What Is A K-Shaped Economy?

DANO WEIR: Well, you made it. It is Friday, June 20th, end of the week, a beautiful day in Sonoma County, at least, and we hope you're having a great day too. My name is Daniel Weir. I am the Marketing director and podcast host for Sonoma Wealth Advisors, and this is on the Markets, our market show where we look at both the market and the economy with our managing principals, Daren Blonski and Chris Sipes.

DANO WEIR: We'll get to them in a moment. This week, We are looking at the shocking disparity between your home payment. If it was purchased on one line of the sand or the other, and that line is the year 2021.

DANO WEIR: Also, which countries across the world are spenders versus savers? Just guess where the United States falls on that one. And we had something called a triple witching happen today, and things got a little dippy, and it all feeds into this idea of the Khad economy. What the heck even is that? We'll find out after this.

DANO WEIR: All right, get him in here. It's Daren Blonski, CFP, Chris Sis CFP, the managing principles of Sonoma Wealth Advisors and our fermata family of brands, including 401k tax and more. Guys, welcome to the show. Chris, you, you are educating me immediately right off the jump because I don't know what a K-shaped economy is.

CHRIS SIPES CFP®: Well, it refers, of course, to the letter K, where you have, you know, some that are on the uptrend and some that are on the down trend, just like the letter K, right? And, really great podcast this week that was on Odd Lots, which was Jim Eagan, the title of the podcast is Jim Eagan on the mortgage gap that's dividing America.

CHRIS SIPES CFP®: Highly recommended if you get a minute to, to listen to that. But it talks about a lot of the origins of the K-shaped economy where some have done very well and some have not. A lot of that relates back to the when you purchased your house.

DANO WEIR: Daren, as you've been working with clients this year, you kind of feeling that, that disparity between kind of the line in the sand when, when it kind of came to comes to who got their loan when?

DAREN BLONSKI CFP®: Yeah, I have to be careful about how I respond to that question because I, I come from a very sociological thinking background, and when I look at much of what's going on throughout the economy from the recent social unrest that's happening, I think a lot of social unrest to economic disparity, right?

DAREN BLONSKI CFP®: So, there's a big part of me, it feels like a lot of the unrest we've seen socially around the world and also here in the United States is tied to economic disparity.

DAREN BLONSKI CFP®: And I think there's a big disparity about who got their loan when, and I think the disparity is growing, throughout the United States and beyond.

DANO WEIR: Well, let's cheer everybody up with some political commentary or some, at least a cartoon at least. Chris, what do we got here from Hedge Eye?

CHRIS SIPES CFP®: Yeah, it says, I said that we're a part of the K-shaped economy. I never said it was the good part, right?

CHRIS SIPES CFP®: It was a husband and a wife and a kid in a, in a supermarket. So, and I think that's very, very real for folks, and depending on which side of that Khad economy you're on, you could be living two completely different realities here in America.

CHRIS SIPES CFP®: So this is one of the charts from Jim Egan at Morgan Stanley, and what's cool about this chart is it shows the The, the percentage of household income that goes to a mortgage. Now, Dan, I know you're somewhat familiar with Mortgages, right?

DANO WEIR: Just in, yeah, I worked in the industry for a year and I am familiar as a purchaser of them as well.

CHRIS SIPES CFP®: Yes. So you, you, anybody that's ever applied for a mortgage knows that they're gonna take your income, right, and look at what you have to pay out of that income for things like credit cards and car loans, but also what you're gonna be paying for this mortgage.

CHRIS SIPES CFP®: Now, if you remember back to 2020, we were at historic lows in, in interest rates, I'm talking like thousands of years lows, and when That, when, when that changed in 2021, when the Fed started to raise interest rates in response to inflation that affected the cost of debt, the cost of money, that along with the fact that home prices had ramped up dramatically leads to this, which shows If you had your mortgage from, you know, previous years, your, the percentage of your overall income is very low, in many, in many cases less than 10%, in some cases less than 5%.

CHRIS SIPES CFP®: And, but if you got it afterwards, you're pushing up in those high 20s in terms of how much that is taken out of your income monthly. And Jim goes so far to say that maybe it was, leading to some of the, the delinquencies that you're starting to see in the debt Markets where it, where it highs in the auto loan market as an example.

CHRIS SIPES CFP®: So back to the highs that we saw in 2008, where people are delinquent on their auto loans, but, but all that stress could be coming from those families that are, that purchased homes. And maybe had to stretch to get into that house, and now their income, may be being affected from being laid off or whatever it might be in the economy, which is starting to lead to stress across the credit Markets.

DANO WEIR: And then, Chris, you're also seeing that new glut of inventory suddenly get on the market as well. So there's another factor. To add in people, people who potentially stretched to get that property and thought, quote, rates will come down when they come down, they ain't come down yet. They haven't come down yet. So, that might help explain that factor.

CHRIS SIPES CFP®: Yes, and if I remember right, he, he says, you know, I don't have the exact data to back that up, but he's like, I could see that being a logical explanation for that big burst in inventory that we saw. You know, in last week's or maybe 2 weeks ago, the Redfin chart that we were looking at in terms of inventory available versus the demand, out there is just totally separated at this point.

DANO WEIR: I'll just hop on a small soapbox, not a really big one, but a small one, because whenever you talk about the disparity in housing and specifically purchasing a home, it can be very depressing and I don't just want to move on and say, yep, sucks, move on.

DANO WEIR: I so wish that it was different, it's not. And so the way that the the reality of the situation is that buying a home is on your list of something you want to do in your life, I still think it's possible. You have to start considering areas that aren't necessarily your choice areas.

DANO WEIR: You have to start thinking about being a lot less picky about the property itself. You have to believe that, you know, putting your money in that is gonna be worth it long term as an investment.

DANO WEIR: And then there are programs out there for down payment assistance and a whole lot more if you work with a really great lender or a really great agent who really is there to help you. So those are all things that you would have to compromise on. I'm sorry that you would have to do that, but it's not completely hopeless, mostly hopeless. But not completely hopeless.

CHRIS SIPES CFP®: Yeah. Now, this chart or this, I guess, illustration really surprised me. The manufacturing by state. Ok, we've got the US here and Dan, I don't know about you, but I would not have guessed that California had the highest manufacturing jobs by state in the country, but they do, followed by looks like Texas, and then you've got the a lot of the Midwest in terms of the manufacturing, jobs.

CHRIS SIPES CFP®: So, I guess this is, I, I don't know, I don't know really if this has anything to do with investing or or whatnot, but, just interesting, I guess, narrative shift.

CHRIS SIPES CFP®: I, I just wouldn't have guessed, you know, with all the headlines about California and how it's so business unfriendly and all of these things that we would have the highest, manufacturing jobs in the country, number of manufacturing jobs. Now, I know it's the, you know, population wise. That it would make sense, right? But, you just don't hear that much about manufacturing jobs in California.

DANO WEIR: I was just thinking the other day, Chris, because I think that's mostly a result of size, if you ask me. I was just thinking the other day that if California was on the east coast, it'd be like 8 states. You know, it's just such a large swath of land that, that's part of the reason why I think it leads in so many categories.

DANO WEIR: And then what's really crazy too is if you look at population density within California, I mean, most of the state's empty, you know, it's like 2.5 areas and then a bunch of outlying smaller, much very different communities. So, yeah, it's, that's definitely a surprise to me.

CHRIS SIPES CFP®: Yeah, yeah, it's really interesting and then, and they have a note here for Wisconsin ranks number 8th, #8 in manufacturing jobs, despite having the 20th largest population. So, pound for pound, a lot of Manufacturing going on in Wisconsin apparently.

CHRIS SIPES CFP®: So, we got these sentiment numbers this week kind of me, sort of unchanged, not a lot of big changes here when it comes to bullishness, bearishness, and neutrality, we're, we're running, you know, kind of normal levels here.

CHRIS SIPES CFP®: We're always looking for extremes to kind of fade those extremes. Usually when people are really, really excited and bullish, that's not such a great thing for the market moving forward, and if they're opposite feeling.

CHRIS SIPES CFP®: Bearishness, which, you know, case in point, take a look at the one year bearish high in April, so far, would be the low for the year. And so usually when people are feeling really poorly about things, that's That that tends to be a good thing for forward-looking returns now.

CHRIS SIPES CFP®: The CNN Fear and Greed index was at 54, which was down from 60 greed last week. That's considered a neutral reading on the CNN Fear and greed index, and Bitcoin at 57, which was still slightly greed, but down substantially from 71 greed last week.

DANO WEIR: So kind of middle of the road when it comes to sentiment, kind of a somewhat of a down week in the S&P, not necessarily a huge market, jump out this week when it comes to a headline, Daren Orkri. Is this a time when someone perhaps should consider if they, if they ever dreamed of changing their allocation or changing, you know, their risk profile, would this be a time to do that? A boring time like Friday, June 20th?

DAREN BLONSKI CFP®: You know, I, you gotta be careful here, but it's not actually an awful time. To look at something like that because the market is technically an all-time high right now, or close to an all-time high within striking distance of an all-time high.

DAREN BLONSKI CFP®: So, Now is a much better time if someone were gonna change an allocation than when the market's just selling off like it was back in April. It's, it's a good time to just take a look and make sure that's what in fact and how in fact you want your money invested.

DAREN BLONSKI CFP®: If they were on the fence, but generally it's not a good idea to change your allocation in any, you pick your allocation and you stick with it.

DANO WEIR: For sure, yeah, I'm not necessarily, I'm not saying people should do that.

DANO WEIR: All I'm saying is psychologically, this would be an example of, you're not necessarily feeling a pull to quote, everybody's getting out, everybody's getting in, you know, it's going to the moon, we're going to the floor, you know, this is like a boring time, so maybe that is what psychologically when you should consider something like that rather than, when there's momentum.

CHRIS SIPES CFP®: Yeah, absolutely. You know, I I had a client ask, well, you know, we're going through a risk tolerance and such, and they said, well, you know, I guess it would depend. I would be comfortable losing money depending on how long it would take to get it back.

CHRIS SIPES CFP®: And, and I said, well, join the club, you know, that, that's a really tough one to answer, but it's, it's a great question, especially for someone that's, you know, not, it doesn't know a ton of market history because If you look at like our last 5 years, we've had these relatively very quick drops, very quick recoveries.

CHRIS SIPES CFP®: Like, you know, you take the COVID example, one of the fastest drops in history, and then we were back within like a month. It was insane how fast that happened. And so, people forget about the, the longer time periods historically where it's taken, and you go, you know, it goes back to a time like the Great Depression where The stock market was underwater for 25 years.

CHRIS SIPES CFP®: So hopefully that never happens again, and there's obviously a ton different about the market structure now than than it was back then, but, you know, the volatility is just completely different these days, at least it has been recently.

CHRIS SIPES CFP®: And we got a Fed meeting this week, they basically said we're not changing rates, which was Absolutely expected by the market. There was no, the, you know, all the, the futures market was not expecting any type of drop in the rates from the Fed. They're holding steady due to inflation expectations, employment.

CHRIS SIPES CFP®: You know, the Fed has always been reactive in the past, at least, at least the the modern day feds, where they're gonna wait until either the most likely until they see cracks in the labor market, extreme cracks, and, and or lower inflation to the point where they start to worry about deflation, and then they'll start changing the rates, which Doesn't make a ton of sense when you think about it logically, because those rate changes take somewhere between 12 and 18 months to filter their way through the economy.

CHRIS SIPES CFP®: So everything that we're going through now was from rate changes that happened a year, a year and a half ago. So it's, it's, it's like steering the Titanic and any little input has big downstream effects, right? But we're making those decisions in real time. It's kind of, it's kind of crazy.

DANO WEIR: Of all the ships you could have picked, Chris, at least you could have picked one that made it.

CHRIS SIPES CFP®: True, true.

CHRIS SIPES CFP®: Well, and, and just to show you that the market hangs on every word that the Fed says, this is from bespoke showing the, the market reactions in the gray area is after the Fed, talks, you know, meaning the Fed chair, Chairman Powell, you know, the Fed, the, the market is basically flat leading into the Into the the minutes and everything, and then they literally analyze every single word, and they also compare those words to the words that they said last time, like if they add a word or if they took a word out, what does that mean?

CHRIS SIPES CFP®: I mean, it's it's it's really wild how they, how they parse the Fed, the Fed speak, but Hey, it makes sense in today's Markets where the Fed can have such a massive impact.

CHRIS SIPES CFP®: We just talked about mortgages and don't forget that the Fed moved into the mortgage market to back it up during COVID, which, you know, has not been something that they've done previously, and but in the great financial crisis, the government stepped in to save save the the the The mortgage market as well.

CHRIS SIPES CFP®: And so anytime you get tinkering with non-market forces that tends to lead to distortions, good and bad in the mortgage market, and I think we're we're seeing that now, and dealing with those issues now, from, from all that intervention.

DANO WEIR: Jerome Powell is still there as the Fed chair, and there was such a buzz maybe a month ago that he was either gonna get fired and or step down. Is there any more, any more you're hearing or any more you've read about that?

DAREN BLONSKI CFP®: Yeah, there's nothing really that Trump can do. I think Trump would love to get rid of him, but he's unfortunately not in a great spot to do that. There's a lot of pushback and so it's interesting when the, the Fed has, they come out like they did on Wednesday and said, hey, we're basically not gonna lower rating any time soon.

DAREN BLONSKI CFP®: Today, Fed Chair Walters, or not Fed chair, but Fed President Walters, said, well, you know, I could see rates going down as early as July. And, and I've noticed this pattern with the Fed, and they might come out and say something and they kind of walk it back with the other Fed presidents if it's a little too far and the market doesn't like it.

DAREN BLONSKI CFP®: It's clear from how the market acted this week that It wasn't so excited about Chair Powell saying, hey, we're not gonna lower rates anytime soon. It is curious that every other major economic center in the world is lowering rates right now and the US is not. And so I think that's where the pushback is.

CHRIS SIPES CFP®: Ok, so the chart we're looking at here is from, I hope I'm probably saying this wrong, but it's Taho Bracken.

CHRIS SIPES CFP®: And he says the last 15 years have been the best holding period for the US stock market out of almost any other. Since most investors missed it, there's a FOMO with the hope that the trend continues. Warren Buffett said it best, what the wise do in the beginning, fools do in the end.

CHRIS SIPES CFP®: And we all suffer from something called recency bias, which is where we take and extrapolate the recent past into the future and This is a long period of time. 15 years is a fairly long period of time for most investors, and it's hard to remember that, hey, this is actually one of the best. Performances that the stock market's ever had.

CHRIS SIPES CFP®: And and so will that continue over the next 1015 years? Maybe, I mean, there, I guess there's a chance, but I think you would want to take a step back and look and say, is this a situation where the risk is built up, you know, is this the forest that's been allowed to grow kind of uncontrollably without any, any type of setbacks to, to kind of reset.

CHRIS SIPES CFP®: From, from, from the risk perspective, and going back to the fact that really since the great financial crisis, the Fed's been there to backstop the Markets all along the way, and, people now have this Pavlovian response that when the market goes down, we buy the dip because somebody's gonna step in.

CHRIS SIPES CFP®: You know, somewhere around 20% down in the Markets, right? Now, of course, there's no guarantees and it doesn't say that they could do that in the future, but investors have really been trained in that, in the most recent past.

DANO WEIR: So reading this, if I'm an investor who's concentrated. So maybe you've got a handful of single US tech stocks, right? You, you might be indicating perhaps, you know, diversification at a time, we're just wondering if this uptrend is going to continue, especially if they're not lowering rates.

CHRIS SIPES CFP®: That's right. I mean, if you look at that, that period from 2010 to 2024, the average return was 12.2% versus the average for all time periods 5.9. So you're double, you know, since 1970, those rolling 15 year periods, it's just been double, in that time period, so. You know, you, you never know, right? It's it's just the law of large numbers. Now, this, is, is a chart from PIMCO, let me read what they say.

CHRIS SIPES CFP®: PIMCO says some countries are overspending while others are main others maintain fiscal discipline. As the US Congress considers bills that could swell already high deficits, investors are factoring country shift shifting debt paths into their global capital allocation decisions. And if you can't see the US it's down there on the bottom left, right above, it's.

DANO WEIR: Down there on the bottom.

CHRIS SIPES CFP®: Where it says living beyond their means, we're lumped in with countries like Colombia, Brazil, Romania.

CHRIS SIPES CFP®: Of course, the UK is in there barely with us, but, outside, you know, where maybe in the, in the slots where it, it might be a little safer, countries that are saving even more, you've got Denmark, Switzerland, Sweden, Japan. Korea.

CHRIS SIPES CFP®: Now Japan's an interesting one cause their debt to GDP is way, way up there. So even though maybe their current accounts, they might be saving more, their, their overall debt load is massive.

CHRIS SIPES CFP®: It's one of the largest in the, in the world, so, But anyway, it's it's something to consider as we're as we're putting together our our our budgets, and, you know, looking at what happened this spring when we talked about the tariffs, and for the first time in, in really most investors' lifetimes where we've had the dollar going down, we've had rates going up.

CHRIS SIPES CFP®: And, and, you know, people just basically selling out of US assets that way. So stress in the Markets, and you've got people selling treasuries, selling the dollar, and, you know, they say that is more indicative of emerging Markets than it has been of the US in the past.

CHRIS SIPES CFP®: So maybe we're experiencing a shift in The the global capital flows this year. It's, it's probably too early to tell, but it's interesting that that's that that that took place in the spring when we saw that that global stress.

CHRIS SIPES CFP®: And as a result of that, we've got the fund manager survey from Bank Of America showing that most fund managers are underweight the US dollars. In fact, they're the most underweight the US dollar that they've been in 20 years, going back to it looks like about 2005.

CHRIS SIPES CFP®: And so that's, that's a marked difference from 2010. So going back to that rolling 15 year US stock market. Bull market, you look at most of that time, the US dollar was fairly strong with, a lot of that, a lot of that time in 2010, the fund managers were overweight, the dollar, pretty significantly.

DANO WEIR: What does this mean, underweight and overweight?

CHRIS SIPES CFP®: It, it, it means like how much they are, the flows are going to it. So like dollar weighted assets versus say, foreign currency assets, right? So, overweight and underweight would be relative to their benchmarks usually.

CHRIS SIPES CFP®: So most, most fund managers have a benchmark where they have to, or they're trying to beat it, you know, but usually they're, they're also following it somewhat, so they're They're usually referred to overweight or underweight relative to the benchmark.

DANO WEIR: And just, and can you pause at a guess why either of you pause at a guess why suddenly they're Underweighting the dollar? I mean, is it, is it political? Is it their opinion? Is it the fundamentals? Is it the dead? Is it, what could it be?

CHRIS SIPES CFP®: It could be, it could be all of those things, you know, it, it, those are all reasons why someone would be underweight, you know, if they feel that, that the, the country's Debt situation is out of control to the point where the government is gonna have to come in and borrow more money, which drives interest rates up.

CHRIS SIPES CFP®: Remember Big Papa Steve at the barbecue, they, he comes in and he takes all the food, right? So that's, that's the, the analogy, that my old economics teacher used to use and always brings to mind, so. The more that Big Papa Steve needs to eat, the less there is for everybody else, or the more, the more the, you know, the more dear that food is, right? Which in in this analogy would be the, the money.

CHRIS SIPES CFP®: So, the more money that the government has to borrow, drives up interest rates, which makes money more expensive for everybody else, you know, and then going all the way back to those mortgages, you know, it really It really puts a lot of pressure on people that are getting new mortgages as an example, which is usually the biggest debt that any of us take out, taking up a lot more of our income, it makes less room for investing, spending, etc.

CHRIS SIPES CFP®: Etc.

DANO WEIR: Well, it sounds like you haven't bought a Nintendo Switch 2 recently, Chris, because if you had, you would have known that is the largest debt. That you would have had to pick up.

CHRIS SIPES CFP®: This is true again. I have not picked up one recently. Here's the dollar, the DXY, over the longer term though, and you can see that while it is definitely weak relative to any of the time that we've most recently seen here, you know, call it since 2023, going into 23.

CHRIS SIPES CFP®: On the longer term chart, it's really not as weak as, as we were coming into 2021. So the DXY is, the dollar versus other currencies. So, most notably the euro. The euro is the second largest currency in that currency basket. So it's measuring how strong the dollar is versus those other currencies.

CHRIS SIPES CFP®: And so you can see on the moving averages, we just got simple moving averages here to show you the trend. And when you've got that 50 day below the 200 day, that that shows a trend in the downward direction, meaning that the dollar is weakening. And that tends to be good for foreign currency assets.

CHRIS SIPES CFP®: So assets that are, you know, say like foreign stocks as an example, that tends to be a tailwind for them. Because their currencies are strengthening relative to the dollar. It's also a headwind for dollar weighted assets, which we've, we've had that, you know, extra push from the dollar being stronger.

CHRIS SIPES CFP®: You know, for much of the last 15 years.

CHRIS SIPES CFP®: This was interesting from Charlie Bello. We got the, the CPI numbers, this week, and he says the most absurd number in the CPI, he says, according to the US government, the cost of health insurance has declined 18% over the last 5 years.

CHRIS SIPES CFP®: Now, talking with clients, I, I would say that health insurance is the number one. Hot button issue for most people. Most people are the most worried about it, paying for it, going into retirement.

CHRIS SIPES CFP®: I know as a, as a business owner, it's, it's probably the most expensive, you know, line item related to hiring, an employee, and, and so most of that burden in the US falls on businesses, especially small businesses, given that they're the employer of most of most people. And so it's kind of laughable that the CPI. Says they were, they were down 18%. So if you go to the next slide, wait.

DANO WEIR: Is this, is this just because they've been hiring less people? I mean, and they don't believe this. There's no way.

CHRIS SIPES CFP®: Yeah, I, I, I'm not sure how they justify that, but Charlie Bello again, and he says, the average US family health insurance premium in 2000 in the year 2000 was $6000. Then he goes through the various years. In 2024, it was $26,000. That's a 342% increase since 1999, which is 6.1% per year.

CHRIS SIPES CFP®: And he says if you note the US CPI inflation, so all inflation, has increased at 2.5% per year, so more than double the health insurance premiums have more than doubled the The US overall CPI, so, you know, maybe with all this AI, we will see some deflation and some relief in the health, system, you know, I was, you know, me, Dan, I, I eat those sardines, so I try to stay out of the US health system.

CHRIS SIPES CFP®: That's my, that's my game plan. Yeah. But recently had an interaction with the US health system through my dad getting sick and having to be hospitalized for a week or so, and, wow, that is You know, count your blessings if you're not involved with the US health system.

CHRIS SIPES CFP®: Let's just put it that way. It just, it makes no sense on any, on any level. And, you know, God bless the doctors and the nurses, and everybody else.

CHRIS SIPES CFP®: I know they're working hard in there, but it just seems like the, the way the system is set up is just so backwards and, and just hard, hard as a patient to understand what you should do to help yourself and you have no idea what anything is costing and it's just It's just a mess. It's an absolute mess.

DANO WEIR: I had an appointment recently with an unnamed Northern California health system and the doctor had his door tapped on and informed that he could no longer be speaking with me because he'd passed his time limit. So, just a little example there.

CHRIS SIPES CFP®: Let me guess, you were talking to him about Nintendo's.

DANO WEIR: No, no, just you guys, just you guys.

CHRIS SIPES CFP®: Lucky us. Well, after all.

DAREN BLONSKI CFP®: Your Nintendo talk, I was in Best Buy the other day, and I must admit I walked to the Switch aisle, see what was going on over there and try to increase my cool level with my 9 year old and.

DAREN BLONSKI CFP®: You know, it was sold out, man. There's nothing there. It was gutted.

DANO WEIR: Yeah, it's been for those who don't know, it's a it's a fun thing I share with my kids and or maybe for me. And so I always, I always crying Darren and Chris about it. And yeah, if you've got one of those, where's the where's the slide on that, Chris? Where's the Nintendo, not the inventory and need to see what's going on with the Switch too and let's get a slide for that next week.

CHRIS SIPES CFP®: Yeah, I'll get right on it then.

DANO WEIR: Head to my house, Darren.

CHRIS SIPES CFP®: In the meantime, those, those that watch the show regularly will recognize this slide, from a couple of weeks ago, which was, hey, if, if the US stock market's expensive, if there's different areas that have, have really outperformed over the last 15 years, where, where might there be some opportunities?

CHRIS SIPES CFP®: Where, where are the areas that are struggling, that nobody's there, nobody wants to be there, nobody's talking about it, defensives. Which is a term that is put together for health care, utilities. And staples, so the defensive area of the market, things that people end up spending money on, whether they want to or not.

CHRIS SIPES CFP®: It's the lowest percentage of the S&P 500 since the year 2000. Now, market historians will remind you that the year 2000 was the dot-com bubble, where basically, if you didn't have a. com in your name or anything related to the internet at that time, nobody wanted to buy your stock, sort of similar these days, and so you can see.

CHRIS SIPES CFP®: That there these areas are stretched, maybe there, there's some opportunity there, to go search for some bargains. That's if fundamentals even matter anymore, which I think there's a healthy argument that nothing matters to the market anymore when it comes to logic and fundamentals.

CHRIS SIPES CFP®: But another area, if you go to the next slide is real yields. Now, I guaran I can almost guarantee, maybe some of you go to really nerdy barbecues, but you're probably not hearing about real yields at the local barbecue, which is the, the yield that you can get on a on on a fixed income instrument over and above inflation. Now, they typically measure this using the government's issued fixed income.

DANO WEIR: One second, Chris, one second. What is a fixed income instrument for someone who wouldn't know?

CHRIS SIPES CFP®: Ok, that that's for a bond, right? A bond or you're loaning your money, you're loaning your money to some entity in this case, the US government. And they do so through TIPS, which is treasury inflation protected securities is what TIPS stands for. And just like the name implies, they are quote unquote, protecting you from inflation by giving you a rate of return plus the CPI.

CHRIS SIPES CFP®: They'll they'll pay you the CPI in addition to that rate of return. Now, The rate of return is determined by the, the market, you know, it's, it's, what are people willing to buy and sell treasuries for? The, the inflation protection piece of it is determined by the CPI.

CHRIS SIPES CFP®: And so this, this chart from Mike Zaccardi, he's he's saying the 30-year TIPS yield at 2.61% off the off the highs, but still near a 23 year ena. So, What that means is if you've got a real yield at 2.61, that means you're gonna get inflation plus 2.61%. If you purchase that tip security on that particular day, right?

CHRIS SIPES CFP®: And then if you were to hold it for the maturity time, in this case, 30 years, you would receive that 2.61%. Plus, plus, the, the inflation rate. So, right now, that is, that is pretty close to a 5% overall yield, which is competitive with the historical returns on equities. And so it's, it's, you know, we haven't seen these, these rates since again around the dot com.

CHRIS SIPES CFP®: You know, bubble, and at that time, in hindsight, those were, those were very attractive rates for those that that purchased them, but like I said, most people don't look at these, care about them, you're definitely not tripping over yourself to call your adviser to buy some TIPS. But it's an interesting place to consider some, some long term opportunities there.

DANO WEIR: We, we're gonna get to Darren's charts in just one moment, but I have to ask you this cause I'm a little lost. So that's my job on the show is to be the idiot, the idiot. Can we put some numbers to this? So this is a bond, and if I and you're saying, hey Dan, I'm gonna sell you a bond for $100 and over 30 years, it's gonna pay you 2.612% plus plus inflation, and what does it pay me that every year?

CHRIS SIPES CFP®: Yes, you're gonna get that, these pay biannually, I believe. There's an adjustment to the principle for that inflation. So you're gonna get your, in your case, when you said I'm gonna pay 100 bucks for it, you're gonna get that face amount back at the end. Well, with the tip, they're adjusting that face amount based on inflation.

CHRIS SIPES CFP®: So you won't get 100%, you'll get 100 and whatever the inflation rate was, you know, in 3 years, you'll probably get 400 I don't know what inflation rate is hitting on that, by the way, but you're gonna get, you're gonna get that coupon. That's what they call that coupon is that that 2.6% in this case. And then you're gonna get the inflation adjustment to your principal based on, based on the CPI.

DANO WEIR: Gotcha. Ok.

DANO WEIR: One of the beauties of this show, Chris is what we call a fundamental analyst, not a fundamentalist, but he looks at the fundamentals of, the market and the economy and some of the basics, and Darren is a technical analyst, which means, yeah, well, what's going on with the chart itself, sort of, separate from all of those underlying fundamentals, and so we go from the first half to the show to the second half of the show.

DANO WEIR: Darren, what do you got?

DAREN BLONSKI CFP®: Well, as always, lots going on out there. Interesting week. I think it feels like there, there were two main themes I think for the week. One is this geopolitical tension that it's going on between Israel, Iran, Ukraine, Russia, and then how the US is going to engage or disengage from either of those, issues.

DAREN BLONSKI CFP®: That's kept the market really on pins and needles. And then secondly, all eyes on what the Fed's gonna do. Are they gonna lower rates? And when are they gonna keep rates the same, and what is inflation doing? Those seem to be what's driving the narrative of the market.

DAREN BLONSKI CFP®: When we look at it technically, though, it tells a little bit of a different story. So, I put a box, this white box was put on by me, and this is the candlesticks for the last 5 days, so this was Friday, Thursday, Wednesday, Tuesday, and Monday in the market.

DAREN BLONSKI CFP®: We closed the market looking pretty good last week with a strong up green candle. You can see that candle here on the 12th of June. And then we gap down, we went down, opened it down, on Monday, and then quickly saw a nice bounce, on Tuesday, and then since then it's been downhill.

DAREN BLONSKI CFP®: Now, I'm gonna caveat all this, and as Dan you talked about, it's the triple witching this week, and that's nothing super Fancy other than the fact that what the triple witching means is that there's what's called options explorations and so options drive a lot of the volume in the Markets, and when the triple witching happens, the market's rather volatile, and that's what you saw today, ugly clothes.

DAREN BLONSKI CFP®: This candlestick is an ugly clothes for the day, this look at it on the week, it's Not a great candle.

DAREN BLONSKI CFP®: See how it's in, I'm gonna get rid of my cool little white box now, but we, we're we're engulfing last week's candle with a red candle, which typically says, oh, we'll probably have a down week. I could very easily see next week, being a down week, lots out there that could help drive that down market.

DAREN BLONSKI CFP®: One of the, pieces, I'm watching those is this long-term trend line that we recovered from here recently, I could see a trade into this trend line right here and then a bounce up. I'm not ready to say that this Mark is over. We are literally just tapping on, the all-time high level on the market.

DAREN BLONSKI CFP®: I talked about that earlier in the show, you know, now's a great time, for people if you're concerned about your allocation, you were concerned about. Outperformed when things went down, a few months ago. Now is a really good time to look at those things, not when Markets are bleeding and selling off.

DAREN BLONSKI CFP®: It's a good time to step back and say, is this allocation makes sense, that the risk makes sense, etc. We're literally knocking all-time highs in the S&P. I, I think next week, next couple of weeks, I could see some down in testing this long-term trend line in the market on the S&P 500.

DANO WEIR: Darren, I don't want to break your momentum, but can you just clarify one more time what a triple witching is and what options are generally?

DAREN BLONSKI CFP®: So, generally, options are a mechanism for betting on the direction of the market in a particular stock or particular index, and when those expire, which they do usually on a, a frequent basis, there's these what we call a triple witching event where the stock futures, the stock index futures, and the stock futures all expired at the same time.

DAREN BLONSKI CFP®: And, or the index of futures. And when that happens, that brings in a lot of volatility in the market. Everybody has to, well, not everybody, but the people who are playing with options, and usually it's a lot of rather big organizations, they have to kind of reset and redecide where their bets are gonna be.

DAREN BLONSKI CFP®: Let's make it as simple as that. It's just about betting on the direction, and options are used for hedging downside. They're used for hedging upside. There's a lot of reasons people would utilize an option in their portfolio, but when they all expire at once, that kind of forces money to change hands and move differently in the market, and that's what we saw, here just recently.

DAREN BLONSKI CFP®: Gotcha, this today, and that created the volatility. So hard to really take the signal of today, given the triple witching. As anything more than just volatility created by the triple witching.

DAREN BLONSKI CFP®: However, I could see a little bit of downside to test this long term trend line, and then resumption upward. Right now, I just don't see the mechanisms to suggest that, You know, we're gonna see a downmark a significant down market, even though the news seems to make you think that. Now, interestingly enough, this is the CME Fed watchtch tool.

DAREN BLONSKI CFP®: It's basically looking at the probabilities of rates being moved. I did mention earlier in the show that President Fed Fed President Walters came out and said today that he could see rates moving as early as July. And I think that's overall fairly stimulative.

DAREN BLONSKI CFP®: It is curious that all the other major central banks have now moved rates, down, significantly, in some of the central banks, the rates are at 0 again. And I think that's interesting that we haven't moved our rates at all and inflation is quote unquote so persistent.

DAREN BLONSKI CFP®: I think the tariff and the freak out from the tariff is making the Fred very uneasy about doing anything with rates at this point. When we look at the S&P 500 on the heat map, though, this is looking at one day performance. Let's take a look at the one week performance, and you can see pretty red across the screen, a little bit of green here and there, but nothing really consistent.

DAREN BLONSKI CFP®: The fact that energy is up, that, that tells you, right, like, maybe something's getting signaled, maybe the US is gonna participate, the market's thinking that the US is gonna participate in the wars going on in the Middle East. Well, I guess overtly participate.

DAREN BLONSKI CFP®: Right now we're participating, but not necessarily disclosing what level of participation we have. If we go to the oil market, the oil market is curious to me, and you can see this is a long term trend line on the oil, market, and you can see it's hit this resistance, gone down resistance, resistance, resistance, and we spiked through that and got rejected.

DAREN BLONSKI CFP®: But then the fact now that we've recovered up. And we close the week up inside, what we would call this wick here, that tells me we're probably going higher in oil. I think oil is telegraphing to us right now, that we're gonna see the things in the Middle East get worse now before, they get better.

DAREN BLONSKI CFP®: Last week I felt like it was the opposite because we traded into this trend line, got rejected and closed below it, but the fact that we revisited this week. And we closed up above that, what we would call the the the bar on this candlestick, that tells you there's buyers, that tells you that the prices are probably gonna go higher, and we're gonna break out, when we break out, then it tends to go a lot higher.

DAREN BLONSKI CFP®: We see the US involved in Israel-Iranian conflict, we'll see oil go significantly higher, which could be The, you know, the peripheral nail in the coffin when it comes to a recession.

DANO WEIR: Darren, you often, associate the geopolitical events with the charts, that correlate the two and how the geopolitical could affect the price, but then also the other way and that you think the way that the the chart is going could affect the geopolitical. Are you alone in that or do a lot of financial advisors basically understand that's a reality?

DAREN BLONSKI CFP®: I don't know how to. Answer that question. I mean, I think most people Believe and think that the politics of the world and You know, those are the power centers of the world, that those impact the Markets on some level, the degree to which level is highly debatable, but I think there's, it's pretty hard to disconnect the two.

DAREN BLONSKI CFP®: If nothing else, if you look at the amount of fiscal stimulus and monetary stimulus that's responsible for driving the Markets, the way the Markets get driven. You know, perfect example in the last administration, the Green New Deal was a big thing, right? And all these Green New Deal, solar, etc. Companies were doing really great, right?

DAREN BLONSKI CFP®: Because money was flowing into them, it was easy to get loans for those things. Well, we've seen that reverse now, and if you look at These companies that were all involved with solar, that, you know, they're having a tough time right now and I think you can see that if, we look at some of the exchange traded funds and where they show up in.

DAREN BLONSKI CFP®: You know, the solar technology, etc. So, Yeah, I think politics do impact the Markets. I don't, I don't think we can dismiss or impact and.

CHRIS SIPES CFP®: Along with that, if you look up EIS, EIS is the Israeli, the iShares Israeli, sorry, Israel ETF. Now, without knowing anything about it, would you guess that's going up or down right now?

CHRIS SIPES CFP®: Probably cause I'm asking you, you're gonna guess it's going up and you're, you're right, which makes no sense, right? From a like a logic standpoint, you wouldn't think that that would be happening, but, But it is, and so, I, I'm a believer like the market's gonna do what it's gonna do, and it's really hard to understand it, especially because it's, it's looking out into what is is likely to happen.

CHRIS SIPES CFP®: That's not what's happening right at the moment, but what's likely to happen and That result relative to the expectations. Relative to expectations is the important part.

DANO WEIR: I don't mean to put you on the spot. I only bring it up just because before I worked in this job, you know, there was like the news and then there's like the financial part of the news, and to me, like just as a as a Joe on the street driving and listen to the radio, they feel like they're separate.

DANO WEIR: And since I've worked here, a lot of advisors are like, no, this indicates that and that you see a lot more connection. The chart is not just the money changing hands, it can seem like a lot more.

CHRIS SIPES CFP®: Yes, absolutely.

DAREN BLONSKI CFP®: Well, it's, it's very, it's all interconnected, right? I think to me that's the most interesting thing about the market is that it's all interconnected and it's a giant puzzle, that my mind at least really enjoys trying to solve.

DAREN BLONSKI CFP®: I don't think it ever will solve because I think that puzzle is constantly moving and changing and it's it's dynamic, but that's what interests me about the market is.

DAREN BLONSKI CFP®: That it is this, there's so many different facets, and that's why, you know, when Dan, you say he's a technical analyst versus a fundamentalist, like my fundamental belief is that you cannot fully comprehend all the market. The only way to understand every input of the market is to look at price because price in theory, entails every known piece of data in the market, right?

DAREN BLONSKI CFP®: It's, it's the brain trust of the entire participatory environment of the market. And that to me is why price is so telling and so important. At the end of the day, I believe that price happens, and then we fit and construct the news to understand price.

DAREN BLONSKI CFP®: And that's really the like when you listen to financial media, for example, people are like, why is the market up? Why is the market down? And then they're out there trying to find these stories and extract.

DAREN BLONSKI CFP®: The same process we were talking about earlier on the show, we talked about this hour at 11:20, Today, the market just dumped. And so then what I did is I started doing all this searching online and trying to figure out what news hit at 11:20, cause something hit cause that market just sold off.

DAREN BLONSKI CFP®: The other argument is say, well, it didn't actually, there was no news that hit. What happened is this, this here was resistance, and the market was gonna trade into that resistance at that point, and when it hit it, it sold off, and why was that resistance?

DAREN BLONSKI CFP®: Because it was support over here, it was support right here, it was resistance right here, it was support right here, that was a psychological number that the market had attached to, so why it so awful, it sold under that.

DAREN BLONSKI CFP®: That's why a Chartist would look at this and say, well, shoot, that was an ugly clothes because it didn't hold that support line should have broke above and come came back up.

DAREN BLONSKI CFP®: This is the 5 minute chart, by the way, you're looking at on today. And so every 5 minutes is a candlestick, and the fact that it traded up, got rejected at that important support resistance line and then went down is, you know, indication of, OK, that was a really important point, regardless of what happened.

DAREN BLONSKI CFP®: You go out and search all the You know, LLMs or the chatbots or whatever and try to find something that happened at 11:20 today, there's nothing out there right now, to explain that other than the fact that it hit an important psychological point in the market.

DAREN BLONSKI CFP®: So that's why you go to chart because price ultimately is the barometer of all information that is known in the market.

DAREN BLONSKI CFP®: And, and often why the chart can start telling us something's up, right, when we look at the oil chart, for example, and just a minute ago I was talking about how it hit this trend line, it's still hovering up there, which tells you that there's a belief in all the data that is known.

DAREN BLONSKI CFP®: In the market that the market could be, in fact, going higher, and that would be a signal that in fact, the US is gonna get involved, we're just making sure we get as many people out of the Middle East before we get involved. So, And it's that that's why I guess the Chartist looks at it.

DAREN BLONSKI CFP®: When we look at the bond market for our diversified folk, and this is the good news bad news, like this also shows to me like, hey, you know, there's strength in the bond market right now, it's coming up against this resistance line and looking at breaking through and It to me, the fact that it visited 12, and now the 3rd time, and it's still hovering there, we're probably gonna get a break.

DAREN BLONSKI CFP®: So Chris, you can do your excited victory lap for your bonds here in a minute.

DAREN BLONSKI CFP®: So that, that's what, so if that's true, then you would have to suggest that, OK, well, the US 10-year bond, which is inversely related to the AG, which is the bond index, is now breaking below this trend line here.

DAREN BLONSKI CFP®: And the fact that it traded below and it's revisiting this support level, that tells you rates are probably headed down, which would then play well with the idea that, oh wow, US gets involved with Middle East, that pushes rates down. The Fed actually raises, lowers rates faster than they're saying they were on Wednesday, that becomes stimulative, but does it actually sink us into a recession?

DAREN BLONSKI CFP®: That becomes the question, and I think that's what we're being up actually. Yeah, a piece of straw that broke the camel's back.

DANO WEIR: Dumb question. Can, can the Fed change rates at any time or do they have to change it at meetings?

DAREN BLONSKI CFP®: They could do it any time. They've historically, so the early, so many years back, the, the Fed would just change the rate and tell nobody about it, right? But Janet Yellen was particularly helpful in this where they started communicating more with the market, right?

DAREN BLONSKI CFP®: Cause the idea is that you can effectively manage the market, manage inflation, manage the economy just by communicating we will or might or could do this thing. And so they, in recent history, the Fed has been much more transparent about what they're doing. That hasn't always been the case.

DAREN BLONSKI CFP®: And there's these people we call Fed watchers these days, right? That what hang on to literally every word that comes out of the Fed and the market responds to it. That's a more recent phenomenon in recent years, because the Fed realized that they could manage the economy just by their, the words that they use.

DAREN BLONSKI CFP®: So, you know, the, the story I think right now. Is that the the market's kind of on this like teetering line of like we're all time highs. I don't think it'll take much to push above all-time highs. Maybe we get a surprise piece in the Middle East. Something like that, but I also think it could very easily go the other way.

DAREN BLONSKI CFP®: I think what's on store for this chart though, first is a test of this trend line. You can see this break above it. We're gonna come in and test it and then maybe resume higher. I think that's what the charts telling. So I do expect the next couple weeks to be down weeks, given everything that's going on geopolitically, there's plenty of excuse for the market to have a more rough couple weeks.

DAREN BLONSKI CFP®: All right, I mean, we could talk Bitcoin if you guys really want to. I know Chris is on the edge of his seat, wanting to talk about Bitcoin.

DANO WEIR: We, we, we, we serviced me with some Nintendo talk. I feel like we have to even things out and, and give Darren his Bitcoin time.

CHRIS SIPES CFP®: That's right. We, there hasn't been much going on there lately, it seems so. Yes, enlighten us.

DAREN BLONSKI CFP®: I think it's kind of bad news for the Bitcoin chart, to be honest, cause you kind of got this double top thing going on right there, McDonald's. If we break below 100,000 of coin, then I think, you know, we look at 96. But I think the risk is to the downside at the moment. I don't think it's to the upside.

DAREN BLONSKI CFP®: But we shall see, and, and Bitcoin tends to be a, you know, a leading edge or risk off, right? Seems to be how it's lined up over the recent years, and if that's true, then that would support the thesis that the S&P is gonna check the support line here, and Bitcoin is also gonna check 100,000 and make sure there's support there and buyers.

DAREN BLONSKI CFP®: When I mean support, I just mean buyers. People step in and say, oh, I'll buy that at that price. When I mean resistance, it just means the seller say, oh well, that's overpriced, I'm selling it.

DAREN BLONSKI CFP®: That's all support and resistance means and so the charts when you look at them, are just, you know, areas where buyers And sellers were battling out price. Buyers, sellers, buyers, sellers, sellers, buyers, buyers, and it's just the debate of buyers and sellers and buyers and sellers about what fair price is for whatever asset that's trading.

DAREN BLONSKI CFP®: And because there's no way for the human mind, maybe someday with AGI we'll be able to comprehend all that is out there, of all the data points that exist that to go into price. Price is the perfect AGI in my opinion, it is the perfect summation of all opinions that exist and have influence in the market.

DAREN BLONSKI CFP®: All right. Well, we will leave it there, I think. Lots more we could talk about, but generally, we'll see how next week goes and Hopefully things calm down here.

DANO WEIR: So in summation, wrapping things up, we had a triple witching, which was the expiration of options all at one time from three categories, which we believe may have impacted a bit of a dip here at the end of the week for the S&P.

DANO WEIR: And Chris, we talked about a K-shaped economy, just for everybody again one more time, because we kind of looked to the disparity between two, you know, two groups of people, people who got their mortgages either before or after 2021. Again, one more time, what is a Khad economy for people who are wondering?

CHRIS SIPES CFP®: It's simply just referring to the, the shape of the letter K where you have, you know, part of it going up and part of it going down, and it's referring to, you know, two different demographics within the economy, those that are financially secure, probably got their mortgage prior to 2021, may not even have a mortgage at all, doing very well versus those that don't and probably experiencing a totally different economy.

DANO WEIR: Thank you so much for checking out our show on the Markets. We are Sonoma Wealth Advisors. You can learn more about us at SonomaWealth. Com, and if you are a client, we appreciate you learning more about what we do and what we're looking at, and if you would like to become a client, that's where you learn, SonomaWealth. Com.

DANO WEIR: Also wherever you found this show, make sure to subscribe. We're always looking for more subscribers and we appreciate all the support from everybody who listens, and we will see you again next week.

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