On Monday, the 6th of August 2024, the S&P 500 opened down almost 3 and a half% with the NASDAQ down 4%. In other global markets, down by significantly more than that, markets like the Nikkei 225 are down over 12%, and Taiwan's main stock index is having its worst day in history. This followed a weekly trend that has seen trillions of dollars wiped off markets around the world and fingers being pointed at Japan, the Fed, and greedy Wall Street traders, or really whoever else people want to blame when things go wrong. And then just to prove that nobody fully understands what is going on, just one day later, markets across the world rallied almost covering the losses from what people are now calling the New Black Monday. Since you should expect a lot of YouTube thumbnails with red graphs, laser eyes, and so so many flames in your immediate future, now is probably a good time to ask what the is happening to the stock market right now. European and Asian

markets plummeting around the world, and we've been looking at Futures, and they were more than a thousand points down. Traders may want to put on their hard hats. That's because US markets picked up where Japan left off, and the global stock market intensifies. MK index fell 12%. It's the single worst decline since the 1987 crash on Black Monday. London, Washington, andico to best understand the selloff. You should probably know the work of this man, George Soros. Soros is a polarizing figure, but love him or hate him. He is one of the greatest investors and hedge fund managers of all time, and he attributes his success to a theory he pioneered called reflexivity. I will leave a link to his full lectures, books, as well as papers on the mathematical modelling of his theory, but that level of technical detail is not important to understand the current crash. Basically, the theory of reflexivity in the context of capital markets says that markets can

be explained by feedback loops that distort asset prices from what their true fundamental value should be before a spark causes them to revert back to an equilibrium. Pundits of this theory also point out that the positive feedback loops that distort prices into a speculative mania tend to be long and drawn out, whereas the reversal of those feedback loops tends to be very quick, a lot like what markets are experiencing right now. You could make a convincing argument that the stock market has been in a positive feedback loop cycle. Hype around artificial intelligence and its potential applications has catapulted the value of five or six already extremely large companies into the trillions. Most companies have been trading completely flat, but just the Magnificent Seven, as they have been dubbed, have carried the entire stock market because of their enormous size in price performance. That extra investor money has funded intense research and development efforts, accelerating the rate of progress on these tools, which means that almost every new week you are

seeing some new technology that could make you redundant. This feedback loop has been helped up by trillions of dollars worth of liquid capital that has accumulated around the world, leading to stretched valuations from investors who don't want to be left out of the party. This trend has already started to slow down as investors have become weary about how companies will ever be able to justify their current valuations, and consumers have been resistant to AI tools. This time last year, tools like chat GPT and mid-journey were incredibly exciting to consumers, professionals, and college students with an overdue assignment alike. Now, a recent study has revealed that consumers intentionally don't purchase goods or services that feature AI openly. That's putting pressure on the bubble, but the fire still needs a spark. That's why everybody is blaming this global market crash on Japan and a weird little investing loophole that their unusual economy made possible. So, it's time to learn how money works to find out why this is happening now.

and what you should do about it. This week's video is sponsored by Ridge. Ridge started with a simple belief: they can make wallets better. Over 10 years and two successful Kickstarters later, they've sold over 2 million wallets and continue to innovate with their everyday carry items. Ridge wallets are uniquely slim, designed for your front pocket, and can hold up to 12 cards along with cash. They feature RFID-blocking materials to protect your personal information and are made from premium materials like titanium, aluminum, and carbon fiber. With over 50 colors and styles, there's something for everyone. Ridge also offers a key case that can securely hold one to six keys, eliminating noisy key jingles and fitting easily into your pocket. The key case is a game changer for keeping my keys organized and silent. And now Ridge is hosting a massive sweepstakes where you can win a Hennessy Velociraptor, a gold-plated Cybertruck, or $100,000 cash. And the best part? You can enter

for free. Also, every $1 you spend on the Ridge website equals one entry, and you can get four times the entries if you purchase the Cyber wallet or Hennessy Specialty Products using my link. Head over to ridge.com/money or click my link in the description and start your entries today. Japan's economy has been stagnant for more than three decades now, and the Japanese government, along with its Central Bank, has been trying to change that by keeping interest rates extremely low, even going negative. Between January 2016 and January 2024, it was hoped that these low rates would encourage local borrowing, boosting the economy, but when that never happened, the Bank of Japan almost became stuck offering these low interest rates because any increase would further slow down an already sluggish market. It might not have done much for Japan, but investors took advantage of these low interest rates by borrowing money in Japanese Yen and then either investing in Japan or, more often,

exchanging Japanese Yen for another currency like the US and then investing in asset markets here in America. Since stocks only ever go up, investors could make money on the spread between the low Japanese interest rates and the higher returns they could get in the market. According to data from the Bank of International Settlements, the value of these cross-border loans was more than $1.5 trillion. This investing scheme, called a carry trade, was made even better by the fact that the Yen was dropping in value relative to the US dollar. So, investors could make extra money on the foreign exchange exposure if they didn't hedge against it. Like all good things, this worked well until it didn't. Eventually, the value of the Japanese Yen got too low, prompting the bank to acquiesce and raise interest rates to a staggering 0.25%. That's extremely low compared to rates in most markets, but it caused the value of the yen to increase by more than 11.5% in just under a month. Such a

rapid swing in the exchange rate between the first and third most traded currencies in the world have sent shock waves to the financial system as investors in carry trade positions face up to significant losses within the space of a month purely because of Foreign Exchange losses. If you had $100,000 and borrowed $900,000 worth of Japanese Yen last month to take out a 10 to 1 leverage position in American markets, you would have lost all of your money because your debt is now worth more than a million dollars because of the appreciation in the currency you took the loan out in. This is causing many investors to close their positions to cover their loans, which is pushing markets down around the world and the value of the Yen further up. As these markets lose value, other investors have panic-sold their positions, forcing more people to sell, ultimately making the losses on Monday alone greater than the total value of the K trade loans in existence following the theory of fre.

flexibility. This is taking the easy money out of the feedback loop right as the hype around the world's most valuable companies was already going down. Now things are changing so quickly that by the time I publish this video, markets may have fully recovered or we could be in 2008 all over again. But what does this all mean for you? Now is as good a time as any to remind ourselves that the stock market is not the economy and the economy is not the stock market. Today after this new Black Monday, markets around the world rallied and almost fully recovered their losses from the day before. But there is a danger in putting too much hope in this too. People who are paid millions of dollars to manage billions of dollars aren't sure what this one is. So what does this all mean for you? It's important to remember that two of the top 10 best trading days in the history of the Dow Jones Industrial Average occurred in 2008 and another occurred in 1929 in the lead-up to the

global financial crisis and the Great Depression. Respectively, according to data from the St. Louis Fed, the top 1% of individuals now own 34% of all financial assets, an accumulation that has never been higher. Simultaneously, despite fintech advances like commission-free stock trading apps and fractional shares designed to make investing in the markets easier and more accessible to everyone, the share of financial assets owned by the bottom 50% of individuals is now only 2.6%. Now, that's depressing, but it means that this market crash is only going to hurt rich people. Your investments can't tank if you never had any investments in the first place, right? Wrong. According to the Financial Times, several retail brokerages such as Charles Schwab, Vanguard, and Fidelity experienced outages on their platforms, and Robinhood halted trading amidst the selloff as regular people sold their positions on fears that this could be the start of a recession that many people think is overdue. This means that many smaller, less sophisticated investors are

selling off what few investments they have, which will only be made worse as alarming headlines and YouTube thumbnails with laser eyes fight to capture clicks over how bad this situation could get. The second bigger problem is that the anecdote about the stock market not being the economy is only half true. If the stock market is doing very well, there is no guarantee that it will translate into widespread economic well-being for everyone. But if the stock market is doing badly, then companies will be pressured to pull back on expenses like staffing to appease shareholders. Big tech layoffs are already happening, and this can have multiplying effects as these generally high-income earners pull back on their own spending in local businesses. The most important thing you can do individually is not take any advice from people on the internet, no matter if they are a financial professional or former financial professional. Theoretically speaking, it's impossible for anybody to understand your personal financial situation without seeing your personal financial situation.

Panic selling is generally bad advice at a time like this, but for someone with high-interest debt, no emergency savings, and a job that's about to be replaced by AI, it might be a sensible decision to cut out another risk factor. The point is nobody knows, and the worst thing you can do is let people who get paid for clicks convince you to make decisions you otherwise wouldn't have. Now, I am going to be writing an article about the almost comically bad use of AI in the financial sector over on my free email newsletter this week. So, if you're interested in more stories like that, which will never be made into videos here on YouTube, sign up at that link below. And if you want to see the other side of this market panic, go and watch my video on who is going to keep businesses in business if they can replace us all with robots to keep on learning how money works.

WTF Just Happened To The Stock Market?

Subscribe to learn about business, careers, and everything else about How Money Works.

WTF Just Happened To The Stock Market?

WTF Just Happened To The Stock Market?

스크립트