Money Rehab with Nicole Lapin - Decoding Monday's Market Madness with Dr. Shane Shepherd

Episode Date: August 7, 2024

After Monday's stock market tumble, you might be asking yourself: what the heck is going on? Nicole is answering just that with the help of Dr. Shane Shepherd (Assistant Professor of Finance and Business Economics and the Academic Director for the Master of Science in Finance Program program at USC). Dr. Shepherd and Nicole talk about the unexpected factors that led to the market dip, how to protect your portfolio, and whether we're headed for a recession. Find more of Dr. Shepherd's work here: https://www.marshall.usc.edu/personnel/shane-shepherd All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank. Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value.  Brokerage services for Regulation A securities are offered through Dalmore Group, LLC, member FINRA & SIPC. Risks at public.com/disclosures/alts-risk-and-conflict-of-interest-disclosure See public.com/#disclosures-main for more information.

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your

reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Well, as promised, I'm going to decode what's been going down, literally, in the markets this week.

Today, we're focused on the beginning, what happened on Monday and how we got there. To help me tell this story, I'm talking to Dr. Shane Shepard, who is an assistant professor of finance and business economics at USC and the academic director for the Master of Science in Finance program there. So he is a very, very smart fellow finance nerd. Dr. Shepard and I talk about what led to the sell-off and the dip. As you can guess, national economic issues were big factors here, but there were also some other players in the story that you might not expect, like Japan. But Dr. Shepard will help walk us through this plot twist and whether or not we're headed for a recession now. Dr. Shane Shepard, welcome to Money Rehab. Hi, Nicole. Thank you so much for having me. Delighted to be here today. But it has not been delightful in the markets. Monday was the worst

day that we've seen in the markets in years. You probably know how many years precisely the Dow dropped 2.6%, the S&P 500 dropped 3%, the Nasdaq was down more than 3%. How are you feeling with this news? It's certainly interesting times. This is also not that unusual, though, these sorts of periods with heightened volatility and retreats in the market, they will happen, they'll happen every few years. And so it shouldn't be a surprise when they do. Just trying to keep perspective and realize if you wanted to be invested in the stock market, this is part of the deal. You're going to have to go through periods like this. And I think what's going on today is not going to hamper long-term investors. It certainly is a lot of uncertainty in the short run. But I think as far as long-term investors go, trying to ride out the ups and downs and

stay invested for the long haul is probably the right thing to do. Yeah, it's like a roller coaster. There are a lot of ups, there are a lot of downs. You can't get off in the middle of a roller coaster, or you shouldn't get off in the middle of a roller coaster. Even though somebody is invested for the long term, I am, it still is anxiety provoking and nerve wracking when you see this. You see these headlines, like two or 3%, how big of a deal is that? Can you put that into context? It's a big move. Two or 3%, certainly much larger than you typically

see. And especially when we've seen a few of them in a row, but it's not that problematic. Just in terms of context, we've seen the markets in Japan and some interesting things happening in Japan right now. They dropped 12% in one day last week. Now, that's a big move. The largest drop we've seen in October 1987, the S&P 500 dropped about 25% in one day. So that's much more catastrophic. Two or 3% is certainly larger than we're used to seeing.

But kept in historical context, it's not all that extreme. And I don't think it's something that people will even remember or think about six months or 12 months from now. I love that good perspective to zoom out of the current cuckoo chaos. I want to get back to Japan. But first, if we could dig into some of what happened in the U.S. and why there was so much uncertainty in the markets. The jobs report.

This is like the big kahuna of employment reports. It comes out once a month, right? Can you talk to us about the relationship between the big jobs report and the stock market and how traders, investors look to that? Yeah, sure. So there's a lot of concern about a recession coming, right? And this is people have been predicting a recession for probably more than two years now. And so it's been perhaps the most talked about recession that hasn't happened, at least yet. And so the jobs report that came out is a bit of a signal that heightens those concerns. I think the most recent number was we added 110,000 jobs, which is about half as many as we had been. And we're going to slow down hiring. What the stock market cares about,

what corporations care about really is earnings, right? So they care about how much money these corporations are making. The jobs report is a signal that corporations aren't hiring as many people, because in their mind, the prospects going forwards is not as large as they would like. So they're not going to hire as many workers to come in, and they're going to be selling less goods, producing less things. And so that's a sign that the economy is slowing down, and that corporate earnings will be lower going forwards. So that's the bottom line. The jobs report is just the most recent number that is reviving a lot of those concerns around a slowing economy and slower growth for corporations and lower corporate profits going forwards. Well, let's talk about the Fed for a second. The Fed is obviously monetary policy. And then we were just talking about

economic indicators. And then we have the stock market. I think of them, they're all intertwined and intermingled, but they're separate, right? Like you said, the stock market with corporate earnings is not the economy. The overall economic indicators will affect that, of course. But then we have a whole other policy of monetary policy that the Fed decides. And last week, the Fed decided not to cut rates, which a lot of people on Wall Street were hoping for or expecting. Can you walk us through why the Fed said they decided to hold rates steady this time? Yeah, sure. So I think the Fed probably has one of the hardest jobs out there. They're always going to be criticized or wrong, regardless of what happens in one direction or the other. They really have two goals, right? They care about employment and they care about inflation. And the tool,

the primary tool they use to try and balance those two things is the interest rate. And it's really the very short term interest rate that is what they move around the Fed funds rate. That's the overnight interest rate, kind of a one day interest rate. And it's like not what we see in mortgages. No, no, not at all. So that's what banks will borrow from other banks. That's an interbank lending rate. So but it's important because that flows through to the interests that banks will pay to people

that make deposits there. It flows through the money market accounts. It flows through to the interest that US treasuries will pay. And then of course, to car loans or mortgage loans that the average consumer will get as well. So as they raise that short-term rate, they've got it at 5.5% now.

They've done that in order to slow down inflation, right? And we've seen that's worked. Inflation has been steadily tricking downwards and their target rate is 2%. We're not there yet, but we've been moving somewhat quickly, at least now, in that direction. And so the thought is that, OK, well, Fed's now got inflation more under control. But in the process of having interest rates very high, well, that's going to slow consumer spending, right?

And the mortgage is a good example. If you can get a mortgage back at two and a half percent, well, people are very happy to make a purchase on a house or to get a home equity loan and go down to Home Depot and start remodeling their house, right? They're easy to borrow money. You can borrow money much more cheaply. You're going to spend a lot more money. Car loans, you can get a car loan more cheaply. You're much more likely to go out and purchase a new vehicle. If you've got to pay 6% or 7% for a car loan, you might drive your old car for another year or two and save up a little more money before you go out and take that loan. So these high interest rates have slowed down consumer spending.

And that flows through to corporate hiring and then the jobs report that we were talking about. So the idea now is that, well, maybe inflation is under control and we're starting to see the economy slow down. So it's time for the Federal Reserve to start dropping interest rates and allow corporations and consumers to get a lower borrowing rate in order to invest and consume more. So it's a tough job to try to balance both of those two. Inflation is still higher than you would like. The economy has been actually really strong in the face of these higher interest rates. And we're starting to see it slow. The Fed, they need to move in advance. One of the phrases that you'll hear Chairman Jerome Powell, the Chairman of the Federal Reserve, he said is that Federal Reserve

policy acts with long and variable lags. So what does that mean? That means that when they change interest rates, it takes a good number of months before the impact is felt on the economy. And not always the same amount. I was just gonna ask you, it takes a while to trickle down from the Fed funds rate to the car loans and the mortgages that you talked about. So why was the market so upset? Why was there such a negative effect when the Fed didn't cut rates? And it would have only been 25 basis points, which is 0.25%, right? So it's not changing anyone's life. And then it's going to take a while to maybe make a dent in somebody's life.

Yeah, that's correct. I don't think it's that important, really, whether they cut rates in August, or if they did not, or whether they do in September, which seems quite likely. A fun website to look at. I tell my students this. Go ahead and Google the CME FedWatch tool. CME is Chicago Mercantile Exchange. Yeah, those are my old stomping grounds.

Oh, yeah. Great, great. It's a fun site. And they show kind of the probability of Fed changes of interest rates based upon market expectations in the Fed funds futures market. And what that shows right now is 100% chance of a cut in September. And I think probably about a 70% chance of a half percentage point and about a 30% chance of a quarter percentage point. So the market's banking on either one or two cuts

by September. You could look out in not just September, but out through the end of year in December, expectations are that the interest rate is going to be down short term interest rates down close to 4% by September. So that's a lot more meaningful to get down there by the end of year in December, expectations are that the interest rate is going to be down, short term interest rate is down close to 4% by September. So that's a lot more meaningful to get down there by the end of the year in December. And I think we're going to start heading in that direction. Whether we started it here in August or in September, I don't think will be particularly impactful for the markets. I think the Fed is right to still be concerned about inflation, you know, that inflation genie out of the bottle. And you want to make sure that you break it before you start lowering rates and let it revive itself. So, yeah, I think they're right to be more deliberate and focus more so on inflation, given the strength of the economy and the problem that we've seen with inflation over the last couple of years. That's probably still where you need to have their energy focused.

There are some economists that say the Fed needs to implement an emergency rate cut. So like in between these meetings, I assume you don't agree with that. But has this happened before? And like, what does that look like? Yeah, so certainly they will. Most recently during COVID, they met in March of 2020. And they typically they'll meet nine times a year at these regular intervals, and they'll make their interest rate decisions at these regularly scheduled meetings.

When something big and catastrophic happens, and the economy looks to be falling apart, they can meet in between these meetings and do this emergency rate cut and say, we can't afford to wait another four weeks or whatever it might be. And so that they have done that in the past. They did that in in March 2020. They took the interest rate right back down to zero really quick. They did the same thing in 2008 during the global financial crisis. And that's a way of providing a lot of liquidity to the markets immediately, directly, making sure that corporations can continue to finance themselves and make their interest payments and keep themselves out of bankruptcy. I don't think they're going to do that this time. That's also viewed as kind of a message of, hey,

the Fed's really concerned now. Things might be a lot worse than we think they are. They're going to do this emergency meeting and cut rates right away. And so I don't think they're going to do that. I don't think things are that dire. And I don't think the Fed thinks things are that dire. I think they'll continue to have a relatively measured pace and try to remain balanced. Yeah, that's a really interesting point because so much of the market also trades on vibes. So we talk about economic indicators, monetary policy, the stock market, and then there's just vibes. Yeah, emotion is a big part of investing in the markets. And there's this idea of sentiment.

And people do a lot of various ways to try and measure sentiment and think about what is market sentiment. And it has been turning for sure. I think we've had good vibes in the market for the last couple of years. And that's shifted now as we're looking at a heightened probability of recession. And a recession could certainly be in the cards. That's a very realistic outcome here, that we could see economic growth slow down, we could see GDP growth turn negative, we could see corporations start to lay off people and the stock market would certainly do poorly in that regard. Two or 3% is a pretty small move compared to what you might expect if we do enter into a recession. The average recession stock market might fall 20 to 25%. So that's certainly a possible outcome. That wouldn't surprise me too much. Again, those things happen.

If you're investing in the stock market, you will hit recessions. You will lose money like that from time to time. But I think staying invested, focused on the long run, rebalancing your portfolio, and just maintaining a sensible risk allocation is the right thing to do in that sort of situation. Yeah, we've never not recovered from a single one. And when recession rumors start swirling, which stocks, which sectors typically get hit first? Yeah. So if people are to look at which stocks to invest in or how to allocate in the stock market,

it's the ones that have high sensitivity towards those economic conditions. Think of that as consumer durables or cycles are the ones like Ford Motors, for example, they came out last week, I think it was and reported pretty poor earnings and stock their stocks sold off by quite a lot. Those large car purchases, those are the kind that people are going to forego, right? If you get laid off, the last thing you're thinking about doing is to buy a new car. So when the recession comes, it's those highly cyclical, those large purchases, those ones are the ones that will tend to have the largest drops in their earnings and the largest drops in their stock prices.

Ones that are more of the staples, Procter & Gamble, I think is a great example of that. You may not be buying a new car, but you're going to keep buying toothpaste, right? So food companies, things that really are ones where people are going to continue to spend and have that kind of low sensitivity towards economic fluctuations. Those are companies where you're going to see them hold up much better. Tech is interesting because tech is less sensitive towards those economic fluctuations, but you've got a lot of valuation concerns in technology right now. And partly from a kind of slowing economic growth, but also from a valuation

standpoint. And we see really inflated valuations on some of these technology names that they've got to deliver the goods in order to justify the price people are paying for them. And even a small slip in that is going to be interpreted as pretty bad news. And you could see those stocks sell off by quite a lot. Yeah. For the last couple of weeks, we saw like this move out of the Magnificent Seven and people weren't taking their money out of the market entirely. They were just like shifting around to more recession-y McDonald's or Pepsi or Coca-Cola or stuff like that. And so is that a better play? Like when you start hearing recessionary rumors to reallocate toward more of the boring names. Yeah, no, there's certainly truth in that. And certainly people will in a recession,

they'll trade down and Walmart may do better than higher end retailers, for example. It could be good for them, right? They'll be the lower cost provider. So that's one way to do it. You can also do it probably a more traditional way is at the asset allocation level between the stocks you hold and the bonds you hold. And I would say the best way to ensure your portfolio against a recession is to increase your holding of U.S. treasuries. And in a recession, U.S. treasuries has been historically the best investment to hold. That is, as the economy suffers, the economic conditions deteriorate, you're going to see corporate profits slow and people are going to sell out of stocks. They're going to start buying bonds because they want that safety. And as the Federal Reserve lowers interest rates, that's going to reduce the yield on these bonds, which increase their prices.

And so historically, we've seen, we call this negative correlation between stocks and bonds. And so when the stock market is suffering, typically government bonds do really well. And so you'll be making money in government bonds at the same time as you're losing money in the stock market. And so holding a balanced portfolio between stocks and bonds is traditionally really the best way to try and insure against a economic drawdown. So you could do it within kind of more defensive oriented stocks or really just even shifting over towards government bonds. And I think lengthening the maturity of bonds that you

hold, I think a lot of people who have been invested in money market accounts or short term government bonds, that five and a half percent on a short end yield curve, that's really attractive. And in the long term, a 10 year treasury is only going to give you 4% right now. Well, five and a half is a lot better than 4%. But you got to ask yourself, am I going to get 500% on average over the next 10 years? This is what the market's telling you is no, right? It's saying, well, you might get 5.5% now.

By the end of the year here, you might be getting 4%. And the next year, you could be getting 3% or 2.5%. So locking in that 4% yield on a 10-year treasury could be a pretty good move. And that's going to do quite well

if interest rates come down further or more quickly than people expect. And you'll be offsetting losses in your stock portfolio with gains in your bond portfolio as you increase that maturity. There's also a possibility that this is just a market correction. And the market has been rocking and rolling. Like if it was the first half of the year, I think hit records. It's gone up. It's gone up some more. And what goes up must come down a little bit. So do you think that this is just a temporary correction and not so big of a deal as recession bells ringing?

Yeah. So there's definitely this possibility. And it's good to keep them. People like to extrapolate, right? They like to extrapolate recent performance. And the stock market's up 20% in the last couple of years. Well, you should go up 20% again this next year, right? That's a big number. Wishful thinking. Yeah. Yeah. That's not sustainable, right? If we're going to earn, let's say eight, eight and a half, 9% from the US stock market over the long run on

average, that's a pretty good number. And that should be much more in line with people's expectations. And so, yeah, if we've seen the stock market go up 20% over the last 12 months, yeah, a little bit of a pullback is not at all unexpected. And so it could certainly be that, that may very well be what we're seeing right now. But what we do see is the market's really sensitive towards any kind of economic news right now. And so a jobs report that comes in a little below what we expect. In other times, that might not be such a big deal. But right now, people are paying really close attention

to every single little bit of data, trying to get a better idea of where the market is heading. And so you're seeing the market respond in a really highly sensitive way with a lot more volatility to the economic news. But it's a hard game, right? I would say, if we do see a recession, one thing I can almost guarantee is the stock market is going to sell off well before the recession occurs. That's what we've always seen, is that the market

is going to predict the recession, not coincide with the recession. And so by the time the really bad economic news comes out, you're going to see the market already have sold off by 10, 15, 20%. So if you're waiting for the economic news in order to make your reallocation decision, the market is going to be well ahead of you in that regard. So it's a tough game to try and watch that economic news and make your investment decisions based upon that because everybody else in the market is doing the same thing and probably more quickly than you and I are. That is for sure.

doing the same thing and probably more quickly than you and I are. That is for sure. The quants out there, the day traders that are just like living and breathing this stuff. Hold on to your wallets. Money Rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with

direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bank Corp Bank N.A. or Stride Bank N.A.

Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb,

start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look

guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. So we talked about U.S. indicators, the Fed, jobs report. Then we have the international issues, and Japan actually plays a role in this. Can you talk us through the carry trade? If you're deep in the headlines, you've probably seen that come up. Japan's pretty interesting, right? So what happens in Japan and the world markets, we're all very connected nowadays, right? I think a lot of the volatility we're seeing here in the U.S. stock market over the last week or so actually can be traced in part to Japan, right? So part of it is, yes, we've seen some economic news, which is a little foreboding, but also

it's connected to Japan. So Japan, they've had very low inflation or deflation for decades, but they've had a hard time. Their central bank policy has been to keep interest rates as low as possible in order to try and create a little bit higher inflation, a little bit more growth and allow really cheap borrowing and funding. But more recently, you've seen inflation is starting to return to Japan. So they're actually seeing inflation now upwards of 2% that they haven't seen in decades. Now, because interest rates in Japan have been so low, so this is a very kind of popular

hedge fund strategy. It's called the carry trade. And so a lot of hedge funds or institutional investors, not just hedge funds, will borrow money in Japanese yen. And so you can do this. You could go borrow money from Japanese banks at pretty close to 0%. So you're getting free money from Japan. And then you go out and you invest those assets. So you borrow that money.

You can invest it in maybe the Japanese stock market and maybe in the U.S. stock the US stock market, maybe in US real estate, maybe just in other currencies, right? So you could borrow in Japanese yen and just go invest in US dollars. Well, if you borrow at 0% Japan and invest in 5.5% in the US, and you're making that 5.5% income on that. So that's been a pretty compelling strategy. strategy. Now, the trouble is, as Japan, as they're starting to see inflation, they're doing the opposite of what the US Federal Reserve is doing. They're raising their interest rates. So they're raising their interest rates up. And so that cost of funding in Japan is increasing. And Japanese yen has had this pretty significant shift back and started to appreciate quite strongly against the dollar. So these people that have borrowed money in Japanese yen are suddenly starting to lose a lot of money. And that cost of borrowing has become a lot more expensive. So they're closing down those trades. So what they're doing now is they're saying, all right, we're going to repay our Japanese yen loan,

meaning that we got to sell off the assets that we just bought, right? We had borrowed all this money from Japan, we bought US stocks or Japanese stocks or real estate, whatnot. We got to sell all those things that we use that money for, and we got to pay back our loan to the Japanese banks. And so as they start selling off US assets, I think that is a big part of what's driving this volatility is the unwinding of that carry trade. As the impact of Japanese interest rates increasing, people are less compelled to borrow so much money from there anymore, which is not a bad thing. I think too much leverage, too much borrowing is not really healthy for the markets. So it certainly is contributing

to volatility, but I think will probably lead to a little more stability in the long run. And to just break that down, so carry generally in finance is this kind of arbitrage of weighing the benefits of holding something versus selling it, right? Yeah. So you don't have to borrow in Japanese yen, right? You could borrow in US dollars and you could invest in Mexican pesos, right? And Mexican estates are at 12%. And so you could borrow at 5% here in the US

and earn 12% in Mexican bonds. Now that's this idea of an arbitrage. Are you, you know, you're borrowing cheaply and you're earning a high rate of interest. That's the carry. There's certainly risk there, right? And the risk of course is that the Mexican peso depreciates in value, and you lose a lot of money in that investment. And that is what happens, right? The gamble is

that the depreciation, if we're earning 7% on that different in interest rates, as long as the currency only depreciates by 3, 4, 5%, you're still making money, right? If it depreciates by more than 7%, now you start to lose money. So but there is certainly risk, right? So yeah, so you're borrowing in a cheaper currency that historically has been Japanese yen, just because it's been so cheap. Swiss franc or other currencies are still pretty affordable, too. So you could still continue to see this carry trade happen in other currencies. And I'm sure you probably will hedge funds being what they are and seeking out low cost of funding, wherever it may be. I doubt they're going to stop that. seeking out low cost of funding, wherever it may be. I doubt they're going to stop that.

And should we give a disclaimer? Don't try this at home. This is like a hedge fund type move. Forex or currency trading is very, very volatile and super advanced. Yeah, that's right. So there's a ton of risk, I'd say. And like Warren Buffett's message of, I don't invest in things I don't understand. So I think that's very good advice for pretty much all of us. I agree. He just has little good one-liners. He really does. The folksy one-liners. Shane, I know you don't have a crystal ball, but what do you think happens next in the short term? So the rest of the year, of course, this is an election year. So it's going to be more cuckoo bananas than normal. That's what just happens in election years because it creates this uncertainty, which markets hate. Yeah, that's great. So short run, I think we

are going to see a lot of volatility in the short run. Election is certainly part of that. There's a lot of uncertainty around what might happen there with differing policies. There's economic uncertainty. There's interest rate and inflation uncertainty. So we're in a time when you should expect to see a lot more volatility and these bigger moves of 1, 2, 3 percent per day. I would expect to see more of those between now and the end of the year. I don't think that's going to calm down anytime soon. It's my my personal view is I think the markets pay too much attention to politics. Maybe that's not not a popular view.

But I think if you look at the long run, long run track record, the US economy has done well, regardless of which party holds the presidential office, it's done well, regardless of who controls Congress. On average, there's not a whole lot of evidence that one party is better for the US stock market than the other. And so I think it's not going to be as impactful as people think. There will be some impact, and certainly some sectors could do better than others and whatnot. But I think it's probably less impactful than people think. I think in the long run, the US economy is still going to continue to be strong. We're still growing strongly, high productivity, relatively good business environment. I think that you should continue to see pretty good business prospects for the United States over the long run. So yeah, so keeping your eye on

the long term, if you do see a market pullback, long term investors should just continue to save and invest. And I think a great strategy is just whatever amount you're saving on a regular basis, continue to put that into the stock market, regardless of what happens in it. And if things drop in price, you buy more shares and you can continue to invest and don't make any rash moves. Just kind of keep that long term in mind. Have a sensible risk allocation. So maybe a good time to think about your asset allocation between stocks and bonds. I know a lot of people didn't hold many bonds for a long time with good reason.

Why would you when they're paying you hardly anything? 0% is not a lot compelling rate of a return. But now that you can get 4%, 4.5%, 5.5% on the short end, there's a place for fixed income in your portfolio once more. So people who have been historically a little underweight in terms of fixed income now may be a time to revisit that long-term strategic allocation. But otherwise, I just say stick to the long-term plan and don't do anything too rash, regardless of what might happen in the next six months. And recession odds, I'm sure you would know, is there like a CME interest rate probability Vegas type thing, but for recessions?

I don't know if there's anything quite similar in terms of recessionary odds. There's all sorts of various models that economists have put together to try and say, what is the probability of recession? I haven't seen one that I feel is all that reliable. But it's hard, right? Because recessions just don't happen that often. And so you've got, well, we could look at seven or eight data points, and how do we create a model that can predict from only seven or eight points of data. So it's a really tough problem to apply modeling to. So what is the probability of recession? I'd say certainly higher than average, but maybe still below 50%. Right. And so it's less likely than not. Although if you think in the average year, you might get what a 5 or 10% probability of a recession. And if now you have a whatever it might be 25, 30, 35% chance of recession, that's quite a bit higher, but it still means that you would be less likely to see recession than not. So we end our episodes, Dr. Shepard, by asking all of our guests for one tip that listeners can take straight to the bank. Do you have a tip that you use to help yourself get through difficult economic times or seeing some of these scary economic reports come out?

Yeah, it's hard. Even having the experience in education finance that I have and knowing the long-term track record and having studied behavioral finance and kind of knowing how human emotions respond here, like I'm still very subject to these sorts of things. And I still feel that panic rise and I see the market sell off quite a lot. And so I think it's really hard to get away from that no matter how much experience or knowledge you have. So one of the best things you can do, I think, is, you know, it's almost like don't pay attention. There's been some studies where they looked at people who had online brokerage accounts. And one of the findings was those people that logged into their account the most had the lowest returns. And those people who logged in the least had the best returns.

So the simple act of logging in and checking your portfolio prompts you to do things that are detrimental to the long-term health of your portfolio. And so I think you're almost best off just having long-term faith in the markets. Don't check in too often. Don't worry too much about it. Make sure you've got a sensible long-term strategic allocation. And there's a lot of noise in the markets. There's a whole lot of noise in the

markets and actually very little signal. And so not being too distracted by the noise and just trying to isolate yourself from that. So yeah, so I'm going to go to the park with my kids and kick the ball around and have a fun time with them and just focus on those sorts of things and not worry so much about the up and down day-to-day gyrations in the market. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me.

And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.