Why Everything Is Crashing | Crypto & Stocks
This has been an insane week, so this is gon na be a super juicy video. Let me explain exactly whats going on in the markets, because everything is crashing with bitcoin and ethereum hitting their lowest price levels since the year 2020 stocks are falling. Thanks to worries of a recession and the fed breaking the economy, and, of course the video i did about losing a million dollars just a couple days ago, is already outdated. We should start renaming 401ks to 201ks at this rate, in all seriousness, theres two things that are going up this week that we dont necessarily want – and that is real estate interest rates, which saw their biggest weekly jump since the year 1987 and, of course, inflation. So this week, the cpi, the consumer price index, which is the thing we used to measure inflation, came out. It was way worse than we thought, because inflation is now at 8.6 setting another 40 year record high. It was food, shelter and gas that contributed the most to inflation. The last time our cpi reading was this high was in the year 1982, but heres the kicker. All of this news comes at a time when the market is at its most sensitive point. So let me show you the market data first and then ill help break down exactly whats happened, but remember that all the data that we have today is data from last month. So everything we know about may is just coming out in june.
So heres, where the story begins from january to march of this year, the cost of living kept going up and up until by march this year we reached 8.5 in our cpi reading, but then april numbers came out in may and it was lower. It was 8.2 percent, which means maybe that means inflation is now behind us for the rest of the year, were gon na go down. Imagine youre seeing a graph that goes up and up and all of a sudden boom it goes down. It gives people hope that now the worst is behind us, but then not youll never get this because come june, mays numbers come out and now we get 8.6, which means now theres another inflection point but to the upside thats, not what we want, because now we Have no idea once again how high and how bad inflation will get before it gets better and anytime. The market is not sure whats going to happen. It becomes unstable, which is sometimes referred to as volatile. So in response to these crazy market conditions. Papa powell, steps in and increases the federal fund rate to cool down inflation, but here is the most interesting part. The market knew exactly how much interest rates would go up by. In fact, i made a video about this on may 2nd, and i explained in that video exactly how the market would do. This now im going to assume youre, not an ultra nerd and you dont watch every single one of my videos because theyre honestly, not that good.
But if you did watch that video, you might have remembered something called the cme fed watch tool and in that video i showed that the market was pricing in an 88 chance that come june 15th. Our federal fund rate would fall anywhere between 150 basis points and 175 basis points, in other words, 1.5 to 1.75 percent. And what do you know? That is exactly where we are today, because after june 15th, this week our federal fund rate went up from one percent or 100 basis points to now 175 basis points or 1.75 percent, so the market knew exactly what was going to happen. So if thats the case, then why is the market crashing and thats what i want to help explain in todays video? So if that sounds interesting, lets get right into it. Hi, my name is andre jic hope, youre doing well come for the finance and stay for the explain it like on 5 version of what happened this week. So first lets talk about the granddaddy of all interest rates. The federal fund rate, which this week papa powell, increased by three quarters of a percent and true story. This is the single biggest increase since the year 1994.. So once again, millennials got the once in a lifetime economic event for like the 15th time this year now heres the catch, even though i told you, the market predicted an 88 chance for the federal fund rate to be between 1.
5 and 1.75. Today, the truth is that the majority of peoples expectations was toward the lower end of that spectrum. So is this good or is this bad that depends on how you look at it, but theres two main reasons why we got the higher rate increase and the first reason is because the cpi data which came in higher than we thought so, of course, the central Bank corrected a little bit more, but the second reason is arguably much more interesting and thats because of something called consumer expectations. This is something newyorkfed.org actually monitors, and you can check yourself because inflation works on our perception if we believe the cost of living is going to go. Higher, of course, were going to spend our money today and the problem is actually getting worse, because consumer expectations went to 6.6 as opposed to 6.3 percent in april and its steadily climbing and thats bad news, because if this is a theory that we all believe, of Course were gon na go out there today and spend our money because we know if we wait tomorrow were gon na pay more money, thats, especially true for the higher ticket stuff. But this makes the problem even worse and its a self fulfilling prophecy. So, in a way, papa pal has to play the role of a magician in that he has to manage our expectations and use misdirection to convince us that prices will come down and well get deflation, but that means obligatory magic trick kind of like this card right Here the king of hearts.
Now the expectation management part is where i want you to believe that im bending this card in half – and i want you to think that its somewhere in the middle with the economy on top. Even though the truth is that prices are still rising to the top thats the magic trick, the fed needs to convince us of, and even though collectively we should believe that the card is somewhere in the middle. The truth is that no one believes the magic because weve been edumacated. We watch these youtube videos and weve subscribed right. So, for those two reasons, consumer expectations, as well as cpi data, is why the fed increased the rate by three quarters of a percent. Because if i cant fool you with a magic trick, im gon na beat you into submissions with those rate increases and its tough. Because even inflation expectations for the long term for the five and ten year timelines have actually increased according to the university of michigan. So now the question becomes: how can we apply this information to predict whats going to happen to the markets in the future and the truth is. I have no idea whats gon na happen in the future, but i can show you historical data about what happened to the market when the fed increased the rate by three quarters of a percent. So let me show you that juicy data and how you can apply it and how you can use it investing in the markets right now is super frustrating and heres.
How i thought about this. If you had invested your money into the stock markets, s p 500 youd be down over 20 this year. If you had put your money into bitcoin, youd be down over 53 and if you had kept your money in cash. Youd still be losing 8.6 thanks to inflation. But somehow the rich continue to get richer and thats, because in the first half of 2021 global venture funding, totaled 288 billion dollars of invested money, so wall street makes it easy for themselves to continue to get richer because they invest billions of dollars into early stage. Startups which allows their money to discover the ubers and googles of the world before they become billion dollar companies. But in order to invest in early stage startups, you have to be an accredited investor, which means you have to make two hundred thousand dollars a year or more for at least two years or be worth a million dollars and unfortunately, that excludes 95 of the us Population and thats how wealth is protected and controlled by the few and thats where todays sponsor comes in sweater. Sweater is the first and only vc fund, thats designed for everyone regardless, if youre, accredited or not, you can invest in startups. I believe in their mission. So much that ive personally invested my money into their company and sweater is a fully managed fund, and that means their investment team invests money into venture backable companies on our behalf.
They handle the entire process from making the investments conducting the research and reporting back in real time to the sweater members. I also met with their founder jessie randall, and i agree with their belief that venture capital shapes the future and the right to shape the future belongs to everyone. So if you click the link in the description below the video at sweaterventures.com forward, slash andre, you can skip the line and start investing like the rich im so excited and i hope youll join me. Thank you. Sweater for sponsoring this portion of the video now lets get back to it all right. So, the last time the federal reserve increased the federal fund rate by 0.75 was in 1994 and heres. What happened at that time. There papa pal was fed chairman alan greenspan, man who looks like hes really proud of himself for catching you cheating on his calculus test. Now he started a campaign to increase the federal fund rate seven times over the next 13 months, starting at three percent in 1994. To six percent by 1995., so heres what happened? In 1994, their stock market went down 1.2 percent, but by 1995 the market was up 34. So our market looks at that history and says: well, maybe theres a path for us to do the same thing. Thats. The good news heres the bad news – probably not going to happen and thats, because our stock market is already down over 20 and at that point in time they were starting to increase the rates from three percent to six percent.
We havent even gotten three percent yet for context were still at one point: seven: five percent. We have a ways to go before we even reach three percent and thats in the face of red hot inflation of eight plus percent. So the question is: where will our interest rates be at the end of this year? So let me introduce you to that nerdy tool that i talked about before the cme fed watch tool heres how we can use it to figure out where interest rates will be at the end of this year. So here it is december. 14. 2022. The time of the last rate hike five graphs with five different probabilities. So far the market thinks theres a ‘.4 percent chance. The rate will be anywhere between three and a half and four point: two five percent, but the market also thinks theres a 32 percent chance. Itll be between 3.7 and 4.5 percent, so here is what it means: theres, roughly a 70 chance that at the end of the year the federal fund rate will be anywhere between three and a half and four and a half percent thats. What the market is pricing in now the fed also has its own guess and its telling us that the fed fund rate will be at 3.4, so the good news is that rates are climbing, which should bring inflation down. Now. Let me just summarize everything i told you and how you can actually apply it in a super useful way now: im, not a real estate agent or a loan officer, but heres how you can use this information to hopefully help you out when making a bigger decision On taking out a loan to buy a house, for example, so heres what i did step one i compared the federal fund rate, which remember, is the cost for banks to borrow money against the prime rate, which remember, is the cost for consumers to borrow money.
And i looked at historical data from 2015 all the way to 2022, and what i found out is that the prime rate is almost always roughly three percent more than the federal fund rate. So, for example, today the federal fund rate is 1.75, which means, historically speaking, our prime rate. Our cost should be closer to 4.75, which, coincidentally, is exactly where were at. This is not always the case, but its anywhere between three to three and a half percent. More than the federal fund rate, okay hope youre with me so far now lets apply that toward the end of the year, when the federal fund rate well jump to at least three and a half percent, which i think is the minimum, that rates will go up To at that point, plus three from that would mean that the prime rate should be anywhere between 6.5 and 7. I hope youre with me so far, im just using historical data to predict what our borrowing costs will be now step two. I compared the prime rate versus what the average person was getting on the interest rate of their 30 year mortgages now for the economics nerds that are watching the video and shouting andre mortgage loans are not dependent on prime rates theyre dependent on the 10 year treasury Bond yields – i hear you, i understand, but im not smart enough to predict where bond prices and yields will be in the future, so instead im using something simpler, which hopefully ive just shown you how to calculate and predict out into the future, which is the prime Rate – and my question is how close is the prime rate and the cost to buy a house.
The two are not exactly the same, but at the end of the day, in my opinion, all interest rates are tied together in some way or another to some degree of margin, and my question is how close are the two really. So let me show you the data, which is going to seem a little complicated at first, but i promise ill break it down and help explain what it means. In december 2015 notice the prime rate was 3.5 percent, but the average 30 year mortgage loan had an interest rate of 4. Then i looked on december 2016 when the prime was 3.7. The average loan was 4.1 percent, so only a quarter away. March 2017 prime, was four, and mortgage loans were 4.2 june 2017 prime was 4.2 and mortgages were 3.9 december 2017 prime was 4.5 and mortgages were 3.9 december 2018 prime was 5.5 and mortgages were 4.6 october 2019 prime was 4.7 and loans were 3.5 may 2022. Prime was 4 and loans were 5.25 heres what it means. It means that the difference between the prime rate and the 30 year mortgage loan interest rate is usually within 1.25 of each other at any given time and ultimately, what it means is that when we finish this year at a 6.5 prime rate at least the minimum Of what i think itll be, that means the cost to buy a house with a 30 year. Mortgage loan will be between 5.25 and 7.
75 percent. My personal guess is that it will be closer to seven percent, which is pretty bad for real estate. That means its all but guaranteed to cool down. Now, youre probably never going to use this information anytime soon, unless youre planning to buy a house six months to a year out, in which case you can actually use this information to calculate the affordability range of your monthly payment. So that i think, is super useful. So thats stocks interest rates real estate now lets talk about crypto, bitcoin and crypto crashed really hard this week, almost their previous all time highs and why this happened is super simple, macroeconomics because worries of a recession, inflation going higher and interest rates going up more than We expected, you, add it all up and you get the risky stuff to fall the hardest. Now i wish i could show you data to prove my point, but cryptos still too new, but i will say this going forward this year. We might start to see more crypto exchanges, freeze, customer withdrawals, so if youre someone who needs access to your crypto right away, consider keeping it offline on cold storage ill leave a link down below to the one im using, but the reason that we might start to See this is because they want the market to remain stable if they allowed everyone to withdraw their money. That would be chaos. They need to control the flow and supply of money to keep everything steady.
So if this happens to you thats, probably why personally im not worried about bitcoin and ethereum at all. This is what they do. These are the cycles they go through and they will test you, but they will also reward you if you can stay with it, but just like the people who called it right got their time in the spotlight, its the people, calling other people grifters and scammers and Promoters of crypto that are gon na get their time in the spotlight and its the same narrative back and forth over and over again, but in the long term. The objective truth is that we will continue to get higher lows and higher highs, so stay with it and dont get left behind, as always have a wonderful rest of your day. Smash the like button subscribe. If you havent already go grab up to 250 worth of free bitcoin with this link right here, go grab your free stocks, links are down below and then go track them automatically with a spreadsheet linked down below.