Tom’s Thoughts on a Potential Market Crash
Transcript:
Katie Nealis:
So right off the bat, we have a question about, is there a chance the market will crash like it did in 2008?
Tom Vaughan:
Ah, well, yeah, there’s always a chance of crashes. You know, one thing about crashes. And here’s my analogy that I always use. It’s usually something that we don’t aren’t really thinking about. And that’s what makes it a crash. So my analogy is always, you know, you’re walking down a dark street, and there’s this big hedge, and somebody jumps out from behind that hedge, and you know, that’s your adrenaline goes, and you get, there’s a lot of fear, versus kind of knowing that there’s somebody behind that hedge and jumping out, not as much fear, right. And so that’s what happens most of the time, you know, we weren’t thinking about a pandemic, and we had the biggest, fastest 35% downturn in history, because it was the person that we didn’t know behind the hedge jumping out, right.
And so it’s always possible to have a downturn in the sense of, you know, an unknown scenario that we’re not really thinking about, having said that, one of the main catalysts of downturns is rising interest rates, especially by the Federal Reserve, at least in this timeframe. So just like I just showed here, the 2000 2008 downturn, you could look back very critically and see that there was an interest rate increase that kind of caused that. And, you know, eventually, it just gets to be so much that the market ends up selling off, and we’re at zero right now, essentially. And there’s just some talk about possibly raising rates in 2023. I’m pretty confident right now that the market could do quite well, you know, is it gonna make 20%? Or 2%? You know, that is a little hard to tell? Is it going to lose five, because those things happen all the time, right? Anything up to negative 20% is pretty common.
And so but is it 2008, specifically, it was 53%, on the s&p roughly 60% on the total stock market here in the US alone, and it was a devastating, you know, scenario with lots of unemployment and all these things, I would be very surprised, usually, that comes in a different scenario. So I would say the odds of that are actually quite low at this point. We could be there in a year, three years, five years, you know, when things really develop, when unemployment is, you know, a lot lower and those types of things when the market is just kind of really exhausted itself. And the Federal Reserve has raised rates and raise rates and raise rates. That’s a fairly common scenario. Again, something can always happen, like a pandemic, that we weren’t expecting, but I would say that’s, you know, probably a low possibility right now.
Easan Arulanantham:
So do you feel that like cryptocurrency now? You know, it crashed for 40% but you don’t think it’s uh, do you think it could still be a possible course in the future?
Tom Vaughan:
You talked about in earlier videos how we speculate with crypto, yeah, it’s actually kind of interesting, because one of the issues that I’ve been trying to watch very closely is to see because one in cryptocurrency, there’s no regulation. So you can do 100 to one leverage. So you can put up $1 and buy $100 worth of cryptocurrency, essentially. And so of course, if there’s even a little bit of a downturn, you got to sell, you know, or you get a margin call. And so what can happen in those scenarios, when a lot of people are borrowing money, is they start to sell some of the other things that we own. So you know, apple, or whatever it is, that you like, is now being sold off, because it’s a source of funds to cover those margin calls on the cryptocurrency side, we didn’t see that here. So we did like literally, you know, from high to low there, you know, that was a pretty big drop or closer to 50%. And we’re not seeing the market, you know, fall apart, or we’re not seeing big sell offs.
And actually, we’ve seen just the opposite that people have come back and I think are buying some of these, you know, genomics, innovative technology, you know, clean energy, you know, those areas that they were buying last year, they’re coming back to, and I would suppose there’s just a guess, because it’s very difficult to see there isn’t a lot of transparency, what’s happening there, you just kind of watch price and see what happens. But I would suppose you’re not seeing a tremendous amount of institutions get involved with leverage because that when hedge funds get in there, and they start using leverage, they’re the ones that end up selling off the rest of the stuff in their portfolio, which can cause downturns, if it’s individual investors using leverage. They’re important, but they’re probably not driving the market down, you know, especially not even recently, as much as the Federal Reserve comments are driving the market down. So yeah, it’s it’s something to watch. I’ve been studying that. That’s why I’ve been showing, looking at those charts that I just showed you. I think it’s an interesting