the

Here's Why The Stock Market Is At An All-Time High

so we are past the halfway point but the

wild ride of 2020 is not

letting up the news cycle is filled with

horrifying headlines day in

and day out an outside observer could be

forgiven for thinking that we are

genuinely living through the apocalypse

but amongst all of this in complete

defiance

or perhaps complete ignorance to the

goings-on of the world

the s p 500 an index that measures the

stock performance of the largest

companies in the usa

closed out this week at its highest

level

ever this is a collection of stocks and

companies that have been

impacted by the fallout of the

coronavirus as well as

all of the other nasty stuff that's

going on in the world right now so what

is going on here

people could be forgiven for thinking at

this point that an

extinction-level media strike would

qualify as a strong buying sign

and you know what they may not be wrong

the usa releases its worst gdp figures

in history

the stock market rose the next day

research is released that this whole

ordeal may not be over until 2022

1 rally in the markets to a rational

viewer

this is verging on insanity but

is there method to this madness a quick

note is that of course we have actually

explored this issue on the channel

but since that video a full recovery has

taken place

a big takeaway of that video is that

there might not be any better place to

keep money at the moment

and we will actually expand on that

point here so

call this a part two if you will but

this entire issue

definitely deserves further exploration

and there are a few

key points that have surfaced since then

to give some remarkable insights into

how this broken system

might have been right all along to

determine this

we need to decide on a few things

what is the actual role of stock market

investors

does the stock market have any

relationship to the economy

is this potentially a sign that things

are not as bad as we are led to believe

and since the market has now rallied 50

percent

in four months is it fair to say that we

are right back

in another market bubble this episode of

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below it is often taught that markets

are

efficient that since something is only

worth what someone is willing to pay for

it

prices are gospel but humans are dumb

and the machines haven't completely

overtaken wall street just yet

so maybe the best way to understand this

market craziness

is to understand the crazy people that

make it possible

so at its core what is the role

of an investor this might sound like a

simple question with an easy answer

an investor is someone who puts money or

capital towards a promising idea or

business venture to get it off the

ground

or to make it more efficient an investor

might invest

two hundred thousand dollars into a farm

for a fifty percent stake in the

business

the farm can then use that money to go

and buy a combine harvester and an extra

few acres of

fields which will triple the output of

the farm sure

the profits now need to be split 50 50

but with three times the output

everybody is better off the farmer

increases his income by 50 percent

the investor is getting a good return on

his investment and

even the wider economy is winning off

this employees at the john deere factory

get to sell an extra piece of equipment

that they wouldn't have otherwise been

able to

and of course there is more food for

everyone to consume

now this is of course very

oversimplified and

actually quite divorced from reality

if today you go out and buy shares in

apple that money is not going towards

the company

it won't be invested into research and

development or building new factories

instead it will just go to some other

investor who used to own those apple

shares

companies very rarely raise any money

from selling shares

after their initial public offering or

ipo

and the trading volumes of shares that

are part of an ipo

are a tiny tiny fraction of the total

trading volume on exchanges like the

nyse

or the nasdaq in fact once a company

lists its shares after its initial

public offering

that's kind of it for them it's really

unlikely they are ever going to be able

to raise money from investors ever again

if they do need money to put towards

productive ventures then their options

would be to take on debt in the form of

a company loan

or to turn a profit if that's something

that companies still do these days

what this means is that in principle the

stock market amounts to people playing

hot potato with securities that don't

actually ever go towards anything useful

right well actually sort of people with

vast share portfolios

shouldn't really be patting themselves

on the back as the guiding force of

modern industry

but they are more so the holders of

contributions

that have been now full disclosure

i am saying this as a proud holder of

these

has been contributions to society but

perhaps this

isn't entirely fair the role of an

investor into the stock market isn't

completely

useless it's just very let's call it

abstract real genuine investment as we

saw in our lovely little farm example

takes place primarily as funding rounds

into younger businesses well before

an initial public offering these will be

called

investment rounds where the owners of a

company will sell off shares to

qualified investors companies like

wework are not yet publicly traded or

listed anywhere

and depend a lot on investment funding

to make them possible

these investments don't come from

regular households but

rather from large investment funds in

this case

softbank and a collection of venture

capitalists now most

modern venture capitalists are not at

all interested in sharing in the profits

of a company

but rather they want to buy in on the

ground floor

and then work on exiting the business an

exit basically amounts to them selling

off their shares that they got from a

very early and therefore

very risky investment into the company

these exits are normally done

after a company goes public so in

reality

an ipo actually serves two purposes

the first is the standard capital raised

to make money to put towards the growing

business yada yada yada but perhaps the

more

important component is that these gives

these early investors a platform to sell

their once volatile investments

to regular investors with less of a risk

tolerance

these early investors will then get a

nice big pool of cash so they can go out

and do it

all over again the role of a standard

household investor into the stock market

is not to fund

a young business in need but rather it

is to fund

the people that fund the young business

in need or

depending on how many times a particular

share has been traded back and forth

since its listing

it might be to fund the person that

funded the person that funded the person

that funded the young business in need

but you get the idea so this all

actually begs the question

why do people care about the stock

market

obviously investors want their

investments to go up in value or at

least return some nice fat dividends

but outside of people with direct

ownership does this even matter

if companies don't rely on shares to

raise capital and the stock market is

not directly contributing towards making

a happier wealthier world

then why does it dominate headlines for

starters of course

people conflate the economy with the

stock market

it might sound silly to you someone who

would sit down to watch an economics

video

but remember most people don't know and

or don't care

at least until they see headlines with

big alarming figures that make it sound

like the world is coming to an end

and of course a stock market crash can

be a sign of an economy in turmoil

but it's not always the case the stock

market and the economy are

two different entities a strong economy

will almost always lead to a healthy

stock market

but the opposite is not necessarily true

a strong stock market

doesn't necessarily mean a healthy

economy as we can see

right now so a company executive

and especially a politician for that

matter being overly focused on stock

market performance

doesn't sound that logical right well no

there is actually a very good reason for

both

to the corporate executive the stock

price might not have much bearing on the

company's actual financial performance

but shareholders own the company that

means that they can elect a new board of

directors and replace ceos on a whim

if they are not happy the best way to

keep them happy keep that stock price

high this sounds sensible enough but it

is actually one of the big

disadvantages of having a public company

since investors want strong returns and

the investors control the board who in

turn control the executives who run the

whole business

the whole operation can become ultra

focused on stock price

this is made even worse when c-suite

level compensation

is tied to stock options which it almost

always is executives may elect to do

something that is not necessarily

in the best strategic interest of the

company if it will bump the stock price

up a bit

like say taking on massive debt to do

sweeping stock buybacks

these decisions give them a nice fat

bonus and keeps most stockholders in a

happy state of complacence

now to politicians it's all about optics

the media loves to scream and shout

about a stock market crash

in reality and in isolation these

headlines won't

impact most of the people reading them

but if people see

the dow didn't ow and connect that last

time this happened they lost their job

they may be very very angry at whoever

is in charge

what this means is that while the stock

market might not be that important for

business managers politicians or regular

folk

investors have a way of making it

relevant

but this all sounds like it is skirting

around the 27 trillion

dollar question why is the market at an

all-time high

in the midst of armageddon now of course

one of the big reasons that we mentioned

in the last video

is fiscal stimulus leading to inflation

but that is worth exploring in more

detail

of course the money printers have gone

bro and this has introduced

trillions of dollars into the economy

some of this went to regular households

to cover the cost of living for people

that may be out of the job through no

fault of their own but a good majority

of this went to

businesses and their wealthy owners one

side effect of this has been a spike in

lamborghini sales

but for the more prudent millionaire

they might put this money towards the

stock market

this has increased demand for shares and

hey presto this has pushed up the price

but this isn't the whole story the other

side to this

is that when we are assessing the price

of something be it a house or a roll of

toilet paper or

company stock we will look at the price

of alternative goods

if rent doubled overnight the price of

houses would likely shoot up too

because more people would be desperate

to get out of rentals and into a

property that they

owned if the government gave a free b

day to

every household in the nation the price

of toilet paper

would fall and if interest rates were

lowered to zero percent on treasury

bonds or large bank holdings

then the stock market is the next best

alternative

howard marks a billionaire investor has

noted that he

and his company are just happy to accept

a significantly lower price to earnings

ratio in this crazy crazy world

a price to earnings ratio basically

notes how much an investment returns as

a multiple of how much it costs

so a price to earnings ratio of 16

would mean that the price of an asset is

16 times

what it returns per year which is

coincidentally what investors normally

expect out of a relatively safe

investment like a

s p 500 index nowadays

that expectation is more like 24 times

and it is only getting worse as

investors continue to lower their

expectations around their expected

returns

in the short term these lowered standard

means that investors can bag some quick

wins

like a 50 rally in stock prices which

kind of sounds like a great success

but think of it like this the stock

market is a market like any other

it has things that offer value to the

buyers and those things trade for what

people think is a fair price

if the price of groceries went up by 50

in the space of three to four months

that would be seen as an

absolute disaster verging on

hyperinflation and it's not necessarily

different to the stock market

the actual value of the market is lower

than it was this time last year

it is a rotten banana it's just that

people are starving

and they will pay whatever it takes to

get something to chew on

so with what could amount to a

multi-trillion dollar market failure

is this a bubble the last consideration

in the trillion dollar bubble dilemma

is where this recovery has come from the

so-called

fang companies that is facebook apple

amazon netflix microsoft and google

all have very sore backs at the moment

that's because

they have been carrying the entire

market

these companies are collectively worth

over five

trillion dollars which is 25 of the

capital valuation

of the s p 500 to give you an idea of

their weighted influence

amazon and apple alone have a larger

market capitalization

than every publicly listed company in

australia

combined and australia is not a small

economy

what this means is that these companies

dictate the market

every other industry be it oil

pharmaceuticals

retail minerals the automotive industry

hospitality

they are all suffering as you would

expect it's just that the success of the

massive tech industry has made this

stagnation

completely invisible in the context of

the broader market

which leads to one big final scary

consideration

we have spent this entire video looking

at the s p

500 which is an index and index

basically means a collection

in this case it's a collection of the

505

biggest companies in the usa but indexes

are actually

really popular as investment classes

where instead of buying

one share or a group of shares people

will invest into an index that has a

pool of

hundreds of shares this gives an average

investor

in-built diversification and exposure to

lots of companies without having to

spend

millions of dollars to buy all of these

and weigh them individually

this is great for easy investing but it

means a lot of misguided capital

is being issued directly towards these

companies that are listed in these

indexes

these companies are already very very

large

and very established and potentially

very overvalued

dr michael bury yes that michael bury

the one that predicted the 2008 subprime

mortgage crisis

has made similar predictions about

exchange traded funds

just because you bundle something up

call it diversified

and then feed it into huge pools of

capital does not necessarily mean

that it's a good investment what is a

good investment

is in yourself and i can't think of a

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thanks guys bye