Has Finance Become Totally Detached From Reality?

The economy is not the stock market, and the stock market is not the economy. But whether we would like to admit it or not, they do have an impact on one another, just not always in the ways we might expect. Despite a very long list of problems in the economy being faced by a majority of people, the Dow is, or sorry, was over 50,000, setting new records. On top of this, we have seemingly developed entire industries built around playing hot potato with bankrupt companies. Without understanding the true mechanics of how these financial niches work, it can look like the entire system has become completely divorced from reality. The uh, good news is though that once you do understand how all of these systems work together, you will see that they have become very stupid, just for a whole different set of reasons. So many folks are drowning under the weight of credit card debt, as the number of accounts with delinquent balances has more than doubled since 2021.

The private credit side of the business that has seen a real sentiment shift. Apollo, Aries, Blue Owl, and KKR seeing significant declines week to date. While those more exposed to private equity, Steuart Healthcare was at one point the largest private hospital system in the country when the private equity-backed network filed for bankruptcy last year. It devastated providers and patients.

The Dow is over $50,000. I don't know why you're laughing. You're a great stock trader, as I hear Raskin. The Dow is over 50,000 right now. If you pay any attention to financial news, you have probably heard the same line every time the stock market has a little whoopsy daisy. Every time green line does not go up, we are told some company or the market has lost, destroyed, or wiped out however many billions of dollars. But all right, then where does that money actually go? It might not surprise you to learn that headlines like this are written more for shock and awe than genuine insight. But the simple truth is that the money doesn't actually go anywhere because it never existed in the first place. Sort of. If you can look beyond the flashy headlines like this and actually understand what they are trying to say, you are going to be much better equipped to make sensible financial decisions when everybody else is busy losing their minds. And if they are lucky enough, maybe even their retirement savings, too. This basic understanding has probably actually never been more important than it is right now because the stock market is breaking new records every single week. Nobody knows if or when the party will stop. But what we do know is that in this particular case, the money doesn't actually have anywhere else to go. So there are really three different levels of technical explanation for what happens to money during a crash. The good enough for most people level, the armchair market analyst level, and then the level that considers debt consumption in all the different asset markets that are getting kind of weird at the moment. Now, most people don't even get level one right. But I promise none of this is as complicated as the financial bros would like you to think. And actually seeing how these markets work is the only way to understand how messed up they really are at the moment.

But all right, most of the time when headlines are talking about billions of dollars being destroyed or whatever, what they are really saying is that the market capitalization of a company or group of companies has been repriced. This is just calculated using the number of outstanding shares multiplied by the price the last share was traded at. So, for example, Nvidia currently has about 24 billion outstanding shares. And right now, those shares are trading at a price of about $170, which gives the company a market cap of $4.1 trillion. If for some reason tomorrow people decided to start trading Nvidia shares at $85, then it would have the market cap of the company, and you would inevitably see headlines about Nvidia losing $2 trillion. But they didn't really lose $2 trillion. They were just revalued using this very crude calculation.

Now, technically, this could actually help Nvidia's ongoing business operations. Since the AI boom, the company has been doing a lot of share buybacks. Well, they will use their profits to buy company stock off existing shareholders to take it out of circulation. They are only supposed to do this when management thinks the company is undervalued. So, if their stock happens in price, they will get twice as many shares for the same money, which should be a good thing, right? Well, this is assuming, of course, that they aren't just doing stock buybacks to drive up an already hyped up stock. Part of what is making the current stock market so strange at the moment is that by far the biggest net purchaser of shares in these companies are these companies. According to the Fed's Z1 Financial Accounts, households made net purchases of about hundred billion of stock in 2024. This was dwarfed by listed corporations that did over $625 billion worth of net buying, meaning that companies were buying six times more of their own stock than actual stockholders were. Now, that doesn't seem great, but it's actually worse than it sounds. The whole point of a stock market is that it's supposed to be a place where companies can go and sell their shares to raise money to fund business operations. This net sales figure also includes the company subtracting from this net number by conducting IPOs. The total gross value of stock buybacks was over a trillion within 2024 alone. It just so happens that companies also raised about $375 billion in the same year. Now, this has helped to increase market capitalization by driving up share prices. But that's not even the biggest problem. It will actually get more important later on as we go into how asset markets are supposed to function. But for now, for level one, a market crash is just a readjustment in market capitalization. Unless a company is planning to sell its own stock to raise money to fund future projects, its day-to-day market capitalization shouldn't impact its performance. Market capitalization is kind of like GDP. It's a number that we use a lot because it's sort of easy to calculate and it's good enough as a rough indication of if things are going in the right direction or not.

Now, a lot of people when they learn this take it to mean that market cap is irrelevant. A $10 banana is no better than a banana that's on clearance for $5. And while that's true, a sudden price drop on anything can be an indication that there is something rotting away beneath the surface. So for the next level of understanding, you need to do what the journalists writing in the headlines aren't willing to do and actually follow the money. Now, I know I just said that if a stock has in value, that doesn't necessarily mean that any money has gone anywhere. But in highly liquid markets, such a scenario can only really happen one way. The NASDAQ doesn't get to slap a 50% off clearance label on Nvidia stock like Walmart does on questionable milk. The way the price moves in these kinds of markets is that if there are more sellers than buyers, the price falls, and if there are more buyers than sellers, the price rises. When people are panic selling stocks, they are still getting money in exchange for their stocks. It may not be as much as they wanted, but what they then do with that money is where things get interesting. Let's say you had some spare money. Yeah, I know. But just pretend with me for a second. With your pile of cash, you have some options. You could invest into the stock market, real estate, bonds, gold, alternatives like cryptocurrency, or you could just hold on to your cash. Alternatively, if you just want to enjoy your life right now, you could spend that money on goods and services like a new car, a bigger house to live in, or a nice vacation. All of these activities that improve your quality of life are generally classified as consumption. Depending on where you and everybody else who has spare money puts their cash, it will increase the value of these markets. So if everybody buys gold, its price will increase as demand increases on an asset with limited supply. Now stocks, bonds, and real estate are kind of unique because they generate their own cash flow to give money back to you. Stocks do this through dividends, bonds through interest, and real estate through rent. Those cash flows come from other people deciding to put their money into the consumption pile, which becomes revenue for these three asset classes. But all of these other assets really only make returns by having more people buy in at a progressively higher price. When the stock market crashes, what is really happening is everybody trying to grab their cash out of that particular asset market. They do this either because they think the market won't generate as much cash flow in the future or more often just to get their cash out before everybody else lowers their price by taking their cash out.

Now, if you were lucky enough to get your cash back before everybody else, you have a choice. During a lot of market crashes, people just want to hold on to their cash because they are afraid they will lose their jobs and nothing else is generating cash flow. But eventually you will need to put your money somewhere and that predicament is what is creating such a big problem right now. Sure, maybe you think that the stock market might be an AI fueled bubble, but if you sell your positions, where exactly should you put your money? Gold is at all-time highs. Real estate is risky with today's interest rates. Cryptocurrency is highly correlated with the stock market. Goods and services are more expensive than ever. And people are even starting to question the long-term safety of the bond market. People are quickly running out of safe platforms to stand on, which has got a few people saying that maybe these markets aren't actually broken. Maybe it's the money that's broken. So, it's time to learn how money works. To find out if money actually works, this video is sponsored by Factor. I used to waste so much money ordering takeout because I just did not have the time or energy to cook after a long day. Factor is America's number one ready to eat meal service. Their meals are fresh, chef crafted, and ready in just 2 minutes. No cooking, no cleanup, no excuses. They have over 100 meals, breakfast, shakes, and snacks to choose from every week, so you never get bored. What I actually like about Factor is the quality. Their meals are made without refined seed oils, sugars, or artificial junk. And most of them pack 30 g of protein or more. It keeps me full and focused without me having to think about it. Whether you're focused on high protein, low carb, calorie smart, or even GLP1 support, they have options that match your goals without sacrificing flavor. I've been enjoying the peppercorn spiced filet minion, and it's been a go-to for me on busy weeks. They've also added more Mediterranean inspired and gut- friendly options recently, which is a nice change of pace. It's a kind of variety that keeps me coming back. Head over to factor75.com or click the link below and use my code hmwf to get 50% off your first box plus free breakfast for 1 year. One per box with active subscription. Free meals applied as discount on first box, new or returning subscribers only varies by plan. Sign up today.

The way that money flows in and out of these markets can have a big impact on the way that you live your life. Even if you don't actually have that much in any one of these respective piles, increasing housing prices have become a defining financial problem of young generations as people can't afford a place to start their own lives or their own families. House prices have outpaced inflation by a lot, which I know is not exactly shocking to most of you, especially if you have watched any of the dozens of videos we have made about the structural problems and broken incentives in the housing market. But the key here is that when we measure price increases relative to inflation, we are only measuring relative to the consumption pile here with the consumer price index. The problem with this is that it doesn't reflect the changing gaps between these other money piles. Real estate, for example, has grown faster than consumer prices, but relative to fixed assets like gold, it's actually gone backwards. An article published by Jonathan Hobbes, a chartered financial analyst, compiled this data to show that if you were paying for the average American house today in gold, you would be spending about half as much as you would have been back in 1991, and roughly a quarter of what you would have been paying in the early 2000s. Now, the article itself used this data to build a case for just buying gold, but the reality is basically any assets would have had the same effect. If you were paying in S&P 500 indexes, the relative fall in house prices would have been even greater. So, there were two lessons from this. One is that investing is important. I hope you already knew that. But the deeper lesson here is that it's become much easier for people with lots of money in these piles to buy basically anything they want from these piles. There is only so much money that people can spend on consumption. So, wealthy people naturally throw the rest into one of these. As they have grown, they've provided more money to people who own them. And since most of them were already maxing out what they could throw into consumption, they put even more back into these piles, creating a feedback loop of wealth generation. A basic look at the historic numbers makes this pretty clear. Market returns over the past 60 years have averaged just over 10%. And inflation has averaged just over 4%. If you include taxes, this generally means if you can consume less than 4% of your invested assets annually, you can live forever without touching your principal. This basic arithmetic is the foundation of things like the financial independence retire early movement. But for extremely wealthy people who can easily afford to live on less than 4% of their net worth, they can compound wealth faster than they can spend it. Now compare this to most people who earn their income by selling their time. Most wage increases are indexed to consumer prices if you are lucky, which has been the slowest growing one of these piles. This has made it harder and harder for the wages to compete when both groups want to put their money into the same area. A lot of what the wealthy are buying is different from what working people are buying. But there are some areas where these cross over. Real estate is just the most obvious and socially destabilizing example of that. The reason this is happening now is that the growth in these asset piles has become unprecedented. We have been paying a lot of attention to what the money printer has done to consumer prices. But these other money piles have soaked up much of the excess cash and it has put non-asset owners further behind.

Now the point of this is not that inequality has become worse. You already knew that. But a new problem coming from that is how these increasingly consolidated markets are behaving. According to the Fed, participation in the stock market is approaching all-time highs, which sounds like a good thing. But this has mainly been driven by lots of people investing very small amounts of money through platforms with low fees and low barriers to entry like Robin Hood. The real money in these asset markets is more consolidated than it has ever been, with the top 10% of households owning 93% of all equities. The last time this data was collected at the end of 2024. In a market panic, the reason why people sell their assets is because they want to make sure they have enough cash on hand to cover their most basic consumption needs if they lose their source of income, which for most people is their job. Unfortunately, job losses and market downturns often go hand in hand. However, as these assets have become more consolidated amongst people who can easily cover their living expenses several times over, there have consistently been more people with lots of spare cash to buy in versus the people that need to sell out to cover themselves in a hard time. Put another way, if unemployment was to hypothetically spike tomorrow for any particular reason, most of the people losing their jobs would not have a meaningful pile of assets to sell to cover themselves while they were looking for a new job. And it's not like we would miss the consumers either. A majority of the consumer spending in the economy now comes from the top 10% of households. And corporate profits are primarily driven by selling stuff to other corporations. Sounds pretty bad, right? Well, it gets worse. Remember those record setting stock buybacks from earlier? Well, they have outnumbered net household share purchases 6 to1, adding even more people to the side piling money in. If you add this to the rise of index funds that mindlessly buy and hold a broad selection of shares, it's easy to see how lopsided the market has become. Now, this does not mean that markets can't fall. But what it does mean is that they can stretch far further and stay irrational far longer than they could ever before. And while they do, they are throwing off money like never before for people to buy up every other asset market.

Sounds pretty bad, right? Well, it gets worse. A huge amount of this money recently has been tied up in chasing returns from AI. These companies have spent trillions of dollars on this project so far. If you ask anybody what they think about the investment market surrounding AI, they are all going to say the same thing. >> Internet bubble bubble. There will be a bubble. >> We are in an AI bubble. >> Bubble. Bubble. Bubble. >> Yeah, that's right. We are in a bubble. And it's easy to see why they might think so. The entire market is being carried by a few firms speculating about the future of AI. They are all playing a game of say a bigger number every quarter. The products they are releasing are a long way from covering the cost they are incurring and every day it just looks like this whole game is being held together by tech CEOs passing around the same pile of money to make their numbers look good. This is to say nothing of the outside geopolitical risk that could smother this whole industry. The more you look into the current state of the market, the less flattering it looks behind the scenes. But the most dangerous thing in the world is not what you don't know. It's what you know for sure that simply ain't true. If everybody has agreed that this is a bubble, then why are informed investors still piling billions of dollars into it every month? Are they dumber than us or do they see something that regular people don't? Now, I want to say that for the record, I think this whole thing is absolutely cooked. However, the best way to really understand something is to not seek out information that confirms your beliefs, but instead those that challenge them. So to play devil's advocate, how is it possible that this whole thing is not just speculative mania?

Now the thing about bubbles is that usually they take some kind of outside force to pop them. The dot collapse was kicked off by a combination of factors, but three really stand out. Microsoft being sued for violation of antitrust laws, Micro Strategy doing a massive revising of their financial results, causing their stock to fall 60% in a single day and getting them into hot water with the SEC. And a single article that pointed out the unviable business model that a lot of dot companies were running on. A few years later, the housing bubble was popped by the subprime mortgage crisis, which itself was kicked off by rate resets and loan originators filing for bankruptcy. So, if the AI industry was in a bubble, it's had a lot of things that have come a long way which could have popped in. Market instability around tariffs, legislative controls over AI chips, rising interest rates, legal challenges over training data, organizational shocks, infrastructure problems, concerning studies over business use cases, and what looks like increasingly desperate attempts to generate any kind of revenue. That's not to mention that if one article back in 2000 could start unraveling the dotcom bubble, surely the daily articles coming out about the problems in this industry should do the same, right? Well, so far at least, the market has pretty much just shrugged all of this off. And it's been able to do this for three very important reasons. The first is where all of this money is actually coming from. Over the last decade and a half, big US tech companies have slowly built up an enormous pile of cash. Outside of insurance or financial firms, which are legally mandated to have cash on hand for compliance reasons, tech companies like Microsoft, Meta, Apple, and Alphabet have more cash than any other companies on the planet after saving it away for the better part of two decades. They had been doing this for two reasons. The first was that before 2017, tax laws heavily incentivized shifting cash into offshore accounts primarily held in Ireland. The exact structures that they used to erode these profits into a haven like this were very complicated. But once the cash was there, they couldn't really touch it unless they wanted to pay tax on it. This means that they just slowly accumulated cash waiting for something to use it on. However, in 2017, these companies were offered a one-time deal to bring back these offshore savings into America for a small tax concession, which gave them all a lot of dry powder to make some big local investments. Now they have used a lot of that money to do share buybacks and they have kept a lot of it abroad to fund their international operations but they also earmarked billions for future capital expenditures.

Now the second reason they built such huge cash reserves was because for a while these companies were actually struggling to find projects worth investing in. They had become so dominant in their respective markets that spending a lot of money on development was seen as an unnecessary expense that wasn't really worth the risk. Today that has obviously changed and the big companies that are driving most of the expenditure on data centers are almost making up for a lost decade where they were arguably not investing enough money into new projects. This also applies to all of the money they are introducing into the system to support less established firms like Open AAI. Sure, the money is getting passed around a lot once it's in the system, but the initial source of these funds is largely coming from piles of cash these companies had sitting on the sidelines. This means compared to something like the housing bubble which was propped up on a lot of debt and rigid derivatives, these companies are at least building a top a solid fiscal foundation. Now, of course, having a strong foundation does not guarantee that the house you build on top of it will also be good. Similarly, just because these companies happen to be holding on to trillions of dollars doesn't necessarily mean that setting it all on fire to chase one single bet is a good idea. It also doesn't mean that regular investors won't get burned if this money suddenly gets yked back off the table. One of the most concerning trends that has developed in the space is the circular dealing between all of the companies involved in different areas of this industry. We first covered this about 2 months ago when Oracle stock price spiked after reporting a huge data center rental commitment from OpenAI, who had raised billions of dollars from Nvidia, who made that money in the first place by selling graphics cards to companies like Oracle. Since then, the deals have only gotten bigger, and reporters have done a really good job piecing together just how far and wide this web of financial goes. Now, most commentary has rightfully called this out as companies pulling themselves up by their own bootstraps. They're making their revenue look better than they really are by investing in their own customers. Not exactly a sustainable business model. However, to play devil's advocate again, there is something to be said about this strategy from a risk mitigation perspective. When people look back with the benefit of hindsight at the dotcom bubble, they all say the same thing. Yeah, the market was dumb. But after a major correction, there were still some big winners that emerged. Some of them being the same tech companies involved in the AI market right now. Nvidia investing into a company like OpenAI right now looks a little bit suspicious. But had a company like AOL invested in Amazon back in 1999, we would probably be a little less critical. By investing up and down the supply chain, if you could call it that, these companies are in theory maximizing the chance that they will capture the value eventually generated through AI. There is also one other really important detail that a lot of people gloss over when exposing this financial circle truck. It's easy to look at this and conclude that this whole market is just a Ponzi scheme popped up by investor hype. The only problem with that deduction, though, is that they aren't really taking investors money. Neted out, the major players in this industry are paying out far more money through dividends and stock buybacks than they are taking in through stock issuance or borrowing. When compared again to the dot bubble, the story was very different. Hyped companies were dependent on bringing in a continuous stream of investor money to keep the lights on in businesses that made no profit and often didn't even make any revenue. A company like OpenAI is also in this position where if they don't keep on bringing in new investors, they won't be able to continue operating, but they are not raising money from regular investors. They are primarily getting it off companies that have plenty of cash to invest.

Now, I am not exactly going to say I feel bad for big tech companies, but nothing they do with their money right now is going to be popular. If they make capital investments into data centers, people will say they are blowing their money on chips that will be obsolete in two years time. If they buy their own shares, people will call them out for driving up demand on an already overvalued stock. And if they buy shares in other companies, people will call them out for circular dealing. Yeah, I know. I am sure they are truly devastated. Now, with all of that said, that doesn't mean that these companies and the wider economy are completely safe. Share prices are clearly elevated on the expectation that AI products and services will eventually bring in trillions of dollars to major participants in this industry. If this doesn't pan out, then those prices could be reconsidered very quickly. The major incumbent players aren't at immediate risk of collapse because they still have far more cash than debt and they still have functional parts of the business to fall back on. Their biggest risk is that if this does go tits up, then they will have to explain to their investors why they thought it was better to spend hundreds of billions of dollars on redundant data centers instead of just paying out that money to them. Now, nobody can truly predict what the future of AI will look like. And even the CEOs themselves have admitted that, but they are framing it like this. They are betting $500 billion on a dice roll. If it comes up to six, they will make $10 trillion. It's a risky bet, but that doesn't necessarily mean it's a bad bet. Oh, and it takes the sting off knowing that the government will probably be there to comp them some chips if they just keep the game going. But we don't say that part out loud.

So then, if the gamble doesn't pay off, will we all end up paying for it? Well, we might already be, but you wouldn't know if you just looked at the numbers. Making economic policy or business decisions without reliable data is like trying to fly a plane without reliable instruments. It's just not going to work. By their own admission, the Bureau of Labor Statistics and other government agencies in charge of collecting data have produced less reliable numbers over recent years, and it's only getting worse. A week before releasing the controversial jobs report, the Bureau made another press release talking about major compromises they were making in the collection of consumer prices. This data is used to make the consumer price index, which is what they use to measure inflation. So, it's kind of important. To make matters worse, everybody from politicians to venture capitalists have started jumping in to provide solutions to a problem they really don't understand. But there are three big reasons why these compromises are being made in the first place. And three reasons why it's probably only going to get worse. The first reason is that markets are changing faster than ever and traditional agencies are struggling to keep up with new economic realities. For example, the jobs report that is suddenly stirring up so much controversy is really two different surveys: the establishment survey and the household survey. The establishment survey is what was getting so much attention and it works by asking thousands of businesses and government agencies how many people they have on their payroll for that month. Now, these surveyed businesses supposedly include small, medium, and large employers. But this already presents some challenges. Large employers are more likely to have dedicated human resource departments that can respond to these surveys as part of their full-time job, whereas small businesses on average aren't as timely, if they bother doing it at all. The actual survey only takes about 20 minutes, and for a lot of larger companies, it's built in automatically to their payroll software. But for a small business owner already putting in long weeks, a 20-minute survey on payroll statistics often isn't the best use of their time. Even if they do respond to this completely optional survey, it's usually not until after the report has already been published. According to the bureau themselves, they have been publishing recent reports with as little as 55% of the total eventual collected data, and it's only getting worse every year. To account for this difference, the BLS uses imputed data, which is just a nice way of saying guessing based on previous results. If they are still waiting on lots of small businesses to provide their data, they will look at what small businesses have said in the past compared to large businesses that have already provided their responses and use that to make their report. As any good finance bro will tell you, past performance is always the best predictor of future results. Now, hopefully you all know I am joking, but this system is normally good enough for most months. But the times where the strategy really suffers is during periods of rapid change. Small businesses feel the impacts of bad economic conditions faster and are normally the first to either let go of staff or go out of business completely. So if reports are only using data from big businesses and then guesstimating the rest, then they won't notice these job losses until they have to go back and do revisions like what is happening right now.

Now, this has been the case since the survey was first conducted. Not to sound too alarmist, but these massive downward revisions were last consistently seen during the run-up to the global financial crisis. But what's changing now is that smaller businesses are just responding less overall and there are a lot more of them. The rate of new business creation has increased massively since the pandemic. In the past, these were normally real businesses that had a good chance of creating real jobs for real people. And we are still imputing economic data based on that old assumption when really what most of these new businesses actually represent is people registering for their side hustle as an Uber driver in the gig economy. This not only goes a long way to explaining declining survey response rates because your average person driving Uber isn't going to fill out a BLS survey, but it also creates two bigger problems. The first is that it overestimates real job creation based on outdated assumptions. And the second is that even if this data was accurate, it doesn't capture a more pressing reality. We could create a million new jobs next month and it won't do you much good if you are working three of them and still can't afford to make ends meet. And so far, all of this is just one report. There are dozens of agencies across America and the rest of the world that are failing to properly account for changing financial realities. The Bureau of Labor Statistics is the one cog in the machine that is making headlines at the moment. But other agencies like the Census Bureau, the Treasury, the Bureau of Economic Analysis, the International Trade Commission, the Department of Agriculture, as well as the data collecting branches of the IRS and the Fed all rely on each other to produce reliable numbers that they themselves put into their own calculations. For example, when the Bureau of Economic Analysis produces GDP data, about 70% of that is based on consumer data collected by the Census Bureau in their retail trade surveys. Inter agency data sharing, as this is known, is not a result of laziness, but rather a feature of the system. So that every department is overlooking every other department, but you can probably start to see the problems. Uncertainty in any part of the system creates uncertainty in the entire system and that can be really useful for certain groups. The first are politicians who get to cast out on numbers that might make them look bad, but let's be honest, they never let numbers get in the way of a good spin anyway. The second group are large investment firms with access to their own proprietary data collection techniques. A report from a data firm published by Newswire estimated that investment management firms could spend as much as 15.4 billion this year on alternative data, which really just means anything not published publicly by government agencies or the media. That is 20 times the annual budget of a department like the Bureau of Labor Statistics. These firms are regularly employing tactics like using private satellite imagery or just running their own surveys where they will actually pay participants for more timely responses. The better their data is compared to the publicly available data released by government agencies, the more they can make on that data asymmetry. Now, you might think this sounds a little bit like insider trading, but it's not. Technically, the information they are collecting is out there for anybody to collect. And it's not their fault if the average goober on Robin Hood doesn't have access to a fleet of spy satellites to collect it. This creates the second major problem with our economic data. It's more profitable to privatize the numbers. The BLS, for example, has 10% fewer staff and a 15% lower budget than it did in 2010 following the global financial crisis after accounting for inflation. Now, that doesn't sound terrible, but the scope of its operation has also grown considerably in that time, making its job a lot harder overall. The fewer resources they have to actually go and collect primary data, the more they have to rely on guesstimations based on historical correlations. An article, ironically, published by Bloomberg last week, reported that the agency would no longer be collecting consumer prices from certain rural regions due to budget constraints. According to the report, the volume of data they are effectively making up has more than tripled in the last 6 months alone. The reason this is so ironic is because Bloomberg is one of the biggest data retailers in the world. Every one of those black and orange screens filled with random spreadsheets and stock charts you see in videos on trading floors is a Bloomberg terminal. Each one of those computers costs about $30,000 a year in an ongoing subscription. And the reason that big investment firms pay that much is because it gives their staff access to information that just isn't available to regular people. Anyway, budget cuts can create a vicious but convenient cycle for these parties. These departments have their budgets cut, so they don't have as many resources to collect reliable reports. These unreliable reports with big adjustments are then used to show how pointless these departments are, so they get their budget cut even more. The average voter doesn't really understand what these people do. The average politician doesn't like having their work critiqued. And the average industry group would love it if they had a monopoly on good, reliable data. And that's the third major problem that's quickly getting much worse. Even if these numbers were absolutely flawless, are they even relevant anymore? There are lies, damn lies, and then there are statistics. It's a quote so old that nobody even knows who originally came up with it anymore. But it's remained relevant for hundreds of years. A survey that I ran on all of you while I was putting this video together found that an overwhelming majority did not think that current economic statistics were an accurate reflection of the real economy. Most people who are paying any attention to these numbers while still living in the real world inherently understand this. The idea that what is causing this disconnect is a secretive group of statistitians plotting away behind the scenes to make politicians look bad is frankly pretty dumb. But there is actually an element of truth in it. A report by Cambridge University found that as we have become more politically polarized and less likely to answer surveys, only the most partisan among us actually bother responding to be counted in the data. A business owner who supports a party currently in power is much less likely to respond to a survey with negative economic implications, and they are much more likely to respond if they have good news to share, like having hired new staff. It's less exciting than a shadowy conspiracy, but it is still a problem. Unfortunately, it also just distracts from the bigger problem. A lot of attention is being paid to the referees to see if they are keeping an accurate score, but nobody has stopped to ask why they are monitoring a jousting leak. A lot of the data they collect is completely outdated in today's economic landscape.

And a great example of this is the ballooning government debt. For more than a quarter of a century at this point, we've become very well acquainted with the images of this debt clock and the increasingly regular government shutdowns where they play hot potato with this ballooning hand grenade. If all of that wasn't annoying enough, there is almost the uniform flip-flop between politicians taking turns to be very concerned about fiscal responsibility depending on if they are in or out of power at that time. I believe we are finally putting America on the path towards fiscal reform and fiscal responsibility. >> Republicans in Congress raised the debt three times when Donald Trump was president and each time with Democrat support. >> Would anybody ever use that to negotiate with? They said absolutely not. That's a sacred created. He doubled the debt. >> It's a powerful message, but they do seem to forget about it pretty quickly once they are in office. And fixing it would require actual sacrifice. And if we are being honest with ourselves, it's almost easy to see where this indifference is coming from. We were told we were at an inflection point when we crossed 10 trillion in debt and then 20 trillion and now we are approaching $40 trillion in debt or 130% of our GDP. The rate in which we are taking on new debt is also accelerating. Almost half of all of our outstanding borrowing has been done in just the last 6 years. And yet on the surface, you would be forgiven for thinking not much has changed. And I don't just mean that in the sense of why haven't we turned into Greece yet? Because this also raises a more important question. The government has spent $15 trillion more than it has brought in in taxes in just the last half decade alone. So why don't we feel $15 trillion richer? When will this debt actually become a problem?

So the federal government has a massive amount of debt that has really only been trending in one direction. And there are ultimately only six options we have to deal with it. We can grow our way out of it. We can inflate our way out of it. We can raise taxes, cut spending, turn into Japan, or continue to kick the can down the road. So far, politicians have been promising this first option while overwhelmingly relying on this last option. And it's important to understand the fundamentals of why we can't keep on doing this because, I mean, it's worked out pretty well for us so far, right? As of the time of making this video, the USA has never defaulted on its debt repayment, although it has gotten shockingly close on an increasingly frequent number of occasions. But to be fair, a lot of these near misses were crises of our own creation. It sounds dumb. And to be honest, it is dumb. But not many people actually understand the real mechanics of well, how this money actually works. You may be under the misconception that the national debt has been ticking up every second of every day since we last ran our budget surplus back in 2002. Sensationalist media reporting and iconography like this debt clock certainly haven't helped with that understanding. But as an example, our national debt actually shrunk ever so slightly between Q4 of 2024 and Q2 of 2025. This was because prior to this, the debt ceiling was suspended, effectively taking the self-imposed cap off how much the government could borrow. When that suspension ended on the 1st of January 2025, the debt ceiling came back into effect and the government found itself already at its credit limit. To fill this gap, the government mostly just used the money it had sitting around in the Treasury general account. There are some technicalities, but really this is effectively just the checking account for the federal government. It's a big bank account held with the Fed that taxes and other federal receipts like tariffs go into and all of the expenses of the government, including debt repayments, come out of. The Treasury Department releases a daily report of everything that goes into this account and everything that comes out of it. So, you are welcome to balance the government's checkbook. Currently, there is over $900 billion sitting in this account, a near-record high outside of major events around the pandemic. When the debt ceiling was reintroduced last year and we temporarily couldn't expand the debt, we spent down this account from just over $800 billion to less than $300 billion over 6 months, including a bit of a boost from April tax receipts. Today, the debt ceiling has been increased again to $41.1 trillion after the passage of the One Big Beautiful Bill Act added $5 trillion to our credit limit back in July last year. In the 3 months that followed that, we had already added an additional $1.4 trillion to the debt, with some of this extra money going towards topping this account back up.

Now, it's important to understand these basic financial mechanics because one of the most immediate risks that lenders are afraid of is what happens if the government doesn't raise the debt ceiling and we run out of money in this account. We have actually come incredibly close three times in just the last 15 years. In 2011, there was political brinkmanship over reducing the deficit. In 2013, it was the same threat used to push back against the Affordable Care Act. And in 2023, Congress once again demanded a cut back in government spending, or else it would refuse to lift the limit. At the climax of the standoff, the Treasury had less than $40 billion left in its account. Even after taking extraordinary measures like delaying payments towards pension accounts, there was less than 48 hours of regular spending before the Treasury just simply wouldn't have anything left to fund the government or pay back its lenders. Now, threatening to push the government into default in the name of fiscal responsibility is a little bit like refusing to pay back your credit card because you are starting a new budget. The real reason the government plays this dumb game so much is because it's a good way for Congress to threaten the president. These stunts have had real consequences. Because while theoretically the US can technically always cover its debt by printing more of its own money, we have demonstrated that we might eventually choose not to over political squables. The longer we can keep kicking the can down the road, the more dangerous these games become. Shaking the Jenga Tower gets riskier and riskier the higher we stack it. Playing chicken with a debt half the size of our GDP wasn't a great idea to begin with. Playing the same games with a debt level we have today has had real consequences, even if it wasn't an outright collapse. Following the standoff in 2023, our credit rating was downgraded by Fitch from a perfect AAA to a double A plus, meaning that federal borrowing was no longer seen as completely risk-free. And since then, we have only been downgraded further still. To put things into perspective, US federal debt is now rated similarly or even lower than a lot of mortgage back securities were back in 2007, which obviously sounds bad. So, the actual risk of people holding US debt never getting their money back is effectively zero because at the end of the day, we can ask the Fed to just print more cash. But even a small pause in repayments is an indication that the government

might not have this whole situation under control. And since so many systems in the global economy rely on using treasuries as effectively an immutable cash flow generator, any uncertainty cast doubt over a lot more than just getting an interest payment a few days late.

The risk to bond holders is not that they won't get the money back that they were promised. Even if it is delayed, they will get their money back. The real risk is that by the time they do, the money they receive won't be worth it anymore. Either because it's been inflated away or because nobody wants to use US dollars anymore.

If treasuries can't be relied on as the foundation of global financial plumbing, that is just one thing that could undermine the expected future value. Another risk is that US dollars themselves won't be in demand if America becomes a less dominant middleman in the global economy, which well, I mean, yeah, that's clearly not an unfounded concern.

All these potential future problems means that lenders want to see higher returns to compensate them for these risks. When the Treasury borrows money, it effectively runs a reverse auction. It says it needs a certain amount of money and promises a higher and higher rate until people agree to give them that money. In recent months, as more groups have been looking to diversify away from the increasingly questionable dollar, these auctions have gone on for a lot longer than we have been used to, and we have had to offer a lot more interest than we did in the past.

On top of interest rates that have also risen. As more and more of our debt is rolled over onto these higher rates, the total amount of money that we are dedicating just to covering interest has almost tripled within the last 5 years alone. And unfortunately, that in turn presents a risk to investors who want even higher rates to compensate them for risks posed by higher interest rates.

We have actually spent a similar portion of our GDP on interest payments in the past, but that was back in the 1980s when interest rates were as high as 19%. The only thing that made this possible was the fact that our total debt was a lot lower. So even a much higher rate didn't cost as much as today. The total debt burden that we are carrying around now means that just a 1% increase in interest rates will carve more than 1% of our GDP and repayments.

If we really are just going to try and kick the can down the road, the number one most important thing we can do is to make sure that road is as smooth as possible. But since we seem utterly incapable of doing that, maybe we should explore some other options.

The best option would to be to grow our way out of the debt. And politicians in particular love this idea because it is theoretically the option that requires the least sacrifice. If you have $20,000 of credit card debt and you make minimum wage, well, that's a major problem. But the same debt for someone making a quarter of a million a year is much less of a concern. By working off that same basic assumption, if we grow our economy faster than the debt, we can keep things under control.

The reason this is such a popular idea is because economic growth is an objective in the first place. And if it lets us handwave away another problem, that is even better. No politician really wants to run on the idea of sacrificing hard times. So they go full wolf of Wall Street and propose dealing with your problems by getting rich.

Now to be fair, our debt to GDP ratio has actually shrunk over the last 5 years from a pandemic high of 132% down to about 121% today. It's still not great, but it is at least showing that the economy is growing faster than the debt, right? Well, yes, that's actually true. But there are three problems with this simple assumption.

The first is that we are measuring economic growth in debt from the starting point of the pandemic when the economy was locked down and we took out massive loans to fund big stimulus programs. The second is that by zooming out and observing a more long-term trend, it becomes clear that outside of this little anomaly, we are still overwhelmingly trending in the wrong direction. And finally, this is just measuring the total debt, not how much we actually need to pay on it.

To use the same analogy again, $20,000 in credit card debt is a lot worse than a $20,000 mortgage. And that's because of the interest rate. Because lenders are demanding higher rates from the Treasury in conjunction with a higher cash rate from the Fed, we are now paying around 4% of our GDP and interest payments alone. a 4% GDP growth rate would be considered extremely good and we would need to achieve that every year year after year just to compensate for the interest payments.

Now in reality since the year 2000 we have actually achieved an average annual growth rate of around 3%. And compared to a lot of other countries we are actually doing pretty well. So with this much money going to interest alone just growing our way out of the debt ain't going to cut it anymore.

Another option is something that actually seems pretty logical. Fire up the money printers and inflate our way out of it. Treasuries have a nominal face value and most have fixed interest rates with only the exception of a measly $2 trillion worth of outstanding inflation protected securities. If we have the value of our money, we could effectively half the value of our debt.

If you took out a million dollar fixed interest loan in Zimbabwe before hyperinflation, you would have been able to turn around a year later, sell a loaf of bread, and pay off your debt a thousand times over with the proceeds. Now, it doesn't need to go that far, but if we let our inflation run higher than average for a few years, it could bring down the real value of this debt.

The problem is that this only really works once. To lenders, this is almost the same thing as default. Remember, their only real risk is that the money they get back from holding these bonds isn't worth what they were expecting it to be when they bought it. Sustained inflation would help to reduce the burden of the current outstanding bonds we have. But next time the Treasury goes to borrow more money, investors are going to demand even higher rates to compensate them for the falling value of the dollar over time.

Higher than expected inflation compared to other economies could also further undermine the US dollar as a global reserve currency. Not to mention wreak havoc on regular people who are already suffering from a cost of living crisis. The inflator way our problems by just printing more money does sound simple in theory, but it will almost certainly do more harm than good.

So that only leaves us with some of the less fun paths forward. The simplest solution of all would be to do what anybody would suggest if you have a debt problem. Make more money and spend less of what you make in government speak. Raise taxes and cut spending.

Now we try to cut back in spending starting around this time last year and overall it did not go great. Unfortunately, a lot of our spending is not discretionary. So without fundamentally reshaping the rules around pensions or healthcare, the government can't directly control how much it spends in these categories. Outside of that, the largest expense category is just the interest on our debt. And without defaulting, we are stuck with that too.

The military is the next big expense and this is something we could change. But there are two problems with that especially right now. The first problem is that we have actually increased our military spending as we have simultaneously decided to become more isolationist and interventionist at the same time. Now we don't need another armchair general.

But the second problem is something much more within our wheelhouse. Military recruitment is way up which may be a sign of people wanting to do their patriotic duty. But it also may be a sign that young people and in particular young men couldn't find a job anywhere else. Cutting military funding right now could expose some major holes in other parts of the economy. >> We're investing that record number of dollars have no choice in the United States armed forces. Also creating a lot of jobs, but we're not even doing it for that reason. >>

So, all right, maybe we just raised taxes, right? The one big beautiful bill was one of the largest sweeping tax cuts ever, especially for higher income earners and asset owners. So that probably wasn't a step in the right direction down this particular path. But would it even matter?

Total federal receipts, as in how much the government receives in tax and all other forms of revenue as a share of GDP, has been remarkably consistent since the end of the Second World War. Even during the 50s and 60s, when we were taxing top income earners as much as 90%, the total revenue we brought in was comparatively identical to today. The problem is since then and now the spending of the federal government has almost doubled. We just have more programs, commitments, and expenses.

So this data does on the surface support the idea that taxes alone aren't going to fix this, right? Well, that is true. But it's often used to redirect away from the issue of taxation entirely. We still tax comparatively little compared to most of our economic peers. and who is paying those taxes has changed considerably even if the end result has stayed consistent over time. According to IRS statistics, the burden of this revenue has shifted largely onto middle income earners and away from wealthy asset owners. These are very taxing taxes that impact people with the highest propensity to spend, work, and reinvest when possible. Which means this tax shift is likely also shifting the very same economic growth that we are still hoping could grow us out of our problems.

On the flip side, a lot of the extra government spending that we are doing is flowing more directly to private enterprises through grants, contracts, credits, subsidies, bailouts, rebates, partnerships, and guarantees. So then what does private equity actually do with all of that money?

Private equity is nothing more than any investment company that invests into assets that are not listed on public markets. The variety of private equity companies is enormous. Some private equity firms will invest in very early startups and give them money to grow their business and acquire new customers. These firms tend to go by the name venture capital, but that's still a type of private equity.

Other private equity companies focus on buying alternative assets like airports, toll roads, intellectual property rights, and carbon credits. These firms offer liquidity to asset holders that would find it almost impossible to sell what they own without their services. You can't put your North Dakota drilling rights on Facebook Marketplace and expect to find a buyer. If something is worth money, there will be a private equity firm that will try and make a deal out of it. There are even private equity firms that are called a fund of funds, which, you guessed it, raises money to invest into other private equity funds.

But when you hear politicians, journalists, and angry people online talking about private equity, they are normally talking about the buyout funds. If you can start and run a successful buyout fund, there is a good chance you will become a billionaire because these firms are fine-tuned to make the most amount of money possible from buying entire companies.

So, if you wake up one day and decide to start a private equity firm specializing in corporate buyouts, here is what you will actually need to do in three easy steps. Step number one is before you even think about going out to find your first investor or acquisition opportunity is to get your corporate structure right. As a savvy private equity fund manager, your firm's legal setup is key. It's complicated by design, enabling you to minimize personal risk, maximize personal gains, and navigate complex financial regulations effectively.

Your strategic move is to form a Delaware Limited Partnership where you'll be the general partner. The Delaware Limited Partnership is popular in private equity due to its legal benefits and operational flexibility. Here, you'll have the power to make critical investment decisions and manage day-to-day operations. A crucial element of the setup is the limited partner agreement or LPA. The LPA is a contract that outlines the terms between you, the general partner, and your limited partners, typically your investors. The LPA details everything from investment strategies to distribution of profits and loss allocations. It's the rule book that governs the partnership, ensuring clarity and structure in the relationship between you and your investors.

As the general partner, the LPA empowers you to steer the fund's investment while outlining your responsibilities and the scope of your authority, balancing control with accountability. This structure with its well-defined LPA provides a stable framework for managing the fund, offering protections for both general and limited partners. If you have too much control, nobody will want to invest their money into your fund. And if you don't have enough control, then you won't be able to run your fund effectively.

In the movie The Big Short, Michael Bur's character, played by Christian Bale, gets into an argument with one of his biggest investors, who questions when other investors in the fund would be eligible to pull their money out. >> My god, Mike. >> Bur had made a very risky investment at this point in the movie that most of his investors didn't agree with. So, if they could pull their money out, they probably would. But Bur's firm had rules about withdrawal eligibility written into a mandate. So, they were stuck until Bur's investment paid off. Had they been able to pull their money out early, Our would have had to close his positions and everybody in the fund would have missed out on one of the greatest investment opportunities ever. So, this structure is essential to running your private equity fund effectively.

But you're not done yet. You will also want to add a management company that is technically separate from the firm, but can give advice to the fund and the acquired companies. This is the part of the business that is full of the Harvard MBA analysts that you will need to pay $250,000 a year before bonuses because they are the ones doing the math and due diligence on whether a company is a good investment or a bad one. While you're at it, you'll want to make yourself or a trusted business partner, the chairman and CEO. Once you have this structure in place, it's finally ready to start wooing investors and finding beloved companies to drive into bankruptcy.

All you are really as a private equity general partner is a middleman between investors and good investments. So the second step is the simplest part but also the hardest part. As a head of a private equity firm, you will be taking money from investors and using it to make investments into private companies. Those investors can make the same investments by themselves. So you need to try hard to convince them that their money is better with you because you can make them better returns even after taking out your fees.

Those fees are normally a 220 structure. Your firm will get 2% of all assets you have under management every year. This 2% is used to pay the salaries of the expensive Harvard MBAs working in your management company here. So once they have been paid, there won't be much left over for you. But that's what the 20% is for. 20% of all returns over a pre-agreed upon rate called the hurdle will be paid to you as an additional bonus. If you agree with your investors on an annual hurdle of 10% per annum, but your firm actually delivers 20% returns, you get to keep 20% of those additional returns for yourself as the firm's general partner. So, there are some big incentives for you to make some big returns. You also have an incentive to manage as much money as you can because it's better to get 20% of a bigger pie overall. So, one of your most important jobs is just getting people to invest with you.

The first step in raising money from investors is that you will need to put some of your own money into the fund. If you aren't already a billionaire, your own money won't be enough to start acquiring whole companies. But this still does two very important things. The first thing is that it shows other investors that you are willing to put your money where your mouth is and that you will take good care of the fund because it's your money at stake, too. The second thing putting your own money into the fund does is create an exciting little tax loophole, which means you are going to pay a lower tax rate than most Americans, but you will see how later.

Once you have put your own money in, you need to convince other people to trust you with their money, which is why it's normally a good idea to start a private equity fund after you already have industry connections and experience. If you don't have any of those connections just yet, don't worry. Some investors will also give you money if you have a lot of experience in a particular industry. So, let's say you have owned and managed hotel chains before. You can create a private equity company that will just invest in hotels and other hospitality businesses.

The number one best way to attract more investors is to generate consistently high returns. Do this for long enough and you might even have so many investors that want to give you their money that you will have to start turning them away. But for now, you will have to start small with your first acquisition.

Your team of analysts at your management company will work with investment bankers who act like realtors for people looking to sell their companies. Your analysts are going to be looking for companies that generate profit with good cash flow in a stable industry with improvements that can be made by your private equity firm to increase profitability. Since you have told your investors that your skills are in managing hotels, your team will also need to look for deals that are in the hospitality industry. Buying a pharmaceutical company could violate the investment terms of your limited partner agreement and you could get sued by your investors. If you spent your entire career managing hotels, you won't know about running a pharmaceutical company.

They also need to work with investment bankers to find companies that want to sell at a decent price. Once a business is found, the private equity team will work with the investment bankers to draft an indication of interest and conduct due diligence on buying the company. The private equity team will also start talking to other investment bankers and private lenders to try and take out a loan to finance the deal.

If your firm was only able to raise a pitiful $100 million from investors and the company you want to acquire is also worth $100 million, you are risking your entire firm on one bet. What you need to do instead is show a bank that the company you want to acquire has stable profits and good operating cash flow so that you can get a loan for $90 million to finance the deal. You can then use $10 million of your own money to perform a leverage buyout. If you have only used $10 million, you can also do these 10 more times before you have deployed all of your money.

The companies you acquire are called portfolio companies, and your job now is to get as much money as possible out of them for your investors. Private equity firms have a bad reputation for gutting companies, laying off staff, and saddling them with tons of debt. And that's because they do this a lot. Since you own the portfolio companies, you can tell their CEOs what to do. And if they don't listen, you can just appoint your own CEOs that will do exactly what you and your management team tell them to do.

There are a few strategies that private equity managers such as yourself like to employ to increase the returns of their portfolio companies. One strategy is consolidating the operations of all the companies in the firm. Since you are investing in hotels, you can merge the booking, housekeeping, staff administration, rewards points, and contracting all under one entity to save on overhead and offer a better overall product to customers. But if that's too creative, then you can always use your team of analysts to find the areas of the business to cut costs like employee headcount, employee benefits, and employee training. But you don't have to be creative. You don't even need to cut costs. You can just use the company's profits to pay down the $90 million in debt and then sell the company even if you don't grow it. It's kind of like buying a house and having a renter pay down your mortgage for you.

This kind of Ivy League business advice doesn't come for free. Even though the management fee is considerably less than what you can get if you get a return on your investment, it's still a lot of money once you have over a billion dollars worth of companies under management in your portfolio. Which brings us to the third and most important step of this whole operation, getting paid.

By cutting expenses and improving business operations, your portfolio of companies should now hopefully be worth more than what you paid for them. So now you need to turn those paper gains into cold hard cash. The easiest way to do this is to sell the companies at a profit to a buyer. You can call up another investment bank and they will give you three options to sell your companies.

The first option is you could take your company's public through a spa or IPO and sell them to the general public. The second option is to sell them to a strategic buyer like an even bigger hotel chain that wants to acquire your portfolio through an acquisition. And the third option is you could sell it to another investor like another private equity fund or a family office that just wants to continue growing it.

Now, if you think you're in the first category of public investors, I've got some bad news for you. The collective value of all American publicly traded stocks is now over $58 trillion. That's more than a three times increase from just a decade ago. And American public stocks are now the second largest asset class in the world behind only Chinese real estate. These amazing returns coupled with new technology which makes getting into the market easier than ever before has meant that more Americans than ever are stock owners benefiting from this strong market. Investing is the best tool for average people to build up wealth to fund some of the most important life goals like retirement, sending their kids to college, or leaving some money behind for their children. With more people than ever benefiting from the stock market, it means what is good for investors is good for everybody. The only problem is basically everything I have just said is complete.

You are not an investor, but it's really important that you think you are. So, the rate of stock ownership is approaching all-time highs, but those highs are probably lower than you expect. According to a Gallup survey, just 61% of households own any stock at all, either directly or through a mutual trust. This data is roughly in line with the Fed estimates, which suggests that we have now surpassed the previous peak of household stock ownership that was reached just before the market crash of 2008.

More people owning more stocks is great, but the problem is that these record levels have only been hit for two reasons. The first reason is that most of these stocks are held in 401k accounts, which would become far more common as old-fashioned employee pension plans slowly go extinct. This is putting the market risk in retirement onto workers. But overall, a diversified portfolio should be safer than an employee pension scheme, which have been completely evaporated in dozens of high-profile corporate bankruptcies in past decades. This is not really a sign of households owning more stocks though because in the past employer pension schemes would invest their employees pension accounts into the market to help fund the liability. So the only thing that's really changed is what entity is holding on to the shares.

The second reason that more people own shares now is because it's become easier thanks to low-cost or zero commission brokerages like Robin Hood. Now that isn't necessarily a good thing. Investing should be a part of a sound financial plan, but it will not make you rich by itself. According to Robin Hood's most recent filing, its average funded account had less than $5,000 invested in total. Another report published by the finance firm Stilt found that almost 43% of Robin Hood users had FICO scores below 650. A survey conducted by the Wall Street Journal found that debt relief was one of the primary motivators for using the investing app.

Now, I don't want to crush anybody's dreams here, but the chance of being able to generate investment returns greater than the interest payments on high-risk consumer credit is effectively zero in the long term. There are people who get lucky, but the vast majority of these investors would be much better taking the money they are putting into Robin Hood and using it to pay down their high-interest debt. If you do happen to have a consistent strategy for generating returns above the interest rate of a low credit score car loan, then you don't have to worry about those anyway because Citadel or Jean Street would probably offer you a 7 figure signing bonus. Clearly, a lot of these users are not being realistic about generating consistent investment returns. They're gambling.

It's probably no coincidence that the fall in active users for Robin Hood lines up almost perfectly with the rise in active users for sports gambling apps like DraftKings, FanDuel, and the various casino offerings. A report by Bloomberg found that these investors were taking their money out of stocks to top up their accounts on these platforms. And really, they have about the same chance of hitting a five-leg parlay as they do making money on a zero day to expiry out of the money call option on Orange Juice Futures. So the number of people owning shares for the first time is misleading at best and outright dangerous at worst, but you are probably better than that, right?

You might have a buy and hold portfolio that you make regular contributions to. You don't have any high-interest debt, and you might even watch low energy boomers like Ben Felix or The Plain Bagel that give realistic guidance on how to invest your money. Surely, you are an investor, right? Wrong. Statistically speaking, the only difference between you, the average person watching this video, and someone blowing up their Robin Hood account is at least those guys have a little bit of self-awareness.

This video was actually inspired by a comment on our video about farmland becoming the target of major investment firms. I don't want to call that particular commenter out, but they said something like, "Even if investors do buy up all the farmland, it doesn't matter because we are the investors through our pensions, retirement savings accounts, or direct holdings." This line of thinking has been used to protect investors in the past with big bailouts because if markets are allowed to suffer, then people will lose their life savings.

The reality is that stock ownership in America is incredibly concentrated in the hands of very wealthy people. According to a Fed survey of consumer finances, the top 10% of Americans own 93% of all stocks. So, everybody worth less than $1.6 million is really just fighting over the scraps. Even within the top 10% stock ownership is still incredibly concentrated with the top .1% increasing their holdings faster than any other group. These people are investors as a majority of their earnings power will be derived from dividends and capital appreciation from their shareholdings.

The detail is that very few of them got there by investing alone. Most of the wealth in the very highest percentiles of wealth was made through a combination of investing and either running a successful business, having a career as an extremely well-paid executive, or just inheriting their investments. There is a similar misconception that millionaires get rich by building an average of seven different sources of income. Just like the idea of being an investor can make you rich, this is based on an element of truth.

It's based on an IRS report that studied households between 1998 and 2002. And it found that high net worth respondents had reportable tax income from dividend income from stocks owned, earned income from paychecks, rents from rental real estate, royalties from selling rights to use something they've written or invented, capital gains from selling appreciated assets, profits from business they own, and interest from savings, CD bonds, or other lending activities. The thing is, at least four out of those required the household to have money invested in the first place. So they didn't really get rich from having multiple sources of income. They had multiple sources of income because they were rich.

So what this means is that for the vast majority of even the most diligent investors, it's better for them to focus on increasing their earnings to buy more investments than it is to focus on hyperoptimizing their investments. In the best case scenario, if you have got yourself a good job, made responsible financial decisions, and are consistently putting money away into an investment portfolio, not only are you in the top 5% of people, but you are still a worker that happens to have some investments.

Now, there are actually three reasons why it's really important for you to think otherwise. The first reason is that people that think more about their investments tend to make worse investments. A study by UC Berkeley found that stock portfolios held by female investors generated annual returns of 1% higher than their male peers on average. 1% might not sound like a lot, but compounded over a multi-decade investing horizon, and that small difference could easily double or triple a portfolio size. For single men and single women, the difference was even wider at 1.44%. What was the cause of these higher returns? Women just cared less about investing, so they didn't try to fine-tune their portfolio as much as men did.

There is an entire industry of market makers and prop trading firms that can only make money when there is dumb money active in the market. So there is a multi-billion dollar industry that really needs you to trade your investments as much as possible so they can pick up a few cents every time you do.

The second reason is that if people think they are investors, they are a lot more receptive to pro-investment policy either from their governments or their companies. Bailouts, loosen investment regulations, lighter work protections, and business subsidies overwhelmingly benefit investors often at the expense of workers. Other questionable practices like corporate investment into single family homes, leverage buyouts, anti-competitive practices, and market consolidation are surprisingly hard to push back against because lobbyists immediately bring up the fact that restricting these practices would hurt people's retirement savings if these businesses couldn't do what they do. If people think they are investors, it's a lot easier to get support for these policies.

The third reason is that people who think they are investors are better consumers. A survey of 2007 respondents conducted by the market research firm Ticker found that consumers were 80% more likely to purchase from a company that they own shares in. Apple shareholders were more likely to buy an iPhone. Amazon shareholders were more likely to be Prime customers and Tesla shareholders were much more likely to drive a Tesla. It's highly unlikely that the investment returns from these companies will cover the purchases unless you made a significant investment when these businesses were much smaller than they are today.

If you buy a few Tesla shares because you believe in the vision of electric self-driving cars and you also pick up a Model 3, then you are a consumer that just so happens to also own some shares, not an investor. Companies know about this trick, and some of them even offer special deals to shareholders in the business. The Carnival Cruise Line Corporation, for example, offers shareholders discounts on trips if they own at least 100 shares in the company, which amounts to about $1,800 as of the date of making this video. They don't offer these deals because they think a few retail investors will bolster their stock price. They do it because it's effectively a loyalty program that people tie up hundreds of dollars to join.

Now, the most important piece of nuance amongst all of this is that investing is still incredibly important. But go and watch this extended cut video next to find out why companies are quietly going out of business despite a record high number of Americans investing in them. And don't forget to like and subscribe to keep on learning how money works.