 Hi guys, Eddie here. Happy Saturday. Today we're going to be discussing the real reasons for the stock market rally. And this is as a response of me getting loads of questions. The economy is meant to be in such a bad shape as a result of the coronavirus. We're seeing huge amounts of riots in the streets. Obviously this worldwide pandemic that shut down every major global economy in the world. Millions are unemployed and yet markets are approaching the highest levels ever. With the Nasdaq making all-time highs. When the stock market is booming, we're meant to think the economy is booming. But what is the stock market measuring? If the economy is in such a bad shape, does this stock market really reflect reality when the world is up in flames? So today we're going to be discussing some of the economic indicators. But also the real reason at the end of the video why I believe that stock markets are rallying at a time of unprecedented, my favourite word, economic crises and civil unrest is destroying the streets of America. We're seeing it in London. Why is the market so bullish about the future prospects and why have we seen such a rapid recovery in markets? And actually not the economy. So to put it into perspective, as you can see by this chart, this is the US GDP and this shrank by 5% in the first quarter of 2020. And this is the biggest drop in GDP since the last quarter of 2008. As basically the coronavirus obviously forced several states to impose lockdowns in mid-March. And this obviously led to mass unemployment in the United States. So what is GDP? It's a key economic indicator of activity. And this is the Atlanta Fed GDP now basically model. And this is measuring obviously the total output of the economy as a result of traditional economic theory. And this is now suggesting that we're going to see negative 53.8% annualized GDP. So this is obviously a horrendous figure and obviously there's talks of whether you should annualize a figure. Just because if we are pricing in that V shape recovery in the economy, then we're unlikely to see a number this bad. But this is what a federal model from the Fed of Atlanta is actually suggesting, which is obviously diabolical. Obviously we saw the jobs report, which was a complete surprise. So we saw 25 million jobs created in America in May. And the forecast was for a loss of minus 7 million by most Wall Street economists and those predicting the figure. But really obviously Trump came out. It's like jobs, jobs, jobs, you know, I'm the best, the stock market's rallying, the job situation's amazing. We created 25 million jobs in the economy in light of this pandemic and everything else going on. But this chart really suggests the reality of it. And millions of people are still out of work. And just because we, you know, lost, we made, sorry, created 25 million jobs in the month of May. This does not, this is not representative of the real damage of the economy. And this, this chart suggests this more than 40 million people have filed for unemployment benefits as a result of this. And as we can see over a longer time frame, average hourly wages, you know, have really not kept up with inflation and they've really done nothing. So they actually, the average person is not benefiting from, you know, their wages going up. And then if you overlaid the stock market to this, you know, there would be a huge disparity between what the average person is really making in terms of their net worth, their wages and things like that. And actually how the stock market has just been booming. So the kind of upward figure you see in the chart, and this is really, you know, the quite worrying, quite sad thing about this chart is you think, oh, wow, you know, wages are going up incredibly just recently. But what this is actually is, is removing the lowest paid jobs from the economy as a result of the coronavirus. So I think retail, leisure, you know, the casinos, hotels, all those, you know, really, I don't want to say unskilled labor, but those that, you know, maybe do not require a university degree have actually been removed from this figure. So then you see the average hourly wage go up dramatically. So this obviously is showing that the people that actually suffered the most from the coronavirus, you know, they're not the, the tech developers at Amazon, you know, they're not the CFOs, these are the people that are earning minimum wage, or something like that. They were unable to work, you know, fueling this kind of bad feeling of raising and rising inequality in America. But the Dow has surged since the March recovery. And obviously this is feeding equity holders. The unemployment rate, 14.7 was reading in April and May was 13.3. You know, and while people may be celebrating and in light of all these riots in response to George Floyd's murder by the policemen. People are celebrating this, but actually the racial disparities remain. Black unemployment has remained virtually unchanged. And this is actually increased in May while the unemployment figure went down 19.6 million jobs are still gone. Obviously 2.5 million jobs coming back. That's not insignificant. But March and April saw 1.4 million and 20.7 million decreases in employment retrospectively. So that means that 19.6 million have still not come back into work. Hospitality and leisure jobs gained 1.2 million, but there's still a 35% jobless rate. And the unemployment rate, whatever you think about that figure that came out, creating 25 million jobs took so many people by surprise. You know, there's something fishy going on there, whatever it is. And the unemployment rate is, in my opinion, definitely higher than it appears. Jobless claims probably are understating the true level of job losses. They don't include pandemic unemployment assistance, and they don't include the mass numbers of workers that were forced to retire. And the African American economic gap remains despite the US expansion. And this is the kind of argument is how can senators in America who have a median net worth of around 1.76 million empathize with the struggles of everyday people that have a median net worth of 97 million. And this is a net worth figure, not a salary. Okay, so this is what, you know, the total assets of people are. So how is it even possible for them to basically suggest and kind of empathize with people if their income and their net worth is so much higher? So how can you make money in the stock market? So this is flipping from the economics to the stock market. So you can make money by investing in an equity either by capital appreciation or dividends. So dividends are essentially this fixed income stream that gets paid out by companies to equity holders. And this may attract more equity investors into this company than thus fueling even more capital appreciation. So what is this capital appreciation? It's essentially when a stock market, when a stock price goes up, the stock market goes up. This is the prospect of the business growing, generating more earnings and the share price increasing. So perhaps you can sell this stock to another buyer at a higher price. And this is why private companies go public for this more, you know, this greater access to capital. And companies realize this, you know, in 1940s or 50s that you can grow a lot faster with outside investments. And this is why these companies have started to go up, go public, sorry. And this is what we're seeing now is software companies surpassing expectations in terms of their IPOs and things like that. And this really is a beauty contest. So what's the difference between exchanges and indices that you may ask from a stock market, you know, London Stock Exchange, New York Stock Exchange. The stock index is a gauge essentially to read the whole market of a sector. The stock exchange is where you buy and sell stocks, bonds and other securities that are listed on various exchanges. So what are these indices? These are a collection of different share prices weighted by price, market cap or equally weighted. And what does a stock market really do? It encourages people to invest in new ideas, right, but potentially risky ones like Zoom, Google, Apple, Facebook and Amazon. So this is the problem. So the stock market was originally meant to create wealth for average investors. But really what we see is, you know, huge institutional investors and high net worth individuals holding these equities and obviously really benefiting from the price appreciation, whereas average people do not have access to these equities. Of course they have access, but whether they have the means to buy into it is another story. So in terms of the stock market and why we've seen this rally, 20% of these indices is weighted with the tech names and growth stocks and the lowest skilled labor. They don't get a look in. So without the kind of investment in the poorest neighborhoods, encouraging equality in the boardrooms, all of this prosperity is concentrated with the skilled labor. So the people either working for the company or the high net worth individuals or institutional investors that can own these types of equities. So this rebound has really been driven by, you all know the names Apple, Facebook, Microsoft, Amazon, and they've been able to grow even when the economy doesn't grow. And when the economy does grow, they grow even faster. So Netflix and Amazon are people that have actually benefited from this pandemic when people are locked in, they buy more, they stream more. And the reason we're seeing these stock markets rise, one of the reasons is that tech giants make up such a high proportion of the stock market indices that they tend to have an outsized effect on the broader market. The stock market a glorified beauty contest. So this is something put to them, you know, the economic theory of John Maynard Cain saying, you know, you shouldn't. This is from newspapers where they used to literally say vote for, you know, whoever you think is the most beautiful or pretty. And then they would put collect all the results and that's very different from saying, you know, who do you think everyone else thinks is very pretty or beautiful. Right. And really, that's a good reflection of the stock market. It's not about what company you think the best is the best from a value or a fundamental perspective. It's what do you think other people are going to invest in. So you think of names like zoom, Amazon, you know that other people are looking at these names. More recently, we've seen them bidding up of, you know, really trouble names like Hertz Carnival cruise liners think people like that that are now up 100% 200% obviously from very depressed levels. Originally, but people are piling into these talking about kind of retail investors because they know other people will be buying these types of things. Another reason is the, you know, the thirst for yield. And obviously this is the MSCI world indexing showing that the stock market is recovered dramatically from that March 23 bottom and equities in this are denoted by the MSCI world. And they're trading around 20 times forward earnings, about 30% higher than their historical average. And in the US, obviously, this is from last week's video 24 times it's now around 25.5 26 times with Amazon, Google, Facebook, Microsoft leading the charge. So we've seen these work from home trends dominate obviously that we talked about, but global bond yields are trading around 350 bits 3.5% below their historical average. So the demand for credit funds also reveals this kind of hunger for yield among investors with short term interest rates falling to around zero. So basically the spread that you can get between inequities. So the return, the yield, but inequities versus bonds is much wider than usual. So if we look at the three month performance, for example, treasuries are up 2.3%. Amazon is up 30%. And this is one of the reasons we're seeing a big disconnect between markets and the economy. And lots of people like to include in myself and this was obviously the case. Blame the Fed. So it's nearly doubled its treasury holdings. Since July now to 4.13 trillion. The kind of balance sheet is nearly at 7.5 trillion, which is a huge amount. There's been record issuance in the corporate credit markets because they know they've got the Fed to backstop that. So if you're set if you have anything sell seems like the Fed is going to buy. And I got really interesting quote from Jay Powell from October 23 2012. I think we are actually at the point of encouraging risk taking investors really do understand now that we will be there to prevent any serious losses. So during Powell said it himself in 2012, he was encouraging risk taking and now he's obviously the chair of the Fed. He's now encouraging this moral hazard where we've got these zombie companies that just want to should be bankrupt. And now people are taking speculative bets because you know the Fed are there and investors are ignoring this near term economic, you know, turmoil and opt optimistically looking forward to an expected recovery and any wobble in that you'll see the Fed and any central banks around the world are willing to backstop this and growth versus value is a theory and growth has outperformed value since the global financial crisis. What are these growth and value are two fundamental approaches in styles or stocks where Invest growth is where investors essentially seek companies that offer strong earnings growth momentum, while value kind of investors seek stocks that appear to be undervalued and growth stocks have significantly according to this chart outperformed value stocks over the last decade, and this is changing in the short term more recently we've seen cyclicals like airlines casinos cruise liners banks, really outperforming over the last week or two weeks or so, as this kind of rotation flipped from those kind of growth names. But this could be short term. And I definitely think that the growth kind of beauty stock story will return with the with the vengeance record number of stocks are trading above their daily moving average. What, you know, with record levels of low downside protection, so what could possibly go wrong. Earnings are awful, but that's okay. And if you actually remember the 2000.com bubble, you know, they were tech companies and internet companies were almost encouraged not to try and make a profit or turn a profit. Why because they should be reinvesting those earnings into growing so they could generate them in the future. And if you're an investor, depending on your time horizon you didn't care because the capital appreciation of that stock would go up right and it would increase despite if they're generating earnings and this is kind of eerily similar to what we're seeing here valuations like we talked about have reached a higher since 2000 the dot com bubble, but hedge funds are getting ready for another slump in stock markets, and they're kind of a bit uneasy about this surging prices and it does not reflecting the economic problems ahead and some managers are fearing the equity investors used to buying the dips that ended in the March sharp sell off and you think about how, you know, how vicious that sell off was, you know, I think we're going to see this again, in terms of the steepness of the velocity of that sell off if we do see it. You know, in the future. And, you know, many have become so complacent about how quickly we can recover from this Coronavirus, you know, and how effective these stimulus packages actually will be like we saw with the stimulus checks saving rates went up but consumer expenditure didn't increase but that was the intended measure of the stimulus packages. So they're kind of doubting this kind of stimulus and whether this can be, you know, maintained investors are also very greedy the put cold cool ratio and measurement that's widely used by investors to gauge the overall mood of the market. This is essentially heading back to 0.5 so falling put cool ratio is bullish below 0.7 or approaching 0.5 is considered a bullish indicator. It means more calls are being bought sorry versus puts. Investors are also pumping record numbers 22.5 billion into US bond funds, shifting out of their money market accounts to riskier, more higher paying investments and flows are moving and migrating towards areas of fed support, hence a demand for investment grade and high yield credit. And the yield of the Barclays US corporate IG index has returned to pre pandemic levels of just under 2.5% from a March high of 4.5% last month. Investors have also plowed 4.3 billion into Black Rock's LQD corporate bond fund, which is now inevitably too big to fail so more investors are getting greedy and reaching for this higher yield. So where are the funds putting their money? They're putting money where the flow is going. They're going into money markets year to date, but this trend is starting to shift according to the kind of indicators that we look at if we build this holistic picture. Remember this chart from last week? Where is the smart money flowing? They're selling S&P, they're selling stocks and they're buying gold, so what are they scared of? And this is really the crux of the video. Why are stock markets rallying? It is that they are scared of inflation. So what is driving this market? It's fear. If you have a lot of cash, what happens to your money? If you have money in cash and there's assets, if let's say the stock market or real estate goes up, if you're holding cash, your money is now worth less. And when we're in this kind of irrational trend, people start to follow the crowds when they're scared. They don't care about fundamental valuations. They're chasing these growth earnings momentum stocks just so they don't essentially their money doesn't become worthless. So with all this QE money printing, money literally being created out of thin air being printed digitally, how do you preserve your capital? If you know before you would hold it in cash, you buy assets, right? And this is the stock market like real estate and stocks. But this is why you're seeing the so-called quote unquote smart money buying tips and gold. They are hugely scared of inflation as a result of all of this quantitative easing. It's almost at the point of if Amazon was trading at 5,000, would you care? Maybe not. If NASDAQ was at 10,000, would you care? Maybe not. So this is what people are really scared of. And when the bubble bursts, you can make your own mind up where we are in this kind of stages of a bubble. We could be in this kind of bull trap where really the economic reality and stock markets are completely disconnected. And we're just seeing huge greed taking over. And this is really the reasons why the stock market is rallying in my opinion. So I hope you enjoyed the video and gave you some things to think about. Please leave your comments down below, like and subscribe this video and to the channel. And if you like this kind of longer style, definitely leave your comments down below. Thank you. Have a good weekend and take care.