00:28

I’m going to give you three reasons why I think the volatility that we saw about a week and a half ago may not be over. So we had a less than stellar jobs report on a Friday and then last Monday we had what was most likely the unwinding of something called the Japanese carry trade, and since then this is August 15th we have rebounded. I don’t think all the way, but a good chunk of it, and I suspected, if you watched the previous video, that that might be the case or something like it. The reasons I don’t think the volatility are over is number one. The Japanese carry trade might not be fully unwound and, to refresh your memory, it’s basically hedge funds mostly borrowing at 0% interest in Japan, converting those yen, the Japanese dollar to whatever country Australia, USA and then invest in other things that have a better return than zero, which, of course, you have exchange rates and other things. But you know, in our case you could buy T-bills at 5% and it’s not quite as profitable as that may sound because of exchange rates and so forth, but, that being said, that was something that people have been doing for some time, as profitable as that may sound because of exchange rates and so forth, but, that being said, that was something that people have been doing for some time and it had to be at least somewhat profitable. Well, when the Japanese government said that they were going to start raising rates to fight inflation and they’ve had trouble getting any inflation for a long time Japanese, the Japanese debt and demographic story is pretty interesting. 

02:07

Folks were forced to cover margin calls. In essence, they had, so they might’ve invested in some tech stocks or they had some other. They had other things that were collateral and when they, when this trade started to move against them and they had margin calls or they had to pay back loans, just paying, you know, forget the meaning of a margin call. It’s basically a loan, but regardless, when interest rates started to rise and they had to pay back these loans, they had to sell whatever they could. And when you have something like when you have leverage, because people are borrowing money and people have to unwind things quickly, that causes panic’s not the right word. They’re trying to sell anything they can, and when everyone’s trying to sell at once, the price just goes faster and faster down. So no one really knew how big this trade was. Now people are starting to take a closer look. Some people estimate that it’s 75% unwound, which might be true, but you still have 25%. Now if it’s unwound, meaning these folks close out their, the loans, we’ll call it in Japan no harm, no foul. You can let the real economy, the real stock market work, but if they have to force sell again that’s concerning Number two. 

03:33

Japan’s government basically said we’re going to backtrack. We don’t want the yen to decrease anymore. We’re scared. I think they feel like they can’t raise rates. The amount of debt that their government owns is much higher than ours. I want to say 25%. Ours is 13%, but don’t get too bogged down in the numbers there. 

04:01

The bottom line is they clearly are afraid to have that kind of panic they have and if they, it’s going to harm the Japanese people to have inflation run away, assuming that’s what they get. But if people can still borrow at zero and invest other places for more money and they can still lever up and what, what’s to keep them from it happening again now maybe, maybe not to the same degree. And if we do have this short-term volatility, if this is only it, then for you longer-term investors, who cares? You know, if we unless we’re maxed out on our, our risk allocation, if we have extra cash or can rebalance into them, all the better, it gives you a buying opportunity. But the issue is, no one likes to see that kind of volatility and it could kick something loose or it could happen at a bad time, like we saw the one-week jobs report Combined with that, and then again, once you start getting things cascading. And then if you do have a Silicon Bank thing that no one quite knows about, or there are companies sometimes it’s just luck and timing there are companies or banks that if something happened at one time, they could go under and need to be bailed out At another time. No one even notices. So I’m not too concerned longer term about the Japanese carry trade and I think the chances of that happening with other things happening are pretty low. 

05:40

But those are two reasons why I think we could have more volatility, as long as you’re having one country that has zero interest rates and other countries that don’t, or have more of it if they have an opportunity to arbitrage or to borrow at zero and invest someplace else. People are gonna try to make money and they’re going to borrow and leverage up and you know, and it again it shows that, at least in the short term, our system is vulnerable. I think we’re strong enough over longer term that it’s not going to be a big deal, other than if it happens at a really bad time. If, say, if we had Russia problems or if we had Middle East problems at the same time this was happening, that’s where it could be dangerous. 

06:24

Also, number three, as we get closer to rates lowering and normalizing, I think that we’re going to be more sensitive to these short-term data points, to these short-term data points. So, as long as we were headed in the right direction, if we had one bad jobs number one, slightly bad jobs number one, bad CPI report, we might disregard it, because as long as we’re still rowing, I’m going to use a Minnesota Golden Gopher rowing to shore. We’re still rowing to low-rate shore. We’re heading in a general direction. One bad wave, no one’s going to get too too crazy about it. The point, I think, is that we’re making overall, making that progress Well as we get closer to shore. 

07:11

If we keep having these bad waves bad economic data waves, bad inflation data waves. 

07:18

Although I think jobs market is probably more of a concern now, the market might not take it as well, because they might view that as being. We’re getting so close that that hard landing, that hard docking I’m using a lot of Minnesota references that hard docking might happen, so we get more concerned that that soft landing is not going to be there. So I think, for those three reasons why we could be for some more volatility not to mention the election coming up and then geopolitics so when you have all these things happening at once, even though there’s a lot of good stuff out there lower inflation data, job market is still strong, you know, and we’re going to have to have some increase in employment the idea that that it’s, it’s that perfect, because no matter how good a job the fed or the American economy has done, you’re not going to have every data point, everything go perfectly. You know life is messy, so we’re gonna have some bad data and I think we’ll be more sensitive to it as we get closer to rate cuts and to things normalizing. 

08:27 – Intro Person (Host)

So there you have it. 

08:29 – Mark Struthers (Host)

This will help you understand what’s going on and maybe prepare your portfolios. I do not overreact. Some things you could probably do is look at maybe extending the duration of some of your fixed income, the maturity, since rates are probably going to lower. Take advantage of some of the buying dips. Reassess your risk-return profile that’s probably the biggest thing, especially if you’re in retirement or near retirement, to say is my risk-return profile adequate? And also double-check your diversification. You can see if you’re going into retirement and you have a bunch of tech stocks and say that’s all you have, US tech stocks, that’s all you have. If all you have is semiconductors, if all you have is the Mag7, that’s something you can do now. Otherwise, that’s why we have a plan. Otherwise, just keep rowing towards shore and stick to your plan, because if you do that, you’re going to have a healthier, a wealthier and a happier retirement. Don’t forget to hit, subscribe, hit it, hit it right now. Hit it. 

Disclosure-

Investment advisory services are offered through Sona Financial LLC (DBA Sona Wealth Advisors, Sona Wealth, Sona Wealth Management), an investment adviser registered in the state of MN. Sona Financial only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided a copy of the firm’s ADV Part 2A brochure and document. 

This video is for educational purposes only and is not exhaustive. Nothing discussed during this show/episode should be viewed as investment advice. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.

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