Where are we with Investing Today! 15% UP Per Year Next? or 80% Crash?

Everything looks great in the markets, but investing is not about the past. Investing is about from today to the next 10, 20 years. Good day, fellow investors. In that line, we're going to look at the key risks and potential rewards of investing today by touching on the key factors leading to your investment returns. Valuations, earnings, outlooks, the debt cycle, money, money flows, the economy. Structure that into an investment outlook and then create an investment strategy so that you can see what best fits you. Some topics, how important is AI? Where we are in the debt cycle? Can the economy keep on going as it has been recently? When it comes to the outlook, it might not be nice just to not put your hopes up, but the strategy is there, it might not be easy. Let's start, but before that, just for those who don't know me, I have been investing for 25 years, value investing style, which means the first rule of our investment strategy is not to lose money. We'll discuss that through the video. We want win-win-win situations. So I can make some money, win some, win half, or win big. There is no option for I can lose all my wealth, which is something we'll discuss for just market strategies, for example. The key when it comes to investing is that whatever happens next, politics, geopolitics, economy, recessions, whatever, that I keep on compounding my long-term wealth. If that works, then you are a good investor in my eyes. For those who want to know more about me, check the links in description below for more stock analysis, my research platform, and others. And then just a small bonus towards the end of the video, we're also going to answer the chicken little comments and critics that always come when I make such videos, likely in the comments also without watching the video. Let me know if that is the case. So let's start. Everything is great. The S&P 500 has given 10X returns since 2009 to investors. Over the last few years, it has been 10, 20, 10, 20% year after year. If you look at the levels, you can say, okay, forward valuations at 20, not even that high. We were there in 2020. We were much higher in the dot-com bubble of the 2000s. So there is not much wrong with the S&P 500, one could say. Plus, earnings have been good. The P ratio, the forward P ratio went down. Recently, the last two quarters, everything looks great. Earnings are exploding and companies are so good that their margins are extremely high. And let me focus a little bit on this. This is the projected growth rate of S&P 500 earnings for the next three years by Wall Street analysts. So first, 32% earnings growth in 2026. Then on top of these 32%, 15% and 16% next. So practically, earnings almost double in the next three years. And that will happen on the great margins that these companies have. Unbeatable, never seen in history operating profit margins. Especially, all of it will be enhanced by AI increases in productivity. Now, even Warren Buffett said that when profit margins are above 8%, that is not sustainable. Because somebody's making a lot of money, but the rest isn't. You're overpaying for services, you're overpaying for everything. That means there is a big risk that these margins retract to normal historical levels. God forbid we have a recession and then you see margins crater. If margins crater, so do earnings. Even if everything continues well, and we have had a few great years, the last five years, but if I divide earnings from five years ago, including everything, including AI, including Google calculating Antropic, Nvidia calculating future revenues, earnings growth has been 6% per year over the last five years. And we have had no recession, 6%. Not 30, 15 and 15, six. That's the average, no recession, everything good, money printing, everything looks good, 6%. True earnings growth. Wall Street now estimates for even more growth over next three years. But Wall Street is always exuberant. If you just trickle down, if you just peel the covers off, you'll see a lot of inconsistencies. And that is why we are here. If you look at earnings, if you look at the market capitalization, everything is concentrated in the top 10 companies. So the key question from an investing perspective is, how can I lose money by investing in the S&P 500 and the NASDAQ? That's a key value investors question. Well, the first potential risk is valuation normalization. If you look at valuations, if you look at Wall Street, everything is great on their 30% earnings growth. However, if you look at reality, that is just as companies report earnings, the current PE ratio is 26 down from 29, 30. This is because Google and Microsoft and all these companies reported huge gains in their open AI and entropic stakes. So that will change next quarters, but still we are here 29, 30 PE ratio. The historical average is around 50. We have to disregard this big PE ratio expansion because a lot of companies had losses in 2009. But if you are looking at this, you can compare it in history only to the dot-com bubble. We had some elevated valuations in the 1960s, some in the peak of the 1920s and then crashing as earnings crashed. This is just again, the 2009 example. And the thing is that usually these earnings were compared to the US 10-year treasury. That is now getting close to 5%. When valuations went down, then rates went up. This is now broken, but if you compare to history, you can see valuations down in the 70s, you can see valuations down after 2000. And what happened, here we have higher interest rates in the late 70s, higher interest rates in the 2000s that led to different valuations. It has always been the 10-year treasury, the risk-free rate to compare to stocks. However, that price discovery is broken now because nobody cares. 5% bonds, 5% inflation, everybody wants to make 20% per year and you can make that by investing in AI. However, as we discussed in this video, the growth in earnings isn't real. If you look at Microsoft, first, there is so much circular financing in their cloud businesses that they are reporting growth that isn't there because they are self-purchasing it. Plus, if you look at the earnings, if you reduce the increased earnings because of their higher valuations of open AI and entropic stakes, then everything changes. Then apart from valuation normalization, a double whammy could be earnings normalizations, especially on the AI distortions. AI is driving all the growth. Everyone is booking profits on an open AI, entropic, great, valuations expand, everybody happy. However, all these investments, the 400 billion by the hyperscalers in 2025, the 800 in 2026, who knows, perhaps the trillions in 27 and 28, all are now booked as profits. We invest, we buy, that is valuable. We have commitments, revenues, contracts for the future, everything great. However, as you put that on the balance sheet and you put it into production, so not in preparation, but really in production, then you start to have depreciation on all those investments. And then over time, that depreciation will weigh on earnings, especially if they have to keep the negative cash flows that the big businesses are in now. We have circular financing and purchasing, the stakes are there. NVIDIA, to keep on the growth, will invest 99 billion into other businesses so that these businesses have the backing of NVIDIA, can borrow more money because it's backed by NVIDIA, and buy more of NVIDIA chips. Without this, NVIDIA would not grow as fast and perhaps the whole house of AI cards would revert. If that happens, we have valuations contracting and earnings contracting because these margins are also not sustainable. Sooner or later, depreciation will hit, some investments will go sour, you then have impairments and everything changes. And the key question now is, will AI live up to expectations? Will it change the way we live? For sure, more information, faster decision-making, helping here, if you know to ask the right question. However, the key question for investors is, will it deliver return on investment at scale, at the scale of the investments? For me, the biggest risk is that it evolves like the internet, commoditization, price wars. You're watching me now for free or for a flat 20 bucks rate per month. That's not how you get the huge returns on investment on the trillions invested. And then there is another risk. Even Elon is open about it. China might be the leader of AI down the road because it's China, five times the population, which means five times the number of geniuses that are working hard to win this race. Lower prices, when it comes to China, it's always lower prices. We can just say that the return on investment is unknown, but everybody's investing. If everyone is investing and we don't know the answer, we don't know the results, we can simply say it is a mania. If we go to 1999, herd mentality, everyone is going in the same direction, not knowing what they're going after. They simply don't know. Not even the heads of Entropic and OpenAI know. But everybody's making money. Everyone is investing. Everything looks good. Everything is growing great. If the venture capital dries up, the risky ones go belly up. And then even the whole NASDAQ index plummeted 78% from its peak to the bottom in October. That's how ugly it might look. Only the future will tell. And the future will require some profits at some point. That's how venture capital works. But for now, we have the bull and bear cases. Just found this from Morgan Stanley. The bull case is productivity will increase everything. The scale is justified. The global corporate profits of 5 trillion will be good enough to be invested in AI, to grow those profits to 10 trillion. And that's 5 trillion extra. 5 trillion is more than the investment. There will be great returns. There is the financial capacity. There is enough money around the world to invest in that. And then the self-sustaining growth created by circularity here is seen as a plus, as a bull case. If these companies keep on investing in each other, then everything is good. Everything is growing and everybody happy. However, there is also the bear case. Unsustainable leverage. You need returns for leverage. Revenues, they are very weak. OpenAI, what was it? Maybe run rate of 40 billion. We'll discuss the commitments in a second. Leverage buying, everything is growing, but those payments will come due someday. Annualized revenue for Antropic. Annualized, so they take the last great month and then they annualize it. 65 billion, 40 billion for OpenAI, but they have funding that has reached 200 billion over the last year. Just those two companies. It's easy to get 200 billion of annualized revenue if you spend 200 billion. That should be the minimum. And then they have commitments, OpenAI, for over a trillion in compute cost in everything. The revenues will now hit 40 billion. That's crazy. But everything is great. What are you talking about, Sven? Everything is great. I have also learned that it means high risk. And everything is great because there is plenty of money. And there is plenty of money because there is plenty of financing, which means that the debt cycle just keeps on going. And when there is plenty of money, people start making exuberant bets. And we can just start with the exuberant bets with the government. Let's take the US government. The deficit is 25% of revenues. Of that money, one trillion just goes to debt payments. Just 40% of the deficit is used for better other things, like social security, Medicare, schools, defense, and other. And the assumption is that these deficits will just continue to be 6% of GDP, no recessions ever, real GDP growth, always good. And nobody will care that the debt-to-GDP ratio goes up. And that could be okay if something hasn't happened. And this is interest rates going up. Too much debt, too much competition for debt now with all the AI investments. And US government interest payments over the last six years went from half a trillion to 1.2 trillion. That is crazy. The Fed's balance sheet already started expanding last year this time, and it has not stopped. We had inflation, balance sheet contraction, okay. But now here, it reached a point where it cannot go forward. Similar to the 2019 and 2019 situation, then everything was changed by the pandemic. But at some point, the Fed needs to start printing. This has been discussed by Ray Dalio. US faces a debt crisis in three years, give or take two years. Great article on how countries go broke. So he's explaining there what's going on, how will this end. In 10 years, the best projections are that the US debt will be 60 trillion, but the situation is that interest payments will squeeze all other investments, and it is impossible to sustain that. When everybody gets it, that it is impossible to sustain, then pension fund holders, investors, will want their money back. Everyone will want their money back, will try to get as much out of the crazy markets as possible. And when you have a debt crisis, everything else crashes. Plus, public debt analysis have been made, and the situation is that when you surpass 80% debt to GDP, growth in debt starts to be negative because the interest payments weigh on other investments, and they are not stimulative long-term for the economy. When you are a small country with no debt, of course, investing in infrastructure, this pushing debt to 80% of GDP, helps the economy, helps the productivity, helps the growth. But above 80%, it doesn't help any more. There is the crowding out effect. This is unsustainable. Okay, the debt crisis will come in three years. Key factor, give or take two. Can be next year, can be five years, or even seven years down the road. If interest rates keep on going higher, valuations go lower. If profits go lower, if investments go lower on higher interest rates, that's a double whammy. Even earnings go lower. Then if we have a recession, spending, and the spiral lowers earnings, lowers valuations, everything gets very ugly. Unemployment gets up, but that's a typical cycle. And we haven't had that cycle reversal for the last 17 years. The last one was ugly. The next one will be uglier. But when it comes to investing, everybody wants to know the answer to not whether it will happen. Everybody knows it will happen. Everyone wants the when it will happen. Because can the NASDAQ double from here? Yes, if the AI bubble continues, the dot-com bubble doubled, the NASDAQ doubled last year before it burst. Can NVIDIA double? Yes, it can, but then it would be 11 trillion. Okay, they say they are going to grow 70%. However, this is, in my opinion, pure marketing. They are saying this is huge demand constrained by physical supply constraints. So this is, in my opinion, more like Babe Ruth saying where the ball will go and everybody invest to catch that ball there. And now there is another question. Can we have the ugliest recession since 1930? Yes, that's also a possibility. If that spiral reverts, if all the exuberance we have been enjoying for the last 15 years reverts, AI investment reverts, return on capital is negative, earnings revert, profits revert, valuations revert, commodity prices revert, government debt issues spike because government revenues will go down, but the interest payments and the obligations will go up, that's the vicious cycle that I don't want to see. I hope we'll never see it, but people like Mark Spitznagel have been discussing it already for a few years. They're also saying not yet, but when it comes, markets will crash 80%. In a recent interview, Spitznagel said that we will see the biggest crash of our lifetimes, but there is no immediate catalyst for a collapse. When we'll be close to that catalyst, Mark Spitznagel will be the biggest bear that you'll hear in the months ahead. We are not yet in the months ahead, so you can feel calm, you can still make your money on Nvidia, but how will that crash possibly evolve? 50% down on valuations, 50% earnings down, that's 75%, a little bit of debt issues, interest rates, that's 80% crash in the market. Everything is great, yes, but if all of this turns, it will look very ugly. This leads us to investing. Everybody has said wants to know the timing, and it's easy to be wrong on the timing, right on the situation. I think Ray Dalio is right on the situation, but can be very wrong on the timing because the politicians, Wall Street, everyone will try to postpone it, make as much money while you can. When all hell breaks loose, you just retire to wherever you wanna retire. That's the strategy for them, but does it matter to you? Can you make as much money as you possibly can and then just escape the 80% crash? That's the question you have to answer because if the crash happens, the market will return to where it was in 2013. Impossible that it returns to where it was 14 years ago. Well, it was there in 1996, and 40 years later, it was lower. That's the stock market, my friends, but if there are no changes, stocks will go up 15% this year, 15% next year, 15% the year after that. How? Just look at this. 24, 23, 16, we are year to date. 12, by the end of the year, we will be 18%. All else equal. Why? Because it's all about flows. $1 trillion, a little bit less in buybacks, $1 trillion passive, $1 trillion 401k additions, foreign investments, also pension funds mindlessly investing, some selling from retirees. Let's say $2 trillion net investments into the US stock market. According to the inelastic market hypothesis, $1 in pushes the market capitalization up by five. That means on the $66 trillion capitalization of the S&P 500 or US stock market, the $2 trillion in pushes is halved by $10 trillion. That's your 15% return. My editor will put all the links to the mentioned videos in the description below. If most of the exuberance of the benefits revert, that's 50%, another 50, that's 75% down. So my conclusion is, yes, you can gain 15% per year until the reckoning comes and then we all lose 75%. That's the risk and reward. I'm not here predicting. I'm just saying, are you ready for whatever happens? Spitznagel's strategy is pretty simple. Tail risk hedging, out of the money options that have asymmetric returns. If the crash happens, you make 4,000%. Like he made in 2020. Just 2% of your portfolio is enough to balance out the risks and you can sleep calmly. If you don't wanna do that kind of hedging, you can do simple option hedging. We discussed it in this video. And the main strategy is that you pay 6% for a put option. You cannot lose. If you gain 16% of the rest of the market, you have a 10% yield that is safe. That has worked in all the last 15 years, even better with the 20, because you would have been protected. But yes, you are sacrificing that 6% and you hope to lose that insurance. If you are not into options, you can look into value. Usually last year, I would say, Archer Daniel Midlands, it's food defensive. We have to eat. The business will remain there. We'll protect inflation. Everything great. And then I said, that's a way to look at value. Now the stock, given all the inflation improvements, now it's already double, which means my protection is half of what it was. I don't own ADM anymore. But then we look at our recent quadrant video. Then you can look for cheap things, cheap growth, cheap financial bets. Facebook is cheap if it keeps on doing it. Amazon might not be that expensive. Asian stocks a little bit. HP is not that cheap anymore, as we discussed. You can check my research platform. There are some really cheap things. Tomorrow we'll discuss a UK home builder. The stock price is down 80%. So when it comes to these cheap things, you need to know them well and then have the patience to really buy them where they hit rock bottom with the margin of safety. Another example that we discussed in recent video, process 10 cents on the cheap side of things. When it comes to a long-term value investing strategy, you want to buy at the right price and you want to buy a business that will keep on working for you over time. Keep on delivering returns, owner's earnings, dividends, buybacks. We have all been enjoying this. This is the last 17 years. But just before that, the market did crash 60%. Human nature hasn't changed. So each of the boom periods has been followed by a 10, 15 year when real returns were minus 60% or more. Similarly in the 70s, 2009. And the only way to survive as an investor is through owning businesses that deliver owner earnings, cash flows, and dividends. That's my strategy. We discussed some stocks. It's not an easy answer. So it's a long-term process. For that, you need to follow my channel. You need to follow what I do if you're interested in the value investing part or learn about hedging through options, tail risk hedging, and things like that. Now, to answer the chicken little critics that will always arise in such a video, like in some other videos that I do here and there, every time I click Sven's video, it's either about crash or stock platform research ads. Another video, Sven calling for a crash. Another day, the NASDAQ will go up 2%. We all explained how the NASDAQ will keep on growing because it has been growing for the last 15 years. My performance over the last eight years has been equal to the S&P 500. I have done my 15.3%. The S&P 500 has done 15.3%, including dividends. So my performance is equal, but I am ready for whatever happens next. I'm ready for the Spitznagel 50%, 80% crash. I'm ready for Ray Dalio's debt crisis. I am trying to be ready to owning value, owning some hedges in the form of value, because that's what value investing is. The win, win, win, we mentioned at the start of this video. So I'm not here predicting crashes. I'm here asking the question, is there a chance this is a bubble? If yes, the next question is, how much can I lose? If you're a value investor, minus 50% is not tolerable. We have seen this chart. I cannot accept being 70% down in real terms over the next 15 years. That's simply not acceptable for me. Value investing is win, win, win. So I want minimum be 50% up in the next 10 years and then the upside to be unlimited. Some say Berkshire has safety. Okay, Berkshire will not crash 70% because they will use the cash by value so they can crash 40%, 40%. Still better than the market. But the upside is 5%, 6% because that safety is already priced in. The key question is, am I ready? Can I be ready? And you can be ready by compounding wealth no matter what. Being happy with that 50% up over the next 10 years, worst case scenario. Many are, worst case scenario, 90% down. And just that is my message. If you're listening to me, I want you to be at minimum performance 50% up over the next 10 years. Not considering the risks of the market, in my opinion, is stupid. Because as value investors, we want to compound no matter what. No matter what will be happening the next 20 years. Bull market, bear market, we want to compound. So I'm fine with being wrong today. I'm not fine with risking my wealth on someone's bet. Be it the government, be it AI, be it Google, whatever. The message I want to conclude this is, be ready for change in the best way that is suited to you. Perhaps I can add a little brick with this YouTube channel, with the mindset or with the investments on my research platform. Thanks for watching. I'll see you in the next video.