 Good day, fellow investors. Dr. Michael Burry, famous from the movie The Big Short, the guy that predicted the mortgage crisis, maybe a lot of money on it, is out with a new prediction comparing the current index fund investment bubble with the 2007-2000 mortgage collateralized debt obligation bubble. He sees the same forces going on and he sees the same ending. So we are in for an index fund meltdown. When it will happen, he doesn't know, but in this video I want to explain what is he saying, what did he say in this Bloomberg interview. I want to give you the details, so the fundamentals, the facts, so that you can make your own decision about what to do and how to invest for your long-term financial benefits in this environment where there is a big risk of a complete stock market index fund crash. Let's start. By going through Dr. Burry's comments, we are going to explain the flood of money going into index funds and ETFs, the passing investing vehicles, the absence of price discovery, liquidity risk and how this can end badly and what you can do about it. I'll give you some simple solutions. Lifelong investing is about common sense after all and I'll give solutions both for the passive investor and the aggressive investor. So let's see Dr. Burry's comments to quote him. The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system. Burry, who made a fortune betting against CDOs before the crisis, said index funds inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some point and it will be ugly. Like most bubbles, the longer it goes on, the worse the crash will be. And what we have to understand is the flow or how he calls it the flood of money. Whenever money goes into just one thing, it creates a bubble and we all know how bubbles end, bubbles end badly. Let me explain the facts, the fundamentals between this flood of money going into index funds. Index funds are a new creation, have been around for just 40-50 years and what you will see now is staggering. Just take a look at Vanguard's assets under management. You have Street Capital Advisor, BlackRock, so you have a lot of these low-cost index firms. Assets under management in the 1990s were just 55 billion, now those are at 5 trillion. So what's that? A hundred times increase. That's huge and all of those assets are piled without thinking into certain asset classes. If we look at something even more important, let's look at the annual total flows for equity and fixed income passive investment vehicles from Bloomberg. You can see that in the past 18 years there hasn't been any negative flow of money. So if for 18 years money keeps flowing in, in, in, in, in and 18 times in, it means that simply there is no price discovery, there no, nothing matters. It's just automatically piled into these vehicles and these vehicles consequently push the relevant asset prices higher and higher, which creates a bubble. We've seen the Vanguard chart, it's staggering. We see the flows of funds, it's again staggering. And all these funds for the past 30 years went mostly into U.S. equities and bonds. We can see that all those passive income funds go into U.S. securities and the rest of the world is a little bit, let's say, on the sides. So this is the bubble, United States of America passive investing because Nobel prices said it's the best investment because of course we are a herd, we behave like a herd. We always look for confirmation before we do something from the herd and now that the SAP 500 is at 3,000 points, now it is the best investment. It wasn't a good investment when it was at 660.66 I think in the deaths of the 2009 crisis. And if you look at the flows, those flows were very low around 2009, now those are higher, higher and higher. Now that the SAP 500 has tripled or even quadrupled, now the flows rush into this and the more money goes into this, the bigger is the bubble and the harder will be the crash. Why is money going into index funds? Well, Dr. Burry says that capital flows based on Nobel approved models of risk that proved untrue. Here he comes back to the efficient market theory that whatever the price on the market is, it's the right price because the market implements all information and supply and demand gives the right price. Due to the inflow of money, simply blindly buying index funds without thinking what you are buying, this price keeps going, going up, up and up and it starts to become irrational as in any bubble. High prices, irrational prices not based on fundamentals or any opinion or thinking creates bubbles, irrationality. Irrationality destroys the Nobel Prize models on efficient market theory and you have something that goes all over on, on and on with human history, especially thanks to now lower interest rate and free money. So we have these index funds that are perfectly structured. So this structured asset play in the same story again and again. So easy to sell. It's easy to sell an index fund low cost. It had done extremely well over the past 35 years since inception of these index funds. Everybody is happy that owned index funds. Therefore, it's really easy to sell them. More money comes in. Thus, it's a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexes, passive products, but they are not fools. They make up for it in scale and we have seen what Vanguard did. So they are promoting it no matter what the price is. They make it up in scale. They have lowered fees but they have 100 times the scale they had 30 years ago. Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy-sell strategies used to help so many of these funds pseudo match flows and prices each and every day. So these ETFs match the price of the underlying security but using derivatives and naked buy-sell strategies. Naked means unprotected. If the flow turns, it gets ugly. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don't know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be. Nobody cares about price. When things are going well and more and more money is piling in, interest rates, everybody pushes them for interest rates to be low. Trump is urging for lower interest rates. DCB is lowering them. But those lower interest rates make everybody party, everybody happy and that's good until things go well. There is a great cartoon from Carl Eichen from a few years ago that the low interest rate party bus, the index fund bubble, makes everybody feel good but it's going to crash not on Vanguard, also on Vanguard but on a big black rock. So at some point the thing is that when those funds revert their flows, the exit door will be minimal. With so much money in the system, nobody cares about price. So before explaining what happens when these funds of flows revert and people start selling, the exit door is small, let's discuss price discovery. What does it mean to buy something based on price? And this is the difference between the passive investor and the active thinking, common sense investor. I don't know how to say it differently. If you think, you look at price, you're asking yourself, okay, what am I buying? 98% of passive investors or all passive investors don't care what they are buying, what's the price of it in relation to the value, just I buy it because that's what the noble prices say and it will end ugly for them because whenever you have someone that's not thinking, you know how that ends. So about price discovery, over the last 45 years we have practically been living in just one part of the normal cycle, part where interest rates go down, down and down, interest rates going down, free money, more money, money printing, we've seen again, ECB printing, printing, printing and everybody feels well until things change. So central banks and Basel free have more or less removed price discovery from credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from equity markets, the simple thesis and the models that get people into sector factors, indexes or ETFs and mutual funds mimicking those strategies. These do not require the security level analysis that is required for Q through price discovery. Let me show you what we are buying. What is price discovery? This is the SAP 500 earnings yield. When you invest in something over the long term, if you're an investor, if you buy businesses, your long-term investment return will be perfectly correlated with the underlying earnings of the business. So if the business does well, your investment will do well. But the underlying earnings of a business is what nobody cares about now. If we go back to this yield, everybody says yes, index funds did 11% over the last 35 years. They destroyed everything else every other asset class. Correct. Earnings yield of the SAP 500 in the 1980s from where when everybody's measuring it was 14%. So everybody that invested in index funds in 1980 should have reached 14% return. They didn't. They reached 11%. Okay, maybe with a little bit of dividends, a little bit higher. But now earnings, the earnings yield is just 4%. So nobody can tell me that it is the same mechanics, the same efficiency behind those markets. Those that invest now might hope for 4%. Those that invested in the 1980s got 15%. And that's the price discovery difference. If we look at risk, this from a Pabrai presentation, over the last 45 years, we had 17 years of 15% for the DAO, then the last 10 years and at 10, 11% just a pause of 12 years from the dotcom bubble. But look at what happened in history after such spikes. You have 22 years of zero returns, 25 years of zero returns, 17 years of zero returns. So it's likely nominal or real returns. That's also a big difference that I discussed in other videos. But it's likely that over the next 20 years, index fund investors, especially SAP 500 US equities investors will see negative real returns that's a given and perhaps zero nominal returns. That's already something very, very ugly. If you're betting on your mortgage, on your retirement by investing in index funds and those return zero over 20 years, you have done nothing. You have lost a lot of money. And therefore, I urge people to start thinking to just think about price discovery in their own portfolios. Just look, okay, what am I buying? What's the return? And I'll discuss that better later in the simple investing strategy that I have for everybody. So back to the earnings yield. This will explain everything. If you invest now in the SAP 500, you will have four to five percent, hopefully over 30 years. But it can be also 50%, 40%, 30% down investment over the next 20, 10, 20 years. That's the risk reward. I prefer buying businesses where I don't care about the price. I care about the business returns, the earnings yield. If I can find businesses with an earnings yield of 10, 15, 20%, I don't really care about that short-term volatility. I know that the 15% from the earnings yield is what will give me my return. So I focused on price discovery, index funds push up US equities. So if you look elsewhere, you make money and you can find those gems. I urge people to, okay, diversify everybody's long SAP 500 index funds through your 401k, through pension funds, through your parents pension fund, through whatever. You're already long that the government economics. So let's start looking at other things. That's my message. Look at other things. If you want to see whatever I do, if you want to have me working for you for less than $1 a day, then simply check my stock market research platform. Let's now dig into the liquidity crisis that what's going on might create like it was the case in 2009. Just one thing before that. This is the SAP 500 earnings growth over the second quarter of 2019. It was negative. Nobody talks about that. Everybody's talking about trade wars, about growth, about index funds, investing index funds is the best thing that exists. But look at the average growth. It was negative. In an environment with prices don't matter. It's all about sentiment and sentiment can't last forever. When the sentiment turns, there will be a crisis. And this is very much like the bubble and synthetic asset backed CDOs before the great financial crisis. In that price setting, in that market was not done by fundamental security levels, but by massive capital flows based on noble approved models. To quote again, Dr. Burry, this dirty secret of passive index funds, whether open and close then or ETF is the distribution of daily dollar value traded among the securities. In the Russell 2000 index, for instance, the vast majority of stocks are lower volume, lower value traded stocks. Today, Dr. Burry counted 1049 stocks that traded less than 5 million in value during the day. That is over half and almost half of those 456 traded less than a million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The SAP is no different. The index contains the world's largest stocks, but still 266 over half traded under 150 million today. That sounds like a lot, but trillions of dollars in asset globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was, or it won't be enough for everybody to exit. All this gets worse as you get into even less liquid equity and bonds market globally. As he said, it won't end well. Let me give you an explanation of this by looking at a bond ETF. So he discussed equities, Russell, SAP 500, but I really want to give this a good explanation. If we look at the iShares, high yield corporate bond ETF, the net assets are 17 billion. Okay, you say 17 billion. There are many ETFs, index funds that invest in bonds, but I want to show you something else. At first sight, it tones a very diversified portfolio of 1000 high yield read junk bonds. The largest holding is 110 million in altis bond, while for example, Bausch health holds fifth place with 64 million. Okay, you say 18 billion 64 million on 18 billion is not much. However, when I download the complete list of 1000 holdings, sorted data by the names, I see that the ETF owns many Bausch health bonds actually tones 319 million of them. 319 million is already something on an 18 billion capitalization. And it is even more significant when compared to Bausch market cap of 8 billion. There is simply no liquidity to sell the 319 million that this ETF has. And many others have on a market cap of 8 billion. And on a capitalization of for the bonds, there is absolutely no liquidity on that market. But those derivatives naked options make the volatility make the assumption that there is liquidity. When this turns, and sometimes it will turn because somebody will yell the king is naked. Let's look at the prices. Let's look at the fundamentals. Let's look at the business yield of what I'm investing in. And then there will be trouble. It might melt up in an inflation way in might melt down in 2009 crisis way. We don't know the only thing we can do is buying businesses. So let's look at portfolio solutions, how to invest what you can do to protect yourself and end up financially. Well, nobody knows what will happen. And especially as Dr. Barry says, nobody knows when it will happen. But there is always something that you can do to be prepared to limit your risk and be exposed to the upside. I have made a little pyramid. So we have investors that are not interested in thinking passive investors ready to think about life. And those investors that are asking for more, when it comes to the passive investor, I have money, I don't want to know anything about it. How do I invest? Here I agree with Buffett, keep investing in index funds, you might find five index funds around the world and put equal amounts of money in, I don't know, emerging markets, US, Europe, Latin America, and I don't know, whatever. And the key there is that as long as you work until you are retired at 67, 65, something like that, you put amounts, fixed amounts of money in those index funds blindly. Yes, now the return is 4%. But if the index fund falls 50%, the return will be 8%. So you will be happier, you will reinvest those dividends. And on average, over the long term, 10, 20, 30 years, with all the money investment, now on the money you have now will be 4%, on the money you will invest later will be 7, 8%. You will have a good 6, 7% yearly return on all the money invested over your lifetime. That's good for those not thinking. The only thing you have to think about is that you invest when the crisis comes. If you don't invest when there is a meltdown, if you are, get scared there, or if you sell like most people do, then you're not a passive investor. So that's the first thing. Passive investors, no matter what happens, keep, keep, keep investing and you'll do well. But please make me a favor, invest when the time gets ugly. Now, the second step is investors that want to think a little bit about their finances. So you have index funds 4%. Look at your mortgage. If your mortgage is 6%, if your student debt is 7%, if your credit guard debt is 10%, if you can find some real estate, or if you're renting and you see, okay, if I buy something, my investment return from living in the property will be 4% because the rent will go up, up, up, up and up. So think about that and put just the S&P 500 index into perspective on what are the other opportunities in life. And then when it falls to 6%, okay, then rushing, don't pay, don't pay off your mortgage faster. So just balance that and you will reach even higher returns in your lifetime. You will not have four now, you will just invest at seven and seven will compound to eight, nine in the long term, and you'll do much better than the passive investor. And the third part of the pyramid is those who want more, those who want more, as I said, they are already exposed to the US investment mania, those have to invest there where others are not investing and buy businesses, businesses that yield 10%, 15%. And you have to think, okay, what is that index funds don't like commodities, for example, we know we will need more copper electrification, Tesla, everything's going to be electric less oil buying. So the technology is there over the next 10, 15 years, there will be much more demand for copper, nickel, batteries, etc. So nobody's watching that because it wasn't hot or the bubble burst in 2012. And now it's cheap. So you might want to start thinking of diversifying. As I said already, if you want me to research that if you want research reports, if you want, and that's only for the 2% population that really wants to think about investment, check my stock market research platform and see how that fits your portfolio. It's different. It's not following the crowd. It's focusing on businesses on earnings yields that gives you longer term investment returns. And I'm somehow convinced that over the very, very long term, especially from this point in time, we will destroy the market because of the index fund bubble, because of the fundamentals, because of the failed price discovery, because of the low yield 1.8% dividend yield. Those that switch now from index funds to active investing to buying businesses for the long term will do extremely well. It might be more volatile because the SAP 500 is stable until the crash comes and then it crashes hard. Short term, in that short term more volatility, but higher returns in the long term. Thank you for watching. Looking forward to your comments. Send me an email if you have any questions. Contact me on Facebook. Just message me if you have any questions. I'm happy also to reply there. Thank you for watching. Looking forward to your comments. And as I said, and I'll see you in the next videos coming, GraphTech, Rio Tinto, QDN, the copper teases, and some other comments about how to invest in gold, perhaps even what's going on in the European Union. A lot of videos coming. I'm back to work. I'm very, very productive. So I'm looking forward to sharing my thoughts with you. And don't forget to subscribe if you haven't.