The Stock Market Just Flipped

What's up, you guys? It's Graham here. So hold on one second, I'm going to invest some money really quick. [Applause] Oops! Well, that's basically what investing felt like this week after the inflation data came out.

That's right, in the last week we've seen the stock market's single worst point drop since January. Inflation increased at the fastest pace since 1982. The billionaire Sam Zell is buying gold, and if you thought it was done, there is now talk about there being a sand shortage.

But no, here's the thing. On a serious note, the price of pretty much everything that we use is rising. Gasoline is up nearly 50% from a year ago. Fuel is up almost 40%, and energy prices are up 25%. Used car prices are up 21%, and even shelter is up 2.1% compared with a year ago.

That presents a unique problem to investors where if you hold on to too much cash, you're losing value. If you invest your money in the markets last week, it's dropping in price. And if you want to bury your head in the sand and pretend like none of this exists, well, there's not enough sand anymore.

So let's break down exactly what's going on: why the stock market is selling off, why my portfolio dropped $400,000 last week, whether or not this is something to be concerned about, how you could invest going forward, and then finally, most importantly from all of this, we got to talk about Jeff Bezos's brand new $500 million super yacht that's so big it needs a support yacht to come with it.

And seriously, if you find these videos helpful or even if you just find them entertaining, just do me a huge favor and inflate that like button for the YouTube algorithm by pressing it until it turns blue. That's it! And if you do that, I will do my best to respond to as many comments as possible. So thank you guys so much! And with that said, let's get into the video.

All right, so to start things off, here's the big spooky word that investors hate more than Melvin Capital: inflation. Like, remember when your grandparents would tell you about the good old days when a movie used to cost a nickel or a brand new Ferrari 250 GTO was $118,000 in 1962? Well, that doesn't exist anymore, thanks to inflation.

This is the rate that products and services go up in price over time, lowering the value of your money. Today, it's generally thought that the more money gets printed into our economy, the more we devalue the existing currency in circulation. And over time, the more dollars it costs to buy the exact same thing.

Now, historically over the last 40 years, the rate of inflation has been consistently going down thanks to increasing efficiency, meaning our money isn't losing as much value as quickly as it used to. But that might soon change.

That's because almost 20% of all US dollars in circulation were created in 2020 alone, and the fear is that with all of that extra money loaded into the economy as we reopen, that could further drive up the cost of the items we buy day-to-day, send our money into a downward spiral, and cause interest rates to rise faster than we expect, crushing real estate and stock values in the process.

Think of it this way: if we keep our interest rates low, that means people and businesses are able to borrow cheaper money. That means more profits left over, and that's more money left over to spend back in the economy. Plus, a little inflation is a good thing, but if too much money comes in all at once and prices rise too much too quickly, interest rates are increased to prevent the economy from overheating. Profits are dialed back, and stock values tend to drop like we saw last week.

Or in other words, just imagine our economy like a fireplace and interest rates like water. A small, slow-burning fire could be good to keep us warm, but if it gets too out of control, we're going to have to throw some water on it to prevent it from burning down the house.

Well, that's pretty much what's going on here except with your money. Consumer prices leaped 4.2%, the fastest since 2008, and all items minus food and energy rose nearly 1% just last month, which was the highest increase on record since 1982. Not to mention the Producer Price Index, which measures how much businesses pay, rose 6.2% from a year ago.

So all of this is to say is our money losing way more value than we originally expected, and what can we do about it? Like I mentioned last week, stocks began to sell off due to the fear that inflation is here to stay. The price of everyday items is going up, interest rates are going to be going up faster than we expect, and that's going to put a damper on stocks which benefit from low interest rates. Or in other words, the better things get for the economy, the worse the stock market is going to get.

And if you think that makes absolutely no sense whatsoever, just listen to this: the valuations 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 low, investors could afford to pay a higher price for the stocks, thereby driving up the price. Nice! But when interest rates go up, so do the treasury bond yields, which start looking a lot nicer in comparison.

And then all of a sudden, growth stocks start selling off, bringing down the entire market alongside with it. Think of it this way: investors have no problem investing in Tesla stock when interest rates are low because your other option is going and buying up a 1% treasury bond, then that's no fun.

But what would happen if treasury bonds all of a sudden started paying you a risk-free 8% because inflation is getting out of hand? Well, in that case, you're probably going to sell off some stocks, rotate your money into treasury bonds, and then relax in Hawaii while drinking Mai Tais.

Well guess what? The 10-year treasury yield has just started to pay more, and usually when that happens, stocks tend to go down. But on the other hand, the opposite happens when interest rates go down. When that occurs, growth and tech stocks look like a better option, and they go up.

And that's why throughout the last year, with interest rates at record lows, they performed incredibly well. But as we all know, most likely that is not sustainable forever, and eventually, interest rates will probably go up and things will return to normal.

However, when it comes to this, Jerome Powell of the Federal Reserve reassured everyone that interest rates would be staying low until 2023. There's still plenty of time to print tendies, and that any signs of inflation that we see today are just temporary.

So what's going on, and why did my portfolio keep dropping $80,000 a day last week? Well, let's look at the actual data behind this to determine whether or not this is something we should worry about. To do that, we need to look at exactly how they calculate the inflation rate because this is going to make a difference.

Typically, they'll monitor the price of everyday items like housing, food, clothing, recreation, and transportation, and then they'll track how much those items increase in price month over month or year over year. Normally, these items will increase at a rate of 1% to 3% a year, meaning every single year it's going to cost you a little bit more than the year prior. But not enough to cause you to sell off all of your Tesla stock and then YOLO into Dogecoin.

However, now we're starting to see something different. See, historically, inflation was something that the FED really had a lot of trouble producing. That's because the cost of manufacturing is going down; we're getting better at producing higher quality materials for less, and people are choosing to save a lot of extra money, causing inflation to be a thing of the past.

The thinking is that as we get more efficient as an economy, deflation is actually a bigger concern because that would cause people to hoard onto all of their money and refuse to spend it. So the FED actively tries to get there to be inflation to encourage people to go and spend their money. But so far they've somewhat failed.

But now, all of a sudden, we're seeing way more inflation than we ever anticipated. So what's going on? Well, like I said, this all has to do with how inflation is calculated, and to me, what we're seeing today is not at all surprising. I even covered this in detail 3 months ago, warning people that this was about to happen and not to panic. And then guess what? This happens, and people panic.

Here's what I said back on March 22nd, and all of this is especially true today. 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. Like if we just start tracking inflation from May of 2018, all of a sudden, an inflation increase of a fraction of a percent doesn't seem so scary. And if we look decade over decade, we're pretty much exactly on par with what we saw in 2012.

And guess what? No surprise; they were saying the exact same things 10 years ago as now they're saying today. Like here's just a few examples of what they were saying back then: "Is galloping inflation around the corner?" "How the FED manages to keep inflation under control?" "US money indicators pointing to inflation?" "Is your portfolio ready for hyperinflation?"

And you know what? We actually saw 2% inflation, even though technically we saw very high inflation when you measure from the lowest point in the graph. And had you listened to all of that fear-mongering telling you to invest $25 million in an inflation-proof fund, you would have missed out on one of the longest-running bull markets in history.

So right now today, investors are still struggling with that exact same dilemma. What are they going to believe? The Federal Reserve, who says there's not going to be any crazy inflation and that what we're seeing right now is only temporary, or the fact that 20% of all US currency in circulation was introduced just last year and that maybe the FED is wrong?

It's really a tough one because on the one hand, we've got a lot of factors that are artificially driving up prices and making things seem a lot worse than they actually are. For example, in real estate, supply chain issues are creating a shortage of lumber, raising the average cost of a house by $36,000.

Gasoline is getting more expensive because of a recent pipeline cyber attack, and the ship blocking the Suez Canal didn't make things any better, either. Not to mention, there's also probably going to be temporarily high demand as people finally leave their homes, take the vacations they've been postponing over the last year and a half, and finally get to live it up and get things out of their system as everything returns to normal.

But the fact is, we've got a lot of temporary, unique situations working against consumer prices, driving up the cost of things way higher than it normally would be. Like seriously, come on! A used car shortage? Guaranteed that's not going to last forever, and eventually, things have to settle down.

Now, that's not to say that we can't have unusually high prices over the next 6 to 18 months as things begin to settle down. But from my perspective, there's absolutely no data out there that exists that confirms 100% that all of this is going to continue once everything returns to 100% capacity.

That's why I tend to agree with the FED, who've been warning for months that this announcement would happen. He said it was going to look bad in the short term, but they've also made it clear they're not going to raise interest rates without seeing it actually become a persistent issue first, which is really not something we're going to know about until probably later this year.

As for this month, though, we knew what was going to happen. We were told what to expect, but the markets were going to react negatively anyway. And the question now really becomes: do you think inflation is going to be a persistent issue and the FED is wrong, or do you think the market is overreacting and by the end of the year the prices of things will start to come back down?

Personally, I believe the latter. I've made so many videos explaining that this was going to come, and now I see this as a good opportunity to buy into the markets, get everything at a bit of a discount, and then I could just hold everything to see what happens. Even if the market continues to go down, this last Friday was really a perfect example of why you can't time the markets.

Because out of nowhere, for no reason at all, the markets rallied to their best day since March. If you had otherwise sold or decided not to invest back in as the markets were dropping, you would potentially miss out on those best days. A recent study even confirmed that if you happen to have missed the 10 best days in the stock market over the last 15 years, your overall return drops by over 50%, and if you miss the best 20 days, your overall return drops by more than 70%.

That's why buying in and continuing to buy in, even when the market drops, is the only historically proven way to come out ahead with as much money as possible. Now personally, as for my own thoughts on this, I think we're going to see a bit of a mixture between the market thinking the FED is wrong and the FED saying that rising inflation is only temporary.

I wouldn't be surprised if prices and inflation stay high longer than expected, and that spooks the market into dropping a little bit further. But long term, I don't think it's going to be as bad as some headlines make it out to be, and so many situations happening right now are really only temporary and will eventually be solved over time.

This is also a really great reminder to show you the importance of diversification and not chasing after returns of high growth companies just because they've done well previously. For example, tech stocks which have really rallied throughout the last year are not doing as well today as some of the value stocks. And there's certainly been a bit of a rotation now that the economy is starting to reopen.

So instead of constantly rebalancing your portfolio, just go and buy into an index fund and ride the entire market all at once, and then you won't have to panic at the slightest signs of a drop.

Although now we should probably end this on a positive note. We got to say a huge congratulations to Jeff Bezos, who just purchased a $500 million super yacht that's so big that it needs a support yacht.

Now just to put that into perspective for you, Jeff Bezos is worth $187 billion, and him spending $500 million on a super yacht would be the equivalent of someone worth $187,000 spending $500 on a boat. And if you want to put that in terms of you, just take your net worth, divide that by 374, and voila! That's the equivalent to him buying a $500 million super yacht.

Feel free to share how much that would be for you, by the way, down below in the comments. And as usual, I do my best to read and respond to as many of them as I can. 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.

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Thank you so much for watching, and until next time!