#33 – Carry Trade, The Death Tax, and Participation vs. Perfection

Jeff Lloyd [00:00:54]:
Thanks for having me back, Wes.

Wes Moss [00:00:56]:
Always good to have you here. I don’t want people to tune out, but I want to talk about what the carry trade is before you hear the record screech. It’s that only a couple of weeks ago we had a massive sell off in a day. And you start hearing headlines of 1987, the japanese Nikkei stock market fell 12% in a day. It really created a global sell off. We had our markets down three, 4% or 3% in just one day. But it was more than that. The Nasdaq went into full blown correction mode, down.

Wes Moss [00:01:27]:
It was 13% at one point. Not as bad for the S and P 500 and the Dow, but the doubt the S and P 500 was down almost 9%. So we had essentially a correction, and it happened really quickly. And it’s a really, it’s a scary thing that happens because it’s soon as you realize, markets after a nice steady uptrend like we’ve had for a lot of this year, all of a sudden half of it gets wiped out. You start extrapolating like, wait a minute, we’re not going down just 9%, we’re going down 20% and 30%. And that gets really scary. Now, that has not happened, and we’ve actually had quite a rebound since then. But what really caused that global sell off is the question.

Wes Moss [00:02:09]:
Maybe it was less about the economic data. Maybe it was less that unemployment has risen to 4.3%. Maybe it is less around an economic slowdown because we actually had some good economic numbers this week. CPI still is continuing to get even more tame. Retail spending was up this past week, which was a really real positive for the market. So we’ve had a decent economic data yet. We had this giant sell off. And the reason I wanted to bring it up is that I do wonder if it is more the result of a technical sell off caused by this esoteric word or phrase or activity called the carry trade.

Wes Moss [00:02:50]:
And we’re not typically in the business of trying to explain every single up and down in the stock market here on money matters. But because the market at any given time can have a real layer of froth on the top of the cappuccino that can literally get blown off in the wind like that, I think it’s at least worth exploring this. I’ve gotten a bunch of questions about, wait, what’s this carry trade thing? And how does that, why can trillions of dollars get erased in the stock market in a matter of days? I think it’s worth exploring. Fascinating to me. I’ll try. I think it’ll be somewhat interesting. So don’t change the channel just because we’re talking about the carry trade.

Jeff Lloyd [00:03:30]:
No, I think it’s interesting and I think it’s relevant. And what you said with the japanese market two weeks ago, you saw headlines, Japanese Nikkei has worst day since Black Monday, 1987.

Wes Moss [00:03:43]:
That gets your attention.

Jeff Lloyd [00:03:44]:
Yeah. Down double digits. You saw the, with the american stock market, you saw down 1000.

Wes Moss [00:03:52]:
I like the american stock market.

Jeff Lloyd [00:03:54]:
The us stock market dial down 1000 points s and P 500 has its worst day since 2002. But then you also see japanese stock market has worst day since 1987. You’re kind of like, hmm, well, what’s going on over there, man?

Wes Moss [00:04:11]:
Yeah, the other thing too. Just the headlines. If you go back over the last couple of weeks, there’s such a ping pong. Maybe I still have the Olympics in my head, by the way. I still think that’s a top ten. Top three for me.

Jeff Lloyd [00:04:25]:
Taylor. Tennis and badminton.

Wes Moss [00:04:27]:
Fascinating how good they are. I saw the, I think it was the gold medal match, the women. China versus Japan. It just is so good. One of my kids also sent me a clip and I don’t know if it was from the Olympics or not, but it’s just this phenomenal ping pong player. I’m sorry, table tennis, who nonchalantly crushed this other guy. He’s just kind of guys. He’s hitting as hard as he can.

Wes Moss [00:04:53]:
This guy’s barely looking. Barely looking. Then he does a walk off backhand. Doesn’t even look. Scores the point, just walks off the table. Tennis court. I’m getting distracted here. Let’s talk about headlines for a second.

Wes Moss [00:05:06]:
S pissed. 500 posts. Best day since February as Powell points to possible September rate cuts.

Jeff Lloyd [00:05:15]:
Yay.

Wes Moss [00:05:15]:
That’s great. That was back at the end of July. The world’s. Oh, this is great. August 1, a day later, day or two later, Dow closes down 600 points. Nasdaq enters correction after week jobs report. August 4, Dow tumbles 1000 points. S and p 500 worst day since 2022 in a global market sell off.

Wes Moss [00:05:41]:
Same day Japan’s Nikkei suffers worst day since 1987 hit by us concerns. Wait a minute. Why? Concerns here and now the Japanese. Across the Pacific Ocean. We have a 12% correction for another giant stock market. Gets your attention. August 7. What happens? We’re talking a couple of days here.

Wes Moss [00:06:01]:
S and p 500 notches its best day since 2022. Wall street claws its way back from Monday’s route. August 13, Starbucks Al CEO, name’s Chipotle. Chipotle, Chipotle, Chipotle, Chipotle, Chipotle. Boss as replacement, by the way, he gets, he’s got an $85 million pay package.

Jeff Lloyd [00:06:25]:
He’s got some incentive to do well at his new role, that’s for sure. We’re talking about Chipotle’s CEO taken over at Starbucks.

Wes Moss [00:06:35]:
I don’t know why you have this one in here, but it’s kind of a fun headline. Mars reaches deal for cheese it and Eggo maker Kelanova.

Jeff Lloyd [00:06:43]:
It was a pretty big deal announced this past week, a $30 billion deal between two snack food conglomerates combining candy bars, buying waffles.

Wes Moss [00:06:54]:
How I look at that. Annual inflation slows. This is this week. Jeff Floyd slows to 2.9% in July, lowest since 2021. March of 2021. That’s, wait a minute. That’s good news, isn’t it?

Jeff Lloyd [00:07:09]:
That’s great news. It’s the first time the year over year inflation number has been below 3% since January of 2021 or March of 2021.

Wes Moss [00:07:18]:
It’s a long time. And then now we do see, PC, that personal consumption expenditures, which is also in another inflation reading, that is down to two and a half. And that’s what the Fed’s watching. That is getting really close to their target, their target range of two. So that is, that continues to be this headline of we’re getting close. And then the probably the most important economic headline of the week, breaking, will not be returning for the 2028 Olympics.

Jeff Lloyd [00:07:46]:
You know, I just thought that we would include that in the headlines. You know, that is literally breaking news.

Wes Moss [00:07:53]:
He’s breaking news. It is. I don’t know what to say about that, except I get it. I can see the australian breaker breakdancing, by the way. That’s what we’re talking about. Producer Mallory giving me the thumbs down on that was, I guess, bad enough that. Do you think that’s what got rid of breaking? Because I saw a couple of those break offs, kind of a dance off that were incredible, incredibly athletic. I look at it as kind of a mix of gymnastics and maybe it’s too subjective.

Wes Moss [00:08:32]:
Maybe that’s why they don’t want to have it in the Olympics.

Jeff Lloyd [00:08:34]:
And she was kind of so bad, she kind of went viral and it.

Wes Moss [00:08:38]:
Got more headlines that I don’t even know who won the gold, but I know about the LLC. They got zero points.

Jeff Lloyd [00:08:43]:
Japan won the gold in the women’s and Canada won with the men’s. And so breaking will not be back in four years in Los Angeles, but lacrosse, cricket, baseball and softball will be.

Wes Moss [00:08:57]:
But is it true basketball is coming? Is going to be in LA?

Jeff Lloyd [00:08:59]:
I think that’s right.

Wes Moss [00:09:00]:
That seems like a no brainer to me.

Jeff Lloyd [00:09:02]:
It really does.

Wes Moss [00:09:04]:
These paddle sports are so fun to watch, and I can’t imagine Olympic pickle now.

Jeff Lloyd [00:09:09]:
You played some pickleball this past week, didn’t you?

Wes Moss [00:09:11]:
I did. I did. I almost. I kind.

Jeff Lloyd [00:09:13]:
No injuries, which is good. You’re not here with any. No crutches, no cast.

Wes Moss [00:09:18]:
Do you remember we were making fun of the. Well, we weren’t making fun of it. We were just kind of pooh poohing it because we love pickle, and it’s. And really, pickleball is the Labrador retriever of sports. You can’t not kind of love it. And I hadn’t played pickle for a while. It’s been probably a couple of years, and went back, played a pickleball match in the 90 degree, 95 degrees. So I didn’t have.

Wes Moss [00:09:46]:
It was pretty rough that side of it, but it was so fun that we scheduled it for, again for today. It was actually, it was last Sunday I did it, and then after the show, and then I’m gonna do it again today. But it’s just, when you play it, it’s kind of. I think it’s just the perfect marriage between tennis and ping pong. And so you feel like you’re doing a little bit something athletic, but not all that much athletic. And everybody can kind of do it. And it’s fun. It’s kind of competitive, but really not that competitive because it’s really kind of a wiffle ball.

Wes Moss [00:10:18]:
So it just has so many nice components to it that it’s just such a no brainer sport. However, I did kind of sprain my ankle and the UB, remember the UBS report said something like, because we have an aging population and more people playing pickleball, it’s a fast growing sport. You’re going to have. It’s going to cost $60 billion a year towards Medicare because of the. The injuries that are going to be had on the pickleball court. Producer Mallory, her mom just broke her wrist playing tennis. UBS, I guess, is right.

Jeff Lloyd [00:10:50]:
Well, she probably listened to money matters a couple of weeks ago and heard that tennis adds, what, a decade to your life. So following that core pursuit, well, the.

Wes Moss [00:11:00]:
Great news is it’s going to be a comeback story for Mallory’s mom. She’s down, she’s out. She broke her wrist and she’s gonna now rise up from the ashes. She’s gonna heal her wrist and she’s got tennis to go back to.

Jeff Lloyd [00:11:13]:
She’s gonna come back even stronger.

Wes Moss [00:11:14]:
She’s coming stronger than ever is what’s gonna happen. And it’s this great story of resiliency that she can come back from breaking a risk.

Jeff Lloyd [00:11:23]:
And why do we fall? To learn how to pick ourselves up.

Wes Moss [00:11:26]:
That’s the only reason we do it. So what really caused this global stock market sell off? I just wanted to understand a little bit better what has happened. I think that anytime you have something big happen in the market, for some reason, I just kind of. I feel like I have to put into perspective. But the perspective is that you have these simple little changes. I’m not talking about massive, real scary events like the pandemic shutdown. That was scary. I was scared.

Wes Moss [00:11:55]:
We were all scared, and we were shut down. The economy literally stopped for a little while. Unprecedented and actually scary. Wait a minute. How long are we going to be shut down? But you can have these little events that people don’t really even see, understand. It’s hard to perfectly quantify them. And then, wham, you’ve got these ripples that happen really quickly, and in the end, a little ripple can cause this giant overreaction. And what does that do? It distracts us from the long term business of investing.

Wes Moss [00:12:29]:
Enter the carry trade. Here’s the best way I think I can try to explain the carry trade. So think of it as you’re borrowing a low yielding currency to take the money from the borrower to buy a high yielding currency, and you make the difference. That’s it. That’s what the carry trade is. So think about this. In this case, you borrow yen. That’s aka the cheap currency.

Wes Moss [00:12:54]:
By the way, interest rates in Japan have been at almost zero for it feels like forever now. They’re close to a quarter of a percent. A quarter of a percent. Our federal funds rate, we know, is five and a quarter to five and a half percent. That’s a big difference. So imagine a hedge fund takes out a loan in japanese yen because their interest rates are super low. The hedge fund could actually. They could either take out a actual loan from a japanese bank in yen.

Wes Moss [00:13:22]:
Again, since Japan has these ultra low interest rates, it’s a cheap loan to service. The hedge funds could also sell short the yen. That means they borrow the yen, they immediately sell it. So they pull in cash, and then they exchange it for another currency, like us dollars. And then later they have to buy back. This is an important part of the story. Buy back the yen to replace the loan and hoping the exchange rate doesn’t move all that much during that period of time. So, okay, they get money in cheaply.

Wes Moss [00:13:53]:
Now they have to buy this other currency. Let’s say they invest the money in something like us bonds, which have a higher interest rate, much higher 5% versus a quarter of a percent. This way they make money from the spread, the difference between the low japanese interest rates and higher us rates. But this creates a coiled spring of leverage in the system when anybody’s borrowing anything. So borrowing money cheaply, that in itself is leverage, essentially amplifying the potential profits using borrowed money. Remember, it’s the bank’s money they’re using in a lot of cases, so that they’re investing the cash they have in their fund. So they’re getting exposure beyond 100% of what they have. And imagine this, something in that delicate equation just changes a little bit.

Wes Moss [00:14:45]:
The delicate equation entered here with a coiled spring of leverage. The unwind can happen really quickly. And that, we think, is what happened over the last couple of weeks. And that’s the carry trade. Kind of fascinating. More money matters straight ahead. If you’ve ever done a Jane Fonda workout, or if you remember as a kid, Rocky running the steps. And if Michael Keaton is still Mister mom to you, and guess what? It’s officially time to do some retirement planning.

Wes Moss [00:15:18]:
It’s Wes moss from money matters. Weren’t those the good old days? Well, with a little bit of retirement planning, there are plenty of good days ahead. Schedule an appointment with our team today@yourwealth.com. dot that’s your, yourwealth.com dot. A couple quick things. One I want to talk about best, worst days, because we’ve had this ping pong of headlines. The worst day, the best day, the worst day, all within the last couple of weeks. The technical you’re trying to point to, how did you have such, this massive global sell off at the very beginning of August without anything really, all that dire happening.

Wes Moss [00:15:56]:
We have dire events happen all the time. And it kind of gives some real credence to why the stock market sells off. The pandemic is the most recent one, the housing crisis before that was very.

Jeff Lloyd [00:16:09]:
Obvious, particularly recent major geopolitical events.

Wes Moss [00:16:13]:
Geopolitical events. We know that these scares investors uncertainty. I’d rather be in cash than stocks. Market sell off. The more recent, what we’ve experienced more recently, there’s really no one particular thing to point to. So wait a minute, why did markets, why did we get hit so hard so quickly? Was it because the unemployment rate went from 4.1 to 4.3? Was it, that just doesn’t, the impact just doesn’t seem to measure up right for the, for the event. So what we have determined is that a big part of what we’ve just recently seen on the sell off side, and we’ve rebounded dramatically since then already, which is why we want to talk about best days, worst days in the markets and why we really can’t time them, is something called the carry trade, which, it may sound wonky and sound esoteric, but it’s a really good example of just how, how delicate markets are when it comes to big money moving around the world. So if you think about the trillion plus dollars that are in hedge funds that do something like the carry trade, which the way I explain this is that imagine you’ve got a super low yielding currency that’s cheap to borrow, that is yen, japanese yen rates there are ultra low still, quarter of a percent.

Wes Moss [00:17:31]:
So you take a loan out in yen and it, it costs a quarter of a percent to service it. Let’s say it costs 1% and you can buy a us bond that yields 5%. So you put $100,000 in, you borrow 100,000, it’s going to cost you a grand at the end of the year to pay it back. Okay, well, you just made $5,000 in interest on that transaction, so you pocket $4,000. Now, that’s not this tremendous home run rate of return, but hedge funds will do that because it’s a steady way to make a little bit and they’ll apply leverage to it. So they’ll borrow even more than they have and they’ll leverage up that trade. And I think that’s what creates what I call here like a coiled spring and leverage in this system. So think about this.

Wes Moss [00:18:18]:
Borrowing money cheaply, investing in a higher yielding asset, hedge funds using leverage, and they’re amplifying their potential profits because they’re borrowing money to do it. Remember, it’s the bank’s money they’re using. So while they’re doing other financial transactions with their own fund money, they create an investment environment where they’re investing more than they actually have. Think of it as on margin borrowed money investing. And when it’s going in the right way, that differential works out. It can be very profitable, but it’s a delicate equation. So think about why did it unwind? Bank of Japan raised rates a little bit, or hinted that they would raise rates. That’s making one side of the equation not as profitable.

Wes Moss [00:19:06]:
And our interest rates now all of a sudden going down because the unemployment rate went up. Now this super delicate equation just moved. And this seemingly placid, easy trade, all of a sudden, lots of leverage had to unwind. So what happens when you unwind that and you have to pay back the loans, you got to sell something else. And that’s why you saw this big sell off in stocks there. You saw a big sell off here, and all of a sudden you’ve got this turmoil that’s created by just kind of a technicality. And that doesn’t potentially explain everything that we saw in early August. Doesn’t mean that it won’t happen again, doesn’t mean that it’s completely unwound at this point, but it’s a really good example of just a little ripple can create a tidal wave of movement, and that’s, I think, what we have seen.

Wes Moss [00:19:57]:
Now, Jeff Lloyd, you smartly point out, and this is the first time I’ve ever seen this research. So we continue to try to do new things here on money matters, the ping pong of good and bad and good and bad headlines. So S and P 501 of the best days ever. Everyone’s excited. Rate cuts, markets up a bunch. A day or a day or two later, Dallas down 600 points. A day or two later, Dallas down 1000 points. Then a couple of days later, S and P 500 notches its best day on in 2022, recovering from the route.

Wes Moss [00:20:29]:
So we ping pong back and forth between really good news and then really terrible news all at the same time. It goes back to remind us as investors that there’s no way you can’t possibly think you’re going to know the night before what the bad news will be the next day, or know the good news that’ll be the next day, have to be fully invested. So we’ve gone over this chart over the years several times. This goes from imagine investing in the S and P 500 in 95 to the end of 2003, it’s 29 years of data fully invested. We know that’s about 8.8. Call it 9% for the S and P 500. During that, if you’re invested the whole time, you missed just the ten best days. In that entire almost 30 year stretch, you go down to less than 6% and you miss the 20 best days.

Wes Moss [00:21:25]:
Now you go down to 4.1. So your return is cut by more than 50% just because you miss a couple of the best days in the market. And we just don’t know when they’re coming. Now, in fairness to the other side of that, this kind of philosophical exercise, what happens if you do miss the worst days? Jeff Lloyd.

Jeff Lloyd [00:21:47]:
Yeah, this is kind of the first time that our research team has taken a look at this data. You know, mainly when we’re talking about this, it’s just, well, hey, what happens if you miss out on the best days? And we wanted to look at it another way because usually the best and the worst days happen pretty close to each other. Let’s just take the last three weeks. Like we said, it’s happened again. Tv 500 has worst day since 2022. Couple days later. Best day since 2022. A couple of days later.

Jeff Lloyd [00:22:21]:
Worst day. The ping pong back and forth table tennis.

Wes Moss [00:22:24]:
Chapter ten.

Jeff Lloyd [00:22:25]:
Table tennis. Okay, okay. But the back and forth. And we just wanted to look at it another way. So, fully invested, you’re about 8.8%, close to 9%. Funny enough, if you miss out on the ten worst days, goes up to 12%. Missing the 20 worst days, up to 14%. Now, if you miss out on the worst 40 days, you’re up 18% per year.

Jeff Lloyd [00:22:51]:
And then if you miss out on the worst 50 days in the market, your annual return is close to 20% or 19.6% per year.

Wes Moss [00:23:00]:
It kind of makes sense. It’s kind of the inverse of missing the best days. But I think to your point, you dig a little bit deeper. Over 70% of the best days occur within just a month of the 50 worst days. So they really happen almost back to back, but not predictably or necessarily perfectly back to back. Then leads us to, again, something new that we to share here on money matters. What happens if you just miss the best and the worst days? And that. That this is what I think makes more sense to me.

Wes Moss [00:23:37]:
If you were to able to miss all the worst and or 50 of the worst during that long period of time and the 50 best, where do we round trip right back to about nine and a half percent. You missed the 30 best days and worst days, up 9.3%. You missed the 20 best days, worst days, 9.2%. So the point here is that because we know we can’t always time it to always be there when we get the best, clearly is a nice reminder that we need to stay invested and we still end up long term with that. 910, approximately average annualized rate of return. And that goes a very long way in the business of investing and getting you to a place where you have financial freedom in retirement. All right, with that, Jeff Lloyd, we can go politics, hobbies on steroids. Why are they so good for you? Core pursuits, the ping pong of what’s happened with headlines, character participation, perfection.

Wes Moss [00:24:39]:
I’m drawn to this for just a second here. I want to make this point about recession. It wasn’t long ago that we read a study that showed 59% of Americans felt as though we were in recession, which we were nowhere close to recession. But it’s the feeling in America that affordability. I heard a political analyst this week, a guy named Frank Lutz, and I love listening to him because he’s such a, he’s so efficient with what he calls things. He’s famous, and I think this is him. But he’s the political strategist. So of course he’s looking at the election handicapping how everyone’s doing in the election.

Wes Moss [00:25:24]:
But he is well known for changing the estate tax, calling it the estate tax. The estate tax to what, Jeff Floyd, what did he change it to? The death tax. He changed it.

Jeff Lloyd [00:25:42]:
He changed the name from estate tax.

Wes Moss [00:25:44]:
Nobody cares about the estate tax. You can talk about it as a politician all day long till you’re blue in the face. The estate taxes. We need a bigger exemption. Who’s listening? No one. So what’d they do? He said, what if you called it the death tax? Guess what? People started to listen. So he’s just well known to try to bring attention to the same thing, a new way of looking at it, essentially new verbiage. He did it this week.

Wes Moss [00:26:12]:
He was talking about politics, and he said, everyone’s talking about inflation. Inflation, inflation. That’s great. We all know about inflation. He said, the politicians should be talking about affordability. Stop saying inflation. Start saying affordability. We’re going to bring down inflation.

Wes Moss [00:26:27]:
We’re going to make things more affordable, maybe a better mess.

Jeff Lloyd [00:26:31]:
That seems a little bit more relatable to the consumer. Hey, inflation up 2%. Inflation up 9%. What does all that mean? Affordability.

Wes Moss [00:26:39]:
Affordability so it struck me because we’ve said the word inflation thousands of times over the last couple of years here on money matters. And really it’s about affordability. And that’s why a couple of months ago, the study that got it was on some sort of Harris poll that showed that most Americans, more than 50% of Americans, feel as though the market’s in a bear market. That was not true. That the unemployment rate was at a 50 year high when it was at a 50 year, almost a 50 year low. And the majority of Americans feeling like we’re in a recession. The reality is it makes sense because affordable, we don’t feel like the world is all that affordable because everything has gotten to be so inflated. It’s an affordability issue.

Wes Moss [00:27:26]:
And that’s why the sentiment in the United States has not been all that great economically, because even though we haven’t gone into a contraction, yes, we had those two quarters, what, a year and a half, two years ago that were slightly negative. We’ve been running at a very positive GDP, gross domestic product, which is the measure, really the large measure of whether a recession or not. And if you look at the Fed GDP now, and they update this pretty frequently, but that’s been in the two and a half to almost 3% range for GDP growth in the third quarter for a while now. So we’re not in a recession. The kind of, the funny thing about recessions is that it’s not uncommon to get a call from one of the big investment banks, whether it’s some big investment firm or research firm that says, oh, they just upped their chances of recession. So it’s a headline. They upped it to 30%. It was 25.

Wes Moss [00:28:23]:
And now their model shows that there’s a 30% chance. And the reality here is that we know that the recession forecasts have been so wrong because we haven’t gotten a recession yet. We’ve had lots of calls.

Jeff Lloyd [00:28:35]:
Didn’t we see headlines back in 2022, maybe even in 2023, calling for a hundred percent chance of a recession next year?

Wes Moss [00:28:45]:
Because when they say 100% chance, it’s that 80 out of 80 economists all say we’re going into recession over the next six months. That’s when I think you get to this 100% chance. And that was a Bloomberg survey of economists. Then, same year, Jamie Dimon comes out, the CEO of JP Morgan that everyone loves. Smart guy. We listened to him. He says, brace yourself, economic hurricane is coming. Jeff Bezos urges consumers the same thing late 2022.

Wes Moss [00:29:17]:
Consumers and business owners to reduce risk, urges them to reduce risk in the face of likely recession. This is, this was in, let’s see, 22 again. Here’s November of 2022. Elon Musk says a global recession could last until the spring of 2024. We didn’t even have a recession, let alone it lasting into 2024. 59% of Americans wrongly think the US is in recession. Report fines JP Morgan now and this is, I don’t know, this is a little bit tongue in cheek because I know that there’s a lot of work that is behind these models and they’re very smart people. And you got big teams that are looking at all the economic data points.

Wes Moss [00:29:57]:
And we know that we have this giant stew of data points. Consumer spending, retail spending, consumer sentiment, housing interest rates, whether we have new home sales, housing starts, existing home sales, median home prices. We’ve got manufacturing data. We’ve got whether it’s the manufacturing ism services and ism. And then. Good. So we’ve got this long list of, and this is just literally off the top of my head, earnings, employment claims, unemployment claims. There’s the regular unemployment numbers.

Wes Moss [00:30:37]:
Then there’s the u six unemployment numbers. So think about the stew of economic data that comes in day after day.

Jeff Lloyd [00:30:44]:
Those are a lot of economic ingredients going into that.

Wes Moss [00:30:47]:
It’s a big stew, that stew. It’s a complicated recipe. And a lot goes into modeling what is going to happen. Right? I know that there’s research firms that are taking satellite photos of the parking lots of Walmart to see how many people are shopping. And let alone we get reports from companies nearly every day. Procter and gamble says this about the consumer. Home Depot says that about the consumer. Coca Cola says this about the consumer.

Wes Moss [00:31:13]:
So every single day we are getting some sort of economic data. We go out, we model it, and you have all of these forecasts. But in their defense, it’s almost an unlimited, it’s almost an infinite list of inputs, because what you hear from every company every quarter or in between quarters is another economic input. So it’s a never ending cycle of changing data that’s coming in. Some of it is leading, some of it is concurrent, some of it is lagging. I love the housing data. It’s like two and a half months old by the time we get the housing data. So it’s a very old data.

Wes Moss [00:31:55]:
So you have all these variables and then you have old middle and leading. So essentially, I guess my point here is that it’s impossible to forecast a recession. And so that’s why you always see these calls for recession that are these hedged numbers, it’s, there’s a 30% chance. Well, if we’re wrong, we could say, well, there’s a 70% chance we weren’t going to a recession. There’s a 40. And this is, JP Morgan just said we’ve got a 35% chance of recession. Citigroup just said we have a 40% chance of recession because the Fed essentially is buying the curve. Here’s another one from Bloomberg.

Wes Moss [00:32:33]:
Economists. Low recession lower recession forecast to 40% on us job growth expectations. Bank of America US economy has 40% chance of being a recession by next year. The reality is they just can’t tell. That’s just the reality. And it’s not really not even their fault. It’s that it’s a constantly amorphously changing set of data points that never stops changing. And that’s the reality of it.

Wes Moss [00:32:59]:
And the point here to this funny article, it was from, it was, I think, a wealth of common sense. I don’t know where this came from, is that’s how you make a recession call. You make a call where you just say 25% to 40% and you kind of are never wrong.

Jeff Lloyd [00:33:15]:
Well, just think about, and let’s take it with a grain of salt, but think about how many things that you just mentioned can happen, measures of the economy that go into that economic stew. I mean, you listed out 15 or 20 indicators or economic measures that these economists look at and, you know, we’ll give them the benefit of the doubt. It is, it is hard to predict the future. It is hard to predict when the next recession is coming. But if you’re saying 30 to 30, you’re, you’re raising your forecast from 30% to 35%. Or you’re just saying, hey, there’s a 40% chance of a recession. What is that really saying? You’re just, you’re just hedging your, there’s.

Wes Moss [00:33:59]:
Always a 30% chance in my mind.

Jeff Lloyd [00:34:01]:
You know, it’s like a, we’re going.

Wes Moss [00:34:02]:
To go, to go into recession over the next six months. It’s going to rain over the next six months.

Jeff Lloyd [00:34:08]:
Yeah, there’s a 50% chance of rain tomorrow. It’s like a coin flip. Maybe it will, maybe it won’t in Atlanta.

Wes Moss [00:34:14]:
It’s a pretty good bet. 50 50. More money matters, straight ahead. These are some of the things on our mind here today. Jeff Lloyd, what did we get with the recent CPI report, the consumer price index, affordability, or lack thereof. Affordability. Where do we fall on the latest CPI data?

Jeff Lloyd [00:34:40]:
Yeah, so this last report came out on Wednesday, this past Wednesday, and showed that prices on a year over year basis increased just 2.9%. I say just 2.9%. That’s still a big increase, but it’s not a big increase like we’ve seen in the past two years ago. 9%. We’re kind of getting closer to that 2% target. I know we talked earlier about the Fed’s preferred measure of inflation. Isn’t this actual CPI data that we’re talking about? It’s PC, which the last print was, I think two and a half. Two and a half percent.

Wes Moss [00:35:18]:
There’s CPI and then there’s PCA. CPI is the consumer price index, and that just measures a basket of inflation and then tracks prices from month to month to month. And of course, year over year, the PCE, its personal consumption expenditures. And the difference there is that the economic data is looking at what people are actually spending their money on. So how much more are you spending or less on a similar item in any given year? So theres a little bit more on the ground of what people are actually buying. What are they spending their money on? So maybe that’s why the Fed prefers PCE, but that’s already back down to 2.5%. Remember, their target is too. So that’s a target range.

Wes Moss [00:36:04]:
It’s not a specific, it’s not, doesn’t have to be all the way. Exactly down to 2%. And that’s why the chance of increasing rates has gone away and decreasing rates has gone really through the roof. The chances now the market is saying, hey, we’re looking at lower rates in the future when the Fed meets again in September, et cetera. In fact, the probability is, it shows an over 100% probability that they’re going to lower rates starting in September. Now, what does that really mean for overall? And again, these are just probabilities. Even though it says 100%, it’s actually not 100% because that can change tomorrow. But clearly the direction of rates from the Fed’s federal funds rate standpoint, which they control, that clearly seems to be coming down over the coming months.

Wes Moss [00:36:54]:
And it’s not just because inflation has gotten somewhat tamer, but it’s also that other bigger economic areas, like the employment situation has clearly gotten a little bit worse. It’s still not terrible, it’s still not bad, but we’ve gone from 3.4% to 4.3% over the course of about a year or so. And that’s, again, still relatively low unemployment. But that’s about as much as the Fed wants to say. So they’re saying, wait a minute, it’s not just about inflation, it’s also about employment. That’s why they’re hinting towards lowering rates. So if they do that, what does that mean for you and what does that mean for us? Well, it’s the opposite of what’s been happening over the last couple of years. Remember that? When I had a conversation this week, someone that had locked in a 1.99% 15 year mortgage? That’s the lowest I’ve ever heard.

Jeff Lloyd [00:37:48]:
Can we do a mortgage swap? Yeah, that would be nice.

Wes Moss [00:37:51]:
Trade mortgages, 1.99. So let’s call that two, two and a half, three, the vast majority of Americans that had housing debt refinanced back in 2001, and two when rates were super low. That, of course, has led to people now that rates are much higher and we hit seven and a half percent. Jeff, I don’t know. Where are we on the. What’s the 30 year right now?

Jeff Lloyd [00:38:14]:
We’re kind of in between that six and a half and six and three quarter range right now for a 30 year fixed mortgage.

Wes Moss [00:38:21]:
But what’s interesting is that we have this two sided monster, which is housing prices have continued to go up. Median home price, over $425,000, median home price. And at the same time, rates are much higher now. So to buy and finance that now a more expensive home and a more expensive rate, it’s left a lot of buyers on the sidelines saying, hey, it’s not affordable for me to go buy a house. At the same time, what exacerbates that is that the 80% of Americans that locked in low rates, they don’t want to sell and move because they don’t want to now jump to a higher mortgage rate if they were to sell and have to take on a mortgage at a higher rate. The whole thing is work towards ultra low transactions. We’re seeing existing home sale rates lower than where we were in the economic lockdown, the shutdowns of COVID So there just hasn’t been a whole lot of activity. But imagine if rates were to start continue, mortgage rates were to continue to go down.

Wes Moss [00:39:23]:
If you go back to 1986, and this is not a perfect line, but on average, the mortgage rate in America is about one and three quarters of a percent above the ten year treasury. And again, the ten year treasury moves on its own. The fed only controls current ultra short term rates. But as they move those lower, it stands to reason that the treasury comes down as well. We finished the week at what, 3.89?

Jeff Lloyd [00:39:55]:
Yeah, 3.93.95. Kind of in. Kind of in that range, sub four, which was nice.

Wes Moss [00:40:01]:
So imagine if the Federal Reserve takes the target rate down by 2% over the course of the next year or so, six months to a year. Now that’s a fairly big move, but it’s not inconceivable. Well, that would mean we’d be at three and a quarter, approximately, plus one and three. One and three quarters. Call it two. Call it two. Now you’re at five and a quarter. Five and a quarter on a 30 year mortgage is a light, is it’s light years away from seven and a quarter.

Wes Moss [00:40:32]:
That gets people talking. Hey, wait a minute. Have you heard where mortgage rates are? People chat. There’s a lot of chatter around mortgage rates. Americans know what mortgage rates are. There’s a great recall when it comes to, and maybe because it’s one of the most important financial metrics in our lives, hey, what’s our mortgage rate? And it moves the meter when it comes to activity. And we’ve had this reservoir of housing, what I think housing demand just building up and building up, building up because life goes on. Family situations change, families grow, families shrink, people want to downsize, people want to upsize, people get married, people get divorced, people move.

Wes Moss [00:41:17]:
So there are these natural catalysts in life that have been to some extent sidelined, that families want a different housing situation and they’ve wanted a housing situation, and none of that has slowed down and gone away. People just haven’t acted on it. So if rates get to a more favorable position, particularly mentally for us, and five sounds a heck of a lot better than seven, I think it does two things. One, of course, it brings back those who are looking for more affordability, lower rate. My mortgage payment will be a little less. But I think it also then unlocks some inventory, because the homeowner that is now scared to move and get a. On a higher mortgage rate, I think they would look at a five rate and say, well, that’s doable. If your rate’s three and a half or four, I can move to five and a half.

Wes Moss [00:42:08]:
So it may prompt those families that have not wanted to move to say, okay, it’s time to put a for sale sign in the market. So you could have an increase in supply of homes and also bring people back. I just think it could lead to an awful lot of housing activity.

Jeff Lloyd [00:42:24]:
I think so too. And I think if you get to that high four to high five range, I think people are going to understand that’s kind of a more normal range. And I think a lot of people are going to stop comparing it to the sub 2% 30 year mortgage that you just mentioned or the sub 3% 30 year mortgage. I mean, those were at historic lows. And I think if I, if we just start to see mortgage rates normalize, you’re going to start seeing a lot more activity.

Wes Moss [00:42:58]:
So, Jeff Lloyd, I was just doing some calculations here. We had this table of how mortgage rates impact monthly payments on a $500,000 loan. A 7% mortgage, 33 27 a month. A 5% mortgage is 26.84 a month. That’s $643 per month less. And if you do the math around how much that’s lowered the payment, it’s about 20% lower. It’s a 20% decrease. So that’s obviously a huge deal.

Jeff Lloyd [00:43:34]:
And that monthly mortgage payment is the biggest bite out of someone’s budget every month. And just having a little relief will go a long way.

Wes Moss [00:43:46]:
We’ll see. And we could have absolutely, this could absolutely not happen. Forecasting where interest rates go is difficult, or more difficult than forecasting where equity markets go. We don’t control the Fed. As we talked about earlier, economic data is so vast, there’s so much of it, that the tune can change at any given time, any given week, any given day, even though it looks right now like the Fed is on a lowering trajectory or an easing trajectory, lowering interest rates to stimulate the economy, to help the labor market to some extent, we still don’t know that’s going to happen. This really is just a hypothetical. If rates do go down, and it wouldn’t shock me if they do and mortgage rates follow, I think that you’d be hard pressed not to see some real housing activity.

Jeff Lloyd [00:44:39]:
Yeah.

Wes Moss [00:44:40]:
And good news for those who are looking to get into the housing market. Hold on. Before we go, politics, as our weekly quick reminder. Yes, politics don’t matter when it comes to markets. There’s a couple of different ways to look at this. Of course, if you were to only have invested under one political party, Democrat or Republican, of course you don’t come close to being staying fully invested. First of all, that’s just a matter of time. So there’s been, you’ve got the entire period of time that we’ll look at $10,000 essentially over the course of economic history.

Wes Moss [00:45:22]:
From 1961 through the end of last year, 10,000 turns into over $5.1 million if it’s in the s and p 500. Only under Republican, 102 grand. Only under Democrat, 500 grandd. Obviously, those numbers don’t even come close to being fully invested. Maybe what’s even more important is that almost any political combination, Republican Senate, Democratic House, republican president, 13 and a half percent or so on average over economic history back from 1933. But if you look at a Republican, Republican Congress, democratic president, 13% on average over the course of history. So the reality here is that markets do fine and have historically, under any political combination, regardless of whether we like it or not. Jeff Floyd we learned anything today.

Wes Moss [00:46:16]:
I hope we did.

Jeff Lloyd [00:46:18]:
I hope our listeners learned something today, because that’s the mission. And at our core, that’s what we want to do every week here on.

Wes Moss [00:46:25]:
Money matters, take the blender of economic news that is meant to blend us up and gin us up and make us worried and try to continue to remember that look, we’ve got to focus on what’s important. That’s the innovation and the army of american productivity in the United States pushing earnings a little bit higher, a little bit more profitable, a little bit more innovative, just little by little every day. If we can continue to do that, usually we’re in good shape to be long term investors. The other thing about this, and this is something we just launched, it’s, we call it a happy retirement planner, is that a little bit of planning goes such a long way. I can’t emphasize or stress that enough. It doesn’t have to be super complicated. You don’t need a 50 page financial plan. It can be done on a tablet with a digital pen.

Wes Moss [00:47:18]:
It can be on a piece of paper with an actual pen, and you can timeline out retirement. When your income sources come into play, how much your assets are today, what they will be hypothetically worth tomorrow, mix in what you think you’ll need to spend in the future, and voila, you’ve got at least the semblance of some sort of plan that can be very, very powerful, even subconsciously. Once you have a plan done, you’re subconsciously working towards that. And it makes investing, which in itself without a goal, makes it really difficult. Investing towards something or some sort of plan really helps. I think everybody should be able to do some sort of financial plan. It’s just not easy to really get that finished. It’s not easy to get it started.

Wes Moss [00:48:06]:
There’s a million different calculators online. I’ve looked at many of them and didn’t really love all that many of them. So we built our own, and it’s on our website@yourwealth.com. comma, your, yourwealth.com dot. We call it the happy retirement planner. You can either go to the resources tab@yourwealth.com or go to the bottom of the homepage and find the under happy retirement tools. But it’s going to take and our philosophy is both the lifestyle and financial side of retirement. Here are five core lifestyle questions.

Wes Moss [00:48:39]:
Kind of give you an odometer reading of where you stand on a kind of one to ten and then input then the next section of this plan, which could probably all be done in less than five minutes. Enter in your big picture financial numbers and your goal on how much you think you’re going to need to spend out into the future. If you don’t know it, guess maybe it’s eight grand a month, maybe it’s nine, maybe it’s twelve, maybe it’s 15. But at least you put that in an interactive tool and we can show how you can pay for the lifestyle that you’re wanting to live. And we’ll give you an odometer score. On the financial side, if you don’t like it, you can adjust it and figure out how much maybe I need to save a little bit more into the future, maybe even spend a little bit less and you can adjust those numbers and then you get a five page printout. Probably could all be done in one page. Jeff Floyd but we couldn’t figure out how to do that technologically, so we made it five.

Wes Moss [00:49:32]:
Five sounds better than one. Anyway, so again, it’s the happy retirement planner. I think a little bit of planning goes a really long way. Free to use, quick to use, and I hope that it’s helpful to our listeners. Jeff Lloyd, thank you for being here on the show.

Jeff Lloyd [00:49:47]:
Well, thanks for having me back and I might be using this tool later this afternoon with that.

Wes Moss [00:49:53]:
Thank you so much for tuning in here to money matters. You can find our team at your wealth your wealth.com. have a wonderful rest of your day.

Mallory Boggs [00:50:07]:
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment return, yield or performance will be achieved. The information provided is strictly an opinion and for informational purposes only and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

Mallory Boggs [00:50:55]:
This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. Investment decisions should not be made solely based on information contained hereinhood.