Hello everybody. Welcome to another episode of the  sense of things with Jeff and Ron. Getting started  

with another crazy week in the market. Ron’s going  to cover some things about tech versus the rest of  

the market cap of some of the big companies versus  the rest of the market, stocks and election years,  

and then the 2-year versus the 10-year. He’s going  to cover that. I’ve got a piece on something I  

covered about a month and a half ago on the yen  carry trade and specifically what I think has  

occurred when it comes to the bond yields  because what has been going on just didn’t  

make a lot of sense to me. And so as I kind of  work backwards, I think I’ve got the answer a   little bit for us. All right, so stay tuned.  We’ll be right back on in just one minute.

Okay, everybody, welcome to the show. Ron, how  are you, my friend? Good morning. Earning season   has kicked off. It is nice and cool. I got in my  car. It was 56 degrees this morning. It was nice.  

It was nice and brisk. I know. All good. Now the  market’s pulling back. It’s the the October swoon  

prior to the election and the midterms. There’s  going to be some good buying opportunities here.   No, I agree. I think I think there’s going to be  a lot of good buying opportunities. We’re in the  

process of repositioning a lot of this stuff. So,  we’ll we’ll have the opportunity to buy some good  

stuff at cheap prices hopefully. Absolutely.  Cool. Let’s let’s kick off what happened this  

week in history. It’s it’s a light week, but  an interesting week. N 1892, The Adventures of  

Sherlock Holmes is published by Sir Arthur Conan  Doyle and completely ripped up and bastardized by  

a lot of film directors over the years, but still  kept its core theme. Yes. Still my favorite prime  

wasn’t too bad. Then I think they’re going to  do a second season, but it wasn’t too bad. Yeah.  

Actually, my my favorite have been the Robert  Downey Jr. ones. He did a really good job with  

that in the first film. The second film, not so  much. Yeah. And they never did make the third. No,  

not after that second movie. 1923, Walt Disney  Company is founded. Founded 1931, they finally  

got him. Al Capone convicted of tax evasion. There  we go. And actually, rather ironically, he spent  

some time there. Alcatraz Island is founded  in 1933 and was offici I shouldn’t say it was  

founded. It was officially designated as a federal  maximum security prison for about 30 years. Yep.  

Until Shan Connory escaped. Till Shan Connory got  still one of my favorite movies, The Rock. Still  

one of my favorites. I still my favorite line in  the whole movie. The Rock is a tourist attraction.  

There’s a lot of good lines in the way. How in  Zeus’s butthole did you get out of your cell?  

There was some good There was some good lines in  there. That’s just a great movie. Carlo was the  

prom queen. All right. 1947, Chuck Jagger breaks  the sound barrier and did not destroy the Earth  

as some people had predicted. Yes. Didn’t even  destroy himself. No. Soviet missiles in 1962  

were photographed Cuba. Yep. Covering basically  exposing those 13 days where we came pretty damn  

close to some level of war. Yes, we did. 1971,  one of my favorite songs, John Lennin’s Imagine  

is released. And he had just learned three  chords on the piano and that was basically  

what he built this song on. Interesting enough.  Yeah. 1975, Saturday Night Live debuts. Sweet.  

Yeah. It’s actually an interesting week. Yeah.  And every now and then there’s a good episode,   but it hasn’t been been good since the late 90s,  early 2000s. Yeah, absolutely. Still waiting for  

some good characters and some good skits and some  recurring characters. They haven’t even really had   that for a while. Yeah, I know. They just keep  amling around trying to figure that get their  

feeding and they got too many. They got too big  of a cast. Yeah, get some good people. I get some   I don’t know if I was smart enough to figure it  out, I’d be producing it. Yeah. originally is what  

seven in the original cast and I don’t think it  that up till the 90s I don’t think there was ever  

more than about seven to 10 and now it’s 50 people  on the show. Yeah, just the opening credits is  

about the first 15 minutes of the show. All right,  so I thought this was interesting. Obviously this  

is expanding more. People were talking about  the market the S&P 500 is not your benchmark  

people. I don’t care whether you’re in full growth  mode or you’re a pre-retiree or you’re a retiree,  

but if you just take out tech, you can see the  market’s going the other way. And obviously things  

are starting to break. I think this is about a  week old, but you could just see the bifurcation   here. It is going in two different directions.  We’ve been starting to see a major pullback,  

which we should see for the next couple of weeks  up until the midterms. And depending on how that   goes, I still think we’re going to be higher  by the end of the year, but there’s going to  

be some pain here. What are your thoughts? Oh,  I agree. No, and I think it’s funny. Everybody’s  

speculating about and it always happens with  this with the elections. And I’m like, okay,   so let’s assume the Democrats win the they’re  going to waste their time for the next two years  

trying to impeach Trump, which they won’t be able  to do because they’ll never get 60 in the Senate.  

So, it’s like it’s just going to be basically  nothing getting done, which quite frankly,  

when the government gets out of or when Congress  gets out of everything and doesn’t do anything,  

typically the market does exceptionally well.  Yep. And I got a chart on that and two more   slides. Perfect. But I thought this was fun  and interesting. As of last week, the top  

five stocks market cap is equal to the bottom  434. Now, if this doesn’t tell you that there’s  

too much of a waiting and a concentration, why  the S&P 500 index should not be your benchmark,  

folks, if you’re a pre-retiree or retiree,  the majority of your portfolio should not be  

in these f top five or even top 10. So, this  is this is a very telling chart. Yeah. Oh,  

it’s amazing. and they’re great companies, but do  they deserve to be $21 trillion of an index? No.  

And I still have the problem of the the market  weighting of indexes to begin with. I think the  

equal weight I think is a a better play. It’s  been a terrible investment, but I think it’s  

a better it’s been pretty good. The equal weight  500, there’s two different ones out there. Look,  

the top 10 stocks are still about 30%, but instead  of 40 or 50, right? But it also has evened out  

the rest of it, too. Sure. So, it’s not just the  top 10. It’s how they do the top. It gives you a  

better Yeah. It gives you a better picture of the  the index though of what should be or at least a  

better picture of the world at that point to  benchmark from. So everybody will say, “Oh,  

if the GOP gets both the Senate and the House,  the market’s going to go to crap.” No, if the  

Democrats get the House and the Senate, it’s going  to go to crap. Well, folks, not necessarily true.   And I actually do know a family member who’s  pretty wealthy. Soon as Trump got elected,  

pulled all his money out of the market, went to  cash. And by the way, and I on the other side,   too, when Biden was going to be elected, right,  they went to cash, right? It’s the same thing. But  

folks, here you go. Midterm years typically is the  worst performing year historically since 1933. All  

right? Presidential election years, it’s typically  up. And in non-election years, it’s typically up.  

What we’re trying to say is stay invested. It’s  going to be up and down years. Remember, the   market’s up 70% of 70% of the years. So, at some  point, there’s going to be a down year. You add to  

quality positions. So, I can’t stand when I hear  people on the far left or the far right saying,  

“I’m getting out.” Yeah. Just It’s idiotic.  Just it to worry about politics. Once again,  

politicians, we’re seeing it with our Senate  race here in Texas. The politicians are, “Oh,  

I I’m a moderate. Okay, you hadn’t been  before six weeks ago. Now all of a sudden,  

you’re a moderate. Okay, then you’re going to be  Yeah. It’s just I relying on politicians drives me  

crazy. Just follow what the companies do. Go back  to what Peter Lynch said. Prices are always going  

to follow earnings. So if companies are earning  more money, you’re going to make money over time.  

Yep. And looking at the bond prices, right, the  two and the 10, which everybody follows. And look,  

this time was different. When the 2-year went  below the 10-year, we did not have a recession  

within 16 months. But you can just see here people  are looking for a place to hide out. Yeah. Why  

would you not put some money in the two or the 10  or even the 30-year? You can get out at any time,  

but the 30-year is 5.88 somewhere in there. Yeah.  But I I wouldn’t want to be I wouldn’t want that  

duration risk right now because once again, we’ve  had this conversation. Yes, you can put money in,  

but people do not stay in the market or do not  stay in things and it’s going to be highly risk.  

It’s going to be highly interest as yields keep  going up, the prices are going to go down pretty  

dramatically. I think staying on the shorter end  of the curve right now, staying in things like   floating rates. If you stayed on the shorter  end of the curve, you could double dip. You  

could get 488 and you’re buying it at a discount.  Oh, I know. No, I’m saying that’s why I’m saying  

there and looking at floating rates. I we’ve been  really taking a look at at the Treasury inflation  

protected securities. I’ve always had a little  sleeve in it, but yeah, the tips I think are  

interesting in a rising rate market and I think a  lot of that speaks to what we’ve seen this week.  

We saw both PPI and CPI up. PPI today was just  off the charts up. That’s telling me PPI tells me,  

okay, the diesel fuel now is really having a  dramatic effect across the board. It had an  

effect pretty broadly in the the CPI number. Prior  to this, it really had just been a little piece of  

that PPI or the CPI chart was it was just oil and  everything else, but we’ve seen almost 60% of the  

categories this time on the CPI report were over  3%. So that means it’s filtering out through the  

entire thing. Yep, I know. All right, what do you  got? Okay. So, what I wanted to do is I wanted to  

go back to something I had covered previously,  which was the the yen carry trade. And if you  

remember on Ron’s chart that he just had up, you  saw that just dramatic 2020 or 2026, we’ve seen it  

go up, but then we saw this wild dramatic move of  almost a full percent in a really short period of  

time. And of course the the argument by the the  talking heads on all the different channel it’s  

because of the the government was overspending  and all this and we’re at 40 trillion. Yeah,  

that probably is part of it. Probably of course  inflation is a part of that. But I wanted to go  

back to something that I really feel is part  of this wild dramatic move and it was the yen  

carry trade. So let me go back over that really  quick and I’ll put a link in the show notes to  

the original show we did on this where I explained  this in much much more detail. But just think of  

it this way. The yen carry trade is basically when  rates are extraordinarily low in Japan which they  

were for a decade. Basically rates were at near  zero. Big hedge funds and institutions here would  

go to Japan. They would convert dollar basically  convert to US dollars from yen. So they’d borrow  

money in yen, convert that to dollars, come back  and buy US bonds and stocks that pay a much much  

higher rate of interest, and then pocket the  difference. So, it’s basically free money as   long as nothing changes. So, the best way I  can explain this for most people is it’s like  

getting a 0% credit card, getting a cash advance  on that 0% credit card, then taking that money and  

putting it into bonds or a 5% savings account  if that exists anywhere, and you get to keep  

the difference. And of course, you’re going to pay  some tax on that, so you’re not getting a full 5%.  

And that works perfectly fine until something  changes. The something changes is it began in  

July with the US and the and Japan trying to  prop up the yen a little bit. So that started  

it things stabilized in the dropping yen and  people all right fine everything was fine there.  

Then in anticipation of what happened which Bank  of Japan raised interest rates for the first time  

in a decade the yen started to strengthen as well  because typically when you raise interest rates in  

your country people start to buy bonds and they’ll  buy that raises the the price of the yen or people  

will put money in yen. So you started to see that  get rise. So it’s basically reversing directions.  

Now the yen, the rates in Japan are up. Yen’s  stronger. Okay, now that carry trade is starting  

to unwind a little bit. People are closing.  They’re basically selling their bonds. They’re  

buying back or bringing those dollars back in,  taking those dollars, buying in, and then turning  

that into or paying off those loans that they  have. So that’s been reversing. And I think I  

this is my personal opinion that we really started  to see that at the beginning of August. This is  

right about the time that I made this point. This  started to change. And then if you look at the the  

chart of the Yeah. If you look at the chart of the  yen and you look at the chart of the yield on US  

bonds, they both are literally in parallel to each  other. So what I think was happening is all of a  

sudden the yen went up. People said, “Okay,  we need to start selling out of our bonds.”  

And if you understand bonds, when you sell bonds,  yields go up. So you see a teeter totter effect.  

And then it started to feed on itself because all  these people are starting to unwind. And there’s  

like $285 trillion dollar in US government bonds  that are part of this US this carry trade that’s  

out there. So it started with the rising of  rates. Then I what I feel is correct and I  

actually got a little vindication. Ed Yardini,  who both Ron and I follow quite carefully,  

made the same point last week and so I felt a  little validation on that that we were starting  

to see that. So that was what I call last week’s  story at this point that investors were selling US  

bonds that started that process going. I feel like  we might be seeing the crowded AI stocks which I  

think are also part of this yen carry trade that  might be they’ve not been good for the last few  

weeks and they are accelerating with the rise in  yields and everything else. So that said there is  

an encouraging part and this to Ron’s point there  the bond side is actually settling down a bit.  

It’s what’s happening is is some of this other  stuff is unwinding. People are literally going,  

“Hey, you know what? Maybe it’s time to take a  little pause on the higher risk stuff.” And if  

I can get better yields over here, they start  buying bonds. And that seems to be stabilizing  

that rapid move of the bonds up. Now, it’s still  way up. It’s up 530 or so. I don’t know where it’s  

at this morning because I haven’t had a chance to  look yet. But we’re we’re going to stay, I think,  

above five. And with other things unwinding here,  it is an opportunity that I think people will look  

at. Okay, here’s a place where I can put some  money, safe money at this point and get paid  

for that. So, that’s my personal belief. I may be  right, maybe wrong, doesn’t matter. But I think  

we’ll see more of the AI side. we start to see  the big hyperscalers here in the next two weeks,  

we’re going to see the big hypers scale that  those five or seven companies that you saw on  

Ron’s chart there that are basically half of the  market cap are going to be reporting and that’s  

going to be the honestly I think that’s going  to be what tells us for the rest of this earning  

season at that point. Thoughts Ron? You’re on no  sound? been kind of talking about on the podcast  

before and to other clients during client reviews  here in the fall there there’s with the AI the  

chips the hypers scale the whole business sector  and anything related to it there’s been an air  

pocket under the price we know that how much there  was don’t know at some point it will be overdone  

but a lot of them are high quality they’re  making money it’s not like they are there there  

was an air pock pocket and they weren’t making  money. They were just overvalued. Even SpaceX,   it hasn’t even really pulled back to a fair value.  It’s got a ways to go. But my point is that on the  

way down, if you liked them before, you you should  like them even more now and even more. Keep adding  

on the way down to the highest quality because  on the other side of this, they’re going to be  

spring coil to the upside. you’re going to see  another parabolic move like you saw in April,  

May, and June and in the late summer when we  saw another little spike up when Nvidia just  

hit an all-time high last week. It’s going to  happen again to the top quality companies in this  

space. It’s just there’s an air pocket. You flush  the the bad investors out, the emotional people,  

and the smart money comes in. It happens all the  time. Totally agree. Totally agree. So, that said,  

do I think we’re going to see more interest  rate raises after these two reports? Yes. Do  

I think we see one before the the election at the  later part of this month? I don’t think there’s   a chance at this point of them doing it. Now,  they could because they might be more concerned  

about this getting out of control. But I think  the the answer I think part of this inflation  

if you look through the whole picture part of  the inflation is just straight up fuel prices  

and we’re going to just be dealing with that and  there is nothing that the Fed can do to fix that   problem. The other side of the coin though and  this is really looking at the numbers a little  

bit more in detail. Another major piece of the  cost of inflation going up really is a big part  

of this whole AI story that just incessant need  for memory and all these pieces of the pie and  

storage and everything else is filtering down  to other technology pieces. So, I think that  

is a major part and that might be something that  that might be something that the Fed can fix by  

trying to kill it off. But why would you kill the  goose that laid the golden egg? I have no idea at  

that point. But the the answer is we’re probably  going to see interest rates tighten even further,  

the Fed tightening further. I would expect at  least one more raise this year and who knows  

what next year looks like at this point. position.  Look, take Ron’s point. Look for opportunities on  

these pullbacks to put some money to work and take  advantage of some really quality stocks that are  

just getting crushed right now. Yeah, I agree.  I agree. We’ll see how things pan out over the  

next couple weeks with some of the major earnings  calls. We got to get past the midterms. We’ve been   talking about it for a while. I was expecting a 3  to 5% pullback late September into late October.  

So maybe this is maybe this is a part of it  and if it flushes out some people that just   creates more opportunities. Absolutely. Fantastic  folks. As always, we do these shows for you. So,  

make sure you subscribe to the channel  and we will be right back next week.