Hey everyone me kevin here in this video we're going to talk about what the federal reserve just said about the stock market and debt in the markets. This is part one out of three parts of the series, because we're going to talk stocks and debt in part, one then we're gon na do real estate and part two and crypto in part three, all from the federal reserve. Folks, let's get into this right after i mentioned that this video is brought to you by the daily upside, a free business and investing newsletter sent right to your inbox every morning, all you have to do is go to medkevin.com upside. It's totally free, go to medkevin.com upside and sign up for a free business, investing newsletter, okay, folks, let's get into the financial stability report, it is 85 pages long and i'm just going to give you the straight bottom lines here.

The straight scoop about the most important part here we go part one the overview folks, the federal reserve is consistently looking for risks in the market. Now there are a lot of folks who like to leave comments on youtube, saying things like: oh, my gosh, why are we always talking about the market crash folks? It is so important to know what risks are so that when they appear you are prepared. You know why the market is reacting, the way it is, and you have the opportunity to make money. For example, if you knew exactly what was happening during the march and april recovery, so the end of march and april recovery in 2020, you would have thrown a lot of money into the stock market, and that is exactly what i did so i'm covering and watching.

The news every minute of every single day i live and breathe this stuff. So when the fed talks about risks, i pay attention now. I know not, everybody believes them, but hey best thing is listen to their bottom lines and consider them. Okay, number one prices of assets very, very high risky assets; okay, look in may of 2021; they did a financial stability report six months ago and they said that basically, stock prices were already very, very high compared to their expected future cash flows worth noting that they're, Not talking about high, like stocks, are priced high compared to current cash flows.

They're saying stocks are high compared to expected cash flows. That's a sign, that's a little concerning, in addition to that, they suggest that asset prices remain vulnerable. To quote significant declines. Should investor risk sentiment deteriorate, progress on containing the virus disappoint or the economic recovery stall? Personally, i don't believe the economy economy stalling is a concern.

I also don't believe that the virus is. Is that big of a concern, at least at this moment, with the data that we're seeing in vaccination rates and so on and so forth? Now the biggest one here is this right here? Should investor risk sentiment deteriorate, we could see significant declines. The fed is basically saying the stock market is not going up for fundamental reasons. They're, basically saying the stock market is up because people feel like stocks only go up.

Stocks only go up. That's dangerous! That's risky right, so these are important things to pay attention to. The federal reserve is telling us this. This is a warning.

This is a red flag that says, get out of margin, do not be highly exposed to debt, don't be exposed, ideally to any debt. On your securities, especially crypto, or so my gosh stay out of margin very, very, very dangerous and instead be comfortable, taking a little bit of profits on options. If you have options, stow away a little bit of cash and the good times are times to stow away. Some cash, even though the market was pretty red today, market was probably red honestly partially because of this report.

It's something to pay attention to now. Borrowing by businesses and households has mostly returned to pre-pandemic levels, which is actually a good thing. A little note in here about some issues that small businesses had during september, not that big of a deal and leverage in the financial sector, like banks, is actually pretty good, with the exception of life insurance companies, where things are a little more elevated. Now, there's also a note here, which i thought was very interesting, especially since there's they're leading off by talking about sentiment, leading stocks to be high.

Take a look at this social media, retail investors and equity trading was a report that was put together and it analyzed the volatility in so-called meme stocks by linking changes in demographics regulations and technology to recent trends in the demand for and supply of, retail trading opportunities. In the market, and in other words, the federal reserve is now and they're going to make some comments about this. In a moment, the federal reserve is now looking into social media trends. Look at this retail investors, social media and equity trading as potential risk factors for financial stability.

Take a look at this to date, the broad financial stability implications of these developments have been limited, with bursts of retail trading volatility that have rapidly subsided right. It's that classic momentum stock pattern. Where we see this, then we see the decline and then the bleed out that right. There is the sign if you're, if you ever see modern art - and you see something like that - folks, memestock, okay, uh all right.

So, let's keep going over here, so the revival of household financial risk appetite and stock market participation take a look at this one household financial risk appetite appears to be cyclical, and here the federal reserve is saying that people get interested in stocks in cycles. We hit a peak in 2001 and another peak in 2019 and a trough in 2009, so unironically, when people should have been most willing to take financial risks, which a financial risk is really just an investment right. A calculated investment is still a financial risk. No risk would be you know well old days, it used to be just cash uh, but there's obviously now inflation risk associated with cash, so really, no matter what you're doing, there's some sort of form of financial risk, but generally what they're thinking of here is when You take a financial risk, you're generally referring to investing like if you bought treasury bonds.

Technically, those are supposed to give you your money back in the future, and if you were worried about inflation, you could buy tips uh and, although you're still paying a premium for those as well, so you're still going to lose a little bit of money. But anyway, getting off that tangent here by 2000 uh by 2019, the most in the most recent survey. It was again approaching a 2001 peak and it's interesting to notice here that the household direct stock ownership appears to follow risk appetite to some degree. So, as risk appetite goes up, more people are buying stocks and usually risk appetite is going up when prices are going up.

That's bad! That's dumb! That's the opposite of what we should be doing. When prices are going down, that's when we should be making the biggest investments, but before i go any further, you need to check out the daily upside. It's a free business and investing newsletter sent right to your inbox. Every morning, if you're like me and you're, tired of all the clickbait financial news, headlines and biased coverage of important issues by traditional outlets, starting my mornings with the daily upside, helps me cut through all of the noise and have a better jump on the markets.

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Join the 150 000 readers and sign up totally for free by going to mattkevin.com upside or by using the link in the description down below all right. Now, let's get back to the federal reserves report because so far the federal reserve's report is basically saying: hey, like debt levels are good asset prices are really high yeah. We may have run the money printer a lot, but we're seeing a lot of especially younger folks. Taking more risks than older folks and the amount of younger people getting into stocks is substantially higher than it used to be, and it's an increasing trend.

Now there are good things associated with that, but maybe not if they're all associated with yolo call options. So we want to be careful that, but i want you to keep an eye on the trend of this financial stability report. They're saying prices are high, it's very risky to invest when the market is higher and you should basically be safe with your investments, by limiting margin and limiting debt, and that's what other companies are doing. With the exception of life insurance companies, a lot of companies are actually reducing debt.

We'll see some more references to that in just a moment now the report does go on to say that so far there is a little bit of a moderation in investment risk. Even though risk is overall trending up, we've seen a little bit of a pullback from the craziness that we saw in the springtime and that's partially, because we're seeing less ipos and especially less specs, especially because of increased regulatory scrutiny on specs, which keep in mind those Investor presentations they put together for spax totally ridiculous on payment for order flow. The federal reserve mentioned that payment for order flow has been pretty useful in getting people to invest in the stock market, with free commission trades right, and it's really come out of laws from 2005 and 10 that essentially led companies to be able to take a little Bit of a spread every time you trade, as long as the customer receives, quote the national best price or offer price or better, and this is where you get companies like robin hood, saying well, you're getting the best price really. Is it really the best price or could i have gotten a share for three or five cents? Less right, that's sort of the argument, but either way overall the biggest risk that the federal reserve sees when it comes to payment for order flow is actually options trading because option options trading is the most profitable for brokerages.

This is where payment for order flow and the spread for payment for order flow is the highest usually around five to ten cents, as opposed to maybe one or two cents for stocks. So so you could really see five to 10x the spread or potential profitability and options for brokerages, so they have an incentive to encourage you to trade options worth noting that, because options can be very, very risky. This is why, for example, somebody left me a comment earlier. They said, oh kevin.

What happened to mr never sell i'm a big fan of never selling some of my deep long-held share positions, but when i hold options you go into options knowing that at some point you're going to sell. So if you know you're going to sell the options or roll them or whatever you're going to do, you may as well take profits when they're green act quickly, though, because options move fast, you got to have a good risk appetite for options, but anyway, take a Look at this reference again back to younger traders, the average age of account holders in trading apps being 30 years old, nearly half of them identifying, as quote first time, investors in basically colorful apps like robinhood. That's literally what they're talking about here and get this! This is going back to that social media part. The widespread use of large open social media platforms has shaped how retail equity investors communicate about the markets.

Recent academic papers have shown that social media can increase the information flow to retail investors, as well as the amount of noise in markets from retail traders. Social media can contribute to an echo chamber in which retail investors find themselves communicating most frequently with others of similar views and interests, thereby reinforcing their views. Even if these views are speculative or biased. Folks, the federal reserve has never before talked so much about how young people please pay attention, because you're all sitting in really stupid, echo chambers paying way too much money for stocks and you keep buying more of them when the price is going up and you're stupid.

You're gon na get screwed please at least just don't be in debt. Do what the other banks are doing and be out of debt, which, in fairness, is very true folks. I've made three videos in my career about this company called hylion. The first video i deleted because i did not recommend people invest and i don't make recommendations, i'm not an investment advisor right, but i didn't recommend or or consider highly on a good investment for myself.

This was back when it was at 18 to 20 dollars. I said i thought it was a dangerous company to invest in. I had to delete the video and remake it. Two.

I made two separate videos breaking down why i thought there were risks associated with the company, and i was arming investors with information about hey. This is what you got to pay attention to. This is a risk factor. This could hurt, be careful, watch this and uh.

If i wasn't too careful, i was getting flamed by people who are basically only interested in hylion. That's because it's not their fault, it's how the algorithms work think about it. The algorithms will show highly on videos to people who, like hylion, so the algorithms reiterate an echo chamber - that's dangerous, like somebody who hates highly on and doesn't care to, invest high highly on is not searching highly on on youtube. Anyway, they went from like 18 to 20 dollars to eight to nine dollars so worth noting.

Sometimes it's worth listening to alternative opinions, but anyway uh. I. I really find it fascinating how the federal reserve continues down this path, about expressing risks about financial stability associated with uh individuals and uh and social media kind of interesting uh, otherwise for younger stock investors. Here you go again, i i kid you not.

They are just talking straight up to like millennials here for younger stock investors. They tend to be more leveraged than older households. Median leverage ratios of younger retail investors are more than double of all investors, leaving those investors potentially more vulnerable to large swings and stock prices. If they have large, as they have larger debt burdens to service vulnerability is amplified, as investors are now increasingly using options which can often boost leverage and amplify losses.

Folks, this entire report may as well just be called yo millennials, stop being stupid. This is like, if you're watching this and you're like dang, i'm really exposed to options. Dang, i'm really exposed to yolo trades. It is okay to have some apple, some google and some amazon in your portfolio.

Okay, it makes up about 15 of mine. I consider it a solid foundation. It's the bottom part, it's a lot less volatile than like options at the extreme or yolo bets right, so be very, very careful with it with some of these uh. It's so weird how they keep referring to to this, but anyway uh.

Let's keep going so then we have uh business debt. Uh gross leverage is high, but net leverage, the ratio of debt, less cash to total assets, has dropped since levels not seen in 2018.. Again, good news for businesses, good news for companies, not so good, for potentially retail investors like millennials, who have a lot more debt credit quality which has often which deteriorated after the onset of the pandemic, has continued to improve. This is very good, better credit quality, very good thing default rates on leveraged loans.

These are basically subprime loans, rebranded, as leverage loans have fallen. That's good and the financial position of many households has continued to improve, since the previous stability report in may also very good. So you're getting a lot of good news about debt credit quality, lower defaults. Look at this one-third of household debt is consumer credit, which consists primarily of student loans, auto loans and credit card debt, inflation, adjusted consumer credit edged down in 2021, and student and auto debt were flat and credit card debt declined in real terms.

That's actually really good and the share of auto loans that were either delinquent or loss mitigation declined further to about 3 percent. However, there's a little bit of an increase because of stimulus programs wearing off, but otherwise the risk that student loan debt poses to the financial system appears limited and consumer credit card balances have contracted on net. This is good. This is very good, but again that reference to younger individuals having too much debt versus banks.

Overall delinquency rates of loans held by banks fell during the first quarter. We also hear that hedge fund leverage associated with equity market activities remained at high levels in january of 2021, but we're actually seeing, even though we're at elevated levels we're seeing a decline in hedge fund leverage. The black line here is hedge fund leverage and we're seeing that start to decline a little bit. This right here is january, and this right here is now so you're.

Seeing that leverage at hedge funds come down again another indicator that hedge funds and institutions are aware. Asset prices are very rich and they're. Reducing leverage and potentially raising cash bank lending to financial institutions operating outside the banking sector. Continued increase uh in in amounts, but overall credit quality is still very, very strong.

Then the federal reserve talks about what they think is actually one of the biggest risks to the financial markets, and it's actually cyber security. This to me is bullish for a company like cloudflare. I really wish i invested in cloud fair i'll, wait for a dip, but anyway take a look at the four different risks they pose for cyber security. One example here is a cyber attack at a bank holding company that impairs user data, so this would be much worse than like robinhood leaking potential names or dates of birth or whatever.

It would be literally corrupting institutions data and how complicated it could be to fix that sort of data, so that would be a risk, also a potential cyber attack of a a stock exchange that could limit or halt trading like what happened in new zealand at the Key with the kiwis uh for four days that there could be a loss of confidence in the market if there were a cyber track attack. Imagine if they were cyber attack at the same time as you had some form of uh disastrous market crash like it could just amplify problems, it'd be horrible uh. You know what happens when people can't sell people freak out and get more nervous number three financial institutions weren't the target of a solar winds attack, but some form of other financial institutions getting hit hard. This could, in my opinion, be something like a citadel or a brokers that handle trades outside of the exchanges and a fourth risk would be potentially one of the one of the big trading firms, one of the big banks going down and in 2018 the federal reserve Did a study on this and found that 31 percent of banking sector assets would face compromised liquidity outside of the affected bank? If one of the five big banks went down, i mean this right.

Here is basically a blueprint brent for how hackers could really screw up america in my american finances, but look if we have a summary of this financial stability report outside of the other parts when i'm going to talk about housing and stable coins and cryptocurrencies folks. This report right here is a massive warning to younger investors, who are using options as a large part of their portfolio or are in debt and folks, if you want more insights into my opinion on how how to properly invest, how to maybe modify the way you're. Investing check out my programs on building your wealth link down below, especially the stocks in psychology money group. You get buy, sell alerts every time.

I make a transaction and i make it very clear if i'm doing something out of speculation, if i'm yellowing or if i'm making a long investment and i'm doing something to buy and huddle so folks, i look forward to seeing you there. Thank you so much for watching this video and we'll see you again in the next one goodbye you.