Name: The Next Market Crash - How Bad Will it Get?!
Uploaded: 2021-03-25T19:50:12.000Z
Duration: 9 min 54 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

The imperative

If you missed the financial news recently, let  me summarize everything that has happened in  

Future simple

the last few weeks to find out if the market  will keep crashing or it will finally recover. 

Back at the end of February, when it  seemed like the market won't crash further,  

it kept falling! And right now, everyone  is confused about whether they should  

buy or wait till it keeps dipping more. Personally, I would love for it to keep falling,  

but it seems like it won't because the fed got  out on the 17th of March and clarified everything.

We will talk about what the  fed said. What does that mean?  

And How is it going to impact the stock market?

One of the metrics investors use  to value companies is discounted  

Cashflow. It can help us to understand  where the market is overall headed to. 

Without getting into a lot of details, I will  explain what Discounted Cashflow is? How is  

that related to what the federal reserve  said? And will there be another crash?

Interest rates aren't just important because they  make borrowing money cheap or expensive today  

but also because they influence  the value of future cash flow,  

which is what investors are concerned about the  most. You don't care about how much the company  

is earning today or how much it has been  earning in the past. What matters at the  

end of the day is how much the company is  going to earn in the future. Based on that,  

you will decide whether you should  invest in this or company or not.

Stocks always compete with other  type of investments such as  

bonds, cash, fixed deposits, whatever. Let's say you have a thousand dollars  

in your pocket. Is it better to  invest in the stock market? Bond  

market? Or just keep it in your wallet? Obviously, investing is way better. Let's  

say interest rates are 5 percent. So if you invest  it in government bonds, your 1K dollars will worth  

1005 dollars next year. So it's important  to look at the time value of money.  

The sooner you have the cash on your  hands, the more it worth because,  

the sooner you will invest it, a dollar  today is worth more than a dollar tomorrow. 

SO if the company is going to earn a  billion-dollar five years from now.  

It's not going to be billions because a  billion dollars 5 years from now worth  

less than a billion dollars worth today because  you could invest it and get 5 percent at least.

So it's not enough to look at  the company's future Cashflow. 

"Oh, this is how much the company  is going to earn in the next  

3, 5, or 10 years." But you  have to find the present value  

of that future cash flow. How much that  billion dollars 5 years from now worth today. 

It sounds a bit complicated, but I  will try my best to simply everything. 

You can use this metric in the  future to value other companies.

Of course, no one knows how much any company would  earn in the future. It's all predictions, but  

these predictions are based on multiple factors  such as how the company is performing today,  

where is it investing? What is their strategy?  How is the business environment? What are the  

chances that the company will hit its annual  objectives? What is the political climate? 

There are a lot of analysts who  prepare a certain type of prediction.

Let's say hypothetically there is a company called  Amazon, and it's expected that it will generate  

100K dollars every year for the next three years. On the other side, interest rates are 5  

percent, and they are expected to  stay there for the next three years.

At that rate, a 100K dollar next year would  worth $95,238. I got that number by dividing  

the future cash flow, which is 100K dollars by  (1+0.05)1 because the formula is CF/(1+r)year. 

If we apply the same formula in the second and  third year, these are numbers we are going.

The company's future cash flow isn't 300K  dollars as it seemed at first glance but  

$272,323 dollars or the  sum of these three numbers.

I told you it's not as complicated as it seems.

Here is when the interesting part starts,  what happens if interest rates are lower?  

What happens if the fed lowers interest rates  to one percent? How will that impact the  

projected future cash flow? Let's do the math

First-year - instead of $95,238,  it's going to be $99,009. 

When fed lowers interest rates, suddenly on paper,  these companies are going to make more money even  

though nothing absolutely changed for them. Let's do the second year and the third.

The Second-year will be $98,029 and the third -  $97,059, which makes it a total sum of $294,097,  

which is higher than the previous $272,323. 

Remember, the most important thing that  investors care about is how much the company  

is going to earn in the future. That's why  whenever the fed lowers interest rates,  

stocks become much more attractive even  if they are not going to borrow money.

This metric is even more important when  it comes to tech stocks because most tech  

companies are betting on making huge  profits in the future, such as Tesla.  

It's a great company, but it's barely profitable.  But the idea behind it is that, in the future,  

it's going to be super profitable. It's going  to make a lot of money, but a dollar today worth  

more than tomorrow, so when the fed lowers  interest rates, tech stocks jump through the roof.

So since the end of February, when  the stock market started falling,  

everyone thought that's just a one-day thing.  Honestly, I jumped in and bought some shares.  

I wasn't expecting that it could get worse. I  mean, theoretically, it could, but if it doesn't,  

I will miss the opportunity, but the  market kept falling and falling. Of course,  

I bought more stocks, and on the 17th of March,  the federal reserve said that - listen, guys,  

we understand that the economy hasn't  recovered yet, some business, of course,  

are doing better than they did last year,  but we feel like, in the next few years,  

we will keep interest rates low. What do you think LOW means? 

0 to 0.25 percent at best. You can't get  lower than that unless you go negative,  

which already happened in some countries. Anyways,  it's a clear message from the fed that, this year,  

we will keep the rates low, which means the  market will most probably keep rising. Of course,  

that's gonna cause inflation, but the fed said:  “we know that, but that's not a problem now.”

Imagine what message does  that sends to investors -

Because it's going to be worth a lot  less! This means there will be more  

money thrown into the stock market,  which means stocks will keep rising.

So based on current circumstances, it's difficult  to believe that there is going to be some kind of  

a major crash in the coming future, at least till  the end of the year. Another correction, maybe?! 

I don't know, but corrections happen from  time to time, so I wouldn't be surprised  

to see a few of them throughout the year.  Especially if you are dollar-cost averaging,  

these dips are the perfect time to buy. If the market is heading higher and higher,  

buying when there is a dip is a perfect option. By the way, I am not a financial adviser,  

and everything I said in this video is  for educational or entertainment purposes  

and nothing more. So do not base your financial  decisions on what random people say on YouTube.

Low-interest rates also mean that companies will  keep borrowing money. When interest rates are at  

almost 0 percent. Any money you borrow is free.  Even if you do not need that money, you will  

still turn a profit if you borrow it and invest  it elsewhere. It makes sense to borrow as much  

as possible at 0.25 percent for example, so any  return you make above 0.25 percent is considered  

to be a profit so when the fed is planning to  keep the rates at such a low rate until 2023,  

its extremely difficult to imagine that  there could be a crash or anything like that. 

Of course, we don't know for sure  whether interest rates will stay that low  

for another 2 years, anything could  change, but only time will tell.

What really worries me is higher bond rates.  Bonds have an inverse relationship with the  

Subtitles ListPlay Video

The Next Market Crash - How Bad Will it Get?!

strategy

average

impact

expect