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The Next Historic Financial Crisis Is Already Here — Transcript · YTtoTranscript

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The Next Historic Financial Crisis Is Already Here

Everything Money · 5,074 words · 25 min read · EN-ORIG

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If the next great financial crisis has already begun, it probably doesn't look like one quite yet. The stock market is still near record highs. Unemployment is only 4.1%. People are still out shopping and the consumer makes up 68% of GDP. But underneath that calm surface, something extraordinary is happening. A key interest rate just crossed 5% for the

first time since 2007. That's almost 20 years. Mortgages are back over 7%. America's banks are sitting on over 326 billion in losses and oil is above $100. And this week, the Federal Reserve did something that it hasn't done in over 3 years. It raised interest rates. But there are some very interesting things

happening underneath the surface right now that every investor needs to understand. So today, we're going to go down the rabbit hole. We're going to separate what's real from what's hype and most importantly talk about what a smart investor should actually do. So, let's get into it. So, here's the big idea. The most important financial story

in America right now might not be happening in the stock market at all. It might be happening in the bond market and stocks just haven't reacted very much quite yet. So, let me explain this very simply. When the US government needs to borrow money, it sells IUS called treasuries. One of the most

important is the 10-year Treasury. And the interest rate on that 10-year Treasury just crossed 5%, its highest level since 2007. Now, why should you care about some boring government IOU? Because that interest rate affects almost everything. Think of it as one of the starting prices for money throughout the economy. When that rate goes up,

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mortgage rates tend to go up with it. Companies have to pay more in order to borrow money. Office buildings cost more to finance. Car loans can become more expensive. The government itself pays a lot more money on interest on its debt. And it can even affect what investors should be willing to pay for stocks. And

guys, this last part is incredibly important. If I can get 5% lending money to the US government, I'm going to have to demand far more from a business before I take on the additional risk of owning its stock. Remember, a stock is just a piece of a business and the value of that business is based on all the

cash that we expect that business to generate for us in the future brought back today after discounting it at a certain rate. If rates are 0%, there's no discount. If rates are 30% a year, then I'm going to sit there and say, well, I can invest my money at 30%. So, I've got to discount all that cash flow

30%, which will mean that $100 in 10 years is worth pennies today. So the higher that rate goes, the less that future cash flow is worth today. If I require a higher return on those future cash flows, the price I'm willing to pay today goes down. That does not mean that a company suddenly becomes a bad

company. All that it means is that the price that makes sense for me as an investor will change as rates go up and will change as rates go down. This is why price versus value matters. a great company at the wrong price will still be a terrible investment. Now things get even more interesting. On September

16th, the Fed raised rates by a quarter of a point, its first rate hike since 2023. Normally, when people get nervous about the economy, they start screaming, "The Fed's going to cut rates." This time, the Fed went the other direction. But the question is, why are rates higher now? Well, the one answer,

inflation. Inflation is still running far too hot and the Fed has indicated that rates could remain elevated for quite a while as they fight inflation. But notice something important. The Fed is not currently forecasting a recession. In fact, I haven't even heard any reference to that. It expects the economy to continue growing. So what

it's basically saying is this. The economy can continue growing, inflation can remain stubborn, and rates can stay high. That creates an interesting situation because if the economy eventually does weaken while inflation stays high, what does the Fed do? That is what we call stagflation. The very thing that we saw in the 70s, a stagnant

economy or a declining economy with inflation high. If you cut rates to help the economy, what does that do to inflation? It possibly makes inflation worse. If you keep rates high to fight inflation and keep putting pressure on borrowers, what does that do? It keeps the economy declining. Now, one of the easiest places to see the effect of

higher rates is housing. Just follow the chain. The 10-year Treasury goes higher. Mortgage rates move above 7% and suddenly the exact same house becomes much more expensive every single month. Think about the average Dave. Dave has been saving for a house. He finds one for $400,000. The house hasn't changed. same roof, same kitchen, same backyard,

same neighborhood as months ago. But if Dave's rate goes from 3 or 4% like it was a few years ago to more than 7%. His monthly payment can change dramatically. Dave doesn't care that an economist on CNBC says the economy is technically growing. Dave looks at the monthly payment and says, "I can't afford this

anymore, so he doesn't buy." And the seller says, "Well, I'm not selling my house because I have a 3% mortgage and I don't want to replace it with a 7% mortgage." So now you have fewer buyers and fewer sellers. Homeowners who won't sell their 3 or 4% mortgage. So what happens to the market? It freezes. Home

builders are now the most pessimistic they've been in a year. And nearly 40% are cutting prices to help move houses. That's why I want you to remember this. Housing usually doesn't crash first. It freezes first. Transactions slow. Buyers disappear. Sellers wait. Builders get nervous. But what's interesting guys is we do have a supply problem. We need to

build a lot more inventory in order to sit there and support our growing population. Only after all those things happen do we find out how much actual damage has been done. Now does that say that housing prices are going to collapse. Guys, I say this all the time. I'm in the real estate business and

nothing would make me happier than a housing price collapse from an investment standpoint. But the collapse we had in the late 2000s that was based on lending standards being incredibly incredibly loose coupled with this euphoric building up of this bubble. We don't have that today. So I personally don't believe that housing is going to

collapse. But it does tell us that higher rates are having a real effect on the economy and that's what matters. Now guys, real quick before we move on, a reminder, never take our title and thumbnail literally. We're never here to give you a stock tip. We're here to teach you a process so that one day you

can sleep better at night applying that pro process to your own investments because you know how to value a stock. Make good assumption about its future and understand that the price you're paying is different than the value you're getting. And regarding all the concerns over a September stock slump, never ever try to time the market.

you're going to regret not buying and not dollar cost averaging into your favorite ETFs and the stocks you have identified that are selling at a great price. If you do that, if you stick with it, you're going to look back decades from now and be really glad you did. So, let's go through some of the biggest

numbers that people are sharing and separate the facts from the story being told around them. Number one, long-term unemployment. The number of people out of work for more than 6 months jumped to about 1.93 million. That is around 27% of all unemployed people. That's worth watching. If somebody is unemployed for a couple weeks, that's one thing. But if

somebody is unemployed for 6 months, savings can start disappearing, if they even had any. Credit card balances will grow. Mortgage payments become harder. Spending gets cut. Guys, we're in a world now where what would been considered an absolute record unemployment that was unheard of is now becoming the norm. Demographics are changing. I would not be surprised if

that we have supply issues with unemployment. I wouldn't be surprised if our future looks similar to Japan because of our aging population and the lack of more kids being brought into the economy. Could we be into a future where 4% is kind of the norm when before it was 5 to 6%. The 10-year Treasury is

above 5%, gold near record highs, inflation around 3 and a.5%, mortgages above 7%, and oil above 100. Those five things really are happening today. What I care about is why these things are happening and how they might affect businesses that I own. And guys, remember every single one of those things I mentioned, we've had major ups

and downs in those over the last 30 or 40 years. And the economy keeps on growing. One of the biggest issues right now is inflation. Oil above $100 matters because energy touches everything. It's not just your transportation, guys. That does matter. but shipping, manufacturing, airlines, food, consumers driving to work. But every single

product we have [snorts] contains oil. When energy gets more expensive, those costs can work their way throughout the economy. And persistent inflation makes the Fed's job much more difficult. That doesn't automatically give us another 2008. That's recency bias. Now granted, that was 18 years ago, but people still think about it like it was yesterday.

But what do they think about? They think about it from a standpoint of, "Oh, this is going to happen again." Not necessarily. If anything, parts of this environment look more like the high inflation periods of the 1970s than the financial crisis of 2008. And that is an important distinction. So, let's talk about the scenario that's getting people

really nervous. Think about two different periods. In 2000, you had an insanely expensive technology sector. The stories were absolutely incredible. The internet really did change the world. But investors paid ridiculous prices for many of those businesses. That's an important lesson. You can be completely right about the future and the story and still lose massive amounts

of money because you paid too much. Then you had 2008 that was very different. Housing, bad mortgages, leverage, banks, debt. The financial system itself came under enormous stress. So here's the concern that people have today. What if you get pieces of both? What if highly valued AI and semiconductor stocks get hit by higher required returns at the

exact same time that housing, banks, commercial real estate, and heavily indebted businesses are dealing with more expensive money? That's the scenario that people are worried about. But there's a gigantic problem with that argument. The stock market doesn't seem very worried. Stocks are still close to all-time highs. So, what's happening here? Well, maybe the stock market is

ignoring a problem that will become far more obvious later. That is possible. Or maybe people screaming about the next financial crisis are dramatically overstating that risk. That is possible, too. I have no idea. You have no idea. And the guy screaming into a camera on YouTube or CNBC doesn't have a clue, either. The goal here isn't to predict.

The goal is to understand and to remember that we've had these things happen in the past. And every time it happens, we learn and we get better. Now, this is where it gets weird because whenever people get nervous about the financial system, theories will fly everywhere. So, let's separate those facts from those theories. Theory number

one, rates hit 5% before the 2008 crash. That is sort of true. rates did hit roughly 5.3% back in 2007 and then we saw a crash in '08. That's correlation, not causation. We've seen rates go up a thousand times, but it didn't mean that the stock market has to crash. In fact, look at 2022. Our rate was around 0% and

we jumped to 5.25. What happened to the market? Yes, we did have a bare market in 2022 and then skyrocketed from there. Do rates affect stock prices? They should because if today all of a sudden rates went to 20% and you can get a 20% return by buying a treasury from the government, why would you ever invest in

a stock? That would make stock prices collapse because they need higher returns. So whenever somebody shows you two lines in a chart and says, "See this happened last time." You got to understand why correlation does not automatically mean causation. Theory number two, the government secretly wants a crisis. Here's what we can verify. The Treasury Secretary has

publicly discussed a larger plan for reshaping parts of America's economy, drawing partly from the ideas associated with Alexander Hamilton. That is real. What we cannot prove is that somebody's intentionally trying to create a financial crisis. Those are two completely different claims. In fact, the government has taken steps aimed at keeping the Treasury market functioning

properly. So maybe somebody online has a fascinating theory. Fine, show me the evidence. Until then, it's just a theory. Theory number three, China is dumping our debt to destroy the bond market. Again, separate fact from speculation. China has reduced its Treasury holdings from around $700 billion to around 620 billion. That is real. But saying that therefore China is

deliberately trying to crash America's bond market, that requires evidence. And the evidence we currently have doesn't show that foreign money overall is still flowing into treasuries and recent government bond auctions have continued to attract buyers. So China reducing its holding is a fact. The motive people attached to it is a different question

altogether. But underneath all of these theories is one very real issue. Government debt. America is running roughly a $1.9 trillion annual deficit. And total government debt is now larger than the entire annual output of the US economy. Interest payments are larger than we spend on the military. Think about the cycle. The government spends

more than it collects. It has to borrow the difference. To borrow it, it sells more treasuries. Those treasuries require interest payments. If rates stay higher, the interest bill just keeps on getting larger and larger and larger. A larger interest bill can contribute to even more borrowing and around you go. Then we have to raise taxes. When you

raise taxes, you disincentivize more investment. When you disincentivize more investment, you're taking away from future growth. It becomes a very slippery slope and a circular pattern that we don't want to get into. I am not saying that I know when this ends. I have no clue. But I do know this. For years, investors got incredibly used to

cheap money. 0% rates are not this the law of nature. If you're building an investment thesis that only works if money becomes almost free again, I would be very very careful. And guys, this is exactly why we built this channel, Everything Money. I have no idea where rates are going. I don't know that

whether they're heading toward a recession. I don't know if the market's going to fall 30% and go up another 30%. But here's the good news. You don't need to know. What you do need to know is that you're willing to pay a certain price for a business based on its value. This is exactly why we built our stock

analyzer tool and provide all of our data. You can take a company you're interested in, put in reasonable assumptions for things like revenue growth, profit margins, and future cash flow. And the stock analyzer tool helps you determine a range of prices to pay for that stock based on the return and the assumptions that you gave. Because

remember, a great company and a great investment are not the same thing. Price is what determines if it's a great investment. And when everybody else is arguing about whether the next financial crisis is coming, I'd much rather spend my time asking, "What is the business worth? What assumptions am I making? Am I getting a margin of safety at today's

price?" So, when you join Everything Money, you get the stock analyzer tool along with all of our investing tools. And just as importantly, you get access to our community of investors who are doing exactly this every single day. They're talking about companies. They're looking at assumptions. They're sharing idea ideas and they're challenging each

other in order to become better investors because investing guys can get very lonely when everybody around you is chasing the hottest stock or panicking because of the latest headlines. We want to build a community around the opposite. We want to understand the business. We want to understand the numbers. We want to determine what we

think the company is worth and then have the discipline to wait for the right price. Isn't that something that would be very beneficial for you? Of course it would. When was the last time you made a highly emotional decision and it worked out well? Well, right now guys, you can get access to that exact same thing

we're trying to do. Get access to everything money for $7 for 7 days. Come in, use the stock analyzer tool, join the community, get engaged. Start analyzing the companies that you already own and the stocks you're thinking about buying. Run different assumptions. See what happens if growth slows. See what happens if margins improve. See what

happens if things don't go perfectly. Because instead of asking somebody on YouTube, "Do you think the stock is going up?" I want you to start asking the question that actually matters. What price should I pay for this business? Guys, I get messages all the time on Twitter and Instagram of people saying to me, "Paul, what would you pay for

this company?" I never respond to those. That is not what I'm trying to teach on this channel. I'm trying to teach people a process that they can apply to themselves. So, if that's interesting to you, click the link below and join us for $7 for 7 days. So, what could actually happen if these rates, these

high rates stick around? Is this just another 2008? Today, I don't think that's the right way to look at it. The setup is different. In 2008, the problem centered around a housing bubble, terrible mortgages, incredible leverage, and a banking system that was far more vulnerable because they gave shitty loans to anybody who had a heartbeat. It

happened very quickly. Today's b biggest risks from rates is different. It's more like pressure building over time. Think about somebody who has a loan that doesn't need to be refinanced until 2028. Today's interest rates might not matter much to them, but 2028 arrives. Their old loan was 3%. Their new loan might be 6 or 7%, maybe eight. Their

entire math changes. That's why refinancing matters. Commercial real estate is an easy example. So, imagine the same thing on another office building or apartment building. That building is still standing. It'll still have tenants, but if the loan comes due and the new financing costs twice as much, the investment can look suddenly very different if the building doesn't

make a lot more money. Companies face the exact same issue. A business that borrowed heavily when money was almost free may eventually have to refinance that debt at much higher rates. That means more cash goes towards interest. And every dollar going towards interest is a dollar that can't go somewhere else. Guys, it's the same thing

happening in the government. And this is exactly why as value investors, we care so much about balance sheets. If I'm looking at two businesses that are almost exactly the same except for one thing, their debt. One has mountains of debt, the other one generates a ton of cash and barely needs to borrow, which

one gives me more room for things to go wrong? The one with lead. That's what margin of safety is about. You're not trying to predict exactly what happens. You're just preparing for the fact that you will be wrong about something. And here's another history lesson investors need to understand. A giant crash is not

the only bad outcome. From 1966 to 1982, the stock market went nowhere while inflation rage and America went through four recessions. That's actually pretty normal until recently. The investor could have spent almost two decades watching the market go up and down, up and down, and basically end up where it started before considering inflation. We

saw another version of this from 2000 to 2010. So the market doesn't need to fall 50% tomorrow for valuations to matter. Sometimes excess gets worked off through a giant crash. Sometimes it gets worked off through time. And a lot of times it's a combination. That's why I'm not sitting here asking where's the crash,

when's the crash. I'm asking what am I paying for this business and what return can I reasonably expect from that price. That's investing. Everything else is just guessing. If my stock happens to fall because of a crash, that's an opportunity. Now, we need to flip this entire argument around because the doom story could be completely wrong. Look at

the actual economy. It's still growing at more than 2%. And guys, that's after inflation. So, the actual growth is north of 5%. Unemployment is only 4.1%. Retail sales recently jumped more than 1% which is very big for the largest part of G GDP. And banks are incredibly profitable. Consumers are actually falling behind on some debts, slightly

less than before. Government bond auctions still have buyers. American households owe a record 18.8 trillion. But the important question isn't simply, is it a big number? Of course, it's big. The better question is how big is it relative to the economy and relative to history? Can people pay those debts? Are delinquencies exploding? Are banks

failing? Are companies collapsing? Those are the better questions to ask. And right now, the data is mixed, not catastrophic. The banking system also has much more capital protecting it than it did before 2008. And then there's the most obvious fact of all. The stock market is still within a few percentage points of its all-time high. If the next

financial crisis has already started, stocks certainly aren't aren't acting like it right now. Now, that doesn't mean that everything is fine. Markets are wrong, just like markets are wrong in 2007 when they hit all-time highs and then continue to go down until the crisis happened. That's why I don't want you focusing on price. But the bears

don't get to ignore that evidence simply because it doesn't fit their story. And the bulls don't get to ignore 5% rates, expensive valuations, and debt because those facts don't fit their story. In fact, Tom Lee says that fourth quarter of 2026 will start one of the biggest rallies of our lifetime that go into

2027. But we have to ask the question, who's right? We really don't know. And that's the point. Two intelligent people can look at the same information and reach completely different conclusions about what's going to happen next. This is the most important part of this entire video I'm going to get to. The lesson is not we figure out the economy,

therefore sell everything. And it's not the economy is growing, therefore buy everything. The lesson is to build an investing process that doesn't require you to predict anything. That's what we call principal driven investing. And we have five core rules to them. Number one, we are investors, not speculators. We are buying pieces of businesses.

We're not buying lottery tickets hoping somebody pays us more tomorrow. Number two, every investment is the present value of all future cash flows. That sounds complicated, but it isn't. A business is worth the cash it can generate for its owners over time. Our job is to make reasonable assumptions about those future cash flows and then

figure out what they're worth to us today. Number three, if we don't understand it, we don't invest in it. You don't get bonus points for owning something complicated. In fact, it probably hurts you. If I can't understand how a company makes money, what drives its economics, and what could destroy it, I move on. There are

thousands of publicly traded companies. I don't need to own every single one of them. Number four, in the short run, stock market's a voting machine. In the long run, it's a weighing machine. And in the short run, what's popular is going to win. What's not popular is going to lose. Narratives matter. Fear

matters, gre greed matters, but over long periods of time, the business fundamentals will eventually have to produce something. And that's what drives the long-term value of the business. And number five, and the most important statement, a great story becomes a bad investment if you pay the wrong price. This is the most important

lesson for the market that we're in at any time. A great company is not automatically a great investment. Those are two very different things. I can love the company. I can love the CEO. I can love the product. I can believe the company is going to grow for 20 years and I can still lose money if I pay a

ridiculous price. I want to do an exercise here for you. Imagine the best company you can imagine. Forget about price. Forget about value. Just think about the best company out there. A lot of people would say it's Amazon. A lot of people would say it's Apple. Whatever it is, pick it. Take that company. Look

up its stock price. Add two more zeros to it. If you still think it's a great investment with that, then you're only attached to the story and you're not investing. You're speculating. What I'm trying to teach you is adding two zeros makes it a bad investment. Taking two zeros away makes it a phenomenal

investment. The same company, same story, same everything. But the price changed the whole thesis. This is why we care about margin of safety. We estimate what we believe the business is worth. Then our goal is merely to buy it for less than that value. Why? Because we're going to be wrong, guys. We're going to

make inaccurate assumptions about the future. I guarantee you one thing about every stock anal analysis I've ever done and that you will ever do. Something in my assumptions will be wrong. I don't know which assumption. Maybe revenue growth, maybe margins, maybe interest rates, maybe competition, maybe the economy. That's why you don't build an

analysis where everything has to go perfect. You stress test it. What happens if revenue growth slows? What happens if margins fall? What happens if all of a sudden it hits a recession? And here's the other side that people forget. What happens if everything keeps on booming? You want to understand a range of possible outcomes instead of

pretending that you know exactly what the future look like? And right now, I would pay very close attention to debt. Businesses that constantly need outside money are far more vulnerable when money becomes expensive. Businesses that generate lots of free cash flow and have strong balance sheets give themselves far more options. And remember, a

falling stock and a failing business are two completely different things. If a wonderful business dropped 30% while the long-term economics remain strong, I'm not automatically scared. I'm interested. Why did it fall? Did the value of the business change? Did the or did the price simply change? Because if the business is worth $100 and Mr.

Market suddenly offers it to me for 60, that could be an opportunity. But if I thought the business was worth a h 100red and new information tell me it's actually worth 40. A $60 stock isn't cheap anymore. That's the difference. If you like those five tenants of principal driven investing, I want you to do me a

favor. Download our free PDF. It walks you through the framework that we use to stay rational while everybody else is trying to predict the next event, the next crash, the next rally, the next recession, or the next boom. It is 100% for free. Grab it using the link in the description. So here's the truth. The

real question was never, is another 2008 coming? Nobody knows. Maybe something breaks, maybe inflation cools, maybe rates fall, maybe rates stay high, maybe stocks fall 30%, maybe they rally. I don't need to know that, and neither do you. The better question is, if something bad does happen, are you investing in a way that requires

everything to go perfectly? A disciplined investor doesn't need to know whether a recession is coming. They don't need to understand where rates are going to be this year, next year, the year after. They need to understand the business that they own. Strong balance sheets, reasonable assumptions, margin of safety, and most importantly, remember that a great company isn't

automatically a great investment. What you pay always matters. And if you think that 5% interest rates are the scariest thing facing the market right now, there's another possibility that almost everyone is completely ignoring. So, do me a favor. Click on your screen right now. Watch our next video. The unthinkable is about to happen to

stocks.