Why The Market Hasn't Crashed Yet

What's up, Grandma's guys? Here, so we gotta be really, really careful not to blink because if you do, whoops! There you go; you missed the latest market crash, and, uh, now we're back at another all-time high. Better luck next time!

All right, I know I'm exaggerating things a bit. Things do drop for a few hours sometimes, but at this point, there's the growing belief that no matter what happens, the market is incapable of crashing for longer than just a few days. After all, the stock market is the most expensive it's ever been in history. Growth is beginning to slow down. A majority of investors with more than a million dollars believe the market is in a bubble or close to being in one. Big businesses are sitting on a record amount of cash, homeowners are sitting on a record amount of cash, and Millennials are sitting on a record amount of student loan debt—but you didn't see that one coming.

Anyway, with such a huge amount of cash on the sidelines, we gotta talk about why the market is not dropping despite every single warning sign imaginable. Why Michael Burry believes the market is manipulated and will eventually pop. How the Federal Reserve is planning to keep the gravy train going just a little bit longer. And then finally, the story you all came for: a gardener managed to set a brand new world record for picking 839 cherry tomatoes off a single stem.

All right, so all of this began in March of 2020 when the Federal Reserve lowered their benchmark interest rates all the way down to zero percent in an effort to stimulate the... Just kidding, guys! I know you're already familiar with the backstory. I'm not going to bore you with all the details, but what many people do find interesting is that throughout the last year, the markets have consistently hit new all-time highs, fallen no more than three to five percent, and then resumed their upward trajectory as more and more people buy the dip. It's practically a forecast these days as we could predict almost like clockwork what is going to happen in the market, and repeatedly we have been right.

Now, some of this might seem unusual considering that 15% of stocks within the S&P 500 are actually down 20% or more from their 52-week highs. But given that the largest, most valuable companies within the index have seen some of the biggest returns, they are the ones who boost up the market and give us the price increases that we're seeing today... Or are they?

As far as the negative catalysts for the economy, so far everything has been rather shortly lived. For example, throughout the last several months, there has been nonstop analysis showing us just how expensive the stock market is relative to our GDP. The entire economy has begun to grow at a much slower rate. The housing market is beginning to cool down, and from most metrics, it seems like the rapid acceleration of prices is beginning to settle down.

We've also had a short-term market drop on the news that Evergrande, one of the world’s largest real estate developers in China, was defaulting on over 300 billion dollars' worth of debt, completely wiping out some people's savings and causing one of the largest economies in the world to grind to a standstill. But as you would expect, under a new deal, China took control and ownership of the failing company in order to protect their citizens, even though they've also warned their businesses to prepare for its eventual demise and possible storm to come. So good luck picking that one apart!

And then we have, um, Michael Burry, the man who correctly predicted the 2008 housing crash, as played by Michael Bale in the movie "The Big Short." Now, he has a history of immediately going on Twitter when he had something to say, and then he quickly deactivates his Twitter because he's Michael Burry. Thankfully, there exists a dedicated archive account who screenshots everything he posts the moment he says it. I have to say a few of his recent deleted tweets are rather interesting, and I think they deserve to be talked about.

He referenced an article titled "In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis." Which, come on, what kind of title is that? If it were on YouTube, it would for sure be called "Why the Stock Market is So Expensive Gone Wrong: Top Call, Not Clickbait." Anyway, this is a 108-page analysis on the impact that investors have on the market's overall value, and I actually found it quite helpful in potentially explaining why the stock market simply won't crash.

They started by asking people the question: If a fund buys one billion dollars' worth of U.S. equities slowly over a quarter, how much does the aggregate market value of equities change? The average answer was that for an efficient market, the result would be 0.01, meaning if you invest a dollar in the market, the market value would go up by one dollar and one cent. This plays into what they call the elasticity of the market, which is just a really fancy way of saying how much the market valuation changes if you buy one dollar worth of stock while another person sells one dollar worth of stock.

They then test and prove these theories with a whole bunch of math that I don't understand because I didn't pay attention to anything in high school, but the result was just this. They found that investing one dollar in the market increases the aggregate market value by five dollars—not one cent like the average person thought. The purpose was to help explain stock market volatility, find the root cause of rising prices, and estimate the Fed's impact of money printing within the economy.

And that means when we have a ratio of five to one, and companies are sitting on a record amount of cash on the sidelines, we continue to see the stock market going higher and higher. Michael Burry explains that “five to one” is not a natural ratio; it's a product of a paradigm. So what will continue this paradigm? What may reserve it? This is "the knife's edge" because we're at five to one; it may go to a hundred to one or become negative five to negative one. But parabolas don't resolve sideways.

Basically, to sum things up, he's just saying that five to one is not a sign of an efficient market where one investor buys a stock that the other sells. This type of increase within the market is extremely dangerous because it could just as easily reverse or go up another 20 times. But parabolas don't just level out; they snap back to where they came from, and in this case, he implies it's going down. But at the same time, not everything is so doom and gloom. As of now, household wealth rose to its highest level ever, at 141 trillion dollars, even though debt also increased by 7.9%. With record low interest rates, the buy the dip confidence also surged to its highest level since 2015.

And even more interesting is that we have something called the U.S. Crash Confidence Index—that's a tongue twister! Anyway, that measures investor sentiment and how likely they think crashes are to happen. But this is really important because the overwhelming majority of data out there shows that the average investor is almost always wrong at the most crucial points. If the average person thinks things are going to get a lot worse, that's actually a good sign that things are probably going to get a lot better. This also works in reverse, where the less worried investors are, the more likely we are to be at a top. Now, as you can see, we are trending downwards, meaning people are more worried about a crash, making it, in theory, less likely to happen.

This is also mirrored by what's called the Warren Buffett Fear and Greed Index, which analyzes that right now the market is mainly driven by fear, even though it's been trading about on par with its 125-day moving average throughout the last year. On top of that, companies have reported increasingly strong earnings throughout 2021, even as unemployment winds down in the news that the Federal Reserve is going to start tapering their stimulus. Not to mention both people and companies are sitting on a record amount of cash, which is set to be 50% higher than they had just five years ago.

This is because during the pandemic, businesses scaled back on investments, dividends, and share buybacks, and instead, they loaded up on cash and low-interest rate debt. This, in theory, would insulate them in the event of another unexpected market catastrophe, but it also means they have a lot of resources at their disposal if they need it, which could cause the market to go even higher.

Now, yes, it's true that their debt level also increased, but with these interest rates, it's pretty much like free money. Just consider that the U.S. inflation rate was about 5.4% throughout the entire summer. So if a company is able to borrow money at a lower interest rate than that, then not only are they getting a totally free loan, but they're also getting paid to borrow money! What a concept!

Now, homeowners also fall into this category, who saw a record boost of equity over the last years. Real estate values continue to climb. As far as where we go from here, we're in a bit of a bind. On the one hand, usually, the more people who think there's going to be a crash, the less likely there is to be a crash. What if we don't think there's going to be a crash because people think there's going to be one, and then there is a crash because we thought the opposite of what people thought was going to happen? Does that make sense?

All right, so in terms of the overall market, it seems like we've largely priced in future events and know what to expect in terms of both inflation and the Federal Reserve reducing their stimulus. See, as it is right now, they're purchasing 120 billion dollars a month of treasuries and mortgage-backed securities to keep interest rates near record lows. But if they do that for too long, then inflation stays high, our money loses value, and people go into a frenzy. So they've openly laid out their road map in terms of what they expect to happen so the market doesn't have a knee-jerk reaction to not getting their sweet, sweet money.

This is what is in that plan. This week, the Fed said that they would have a discussion towards the end of the year of reducing their stimulus by 15 billion dollars a month, beginning in 2022. That would mean by fall of next year, the stimulus would be over, and interest rates would start to go back up. The expectation here is that this would be done extremely carefully, and if there are any unexpected consequences, that would be appropriately dealt with.

So overall, the market is going up because it knows what to expect. Now, obviously, nobody could predict what's going to unfold in the short term, and anything could happen. But still, study after study continues to show the exact same thing: if you have the cash, it's better to throw it all in the markets all at once than to wait to invest 75% of the time.

Now, even though statistically lump sum investing wins three out of four times, they do admit that psychologically, dollar-cost averaging could be a very effective way of getting your money invested in the markets, whereas otherwise you would be sitting it out. As for myself, I've employed a bit of a hybrid approach between the two because I do keep some cash on the sidelines as my opportunity fund in the event a good investment comes up. But with everything else, every single day without fail, I invest a consistent amount of money in the markets.

And that's it; that includes an investment in the S&P 500, sometimes a few other individual stocks if I'm feeling adventurous, and a smaller amount on Bitcoin and Ethereum. Even on the weekends, I've been doing that consistently throughout the last year and a half, and I have no plans on stopping regardless of whether the market goes up or down.

This is quite different than the 75% of investors who say that now is the time to take some risk off the table and be more conservative in the stock market, while nearly half of them believe the S&P 500 will rise less than five percent throughout the next year. The biggest risks they've noted included worries about a new variant that bypasses vaccines, higher-than-expected inflation, slowing economic growth, poor banking policies, a tech bubble bursting, and worries about debt.

But, like I mentioned, statistically, it does seem like most of the time, the more investors think there's going to be a crash, the less likely there is to be a crash. Unless, by doing the opposite of that, we wind up seeing a crash because we didn't think there would be one, because people thought one was going to happen. But you know what? That uses way too much mental energy, and instead, let's just hear about this!

As promised, this gardener broke the Guinness Book of World Records by picking 839 cherry tomatoes off one single stem. I never even knew this was a competition or something to even strive for, but I gotta say I'm impressed. And for anybody wondering, here's the stem in question. I guess you could say his competition couldn't even catch up—get it? Catch up!

All right, I think that's enough for us today. So thank you guys 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!