Hey trader,
Twenty-five years ago, I drove into the same office as Bill Gross and Mohamed El-Erian every single morning in Newport Beach.
Bill parked a white four-door Mercedes there.
Mohamed parked something closer to a Bentley.
They walked left into their building.
I walked right into mine.
I never worked a day beside either of them.
Yet, I’ve been listening to them ever since.
That habit has made me more money than any indicator I’ve ever put on a chart.
Today I want to explain why, and I want to show you exactly what El-Erian is saying right now about the bond market.
Smart People Make You Better
I defer to people who are smarter than me. I’ve done it my whole career.
There are a lot of people in this business who do the opposite. They look at someone smarter and they get offended.
They get intimidated. They refuse to hire them, then they disparage them behind their backs.
If you want to get rich in this business, you need people who are smarter than you. That applies to anything you do outside of trading as well.
Smart people open your eyes. They educate you and they bring you wisdom.
About 90% of the old-school guys and gals on Wall Street I simply cannot listen to. All they do is watch the tape.
They have no fundamental background at all. I call them camel jockeys. They scream at the camera about their positioning, when really they got lucky on a decade of liquidity and algorithmic dip buying.
El-Erian is the opposite of that. He’s a PhD. He was Bill Gross’s partner at PIMCO once upon a time, and he now runs AXA Rosenberg in New York.
He’s never bearish and he’s never bullish. He comes on and he states the facts, which is exactly what you need.
What He’s Saying Right Now
El-Erian says the market is in a paradigm shift.
He points to the 30-year Treasury yield at 5.27. He calls it a harbinger of a greater affordability crisis.
People want to slap mortgage rates and lending rates onto that number. He says all of that matters less than what it does to the average Joe and Jenny in America.
The bond market is telling you the affordability crisis spills into everything eventually. It has already dinged housing, which is no secret to anyone.
He says it hasn’t drawn down the restaurants yet. He also says that part is coming.
Five Percent Was Always The Norm
Here is the part that reframed my own thinking.
We’ve lived in a world where the Fed held interest rates at an absurd 1% to 2% for far too long. Go back through the history of rates and 5% is the benchmark bottom norm.
Ten years of rates below 5% is almost unthinkable. It’s so far over the top that we could run 6% or 7% for five or ten years just to take back the time we spent down at 1%.
We’re sitting right at the pivot point. El-Erian doesn’t believe we go back to four or three.
Above 5.5 is where it changes. At that level the market is telling you the economy isn’t collapsing, and that prices themselves have become prohibitive.
His number for the index over the next five to ten years is a negative 2% to 3% return.
What You Do With It
Back off the ultra bullishness. Just stop it.
I’m not telling you to go short. I’m telling you to sit down and ask what a 5%, 6%, or 7% regime does to the multiple you’re paying for a stock today.
The market right now defers completely to algorithms and the Fed. It isn’t looking at anything else.
That’s why I don’t project outcomes I want to happen. I look at the technical setup, I integrate the fundamentals, and I let probability do the rest.
The market doesn’t care about me. It’s going to do its own thing regardless.
Watch the bond market. El-Erian believes it’s the straw that breaks the camel’s back, and it hasn’t happened yet.
Smart people are worth your ear. Find them, listen to them, and let them make you better.
Professor Jeffrey Bierman
Creator of the Genesis COG System
