Okay, folks, in another garbage can day for the market and and ahead of the Fed probably inducing more volatility. I want to pick your brand about why you shouldn't be panicking right now, and how history plays out. And then I want to talk about the direct parallels and stark differences between today's market versus the dot-com bubble and bust of the late 90s and early 2000s. Okay, let's go ahead and start with the picking your brain.

So when you're looking at this much blanket fear everywhere across every indices but especially tech, you're looking at it and you're thinking hey, who the hell knows when this is gonna stop And when it does, will we really believe that it's really gone Or will we just think the next round is gonna be a huge bludgeon? I made my own projections and scenarios on both the economy and when the market's going to be bottoming based on each situation. at least in my outlook based on what we know right now, and I presented that in yesterday's video. But what's interesting is that when you're actually looking for when to enter the market and when to get the deals, your emotions tell you to do the opposite of what's actually good for you. For example, most people think volatility is bad sell when there's high volatility, and then get back in when volatility cools down.

How many times have you heard? Oh, I'll get back into that market when things normalize out and settle down. I've heard that many times now that the Vix Volatility index is back in the 30s. You have even more people panic selling and saying that. But historically, if you look at the 500 trading day forward returns aka the returns following 500 days after the Vix hit a range of 30 plus you could see returns range from 20 growth in consumer stables to 28 growth in technology and overall and this is the key overall.

The higher the vix, the higher 500 day future returns work. So despite the common idea that hey, I'm just gonna wait and get back into the market when things calm down, the truth is that the bigger the fear, the bigger the volatility, the bigger the uncertainty, the more promising performance you have over the next 500 days. On average, the 500 trading day forward returns during periods of low Vics are substantially less than during periods of high Vics. In other words, what I'm saying is there are no free lunches in the stock market.

People who take on the emotional trauma and burden to do due diligence during bear markets and not believe what the crowd is saying are also the ones that tend to get paid substantially more than the rest of the market. The other inference here if you look at this data is that if you are anticipating periods of a higher vix, higher fear, higher volatility, higher uncertainty, then it does make sense to hold cash to be able to plow in during periods of more volatility and more fear and thus more risk premium if you buy into good companies. In my scenarios that I presented yesterday, all of them have a high likelihood that we do continue to see increased fear, volatility, and an increased fix. Okay, moving on to the main entree.

I want to talk about the differences between today and the dot-com bubble. Let's get right into it. So, the dot-com bubble arguably started in 1995 and our hypothetical bubble today started in 2020.. obviously, policies of the past five to 10 years in both situations contributed massively to what stocks and to what extent things went up in the bubble cycle.

But just for simplicity's sake, we're going to keep it between this time frame. So during the dot-com bubble, the Nasdaq rose 400 percent to its peak Over five years. During today's bubble, the Nasdaq rose 142 from coveted lows after a huge panic sell-off. If you're calculating pre-covert highs in early 2020 to peak, it rose 66.31 If you're calculating based on today's Nasdaq valuation after the little selloff we've had so far, Then, from pre-coveted peak, you're at 39.8 growth.

Now you look at the S P 500 P E ratio. at peak. During the dot-com Bubble, you had it rise 127 above historical averages. In today's bubble, you have it at 79 percent above historical averages.

This is what it looks like on a chart. It's worth mentioning though, that tech takes up a much bigger portion of U.s Gdp growth, and a lot of tech companies tend to favor reinvesting money instead of shooting it out in terms of earnings and paying the tax, man, which is one reason why you do see it this high up. even though it is lower than the dot-com bubble, it's just simply because companies are keeping the money in their own companies and reinvesting it. at least in terms of tech.

A lot of the other companies in the value segments are just shooting it out to shareholders and screwing their future growth, but hey, that's the market that we live in right now. But again, the biggest companies that are weighing up these averages are tech, so that's relevant, whereas in the dot com bubble, that wasn't a thing, and you still had it up to 127 above historical averages, so certainly more frothy for large caps even during the dot-com bubble. And then you talk federal funds rate. In the era prior to the dot-com bubble, you had lows around three percent, and then they slowly lifted that after 95 within a range from 4.5 to 6.8 percent.

And it's worth mentioning that the hottest years of the dot-com bubble came at the same time where they were raising interest rates. It was only at the far end at the last rate hikes where it started cracking. Obviously, today, you have much more accommodative monetary policy near zero, So if you think about it in terms of real interest rates, though, real interest rates right now are actually negative. if you factor in the fact that we're at zero in terms of the federal funds rate and then inflation is at seven percent.

So if you're borrowing money right now, you're kind of getting paid to borrow money because you have inflation at seven percent. Now, Obviously, I think that inflation is going to go down at least by the second half of this year, but hey, that's what it is right now. During the dot-com Bubble, you did have real interest rates also very, very close to zero, but not to the extent that we are today where you're far below zero. So at this point this far in the analysis, I would say that the big difference between the two scenarios is that during the dot-com bubble, you had valuations a lot more frothy for what you were getting.

and then in today's bubble, you had much more accommodative, aggressive monetary policy. Next, the other layer of this is public debt. as a percentage of Gdp. This is substantially worse.

60 to 65 in the dot-com bubble 122 in today's bubble. The reason this is such a big sneaking deal in regards to a bubble is very, very simple. It puts downward pressure on the amount that central bankers can raise interest rates without causing massive other problems elsewhere in the economy. If you go from say one to two percent, you are doubling the debt service payments.

If you go from two to four percent, you are doubling it again. And the more you go up, the more you increase the deficit and the more you increase the need to borrow even more money, which is a very, very vicious and disgusting cycle. And you consider how the U.s has been addicted to running up the debt to Gdp ratio over the last four decades. and it's not super confusing to figure out why you've had so much downward pressure over that time period on interest rates.

That's not saying that the Fed won't raise interest rates to combat inflationary pressures, but it is saying that when you start getting into those areas where you're getting very, very aggressive hiking, it simply doesn't last very long and it goes back down. So what really was the cause of the investing behavior that led to each bubble? Well, in Dot Com, you had the rapid adoption of the internet, leading to rapid investment and speculation on new internet companies, many of which had no revenue and a lot had no business plan whatsoever. they didn't even know how they were going to monetize and low interest rates, especially relative to that time period, and during the beginning of that time period, did help aid in risk taking to a large extent. This time around, you certainly have once again easy money policies creating huge risk taking, but the risk taking was taking place in factoring in valuations on companies that are actually creating a huge amount of value for the economy and actually seeing huge revenue growth quarter over quarter, some cases earnings growth and in many other cases had huge, total addressable markets that they're growing into.

If you look at Com, the market was bidding up companies that had no real inherent value and just some sloppy ideas. If you look at today, the market was over bidding up actually good companies. There's a difference between over bidding up bad companies and over bidding up good companies. There are certainly huge exceptions, but it's not the vast majority in today's market, the vast majority of companies that saw huge growth.

We're doing extremely strong business numbers during the pandemic, and on a longer term scale. I'd argue that the big difference in fundamentals here is that the standards evaluation both have a layer of huge speculation on them. But the standards today are much much higher in that people are actually valuing companies that are succeeding instead of just valuing companies that, again, maybe had a website and they're like, oh yeah, internet. But and comment was simply speculation on good ideas, not good businesses.

That's a big difference because you're actually buying a real working business and monetization model instead of something that could maybe one day come together in some way shape or form that we don't know of yet. In terms of actual numbers, you look at small cap valuations based on forward p E ratios and the S P 600 small cap index. During the dot-com bubble, at peaks, you were at 21, at trough, you were at 13. in today's bubble, you're at 13.7 obviously after the current massive deceleration that we've seen throughout 2021 for small cap and medium cap markets.

But in comparison to fundamentals right now, you're much closer to the trough of dot com than you are at the peak. Now, that's not saying they can't go down more. They could go down to as much as the Fed wants them to go down too. But if you're looking at it from a value standpoint, how much value is in these companies, they are very close to the trough of the worst days of the dot-com bust.

in the mid caps, you are at 20.1 at peak 13.3 a trough, and then currently you're at 14.5 in today's bubble, and then in the large caps. of course you are looking a bit more frothy. 27 at peak 14 at trough 19.6 current. The other thing I do want to reiterate a bit more is that the big difference in terms of valuation standards were in the dot-com bubble.

The standard for valuation was: how many users do you have? How many eyeballs do you have? You'd have people buying up companies that didn't even have monetization models. They didn't know how they were going to monetize their users, but people were still buying them because, oh, they have users. Today you had people buying and in some cases over buying companies that quite frankly have great businesses behind them. It's just that people wanted to take that risk of more and more multiples over a longer longer term time horizon and eventually the market says risk off and then all of that goes back down and gets clamped.

But at least the valuation standard theme was higher. Look at something like a Tesla, right? Tesla, or in the last three years turned from a pretty shitty company that was going to go bankrupt to all of a sudden, a very, very good company that's doing very, very good numbers. It's on a rapid deceleration cycle, and fed policies in the overall market that we're in allowed it to factor in a lot more years of growth because you're in that kind of environment. That's what happened to a smaller degree across the rest of the market as well, factoring in more and more of the future on companies that were actually good instead of factoring in the future on companies that quite frankly have no future.

The other day I was looking at comments and somebody said Palantir is going to go bankrupt. Trash company. Just look at the stock. I'm just thinking, what are you talking about? Much like many other good growth companies, they have tons of cash on their balance sheets and in their case, they actually have no debt.

If they wanted to, they could gut R D tomorrow and operate with a profit. The company will go bankrupt because the stock price is down. I think it really symbolizes the situation with a lot of growth companies. But anyways, what killed the bull cycle? Well, interest rate increases during the dot-com bubble rose throughout the bull run, but eventually they peaked around the time that the dot-com bubble peaked.

which leads to the conclusion that they certainly contributed to the slowdown to a huge extent. But the truth is that because a lot of these companies didn't have monetization models the minute that they stopped getting huge investments into their companies, all of a sudden their cash burn rate killed them and they went bankrupt. Businesses started flopping everywhere, and then people were scared to invest in anything tech. and they sold good tech companies and bad tech companies and everything dropped massively and then it was very, very difficult to come back.

Why? Well, because then you had 911, you had war, You had the Enron collapse and the overall tech panic and huge pain that people felt made people not trust reinvesting in the market. So that's why it also lasted a while and accelerated losses. of the downside, even after a lot of these companies got bludgeoned to the ground. The start of the bust was in March 2000 and it ended in October 2002.

the Nasdaq fell about 78 percent peak to trough. But anyways, I guess the conclusion that I come to here is that the two situations are comparable in some senses, but they're very, very different in other senses. We're in a completely different economy right now. Technology has a much, much bigger role in the Us economy and in the world than it did in 2000..

in 2000, you had lots of really big, bold ideas. In 2020 and 2022, you have actual companies that are executing on those ideas and having success. In today's bubble, they're buying companies that are real companies that are scaling fast, but they're overpaying for them to some extent. They're factoring in too much of the future.

and so during a period where you have tightening, you have some uncertainty. People get a lot more short-term focused and that's fine. That's a discount opportunity. It has to cool off in order to get that extra alpha.

The more volatility in stocks that are actually good, the more your returns are going to be over the long run in today's bubble. The one thing that you could say is perhaps the Fed pumped a sector that was going to do very, very good. Anyways, it just allowed it to do good faster than it should have. And while the rest of the market is just joining the massive fear and people have just started panicking in those large caps or as the media likes to call them, safe stocks, certain markets have had fear for 11 plus months and now increasingly things are looking more and more oversold, starting with the small cap and medium cap markets.

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have a good one and I'll see you in the next video.