Fed JUST Warned of Significant Price Declines [Details]

hey everyone me kevin here in this video

we're going to talk about what the

federal reserve just said about the

stock market and debt in the markets

this is part one out of three parts of

the series because we're going to talk

stocks and debt in part one then we're

gonna do real estate and part two and

crypto in part three all from the

federal reserve folks let's get into

this right after i mentioned that this

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investing newsletter okay folks let's

get into the financial stability report

it is 85 pages long and i'm just going

to give you the straight bottom lines

here the straight scoop about the most

important part here we go part one the

overview folks the federal reserve is

consistently looking for risks in the

market now there are a lot of folks who

like to leave comments on youtube saying

things like oh my gosh why are we always

talking about the market crash folks it

is so important to know what risks are

so that when they appear you are

prepared you know why the market is

reacting the way it is and you have the

opportunity to make money for example if

you knew exactly what was happening

during the march and april recovery so

the end of march and april recovery in

2020 you would have thrown a lot of

money into the stock market and that is

exactly what i did so i'm covering and

watching the news every minute of every

single day i live and breathe this stuff

so when the fed talks about risks i pay

attention now i know not everybody

believes them but hey best thing is

listen to their bottom lines and

consider them okay number one prices of

assets very very high risky assets okay

look in may of 2021 they did a financial

stability report six months ago and they

said that basically stock prices were

already very very high compared to their

expected

future cash flows worth noting that

they're not talking about

high like stocks are priced high

compared to current cash flows they're

saying stocks are high compared to

expected cash flows that's a sign that's

a little concerning in addition to that

they suggest that asset prices remain

vulnerable to quote significant declines

should investor risk sentiment

deteriorate progress on containing the

virus disappoint or the economic

recovery stall personally i don't

believe the economy economy stalling is

a concern i also don't believe that the

virus is is that big of a concern at

least at this moment with the data that

we're seeing in vaccination rates and so

on and so forth now the biggest one here

is this right here should investor risk

sentiment deteriorate we could see

significant declines the fed is

basically saying the stock market is not

going up for fundamental reasons they're

basically saying the stock market is up

because people feel like stocks only go

up stocks only go up that's dangerous

that's risky right so these are

important things to pay attention to the

federal reserve is telling us this this

is a warning this is a red flag that

says get out of margin do not be highly

exposed to debt don't be exposed ideally

to any debt on your securities

especially crypto or so my gosh stay out

of margin very very very dangerous and

instead be comfortable taking a little

bit of profits on options if you have

options stow away a little bit of cash

and the good times are times to stow

away some cash even though the market

was pretty red today market was probably

red honestly partially because of this

report it's something to pay attention

to now borrowing by businesses and

households has mostly returned to

pre-pandemic levels which is actually a

good thing a little note in here about

some issues that small businesses had

during september not that big of a deal

and leverage in the financial sector

like banks is actually pretty good with

the exception of life insurance

companies where things are a little more

elevated now there's also a note here

which i thought was very interesting

especially since there's they're leading

off by talking about sentiment leading

stocks to be high

take a look at this

social media

retail investors and equity trading was

a report that was put together and it

analyzed the volatility in so-called

meme stocks by linking changes in

demographics regulations and technology

to recent trends in the demand for and

supply of retail trading opportunities

in the market

and in other words

the federal reserve

is now and they're going to make some

comments about this in a moment the

federal reserve is now looking into

social media trends look at this retail

investors social media and equity

trading as potential risk factors for

financial stability

take a look at this to date the broad

financial stability implications of

these developments have been limited

with bursts of retail trading volatility

that have rapidly subsided right it's

that classic momentum stock pattern

where we see this then we see the

decline and then the bleed out that

right there is the sign if you're if you

ever see modern art and you see

something like that folks

memestock

okay uh all right so let's keep going

over here so the revival of household

financial risk appetite and stock market

participation take a look at this one

household financial risk appetite

appears to be cyclical and here the

federal reserve is saying that people

get interested in stocks in cycles we

hit a peak in 2001 and another peak in

2019 and a trough in 2009 so

unironically when people should have

been most willing to take financial

risks which a financial risk is really

just an investment right a calculated

investment is still a financial risk no

risk would be

you know

well old days it used to be just cash uh

but there's obviously now inflation risk

associated with cash so really no matter

what you're doing there's some sort of

form of financial risk but generally

what they're thinking of here is when

you take a financial risk you're

generally referring to

investing like if you bought treasury

bonds

technically those are supposed to give

you your money back in the future and if

you were worried about inflation you

could buy tips uh

and although you're still paying a

premium for those as well so you're

still going to lose a little bit of

money but anyway getting off that

tangent here by 2000 uh by 2019 the most

in the most recent survey it was again

approaching a 2001 peak and it's

interesting to notice here that the

household direct stock ownership appears

to follow risk appetite to some degree

so as risk appetite goes up more people

are buying stocks and usually risk

appetite is going up when prices are

going up that's bad that's dumb that's

the opposite of what we should be doing

when prices are going down that's when

we should be making the biggest

investments but before i go any further

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let's get back to the federal reserves

report because so far the federal

reserve's report is basically saying hey

like debt levels are good asset prices

are really high yeah we may have run the

money printer a lot but we're seeing a

lot of especially younger folks taking

more risks than older folks and the

amount of younger people getting into

stocks is substantially higher than it

used to be and it's an increasing trend

now there are good things associated

with that but maybe not if they're all

associated with yolo call options so we

want to be careful that but i want you

to keep an eye on the trend of this

financial stability report they're

saying prices are high

it's very risky to invest when the

market is higher and you should

basically be safe with your investments

by limiting margin and limiting debt and

that's what other companies are doing

with the exception of life insurance

companies a lot of companies are

actually reducing debt we'll see some

more references to that in just a moment

now the report does go on to say that so

far there is a little bit of a

moderation in investment risk even

though risk is overall trending up we've

seen a little bit of a pullback from the

craziness that we saw in the springtime

and that's partially because we're

seeing less ipos and especially less

specs especially because of increased

regulatory scrutiny on specs which keep

in mind those investor presentations

they put together for spax totally

ridiculous on payment for order flow the

federal reserve mentioned that payment

for order flow has been pretty useful in

getting people to invest in the stock

market with free commission trades right

and it's really come out of laws from

2005 and 10 that essentially led

companies to be able to take a little

bit of a spread every time you trade as

long as the customer receives quote the

national best price or offer price or

better

and this is where you get companies like

robin hood saying well you're getting

the best price really is it really the

best price or could i have gotten a

share for three or five cents less right

that's sort of the argument but either

way

overall the biggest risk that the

federal reserve sees when it comes to

payment for order flow is actually

options trading because option

options trading is the most profitable

for brokerages this is where payment for

order flow and the spread for payment

for order flow is the highest usually

around five to ten cents as opposed to

maybe one or two cents for stocks so so

you could really see five to 10x the

spread or potential profitability and

options for brokerages so they have an

incentive to encourage you to trade

options worth noting that because

options can be very very risky this is

why for example somebody left me a

comment earlier they said oh kevin what

happened to mr never sell i'm a big fan

of never selling some of my deep

long-held share positions but when i

hold options you go into options knowing

that at some point you're going to sell

so if you know you're going to sell the

options or roll them or whatever you're

going to do you may as well take profits

when they're green act quickly though

because options move fast you got to

have a good risk appetite for options

but anyway take a look at this reference

again

back to younger traders the average age

of account holders in trading apps being

30 years old nearly half of them

identifying as quote

first time investors in basically

colorful apps like robinhood that's

literally what they're talking about

here

and get this this is going back to that

social media part the widespread use of

large open social media platforms has

shaped how retail equity investors

communicate about the markets recent

academic papers have shown that social

media can increase the information flow

to retail investors as well as the

amount of noise in markets from retail

traders social media can contribute to

an echo chamber in which retail

investors find themselves communicating

most frequently with others of similar

views and interests thereby reinforcing

their views even if these views are

speculative or biased folks

the federal reserve has never before

talked so much about how young people

please pay attention because you're all

sitting in really stupid echo chambers

paying way too much money for stocks and

you keep buying more of them when the

price is going up and you're stupid

you're gonna get screwed please at least

just don't be in debt do what the other

banks are doing and be out of debt

which in fairness is very true

folks i've made three videos in my

career about this company called hylion

the first video i deleted because i did

not recommend people invest and i don't

make recommendations i'm not an

investment advisor right but i didn't

recommend or or consider highly on a

good investment for myself this was back

when it was at 18 to 20 dollars i said i

thought it was a dangerous company to

invest in i had to delete the video and

remake it two i made two separate videos

breaking down why i thought there were

risks associated with the company and i

was arming investors with information

about hey this is what you got to pay

attention to this is a risk factor this

could hurt be careful watch this and uh

if i wasn't too careful i was getting

flamed by people who are basically only

interested in hylion that's because it's

not their fault it's how the algorithms

work think about it the algorithms will

show highly on videos to people who like

hylion so the algorithms reiterate an

echo chamber

that's dangerous like somebody who hates

highly on and doesn't care to invest

high highly on is not searching highly

on on youtube anyway they went from like

18 to 20 dollars to eight to nine

dollars so worth noting sometimes it's

worth listening to alternative opinions

but anyway uh i i really find it

fascinating how the federal reserve

continues down this path about

expressing risks about financial

stability associated with uh individuals

and uh and social media kind of

interesting uh otherwise for younger

stock investors here you go again i i

kid you not they are just talking

straight up to like millennials here for

younger stock investors

they tend to be more leveraged than

older households median leverage ratios

of younger retail investors are more

than double of all investors leaving

those investors potentially more

vulnerable to large swings and stock

prices if they have large as they have

larger debt burdens to service

vulnerability is amplified as investors

are now increasingly using options which

can often boost leverage and amplify

losses

folks this entire report may as well

just be called yo millennials stop being

stupid

this is like if you're watching this and

you're like dang i'm really exposed to

options dang i'm really exposed to yolo

trades

it is okay to have some apple some

google and some amazon in your portfolio

okay it makes up about 15 of mine i

consider it a solid foundation it's the

bottom part it's a lot less volatile

than like options at the extreme or yolo

bets right so be very very careful with

it with some of these uh it's so weird

how they keep referring to to this but

anyway uh let's keep going so then we

have uh business debt uh gross leverage

is high but net leverage the ratio of

debt less cash to total assets has

dropped since levels not seen in 2018.

again good news for businesses good news

for companies not so good for

potentially retail investors like

millennials who have a lot more debt

credit quality which has often which

deteriorated after the onset of the

pandemic has continued to improve this

is very good better credit quality very

good thing default rates on leveraged

loans these are basically subprime loans

rebranded as leverage loans have fallen

that's good and the financial position

of many households has continued to

improve since the previous stability

report in may also very good so you're

getting a lot of good news about debt

credit quality lower defaults look at

this one-third of household debt is

consumer credit which consists primarily

of student loans auto loans and credit

card debt inflation adjusted consumer

credit edged down in 2021 and student

and auto debt were flat and credit card

debt declined in real terms that's

actually really good and the share of

auto loans that were either delinquent

or loss mitigation declined further to

about 3 percent

however there's a little bit of an

increase because of stimulus programs

wearing off but

otherwise the risk that student loan

debt poses to the financial system

appears limited and consumer credit card

balances have contracted on net this is

good this is very good but again that

reference to

younger individuals having too much debt

versus banks overall delinquency rates

of loans held by banks fell during the

first quarter we also hear that hedge

fund leverage associated with equity

market activities remained at high

levels in january of 2021 but we're

actually seeing even though we're at

elevated levels we're seeing a decline

in hedge fund leverage the black line

here is hedge fund leverage and we're

seeing that start to decline a little

bit this right here is january and this

right here is now so you're seeing that

leverage at hedge funds come down again

another indicator that hedge funds and

institutions are aware asset prices are

very rich and they're reducing leverage

and potentially raising cash bank

lending to financial institutions

operating outside the banking sector

continued increase uh in in amounts but

overall credit quality is still very

very strong then the federal reserve

talks about what they think is actually

one of the biggest risks to the

financial markets and it's actually

cyber security this to me is bullish for

a company like cloudflare i really wish

i invested in cloud fair i'll wait for a

dip but anyway

take a look at the four different risks

they pose for cyber security one example

here is a cyber attack at a bank holding

company that impairs user data so this

would be much worse than like robinhood

leaking potential names or dates of

birth or whatever it would be literally

corrupting institutions data and how

complicated it could be to fix that sort

of data so that would be a risk

also a potential cyber attack of a a

stock exchange that could limit or halt

trading like what happened in new

zealand at the key with the kiwis uh for

four days that there could be a loss of

confidence in the market if there were a

cyber track attack imagine if they were

cyber attack at the same time as you had

some form of uh

disastrous market crash like it could

just amplify problems it'd be horrible

uh you know what happens when people

can't sell people freak out and get more

nervous number three financial

institutions weren't the target of a

solar winds attack but some form of

other financial institutions getting hit

hard this could in my opinion be

something like a citadel or a brokers

that handle trades outside of the

exchanges and a fourth risk would be

potentially one of the one of the big

trading firms one of the big banks going

down and in 2018 the federal reserve did

a study on this and found that 31

percent of banking sector assets would

face compromised liquidity outside of

the affected bank if one of the five big

banks went down i mean this right here

is basically a blueprint brent for how

hackers could really screw up america in

my american finances but look if we have

a summary of this financial stability

report outside of the other parts when

i'm going to talk about housing and

stable coins and cryptocurrencies folks

this report right here

is a massive

warning to younger investors who are

using options as a large part of their

portfolio or are in debt and folks if

you want more insights into my opinion

on how how to

properly invest how to maybe modify the

way you're investing check out my

programs on building your wealth link

down below especially the stocks in

psychology money group you get buy sell

alerts every time i make a transaction

and i make it very clear if i'm doing

something out of speculation if i'm

yellowing or if i'm making a long

investment and i'm doing something to

buy and huddle so folks i look forward

to seeing you there thank you so much

for watching this video and we'll see

you again in the next one goodbye

[Music]

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