 Now, why? Why? Why is the stock market suddenly gone down? Now some people are saying Russia and Ukraine, that's why, you know, people are afraid of war. And maybe markets don't like uncertainty, markets don't like wars, and all the saber-rattling and all the muscle-flexing is not good for markets. But you know, sometimes I wonder, I wonder, with all the economic problems that the United States a Fed that is going to be increasing interest rates, we'll talk about that in a minute, sometime in March, probably. Inflation at seven percent, not clear if it's going up or going down, labor participation rates, still well below where they were before COVID, with all the economic challenges that we're facing and all the political problems Biden is facing, Congress that's not cooperating with him, I wonder how much how much of the saber-rattling has to do with diverting our attention away from all these economic issues. You have to always wonder, I wonder if they'd be making as big of a deal of Ukraine right now, if they'd be egging, if they'd be egging Putin on as much as they are, if not for the domestic weakness, and if not for the Biden administration's interest in shifting our attention elsewhere. Just like he did with Afghanistan, as soon as Afghanistan was looking like disaster, the Biden administration started pushing for boosters, booster shots, completely politicized, booster shots for kids or vaccines for kids, whole reorientation refocus away just so we don't see the disaster that was happening in Afghanistan. All right, let me just remind you that I'm taking super chat questions. We're talking about finance, anything related to finance, if you want, you can ask. Generally though, you can ask anything. You know I answer anything. We've got a $600 goal. We haven't really made a dent in that yet, and I don't have anybody here today helping with encouraging you to participate in the in the super chat or in keeping track of how much money has come in, but feel free to ask questions, $20 questions, and above particularly welcome. So why? What is going on? I mean, it's interesting. You know, stock markets seem like everything is fine and seem like everything is going well, and it doesn't take much to trigger investors to reevaluate their portfolios, to think about are these stocks really worth as much as I think they are, and more often than not, what triggers that reevaluation is a fear or a reality of interest rates going up. Now why are interest rates so important? Danielle asks, why is this talking about it so volatile when the Fed raises rates? Well, what are stock prices? This is where you get the finance lesson. What determines other than the supply and demand and the willingness of people to buy, but what what guides people's interest in buying a particular stock at a particular price? Well, your expectations in terms of what that stock, what that stock will provide you in terms of cash flow, like every financial investment. Stocks are no different. The value of the stock is the present value, the value today of all the future cash flows that you can expect from the stock. They could be dividends all the way out in front of them, because even when you sell the stock, the stock when you sell it will be valued based on, if you will, the dividends going into the future. So a stock is a sum, if you will, a stock price is a sum of the market's expectations of all future cash flows to the investor, what he can sell it for in the future, and the dividends or the equivalent of dividends, the free cash that the company generates that is available for him as an owner of the company. And that's how you value a stock. And what happens is you discount that sum back based on what the interest rate is, the risk free rate if you will, what you could the interest rate you would get in a government bond, plus, and that reflect should reflect inflation, plus a risk premium, something to compensate you for the risk. That's the discount rate. The higher interest rates are, the higher the discount rate, what is the price? The lower the price. So the higher the discount rate, the lower the price. So if interest rates are going to go up, or inflation is going to go up, or people become more risk averse, more afraid of risk, they want to get more compensation for that risk, all else held constant stock prices will go down. So interest rates are a crucial factor, a crucial factor in determining the prices of stocks. It's no accident that since 1982 when interest rates peaked, overnight interest rates peaked at close to 20%, 1982. Since today the stock market has been on a tear with some bumps along the road, as interest rates have plummeted from close to 20% to close to zero, because the lower interest rates are, all else held constant, the higher the price of a stock is. So stock prices, all things held constant are inversely related to interest rates. And of course, for stock prices, the best environment possible is a zero percent interest rate environment. And to the extent that we expect interest rates to be zero well into the future, then stock prices are substantially going to be higher than if interest rates are higher than zero percent. So as interest rates rise, if you expect interest rates to rise, you would expect, again, all else, all other things held equal, stock prices start declining. Inflation should increase interest rates. And as a consequence, as soon as inflation numbers started to come out late last year, and it started to be clear that inflation maybe was not transitory, or if it was transitory, it was not transitory in a sense of a few months, but maybe transitory in a sense of a few years, as soon as the inflation numbers were high, markets started to become volatile, because they expected interest rates to go up and therefore valuations to come down. And because there was uncertainty about how long inflation would last, volatility up and down, up and down, up and down is a reflection of uncertainty. It's a reflection of greater and greater uncertainty about the future, not knowing what actually happened, what path interest rates would go, whether there'll be a recession or not, whether there's inflation, whether inflation would increase, decrease, stay flat. The more uncertainty there is, the more volatility there is in the markets, the more stocks goes up and down, like crazy. And then when the Fed said, oh, we're going to raise interest rates because of inflation, that sent two messages. One is, inflation is probably not transitory. The Fed is worried, and therefore the Fed is raising interest rates in the hope of suppressing inflation. Whether that even works is a different question, but they're raising interest rates in order to suppress inflation. Okay? Well, raising interest rates lowers the price of stocks, but if it causes inflation to come down in the distant future, then that will lower interest rates in the distant future and that'll cause stock prices to go up. You can see again the volatility, depending on what you're estimating, when it happens, how it exactly happens. But the Fed said, we're only going to do that in March. Today, Fed Chairman Powell came out and said, in March, we're going to raise interest rates. Now, it's like inflation is now. Why are you raising interest rates in March? Indeed, a Fed should raise interest rates before the inflation happens. Once inflation happens, it's very hard to get it under control, so why are they delaying? That creates uncertainty for markets. Markets don't know what to do with that. What is that implying to them? Is it the cash flows? What is that implying to them? Is it my discount rate? Where else are you going to get a lesson in finance on top of the philosophical context, the economics, the history? Anyway, so the reason you've got volatility is because there's a certainty about inflation, a certainty about market interest rates, and a certainty about the Fed's action. And then what happens if the Fed doesn't just squash inflation but creates a recession or maybe stagflation? But imagine if we get a recession. Inflation goes down, interest rates might come down, but now we have a recession. What is the recession impact stock prices? Well, if I'm predicting a recession next year or two years from now, then I'm also predicting lower revenue, lower profits, less cash flow generated by the companies I'm investing in, and therefore lower stock prices. So you can see that stock prices are influenced by many things, and that's just the indexes. That's just kind of a stock market in general. We're not talking about individual stocks and particular things changing from day to day that affect our expectations about their future prospects. This is just a macro expectation about future prospects. A complicated, difficult, and people have differing ideas and differing opinions, and that's why people buy and sell, and that's why you get volatility, is when people have very different ideas, you get big swings. Like I think it was this morning, stocks tumbled, then they recovered completely, then they went down a little bit towards the end or tumbled it towards the end. Why all the movement? Well, because people are disagreeing about what everything that's going on in the world has to do with the value of this particular stock, and people are buying and selling based on their own views, which are different than if I'm buying, they're different than the person who's selling it to me. Otherwise, he wouldn't be selling it to me. And what the market does, in a sense, minute by minute, second by second, it's aggregating these opinions of all the different people in the marketplace. And you can say that right now people are pretty pessimistic about the US economy, whether it's because interest rates are going to go up or whether we're going to head towards a recession and therefore companies are going to do poorly, but whatever the exact causal factor, people are worried, and people therefore are willing to sell at lower and lower and lower prices. And that's what we're seeing right now. We're seeing massive volatility. And it's fascinating to me, one of the interesting things is that this is a crucial story because this affects, you know, what happens in the stock market, what happens in the US economy, affects the lives of everybody in the US, arguably, in the world. I mean, it might be a site show but it has huge impacts on which companies get funded if they get funded at all, who is expanding, who is hiring, who doesn't hire, who shrinks, who fires, where capital gets allocated, and generally it's a signal of sentiment regarding the state of the US economy. Well, this should be the most important story in the news every single day. At least when you have these big moves. So, and yet, right, when you open the news, what do you hear? What you hear is Ukraine, Ukraine, Ukraine, Ukraine, Ukraine, Ukraine. I mean, Ukraine's an important story. I've spoken about it. Ukraine's crucial, but it's not going to impact the day-to-day lives of Americans unless America decides to go to war, and the chances of that are very close to zero. It's an easy story to understand. It's easy for the tribes to put themselves on each side. They know where they want to be. Stockpocket's hard. It's complicated. Oh, you have to explain all this stuff to people. You have to explain to them the relation between interest rates and stock prices and all this other stuff. And our media is not interested. It doesn't have an opinion. Maybe you could argue it's left biased so it doesn't want to show the Biden administration a bad light. I don't know that Fox News is talking a lot about what's happening in the stock market. It's too complicated. It's too uninteresting. It's too boring even though, objectively, it has a much greater impact on American lives, on American wealth, on American prosperity than anything happening in Ukraine. But nobody's interested. Nobody is interested. I mean, who are they going to interview? Economists, who for the most part get it wrong, don't really understand what they're talking about, have been shown to be wrong about inflation, about the economy, time and time and time again. So, yeah, it's... This is why you tune into your own book show because here we talk about the important issues. Here we talk about the issues relevant to your life. Here we talk about the issues that are crucial to your wealth, to your job prospects, what happens to your economy. But even here, right now, there are 110 people watching live. Last time when I talked about Ukraine, there were 180 people watching live. Ukraine sells. Stocks don't. Thank you for listening or watching the Iran Book Show. If you'd like to support the show, we make it as easy as possible for you to trade with me. You get value from listening. You get value from watching. Show your appreciation. 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