companies because the Internet was going to be the future. Well, that was unsustainable because the majority of those companies didn't actually make any money, and after a few years of exponential growth from the market, it collapsed and wiped out most of their value.

And if you were in tech stocks back then, you would have lost an average of 78 percent. And lastly, we got the 2008 real estate bubble. This happened when banks lent out way too much money to people who were not qualified, who then went and speculated on real estate, boosting the prices to the moon.

And then once those home buyers could not sustain those payments, they began defaulting. Banks, who then lent those loans, began defaulting themselves. People were losing their homes left and right, and as a result, both the stock market and the real estate market fell about 50 percent.

Now, obviously, some also mentioned Bitcoin in 2017 as being in a bubble because it simply rose faster than the fundamentals could support at the time. Others also mentioned gold throughout the 1980s, which skyrocketed from a panic of leaving the gold standard. But now we have people saying the same thing about today's market, or as Rich Bernstein warns, "the greatest bubble of my career."

He says in simple terms that the Federal Reserve has distorted stock market valuations by keeping interest rates artificially low and causing more money to enter the market, thereby driving up prices. And that the only reason valuations could stay this high is to believe that interest rates won't eventually go back up. Because, as he says, that would be kryptonite to the bubble.

Short seller Jim Chanos says that retail investors like you and I are prone to entering the market at the late stage of the cycle and that we could end up holding the bag—and not like securing the bag, which would be good, but like holding the bags, and we would see some losses. His rationale is that retail wasn't there in 2009 at the bottom of the market. They weren't there in 2002 after the dot-com bubble collapsed. But they were certainly there in 1999, just as things were getting started.

This is evidenced by the fact that retail investing has surged to the highest level ever. They've changed the landscape of investing in momentum stocks. Many of them are new investors, and Goldman Sachs said this could just be getting started. In addition to that, they noted that a flood of companies rushed to public markets to raise capital this year to take advantage of sky-high prices and wild animal spirits.

Back IPOs also rose to their fastest level in history—more than triple of what they were at the height of 2006. While other companies diluted shareholders by raising capital at elevated valuations, for example, in February Carnival Cruise Lines announced that they would be offering one billion dollars worth of stock with the intention of using it for general business purposes.

Then, as their stock price continued going up, just a few months later, they announced that they may sell up to 500 million dollars in stock from time to time as a part of the money equity offering program. Tesla was also quick to take advantage of this. In December of 2020, just as their stock price was about to hit a record high, they announced that they would begin to sell up to 5 billion dollars worth of stock.

Another example is a really popular one, and that would be GameStop. In April, they sold three and a half million shares into the market at an average price of 157 each, raising 551 million dollars in the process. And AMC also did the exact same. They announced that they completed another share offering at an average price of fifty dollars and 85 cents each, giving an additional 587 million dollars back to the company.

In total, they raised over 1.2 billion dollars. Microvision is another company looking to cash in, announcing that they would be selling over 140 million dollars worth of their stock during a time when their share price was up over 1200 percent. And lastly, Virgin Galactic recently filed registration that would allow them to sell two billion dollars' worth of stock during a time where, you guessed it, the stock is trading at an all-time high.

In response to that, they said that historically, we've looked to take advantage of favorable market conditions to raise capital for the business. And they're not alone with more than 750 money-losing firms having sold shares in the secondary market in the last 12 months.

Now, this is not always a bad thing, and companies are smart to do this when they could redeploy that cash back into further expansion. But it could also make you question whether or not they're doing it for growth or because the stock price is too good not to take advantage of.

Now, the short seller Jim says that we're getting into money being raised for all kinds of things that probably aren't, at the end of the day, going to be productive but might line the pockets of the promoters doing it. And he hands it off by saying that excessive risk is not going to end well for those buying in at the late stage of the cycle, which he implies is now.

But when it comes to this, here's where it gets interesting. I wanted to do my own completely unbiased research into the effects of low interest rates and how that influences speculative trading. In this study that I found, they broke down investing into two categories. One group considered the choice between a risk-free five percent or a risky ten percent, and the second group considered the choice between a risk-free one percent return and a risky six percent return.

In both situations, the risky asset pays the exact same five percent more, but in both situations, the results were vastly different. Throughout a representation of the entire U.S. population and 400 Harvard MBA students, low risk-free returns caused significantly more speculation for higher returning assets, even though technically the difference in payout was exactly the same.

Those findings begin to normalize when the risk-free return is higher, even though the riskier investments still pay the exact same amount more. Now, for all of you visual learners out there, when interest rates are zero percent, seventy percent of their portfolio went into risky investments. But when interest rates are five percent, the risky portion goes down to 50, reflecting a more balanced portfolio.

So the conclusion they found was just this: people form reference points for investment returns, and when interest rates drop below that level, investors are more willing to take riskier investments to seek higher returns.

In addition to that, if the risky return earns substantially more than the risk-free return, investors are more likely to go for it. In this case, the difference between earning 5 and 10 percent is double, but going from one percent to six percent is a five x return. So when you view this in proportion, it makes the riskier investments seem a lot better and even more surprising.

But yield chasing, as they call it, does not diminish with education, wealth, and investment experience, meaning this one applies to nearly everybody on a broad scale and explains exactly why we're seeing the market conditions we are today. Simply put, when interest rates are at all-time historic lows, people are more willing to take riskier investments for an even higher return, thereby boosting the price of the market.

The negative here is that it also might encourage people to take excessive risk beyond their ability to handle it, and that, as we all know, is prone to disaster. The conclusion they want to make from this is that if interest rates go up, then investors don't need to take such risky investments. And because of that, the market could go down.

Now, of course, all of this is just hypothetical, and it all depends on fixed variables that we just can't control. But it does explain why that with low interest rates, people want to take more risk and how that winds up increasing prices to the point where someone like Rich Bernstein believes we're in a bubble.

As far as what you could do about this, the only answer that anyone could reasonably give is diversify. The famous saying that the market could stay irrational longer than you could remain solvent is especially true. If inflation slows down, then interest rates could stay low for quite some time. And in the event we see deflation, just watch out because interest rates could go even lower.

So, because there's no way to predict what's going to happen and when, the only thing that you could do is have as robust of a portfolio as possible. That means to spread your investments throughout index funds, international index funds, real estate, a small portion of cash, and a small portion of crypto. If the market doesn't drop, then you're still invested and you get to reap all the benefits of the market going up.

And if the market does drop, then you're not likely to see as big of a hit because you've spread out your risk across multiple investments. Really, at the end of the day, that's the best thing that we could do. Because, even if we are in a bubble, who's to say it won't double from here before then eventually falling 40?

If history shows us anything, it's that markup predictions like this happen every single year. And even though it's a great idea to educate yourself in the status of the market and hear as many different viewpoints as possible, at the end of the day, there are just too many variables that could change at a moment's notice. And that's why, once you diversify, you're best off just smashing a like button for the YouTube algorithm.

And also, I know I promised I would tell you about this guy who tried robbing a bank but couldn't because his handwriting was so bad. For anyone wondering, here was the note in question: I mean, who writes "customers" plural like that? And if he was smart, he would have seen the Woody Allen movie on this exact same situation and realized that he should have just typed it out instead—or preferably just not robbed a bank because don't do that! That's bad.

So with that said, you guys, thank you so much for watching. I really appreciate it! As always, make sure to subscribe and hit the notification bell, and also feel free to add me on Insta. I post pretty much daily, so if you want to be a part of it there, feel free to add me. There is my second channel, The Graham Stefan 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 until next time.