TRANSCRIPT
Chapter 1: What’s Moving the Markets This Week?
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.
Chapter 2: Welcome to Cents of Things
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
Chapter 3: This Week in History
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
Chapter 4: Tech vs. the Rest of the Market
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
Chapter 5: Five Stocks Equal the Bottom 434
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
Chapter 6: Midterm Elections and Market Performance
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
Chapter 7: Why Politics Shouldn’t Drive Investing
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.
Chapter 8: The 2-Year vs. 10-Year Treasury
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
Chapter 9: Bond Duration and Inflation Risk
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
Chapter 10: What’s Really Driving Treasury Yields?
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
Chapter 11: The Yen Carry Trade Explained
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
Chapter 12: Why Japan’s Interest Rates Matter
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.
Chapter 13: How the Carry Trade Unwinds
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
Chapter 14: Why Bond Selling Pushes Yields Higher
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
Chapter 15: Could AI Stocks Be Next?
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
Chapter 16: Big Tech Earnings and Market Direction
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
Chapter 17: Finding Opportunities in AI Stocks
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,
Chapter 18: Inflation, Energy and the Fed
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
Chapter 19: What Investors Should Watch Next
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.
Chapter 20: Final Thoughts
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.