Chamath: The ENTIRE Stock Market Is Crumbling Down (And When To Buy)
over the past few months a variety of fund managers and billionaires have been warning of an economic slowdown one of these managers is billionaire hedge fund manager chamath palihapatiya who has recently been warning about the implications of the fed's actions we saw what happens when the fed printed unprecedented levels of money into the economy inflation began to soar the financial markets appreciated to all-time highs and speculation increased to dangerous heights the federal reserve has a substantial impact on the economy the risk going forward lies in the fed's reaction to rising prices that is what so many fund managers economists and retail investors have been worried about this video will cover why chamath believes inflation is no longer what investors should worry about according to chamath investors should be looking at a totally different indicator in a frightening turn of events the federal reserve is adamant about cutting its balance sheet and raising interest rates to combat inflation millions of people around the world have called out inflation as not being transitory but it's looking like those worries may be a self-inflicted prophecy the popularity of that opinion is causing the fed to be overwhelmingly hawkish just like the fed's reaction during march of 2020 the fed may be overreacting again but on the other side of the spectrum chamath believes that inflation may actually turn out to be more transitory than people are expecting solely because the fed may overreact one famous investor named jeremy grantham has been warning of a market crash for america's super bubble grantham explained how the market has been stabbed by covid money printing unexpected inflation and the promise for higher interest rates the phrase super bubble is used because grantham called 2020 a quote-unquote epic bubble and he also called 2021 another bubble therefore we would currently be in a bubble squared or a super bubble i personally don't listen to jeremy grantham because he is essentially a broken clock a broken clock says the same time every day and will be right two times a day in the case of grantham it's unclear whether his money is where his mouth is that being said grantham does detail solid points from time to time the u.s economy is in a weak position by all means chamath believes that the fed will likely overdo his reaction and potentially cause the u.s to go into a recession the government printed 10 trillion dollars inequities have also corrected by 10 trillion dollars if equities continue the crash from rising interest rates then it is possible that the net money outflow could eventually become negative this is evidence from the fact that growth stocks and cryptocurrencies have crashed significantly over the past couple of months on january 22nd on the all-in podcast david sacks a famous venture capitalist explained why a recession is imminent which chamath agreed with you know we had jeremy grantham as sort of an old school yeah old school kind of bearish type market commentator he had this expression that the yeah i mean it's more one of these stop clock right twice a day things here jeremy grantham has never found a market he didn't need yeah yeah exactly but but but a stop clock can be right twice a day and um the line he had today is we're seeing the popping of a super bubble and you know we've been talking about power bubble yeah exactly basically that's not that's not true but i mean it's good yes it's evocative well the the sense of which it might be true is that i mean we've talked about this last few months is that you had the fed and the the the federal government pump a 10 trillion of liquidity into the market over the past two years because of covid now they're starting to pull that back and there was i think a general asset inflation across asset classes certain types of assets clearly got more inflated than others we've seen a huge correction in growth stocks we've seen a huge correction in uh in crypto basically anything long dated as the fear of interest rates increasing has gone up they've massively corrected but so the concern is that you know with the losses we're seeing and i mean every day it just keeps like keeping more red that this could turn into a recession you know popping of bubbles is usually followed by uh by recessions or so i think you know the fortunes of the economy could turn really quickly here and that is that is the marginal risk the marginal risk is actually for recession we we talked about this before by the way just to your point you're right that we pumped in 10 trillion dollars but over the last three weeks and really over the last two and a half months we have actually eviscerated 10 trillion dollars of value as well so if you want to measure it we put 10 trillion of excess capital in but we've now destroyed 10 trillion dollars of equity by lowering the prices or pricing stuff yeah we've been pricing the crypto i mean crypto in the last couple of days has just been flat uh growth stocks have been shellacked uh biotech stocks have been just absolutely spoken everything is getting crushed the most important factor that is pointing towards a potential recession is the bifurcation or in other words the division in the global economy you might think that interest rates are increasing around the world but that's not the case while the u.s federal reserve has been increasing interest rates china has actually been lowering interest rates this is concerning for one reason the fed raising interest rates could indirectly crash china's economy which is currently in a weak position because china represents such a significant part of the economy a crash in china's economy would hurt america's economy as well this is problematic because china's property sector is currently going through a major deleveraging ad leveraging is when companies reduce their debt by rapidly selling assets we've seen this happen not just with evergrand the second largest chinese real estate developer but also with plenty of other developers as well at the same time that this is happening china is also being impacted by omicron as the chinese government has been extremely strict on shutdowns the result of these two factors is china's rapidly slowing economic growth chinese policymakers are panicking in response to this yu yangding an economist who once advised the people's bank of china told reuters that we need a relatively loose monetary policy how much we loosen depends on economic conditions but the policy direction is clear the people's bank of china will likely cut the bank's reserve requirement ratio soon as well a reserve requirement ratio or rrr is the percentage of deposits that banks must hold on to in this example the reserve requirement is 8 if the reserve requirement goes down to six percent then the bank can loan out or invest two percent of excess reserves on the flip side if the rrr goes up to ten percent banks will have to sell a portion of their holdings to meet the requirement china's reserve requirement used to be 12 percent before they lowered it to 11.5 percent in december 2021. that means that banks now have 0.5
percent of excess capital to invest or loan out such a move signals that the chinese economy is struggling and that artificial cash inflows are necessary to keep the economy running an anonymous chinese policy insider told reuters we definitely need to loosen policy as the downward pressure on the economy is relatively big lian ping a chief economist from zee seeing investment expects one or two more rrr cuts this year that might sound like a lot but some economists expect even more turmoil such as su hong kai a deputy director of a chinese economic policy commission su hong kai believes that the rrr will be cut by at least 3 times in 2022 one of the reasons why more rate cuts could be necessary is because of the us federal reserve as the fed raises interest rates the u.s dollar will increase in value this is because holding the dollar would have higher comparative returns therefore people would hold more dollars in comparison to the chinese one not only that but when the chinese government lowers interest rates it causes the yuan to drop this is detrimental to the chinese one because investors and institutions have been selling the chinese yuan for u.s dollars so while the fed is raising rates and the chinese government is lowering rates the us dollar will go up while the chinese one will go down this puts a substantial amount of pressure on the people's bank of china the pobc claims that it'll focus on its own economic situation but economists worldwide think that it won't have a choice we saw a similar situation happen in 2018 that led to a mild manufacturing recession for the united states while that happened china's economy experienced the slowest growth in 28 years so how did this all happen in 2018 jerome powell raised interest rates in the middle of a trade war causing the chinese economy to slow down substantially this forced the fed to lower interest rates in 2019 as the global economy decelerated significantly u.s manufacturing production suffered as a result and entered a mild recession we're currently in a similar situation to the 2018 recession but potentially even worse before we get into chamat's explanation if you enjoyed this video so far please hit the like and subscribe button for more content like this now let's get back to the video the risk in my opinion is not of runaway inflation anymore and the reason was what happened this weekend was incredibly important and we have seen this happen just a few years ago so this weekend uh china cut interest rates now as we know we are dealing in the united states with this issue of whether we should raise rates and by how much because we're worried about inflation well if you're cutting rates it's because you're worried about the other problem which is that the economy is basically turned over and you need to become more accommodating right you need to incentivize businesses to spend by turned over you mean it's slowed down people are not building companies not doing new projects so you want to inside you want to give them an incentive or maybe some catalyst to start some new company or start some new project because all the real estate projects have wound down in 2018 here's exactly what happened the setup was the fed we were everybody was worried about what the fed was going to do on interest rates the fed was looking at china as the canary in the coal mine the leading indicator of what we should do and at the end of 2018 uh jerome powell decided to raise rates and we raised rates and then enter 2019 and uh the chinese economy turned over and uh we realized that their economy was not nearly as strong as we thought it would be and so our reaction was disproportionate to what the actual data on the ground said we entered a recession in 2019 that's when you guys probably saw trump going crazy blaming powell i mean most of us ignored it because you know we were all dealing with you know trump derangement syndrome but the underlying thing of what he was saying was hey hold on a second uh you just caused the recession in america by raising too quickly the fed is now in this really delicate situation where china cut rates last week we have an fomc meeting the open markets committee that sets rates on wednesday i think of this coming week what is he supposed to do one week after predicting a recession chamac became even more bearish than before this is because in addition to china germany is also showing signs of a slowdown germany cut its 2022 gdp growth forecast to 3.6 from 4.1 percent before the german economic minister robert havoc cited germany's ongoing struggles with the pandemic as one of the main reasons for the slowdown germany's national statistics office also predicted that germany's output for the fourth quarter of 2021 will decrease by 0.5 to 1 percent that might not sound
like much but when annualized that decline would be two to four percent the reason why this all matters is because the fed might be too optimistic about the u.s economy perhaps the economy isn't as strong as the fed thinks and the rate hikes will crash the us economy we've already seen signals from china and germany that the economy might be weaker than expected but china cut rates this past weekend actually germany decreased their gdp forecast and so you're starting to see two huge countries already say hey wait a minute we need to be you know we need to be more realistic about what long-term growth looks like here it's inconceivable in my mind that those countries are slowing down and we won't and so i think what happens in these other huge gdp drivers of world gdp will affect us and so you know sax and i have said this before but the marginal risk will be that we over correct and actually create a recession that doesn't need to be one the federal reserve open market committee or fomc meeting that chamath mentioned recently happened at the meeting the fed chair jerome powell remained focused on raising interest rates and cutting down bond purchases that supports shamath's thesis in a huge manner some investors might assume that when the fed raises interest rates the market bottom will be nearby however that's actually not the case market prices are forward-looking and therefore price in future events the market is relatively efficient as theorized by the efficient market hypothesis the efficient market hypothesis states that all asset prices reflect the available information that hypothesis is not completely true but is still relevant to a certain degree investors know that rate hikes are coming and that's being reflected in the market right now chamath found out that the market actually tends to increase after rate hikes occur that being said perhaps rate hikes are already being priced in and it's time to start dollar cost averaging into the market the fomc meeting happened this week and powell basically said look we're going to start tightening in march i think the way that he said it you know all of these words tend to be so scrutinized and overanalyzed but the instead of figuring out what people thought i think their actions post the fomc are important which is that you know we effectively now started to price in about five rate hikes this year so probably five 25 point rate hikes effectively that's what that's what the that's what the yield curve tells us if you take a big step back i just want to remind people like it's really hard to live through volatility right and we're in the phase of it now but typically these big drawdowns are like you know when stocks go down it actually precedes so it comes before the actual starting of a rate hike cycle and so if you go back to you know from 1950 onwards today every time the government has started to raise raise or the federal reserve has started to raise rates the stock markets have actually rallied now why is that it's typically that they see through the end of the rate hike cycle and they start to price the business as if these rate hikes are done and to to rebase things and on average i think the stock markets go up between seven and eight percent so call it seven and a half eight and a half percent and so what's interesting to me is now we're finally starting the process of these hikes and the real question is going to be how data dependent do these guys get raising rates is necessary to cool down inflation but doing so has devastating consequences powell's adamant claims reaffirmed chemothesis that inflation is going to be transitory if the global economy is weak like china has demonstrated then inflation could quickly decelerate as the economy slows down bill ackman a famous hedge fund manager has been pressuring the fed to raise interest rates even more than expected ackman has a short position in the bond market and would benefit if the fed listened to him however that doesn't come as a surprise because bill lackman is known for manipulating the market in march of 2020 he ranted on cnbc about how covert was going to get worse while cashing out his short position and going long on the market you know bill ackman two weeks ago was advocating for a 50 basis point raise in this meeting so that's way beyond what people even thought is supposed to we should just remember that bill ackman has bets macroeconomic bets in the market if he's calling for a 50-point raise i guarantee you you're gonna make a lot of money you'll make a lot of money no conflict no interest yeah yeah yeah my only point is the setup is a very complicated one for the fed coming into this week and the risk is to a recession because if we over correct yes and the leading indicators all around the world tell us that their economies are weak then inflation may have actually been much more transitory than we thought and right now we have to decide because if we over correct we're going to plunge the united states economy into a recession so we know that the economy may go into a recession but that doesn't necessarily equate to a major market crash the mild recession that america experienced in 2018 led to a 17 decline in the s p 500 that is not a lot and one of the reasons why is because there's a lot of money on the sidelines total savings at all depository institutions have increased to over 11 trillion dollars over the past decade that is an immense amount of money and a considerable amount of that money is waiting for a buying opportunity even if the market crashes as much as it did during covid it would likely rebound relatively quickly because of the cash waiting to buy the dip not only that but plenty of tech stocks have already crashed by humongous amounts forty percent of the stocks on the nasdaq have crashed at least fifty percent from their highs that level of decline is almost in line with previous economic disasters therefore perhaps the bottom is close by for the market chamath believes that once big tech goes down 10 to 15 percent more the market bottom will be nearby this is interesting after recent events we've witnessed meta go down 26 percent in a single day which is a major signal that big tech isn't as strong as people have anticipated chamath profited significantly from this event in a previous video i detailed how chamath is going long on google and microsoft while shorting meta amazon apple and netflix this spread trade has performed incredibly well recently especially after the recent price decline in netflix and meta the bottom of the market he and it was a phrase something like when we shoot the generals and his comment was the generals are big tech when those things trade down 25 the bottom is in and i think that collectively most people think that uh we're a little bit oversold in all areas except big tech i think big tech is down 10 11 12 when you see this thing really get cracked is when those folks you know trade down another 10 or 15 percent and then i think we're kind of through most of the pain so peloton and zoom were kind of mid-tech i don't know what we call those but i would call them like mid-tech they're obviously not big tech but they're not small either mid-tech gets their asses kicked 50 to 80 percent big tech 15 but if big tech goes down 30 percent then we start really seeing a bottom and we consider netflix you'll never see that because i think big tech you have to remember is basically the index and in the last 10 or 20 years you've never seen drawdowns more than 15 to 25 you've never seen it and and when you've ever had a 15 to 25 drawdown meaning the market goes off 15 or 25 you have to remember the thing that we have also done over the last 20 years has created so much money on the sidelines always looking for a cheap buying opportunity and so the minute that these things so even you know in march of 2020 remember when we started to do this pod and it literally looked like the world was ending yeah the bottom existed for a week yep and then within a week the entire 25 loss in the stock market was wiped out and we were back to normal to make matters even worse businesses have ordered too much inventory due to supply chain issues this is frightening because if the consumer demand does not match the excess inventory coming soon there will be a massive amount of sitting inventory that problem could lead to and exacerbate a recession chamath recently spoke with a supply chain expert named ryan peterson on the all-in podcast peterson who is the ceo of flexport detailed how he believes that businesses may have ordered too much inventory chemoth agreed with the statement and pointed to an upcoming recession as a potential risk you're bringing up a really important effect of all of this which is what happens now in six or nine months to your point when the consumption of hard physical assets turns towards the consumption of services which it typically does right if you revert back to the mean here you know people aren't going to be buying as many pelotons and all of that stuff because they bought them all right they bought all the physical goods they need and to your point these companies have over ordered all this inventory actually peloton is a perfect example because they basically shut down their entire supply chain last at the end of this past quarter and essentially said our inventory turns will be more than enough to meet you know existing demand for the foreseeable future that's an enormous capital problem that these companies now all of a sudden will face right so like the next step beyond all of the supply chain issues could be um and i think saks has been talking about this a lot like a a pretty bad recession if these companies have all this inventory and they don't know how to get working capital the interesting part of this market downturn is that a large percentage of the crash is instigated from people hedging their portfolios almost all top tier fund managers are hedging their portfolio in some shape or form the initiation of these hedges is likely negatively impacting the market for instance buffett is hedging his portfolio with cash while kathy wood bill lackman and chamoth are hedging with short positions these hedges have a considerable impact on the market and could be the driver for the current correction chamath mentioned how this is the most hedging activity that he's ever seen since the 2008 recession we have had more activity and hedging than in any other period in recent memory except the great financial crisis just to set the tone of where we are in terms of volatility in the capital markets mutual funds who don't short stocks right the multi-trillion dollar mutual fund complex whose only job is to buy has been a net seller hasn't even started buying a single thing yet like chamath mentioned even if the market crashes further it likely won't last long because there's simply too much cash on the sidelines like i mentioned before in the 2018 market correction the market only fell by around 17 percent nobody knows how large the crash will be but it could be as small as the 2018 correction for the past two to three months i've been talking about a market crash on this channel because frankly i was not bullish on the market that being said now that prices are correcting the dust is settling down and rate increases are being priced in because market prices are forward-looking and i no longer believe i have an advantageous and or unique perspective i will likely begin dollar cost averaging into the market i believe the inflection point for the market will occur when inflation cools down and therefore rate increases will pause if not revert downwards nevertheless it is impossible to pin down when that exact point is extrinsic factors could also occur like a global economic slowdown from china if that happens i will simply dollar cost average more aggressively let me know what you think in the comment section down below do you agree with chamath i'm interested in having a collaborative discussion with everyone if you enjoyed this video please hit the like button and subscribe and i'll see you in the next one
2022-02-07 22:55
