 Good day, fellow investors, and welcome to the stock market news that offers a long-term perspective on things. Recently, markets didn't do that well and many are certainly not happy about what has been going on. However, we have to put a long-term perspective on this. And I want to go back to Delio, Ray Delio, because he explained it constantly over the last few years what is going on and what will probably happen. Three things that have been a recurring topic with him are financial engineering by central banks, the ending of it, 60% chance of US recession by 2020 and expecting zero real returns from stocks, equities over the next decade, which is what is happening now. So let's analyze the things that Delio is sharing and has been sharing with us so there is no surprise to what's going on with the markets, analyze those and then put them into a long-term perspective to see what you can expect and how to invest. Let's start with financial engineering. I listened to an interview I think it was two years ago at DEVOS when Ray Delio mentioned the word financial engineering at least 10 times over that Bloomberg interview. Financial engineering means that central banks distort the normal way things work by, in this case, lowering interest rates. Interest rates have been lower after the previous recession for a few years and then the Fed increased interest rates to prevent the economy from overheating but they didn't manage to prevent the housing bubble. Nevertheless, in the last 10 years we have had 9 years of lower interest rates and now the Fed has decided to increase rates. Some say too late, some say they shouldn't but never mind what the Fed is doing. Something also very important is that the European Central Bank has been constantly printing money to help markets, to help the economy, so putting liquidity into the system but they are also cutting on their monthly buyback program. So these are two negatives that are impacting the ways things have been working over the last few years. If we compare the central banks balance sheets, in this case I have combined the Fed's balance sheet, the European Central Bank balance sheet and compare it to the S&P 500 the correlation is clear. Stocks have been going up because of the quantitative easing, because of the monetary easing that central banks have been supplying the economy with. Money comes in and it has to get out somewhere, it gets out through buybacks, through low interest rates, to higher earnings etc etc and that's the reason why the S&P 500 is higher. However, now with stocks crashing, headlines like this one on first day morning, global stocks tumble on deepening fears of a Fed mistake or this on Friday morning, stocks tumble to the end of a miserable week, markets rep etc etc, however people tend to forget something, something very important, something crucially important. If I take the chart of the almost last 10 years or if I go back to the low of March 2009, I think the intraday low on a day in March was 666 points, the current level of the S&P 500 is 270% higher than where it was 10 years ago. So despite this current turmoil, the current crash maybe will have a bear market 20% down, who knows it's still nothing when put in such a 10 year perspective. But the reason for this extreme performance is financial engineering. Now with this financial engineering coming to an end, those that have benefited from loose monetary policies, low interest rates, low interest rates on debt and high liquidity like corporations and businesses and real estate are bound to suffer at least a bit. That's logical. How much are they going to suffer? Well, that depends on what happens with the economy and there a lot of opinions are divided. In their publication the Federal Reserve this week said that they expect slower economic growth for the US on 2.3% growth down from a September projection of 2.5% growth, GDP growth in 2018 is slightly lower at 3%, slightly lower from the 3.1% in September and the forecast for long run growth actually increased to 1.9% from 1.8%. So the Fed has room to tighten as the actual long run growth is increasing but what does that mean for the economy? So Delio has been warning us that there is a 60% chance of a US recession by 2020. So in the next two years there is a very large chance of the US economy hitting a recession which would be detrimental for the economy and of course for stocks. But let's see now about the economy and then we'll look at the stock market. So the real gross domestic product has really gone up over the last 70 years. Things have been also good. In the last few years the current GDP is 18.5 trillion, it was 15 trillion at the bottom of the 2009 recessions and you can see that there has been economic growth for 9 years and I would argue that it's normal to have a recession after 9 years. It might be a big recession like 2009, it might be a mild recession like 1990s like in the 2000s but you never know with those kind of things. However a recession would not be good for stocks because the margins get tight, a lot of businesses go bankrupt, sales are lower, earnings are lower and then the projections analysts have and when there is turmoil in the economy that really reflects usually bad on stocks. So we have to see okay where are we with stocks now, apply what can happen to them and this leads me again to Delio that has been warning us during 2018 that the real expected return for US equities over the next decade is zero or negative. Which means that adjusting for inflation stocks should deliver a zero percent return over the next decade in the most likely situation. And that's something we have to put into perspective because now we see that the things Delio has been warning us about are actually developing. We see turmoil on the stock market, we see the Fed increasing rates, we see increased probabilities of a recession, economic slowdown. So let's see what's going on with the stock market and what we can expect. Slower earnings less cash for companies means also lower buybacks. Companies when things went well just a month, two months ago were planning to spend more than 3 trillion in 2019 with buybacks taking the biggest chunk of that. 3 trillion, let's say 1.5 trillion of buybacks on a 30 trillion market is what? 5% of the market pushing stocks up through buybacks. Now if earnings contract then you will see those buybacks back to the levels of 2009 or prior to that. So you can see when things are good and stocks are expensive, management rushes to do buybacks to push stock prices higher to get bigger management bonuses in the way of options. However, when stocks are cheap, they do the opposite, they stop doing buybacks and they try to save whatever they can save. And there is something else. Higher interest rates do not do well for those that have high debt levels. And you can see here how the debt levels of US corporations have increased by about 50% over the last let's say 10 years 2007-2009. So corporations have taken advantage of lower interest rates but with rising interest rates then the cost of that debt also increases and lowers earnings. Going forward to earnings, slower economic growth, higher interest rates will weigh on earnings and bring that to the normal long-term level. We have seen a boost in earnings over the last year due to lower taxes. However, if you look at the long-term real earnings growth it is about 2.1% over the past 100 years. I look at earnings today, let's say the average adjusted is 120, earnings in 1920 were 15, 100 years of growth of 2.1%. As the economy grows you can expect to see earnings grow in line with the debt. So earnings in 2028 should be around 123 if you take 100 as the average current or 147 if you take 120 as the current SAP 500 earnings. Still, let's take 150 as 2028 earnings for the SAP 500 and let's put a mean historical valuation of 15 onto that. In terms of 150 for the SAP 500 valuation of 15 the SAP 500 level in 2028 adjusted for inflation should be at 2250 points which implies a negative return over 10 years actually a decline. So this is what you should expect from stocks in general. And now this is the average long-term so stocks are now at 2,400, 2,500 you have to expect them to be lower sorry 10 years from now at 2.2,000 if things go well. However the stock market is much more volatile than these long-term let's say most probable projections that Daileo uses to make and he plays around that. If buybacks dry up, if there is a recession earnings drop down, analysts get pessimistic. People start selling start buying less ETF start investing less pension funds have less money because less people are employed etc etc and the same spiral that push stocks up now pushes them down we might see a lot of fluctuations before we get to that 2250 points. And I always like to go to Buffett when it comes to what to do and how to invest and there is one thing Buffett keeps reminding people if you just look at his balance sheet. If you just look at Berkshire's balance sheet the cash pile is I don't know 110, 120, 140 billion US dollars and don't forget that he can get leverage whenever he wants but he has been sitting on that cash pile for already a few years not buying things just sitting and waiting. So the message is simple okay stocks might crash there might be volatility be ready to buy on the dip like Buffett will do because he knows that buying cheap is the way to get to long-term returns. He knew in 1989 when 88 when he was buying Coca-Cola on the cheap that it will be a great investment for the long-term you just need to have the cash to do that. And everybody's mentioning Buffett and buying Apple that's just a smaller part of what he's doing he's ready to average down his target the return is 10% if stocks go down he will be happy to increase the position I think and increase his long-term return on the money he is managing. He didn't put 50 billion at once in Apple he still has the cash position. So that's something to think about and it's important to have dry powder like Buffett still has and will be deploying when the time comes. So this is the summary of course you never know what can happen with stocks. Stocks are volatile projections are futile if you know what you're doing if you know what your expected return try to find stocks that have an expected long-term return higher than zero. So a little bit higher growth because when you put things into 10 year perspective especially with a lot of people buying ETFs and index funds there will be a lot of divergence. So if you focus now on good fundamentals you might find those stocks that will not be a 220 like the SAP 500 but just to put in perspective 250 3000 5000 and not going down because the SAP 500 will be an average. Some stocks will go high up some stocks will go high down. So try to pick those that will go high up avoid highly indebted companies that don't do well in cycles go for quality go for dividends and have dry powder to do that when the opportunity knocks opportunities will always come. So be patient keep following this YouTube channel subscribe and we will try to work on the correct mindset for great long-term investing success. Thank you for watching and I'll see you in the next video.