Under the Covers

What really is behind the stock market rally in 2024 and the selloff in the first week of August. Lori and Lisa begin this podcast by explaining why the U.S. economy has remained resilient in spite of the Fed raising interest rates and reducing its balance sheet.  They then explain what triggered the selloff in equity markets last week and what investors should do now.

Find out more and reach out to us on our blog.

Transcript

[00:00:00] Lori: Welcome to the Nest Egg podcast. We're 2x Wealth group. I'm Lori Zager. I'm here with my partner, Lisa James, and we are a team at Inglesin Snyder, an independent registered investment firm in New York city. 

[00:00:16] Lisa: Well, there've been a lot of exciting things happening of late. So we're going to cover more than one topic in this podcast.

[00:00:22] It's mostly about. Our previous quarterly letter called what's happening under the covers and the reason that we put that title out there was that while it appears that the Fed has been doing things to slow the economy, one would think somewhat dramatically by raising interest rates so much and also reducing their balance sheet.

[00:00:50] If you didn't know some other things that were going on, you might be surprised that the economy has been very resilient until just In the past week, I hadn't shown that many signs of slowing down. 

[00:01:03] Lori: Well, it's not only the economy, it's the market has been incredibly resilient. And you would think if the fed was taking liquidity out of the market, that it would affect risk assets.

[00:01:16] And it was bothering me that. Risk assets were continuing to do well, and everybody was talking about the fact that the Fed was reducing its balance sheet. 

[00:01:26] Lisa: Well, and we're going to go into a little bit more detail about what that means, but first we want to address, uh, the question of liquidity. So, we have a really good example that Lori's going to talk about, but also in addition to that, The second part of this podcast, we're going to talk about liquidity issues and leverage issues in the market and how that affected the most recent sell off.

[00:01:59] We're just going to start with sort of a easy. analogy for understanding how liquidity works in the financial system. So, 

[00:02:08] Lori: take it away, Laurie. This came about because I was trying to explain to my PT what was going on in the markets. And I tried to explain it with the normal economic terms and obviously he's not an economist.

[00:02:24] And so I came up with this idea that the financial system was really like a large tank of water. Yeah. and that it had various boats that were floating on top of this tank. So think of the boats like stocks or cryptocurrencies. And if you let the water out of the tank, you would think that risk assets like stocks and, in my analogy, crypto would go down.

[00:02:52] So with the Fed reducing its balance sheet or taking water out of the tank, Why weren't risk assets going down, and as Lisa said, the economy was also holding up really well. Well, it turns out that while Jerome Powell was taking water out of the tank, Janet Yellen was putting more water in the tank than Jerome Powell was taking out.

[00:03:18] But In reality, Jerome Powell is not supposed to be a political appointee. He is supposed to be balanced and think about inflation and unemployment, but Janet Yellen, she's a political appointee, so she can do what is in the best interest of someone that made 

[00:03:39] Lisa: her. Right. And so in order to understand that, we just want to give you a little bit of background.

[00:03:46] Just some basic concepts about how the U. S. Federal Reserve works. First of all, they really are a pretty simple organization in terms of their mandates. They have two, and one is to achieve maximum employment for U. S. citizens and to keep prices stable. And so 

[00:04:05] Lori: And I just want to say, blaming the president For inflation is not fair.

[00:04:10] Yeah. Any president. Any president. And we've, we've had inflation under both the last two presidents, actually. Yeah. And it's really the Fed's mandate to rein in inflation, not the president of the United States. Exactly. 

[00:04:26] Lisa: You know, just in the normal course of things, the economy goes through stages of growing.

[00:04:32] And slowing and if it gets too extreme, uh, the federal reserve will jump in to try and make things better. And they have a couple different tools to either stimulate or slow the economy, but really their primary tool. is short term interest rates. That's why you always hear things about like, is the Fed cutting rates or raising rates and how much, and everybody like, you know, makes bets on what they think is going to happen.

[00:04:58] Lori: And it's not a very sophisticated tool. I mean, it's a pretty blunt instrument. It's very blunt. Yes, quite blunt. So during the great recession and the housing crisis, the economy got very 

[00:05:09] Lisa: slow. In fact, you know, during that period, people forget, unemployment was over. And so the 

[00:05:16] Lori: Fed cut interest rates down to zero, basically hoping to stimulate business activity and it didn't work.

[00:05:25] It didn't work. It wasn't enough. And so the then chairman of the Fed, Ben Bernanke, came up with a new way to add financial liquidity and he called it quantitative easing. Why don't you explain that Lisa? 

[00:05:40] Lisa: Yeah, sure. So quantitative easing, It's not rates, it's quantity of things, mainly treasury in the market.

[00:05:48] During quantitative easing, what the Fed does Is it buys bonds and during the recession, they also bought mortgage backed securities, which were a very troubled asset during the financial crisis. So the Fed goes out, they buy all these bonds and they essentially put cash into the financial system. They, they 

[00:06:10] Lori: print money, so to speak, and they pay for those bonds with the money they printed and put it into circulation.

[00:06:18] And that was done to help the economy when taking interest, they really didn't want to take interest rates to below zero. Which 

[00:06:27] Lisa: has happened, but it doesn't tend to work very well. So, just to understand the magnitude of this, during the financial crisis, the Fed actually caused its balance sheet to rise from about one trillion.

[00:06:40] To 5 trillion because they bought all of these bonds and they went on to the Fed's balance sheet. So this technique was used again during the pandemic in 2020, because once again, they dropped rates to zero and they feared that it wasn't enough. So they started buying all kinds of bonds, not just treasuries and mortgages, but they also bought corporate bonds.

[00:07:04] And this ballooned the balance sheet even further. to nine trillion dollars, which starts to be a very big number and During that time don't forget the US government was also adding money to the financial system Because they sent people checks and that is the thing that's really inflationary because money in the hand You know, is money that can be spent in the economy and, and people paid down loans, they bought things, they, as we know, they bought a lot of home related goods.

[00:07:37] And so that, that really made the economy grow. And so you could say it was an overly, Successful strategy. 

[00:07:45] Lori: On top of it, you had the pandemic where there were supply shortages that exacerbated the supply side of things. Right. If 

[00:07:52] Lisa: nobody was getting goods from China because they were locking people in apartment buildings, and container ships weren't able to land in the U.

[00:07:59] S., so the goods weren't actually getting onto our shores. And even here 

[00:08:03] Lori: people weren't manufacturing. What was done here was not being done because people weren't going into the U. S. The manufacturing plants, I mean, was a real problem. So you had this increased demand from both quantitative easing and also from checks landing in people's pockets.

[00:08:22] And at the same time, this was coupled with contracting supply because of a pandemic. And what happens is inflation goes 

[00:08:31] Lisa: crazy. Yeah. And so that's why we ended up with 9 percent inflation in 2021. And also like tremendous economic growth. It wasn't just inflation. There was a lot of growth as well. Then the feds on the other side of the equation, right?

[00:08:44] Because there's two things they need to do. They're supposed to keep people employed and keep prices stable while they've really fixed the employment picture. And if you go back to the financial crisis, we didn't get inflation then, but we also weren't sending checks in the mail. But this time around. We did get quite a bit of inflation, so the Fed had to do, essentially, an about face.

[00:09:07] Because they were overly successful in stimulating the economy, they then had to do something to bring inflation 

[00:09:14] Lori: back down. And there were other things that the Fed had nothing to do with that created inflation, some of which we don't think will go away. Demographics were a problem, now immigration is helping that a bit.

[00:09:26] As we speak, but we're not producing and just in the developed world all over, not just us, a war in the Ukraine was having was hurting supplies of things that were needed. War is very inflationary. We're having some kind of an altercation with China, I would say now, and that is inflationary. There were things that were making it worse on top of all of this.

[00:09:51] So the Fed 

[00:09:51] Lisa: did two things. They raised interest rates, actually at the fastest pace in the history. They went from zero to five and a half percent in about a year or so. And at the same time, they started to do quantitative tightening, the opposite of quantitative easing, and they wanted to reduce their balance sheet.

[00:10:13] Now that process is a little bit different because all they do is they wait for bonds that they own to mature. And then they don't buy any Well, they could 

[00:10:22] Lori: have bought it. They could have bought back. They decided not to. What they decided to do for this time is just to let them roll off. That's all they ever do.

[00:10:30] They only ever 

[00:10:31] Lisa: let them roll off. They, you know, it's just too aggressive to start selling guns in the market. Right, they could, but technically they can't. They could, but they don't. Technically they can't. They don't. They don't, but they can. They have plenty rolling off, and they like to do these things gradually so it doesn't, like, start to So anyway, that's the introduction to actually what has affected the market over the past six months or six to nine months.

[00:10:55] So what we're saying is the Fed's done all this stuff, but, you know, the economy didn't slow down all that much. And risk, risk 

[00:11:02] Lori: assets continue to do well. So why? given that liquidity was being quote unquote drained from the system. Exactly. Well, we found out from reading a source of ours that Who we should credit.

[00:11:16] Yes, Strategus. And now a lot of people are actually talking about this, but they really didn't go down to the level of understanding exactly. What was going on, they figured out that something is going on, but they haven't figured out what, and it's not that easy to figure out, 

[00:11:33] Lisa: because it's really in the, it's really in the underlying plumbing of the Federal Reserve and the Treasury and Treasury systems, yeah, which most people aren't that familiar with and don't have a reason to be, 

[00:11:43] Lori: and we weren't either, quite frankly, until we started, even the author of the original article that we read, referred us to his DC policy people to understand how the Fed balance sheet worked because we couldn't figure out how they were doing this, but we figured it out.

[00:12:01] Basically, what happened is the Fed 

[00:12:05] Lisa: was reducing its balance sheet so they don't hold as many bonds, which means they're taking liquidity out of the system and lowering Lori's tank Transcribed of water. And typically when that happens, you would see a slowdown. And while inflation has moderated, employment and economic growth has continued to be pretty good, not as fast as 2021.

[00:12:29] That was extreme. But we've had quite stable and good economic growth. And until last week, the markets 

[00:12:35] Lori: were 

[00:12:36] Lisa: very happy with it too. But there was something else going on during this period That had not been around so much before, which is that the Fed had created something called a reverse repo facility, and this provided an opportunity to For Janet Yellen to take advantage of her need to fund the government debt in a way that basically put liquidity into 

[00:13:08] Lori: the system.

[00:13:08] So she was putting water into the tank. As Powell was taking it out. And just to quickly say that Powell reduced the balance sheet by taking down bonds that were an asset and by taking down reserves or cash in circulation, which were a liability, the process of letting the bonds rolled off, created the liabilities to go down as well.

[00:13:30] So Janet Yellen. And basically just swapped liabilities on the Fed's balance sheet. And there's a 

[00:13:37] Lisa: reason for it. It's really because of this reverse repo facility, which was no small thing. It was as large as 1. 4 trillion at one point. And so what happened was money market funds had a lot of cash because, you know, cash yields were 5%.

[00:13:54] So a lot of people were very happy to put their money into money market funds. We had all those issues with people taking money out of their checking accounts and bank accounts and savings accounts and putting them into money market funds because they got such a nice high yield. Then the money market funds turn around and go, okay.

[00:14:11] Well, what am I going to invest in? Well, one of the things that they could do is called overnight repo with the Fed and give the Fed their cash in return for holding some of the Fed's treasury securities. And that was about the best short term rate in the market. And so they were doing a lot of it. 

[00:14:33] Lori: But Janet changed that.

[00:14:34] She made it more attractive for the money market funds to buy treasuries. By issuing debt at the low end of the curve, maturity 

[00:14:45] Lisa: curve. So that means that she was issuing treasury bills that were shorter than one year. And at the same time, the money market funds were starting to worry that the Fed was going to cut rates and, you know, You know, they weren't going to be able to keep getting this nice 5 percent rate if the Fed cut.

[00:15:02] So they, they were interested in locking in some longer rates and three month bills and six month bills. So that was another reason they were interested in buying what Janet Yellen was offering when she increased the size of the Treasury bill auction. 

[00:15:15] Lori: And at first, we wrote a blog, Janet Yellen Wins the Prize, and made the point that Yellen issued Things at the short end of the curve, rather than at the 10 year level, where everyone was anticipating that she was going to issue new treasuries, and it was more costly to do it that way.

[00:15:34] So yes, because 

[00:15:35] Lisa: at that point, the curve is still in was still inverted. And so 10 year yields were actually. lower than short term yields. 

[00:15:43] Lori: So it was costing her money to do it, and it sort of perplexed us as to why she was doing it. And then when we discovered this little trick, 

[00:15:52] Lisa: little wrinkle. So when the money market funds decided to take their money out of the reverse repo facility, that money was considered dead money because it wasn't going into the financial system, right?

[00:16:05] It was like the Fed was just sitting there with the cash. The cash wasn't going anywhere. It was just at the Fed. So it's considered dead money. Not money that's in the financial system. So she took something that was inert, so 

[00:16:17] Lori: to 

[00:16:17] Lisa: speak. Yes, inert 

[00:16:18] Lori: was another expression. And, and she, she instead It increased a different liability, which was not inert, which did provide liquidity in the system.

[00:16:29] She did it by having treasuries go up. It's called the treasury account, which is a liability of the Fed, but it still puts money into the system. Oh, because 

[00:16:39] Lisa: eventually the treasury Has a treasury general account at the Fed. And that's kind of like their checking account, a very big one where they put money in as they issue treasuries.

[00:16:51] And then they take money out as they have to pay for various government expenses. 

[00:16:56] Lori: You probably heard that Jerome Powell said that he was going to slow down the quantitative tightening that he was doing. He was going to slow down the balance sheet runoff. And it appears that his decision to slow it down has been successful.

[00:17:11] Probably something to do with the fact that Janet Yellen was running out of her inert reverse repos. 

[00:17:17] Lisa: Yes, and it had gone down to about 400 billion. 400 trillion. Yeah, this begs the question of why do we care about this? Why is this an important concept that we're having you listen to? 

[00:17:29] Lori: It's because putting water into the tank made stocks and crypto go up, and if something happens where they don't have that ability anymore and the water comes out of the tank, they go down.

[00:17:42] And what happened when the Fed said that they were going to not roll off their, the bond portfolio as quickly as they started to take water out of the tank and Janet wasn't helping put enough more in. They 

[00:17:55] Lisa: had gotten most of their job done, you know, the economy had slowed down, but it was still robust.

[00:18:02] Unemployment, like the number of people looking for workers versus workers available ratio had improved. It wasn't as crazy. Wages weren't growing as fast. Inflation was down. I mean, they, you know, basically a lot of people thought that the Fed was actually achieving the nirvana. of a soft landing, but it's not over until it's over, as you can see with what has just happened this week.

[00:18:28] So in this past week, started last week, started last week, 

[00:18:33] Lori: there's a famous Wharton professor named Jeremy Siegel, and he was screaming yesterday that the Fed needed to cut rates and cut them aggressively. 75 basis points? Well, yeah, 

[00:18:44] Lisa: part of the reason for that is that the Fed funds rate is technically considered tightening.

[00:18:49] If it is 25 or 50 basis points above what's considered the neutral rate, the rate at which the economy grows without creating a lot of inflation. So we think the neutral rate is somewhere in the high twos. Pell said that, that that was the neutral rate was 2. 8%. We have a fed funds rate that's at 5. 33 percent of late.

[00:19:10] And so that is like. incredibly restrictive. So one could argue that the Fed should just ease in order to not be tightening, like they're not easing in order to stimulate, they should just ease in order to not cause an economic problem. And that's what Jeremy Siegel is particularly unhappy about. 

[00:19:29] Lori: But the problem with that is that the market's got It started last Thursday.

[00:19:35] Killed is a little extreme. They went down a little. They went down quickly. Yes, they went down quickly. It's not the magnitude of the drop. It's the speed at which it happened. Speed kind of shocked everybody. Yeah, it was from August 1st to August 5th. The S& P was down over 7%. Right, and that was only two trading 

[00:19:56] Lisa: days.

[00:19:56] There was a weekend in there. Yeah, exactly. And the NASDAQ was down even further. It was down 12%. Yeah, 

[00:20:04] Lori: and if you look, I mean, people 

[00:20:06] Lisa: got really concerned. There were not normal reasons, not entirely normal reasons for it, I think, which is what caused a lot of Confusion in people's minds. The sell off was really based on two things.

[00:20:17] One of which was Japan raising interest rates after leaving them mostly unchanged for years because the Japanese economy is like very slow growth with deflation problems that had deflation problems for the longest time. So they've had low interest rates forever. Well. All the rest of the world, all the developed economies after the pandemic and inflation occurred, they all raised their rates significantly, very similar to the United States and to the four or five percent range.

[00:20:48] That's the backdrop for what happens next. But the other thing, major thing that happened last week was that We had an unemployment report where unemployment rates went up to 4. 3%, which is a near term high. And also the employment numbers were much lower than expected in terms of jobs added to the economy.

[00:21:09] So these triggered some fears of recession, and we'll go into more detail on those later, but there are other contributing 

[00:21:15] Lori: factors. Well, I just think there's no doubt that around, I mean, if you just listen to companies and listen to their earnings calls, it's so mixed. Some companies are doing okay. Other companies are having a problem.

[00:21:27] It seems like the low end consumer is really got some 

[00:21:30] Lisa: issues. 

[00:21:31] Lori: Well, that makes 

[00:21:31] Lisa: sense because they've I mean, there's some idiosyncratic issues with these companies, but they're just around 

[00:21:36] Lori: And you don't think you'd, you probably wouldn't be having these problems, but I mean, there's some other kind of one offs.

[00:21:42] I mean, companies like Procter and Gamble that haven't had good numbers, I mean, Airbnb, I mean, there's some idiosyncratic issues with these companies, but they're just around the edges. I mean, there's some other kind of one offs.

[00:22:00] Cracks that you've got, but you know, in terms of the various data that, that Powell would look at, the manufacturing purchasing managers index was not good. It fell for the fourth consecutive. And that was on Thursday. It came back. I think it was yesterday that the services PMI was actually pretty good.

[00:22:20] Yeah. So like I said, it's mixed. And then Berkshire Hathaway. sold half of their Apple shares, their record cash levels, and they had sold down their Bank of America holdings the week before. And that was concerning to the market. 

[00:22:36] Lisa: People follow Warren Buffett, and they're interested in what he's doing, and he hasn't been perfect, but he has, you know, a good long term track record in terms of what he's doing.

[00:22:45] But the 

[00:22:46] Lori: problem, the question is we don't know why he's doing these sales. I heard someone say, well, it was a concentration risk. He owns so much Apple that it became a concentration risk in his portfolio. And when he's done that, he sort of bought the whole company. He didn't just become that yesterday, I mean, last week.

[00:23:03] Yeah, he's been that for a while. Yeah, but I'm sure he was 

[00:23:05] Lisa: probably selling it out over time. Yes, 

[00:23:07] Lori: and, and then there was also news yesterday that NVIDIA's latest Artificial intelligence chip Blackwell was delayed. It's not been confirmed. NVIDIA's in their quiet period, so you're not gonna hear anything from them on that, but there was concern that the AI got overhyped.

[00:23:27] And look, the market wasn't particularly cheap on top of everything else. So I guess the biggest problem, though, when we sat down and looked at it yesterday was really this yen carry trade. Yeah. 

[00:23:39] Lisa: And so a lot of people were like, why would something going on in Japan having to do with the yen have any influence whatsoever on the U.

[00:23:47] S. stock market? That was the big question. One of the things that set the stage for this is because Japan. mostly, you know, for the most part left their rates unchanged while everyone else raised rates, it set the stage for the yen carry trade. And what that means is that someone can borrow in yen at very low interest rates, like sub 1 percent interest rates and reinvest the proceeds of those borrowings and higher yielding or higher returning assets, such as the dollar.

[00:24:24] A lot of people bought technology stocks, U. S. treasuries, other high yielding currencies, and they often did this. with leverage. 

[00:24:33] Lori: They did do it with leverage. This is being done. This is not your vanilla investor. Most of the people that listen to our podcast that this is not what they're doing. Oh yeah, this is 

[00:24:42] Lisa: not, we don't do this.

[00:24:43] We don't do this. Visitors don't do 

[00:24:45] Lori: this. 

[00:24:45] Lisa: This is much more of a hedge fund. It's a hedge 

[00:24:48] Lori: fund tool and it, it made a lot of money and it worked for a long time and it works until it doesn't work. Yeah. And then it suddenly, it's gone. Yeah, because they had two problems. A, the value of the yen changed and went against them.

[00:25:02] Right, so that 

[00:25:03] Lisa: was the big thing. Japan raised interest rates last week. So that meant, first of all, their borrowing costs went up. And secondly, It meant that the yen appreciated against the dollar. So if they have all their money invested in dollars or dollar denominated securities, and they have to pay back money in yen, which is now worth more than the dollars that they started with, then they start to lose money, or the trade starts to not work.

[00:25:34] And so the only way to get out of that trade is to sell your stocks. Close out your borrowing. And so apparently quite a bit of that happened. 

[00:25:45] Lori: They think that the yen carry trade problem is about half done. I was JP Morgan or Morgan Stanley, probably JP Morgan. That I think said that today, 

[00:25:53] Lisa: but it's also not dire.

[00:25:55] It's not like Japan is coming out and like raising interest rates monthly or something like that. It's not going wildly in the wrong direction. 

[00:26:04] Lori: And the problem is if we do what Jeremy Siegel is suggesting, Which is if the Fed now comes out and lowers rate, that's going to make the yen carry trade worse.

[00:26:14] Because it's not going to make it worse, it's going to make it more of a problem. Yeah, because what happens is, then the value of the dollar is going to go down even more relative to the yen, and so it's going to make their borrowing costs go up. Make the borrowing cost of 

[00:26:29] Lisa: the leverage players go up.

[00:26:32] Yeah. See, these things are actually often set up in a very mechanical way. Like when the trade starts to go against you, you are required if you're a leveraged player to sell a certain amount of your position. So basically getting a margin call, some of the selling is involuntary and that's why it reached such a crescendo over Friday and Monday, but then.

[00:26:56] Obviously, there was a big pause because we had a big bounce today. 

[00:26:59] Lori: You could also argue that, you know, you were starting to see some cracks in some of the magnificent seven stocks that they had been buying as well when people got concerned about the economy. And then there was some talk before the whole Blackwell thing that maybe people were getting too overhyped in AI, that the spending was too much from the companies when they were reporting.

[00:27:21] They were getting it on both sides, if you will. So I think that was probably the biggest Problem with the market yesterday, but it wasn't certainly the only one and Friday too. 

[00:27:32] Lisa: So, the other thing was the unemployment report. Market participants actually pay attention to something that's called the SOM rule.

[00:27:40] And this is a recession indicator that was developed by a former Federal Reserve and White House economist, Claudia SOM. And it has been a very reliable rule signaling the beginning of a recession, specifically when the three month average unemployment rate half a percent or more above the lowest unemployment rate over the past 12 months.

[00:28:05] So that's very, very specific. But what happened on Thursday is that rule was triggered. 

[00:28:11] Lori: The problem is people are, economists are saying, well, this has been a really good rule, but maybe it's not a really good rule now because We went down to historic lows. Yeah, we went 

[00:28:21] Lisa: below 4 percent in unemployment.

[00:28:22] And that's just not normal. And that's extremely low historically. So, they're giving, they're sort of allowing a little wiggle room on this rule right now. Because of the extremes of behavior after the pandemic. 

[00:28:36] Lori: So, there is concern about recession as well as the CN carry trade situation going on. There's valuations that are not as cheap as they have been, and so you had a perfect storm, so to speak.

[00:28:50] So, everybody's like, what's the Fed going to do? What is the Fed going to do? Well, the problem is if the Fed comes out and lowers the rates. immediately, everyone's going to panic and say, what do they see that we don't see? 

[00:29:01] Lisa: Cause sometimes they get data that we don't get. They talk to companies all the time.

[00:29:05] You know, if the fed does something really dramatic and unexpected people generally think it means something's really wrong. So that's why Powell likes to signal very clearly ahead of time, what they're thinking when they're transitioning, they're thinking when they're maybe cutting in September, probably more likely than maybe, but, but to do it sooner than that, would be because of a problem that they thought was significant.

[00:29:31] It may 

[00:29:32] Lori: not be a recession as a problem, if it's a problem with the yen carry trade. We included in our blog a chart that we got from Evercore ISI showing when you saw past tightening cycles, when the Fed raised rates, In the past that there were financial crises or financial shocks, and it's quite possible that this yen carry trade can cause systemic damage or fear of systemic damage to the banking system.

[00:30:02] And this is 

[00:30:02] Lisa: not like a unusual occurrence. I mean, it's happened, it's. But it has happened 13 times since 1971, where some institution or group of institutions has had a problem as a result of the Fed tightening. And the reason for that is that especially for people who are borrowing in order to invest.

[00:30:27] When they're borrowing costs go up, if they're using leverage, that causes a problem. They go from making money to potentially losing money and having to close out trades. And so that's the reason why people use the expression, the Fed might tighten until something breaks and something breaking usually means a financial institution runs into trouble.

[00:30:49] Like, and we could have said a few things broke last year when those regional banks ran into trouble because they owned. long dated treasuries at, I don't know, 1%, half a percent. And then their funding costs went up to 2%. So, you know, that doesn't work. That's losing money. So that is why some of those banks got into trouble.

[00:31:10] It's exactly that process. 

[00:31:12] Lori: So the question is, what should investors do at this point? And it kind of depends on where you are. You're getting wonderful opportunities because what happens is, when these trades unwind, People have to sell all kinds of things that they may not even want to sell because A, they may be forced to sell it, B, they may be sold out of it, and so you're seeing things that we would argue probably shouldn't go down, get hurt.

[00:31:40] Lisa: Or it might just be we see things that we like that were just too expensive because these players were all piling in to the technology trade and to the NVIDIA and AI trades. And they piled out. And so a lot of those stocks went down dramatically. So instead of being ridiculously expensive, they're now like, they're not cheap, but they're now more reasonable than they used to be.

[00:32:05] Lori: Yeah. And the other thing that we would say is we've been big supporters of gold for years and actually, and. In spite of many people saying it's a barbarous relic, not just Keynes, it, gold has done terrifically. And we saw yesterday that gold really didn't do well. 

[00:32:24] Lisa: And I think it was But it still did better than stocks.

[00:32:26] It's true. Didn't do as well as bonds because bonds are actually now, I mean, that was the thing that was really very evident on Friday and Monday is that bonds finally became the counterbalancing force to an equity market sell off once again. Unlike 2022, when everything sold off this time around, bonds were.

[00:32:47] Going up in price while equities were going down in price because people viewed them, especially treasury bonds, as a safe haven when they didn't know what was happening with this. Particularly with the Japan, uh, carry trade, but also when people think there's going to be a recession, they buy bonds because they expect the stock market to go down and bonds to be a safe place to be and bonds aren't at half a percent anymore.

[00:33:11] So what 

[00:33:12] Lori: are we saying to do? Look over the longterm, a lot of people have been saying that your asset mix should go more to equities just because people are living longer and you aren't. You may outlive your money if you don't grow it. And so if you don't have any stocks or don't have enough equities in your portfolio, you've gotten an opportunity to add some.

[00:33:39] If you are fully invested in the equity portion of your portfolio, you can. Get rid of the ugly ducklings and buy things that you think are better positioned that are now more reasonably priced. But we're saying to do this over time. It's a concept called dollar cost averaging so that you don't shoot your wad in one fell swoop, so to speak, 

[00:34:02] Lisa: and that's 

[00:34:04] Lori: what we're suggesting.

[00:34:04] Another way 

[00:34:05] Lisa: of saying that is a little more elegant is Don't try to catch a falling knife, because when the market is first falling, it's often the beginning of a slightly longer trend, so if you're measured and when you jump in and buy and do it in pieces, you may be better off. 

[00:34:25] Lori: The market doesn't usually bottom in August.

[00:34:28] It's usually October when you start to see things, uh, not, uh, act as well. Some of you remember 1987 when that was a, that was a quickie, uh, and bad. So, the timing, it's, it, this is not a cyclically good time of year for equities, but it's not usually a time when The bottom is in. Panic selling is not an 

[00:34:52] Lisa: investment concept.

[00:34:53] And that's partly because markets can rebound very quickly. And actually, people get caught out selling at the bottom and then not getting back in. 

[00:35:01] Lori: And actually if you look, bear market rallies, we're not there yet, but bear market rallies are more vicious than Then even rallies and good markets. They're awful if you're on the wrong side, if you're not invested, they're good.

[00:35:15] If you are, nobody can time things perfectly. So you've just gotta be prudent and make sure that you have enough cash for the next year or so, and then just invest your money, go have a glass of wine. That's all for now. Until next time, we are two X Wells group. We invite you to come, go to our website, uh, or call us right to us, and our website is uh, two x 

[00:35:44] Lisa: wealth.engles.net.

[00:35:47] That's all for now. Have a good one.