Episode 41: Navigating Strategic Global Bond Portfolios with Brian Decker, CMT
01:03:04 Share

Welcome to Fill the Gap, the official podcast series of the CMT Association, hosted by David Lundgren and Tyler Wood. This monthly podcast will bring veteran market analysts and money managers into conversations that will explore the interviewee's investment philosophy, their process, and decision-making tools.

By learning more about their key mentors, early influences, and their long careers in financial services, Fill the Gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street who discovered, engineered, and refined the discipline of technical market analysis. ♪

Fill the Gap is brought to you with support from Optima, a professional charting and data analytics platform. Whether you're a professional analyst, portfolio manager, or trader, Optima provides advanced technical and quantitative software to help you discover financial opportunities. Candidates in the CMT program gain free access to these powerful tools during the course of their study. Learn more at Optima.com.

Hello, and welcome to episode 41 of Fill the Gap. My name is Tyler Wood, and today, as always, I am joined by David Lundgren, the illustrious co-host of Fill the Gap. How are you doing, my friend? Fantastic. How are you doing, my friend?

You know, I think I've formed new brain cells that didn't exist before, digging into not only the Elliott Wave principle, but some complex bond math. And our guest today really opened my eyes to what could be possible for interest rates. This is a fantastic episode. Dave, a couple of highlights from you for this conversation with your old colleague.

yeah my old colleague my my former colleague at wellington brian decker obviously a cmt charterholder he's the strategist on the global bond team which is one of the largest global bond management teams in the world and uh what i really found interesting about this conversation and i knew this obviously because i had worked with him for 13 years that i was at wellington but his approach is incredibly comprehensive and he doesn't just

Like, look at a chart and say what he thinks, because, you know, in real money management, you can't do that. And I think that comes out in spades in this conversation. You can't just have a view just based on what you see on the daily chart. Right. But beyond that, he takes great pains to pull together what I think are three really unique things.

highly differentiated styles of technical analysis into one cohesive research process. So that's Elliott Wave, DeMarc, and market profile. Very rarely do you have those three things in one conversation. It's hard to find them in singularity in one conversation, but he heavily uses all three of them across multiple timeframes and across multiple asset classes to help guide strategic

across multiple asset classes, but in particular bonds at Wellington. And, you know, I used to speak with them all the time when I was at Wellington, and it was just so great to catch up with them again. Yeah.

Yeah, the differentiation between the tools that he is using is a point well taken. And I think for a lot of listeners, if you are not an Elliott Wave practitioner, if that's not part of your process, this is a great conversation to listen to, in part because Brian characterizes his work in a very thoughtful and methodical way. It's not just the black box. I saw Wave 3 and here's my target.

which we too often see in social media. This is a much more thoughtful and thorough approach to market behavior and sentiment in understanding not only what a trajectory might look like, but also as Brian was saying in his schematics, he's constantly keeping an eye on an alternative path. Where will he know when he's wrong? And I think it's that second step that's missing from so many people's work.

where they see something and therefore they're all in. But strong convictions loosely held is a gift to the money management practice. And knowing what will be the trigger to change your viewpoint, I think, is just good preparation. Yeah, you know, I think, Tyler, you remind me of one of the things that he said that I thought was just brilliant in that most people know how to make money, but very few people know how to lose money.

Right. Which means when you're losing money, you need to know when you're wrong and cut your losses and keep the left tail of your portfolio small. Build a wall that doesn't let losses get beyond a certain level so that you can

Let the winners run, but you need to know how to lose money and Elliot wave and to mark and market profile. Those are all well configured to help and assist in doing that. Plus, many other technical tools that we didn't mention in today's discussion, but are obviously in the CMT curriculum. That's what this is all about. Know how to lose money properly.

Because you're going to. Because you're going to. Be prepared for it so you can do it the right way. Yeah, worth its weight in gold right there. For all of our listeners to Fill the Gap, please enjoy episode 41 with Brian Decker, CMT. Welcome to Fill the Gap, the official podcast of the CMT Association.

Typically, when we prepare for an episode, we spend hours researching the guest's background, reading their recent research, and perhaps even any books that they've written. But for this month's guest, we didn't have that opportunity because he works on the buy side at one of the largest money management firms in the world, and he doesn't publish any research.

But the good news is that I had the great fortune of working with our guests for 13 years while I was at Wellington. So I'm very familiar with his research, and I'm really looking forward to catching up with him in today's conversation. His name is Brian Decker. He's a CMT charterholder and a market strategist on a global bond team at Wellington Management in Boston, Massachusetts. Brian Decker, welcome to Fill the Gap. Well, thanks very much. And thanks for the opportunity to be here today.

Absolutely. It's really great to see you. I miss our years working together and all the conversations we had on markets over the years. So it's really, really great to see you, Brian. Great times. Yeah. So typically, to get things started, what we like to do is just get a better understanding of your background. What was your path into finance? And in particular, especially for this audience, tell us a little bit about what got you to flip the switch and really focus on technical analysis instead of fundamental.

Right. I just entered a graduate program at NYU for air pollution meteorology in the engineering department. My brother, Jack, was a trader for a primary dealer in treasuries, and he got me a part-time job keeping positions for the desk. I became fascinated with

the discussion on the desk of markets and economics and the taking of risk and uh just the vibe on the desk was just so great it was just so enlivening and uh i found myself giving up going to graduate school for air pollution meteorology and um i wound up staying within within the uh within finance and then a few years later i got a job at uh

Briggs Shadle, which is the primary dealer, being a trader in training. And so I was trading the front end of two-year notes of the treasury market.

And in reading my research, becoming acclimated with the market, I always saw this research with charts in them. And at that time, no one was charting anything on the desk. So I just took out, I just got graph paper, and I just started charting the market. Actually, I started doing point-and-figure charting from the get-go. What year was this, Brian? This was 1979. Yeah.

And so I started doing charting of, as I said, all the two-year notes, the five-year notes, and the 10-year notes, and the futures, 30-year futures, just all point figure and just inherently just doing channels and support lines, just finding that I just had a...

a sense of it. I started reading more and then the world opened up when I read Prichter's book on Elliott Wave Theory, soon after 1980.

And that just made so much sense to me. And it just tied a lot together between what I was doing with the charts, what I was thinking about the market when it came to momentum and consolidation and price targets. And it just gelled for me. So, yeah, so that was my beginnings and to both the markets and technical analysis. Yeah, we're going to definitely dive into your process because I actually really respect your process. One of the things I used to really...

uh, love about you is if we would talk about markets and I would ask you your opinion of a security that maybe you hadn't done work on, you would say, I'll have to get back to you. I have to do some work on it. And it would take you a couple hours to work up your view on it as opposed to like most people, especially Tyler and I talk about this a lot. We have these, um, uh, armchair technicians on, on, on social media, just winging opinions based on,

what they see on the very surface of the chart. But what we recognize and what I learned from you over the years working with you is that it takes a lot more than just looking at visual inspection of a chart. There's a lot more work that needs to be done to have a qualified, meaningful, and importantly, actionable view on the markets, right? Yeah. What I try to do in addition to

looking at an asset over multiple timeframes. I try to look at similar assets over similar timeframes using the various processes I do. And just to see if there's a big thing is breadth of signal for me. Is it just this one chart that's bullish or is there a theme going on here? And that's what I try to uncover. Right. And we'll dive into your process, but I'm just curious before we get started with that,

trying to get a little bit more understanding of what kind of led you to be who you are as a technician. So you mentioned Prector's book. Were there other books that you read or were there mentors that you had the fortune to work with? How did you get your direction as a technician? Actually, it was all self-directed. I read Martin Prang. I mean, I've read a lot of Murphy's books. I found them interesting. But what really anchored me was was was Elliot, you know, and

I did some analysis on momentum and it was mostly through calculus that motivated that idea around momentum. I didn't really get a lot uncovered by looking at other people's research, although

And when Bloomberg came around, which didn't exist when I first got there, the different measures of momentum, whether it's RSI and stochastics, and that was helpful mostly around bottoms when you were getting divergences between especially between cash and futures. You had

hopefully targets on the downside and that completed Elliott Wave structure. You had that divergent momentum going on. To me, it was just part of the breadth of signal, but there weren't a lot of books that gave me a lot of info like Elliott did. Yeah. You indicated that your original career path was more like a more math-focused engineering type background. Do you find that you're able to utilize that

that type of mindset as well when you're doing technical analysis, Elliott Wave, other things? I think it's just around momentum. How do I use momentum? How do you define it? Where is it right? Where is it, and most importantly, where is it wrong? I think math fits into that framework and you can use things in Bloomberg to help you do that where momentum is failing. I think that's the key thing.

What I try to always understand is where is this wrong? You know, we try to understand where is the market telling you, telling me that we're not doing what we should be doing. Yeah, I love that. OK, so I so I know your process fairly well. I'm sure it's changed in the three or four years we haven't worked together, but maybe just kind of at a high level, talk about.

Talk about the inputs that you use in your process. And then, you know, Tyler and I are going to notice ones that you don't mention. And maybe we'll ask you about, like, why isn't such and such in your process? Because that'll be helpful to understand as well. But just at a high level, get us started. How do you think about the markets? What are your inputs to your research process? So there's technically and then there's fundamentally. What do I look at? Technically, I think 75% of my work is all about Elliott.

I cannot look at a chart anymore without seeing whether we are in a correction or trend. That is the beauty, I think, of Elliott, if you can really get a handle on it, it really buckets the market into one of two worlds, which everybody wants to know, are we trending or are we correcting? I get that sense and you can get some framework around that question. In addition to that, the balance is I have learned to mark,

I rely on formations because I care all about targets. I care about market profile and momentum, as I said, as well as positioning and sentiment, and most importantly, breadth of signal in all of that. Is there a theme going on? Fundamentally, I focus on macro. I care about the cycle. I care about inflation. I care about, most importantly, central banks,

And around all of that, what is the market expecting out of all of this data? Where is it? What do people expect it's going to be? And how much is it priced? Because oftentimes the market's prices in seven high or four cuts. And where is the economic data in that? And where are the data surprise indices around that? Yeah. Yeah. You know, the...

The Prector book on Elliott Wave, I don't personally use Elliott Wave because, as you know, it's a very refined, very, you know, there's a lot of knowledge and process there.

involved in that process that that such that where i'm looking at 8 000 securities around the globe it's extremely hard for me to do elliott wave on 8 000 securities um but that aside that book that elliott wave book from prector is one of the best books ever written on the market because it has such incredible uh insights about the way markets behave and just the simple structure of the five wave

impulse move and the attitudes and personalities of the markets in each of those waves and how they change and how you can just look at how the five wave is unfolding to get a sense for where you are in the cycle and things like that. I highly recommend, as I'm sure you would as well, Brian, that people read that book because it really is like a hidden gem in that regard. Right.

I agree with everything you just said. I do think that people generally see it as more qualitative, so it is more black box. It is not structured like if you have moving average signals, where it is just very mathematical. It is just either on or it is off. There is an interpretation to Elliott. That is the challenge of Elliott.

The thing is, for me, it just makes a lot of sense to me. I found over time, it really just helped me bucket, as I said previously, how to bucket, are we correcting or are we trending? Because I think if you get that right,

It just saves you so much. It saves you from losing money. I like to say, everyone knows how to make money. Nobody knows how to lose money. Meaning that they don't know how to stop the losses. I think Elliot helps me in that regard. Brian, you mentioned market profile. In your process, is it working through multiple securities in a...

in a different kind of chart and then adding in the next piece is there an order uh or step through that you walked through on that mosaic so what i get from market profile and what i try to get through all of this all of the disciplines i look on is are um

targets, and breakout points. So that's where it folds in. And where it may say that I'm wrong in how I'm thinking about the market. And that's consistent with DeMarc, market profile, formations,

And even Elliot, you don't really know you're in a five-way sequence until you get through equality. You could be in a correction, but you don't really know. So I feel like it just folds in nicely around levels of breakout and range and targets, which is all I care about. Where Elliot Wave is very rules-based,

There's a lot of like,

hard and fast rules that are kind of that need to be adhered to have to have a proper count it gives the impression that it is very formulaic and very uh systematic but but what you know watching you do it for 13 years at wellington i i had i changed my my appreciation for what it what it's about because i've seen you have alternate accounts and have different different potential interpretations in a in a style that seems to be very formulaic and formula driven in rules based

What I came to appreciate is that there's actually a lot more room for interpretation in Elliott Wave than most people appreciate. Can you talk about that a little bit? Yeah, so I always have a core view and I have a schematic. Actually, all my charts have schematics in them, like lines on what do I think the sequence is going to be. And then I have in a grayed out schematic, what's the alternate count and what triggers that?

And it's typically around price structure and levels. But when you fold in to what's going on with formations and market profile and even momentum,

When you start failing to follow through, that's a signal. When you're failing to follow through equality, you got divergences and you got the Mark IX spell. It puts me on alert that maybe that grayed out schematic is actually in play. I'm always worried about being wrong, but I'm always on guard about where

my biases are keeping me blind. Yeah. I think what you're touching on, Brian, is super, super important. So maybe we can spend a couple minutes, a minute or so on it. But there's this impulse or like pressure to almost forecast in this business. And I think

It's almost unavoidable that you can't forecast. But it seems like what you're referring to is not so much forecasting, but it's having a set of expectations based on the in-depth research that you've done and then having ways to qualify and identify when your expectations are not being met.

So that you can see that the alternative is unfolding. One of my boss at my first boss, actually, Joel Marver, used to say when what you expect to happen isn't happening, the opposite is happening. And so it's about, yes, you have to have an expectation, but you also have to be able to recognize when those plans, when those expectations not being met and have a plan for that as well. Is that the right way to kind of phrase what you're saying? Exactly right. And also go into it knowing that.

Many of the successful people are wrong 40%, 50% of the time. It's a question about how do you lose money?

How do you, you know, and that's an alarmist, it can be interpreted as an alarmist statement, but it's, you know, riding a trend is so easy, right? I mean, it's just like holding on, right? But when you, to avoid getting chopped around, avoid between, you know,

Overstaying your welcome for the wrong reasons. Actually, there's no good reason for overstaying your welcome, but it's really just about guarding against when I can be wrong. - And knowing when you're wrong. - Knowing. And I shift to neutral. People say, "Well, you're getting out. Are you bearish now? Do you sell it now if you abolished previously?"

I'm very happy to go to neutral. I'm very happy to say, "I don't know." I'm very happy saying, "I need product. I need definition. I need time." But to your point, there's a lot of pressure to be predictive and have an opinion every moment, every day of like, how far are we going? Where do you buy them? How much should I buy? It's more complicated than that.

You know, we have, we're speaking with one of the premier Elliottitians in the business today who also happens to be a DeMarc fan as well. And in DeMarc, there's this, I don't want to get too far into the weeds, but in DeMarc, there's this TD wave, which is a very systematic expression of alternative, I guess, expression of Elliott wave. I'm curious what your thoughts on the TD wave. Do you use it? Is it helpful?

That's a great question. I'm aware of it. The reason why I'm more aware of it is only for one reason, Jason Pearl, who wrote a book on DeMarc, and actually, I spoke in two, three years, he uses it. He uses it to great success. I think he is the best DeMarc person out there.

Right. Agreed. Yeah, he's made he made some phenomenal calls over the years. And I don't necessarily agree with DeMarc Waves because

they violate the core of Elliot you know you could have a two-way below well you could have a four-way below the top of wave two which to me that's not a five-way structure that's why I have a correction right but you know I'm not going to argue with success so I I pay attention to it I pay attention to what his counts are I don't try to make my accounts I I turn it on on my screens but

I pay attention to what Jason says on that DeMarc setup, but I would never invest on it. Yeah, exactly. I would never make a recommendation on it, but I pay attention to it. Right, right.

You know, at our 50th anniversary symposium in New York, Peter Borish told a story about some traders who were net long and levered long going into the 87 crash. And by the end of the day, had reversed their position so dramatically and gotten short that they walked away profitable.

That's great for traders and independent money managers. Can you talk a little bit about how you deal with that in large pools of institutional capital? You can't change your mind very quickly. So do you adjust the timeframe of your analysis or do you, how do you approach that? Well, I approach it. So in that instance, if I was sitting on a trading desk and I could execute my trades, I completely agree with that premise where you can actually do

reversed and engage for low with tight stops. But in the world of Wellington, the timeframe is just too great for that, and the positions are just too big for that. Which gets to, I think, another point is always knowing

What are you in the markets for? What is one's timeframe? I talk to people across the firm, not just in the global bond team, but in commodities and equities and FX. And when people ask me about something, my first question is, what's your timeframe? Are you talking about a week, three months? How much volume are you willing to absorb to make X? And then I can say, okay, if

I think if you're going to invest in this or short this, I think this is where you want to do it. And this is where your stop is. And this is where I think you get out. And that would be a totally different strategy for someone else. Well, it's a totally different timeframe. So I think that's the best way to answer your question. Right. Strong convictions loosely held is a good maxim to live by or trade by, but you got to extend your time horizon to the objective that you have.

The follow up to that, within the fixed income world, there are very different behaviors around high yield or the short end of the curve. Certainly, this recent cycle, since we bottomed out in 2020, has been much more volatile than the prior 40 years. In all of your experience, has your process changed at all in the changing space of fixed income or markets globally? Yeah.

When I develop strategies in fixed income, I'm talking about outright duration, whether yields are going up or going down. At the yield curve, I look at that, and I look at cross-country spreads, US versus Germany, and two is US versus UK, and five. I do look at credit spreads more as a notion of risk appetite.

But the vow of last number of years really hasn't changed my approach in terms of looking at charts and coming up with targets, what's meaningful, what's a break, what's the objectives, where is it wrong? What has changed is I'm much more conscious of looking at other markets for insight. So for example,

I look at volatility a lot. I look at the three-month option, swap option, three-month option on the third year. Because if the world is still in a carry trade, it's on what people are risk-seeking and they're buying high-risk currencies versus low-yielding currencies, high-yielding currencies versus low-yielding currencies.

That's fine as long as vol is stable. Sometimes I get insights on when you have intraday market moves and I'm looking for an opportunity to advocate for a certain position at a certain period of time that I've been waiting for.

we're in a risk-off phase but while it's still stable i'd be more willing to want to buy into that risk-off weakness for a risk-seeking strategy so that's really what's changed for me the other thing that's changed for me to get into the weeds of elliott

One thing I noticed from 2008 and also from 2020, there's this notion of corrections in Elliott, where typically when you have to say the market's bottom that we're going up, you finish a sequence.

There's really four types of corrections. You could do two moves down at equal distance, a normal correction, you go down 10 points, up five, and then down 10 again, and then you re-engage higher. Or you can just go sideways. You go down five, up five, down five, and then re-engage higher. Or you could triangulate. You could just go into a little triangle. If you think of the bottom of the market as the bottom of wave one,

when you have a correction, sometimes we've had what they call irregular Bs, which the correction is actually below beginning of wave one. That's happened so much more frequently since 2008 and since 2020. And it's mostly happened in rising markets where

The market peaks, you have a sell-off and actually have a slightly higher high. Actually, that's part of a correction that was still in play where you have another low, so it's like an irregular B high.

So like an expanded flatter. Yeah. So the idea is that the market's so strong that it's having trouble correcting, like really getting into a full correction. And I think the number of irregular Bs has mushroomed since 2008.

And also, at 2020. And it might have to do with really strong markets, a lot of liquidity. So, you know, where some people say, you know, you have a finished sequence up and you have a setback and they see a new high, they go, okay, we're reengaging.

you know i i really you know that's where i i put on my thinking cap is this an irregular bay one of the signs that this is a regular bay so that's one thing that's really jumped out since uh the volatility of last year much of those irregular days yeah thank you i think the um the conversation that we're kind of like touching around is is

is the need critical need to be able to identify and distinguish whether you're trending or consolidating, but not only that, but also mixing that into three, two or three different timeframes, right? Because you could be trending in one consolidating and another. So, um,

I guess I'd ask two questions. One, when you're putting these different inputs of your process to work, how do you pull them together to distinguish whether you're trending or consolidating? And then the follow-on to that would be once you've identified that, how do you change your behavior depending on whether you're trending or not? Yeah, great question. So it's always starting with timeframe. What is this strategy for that timeframe?

And within that framework, what I try to do is I try to give what is the position size on a minus five to plus five? Where am I at a level for the big picture? Where am I for the medium term? And where am I for the short term? And short term defined roughly

Short term could be a week. Medium term could be a few weeks to three to four weeks. Longer term could be anywhere between a month, three months to years. A perfect example is what's going on in race right now, which we can get into a little later. I try to put position size around the strategy for the relative timeframe.

Within the timeframe, I could be long-term bullish, plus two, plus three, going to absorb X because I'm willing to make Y. It could be like four to one, five to one. In the near term, the people who want to actually be short, there's a size that I'd be willing to tactically be short against that position.

And that could be another index, it could be another increment, it could be I could have a long-term position too, but really trade the five-year around that big position. Does that make sense? Yeah. So if you're longer-term bullish, meaning your expectations are that in the next coming months, the particular asset class is going to resolve higher,

but you're starting to get shorter term indications. And I'm speaking more for this as it relates to your specific situation where you're advising billions of dollars in assets, where short term is important for some people, but for some people that are more

that are how do you convey to them the meaning of that short term tactical caution that you might have what is it just like prize you're buying or don't don't don't. Don't get too negative when this on when this when this negative price action unfolds don't get too negative because the long term still bullish how do you how do you frame all that. I try to again use that minus five plus five I'd say I reduce it. Yeah because I think we're going to go down to X. So if you don't care about that volatility.

Stay where you are. If you care about that volatility, reduce. Some people are in that for the long term. The perfect example is really what's going on in rates right now. Can we talk about that? Yeah, let's do that. Let's dive right in. And before I talk about predictions and why not, I just want to put a disclaimer.

that any of my views, my market price targets are mine and mine alone. And these strategies may or may not be part of any client portfolios managed by Wellington Management Company. Yeah, fair enough. Thanks for doing that.

The big thing about interest rates is longer term, I think we'll go-- with US 10-year yields, I think we're going up to 70%, longer term. You also had a beautiful break of the long-term channel breaking above 30-year downtrend, I think it was back in March 2022.

That signals, I think it was 575. The thing is, from that 31 basis point low in 2020, I actually thought we finished a five-way sequence into 2023. That means correction. Now we're in a correction. We went up roughly 500 basis points. It took us almost four years. We should consolidate. We should back and fill.

Now, that back and fill, the first decline we had from October 2023 down to the December 2023 low, that was 125 basis points. That's a huge move in managing money for anyone. Very few people can absorb that, want to absorb that, even though I think we're going up to 7% or 8%.

So the thing is, okay, so we went down from 5% to actually 378, and then we started re-engaging higher. It's been my view that this engagement higher is the proverbial B wave. The first move down from October to December was an A wave. We're doing a B wave up. Maybe we're triangulating, but we're doing a B wave up. We should peak somewhere around, I thought we peaked somewhere around 360, 365. We got to 373. I'm sorry. Hold on. What we...

We went from 5% to 378, and we actually went up to 473. I actually think we're going to peak somewhere around 450 to 460. We went a little bit through it, and now we're back down to 420. Are we engaging for that ideal level of getting back to somewhere around 350, sub-378, or are we just going to re-engage higher now? Big question. What makes that question

very challenging right here, right now. From 473, we actually had two moves down at equal distance to 420. We had an equality trade. At the equality trade,

It's a really tough bet to bet for 378 and it's a tough bet to bet for 7. It's just like reducing position size here. I favor going back down to 378 to 350. I need more from the market to tell me we're engaged for that. When you look across markets, it's the same with the US two-year note, the different quality trade down. If you look at UK two-year notes, UK five-year swap, UK 10-year yield,

Same thing, we're at the bottom of the range in those markets. So they all, when we did the equality trade down, even though I think we're supposed to continue, this is a pause point. So this gets into your point about how do you manage the trend versus the short term? And right now, I think the--

I would say weeks, months, we're supposed to get down to 350 to 375. Quartage years, I think we're supposed to get up to seven or eight. I wouldn't say quarters, I would say years supposed to get up to seven or eight. The question is, what happens now in the near term? It's a tough trade for me right here. I favor lower, I just don't have enough to say we're engaging lower.

Yeah, maybe another way to think about it, too, is if you're thinking maybe 370 or so is in the cards before we head higher, I think it's probably fair to say that that's your outlook unless we take out some level up above, which would indicate that your alternative count, that equality trade is engaging. So what would be the level on the upside that if we got above there, you would negate the 370 call?

I think we get above 360. The top of A, which is 473, is the clear stop. The thing is, we start getting above 400,

47, I start getting uncomfortable. But that B wave high of 463, we take that out. We're probably going to do, if you look at the chart, you can draw a channel down. It's a beautiful down channel. That channel is roughly 40 basis points. You get above 463, we're going to go to 503. We're going to test the high. It could still be a B wave at 473. We could go right back down to...

420 again yeah right because i don't believe the structure off of the december low is trend like i think it's corrective so interesting you know so we can get above 463 but i don't think we're in flight for seven or eight i could be wrong but that's my lane yeah so this this is um the difficulty that absolutely surfaces and actually managing money where you're you you can identify that you're

you know, at least you're not trending, at least in the timeframe we're speaking to. The question then becomes, what do you do? How do you change your behavior in a portfolio when you recognize that you're not trending? And so therefore it gets a lot more dicey. And we have this sort of, it's almost like on your scale of plus five to minus five in this timeframe, maybe it sounds like maybe we're at

Zero. So in this moment, where do you take action? What do you advise at this point? Not to our listeners, but how do you advise your cohorts at Wellington through these kinds of environments? So for the people that care about 25 to 50 basis points, I went from a minus three to a minus one here.

I'm trying to stay with what I think is going to happen. I'm willing to absorb getting up to 431, 435, maybe 440. Then if we actually take out 418 on the downside after doing that, I'd make it an immediate minus three. For people that just want to care about 7% or 8%,

In their mind, we're at 430 right now. I think in best case, we're going to get down to 350. So we can go down 80 basis points. But from 430, we can go up 270. I think this is a great place to sell 320 puts, 325 puts. Mm-hmm.

You know, yeah. Now I know, as you said earlier, that when you're looking at other asset classes, it's not just what's happening in that asset class, but it's sort of a holistic view and observing how all these things are playing out together. So.

Obviously, if rates go to 7% or 8% in the next year or two years, three years, et cetera, how do you see that affecting other asset classes? I'm thinking obviously equities is the big one, but is that coincident with a run higher in oil and copper and base metals and that kind of thing? Or how do you see that all playing out? So my first blush is it should be good for the dollar. And the caveat is if we're going up to 7% from here, the question is why are we going up? Is growth so strong?

right, and inflation is sticky, that we're just engaged for that and the rest of the world is pulling us up, it doesn't look like what's happening just yet. If that was the case, if it was just a pure strong growth and inflation is sticky,

we may actually have a risk-seeking world, theoretically, just growth is good. Growth can be great for stocks in a higher rate environment. If we go up in rates, because the deficit is exploding, which it very well do, and inflation is accelerating,

I don't think that's a good world for credit spreads nor stocks. So the question is, we're going up to seven. The question is, why are we going up? Exactly. Right? So, you know. Is it 1950s interest rate rise or 1970s interest rate rise? So over the years, it seems to me, because I'm just thinking that if the rates are going higher, the dollar is going higher, in perhaps not so recent history, but over the past, say, 20 years,

You've typically seen the dollar being inversely correlated with commodities, particularly oil. Is that something that you see as holding firm and that if we have a strong dollar, we have lower oil? Or are you seeing oil go higher with the 10-year Treasury yield reflecting that sort of base inflation? And then if so, then how is it that the dollar and oil break apart from their typical relationship of being inversely correlated?

What was interesting, I just have a couple of comments. One is, I think oil and gasoline are highly correlated to rates. I think rates coming down because we're in Goldilocks, you have inflation coming down, we're not going to recession, the dollar can go down in that world. Because it's a good world, it's re-seeking, the discount factor goes down, the Fed's not going to

High dramatically, so that's a good risk-seeking world and the dollar goes down. The pebble in the shoe here is that the US is one of the biggest oil exporters. Rising energy is great for the dollar because everything's paid in dollars and we're a big exporter. I see the relationship between oil and rates more than I see it with

uh with the dollar right and so the dominant less the dominant less likely link to be broken is between crude and rates as opposed to crude in the doll and yeah and the dollar yeah and actually if you just look at crude i mean you know the dollar the dollar has basically been arranged from if you look at dollar index versus g10 right yeah we've basically been trading between

like 130 and 145 since February of 2023. Oil has been trading between, friends, 70 and 100 since October 2022. They are range bound, but there is a stronger correlation, I think, between immediate movements between oil and rates.

And that can impact the dollar depending on the phase we're in about risk-seeking or not risk-seeking, or risk-off, risk-on. Right. If the scenario is that going forward, we do end up with a good growth-type environment where it's just global growth, and for that reason, rates go higher, and it's a good reason, is that a scenario that you think where –

where non-US equity markets can start to outperform because growth is starting to spread out around the world and maybe value starts to outperform growth and these relationships that have been so dominant for like the last 10, 15 years begin to break down because the world is starting to normalize? Possibly. I'm getting a little bit out of my world here on that, David, to be honest. I do think there's other factors whether it's just good growth or not.

What's happening to inflation? Is productivity high and inflation staying low, we're getting growth? That's a risk-seeking world. People are going to buy the Mexican peso, they're going to buy Turkish stocks, they're going to buy risk-seeking assets, and with it along US stocks. If that's not the world, it becomes more complicated, I think.

I've got one question for you, Brian. With the exceptional, brilliant minds that you get to work with, do the economists seek out information from your technical point of view to corroborate or maybe look for disconnects with some of what the economic indicators are telling them? We sometimes look for where are there synergies, where are there conformations, right? And if there's

If confirmation is lacking, it doesn't change their view. But I have found, not statistically, but my experience in working with the great economists that we have on the team is that when we're aligned,

the hit ratio is higher. So I do think when you layer in their insights about the cycle and the central banks and the data upcoming and the expectations around that, and it winds up with my charts, I think it's a strong story. Yeah.

And to your point, you can take a lot of actions knowing that 10-year yields might move to 7%, but the why of why they're moving also colors the actions you need to take as an investor. And the other thing is timeframes. Like my timeframe, having an opinion of a strategy might be different than theirs. Right. So we don't always have to align. I just found that when we do align both in timeframe and direction, we tend to be...

uh pretty good hit ratio yeah yeah um one of your um your inputs brian you had mentioned was position and sentiment positioning and sentiment so can you speak to that a little bit like how what are you seeing on that front these days across the asset classes you know so what i try to look at is um the uh um the cftc data for um the speculators you know and um

I think that's a simplistic way of looking at it. So it's more of a mosaic input. It's not really actionable. Sure. You know, I think...

I think what's been going on in the markets, people have gone from being very same with actually CTAs, people have gone from being very short bond prices to getting more neutral. There's still some shorts out there. There's still room, I think, on positioning and sentiment to ultimately get lower yields. With equities, I think people are bullish. I think they're long, especially in the NASDAQ world.

In the dollar, I think it's just been mixed to reflect actually what the charts are doing. We're actually just going sideways. I think the sentiment all gets driven around

what's going to happen with rates? If rates start going up, people will start buying. I mean, you actually saw it the last couple of days, we went from 418 up to 430. And we just had a decent move in the dollar in the last couple of days. People are willing to go from a couple of weeks back from being big dollar shorts, thinking that we were still in a risk on world and rates were going to stay tame, and we're still in a risk-seeking environment.

And then what happened was we had the Mexican election and Mexico went up 10%. And then we had the mark on the French president's issues. And then you saw French spreads blow out and that impacted Italian spreads. What was interesting in all that was that you had these liquidity events. Stocks held in, right? Partly because vol held in.

Ball didn't explode on that. Yeah. And I guess volatility, would you put, where do you put volatility in your mosaic? Is it part of positioning and sentiment or is it something else, somewhere else? I see Ball as the anchor for risk-seeking behavior. Right. So it's descriptive. I need confirmation.

Yeah, it needs to-- I pay attention to BAL. Even when you had that issue with France, and you saw the ITRAX crossover, the high yield index, it broke above 305, which said we're going to go back to the top of the range at 350. We actually traded at 335. BAL was pretty tame in that world.

little blow-ups, but it wasn't this broad risk-off thing that won. But it did seem like the crowded positions were getting squeezed because people were long Mexico all year. They were long credit spreads all year. So it became very vulnerable. And you recently saw it, well, I don't know, two days ago, but in the video,

you know the videos come like the the the uh crowded positions i think are uh just getting shaken a bit yeah until val really kicks in i don't think we have a proper as they say in the uk a proper scoff

Right. Yeah. It's interesting because, I mean, you were obviously involved in markets during the last technology bubble, which obviously was the late 90s into early 2000. And it's just I saw this chart the other day that showed that NVIDIA's market cap is larger than Europe, the UK and Germany, their individual market caps of their entire benchmark, their stock markets.

And, you know, it's just kind of like these are risky. These are hard times because on the one hand, that's a lot. That's a very large company that's larger than three European countries in their entirety. But we also know that that trend is trend. And so trying to navigate this very murky window of time is not the first time in history, but it's also it's something we must navigate now because it's happening now. So what are your thoughts on where we are in that risk cycle that we are?

Give us your take on it. DAVID ROSENBERG: So my view is I worry about the narrowness of equities, which I think is a commonly held view, which I agree with. So maybe it's not that important if everybody believes it. But just seeing seven stocks go up, taking the market higher, where it's 193 of them,

up maybe 4% on the year or down 4% is historically a sign of extreme. So I'm very guarded. I'm very guarded. And you see, as I said, you saw the blowups in those strongly held positions of Mexico and credit spreads and other things.

strongly held or commonly held assets, I worry about we're in that with tactically a bit extreme inequities because of that.

Even fundamentally, you see that even the videos, earnings are the quarter-over-quarter earnings have actually declined from 88% to 40% to 32% to 22%. We have peak momentum in earnings, even though the number is still going up. But I think it always needs a catalyst. We can all say it's extended and it's narrowed, but

So what? It doesn't matter until you get some signal that you're in the throes of a correction. I just don't have that yet. Yeah, the catalyst, which is an important reminder to everybody. You need to have some preferably unbiased way to measure that there's been a trigger to say that the trend has entered consolidation. And so now you have to behave differently.

Obviously from here we can dive deep on a whole bunch of different assets and unfortunately we don't have the time to do that as much as I'd love to. But I would ask you maybe just to maybe wrap up, if rates go to 7 or 8%, I mean that's a huge call and I actually agree with you. I'm on record as saying the same thing, but also recognizing that consolidation likely prevails beforehand. But nonetheless, it seems like the upward bias to rates is the right call.

What do you think of the other asset classes that you monitor? What's the one that's most likely to be most impacted by rates going to 7% to 8%? And I recognize that it depends on why they go to 7% to 8%, but what's your base case for why they go there? And then in that scenario, what's the most likely impacted asset class? So I think to put some caveats around this, it's about speed too.

Yes, good point. Can you elaborate on that? If we go down, even if we map, we follow my schematic and we get down to 350 and then we start engaging higher. It took us four years to go from zero to 50, zero to 500. We went from 31 basis points to five, let's call it. We went up 500 basis points in about four years.

If we go up another-- which is the reason why I get to 8 is we want a 500 basis points. I think we set back somewhere around 350-ish. We're doing a quality trade-off. I'm not even saying we're going trend. We're just doing a quality trade-off with 350, another 500 gets to 850. We also have that formation target of 570. Somewhere in that north of 6, 8 area, I think is the magnet.

The question is, if we do that in a year and a half, that's not a good stock world. That's not a good credit world. That's wave three, right? That's kind of like an impulsive wave three type thing. Yeah. So that's a problem. If we do that over 10 years and with rates inching up,

And it's because of good growth. I think stocks are fine. I should do better, right? So I hate to say, on the one hand, on the other hand, but it really doesn't matter about the reason why we're doing it.

I think maybe – is it fair to say, right, that the speed at which we begin to accelerate to that target will determine why we're doing it – could determine why we're doing it? In other words, if we're doing it quickly, it's likely because inflation and things – it's like bad –

a bad environment. And if we do it more methodically, like Tyler mentioned earlier, where it's the 1940s and 1950s, where rates went up a lot, but the stock market did really well because it was good growth. Is that the way to think about it going forward? Yeah. If we start getting non-linear gapping, that's a different world. Yes.

I think that's a great takeaway. Nonlinear gapping higher. Yeah, yeah, yeah. That's a great, great takeaway. Investors hate uncertainty, right? If the surprise move strongly in either direction, that's what shakes confidence and that's what increases volatility, right? Yes, yes. Yeah.

Brilliant, Brian. Dave, this has been such an incredible interview. I'm looking forward to maybe grabbing some shellfish in a cold pint with you two one of these days, if I can make it over to Boston. Yeah, I love it. Brian, really appreciate all of your insights and anything that you want to leave the listeners with in terms of big spots on the horizon that you're watching out for or any other asset classes that have really been catching your eye just in the last couple of quarters.

I think what happens in two things. One is what happens with rates here in the near term, we're going to get above 463 or we're going to roll over and get down to that 350 area. I think that's going to be a big deal because that will dictate what happens in other assets. Right here, right now, I think paying attention to the relationship between the Shanghai Property Index and what's going on in industrial metals. The most recent rally we had went up 30 percent,

Then we went down recently 15%, 20%. They've been basically bottoming and peaking around the same day, both in industrial metals and the Shanghai property. I'm a little bit more bullish on the industrial metals chart as a chart, and we're actually coming at the support right here, but when I look at the Shanghai property index,

To me, that is a very bearish chart. Even though I want to advocate being-- provide strategies about getting long industrial metals, aluminum, copper, and zinc, and all that, I need to see reversals off of this area. I'm not blindly picking a bottom because it's that Shanghai property index that really has me concerned.

which is again looking at breadth of signal looking at you know correlated assets not just looking at one chart but it's that property index that is the the uh the concern for me and and being bullish on industrial metals do you see that trend existing outside of china as well looking across other property indices reits uh the real estate market here in the us or elsewhere when i look at asian pacific reads u.s reads european reads

I'm neutral. I'm a zero on them. I think you have higher rates. You can make the case to be long them, but they just really haven't kicked in yet. I've been a zero.

on those for the last couple of months. Thank you as always, Brian. Dave, Brian, looking forward to chatting with you guys real soon. Thank you very much. Hey, Brian, thanks so much for taking the time to chat with us today and special thanks to Wellington for letting you actually take some of your views outside of those hallowed walls and share them with us. It's a special treat for us and we really appreciate it. Thank you.

Fill the Gap is brought to you with support from Optima. In addition to candidate study of the official CMT curriculum, Optima provides a full video course on all of the material that candidates need to know for each level of the CMT exams. Each course is broken up into modules ranging from 15 to 45 minutes, depending on the complexity and length of the topics being covered. Learn more at Optima.com. ♪

Bye.