Preston Pysche, United States, Stig Broder Sohn discussed on We Study Billionaires - The Investors Podcast

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Host Preston Pysche and as always accompanied by my co host Stig Broder Sohn. And we're back with you here for another Current market conditions. Were trying to watch these things as best we can and provide the best feedback that we can't so we've got a list of things that we want to go through today and I'm just on the throat over to stick to kind of kick things off. Would you see where this takes us? The first thing we're going to talk about is what's happened to the stock market since we record last time is two weeks ago since you heard from US last time about the conditions and today's April I I have to say before. The market opens like these days. Everything is so volatile that you almost have to say not just the day but like what time of day? It's absolutely amazing now. A few different things to the type of market environment that we're in right now which is quite unusual to say the least first of all. I think it's important for the listeners to understand that you shouldn't believe the newspapers too much whenever they try to explain what's going on in the Magi that's because most newspapers treated ass spores right. They want to put everything into one headline. That's just how the newspaper business works. They can't be a little more confusing than helpful from time to time. So if the market goes up it's always because of spending or at least that's the way the phrase it and if he might go down it's always because the market is worried about something new with Kobe. Nineteen and think that quickly becomes very simplistic. Not just the past two weeks for quite some time now. It has been known to the market that the virus is very serious. And it's also been very obvious that you would see major fiscal spending and we are likely not done so as a stock investor. I think it's important that you swim out and understand truly going on what you see right now is that we get more. And more data that democracy is trying to factor in and they're trying to do that with known unknowns and unknown unknowns and that's just a very volatile process that takes some time to adjust for which also takes me to the next point because in times like these and I just mentioned before that it is actually important to say which time of Day Recording. And by the way we recording this before the market opens. So what I've been doing some of these days as I've been putting out older is that I'm looking at the futures market and I usually never look at the future smoggy and if I do I don't do it for that day so I just looked it up here and we are looking at something like the Maga opening in minus three percent. Now the reason why I'm saying this is that we often here on the show talked about using limit orders and I still don't think there's anything wrong about doing lindores. But we've seen days where the market has been like down ten percent or ten percent so it actually makes a lot of sense to look at futures if you are looking at the modern day to day basis so let me. Just give you an example. So I say that you put out limit order of the S. and P. Five hundred. That right now is trading at twenty five hundred and you put it out to say twenty four hundred ninety nine. Dushi under normal circumstances. If that was bet you met a long time ago. You can say that's fine because the markets are so volatile right now because you see these major major swings he can actually make sense for you to pay attention to the futures and remove some of those risks because the futures especially short-term are very very efficient and in that sense you can go in and not take the worst beating fight after you make that position and that goes for bioresearch as well as sell orders but all of them that I also just want to point out when you look at the past two weeks we see some crazy things happening. Seventeen percent in just three days last week was the biggest rela since one thousand nine hundred eighty three. So if you're wandering last time we talked about TV finance on new tool. We talked about the momentum of the market and we talked about how tool call the February twenty six that perhaps now is the time to go out of the market. That hasn't changed instead. I just WanNa add that for people that may be didn't experienced two thousand eight two thousand nine and they're looking at the volatility that we're seeing in the S. and P. Five hundred index and seeing these ten percent swings or five percent swing in a day and they're thinking this is crazy. This is pretty normal for what it looks like when you're in a recession type environment a crash. This is how the market behaves. And so much of it goes back to some of the stuff that we mentioned two weeks ago with the derivatives market. Because I think the best way for people to think about why you're seeing such abrasive moves in the market is because you have everybody that has to come into cash. They have to come into Fiat money in order to make good on those derivatives. And so when you have that playing out and it's because you have people that are having margin calls because you had the biggest supply demand shock world has ever seen with this corona virus. And so when you have that taking place you have this four selling you have these liquidations at our massive on scale and so if you see it go down by ten percent and then see the next day. It's up seven percent. That is your normal volatility especially through the initial part of something that has such ridiculous shock to the system. So the fact that we've seen a bounce. I'm not saying that it won't keep going higher but I'm also not saying that. The bottoms in. I think that what we're seeing right now is standard volatility for the type of trend the long term trend that I expect to continue to see with the current market conditions. So it's easy for people to look at this and say oh my God it's up twenty percent from the bottom. I missed the bottom and now I gotta buy and then they step into the market if you go to any large downturns that we've seen historically and I'm not even just saying mother. Nineteen twenty nine one because that's the most notorious one that literally went on clear out to nineteen thirty three every time. You thought all right. It's hit its bottom. Let me step into this and buy something. Because it's up forty or fifty percent. That was the next interim top for a mega downtrend. And I'm not saying that's what's happening here. I kind of expect it to happen. More my personal opinion but. I think it's important for people to have that realization. That if you see a thirty percent up that's not necessarily symbolizing that you've had a bottom here and I think something else to watch very closely as the volume that you see here if you don't see a massive amount of volume it's probably just within the momentum trend that we're seeing in. I think the long-term momentum trend here is in a downward direction. At least that's what our T. Ip momentum tool is recommending still read on pretty much every single company and ETF. That were viewing so. I think that's important for people to remember. I think you bring up a good point there. Preston. It's easy to have too much of a narrow focus if you just look last week a different looks like we're on the way up but we talk about bull markets and bail mangas assets a linear process. Or at least that's the way can be perceived but that's not how it works. It's not like you have seven years and it just goes up and then you have for years only goes down if you do a case study on some of the crash twenty nine or dot com for that matter in two thousand and it didn't just go down. You have all types of interventions financial stimulus package monetary policy. That's coming into the mix and you see this spike and a lot of people think well now it's over and just continues going down so I think you're right. I can easily see this down more than you might see. A spike again might see the market rally and slide down again. I Reference Radio A lot. I know I do. But he has some amazing points on helping people understand how the markets work. And when you start getting into some of these margin. Paul's especially very large shocks to the system. It has a self reinforcing effect to it. And that's where I think people who especially have participated in the markets over the last ten years and maybe didn't experience the two thousand seven to two thousand nine timeframe. Just don't have that experience of seeing how these actions in this selling that we're seeing has a compounding impact and I would argue for how much upside we saw in the last ten years when you think of it like winding up something that Spring loaded when you wind up and wind it up when you finally are able to push it any further because maybe with the source that you're using the wind it is just not strong enough to wind it any tighter. When it starts to undo itself it picks up steam and a picks up momentum as it starts spinning the other way. And so you're seeing that right now the fact that you have all this capitalization and when I say capitalisation you basically have central banks that have continued to supply more and more liquidity into the market which bids the prices of stocks which bids the prices of all these different things as a capitalization above the earnings power. So if I'm a company and I made ten dollars last year. I might be capitalized evaluation at one hundred dollars if I make just one more dollar to eleven dollars. Now my capitalization. Mike jumped to one hundred ten or one hundred fifteen dollars and so the whole market is bid in a way that it's capitalized. Meaning it's there's this multiple effect off of the earnings so those earning start to contract that capitalization is moving in the opposite direction. And so that has a compound. Impact to the valuations of how other things are priced. So like let's say I went out and I was getting a loan on my house but it was based on my net worth and my net worth was based on a capitalization of one hundred and ten but now all of a sudden because the earnings power that that underlying capitalization is moved down to call it seven dollars and now the market cap moves from one hundred and ten down to poets seventy or eighty or whatever. It might be now. I can't afford to go out and get that loan that I used to be able to get because my net worth was capitalized at whatever. And I'm just giving a really really really generic example to show how those forces compound upon themselves as things like this unravel and so that's why you see these bursts in these drops and these bursts up and then further drops down because that wheel is spinning in the opposite direction. And that is a really important concept for people to understand that they're self-reinforcing on the way up but then once that momentum shifts and you get into a long term trend in the other direction itself reinforcing in the opposite way.

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