The Stock Market is Currently Broken | Stock Market Crash in 2021?

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Well, here we are, guys. We are almost at the end. Can you believe it? We are almost at the end of 2020. And no secret, 2020 has been a…it’s been a rough year. It’s not been very nice. There’s been a lot of very negative things happening just in general, but, uh, also economically and with the stock market.

Oh wait, hang on! No way! The stock market is currently at all-time highs, and that’s what we’re going to be talking about in this video. At the moment, we’re currently seeing probably the biggest detachment ever from the stock market and the economic reality that we live in. Literally, the biggest detachment ever.

As we’ve progressed through the lockdown kind of status that has been 2020, the U.S. GDP has fallen to an annualized growth rate of negative 31. If I zoom out on this chart, you can see this is by far much worse than anything we’ve seen in recent history, and it’s basically equivalent to the Great Depression. In the Great Depression, from peak to trough, we saw U.S. GDP go down by 30 percent.

One kind of positive that we can take out of this whole terrible economic position that the United States is currently in is that luckily the unemployment rate is now decreasing. At worst, it was at 14.7. Now, the most recent numbers from September show that it’s fallen to 7.9 percent. But this still means that 12.6 million Americans are currently jobless.

The worrying thing as well is that this unemployment rate is declining by less and less now every month. But on the other hand, the U.S. stock market? Man, that’s just going from strength to strength. I mean, despite walking past more homeless people than ever before on your way to work, and despite, you know, tripping over the 1.6 kilometer queue to the food bank, the average American investor is extremely optimistic. In fact, more optimistic than they have ever been in history.

You see, if you were to just buy the whole U.S. stock market right now, the price that you would pay for that is approximately two times the GDP of the United States. Two times! This is shown in a number called the Wilshire GDP or more commonly referred to as the Buffett indicator, and this number currently sits at a hundred and eighty-nine percent.

What it does is it compares the Wilshire 5000 index, which is a total market index over in America, straight up compares it to the GDP of the United States, so we’re at 189. The U.S. stock market is considerably more expensive than even the GDP of the United States. And this is really scary because, like Warren Buffett, the world’s best investor says, that you should be nervous whenever this number goes above a hundred percent, let alone 189.

So this just shows you how far detached the stock market is getting from the true macroeconomic reality that the U.S. currently sits in. But not only that, the stock market is also broken when you just compare it to itself. If we have a look at the largest 500 U.S. companies—that is the S&P 500—and we have a look at the 10-year average inflation-adjusted earnings of these companies, well, typically what we see, historical averages show that investors are willing to pay a share price that’s roughly 16 times this earnings number.

So say the average inflation-adjusted earnings of these companies turned out to be a dollar, then historically, investors are willing to pay about 16 to own those companies. However, right now, despite what’s happening around the world, what’s happening in the economy, investors are currently willing to pay about 31 times the earnings.

So we’re talking about double, about double the historical average. And what this kind of means is it means that investors generally that are buying these big American companies, they’re roughly two times as optimistic about the future of these American businesses than they normally would be. Two times the normal historical average optimism! Really? I mean, that just seems completely wrong.

So let’s try and ask the question: Why is the stock market so broken? Why is the American market going up and up to literally all-time highs while the American economy is experiencing its worst recession since the Great Depression? Well, a lot of people have been quick to assume that the reason the stock market has surged up so much is because there are heaps of Americans which are just getting paid stimulus checks, and then they just turn around, and then they sink that stimulus money into the stock market. They open up a new brokerage site.

And while it is true that, you know, brokerage apps like Robinhood have seen massive additions in terms of new subscribers, in 2020, I think Robinhood alone has had three million new investors on their platform in 2020. The thing that we’ve got to remember is that retail investors make up about 20 of the market, so 80 of the market is institutional investors.

So really, when it comes to shifting the whole stock market, retail investors, they don’t… they can’t really do it, okay? It’s really the institutional investors that have the power to cause the stock market to surge. So by institutional investors, I’m talking, uh, you know, the JP Morgans, the Goldman Sachs, uh, insurance companies, pension funds, and those really big money managers.

And the biggest reason why the stock market seems so broken versus the economic reality is that these institutional investors are continuing to buy stocks and buy stocks confidently based on the words and the actions of the U.S. Federal Reserve. Now, the U.S. Federal Reserve is the United States central bank, and what a central bank does is it controls the amount of money in the economy.

So the central bank has the power to print more money and inject it into the economy, and that’s pretty much exactly what they’ve done in 2020. They’ve injected about three—get this—three trillion dollars into the U.S. economy, and they’ve come out and said that they are very prepared to do more of the same for many years to come to make sure America comes out of this whole economic crisis as best it possibly can.

This pledge of support from the U.S. Federal Reserve has given the big money managers the confidence to stay invested and continue to buy stocks even in this economic climate that we see. And remember that they’re 80 of the market. At the end of the day, the stock market very… it just works on a very simple supply-demand equation. If there are a lot of people buying stocks or just not selling stocks, then of course the demand goes up, and the supply stays low, and that drives prices up.

That’s exactly what we’ve seen, so that’s how we can get into a situation where we’re literally seeing depression-level economic statistics coming out, like really scary economic statistics, yet the stock market can actually perform really, really well.

But here’s the thing: Eventually, something has to give. The Federal Reserve of the United States, they can’t just print as much money as they want. Well, technically, they can, but they wouldn’t do that because if they print just endless amounts of money, then you end up getting like a Zimbabwe. You end up getting a lot of inflation. And in Zimbabwe, this went extreme—literally! This is so corrupt. The Zimbabwe story is so corrupt, but they printed so much money.

Look, I’ve literally got the… I’ve got it right here. This is what happened in Zimbabwe. They ended up with the… I don’t know if you can see that, the 100 trillion dollar Zimbabwean banknote. And that’s what happens when inflation runs rampant. This 100 trillion dollar Zimbabwean banknote was worth 40 U.S. cents.

So something has to give. At the moment, the price of the stock market is about two times the GDP of the United States. At the moment, investors are optimistic and are willing to pay two times their historical average buy price just to own the 500 largest companies in America right now. Couple that with the fact that the Fed can print money forever, but really it can’t print money forever, and we as investors, we’ve now got to ask ourselves, okay, so something’s got to give.

What’s more likely? Is it more likely that we’re going to see an economic recovery which closes the gap between stock prices and economic data? Or is it more likely that we’re going to see the stock market weaken to close the gap between the stock market price and the economic reality?

Is it more likely that from here, U.S. GDP explodes, unemployment resumes to all-time historical lows, and American businesses get back to their great levels of profitability that we were seeing a year ago? Or is it more likely that we will see a prolonged economic downturn? One where people’s spending habits don’t immediately resume to what they were just a year ago? One where businesses don’t actually have the money that they need to continue on with their big expansion plans that they had a year ago? One where the manufacturing, construction, airline travel, restaurant industries don’t just bounce back to their brilliant best?

And overall, that is the question that we as investors have to answer. But overall, that really is the reason why the stock market right now is just seems extremely broken versus the economic reality that we’re in. But one thing to consider is that with this situation, the market is certainly priced for a very swift recovery, right? The stock market is just surging while the economy really is struggling.

So that means that investors are definitely expecting everything to just pick up back to normal, and what that means with this massive bridge between the two extremes, the stock market and the economy, is that if we don’t see that—like the market has priced in that we are going to see that epic recovery—so if we don’t see that, then there’s likely going to be some turbulent times in the market over the next year or two.

But overall, that’s my take on it. That’s how I see things. I’m certainly no economics expert, but also I’d love to hear your opinion. This is obviously a really interesting, unique—obviously bad, but unique—situation that we see ourselves in, and I’d love to hear, like, what do you think? How do you think things are going to go over the next one or two years, both in terms of the economy and also in terms of the stock market?

Do we see the economy pick up to justify the levels of the stock market? Do we see the stock market fall if we encounter a rough road ahead when it comes to the economy? Leave that stuff down in the comments section below. It’s a really interesting discussion to have, so I want to hear from you guys. Leave your opinion down in the comments section below.

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So anyway, I’m rambling now. Leave a like on the video if you did enjoy it or if you found it useful. Thanks very much for watching. If you’re interested in learning more about how I go about my investing—active investing, picking individual stocks, or passive investing, tracking the market over a long period of time—check out the links in the description below. That will take you over to Profitful, that’s the business I started this year.

There are two in-depth courses over there that should help you out with your investing. But thanks very much for watching, guys, and I’ll see you all in the next [Music] video.

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