Spectra Markets President Brent Donnelly joined us yesterday on Talking Markets before heading off on a trip to Brazil. Our favorite shorter-term zen-master trader updated us on his thoughts on the Fed, the problem for bears, and the risk of capital flight from the US (what a time to be alive).
Thank you , , , , and many others for tuning in on Substack…!
The Fed is “Intentionally Behind the Curve”
With central banks worldwide cutting rates, Brent thinks the Fed is behind the curve but that they’re intentional about it. “They’ve explained pretty clearly why,” he said. “[They think] there’s too much uncertainty around growth, employment, and inflation, and so they’re essentially saying, ‘We’re going to wait until the last second, but then we’ll probably go big when it’s time.’”
And they’re doing this because they’re worried there’s going to be an inflation problem, Brent said. But he thinks they may start turning quite dovish in the summer and indicate 2-3 cuts. “I think I’m going to be watching the Fed speeches now really closely,” Brent said. “I stopped watching them for a while because they were just on autopilot.”
💡“I think over the next 6 months you could get 2 cuts, and then in May 2026 you get a new head of the Fed and that is going to be the most dovish person Trump can find,” Brent said.
The Problem for Bears
The challenge for bears now is that we’ve had a ton of data for May (payrolls, CPI, ISM), and “the numbers aren’t that bad,” Brent said. Bears are “waiting for the economic policy uncertainty and the tariffs flow through to the real data and it’s just not really happening yet.”
Add to that, the “beta on China or tariff headlines is basically zero now,” Brent said (or as
put it, the president is “getting diminishing returns on all of his nasty tariff tweets now.”)So, the bears are just waiting around dolefully and as of now, it’s unclear when they’ll get the really negative data. That’s not to say there’s hugely positive data either - Brent pointed out that the job market isn’t super strong - but overall, “there’s not enough weakness to justify getting really bearish in equities… So then you get positive drift, and just kind of the default, which is that stocks tend to go up when nothing’s going on.”
📝 “Stocks love to inflict pain and being bearish is a really hard position to be in unless you have a steady cascade of bad news, and we just haven’t.”
DOGE Was “Purely Cosmetic”
On Scott Bessent’s 3-3-3 plan (3% GDP growth, annual budget deficits at 3% of GDP, and domestic oil production at 3 million barrels per day), Brent said, “If you look at where we are, that’s a joke. There’s absolutely no improvement coming to the deficit. DOGE was purely cosmetic. And they’re increasing defense spending and cutting taxes in a way that’s going to increase deficits even more.”
However, Brent said, the resulting sell America trade kind of ended up being a “buy the rumor, sell the fact” deal for bonds: “We peaked in yields right when [the bill] passed.”
“Manna From Heaven” for Bitcoin and Stocks
“When they print money to create deficits, some of that money ends up in financial markets,” Brent said. “And so if you thought deficit cutting was a real thing, it’s a lot easier to envision money being sucked out of the system. But if they’re running 7% deficits with 2.5% growth and 3% inflation, it’s just so hard for stocks to go down because you’re debasing the denominator, and that’s manna from heaven for things like Bitcoin and stocks.”
The Dollar Question & Currencies Update
The big “sell America’ trade was followed by US stocks and bonds coming back, “but the dollar hasn’t really come back at all, especially against emerging markets,” Brent said.
So Brent thinks it’s “smart that people are diversifying” away from the US dollar and US equities, not least because “in the US, there’s going to be a risk of capital flight [for the next 3, 3.5 years, because policy uncertainty is so high that if you can’t trust that the rules won’t change, then you start to get scared and take your money out.”
On the FX side, he says: “The real trade has just been to do the carry trades, like short dollar Brazil, short dollar Mexico. Yields in Brazil are 14 so if you’re short dollar Brazil and it doesn’t move you make a lot of money on the carry. And then the dream scenario is that the currency appreciates.”
In other words, here’s how carry trades work, using Brazil as the example:
Brazil’s interest rates are really high: around 14%.
If you short the US dollar and go long on the Brazilian real, even if the exchange rate doesn’t change at all, you still earn money from the interest rate difference: that's called the carry.
The ideal (or "dream") scenario is if the Brazilian real actually gets stronger while you're holding it. Then you earn from both the carry and the currency move.
In short: You borrow cheap dollars, invest in high-yield currencies, and hope those currencies also rise in value.
Currency Risk Outside of Buying Currencies
If you don’t particularly want to play currencies directly but still want international exposure, you’re still likely getting currency exposure too (which I know is obvious to most people reading this but worth stating anyway!)
“If you overlay the Brazilian real against EWZ [the Brazilian ETF], they’re actually almost the same trade,” Brent said. “There are ETFs that hedge the currency risk, but those are specifically hedged FX ETFs. So if you don’t buy a hedged ETF, which most people don’t, you’re implicitly taking currency risk, even if it’s a US-dollar based ETF, [because] the ETF you bought is going to be super correlated to what that currency does.”
The International Opportunity
The “great rotation” has definitely been the theme of 2025 so far, to the point where investors would be forgiven for worrying they’ve missed it, but Brent said: “These regime shifts last years… You know, we had a regime shift of sell dollars and buy foreign assets from 2001 to 2007, basically it was a 6 year trend. So just because it’s popular after 3 months, doesn’t mean it won’t be popular for another 3 years.”
What Brent Likes Right Now
Brent, who is more of a short-term, tactical trader, has been “going with the rebirth of the AI trade” over the past couple of weeks. “NVIDIA looks like it’s almost ready to make fresh all-time highs,” he said. “NVIDIA has kind of been in a range for a year and it’s kind of grown into its valuation, but the price of the stock hasn’t moved.”
Enjoy,
Maggie
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.
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