 Good day, fellow investors. Welcome to the stock market news with a fundamental twist and today's long-term perspective will be on what's going on with the Fed being bullish, being very positive about the economy and the likelihood that there will be higher interest rates and that dance will probably negatively affect stocks and we have already seen what has happened on Wednesday. On Wednesday, the Fed released its minutes from its past meeting and as the minutes were released and as it was clear that the Fed is very positive on the economy, on inflation and has adjusted expectations higher about the economy, stocks went into sell-off mode. And now the questions are will the positive expectations about the economy push interest rates higher and therefore expected returns lower from a risk-adjusted perspective? Secondly, will the Fed be able to balance the economy, growing economy, higher inflation and keep everything stable so that the economy continues to grow at moderate rate? They have never in history been able to do that. We have never seen a soft landing in any economy in the world. So the question is always will they be able to do that now? Then secondly, if they increase interest rates three times in 2018 and another two times in 2019, they have an interest rate of 2.5%. The 10-year treasury will be at 4% then is it logical then stocks have again an earnings yield of 4% or stock earnings will grow 50% thus 23% a year to reach a higher level of returns of let's say 6%. With higher interest rates higher debt costs with higher wages I find it highly unlikely. Let's see what the Fed has said. The key is that they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that the labor market conditions would strengthen further. So the Fed if they see an overheating economy things getting too fast inflation rising spiking up prices that's not good for long-term stability and they will be forced to increase interest rates which then leads to lower valuations of other assets because low interest rates have led to this situation of high valuations in the stock market. Let me give you an example. The SAP 500 has currently a price to earnings ratio of 25.23 which implies an earnings yield of 4%. Now if the 10-year treasury gets to 4% then you would be smarter to invest in a treasury which is risk-free than to invest in stocks which carry significant risk therefore stocks always require a risk premium so if the treasury goes to 4% in the next two years don't just look at what's going on the market takes a lot of time to adapt to what's going on. If the treasury goes to 4% let's say and that's an optimistic view stocks go to 6% then either SAP 500 earnings of 107 grow 50% in the next two years or the SAP 500 drops to a price-to-earnings ratio of 16 which would imply a 6% earnings yield thus an SAP 500 value of 1782 points or a 35% decline from stocks. Here you can see how the US treasury yield is now among the highest in the world which on the other hand makes it difficult also for companies to compete because how can you compete if your interest rate is 4% and in Germany it is negative. Also countries everything is different and it's an unfair advantage and this will or put pressure on the US economy which is again a bad thing or force Europe Germany and other countries to increase interest rates and then we will see the dense also happen in Europe with European stocks. However there is something very important which is the case now and there is a historical mean which everything tends to revert in the longer term as I always say this is the long-term stock market news. If we look at the percentage of corporate profits in relation to GDP it was usually 6%. Now it is closer to 8%. This means that the biggest pie of GDP of profits doesn't go to people that work but to corporations. The current tax reform will further aid corporations and not wages and now some hedge fund managers have already started to look what will happen in the next two years. If you want to be successful in the stock market beat the stock market you have to look not at what will happen in the next few quarters but you have to see what will happen in the next two years and this divergence between wages and corporate profits and might be the perfect political game for the next elections where somebody turns it around and says okay we need higher corporate taxes so that the workers get more money and people are already positioning themselves for such a scenario where corporate profits go down to 6%, 5% of GDP not 8% and that could again turn around everything in relation to current valuations in the stock market. So there is a multiple of risks that can influence and affect stocks. Be careful. As you can see here in the 1980s corporate profits were just 3-4% of GDP now the last 10-15 years without the dip 2009 they are 8-9%, 10% of GDP however the average is around 6%. Usually after they are high they drop down so corporate profits in relation to GDP are volatile. Something very interesting that I also want to discuss is the savings rate. If we look at the savings rate as a percentage of disposable income we can see that it's extremely low as it was the case in 2007 when the economy is doing good everybody has a job everybody is feeling very wealthy because their stocks appreciate real estate appreciate and then you need you don't feel the need to save however that could really be detrimental in future growth. Similar situation in Europe savings rate in Europe is very very low everybody is spending everybody is high everybody is happy taking on loans with low interest rates and you can see here that the higher is the household net worth from Goldman the lower is the savings rate because everybody feels wealthy however when that wealth is just paper money from higher house prices or higher stocks it becomes risky. Further there is this Mnuchin of however I say that he thinks that even if the policies are very loose very stimulative for the economy it it will raise wages without inflation I wonder how that will be possible. Now how to invest two three years ago also this sum over interest rates were very low I thought okay if interest rates are going higher but everybody has so much debt then it is smart to take debt because the government will protect those who have debt because if those go bankrupt then the whole economy crashes and the whole debt economy goes I don't know where so probably there is a high probability that those who have debt will be protected because everybody has debt and the debt pile is growing everywhere in the world. So if you take that to invest in assets then you have an asset that will appreciate in relation to inflation and you have the government who will be protecting you not the savers the government has a lot of debt so it won't go on the savers side it will go to the debt side so that's one way of investing. Now in taking debt now and investing is a little bit risky because if we just take a look at house prices for example in Canada here we see that they have really spiked in Vancouver Toronto Canada the average but Montreal not yet perhaps that's interesting to invest I don't know. Nevertheless if you invest now you're really buying at the top of the bubble so what's interesting how to take advantage of that is to put yourself in a position that you can take debt when those prices crash so you say SAP 500-1500 points one third I take a loan and with that you can hedge yourself 1000 points I take the second part of the loan 700 points I take the third part of the loan to buy stocks assets at really cheap prices so perhaps not just taking that now to investing but just thinking of that as a long-term investment hedge if stock market crashes oh I have more liquidity where I can pull from and invest and take advantage of cheap prices if the stock market crashes something that I want to discuss is reflexivity which means that participants actions have an effect on financial markets and here is an interesting story about the bitcoin we see a lot of technical analysis talking about the bitcoin however if everybody looks at this technical analysis then it is bound to have an effect on the prices and therefore people think oh look technical analysis works everybody's technical on the bitcoin yes then technical analysis will work so think of that reflexivity when investing in such financial instruments trading such instruments technical analysis might even work if the majority is using it if the majority is not using it it won't work because they are using something else so just to have remind you of reflexivity there is a video about reflexivity on tesla how it works george soros used it to trade stanley drackel mirror also that I made the video so it's interesting how what you might expect to happen if the majority expects it it will probably happen the same story goes on with the bitcoin if the majority expects it to go to 20 000 it will go to have a support at some level oh it can't go below that so let's start buying at 10 000 then it will rebound at 10 000 and that's how the markets work because they reflect the participants perspective on what's going on I want to finish with a gift to my notification squad I know there are people who take a break from their job to watch my videos so if you comment below which stock you would like me to research I promise you that the first 20 comments with stock tickers stock names I will go in the next video through that stock to see a little bit what I think what's the risk reward and perhaps maybe I can help maybe you just get my opinion so that's my gift to the notification squad there will be more of them so subscribe click that button click click that bell to be notified when a new video is out there have been also very interesting videos this week so please check them if you haven't I really think they are the core of what I'm doing on this channel so feel free to rewatch them this weekend thank you for watching see you in the next video