Episode Transcript
[00:00:00] Speaker A: The markets, we just can't get enough of them.
[00:00:03] Speaker B: Markets are the drivers of your wealth and investment strategy.
[00:00:07] Speaker A: Welcome to Magic Markets with your co hosts the finance coast and Mohamed Nalla.
[00:00:13] Speaker B: Together we have more than 25 years of combined experience in the markets.
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Welcome to episode 187 of Magic Markets. And what a week it has been in the markets. There's been a little bit of magic, there's been a little bit of panic, I think. Mo we kind of woke up to the news of the Nikkei having a terrible, terrible time of things earlier in the week. And then there was a big debate around what the south african market would do. And then it actually didn't do very much, which was interesting. And the us market had already had a bit of fall out of bed in after hours trading and then it opened up and it was actually kind of strong and just a really interesting week. I think for those who are looking for volatility as a way to make money, that is, those who are traders, lots of fun, I'm sure was had. Maybe some money was lost as well. And for investors, you know, sometimes a day like that is an absolute gift to be able to buy the stuff you've been waiting to buy and just wanting to get cheaper.
[00:01:37] Speaker B: Indeed. Ghost I mean, maybe we should actually rename the show from magic markets to manic markets because that's kind of the behavior we've seen over the last couple of days. Let's maybe take a little bit of a step back because it's been obviously a very pressured two or three days. But over the course of the last couple of weeks, we've actually had fairly poor performance from us markets and an interesting stat there is just that it was its first three week downturn since mid April. So again, we've had some of these corrections and there's a lot going on. I mean, you've mentioned the Nikkei, you've mentioned, you know, the yen carry trade. We're going to unpack a lot of those concepts in detail just so that our listeners can understand the context of what's happening behind the scenes here. But what's important to note is it's not just the yen carry trade that's coming to play here. We've also had heightened geopolitical risk. That's a concern. We've also got these concerns around the us economic performance and what is the Fed going to do with regards to their rate cutting cycle. Last week, we had some very weak us jobs numbers. That's something we've covered here at magic markets as well. So go and have a look at, you know, a couple of shows ago, we unpacked the us jobs data and how the data initially comes out stronger. And then on the next print, it gets revised lower. And so, in fact, on last week's data print, we actually had a weak number and the prior number was revised lower as well. So it's almost this perfect storm of weak us jobs numbers. Where are we with the feds actually initiating a cutting cycle? Because they arguably behind the curve now. We've seen other major central banks moving on that, and then also this yen carry trade superimposed on top of that goal. So a lot to unpack.
[00:03:06] Speaker A: Yeah, there is a hell of a lot to unpack. I don't know where you want to start, but I think let's do the sort of carry trade. I think that's a nice place to start because a lot of the headlines that I saw this week were around whether or not that was to blame. I mean, let me not get into the Donald Trump calling it the Carmela crash. I'm not sure that that's the level of financial analysis that we aspire to here on magic markets. So I'll rather ask you about this Nikkei carry trade and what exactly that's all about.
[00:03:29] Speaker B: Am I allowed to say that the move on the yen was huge with a y like yen?
[00:03:35] Speaker A: Yeah, I'll let you get away with it. I'll let you get away with it in honor of the great Donald Trump markets analyst.
[00:03:41] Speaker B: So we saw this big move on the yen. It was the biggest move ever.
I'm going to stop trying to imitate Donald Trump. Okay, let's unpack the yen Kerry trade, because first of all, what is the Yen Kerry trade? And why is this now all of a sudden coming back on the radar? Many people may or may not know that years ago, when the rest of the world still had inflationary problems, well, Japan was facing deflation. And in response to that, they were one of the first major economies to actually move into negative rates. Very accommodative monetary policy. And we've had it sitting down there at those practically zero levels for a very, very long time. Now, once they hit the zero bound on their policy rates, they also expanded the mandate of their central bank. So they were acquiring assets on the central bank balance sheet. And initially, those were just government securities or treasuries. And then they even widened that to incorporate or to include investing in ETF's. So that quantitative easing program in Japan really went quite far and arguably a lot further than it went in a lot of other geographies. Now, when we look at that, what does that mean for the global financial markets? Well, it stands to reason, if you could actually get money very cheaply in Japan, and in some instances, I mean, if you had a deposit at a japanese bank, you were getting negative rates of return. If you had these very easy monetary policies, people were actually going into Japan. And they were effectively leveraging themselves up in yen, taking that money and investing it elsewhere in the world. Now, would this work? Yes. Your funding cost is very low, practically zero. If in yen, you then take the money out, you invest it in any other asset globally. Hence the yen carry trade. And eventually, when you needed to repay this just because of the easy monetary policy in Japan versus pretty much everywhere else at that point in time, it stood to reason that the yen was weaker than when you actually put the initial trade on. And so you were paying it back at practically zero interest rates, but also a depreciated currency. And so this made it a very attractive, let's call it, origination destination for this global carry trade. It became the yen carry trade. Now, where did the money go? Early days. And I remember this is not something new. So if you go back many years, when I was still working at an investment bank down in South Africa. The yen carry trade was a feature back then as well. It's been a feature of markets for quite some time. And historically, that money flowed into things like, for example, emerging market bonds. They would get a yield in emerging market debt. And that was the lower risk yen carry trade. You saw those flows, and you actually watched the Japanese yen as a litmus test in terms of risk on, risk off. So if you saw these tactical moves of the yen maybe moving a little bit stronger, you saw a short term unwind of the yen carry trade, and then vice versa. You saw it coming back on once the yen start weakening again. Now, the thing that's different this time around is just given where the world's gone over the last couple of years, that money arguably didn't flow into emerging market debt. That's not where the most attractive returns were. That money started to flow into us equity markets and stands to reason, into the us tech sector specifically. Now, if all of this is the context or the construct of what we're working with, what happened around a week ago is the bank of Japan is now on the other side of the coin. They're fighting inflation. They've got inflation running a lot hotter than their targeted levels, hotter than you seeing inflation running other developed market economies. And so the natural response here is that the central bank has to react and they have to actually hike interest rates. And so we saw that, we saw the Japanese, the Bank of Japan actually hiking the interest rates from ten basis points to 25 basis points. It sounds like a little, but remember, on a base of ten basis points, that is a massive move. That's the first point. The second point is that they actually announced that they would be winding down portions of their central bank balance sheet. So this stands to reason that that massive support they were providing to markets, to financial markets in general, was going to be unwound on a number of those metrics. And so this caused a scare in the markets. We saw the yen start to strengthen. And when I say start to strengthen, that move was very sharp. You saw a sharp, sudden and large move come through in the yen against the US dollar. And this started to catalyze the impact through the rest of financial markets. Because think of it, if you are the person who put on the yen carry trade, all of a sudden the yen is strengthening a lot. So forget the 15 basis point move on your cost of funding. It's the fact that you have to pay it back in a significantly more expensive currency. That started to panic people. They started to close out positions that they had put on in terms of the risk positions, unwind that and move that back into yen. And this builds on itself because this now means they've got to go in, they've got to buy yen that's getting more expensive and pushes the yen into even further extended territory. So that's what happens when you have these massive market dislocations, is when they start to unwind. They unwind quickly. And they always say you take the stairs up, but you catch the elevator down. That that's pretty much in a nutshell. What we've seen on that yen carry trade scenario goes, yeah, so you have.
[00:08:32] Speaker A: These crazy structural situations in the market where you just need some kind of worry or something that drives big institutional flows in a particular direction. And that's when you see these crazy one day moves. But then what we saw in the Nikkei was that move almost reversed the next day. So it didn't completely recover. But I think it was two double digit days in a row on an index that basically, you know, has no business delivering those kind of movements whatsoever. Right. It's not exactly like, I don't know, the nigerian stock market.
[00:09:01] Speaker B: Yep. I think Noindex has, you know, the reason to give you these double digit moves in both directions within two consecutive days. And again, some of the narrative I've been seeing in terms of the reasons behind that is, remember, the japanese economy is arguably doing quite well. And there's been a lot of talk around just how attractive japanese equities look. So perhaps you started to see some people come in saying, okay, great, well, we've got the yen carry trade coming through, but we like some of the underlying japanese, japanese securities, or equities, if you want to call it that. And then think of it. If you are an international investor, if you invest in japanese equities, you think there's a good outlook for them and you get a strengthening yen. That is a double whammy. That is an investment case on both the currency move as well as on the underlying security you're buying. So that helps explain it. And again, I had to chuckle a little bit when you said there are lots of traders there, lots of opportunity. No one's going to have actually picked up the move in both directions adequately if they did that in many instances. A lot of chance. Now, where I want to go with this ghost, first of all, is that just contextualizing the move that we saw on us markets? Because, yes, shock and horror. We had 1000 points move to the downside on the dow when we saw the sell off and everyone very concerned. Now, two things actually come to mind. One is that just given the level of where the index has gone, a thousand point move today is very different to a thousand point move four or five years ago. I went in and I had a look and I said, well, where does this actually stack up just on the points move? Where does it stack up relative to other corrections we had seen come through in the market? And I call it a correction. Maybe now's the point. To actually make a correction is really any move between ten to 15% lower. It happens reasonably frequently if you actually look at that, not obviously on a single day, but over a series of days. And it's different to a bear market where a bear market is a move of 20% or greater. Bear markets tend to have much longer tails to it. So naturally, yes, a correction could develop into a bear market if sustained. But that's the key. Let's call it definition or the differences between those two concepts. Now, I said let's look at it. And when I pulled up, let's call it the top ten moves by, on the dow by index points. This particular move, forget the percentage point move because it was roughly around 3% there and thereabouts, but just on the points, it doesn't even crack the top five. So it stands to reason, during COVID that was probably the sharpest moves we've seen in markets, certainly in recent history. We had during the COVID sell off days of 3000 points down on the Dow. So that shows you, I guess, the context. Yes, we don't have a global pandemic at this point in time. So I take that point. But in terms of percentage movements back then during the pandemic, we had moves of around 1210 percent, 8% lower on a single day. If we look at the moves this week, 3%. So I would say take that with a pinch of salt. If you're going to be in markets, expect that you are going to get volatility. Equities are riskier than investing in, for example, let's say, government bonds or cash, whatever it might be. It's par for the course and you can't let that upset the apple cart. If we look at the move on the S and P, for example, yes, that was sharply lower as well. I think that came through in like position number four and again squarely behind the moves we had seen during the pandemic. But you can't forget that we've seen this before in markets. We've had the global financial crisis and so forth. So I don't think we're in crisis territory quite yet. I do think it upsets participants who may be a lot newer to markets. But it raises a very important question that I want to pose to you, Ghost, which is that these market corrections happen relatively frequently, but you can't be kind of sitting around in shock and horror. What am I going to do here? What is the adequate, in your view, the adequate strategy for reacting to moves like this in the market? Because surely you can't throw the baby out of the bathwater. There are still compelling opportunities out there. What do you think of that situation goes, yeah.
[00:12:42] Speaker A: So if you're investing long term, then days like that are an absolute gift. Right? This is when you want to have cash either ready to go into your brokerage account or potentially already there. And if it's international stocks and you're listening to this in South Africa, you kind of have to have cash in your dollar account to react to this because it takes a bit of time to get the transfer across, et cetera, et cetera. But let's assume you do have that cash sitting there. The next question, of course, is, you know, what do you do? Do you panic and go and sell all your stocks when the markets are tanking like this? So as an investor, if you are doing this right, then you shouldn't actually need that money. You are supposed to then be investing money for long term wealth gain. And that means that the very last thing you should want to be doing is going and just selling off all your stocks. Just because you've had a bad day on the markets, you know, then you're in a take profit situation, you're going to pay tax on that and you're probably going to want to get back into the market at some point, but now you'll have to do it on the amount net of tax.
It's just generally speaking, not a great strategy. So what you want to be doing, if you're not a trader and you are an investor, is you basically want to be ready for days like these and you actually want to welcome them. You want to say, thank you very much. My favorite stocks are on a 5% off sale and I will grab them. So you need to know what your favorite stocks are and whether or not that 5% off sale is still a good price or is potentially actually too expensive despite the sell off. Now the only way to do this is to do the homework because you also can't wait to wake up to the news that the Nikkei is off 10%. And then, I don't know, spend your morning while you're at work, you know, googling which us stock should I buy and then finding some random AI generated article online that is almost definitely going to end in tears. So the work we do in magic markets premium is all about building out that watch list. Because the idea is not to screen and say, okay, we're covering this stock this week because it looks like a screaming buy. It's more a case of saying, this is an interesting company. There's a lot to learn here. Let's have a look at it and see at what levels we might be interested. What are the technicals telling us? What do the fundamentals look like? And then, you know, in your heart of hearts, okay, great. If the market tanks, I'm very happy to own XYZ, you know, Uber because I believe in the long term mobility story or meta because I love what Zuckerberg is doing around AI and how focused they are on the advertising revenue, or Microsoft because of the moat and because of how strong they are in enterprise software. This is the important thing with building out that watch list and actually deciding what it is that you would buy and at what price. Because on a day like we had earlier this week, the idea is to then say, great, I've been waiting for this. I want these three or four stocks, or however many it is, and to take advantage of the cash sitting in your trading account or your brokerage account and to actually then get those buy orders in and to do it really, really carefully that you don't do crazy things like, you know, buy at the open. And then you have a scenario where the trading platform that you're using took yesterday's closing price and puts that in as the bid, which is then way above where the thing's going to open. You know, just be very, very careful with using limit orders and that kind of thing. But you've got to know what you're going to buy. And that's exactly how I did it earlier this week. The three that I bought were Microsoft, meta and Uber. I wanted to add to the uber position because it's come off pretty hard. So that's a nice excuse to, you know, just average down my in price. Also something that traders don't really do. You know, they, they cut their losses, they don't go and make a problem bigger. Whereas when you're investing with a ten year view or more, you can look at it and say, actually I welcome the volatility. I'm very happy to buy some more because my position size on the way in left some room for this kind of behavior. And that for me has tended to work over time actually quite well.
[00:16:19] Speaker B: Yeah, ghost, it's that old adage of be fearful when others are greedy and be greedy when others are fearful. I mean, my strategy is very similar to that. I take a top down view. So I say, okay, great, where are we in the economy? What's that telling me from a sectoral perspective? Which sectors do I want to be allocating capital to? Incidentally, I've actually just rejigged some of my portfolio as well. Had a whole bunch of cash sitting on the sidelines. And over the last couple of weeks I've been sitting here looking at this market saying I can't buy some of these names because I just perceive them to be quite expensive. And so I really like your sale analogy or your on sale analogy, because a lot of those stocks have now sold down quite aggressively. Now, it's not to say that that's the reason to buy them. You don't go and buy something just because the price has fallen. But this is where the homework becomes very important, because I have a hit list of stocks that I'm looking at and levels at which I'm comfortable to start allocating capital. The other thing is also not allocating all of that capital in a single go, because markets don't go down in a straight line. Is this a correction or is this the start of a deeper bear market? Quite frankly, yesterday I was actually, there was a public holiday up here in Canada, so I actually wasn't watching the markets very closely, but I was comfortable with that because I knew exactly which stocks I was waiting to actually go in and buy. And, and so it's a really simple thing to go in there, place in your orders if you haven't already left them sitting there in the market. Some people do do that. I do that from time to time. And again, I've been allocating slightly more defensive sectors over the course of the last, let's call it two quarters. I've been really interested in utilities, for example, logistics plays. If you look at ups, that's a stock we've covered at magic markets, premium that sold off quite a bit. And it's now gotten to levels where I think it looks interesting. And that's not to say that I think it's not going to go a little bit further. The downside, sure it can, but it's now at levels where I'm comfortable to start allocating capital to that. And if it goes lower, to your point, for an investing portfolio rather than a trading portfolio, I would allocate some capital. Now, if it goes down, the logic stands that if I was happy to buy it at a certain price based on the fundamentals, I should be happier to buy it if it actually goes a little bit lower, because that is an asset, a quality asset that I like, for example, that I think is on sale. And I'm not saying ups is definitely that one asset. That's just one example I want to land on. One final point in terms of contextualizing volatility we've seen in the markets, because you can look at an indicator like the viX, and that was trading at these massively depressed levels for so long, and the market gets so complacent. It was in the low teens in fact, it dipped below the teens level at some points over the course of the last several months, and that spiked to above 60% yesterday. So keep an eye out on that. Is that it started slowly moving higher. That was your warning signal. I mentioned how you could use the yen as a litmus test in terms of risk. On risk off, you can use the VIX. And then I looked at bitcoin, because bitcoin is the thing everyone loves to hate. Go and have a look at bitcoin because that was remarkably volatile. Over the last 154 days. It's down 33% then thereabouts. But how does that compare to Nvidia? Go and have a look at Nvidia. And if you look at Nvidia, it's down 35% over the last 46 days. So this again highlights the fact that a lot of people say, ah, bitcoin, it's a speculative asset. And yes, it is arguably a speculative asset. But if you are buying equities at extended valuations, if you are buying equities simply on sentiment, not looking at the underlying valuations, is this good value, you can expose yourself to pretty much the same kind of risk even in an asset class where you could argue there are underlying fundamentals that justify a share price. Be very careful in terms of how you contextualize your analysis there. Are we in a bear market? Not yet. This is really just a correction. We're not even technically into the teens yet in terms of a peak to trough on where you are on the big indices. But if you look at specific stocks, Nvidia, that looks like a bear market, 35%, that's a massive sell down. Microsoft, a great stock, I actually sold that out a couple of months ago, felt like an idiot and slowly went higher. That's down 18% over the last month. So you've seen some pretty large moves in some large blue chip names. It's not to say they're cheap enough for your risk tolerance or my risk tolerance. It's saying these will present opportunities. And to your point, ghost, decouple your decision making. If you're a south african investor, I always decouple my currency decision making from my asset decision making. If I see an opportunistic level on the rand, I take the money offshore and then I park it in cash, and then I wait for an opportunistic level on a security that I want to buy. And that discipline is really what is vital to a long term investment strategy.
[00:20:44] Speaker A: Absolutely. And volatility teaches us this stuff, which I think is, is just really great. You know, it's when you see these things play out that you can actually test your thesis, decide how to do it, and if it irritates you that you missed out on a sell down because you weren't ready, then you have an opportunity to do something about it, to do the research, to get yourself ready for the next one, to have your watch list, to have the things you want to buy. That is the joy of investing, right? I mean, it's basically a hobby. It's just a hobby that pays as opposed to costs you money, like basically every other hobby I have. So, you know, that's quite nice. And maybe we should leave it there this week. And it'll be interesting to see how the markets play out over the next week or so because the volatility doesn't seem to be gone. I mean, it's never really gone. But let's see just how rough it's going to be out there. If it goes down enough and if it's my favorite stocks, rest assured I will buy more.
[00:21:30] Speaker B: Indeed. Ghost. I mean, I've been watching this intra market rotation out of tech, into utilities, into defensives quite closely. Like I said over the last two quarters, if you don't look at the headline data and you just drill down a little bit further, you've seen that as a trend. And just over the course of the last couple of weeks, the Russell, which is kind of a, if you look at large caps versus mid caps and smaller caps, that's where you see that move. That was initially a very good trade and you saw a strong rally in smaller cap stocks versus the large caps. And then on the sell off, you actually saw a sell off impact those other stocks as well. But if you go and map what's happened on utilities, on healthcare, on the defensives, they didn't have that much of a sharp reaction to the downside in the market. So perhaps there's something there to just map which sectors you're going for versus where we are in the economic cycle. Time will tell. That's where we're going to leave it this week, though. So let us know what you thought of the show. Hit us up on social media. It's a pod. One word at finance. Ghost and allah all on X. Or go and find us on LinkedIn. Pop us a note on there. We hope you've enjoyed this. Until next week, same time, same place. Thanks and cheers. Ciao.
[00:22:34] Speaker A: This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.
