The Biggest Stock Market Rug Pull in History is Here.

[00:00:00] Speaker 1: In December of 1928, the Goldman Sachs Trading Corporation was launched. A historic amount of shares were sold to the public during one of the most euphoric stock market rallies ever recorded. A few months later, the peak of the 1920s stock market was marked by Black Tuesday, and then the Great Depression began. Fast forward to the 1970s, Intel made its initial public offering, IPO, after multiple decades of strength in a historically expensive stock market. This came shortly before one of the largest peaks in stock market history and followed by a 50% decline in the stock market. And again in 2000, AT&T made its IPO in April, during one of the most euphoric periods for stocks ever. And this IPO marked almost the exact peak of the S&P 500 index before the dot-com bust took stocks down 50%. Today, SpaceX is launching its IPO, which will come down as the single biggest initial public offering in history, and it's doing so amidst one of the strongest and by many measures the most expensive stock market rallies since the dot-com bubble. In many ways, history seems like it's repeating itself. These IPOs that mark historic stock market peaks are not a coincidence, and it's also not a psychological phenomenon. There is a real mechanical explanation for why this has happened time and time again throughout history. And while history never repeats exactly, it often rhymes. This is not a doom and gloom video. I won't be telling you to sell all your stocks and go into cash. I'm going to show you a much smarter way to actually play this setup, but in order to understand it, we need to look at what's happening right now more closely. The US stock market recently posted a 16% gain in two months while making new all-time highs. Believe it or not, this is something that has only happened twice over the past 100 years. Once in 1987, right before Black Monday, and once in 1929, shortly before Black Tuesday. In the 1920s, the euphoria around new technology like electricity and the car fueled a massive speculative run in the stock market. In the 1980s, it was the personal computer. Today, the strength of the market is being driven by AI that is pulling an unprecedented amount of capital to finance companies that are at the forefront of this technology. And that is exactly why we're currently witnessing the single biggest IPO frenzy in history. Companies going public in 2026, including SpaceX but also Anthropic, are going to be raising over $200 billion from their initial public offerings. This is not only the largest sum in history by far, but it's the largest sum even adjusting for inflation, which is what real means on this chart. So the IPO frenzy that we are seeing today really dwarfs the frenzy that took place at the peak of the dot-com bubble in 2000 that took place right before it burst. When companies raise hundreds of billions of dollars like this, the money that is required to buy the shares that are being issued in the IPOs need to come from somewhere. They either come from cash on the sidelines or if there's not enough, then it needs to come from the selling of other assets. In the case of tech IPOs like we're seeing today, investors would most likely sell their other tech stocks in order to gain exposure to the new companies going public. So what typically happens is you have a frenzy of new buyers, often retail investors, that are piling into a handful of companies right at the same time as private investors are cashing out of their investments during the IPOs. All of this actually creates a lot of selling pressure on the rest of the stock market. This is precisely the reason for why massive IPOs like this often happen at moments where the stock market is the most expensive and the most euphoric because private investors that were invested in the companies that are going public want to cash out at the moment where the valuations are the most attractive and when retail investors are the most likely to be buying. In 1999, multiple large tech companies like AT&T, Pets.com, and Linux took advantage of the retail euphoria that was happening around tech stocks in order to go public. The selling pressure that came from these large initial public offerings was likely one of the key reasons for why the tech euphoria slowed down and eventually reversed. There was just simply not enough money on the sidelines to buy all of the shares that were being issued at the time. Today, not only is the market following similar price action to the late 1990s, it's also at similar valuations and it's also heading into a period where multiple large IPOs are likely to cause some kind of selling pressure. Back then, this setup put a dead stop to the bull market and led to its immediate reversal. The question now is whether we should expect the IPOs today to lead to a similar outcome. And in order to answer that question, we need to look at the two forces that contributed to this reversal in 2000. If both of these forces are also present today, the likelihood that this IPO frenzy ends up being a sell the news event is very high. The first force was the lack of cash on the sidelines. As mentioned earlier, if there's a lack of cash on the sidelines when these massive IPOs take place, then it forces investors to sell stocks in other areas. And that's what this chart shows us. It tells us the amount of cash that is stored on the sidelines at any moment relative to the size of the stock market. This is where it stood in 2000, at one of the lowest levels ever recorded. We can see from this that the financial system lacked the dry powder to actually buy the shares that were being issued and it caused selling pressure on the rest of the market. Now today, it is sitting at precisely the same level it was back then, reflecting a historically small amount of dry powder in the system to actually buy the shares of SpaceX or Amthropic that are going public. From this chart, it seems unlikely that investors will be able to buy $200 billion worth of these stocks without selling some of their other assets. JP Morgan estimates that passive funds will need to sell $95 billion of the eight biggest tech stocks just to make room for these new IPO stocks in the index. And we're already seeing some of this take place. Stocks like Meta, Amazon, Microsoft, and Broadcom are massive tech companies that have all been experiencing selling pressure heading into this SpaceX IPO. Now, it's impossible to know the exact reason for why investors have been selling these stocks right now, but it's highly likely that investors are already raising cash in order to buy the new SpaceX shares that are going to be issued. So, the first force that we had in 2000, which is the lack of cash on the sidelines, is definitely also present today. The second key force is tight financial conditions. If the central bank is providing ample new liquidity to the financial system, odds are that this can actually offset any selling pressure from the IPO. On the flip side, if the Federal Reserve is restricting liquidity and pulling it out of the system, the IPOs will essentially prove to be a massive rug pull where private investors are cashing out while retail investors are piling in at the peak. This is exactly what happened in 1929, in 1972, and in 2000. In each and every one of these instances, the Federal Reserve was raising their interest rate and so raising the cost of borrowing, essentially restricting liquidity in the financial system. This took place at moments when the market was particularly euphoric, expensive, and so the large IPOs that took place at these moments created a reason for investors to sell equities, basically making these massive stock market rug pulls. In the present day, the Federal Reserve has not been raising interest rates like they were in those instances. In fact, for the most part, they've actually been lowering their interest rate and so providing more liquidity and looser financial conditions for the stock market. Now, this could quickly change. Probabilities based on the futures market now suggest that the Federal Reserve is most likely to raise interest rates by the end of this year. So, it could be that we are closer to June of 1999, January of 1972, or September of 1927. These were moments where the stock market was going absolutely nuts. Major IPOs were already taking place with very little cash on the sidelines, but the Federal Reserve had not begun to actually raise interest rates and tighten financial conditions yet. In all three of these cases, there was another year or two left before the stock market made its actual final peak. Now, that may sound like a lot, but if we are really following the footsteps of these episodes, today's chart could end up looking something like this. And in hindsight, although the SpaceX IPO will not be the exact peak of the market, it will certainly have been one of the signs that we were inching closer to one. Now, that does not mean that you should be selling your stocks and going into cash because the reality is the purchasing power of the US dollar over time always goes down. There is no such thing as a certainty for when the stock market will peak, but the US dollar losing purchasing power is almost a guarantee. History shows time and time again that being too heavy in cash is almost always a bad idea. The S&P 500, on the other hand, always tends to go up precisely because it is priced in the US dollars that are losing their purchasing power. And we have very good reasons to believe that the loss of purchasing power of the US dollar is going to be accelerating from here in the coming months and years. A much better alternative for these kinds of periods is actually gold. During periods of volatility on the stock market like the 1920s, 1970s, or 2000s, these are actually ideal moments to have exposure to gold. This is one of the most incredible hedges against stock market volatility as it tends to have significantly higher returns during periods where stocks are experiencing large drawdowns. Having, for example, a 70-30 allocation to stocks and gold has worked very well again and again throughout history. Now, owning a mix of stocks and gold will not increase your returns. You're very likely to generate the same average 10% annual return, but it will reduce the volatility of your portfolio significantly, especially in riskier environments like today. If you're looking for higher returns than this, the only option is to adopt a more aggressive allocation strategy where you're picking the right parts of the market or you're exposing yourself to the market only at the right moments. That's where you can hit the 20, 30, or even 40% annual returns and build your wealth at two to four times the pace that most people achieve. This is exactly what our quant strategy has done for the last five years. It has delivered a 40% annual return since 2021. 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