 Good day, fellow investors. Last week we discussed what happened. It happened again this week, but today we're going to discuss what will happen. How low can stocks go? If you are a longer term investor it's pretty easy to make decisions related to investments, related to your financial portfolio and today I'm going to show you what to watch and then your decision-making process will be relatively easy. Should you sell stocks? Should you keep stocks? How much should you sell? How much should you keep and what to do? So keep watching. After that we're going to discuss what is Ray Dalio doing? What are JPMorgan and UBS saying about the markets? What is going on in emerging markets? Those will always be hit the hardest because those are considered more risky and then we're going to show and discuss a little bit about gold. Many of you expect that gold does well when the market falls. No, gold will do well when there is financial turmoil, which is a pretty, pretty different thing. So let's immediately start with how low will the SAP go? Last week the situation wasn't that good, 5.16% down. The worst situation was on Friday, but after lunch, after that sugar kicked in, people were buying like crazy to have a better weekend, at least a little bit better, but still down 5%. Now in the last two weeks, the SAP 500 stocks are down 10%, which is formally called the correction. But that is just short-term thinking. I want to show you the long-term perspective on stocks. And if you look from the long term, it's much easier to make decisions. However, it's very, very difficult because we humans are wired for instant gratification. And if you take the long-term view, it's counter-intuitive, but it really helps in investing. Let's take a look at the global market capitalization in the last 17 years. This is the Bloomberg's World Stock Market Capitalization. And you can see how what happened in the last two weeks practically led to global stocks being there where they were in December. So practically, if you erase the last three months, nothing happened. This reminds me of the Capuchin Monkeys, the behavior of finance test, where one monkey was given one apple, while the other monkey was given two apples, and one apple was immediately taken away from him. Of course, the first monkey was very happy. The second monkey was extremely mad, even if their total gain was equal. So don't be a Capuchin monkey and understand what's going on in the stock markets from a global long-term perspective. So if you focus on paper gains, what happened in the last three months were just paper gains. There were no fundamentals that pushed stocks high, only speculation. So this correction, how they call it, is good because it hits the speculator there where it hurts the most when you are too greedy. As always, in the stock market, the ones that are greedy don't do well. Nevertheless, we can see that the total stock market global capitalization was below 40 billion in 2003 and in 2009, and now it is around 80 billion, and it almost hit 90 billion two weeks ago. But now we have to see stocks have tripled in the last 17, or we can also say 9 years up and down. Nevertheless, we have to see if in the last 15 years the GDP, the global GDP, also tripled because stocks should replicate what's going on in the economy. The answer is yes and no. If we take global GDP in 2010, constant US dollars, the global GDP from 2002 increased 52%. So stocks went up much more than that. However, we have to understand that stocks give some protection from inflation. And if we look at not inflation adjusted GDP levels, the global GDP did indeed increase almost three times. So we can say that stocks increased alongside the global economy. So all looks fine. Well, not that fine. I will now show you the most important charts for long-term investors, which are valuations and earnings. If we take a look at the SAP 500 earnings since 2000, they are just cumulatively, not even inflation adjusted nothing, up 52% over the last 18 years. So that's a very, very slow growth rate. As stocks went up, earnings remained flat. The earnings yield, which is the key component for long-term investing returns, has been only declining and is now around 4%. And that's the key. The earnings yield for stock that determines long-term returns, up and down you can have speculation, tax bills, whatever. The earnings yield is what matters. And that yield is then compared to the treasurer's yield, the yield of bonds. Bonds are the safest investment. Stocks command the premium on bonds. If the 10-year treasury bond gives 2.83% now, and the Fed has said that it will hike interest rates three times in 2017 and then perhaps even further three times. So in two years, we can have the federal interest rates at 3%, let's say 10-year bonds at 4.55%, then stocks would demand an earnings yield of 7%. You can see here how the spread between the 10-year treasury and the SAP 500 earnings yield has been just declining, which means that stocks were considered much less risky than they actually are. As that reverts to the mean, as there is more volatility, stocks are considered more risky and interest rates and treasury yields increase, we could really see higher required earnings from stocks, which means stocks fall. The other option is that the Fed doesn't hike rates, which means that the economy slows down. If the economy slows down, stock market also goes down because earnings go down. So it's a lose-lose situation for stocks from a fundamental, let's say, rational perspective. What has been going on for the last three, five years is already irrational, so I cannot tell you what will irrationally happen. I can tell you what logic says, what will happen as always, be prepared for everything. Nevertheless, the question is how low can stocks go? If we take a look at the price to earnings ratio, in this case psychically adjusted using 10-year average earnings, we can see that it has been only higher from 1998 till 2000, and the returns next 10 years weren't that good from that point. Similarly, we can expect the same in the future, especially as the economy is heating up, interest rates are raising, inflation is knocking on the door, so the Fed might be forced to increase interest rates, ECB stop buying bonds, etc. etc. That wouldn't do good for stocks. How low can stocks go? Well, now the price to earnings ratio is 25, the cap is a little bit higher. Such a price to earnings ratio of 25 gives a yield earnings yield of 4%. If that earnings yield goes to 8%, we need a price to earnings ratio of 12.5, so that's a 50% decline for stocks. Stocks have lost 10% in two weeks. 50% is not that far away. It is very, very possible that there will be volatility, so you might take advantage of that if you're a trader. But long-term investors should really know, look at when do I need the money, can I weather a 50% decline and would that decline be actually good or bad for me? I made a video where I say a stock crash would be good for most, but if you're just about to retire or want to do something special different from that money, you might think about keeping that money in something else rather than stocks. And you can still take advantage of the extremely crazy, rationally high stock prices and sell now, take your money and run. Don't be greedy like in the movie, The Wolf of Wall Street says that the clients keep coming back because they're greedy. So don't be greedy, that's my only message. What are experts much smarter than me saying? Jerry Misiri, UBS head of investment strategy for Americas, is saying this is just a correction, normal market correction of 10% and everything is fine. Of course he has to say that when his salary, his bonus, his everything depends on how much money have his clients invested. If he says no, the stock will crash 50%, he will lose his head, not only his job. Similarly Gabriela Santos from JPMorgan funds, also it's just a crash, earnings are okay, the economy is doing okay, of course the economy is doing okay in the late part of the cycle, and I'm a little bit scared by this lady, aren't you? Nevertheless they keep drinking their own cool aid and saying the same, always old message to all the clients to keep the clients calm. I'm sure that no banker called you, get out of the market, this is crazy, run, hide wherever you can go. No, because he will lose money. However, if you have somebody like that, I would trust that banker if they called you in the last few weeks or in the last two years even to sell everything and if he told you, I will call you back when things are better, that's the guy you want to look for. Now what's Ray Dalio saying? We've just had a taste, 10% decline, just a taste of what the tightening will be like, so just a taste. Of course we always have to be very careful with what these gurus say and what the gurus do because they might say things just to make their trades win. Nevertheless Dalio is putting his money where his mouth is. He has increased his European shorts from 4 billion to 13 billion, that's almost 10% of his portfolio. If we divide his portfolio to the pure alpha, that's almost 20% probably of his pure alpha portfolio. This means a lot of things. He's now shorting 44 stocks in Europe. You can see here that in Teza, Sao Paulo is the leader, Enel, Total also, so he's shorting oil stocks and European banks, insurance, ASML also, with a lot of money. What does this mean? Ray Dalio is shorting, he's not greedy, he's smart. This means that when he opened those shorts, those shorts were extremely cheap and risk reward, the risk was low and the reward was extreme. So if the downturn continues, if interest rates go higher, if there is turmoil in Europe, his bets will pay out enormously. Very very interesting what he has been doing lately and he even increased those shorts now. So I'm looking forward to the 15th of February when Bridgewater will report US holdings to see how things are going on there and what is Dalio doing. I will report on that so keep watching the channel. Just to show you what Dalio is betting on and how the situation quickly changes. This is the assets under management of leveraged exchange trade products that many have been very attracted in the last few years. However, you can see how the assets under management went from 4 billion quickly to 1 billion. That's how quickly things evaporate, especially in those very very delicate situations, like Italian banks, like French banks, like oil companies and whatever you might find in this crazy market. Another very important thing, emerging markets are always considered the most risky assets of all and therefore those stocks will be the hardest hit, even if there is fundamentals, even if there is quality. I have made a video about how emerging markets have been up 50% in the last year and how one should be careful because emerging markets will be hit hard when people start selling in panic because emerging markets, people consider them risky, see them as very risky. Also there are currency issues, interest rates, whatever and they start selling everything. However, there are great cheap companies there to buy that have no debt that are doing well and will do well in any environment and those will also be sold very very much and those will again create amazing investing opportunities. So be patient and I will let you know when to buy, what, just be patient. Now, I have been saying a lot and sharing a lot of things about gold because that's what I have been researching in looking the best hedges for my portfolio. However, gold is not a hedge to the stock market crashing because the stock market is paper gains. Gold is a hedge to economic turmoil, financial turmoil where there is really a dry up in liquidity when the Fed lowers interest rates, when the Fed raises interest rates, when the economy is doing good, gold goes down like a rock or like gold. So be careful not to misunderstand me there. Gold is a hedge against financial turmoil, loose monetary policies, not increased interest rates and stocks going down. Those, the best hedge for that is really to be short or to have puts, protection. So that's very different, something very important to understand. I am exposed to gold, yes, because I don't know what will happen. I don't know when this tightening will affect the economy, which is also very, very delicate. And then we will see gold surge. But until that happens, gold might actually go down and go down heavy. You can see here that gold went down in the last two weeks. Also, the Vanek gold miner CTF went significantly down in the last two weeks. If interest rates raise, gold miners, a lot of them you have seen in the videos that I'm making about gold miners are extremely leveraged, which means higher interest rates, more difficulties to refinance especially if gold prices go down and then you are in trouble. That's why I don't like gold ETFs. I really want to know how am I hedged and why am I hedged. And I also got a lot of comments about correlations. Yes, you can look at correlations. First, looking correlations in the past doesn't tell you anything about the future. Anything can change with econometrics, with all the Greeks, you can prove everything. So be careful about correlations in the past and in the future, especially as it is random. So I wouldn't go into that. Further, so don't expect I own gold unprotected. Your own gold, you're protected for hyperinflation or such kind of things. That's why I'm also always saying keep a small percentage of your portfolio in gold. And the key really to gold investing and having gold miners is constantly rebalancing. That is where you get your alpha also on that part of the portfolio. Thank you for watching. There is a lot to comment, there is a lot to discuss, there is a lot to see, to learn together. So please comment, share your knowledge, your perception, ask questions. I learn a lot also from your questions because it helps me systematize my knowledge. Thank you for watching. I'll see you in the next video.