Transcription
The R word, recession, which when people hear that, it gives them anxiety, fear, panic, makes people scared because you think of layoffs, companies going down.
A couple things that I want to mention regarding that is, you know, the majority of people are very scared of slowdowns in the economy, slowdowns in the markets. However, for the minority of people, recessions, crashes are an opportunity to build wealth. You think of almost like a Black Friday for investors.
So the first point that I want to make regarding that is some people will use slowdowns as an opportunity to build immense amounts of wealth. Immense amounts of wealth. More millionaires are made during recessions than any other time.
How, how do they do it? So that's the thing. You want to find the opportunity. And the way that you find the opportunity is first to understand how you get there because history doesn't repeat itself, but it does rhyme. And so what happens is people say, "Oh, this happened in 2020, so it must happen again." Or, "This happened in 2008, so this is probably going to happen." Or, "This happened in 2001." That's not how it works. You have to understand what happened and how you're getting to where you are right now. That way, you can look for the new opportunity because the opportunity is going to be similar but different. And you want to be ready when times are okay and good and prepared. That way when things go bad, you can come in and pounce on the opportunity and take advantage of it.
So, you've got the stock market, which is, you know, it looks like record lows. It seems like every week it just keeps going down. You've got the crypto market and the NFT space, which seems like it's going down and down deeper into a hole. You've got the housing market, which seems like it's starting to take a turn and might pop this bubble. What, where is the biggest opportunity right now?
So let's talk about how we got here so you can see where the opportunity will be.
So in the past, for the last number of decades, anytime you saw an economic slowdown, the response was to create inflation. The response was to stimulate. So go back to 2001 when the dot-com bubble burst. We saw interest rates get cut. There was stimulus by the Federal Reserve Bank. So anytime you inject more money into the economy, it creates inflation. Same thing happened in 2008. The 2008 bubble, real estate bubble burst, and then we saw new quantitative easing. We saw cutting of interest rates. More money was injected into the economy. Same thing in 2020 on an extremely bigger, much bigger level. 2008 was the largest quantitative easing in the history of time, and 2020 blew past that.
Significantly more. And so what happens is when you create more money, it reduces the value of your dollars. This is what inflation is. Inflation comes from the word inflate. So it prints a lot of money to put it into the economy. Right. New money, which creates inflation. Correct. Right. And the value of a dollar goes down, causing the price of things to go up. So when 2020 happened, we started printing more money and injecting this into the stock market, into corporations, and into people in the form of stimulus checks and unemployment. So what did that do? Well, in 2020, we saw the fastest and most severe stock market crash in history. It exceeded the rate of the Great Depression.
And then what happened? The Fed opened up the money printer, and boom, shot right back up. It was the fastest stock market growth in the history of time. Which, if you think about that, we had the fastest stock market crash in the history of time, and then we had the fastest stock market recovery in the history of time. How was that possible? Well, we printed an insane amount of new money. And when that happened, we created something called unlimited quantitative easing, where they essentially just said that they would print and do whatever it takes to help recover markets. Well, when you start printing all of this money without producing more products, because now, remember, the world is shut down. What happens? We have people who have money and nothing is being produced. So now, if you have money and you can buy stuff, but nothing's being produced, what's going to happen? You start shopping, and things get bought, and all of a sudden, companies can't keep producing the products that they had before. Now you start to create supply chain issues.
So now this started creating supply chain issues, and then this caused the price of things to go up even more because now companies say, "Well, I don't have more mugs to sell you. I only have a few. So I'm going to have to raise the price of these mugs." And now you start to go down this inflationary spiral because now that people need more money to buy things, they go to their boss and say, "Hey, look, I need more money." Right? It's more expensive to survive. Then your boss pays you more money, hopefully. And then your company says, "Our costs have just gone up. People need more money. So what do we need to do? We need to charge more for our products." Now you charge more for your products. People need more money. It starts to create the spiral. So that was the issue that kind of led us to where we are now. And up until just a few months ago, inflation was supposedly transitory. It was supposedly this temporary thing that would just magically go away. But the interesting thing though, if we go into a little bit of data, I don't want to get too confusing, but the interesting thing though is there's really no clear answer as to how much money was created. We have ideas. But if you look at this thing called M1, which is the amount of money out there, you can go to Google, search Fed M1, they have a chart of it. And what you'll see is that in the beginning part of 2020, there was just under $4 trillion of money out there, M1. And then now today, there's over $20 trillion out there in M1.
Of of money, actual dollars. Of M. Now, let me see what the reason why I'm saying it this way is because when the pandemic hit, the Fed started creating more money, but they also changed the definition of money. M1, which is the definition of money out there, as soon as they started opening up quantitative easing, they changed the definition of it. Why? Now, there's no real answer for this, but my guess would be that if people knew exactly how much money was printed by the Fed, then people would be more of an uproar of what's going on. Because then they would see, "Holy cow, you're printing all this money, making businesses rich, making investors rich, making regular people poorer because inflation disproportionately hurts the financially uneducated and the financially poor." Because guess what? Now your gas is more expensive, your groceries are more expensive, your rent is more expensive, but your wages aren't keeping up with it. Unless you had a 20% wage increase, your cost of living is probably outperforming your wages.
So that's what's happening in terms of money. We had an insane amount of money printing being done. And in addition to that, we also saw interest rates get cut. What are interest rates and how does that have anything to do with inflation? Well, the Federal Reserve Bank is the Federal Reserve Bank. However, they're not federal. It says so on their website. They're not a reserve because they don't keep any cash reserves, and they're not a bank. You and I can't go there to deposit money or do any banking.
So, the Federal Reserve Bank, while it's not federal or reserve or a bank, they control our monetary supply. They control our money. There's two ways that they can do that. One is through interest rates, and the other is through printing money. So through interest rates, they have the ability to raise and cut interest rates. When we are in a slowing economy, a recession, they cut interest rates to stimulate spending because our economy runs on spending. If I have $1,000 in my pocket, and I go to Amazon and I spend this $1,000, well, Amazon has more money to hire more employees, invest in more infrastructure, do more things in the business. But if I keep that money in my pocket, they're not making as much money, and they can't keep growing. So, our economy runs on spending. And when you cut interest rates, spending goes up. When mortgage rates drop to two and a half percent, people want to go and buy a home. People want to go out and buy more cars. People want to go out and spend money because it's not as expensive, right? And businesses do the same thing. If you're enjoying this video, I want to take your investing to the next level. I want to remind you that I put together a free investing master class where I walk you through how you can get started as an investor and find hidden investment opportunities before everybody else. It's a completely free master class, and when you register, you'll also get access to Market Briefs, which is my newsletter for investors, completely free, complimentary as a bonus. So if you want to get the investing master class and Market Briefs all for free, all you have to do is click the link down in the description below to get it. Institutions are going to go out and borrow an insane amount of money because it's cheap. If I can borrow money, $100 million at 3% a year, and I can grow my company at 5% a year, I'm going to do that all day long, right? And that's what institutions did. So more money gets injected into the economy when interest rates are down. So that's what happens typically when you're in a recession. It creates more inflation, right? Because you're adding more money into the economy. However, it helps to stimulate the economy. Now, when you're in a growing economy and you want to cool down the economy, you want to cool down inflation, you do the opposite. You start raising interest rates, making it more expensive to buy a home, making it more expensive to live. And then you also can, in this case, remove cash out of the economy. This is what the Fed is trying to do now.
How do you remove it out of the economy?
So, the Fed is well, interest rates and then their balance sheet. And I'll talk about interest rates first, and I'll go into the balance sheet. So the Fed right now is raising interest rates because they want to slow down inflation. So when you raise interest rates, what happens? It's more expensive to buy a home now. So less people buy. Less people buy. Less cash enters our economy. Less institutions borrow money. Less corporations borrow money. So borrowing goes down. Less dollars enter our economy. The second side is the balance sheet. So this one's kind of interesting because you have to understand a little bit of how money works on the government side, without going into politics. So the government is not a for-profit entity. They don't sell products for money, right? What they do is they get their money from tax dollars. People like you and me, right? We pay taxes, and then the government spends money. So when the government spends less than what they bring in, no problem. Their tax dollars cover it, and then they have a surplus in case one year they overspend. But that's not what happens here. We spend more money than what we bring in. So that's why we have this national debt of $30 trillion, this national deficit. Um, and so how do you cover that? Well, if you spend more money than what you bring in, you can do a few things. You can raise taxes, which is going to make people angry if your taxes go up. And so you can't always do that. Second is you can go out and you can borrow money. You can go and raise debt. So that's what the government does. They go borrow money from countries like China and Japan. But there's going to be a limit to how much money you can borrow. So if you can't borrow enough money from different countries, then what's left? Well, then you can issue something called a Treasury bond, which is where now anybody, people like you and me, anybody listening to this, can go and lend money to the United States government. But if the government is running a big deficit, meaning let's just say they need to raise $4 trillion, where are they going to get this money? Well, if they can't get that money from regular people, then they're going to call up the Fed and they're going to say, "Hey, Fed, we want to issue $3 trillion of Treasury bonds. No one's going to buy it. Can you help us out?" Now, remember, the Fed doesn't have a cash pile sitting there. So, what did they do? They print $3 trillion, give it to the government. This money is created out of thin air. Now, the government has this $3 trillion. Inflation just happened, and the government is able to now spend this money without any sort of taxation. However, you still pay the price. The most expensive kind of money that there is, is free money. Because now when the government gets this money for free out of thin air, everybody pays the price. And the person who pays the price disproportionately are the poor and the financially uneducated because now you have to pay for inflation. Your wages don't stretch as far. Your savings don't go as far. And now your cost of living is significantly higher. So you're becoming poorer each and every day. Inflation hurts the poor. And the reason I'm not even talking about the middle class is because inflation is the reason why the middle class is getting wiped out. It's turning into more poor. It's turning more either poor or the wealthy because if you understand what's going on here, you're going to change the way that you use your money, and it creates this divide. So more and more inflation creates a bigger wealth gap. And that's what we're seeing happen now. Some people during the pandemic became insanely wealthy. You know, they talk about how the richest Americans had gained billions and billions of dollars worth of wealth. Well, the poorest Americans saw no change. And so, when the cost of living has gone up so significantly and you don't understand this, you're being screwed over by the system and you don't even see it happen.
So, that's the issue with inflation. And if it becomes a real big problem, well then you can run into some sort of currency crisis or you can run into an issue where the government can default on their debt. And this is an issue that's actually happening right now. Not in the United States, but Sri Lanka. They just defaulted on their debt. The country. Really, what does that mean? We have so much debt. We have spent so much money. We have nowhere to make the payments. We're going to default. And now the currency goes into collapse. Inflation goes through the roof. The economy goes down. It's a big problem, and it creates a lot of civil unrest.
So that is the worst-case scenario because now you're worried not only about the economy, but you're worried about the currency, and you're worried about being able to find food. You're being able to like food becomes a scarcity. And right now, because of the inflation issue, not just in the United States but around the world, the World Bank said that about a dozen countries are on the verge of a potential debt default.
Because of all of the inflation that's going on. So, it's a real issue, and most of us have no idea it's happening. That's why it's known as a hidden tax, a silent tax. Everybody pays the price. And if you don't know you're paying the price, you're the one that's probably paying the biggest price, right?
So, this is where it's so important to get educated on that. So what would be the thing? If there was the biggest opportunity to create wealth right now? What industry or sector would that be? Is that in this, you know, stocks? I feel like I feel like nothing is stable. Like if you're going to put money in something, you could make a lot or you could lose it all within a month. Is it the stocks? Is it the crypto NFT space? Is it the housing? Is it, you know, investing in yourself in another way? What would you say we should be investing in?
Absolutely. So the first, so the answer is going to be looking for where the opportunity happens. Okay. So 2008 was real estate. That was the biggest real estate opportunity in our lifetimes. In 2020, it was stocks and crypto. In 2020, the stock market from its bottom to the end of 2020 grew by 60%. The crypto market grew by almost 600%. And so it's you didn't get out, you've probably come back to, of course, but this is where, you know, again, the psychology of your investing is so important. But the thing that you want to pay attention to now is it's it's you want to see where things are going. Yes. That way you can make the right moves. Remember, history doesn't repeat itself, but it rhymes, right? So you want to look at the same data points and the same factors and see what's happening. So if you can make a prediction of what do you think is going to happen over the next few years based on history.
Yeah. So, let me what do you, what's rhyming right now? What's rhyming for you?
So, it's gonna depend on one thing. Okay. It's gonna depend on what the Fed does next.
Because right now, and I'll explain and I'll give you a defined answer in just a minute, but I'd like to give you my reasoning first.
Give me the context.
So, right now, the Fed is working to fight inflation. And but how? It's like 8, 9%.
Yeah. They're raising interest rates and they're going to start selling off their balance sheet. So, the Fed balance sheet is around $9 trillion. Crazy. And so starting in June, they're going to start selling off these assets while raising interest rates. And the Fed says that they're willing to fight inflation because the economy is so strong and robust, and because the economy is so strong, it can withstand any sort of interest rate hikes. So what is the Fed doing? In essence, they're pulling money out of the economy, and now they're hoping that the economy will continue to stay strong. So by raising interest rates, what's happening? Housing is becoming significantly more expensive.
Housing or rent, like buying a home or renting?
Both of them. Rent costs have gone up by 20%. Buying a home has gone up by even more. And I'll tell you why. Because when people talk about home prices, what do they talk about? They say, "Oh, well, home prices are up 20% from a year ago, but your housing cost is significantly more than 20%." Because if one year ago you wanted to buy a home for half a million dollars, you could get a mortgage for 2.5%, 30-year fixed.
2.5% mortgage. Oh wow. Interest rate. Interest rate. Yeah. 20% down, right?
So $100,000 down. You could borrow $400,000 at 2.5%. It would cost you something between $1,600 and $1,700 a month.
It's not bad.
Today, that home is not $500,000. It's $600,000, 20% more. And your mortgage rate is not 2.5%. Maybe 5.5%. So what does that mean? If you put 20% down, you're not putting down $100,000, you're putting down $120,000. And you're not financing $400,000, you're financing $480,000. So you have to borrow more dollars, and then you're borrowing the dollars at a higher interest rate. So you're not borrowing at 2.5%, you're borrowing at 5.5%. So now your mortgage on that same house, the exact same house, assuming no upgrades, has gone from $1,600, $1,700 a month to $2,400, $2,500, $2,600 a month.
So your housing cost is significantly higher. So now with interest rates going up, what's happening? People are saying, "Oh my god, homes are significantly more expensive. Mortgage applications are starting to go down." In the stock market, what's happening? Well, businesses are having higher costs to operate because now if you were one of the companies that were relying on debt and your stock price in order to operate, because when you're in a low interest rate environment, you don't really need to make money because investors will keep throwing money at you because they can just keep borrowing money super cheap, right? And so if you were one of those companies that were not profitable, you might have just said, "Well, I'm worth $40 billion. I don't need to make a profit because I can just borrow money. I can just get an investor to invest money into me." But now people are looking at you and saying, "I can't borrow that same money at the same rates as I could before. So I need a better return, and you're not making a profit. So I'd rather invest my money somewhere safer." So a lot of companies are seeing their valuations drop, meaning stock prices are dropping as interest rates go up. Same in the cryptocurrency market. There's a saying that when the tide goes out, you see who's swimming naked. What happens? Well, there's a lot of free money out there. There was. And so people can just keep swimming in the free money, throw it into anything and just hope that they'll make money on it because there's a lot of dumb money out there.
But when that money starts to go away, that's when you see who was swimming naked. That's when you see the scams. You start to see the bad investments, and you start to get exposed because now people want to put their money somewhere safe and somewhere smarter. So people are leaving the risky investments and moving to the smarter places. So now back to your question, where do you go? Where do you put your money? And the reason why it depends on the Fed is because it depends on what the Fed does next. If they continue fighting inflation and they say, "We're going to do whatever it takes to bring inflation down," that means we're going to pull money out of the economy. We're going to jack up interest rates. Even if that means that we're going to go into a recession, even if that means we cause a housing market crash, even if that means we cause a stock market crash, we're going to keep doing it. If they do that, well then you're going to have a big buying opportunity in pretty much any asset class, assuming you find a good, um, investment there, a strong fundamental investment. But there's also the chance that the Fed doesn't do that. There's a chance that the Fed says, "We're starting to raise interest rates now," and this is what they're doing right now. And then six months go by, and they say, "These higher interest rates are really hurting the economy now. The economy isn't as strong as we thought." And then they start cutting interest rates. Now, what are you doing? You're in a high inflationary environment, man. And now you're creating more inflation in order to fight the economy because the Fed can either fight inflation or they can fight the economy. They can only do one or the other. And in all the previous crashes that I talked about, we were never worried about inflation. We were worried about an economic slowdown. In 2008, we were worried about an economic slowdown. 2001, economic slowdown. Even in 2020, the worry was not inflation. The worry was deflation. The Fed says we can't have deflation. We don't want people to have their savings worth more. We need to create more inflation. And now it's we have an inflation problem. And so if the economy goes down, what do you do? You create more inflation to save the economy. However, that creates more inflation. Our economic slowdown today is being caused by inflation. You cannot fix an inflationary recession through more inflation. What's that going to do? It's going to make the inflation problem worse. Yeah, it'll probably boost the economy in the short term, but it will crash the stock market and the real estate market, not downwards, but upwards.
Interesting.
And that's a very interesting concept to think about because when you think about a market crash, what are you thinking? Stock prices go down, real estate prices go down. But if you're worried about high inflation and then you start creating more inflation, what's going to happen? People are going to take the dollars and they're going to want to get out of cash because they're going to say, "If our inflation rate goes even higher, our cash is going to lose value even quicker. We want to own any asset, stocks, want to own real estate, maybe cryptocurrencies, some smart ones." You're going to see more cryptocurrencies potentially go under. We've already seen some go under. So, you're going to want to make fundamental investments, but you could see just a lot of money flow into these assets. Kind of like what we saw happen in 2020. We were in a recession, but the stock market was going upwards. Why? The money printer let it all in. So that's where you want to pay attention to what's happening there.
How high do you think the interest rates could get to? What's the potential range you think?
So let's talk about history. In 1970 was the last time we saw inflation this high, or in the late 1970s, closer to 1980. And in that time, we were facing double-digit inflation. And in order to fight that inflation, the Federal Reserve then said, "Either we can fight the slowing economy, or we can fight the inflation." Similar issue. It was called stagflation. Stagflation is a very weird economic concept where you have a slowing economy and you also have rising costs. So it's like the worst-case scenario.
Sure.
And so during that time, they said, "Okay, we have a slowing economy and we have high inflation. We're going to say, ignore the economy. We're going to break down inflation because that will save our dollar. It will save the currency." And so what did they do? They jacked up interest rates, and mortgage rates were almost 20%.
What, when was the last time it was over 10%?
You remember?
Uh, in the '90s to early 2000s, around that time. '90s probably was the last time it was over 10%.
So if it went over 10% now, what do you think would happen? If the Fed continues to jack up interest rates to bring it over 10%, home prices will have to go down. I mean, because people won't be buying. You can't afford the home at the same interest rate today, and that would also significantly hurt businesses because the businesses that are relying on debt, they're going to see a big pain, a big crunch.
And so that's where the Fed is facing a big dilemma. They're hoping that inflation will go down, but the question is how. They're hoping that it's still just supply chain. They're hoping that it's still just Russia. They're hoping that it's still just other issues. But the one issue they never talk about is the money printing and the stimulus. And that's the concern. It's we, if we really want to get serious about fighting inflation, we might have to get more aggressive. And if we get more aggressive on inflation, it's going to hurt the economy. Even the, uh, a previous Federal Reserve chairman said that we need to crash the markets because we need to get serious on inflation because we don't want to deal a currency crisis, which would be even worse than just dealing with a recession. And so that's where it's, what is going to happen? And are we really that bad? And the last thing I want to mention on that is the money printing that we saw happen in 2020. Uh, it has just come out that it also led to the biggest financial fraud of America ever.
Really? Why?
Because people abused the system. Oh yeah. They lied about things. They got free money they shouldn't have gotten. It was the biggest financial fraud in our history. And the reason why, from all angles, but if you look at the PPP, which was the, uh, uh, loan to businesses that if you have employees, you have rent, if you have business costs, and you're shut down, you can get essentially a free loan from the government, and you don't even have to worry about paying it back.
Crazy, right?
And if you are taking out, I think it was less than $2 million, you don't even have to explain what you use the money for. You have no justification. You can just borrow the money. So, what happened? Well, some businesses use the money for good. And some people said, "Well, I don't have a business, but I wonder if I can look up a registry of businesses and say, 'Ooh, these are some businesses.' And just start applying under these business names and say that I need the money."
Billions and billions and billions of dollars were stolen. Where did the money go? Lambos. They went into nice cars, went into nice homes. And it's just coming out now.
And so we saw tens of billions of dollars go to just complete waste. Even in the unemployment program. Now they're starting to realize that some people who were getting unemployment didn't justifiably get the money or shouldn't have gotten the money. And so they were sitting at home playing video games when they should have been working or could have been working, and maybe they were doing something that they shouldn't have.
There was no incentive for them to work because they were making just as much, almost or more.
Or even they were working and still getting the unemployment because they were doing something illegal. And so it created all this fraud. And so it's like we had all the stimulus without really any regulation, without looking into what we're doing with it, and it created the biggest financial fraud. And now who's paying the price? The average person. Regular people are paying the price to inflation. And if you're just now learning what inflation is, you're really probably getting pinched by it. And it sucks because we're never taught about this. When are we ever taught about inflation? When are we taught how to fight inflation? I, it's it's so unfortunate.
Unless you're in like an economics class in college or something, maybe.
Well, look, I tried to get into, I tried to get into business school when I was in college. I needed to take Econ 1 and Econ 2. I almost failed Econ 1, so I couldn't get into business school. So I don't even know if the economics classes teach this. I know.