In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill highlights key insights from our expert guests:
– Felix Zulauf: Shares his views on the global economic landscape, emphasizing Canada’s potential in the next commodity bull market and Europe’s struggles with its green energy policies and bureaucratic inefficiencies. – Sven Carlin: Discusses market psychology, the risks of low liquidity assets like Bitcoin, and the investment opportunities in overlooked sectors. – Cem Karsan: Explains the rising dominance of options trading, the interplay between index volatility and single stocks, and how these dynamics reshape markets. – EJ Antoni: Offers a sharp critique of Federal Reserve policies, insights into Argentina’s economic reforms, and thoughts on achieving fiscal responsibility in the U.S.
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Andrew Brill 0:00
Welcome to wealthions, weekly market recap. I’m your host. Andrew brill.
Andrew Brill 0:09
Felix zuloff Was a guest this week. He believes a shift to the right is good for the global economy. Felix talks about Canada’s political and economic struggles and why Europe has the wrong model when it comes to green energy, because it’s making their economy worse.
James Connor 0:27
Because you brought up trade wars and tariffs, I want to ask you about Canada, because Trump said he’s going to throw a 25% tariff on all things coming out of Canada, and this could set up a very interesting trade war between the two countries. At the same time, Canada’s GDP has been collapsing now for quite a few quarters, and the federal government just released its fall budget statement recently, and the federal deficit went from 40 billion to $62 billion what are your views on the Canadian economy. And do you think Canada can recover from what’s happening right now?
Felix Zulauf 1:05
Well, the Canadian economy is to one way, a natural resource based economy. And natural resources have been in a bear market, in a cyclical bear market. And I think that is being expressed in the trade balance, etc. If I were Canada, I would tell Trump, if you want to tax us that much, we tax water to you. You know, Canada is, is very water rich and and in the US, there are some shortages of water. And if you provide water to Canada, I haven’t checked the details, but if you provide a lot of water to the US out of Canada, and you have plenty of it up there, then I would really retaliate by saying, Okay, if you charge us high tariffs on these and that we charge you on water that you buy from us, we charge you a much higher price. So this is the way things are going. I’m quite positive for Canada for the next cycle. As I said, I think in the next cycle you will see that commodities will be dirt cheap. You will see that many of the industrialized economies have troubles. You will see that the political decision makers will come up with spending programs and infrastructure will be a major scene, including defense and things like that. You need a lot of minerals and metals and oil, etc, for all of that energy, for all of that and I think you will see that you will have a run to the base in currencies, because there will be a devaluation race, because in a protectionist environment, you try to outsmart others by going cheaper with your currency and things like that, and and all of that leads, for me to a bull market in real assets instead of growth. And therefore I think Canada will do very well in the next bull market. Not so much in this bull market, which is getting late anyway, but in the next bull market, Canada is an attractive place to be, so there’s hope. Oh, def, Oh, definitely. I mean, Canada was not really well governed under Trudeau. Trudeau is a socialist and and he has subscribed to the World Economic Forum programs and all that nonsense and and, you know, it’s time that he goes and that you have a more conservative person in power. And I think that will materialize eventually. And Canada is, is a great country. It’s very resource, resource rich. It is self sufficient, wonderful place. And I think those places in a less peaceful world that I see with lots of turmoil in the transition from the old geopolitical order to the next geopolitical order, which we do not know yet, how it will look like is an interesting and attractive place to invest in. You
James Connor 4:31
touched on Europe earlier in the discussion, and the head of the European Central Bank, Christine Lagarde, recently said she’s she expressed a lot of concerns about what’s happening with various countries within Europe, and the ECB also cut interest rates for the fourth time in 2024 but what are your views on Europe? I mean, Germany’s been in a recession now for, I think two years. We got ongoing issues in France. When you look at Europe as a whole, do you see. Any improvement in the coming year? No,
Felix Zulauf 5:02
I don’t. I think Europe has the wrong model. First of all, the mercantilist model of exporting as much as you can and importing as few as you can will not work very well in the new world that we are entering, and that that has nothing to do with Trump alone. It is just the pendulum is swinging towards nationalism and and the nationalism each country and in uncertain times, each country begins to protect its own territory and its own economy and and therefore mercantilism is very much vulnerable in such an environment. And the biggest net importer, which is the US, is the least vulnerable, because if they import less, you know, even better for them, all the others are relative losers. Europe. Has the wrong model in terms of growing via exporting. That’s one thing. They have to create more domestic demand. Then they have gone extremely green, green energy, and it has led to the highest price of electricity in the world, in Germany and places like that, and Switzerland, etc. And economic activity is energy transformed into a product, basically. So energy is an important cost factor. And if you go to such an extreme, the Green Deal, it won’t work. Let’s be clear, it won’t work. We won’t get off fossil fuels for the next 50 or 100 years. I don’t see that. And when you go to an extreme and your energy price goes up, you lose competitiveness. That’s one thing. Then the European Union is run by some not very farsighted people. Let’s say it more eloquently. They have become champions in regulation, and a lot of that regulation is nonsense, pure nonsense, and they have built huge bureaucracies with that tight regulation, high energy prices, you cannot be a winner in economic terms. You cannot. So what Europe needs is we need a swing to the right politically, and we need a program to deregulate. And it has to start in the EU. They need to become the champions, the world champions of deregulation, not world champions of regulation. And when they do that, then it will improve. Then they have to go to Russia and restart diplomatic ties and come to terms and have some of the Russian energy and commodities coming to Europe and do trade with them. I think this whole war thing is nonsense, complete nonsense. It was from the beginning and and I think that could be achieved. And then you have cheaper energy, and then you have to work longer hours. You know, just recently, I saw a statistic that Switzerland is doing very well in the European context the economy, unlike our neighbor and biggest trading partner, Germany, but our people work 200 hours more on average, than the Germans, 200 hours per year. And I think we have to get back to the point to understand that you have to earn your prosperity. It’s not God given. It doesn’t drop from the sky. You know it, it must be earned. And I think Europe has to go through a reawakening and a rejuvenation process. And I do not see any politician of the leading nomenclature there is in Europe that has a good understanding of that. I think we will probably lose one full legislation until a new generation of politicians come to power and introduce all those changes that are necessary. Look what’s happening in Argentina. I mean, we are not down where Argentina is, but how far down Argentina had to go to finally make a turn. And making the turn is very. Painful, and I have traveled very often to Argentina. I love the country, and I’m so sorry about how badly run the country was for so long, and now it’s a painful process. But you have the first fruits coming through. You have the first surplus the government has. You have inflation declining, etc, and and you know, we have to do the same at the higher level, of course. And you know it, it needs a political change, and it just changing one party to the other is not enough, because the guys that are coming to power in Germany do not have the right formula. They will lose one full legislation. So I’m not very optimistic about Europe in economic terms. Unfortunately, it hurts my heart.
James Connor 10:56
So you raise an interesting point about this whole shift to the right across the world. We first saw it in Italy. Then it went to Argentina. It just happened the in the US. It looks like it’s going to happen in Canada during their next election, sometime in 2025 Do you think this will be good for global growth? I
Felix Zulauf 11:16
think it will be eventually good for global growth. Maybe not right away, because the process of the change takes some time, and that change is painful in the first period, but eventually it is good for the longer term and and I think it will happen. You know, it’s the political game is always like that. The pendulum swings to an extreme in one direction, and then it swings back. And we have gone very extreme to the left, and it’s now beginning to swing back. And it’s not just right. I mean, Trump is not a far right person. He is far right in some in some ways, but he’s also a socialist in some other ways. You know, he’s very social toward the average Joe, etc, and he knows that he can only get elected if you care for your people and etc. And I think the same will happen in some other countries, but we are not there yet. Wealthion is
Andrew Brill 12:23
here to help you build wealth with actionable insights from our experts in money and the markets and bring you the same information the pros use if you’re concerned about your financial future. Head to wealthion.com forward slash, free for a free portfolio review with one of our registered investment advisors. Once again, That’s wealthion.com forward Slash Free. Sven Karlin was a guest on speak up with Anthony Scaramucci. He talked about market psychology and the behavioral psychology with fundamental analysis. Sven has concerns about the liquidity of Bitcoin, and compared Michael Saylor strategy to Kathy woods from 2020 he feels bitcoin is way too leveraged.
Anthony Scaramucci 13:08
Okay, so let’s talk about market psychology for a second. Okay, why then is there so much complacency in the market? Because
Sven Carlin 13:16
we are wired to see what has been going on, and simply replicating that going forward. Each Wall Street analyst that looks at the share, they look at what has been going on, and they just replicate it going forward. Nobody is talking about recession, nobody is talking about changing interest rate environment. The Fed will lower rates. Stocks keep going up 10% or more per year, 40% this year. But if you just look at history, it can go for on for another year, two years, three years, but it usually always reverts to the mean, and that is also what Warren Buffett knows. The only problem for buffet is he cannot get out today. In one day, he needs years to get out of his risky positions. So
Anthony Scaramucci 14:07
while I, while I have here, let’s talk a little bit about Bitcoin. Because I know you, you’ve expressed in your reports and in your research that you’re worried about its meteoric rise as well, and you’re also worried about the low liquidity around it. This is, uh, apropos to what Stan Drucker Miller has been saying. The reason why Bitcoin is running hard is that it’s thinly traded. If people want to own it, it’s pushing the price up a lot. But that could also happen in reverse, right? If people decide, okay, they don’t no longer want to own it. So tell us your thoughts on Bitcoin. So
Sven Carlin 14:36
Stanley Drucker Miller said that he tried to buy 20 million of Bitcoin, and he couldn’t, because he doesn’t want to buy something where he is the one pushing the price up, and then he went to sell it, and it took months just to get out on on the position he built, and then you have this low liquidity, inelastic markets, but where, with a few. Millions like MicroStrategy is doing now, you can push the price significantly and look like a genius. The same strategy was applied by Kathy Wood in the great 2020, arc ETF year, she would find these stocks that she could market all around social media with low liquidity, that’s very inelastic, and with a few billions, she could push stock prices up to 410, times, even 20 times. With some positions, we know how that story ended, and from being the next Warren Buffett Kathy Wood lost all the gains in the subsequent years to 2020 and if that trend reversed with the Bitcoin, it will go three times faster in reverse than it went up. And I think it actually happened. We already had the Bitcoin peak a few years ago, only to see it crash 60% or more later, and now we have a new story developing that’s pushing it higher.
Anthony Scaramucci 16:06
Okay, but tell me. Tell me. This is a valuation call by you. Is this a Peter Schiff call that Bitcoin is worthless and it’s just a Ponzi scheme? That’s his narrative. Or, you know, there’s, there’s Michael Saylor that sees this as digital property. Digital gold sees it as part of the future of the way we’re going to account for other assets in the world. And then there’s Peter Schiff that thinks it’s worthless. Obviously. Warren Buffett also thinks it’s worthless. He has said repeatedly he wouldn’t spend $25 on the entire Bitcoin network. And so, where are you? Those are the two extremes. Sven, so, where are you?
Sven Carlin 16:46
I am always trying to invest in producing assets. I don’t own gold, except for a coin that I inherited, because I’m trying to own businesses that will produce something over time. And gold. There is a lot of it there. It has been around for 1000s of years. But when I look at Bitcoin, I think that everyone that owns Bitcoin it is owning it because they want to see it go up in us, dollars, or in whatever other currency Bitcoin is measured in value. So I sense huge psychological, let’s say, exuberance around it, and therefore that is the driver, simply supply and demand and a lot of inflows going in. And for it to be a more serious situation, or currency, or this or that, it should be much more stable. It should be much more liquid, which it unfortunately isn’t okay.
Anthony Scaramucci 17:48
So, I mean, let me just push back a little on that, because there are now, and he’s actually created this, you can get yield on your Bitcoin. You know, you could go to certain places where you could lend the Bitcoin and you could receive interest back on the Bitcoin. Now, obviously things like block fi and Genesis and those things frankly failed doing that and they weren’t properly regulated. But are you suggesting that even if that were the case, let me make that supposition to you, let’s say I could get a four Treasury like yield on Bitcoin. Would that change your view of Bitcoin
Sven Carlin 18:27
depends if I have a Bitcoin and I’m lending it to someone, that someone is not using it to buy a tract or to, I don’t know, work a field. They are just using it to speculate that I’m paying here 5% yield on the person that wants to get 5% so that I make on the Bitcoin going higher in price. It’s not like you are investing into something if you can sell, I don’t know, corn for Bitcoin, and then you have an whole ecosystem around it. It’s just based on speculation. So, okay, you can get 5% when the other person, if bitcoin crashes, go bank, goes bankrupt, then the whole also the lender, everyone the clearing house and everyone goes bankrupt too, which is, again, not a great way to create a financial system.
Anthony Scaramucci 19:19
Okay, so let me ask you this, there were tulip bulbs that and there was a tulip mania in Holland, in the Netherlands. This lasted for many, many years, and the tulips prices went extraordinarily high, and then they crashed and busted. And, you know, tulips are still very popular in Holland, but they’re you can buy them for, you know, a fraction of what they were trading at back in the tool of mania. Is Bitcoin, another example of tulip mania.
Sven Carlin 19:49
As as long as people want to pay up for it, the price will go higher. I am scared about what happens, because if you look at all the Bitcoin holders. Dollars. And my friend is a Bitcoin DECA millionaire. He’s just pumping the price up. And when someone is just piping pumping the price up because he wants to see it go higher, then you know what happens on the reverse, the same as with the tulip mania. Because if the asset isn’t producing anything, we know the results sooner or later, unfortunately for all the people holding it. Okay,
Anthony Scaramucci 20:25
let’s switch gears for a second, and this is why, you see, I love bringing people like you on my show. I brought Peter Schiff on as well. I’m obviously a long term Bitcoin holder, but the point of this show is not for me to debate you. Sven, the point of this show is for you to articulate your wisdom and articulate your vision. So let’s, let’s take it one step further, because you have a PhD in behavioral psychology and so you you’re an interesting person because you’re applying behavioral psychology to fundamental analysis. So given that intersection, what, where do you find value today? Is it in the swab ETF that offers a dividend yield three times higher than the S, P? Is it in Asian markets? Is it just in treasuries? Hey, this thing is completely overbought here. It’s going to end in tears. Where do we go? So
Sven Carlin 21:23
if you compare fundamentals with human psychology, usually whenever something is hot, people want to flock into it, and then they overshoot the fundamental value. On the reverse side, when something stops being hot, people in panic over sell, so you can always go and look for the pockets that were hot, and now people have completely capitulated and forgotten about it. One example for is lithium. Two years ago, everyone was crazy about lithium, lithium stocks, batteries, car makers and everything like now the craziness is for AI and for for Bitcoin or crypto currencies, and for lithium, car stocks, etc, everything has already reverted, so you can go into such places. And from a behavioral perspective, you seek where there is panic, where there has been panic that’s oversold, and thus you look at such markets high
Andrew Brill 22:30
volatility. Jim Carson joined wealthy on this week. The Trump populist movement was a part of this discussion, along with volatility and dispersion, Jem made a case for predicting the market through watching options trading. He also spoke about betting on probabilities when it comes to market predictions. Now, it’s interesting. You talked about taking your care of our people here at home, and that’s one of Donald Trump’s things. He said, Look, we want to make America great again. We want to worry about our people. We want to get our people back to work, and we’re going to close our borders deport people that you know, though, that’s going to cause wages to increase, that’s going to cause prices to increase to offset that wage increase, yeah, people here might have a little bit more money to spend, but they’re going to have to spend a little bit more to get the goods that they want, all inflationary. So is that the trouble? Yeah, absolutely.
Cem Karsan 23:33
And to be clear, it’s not just Trump. I think people like to point political one way or the other. I don’t have no political preference, and I’m not defending Trump or putting him in a corner, either way, the truth is Trump, whether, no matter what people hear from him, is exactly the same as Bernie Sanders, is exactly the same as ASU, not on social issues, right? But economically, they are the same thing. They are populist, the idea of rusted out cities in middle America, which was Trump’s last inauguration speech, right, is populist. And populism, if you’re a student of political science, is the left. It’s the far left, right. And so the amazing thing is that what makes Trump brilliant is that he’s an incredible marketer, and he finds out what people want. And he goes out and he promises them what they want. It’s business, right? You find somebody, you find what your customer wants, and you sell it to him. He is he has managed to take the right the Republican Party and somehow go left of a lot of the the Democratic Party, which is in theory that the Left Party, and in doing so, he managed to keep the social issues on the right for his base of working class people, for the most part, right, while still giving them the populist left economic model, which is, which is exactly the opposite what the Republican Party has stood for for. You know. The beginning of time. And so Trump is not the cause of a lot of these things. He is a vehicle of what is a much bigger populist movement. So that the tariffs and the, you know, the immigration policy, these are, by the way, not new to Trump. These are things that have been a part of history since the beginning of time. When you go through these periods of isolationism and protectionism, it’s an it’s an old playbook. It’s not good for markets. It’s not good for GDP maxim is, sorry, a profit maximization, but it is good for rebalancing and prioritizing median outcomes, but the net result of us is inflation. The net result is a less efficient capital market machine, but maybe it’s what people want at the end of the day, because the median outcomes are more important right now, and so I guess the point here is it’s not a Trump story. This is a generational story. It’s one we’ve seen before, and it’s ironically driven by the youth and the disaffected of the last 40 years, which which is likely not to you know whether Trump is in office or Biden, or anybody else, right? It is the same outcome, and that’s why we continue to go down this path, kind of regardless the volatility
Andrew Brill 26:28
where, how does that play in and, and you’ve talked about, you know, volatility, when you look at an ETF or a specific stock, the volatility of a specific stock, but when you put that stock in conjunction with an ETF, where there’s a bunch of stocks, the ETF itself is not very volatile, but the stocks with it, some of the stocks within the ETF, could be very volatile. Yeah. So
Cem Karsan 26:53
let’s back up for a second. I want to answer that dispersion question, which is what you’re getting at, which is what’s happening to the index versus its constituents, and how that can how the market works in terms of those flows is very important. But before I get to that, I want to I want to make sure people are thinking about things the right way. Most people think about markets in two dimensions. They think about every asset having one value right, like one price that is that defines that whole asset. So if there’s a stock, it’s like the stock price is x, right? That’s very two dimensional thinking, and that’s the way markets have worked for a long time, because it’s simple and, you know, it was an easy way to express and summarize things and get people kind of interested. The reality is, an asset is much more complicated than a price, right? I could give you two exact stocks in terms of price and market cap, in terms of industry. I could put them right next to each other, not they put their names on it. You’d be like, those look like the same stock. And the reality is one might have incredible right tail, like upside risks, upside benefits, like it has this incredible upside potential, incredible fat left tail, it could be at risk of going bankrupt. At the same time, it could have incredible opportunity, and that may be very short dated may be long date. In other words, the distribution of its outcomes, the probabilities of its of what it is and what it will become that will lead to that price may be very different than, let’s say, another stock who just has a very normal distribution of outcomes, no major risk up or down, different, you know, consistent cash flow, so over time, there’s similar you would know none of that by looking at the price or the market cap, or even the industry or or anything else, even the price to earnings multiples, everything right? So what, what does tell that story is the options, the underlying options, of every asset. So if you look at a stock, and you were to peel away the price of the stock, you would see a distribution of potential probabilistic outcomes, both today, tomorrow, a month from now, a year from now, all the way out, and every note in terms of moneyness and the risk that’s expected by the market, you would have a three dimensional view on that actual asset and what it actually has, what risks it has, what realities are expressed by in that sense, in my arbitrage constraints, the price of the stock in that situation is just the expected value. It’s the Summarized value of all of that information. That information, which is the option chain, is available for almost all stocks. Now, people call these options derivatives of the asset, of the underlying asset, because they came the stock asset came first, as in terms of people’s understanding, and the options were derived off of that. What we’ve come to learn is the actual opposite is now true. Options represent a much better picture and a much more precise way to expand. Address the exact dimensions of an asset, whereas that stock price or that bond price or that commodity price, this applies for all assets, is just a summary of that full amount of data. So in a sense, asset values are simply a derived value of the richer, more precise option chain. And that’s what’s happening to markets. The reason options are being traded so much more becoming so much more dominant in markets is we are along a path where we’ve hit a network, some network effects, and a tipping point to where there’s enough volume and enough access and enough, you know, availability of options at daily expirations and all kinds of moneyness and there’s robust kind of market making and liquidity for these things that they’re becoming more dominant. They’re a superior way to bet on markets no matter what you you look at, if you’re a stock analyst and you have some information about stock, why would you go take all the risks on that stock instead of just betting on the time and price that is most probable tied to the information that you have. So in a sense, assets themselves and the asset price is a two dimensional representation, and hence a derivative of these options and the actual underlying so I think that’s an important thing to express here, and a little bit of a break of what everybody kind of thinks to understand what’s actually happening. It’s our view, and we’ve been saying this for a decade, and it continues to be true that that we are at the beginning of a very long move towards towards options and the so called derivatives becoming actually the market. And it’s still relatively early in that, in that reality, but it’s exponential, and we’re really starting to see exponential growth and adoption in this space. So once you understand that, you begin to understand that options aren’t just a tail, as people say, wagging the dog. But the point here is they are the dog, and actually they are increasingly becoming the dog in terms of volume. So once you take that perspective, now we can answer your dispersion question a little bit more clearly. The reality is that people are trading the indexes and the options on the indexes and these products, and they’re also trading these single list stocks themselves and the options on those as well, right? And most people assume that the stocks themselves are dominant, because that’s what they’ve been taught, and that an index is just an amalgamation of, let’s say the S, p5, 100 is just an amalgamation of whatever happens to the 500 stocks that are underneath the hood. But that’s not that’s only part of the story these. The actual story is actually the index itself, and the options on the index are just as dominant, if not more. And so you get this real push pull, where it’s not just the stocks driving the index, but it’s the index driving the single stocks, and not just in terms of direction, but in terms of actual volatility in all the different nodes of each one. So when you look at the S, p5, 100, it is actually the center, the biggest center, for options trading and volume in the equity space. And because you have structured products and all kinds of trading that are generally short volatility on the index level, you get situations like we’re seeing now, in which we saw this summer, and we’re increasingly seeing seeing it 2017 was actually the ideal example of it, where you have so much vol compression from from selling of options and vol products and structured products on the index, that the index itself often gets reflexively pinned that it cannot move because The dealers, the banks, the market makers all own this this optionality, this volatility, that forces compression at that level. But on these single lists, the single list stocks themselves are not where the volatility has been sold. Actually, you might have a lot of buying of options, call options, all kinds of things that are short game on that side. And so what ends up happening, and what we’ve seen is historic by quite a margin, correlation breakdowns where the index is being pinned, but idiosyncratic risk still exists at the single stock level. So you still get a stock moving in a certain direction, but because certain stock is moving in a direction and the index is pinned, by definition, something has to move the opposite direction, because the only way the index cannot move while something does move is something has to move in the opposite direction. And that ultimately is driving historic correlation breakdowns increased, counterintuitively, counterintuitively, volatility of the single list stocks, because the index is being pinned, and that breakdown is part of how markets work. It’s a much bigger picture on how flows work and what’s happening underneath the hood. Again, very different way of thinking about markets than just saying, should this stock go up because it’s worth X, or should the markets go up because of y? And much. A function of the interconnectedness of all these markets, and both the give and take between both the indexes and single stocks, as well as the options for each one and the reflexive effects. So a complicated answer to a simpler question that you have, but I think you have to really start thinking about markets differently, and not in two dimensions, but broadly in terms of their non linear optionality and how they’re all related and interconnected. So is
Andrew Brill 35:28
there a way to since the options seem to be the way the markets, or these ETFs or an individual stock is going to move, is there a way to see what action there is on an option for a stock in a particular like, if someone have more calls than there are puts, or they’re more, you know, is it going to go down? People have more puts than calls, like that would seem intuitive. Like, hey, look, if you follow that action, we can tell you where the where the stock’s going to go. So
Cem Karsan 36:00
the answer is yes, it’s not easy. If it was easy, we do that. You know, in house, there are various ways to do that, some better than others. Obviously, watching the trades and who has what, and trying to really get a sense of where that positioning is is a great start. Now you can do that on things that trade on exchange. Unfortunately, not everything trades on exchange. The majority of structured products don’t on top of that, you have to have make certain assumptions and have certain accuracy to understanding who is holding what. So not an easy exercise. If it was, everybody would do it. But yes, like you said, very important to be clear, it’s it’s not the only thing that matters, but it’s a critical part of the day to day supply and demand of markets that 99% of the world is not aware of or thinking about as nearly as much as they should be.
Andrew Brill 36:57
Can it be a lot less expensive to buy an option than it would be to buy an actual stock, not even
Cem Karsan 37:03
close. It is way cheaper if you do it, if you’re again, I want to be clear, what you are doing with options is you’re compartmentalizing a node of a probability distribution, both in time and space. So you it’s a much more precise bet. It’s a much more precise way to express a piece of it, any piece of information. The question is, what are you trying to express? If you are buying or selling a stock based on some some information that doesn’t involve all the questions about that asset, you are taking a bunch of risk and not getting a direct, precise bet for necessarily the outcome that you’re also trying to bet on. So options are a superior technology sense. They’re a superior way to express more precisely information and bets. And so the answer is, yes, you can be more precise. Now, if you’re not precise in the information you have, and all that you want to bet on is, I think this thing is going up or down, and you don’t have a why or when or how or any other information, then, okay, you just go by the two dimensional asset. But the reality is, I think we all think a little bit deeper, a little bit harder, the information that we have, or the opinions that we have are probably a lot more precise and a lot more nuanced than just up or down. And I think once you get to that nuanced bet in place, getting the risk aligned with your actual bet more precisely is much more efficient. That
Andrew Brill 38:38
was going to be my one of my questions is about seeing, did you kind of wait and see what the policies of the new administration are going to be before you act, or are you looking at options activity further out to try and determine what? Yeah, how you play it. Good
Cem Karsan 38:54
question. Again, we talked about betting and trades, right? You know, being in the stock versus the options, you don’t have to wait if you have a different opinion on the probabilities. We’re not playing in two dimensions, right? This is not just about up and down in the market at some certain time. It is about what is probabilistically underpriced versus overpriced and being very tailored and specific with those bets you’re taking. So you can make those bets now, and if they’re mispriced, there might be a great opportunity to isolate a something, something now, by the time we get there, you may have less less likely, but the point is, you can bet long and short the market over different periods based on probabilities. Now you don’t have to wait, and you’re two dimensional for that time to pass. And again, this is part of what makes options better than me betting just on up down, and, you know, waiting for that time to come
Andrew Brill 39:52
right after the Fed cut rates another quarter of a point, economist EJ and Tony wondered if the Fed is influenced by the Democratic Party. He also took a look at Argentina and their economic improvement, thinking that Doge could follow that blueprint. EJ, also talked about where our tax dollar goes and why the country pays for things it shouldn’t. So talk to me. EJ, the Fed cuts a quarter point, and all hell breaks loose because of what they envision for next year. So I know that usually I ask about the economy, but the economy seems to be strong, doesn’t it?
E.J. Antoni 40:32
Well, what’s really amazing is that none of the underlying data have actually changed over the last several meeting, except the tone of the of the minutes, the tone of Powell has completely changed at this point. It’s it’s gone 360 right? We’re right back to where we were several months ago. So essentially, they’re talking about how interest rates are going to have to be higher for longer, how inflation is sticky. We continue to see these different price pressures. Both the Treasury and the Fed are back to saying, Oh, no, these deficits are not sustainable. Blah, blah, blah, all this bad news that, frankly, we had half a year ago. I mean, the private sector, I think, knew about it long before that, but our government officials were actually openly admitting it. However, then the polls started swinging wildly in Trump’s favor in all the swing states, Kamala was fall. Was falling very far behind. And then all of a sudden, everyone’s tone shifted in terms of the Fed and the Treasury. And it was, you know, brighter days are right around the corner, and interest rate cuts are here and and not just a slow start to those cuts of a quarter percentage point like we had today, no, they came out swinging with half a percent, and now we’ve had another half a percent cumulative thereafter, so a whole percentage point down compared to where we were literally just a few months ago. And this was happening despite the fact that inflation was re accelerating, despite the fact that the jobs numbers that the Fed says they look at still looked pretty strong. So there really was no empirical reason to cut rates other than I mean, I guess you could say the empirical reason was that Kamala was down in the polls. That’s empirical. But now that Trump has won, all of a sudden, not only are we looking at fewer rate cuts, slowing the pace of rate cuts, but now we’re back to talking about higher for longer. We’re talking about persistently high inflation. We’re talking about reduced forecasts in terms of economic growth. It really is amazing how everyone’s tone, in terms of the so called economists at the Fed, has completely changed based on the election cycle. I think it’s appalling.
Andrew Brill 42:43
So really, what you’re saying is that the numbers haven’t changed at all. Inflation is still there, maybe right around 3% maybe slightly lower. It’s been that way for more than half a year, well before this rate cutting cycle started, because they wanted to get inflation down to 2% so if you want to do that, and the rates are where they are, and you’re talking about higher for longer, were they just pressured into lowering rates, and they said, Okay, let’s try this and see what happens. Then they kind of back themselves into a corner, saying, Okay, we’ll have to go a point here. It won’t be all at once, but we’re going to have to go a point, and now they’re at a point where, oh my god, inflation might rear its ugly head again, and we’re going to slow down and possibly not cut anymore. It’s
E.J. Antoni 43:32
a great question. Is the pressure that they’re feeling coming from without or within? The reason I say that is because the vast majority of Fed officials are Democrats. And look, there’s nothing wrong with that, except for the fact that it seems to be influencing their policy decisions. And that is problematic, because the Fed is supposedly independent. In reality, I think they’ve shown themselves. That’s clearly not the case, right? But they’re supposed to be politically independent, and yet over 90% of political donations from the Fed go to the Democrat Party. Again, it’s pretty clear whose side they’re on, and it hasn’t been Trump’s people. Forget that. Before COVID, the Fed spent the entirety of Trump’s terms so the first three years, increasing interest rates and selling off the balance sheet. That’s one of the reasons why the economic growth that we had in the first Trump administration, those first three years of it, at least, why it was considered by some to be so miraculous. It happened during a time when the Fed was trying to prevent it, and they were really pulling out all the stops again, both increasing interest rates and selling off the balance sheet, and now it looks like it looks like they’re poised to probably do the exact same thing, where we may not get those interest rate hikes, but we’re certainly not going to get the cuts that everyone was anticipating. The one exception to that might be within the banking system, though, you could make the argument, I think. That the reason for the recent cuts, maybe even the cut today, perhaps, did not have so much to do with politics as it did with the banking system, which is still in serious trouble. People forget that there are hundreds of billions of dollars in unrealized losses on the books of banks right now in the United States, and the reason for that is because they loaded themselves up with assets at very low interest rates. So they sold 30 year mortgages, let’s say, at two or 3% and now they’re stuck paying deposits at four and a half percent. Well, that means that you have more money going out than coming in. You have negative cash flow. That’s what caused SVB to collapse so quickly, and several other regional banks, first republic and several others, the banks are greatly helped by the reduction in interest rates, if and only if it means they can get down there like the interest rate on their liabilities, chiefly deposits. The problem is it’s not it’s not helping a whole lot, because the bond vigilantes are starting to see that things are really getting out of hand. And despite the Fed cutting interest rates, the bond vigilantes are driving up the yield on treasuries. Well, in a world where the Treasury is issuing so many T bills, which hopefully Scott Besant, the incoming Treasury Secretary, will change that, but in today’s world, it’s still Janet Yellen in charge. She’s flooding the market with T bills. Those are getting gobbled up by money market accounts, which are drawing cash out of deposits because somebody’s sitting there saying, Why am I getting nothing on my on my deposit at a bank, when I could get 5% in a money market? I mean, it makes sense. And so the banks are forced now to compete with treasuries in terms of depositors money, in order to keep their assets and their liabilities in a, you know, in a good ratio there, and so the banks are still not being helped by these interest rate cuts. So, you know, I’m not sure that that’s really what the Fed is doing, but I think it’s a legit theory. It deserves some consideration, unfortunately, though, again, at the end of the day, the Fed cutting interest rates is still not helping those banks that it might be trying to rescue. Yeah, I’ve been
Andrew Brill 47:07
reading a lot about Argentina I know that Malay met with Donald Trump in Mar a Lago, and, you know, Donald Trump was, was amazed at how he did this. And I know that it didn’t come without a lot of pain, and I know that there was a lot of spending that he cut. Is it possible for us to do the same?
E.J. Antoni 47:26
Oh, it’s definitely possible. Absolutely. The question is, just, do we have the political will to do it? I you know, and look, sunlight is the best disinfectant. What’s going on right now with with Elon Musk and Vivek Ramaswamy and Doge the Department of government efficiency, how they are shining light right now on what’s in this absolutely atrocious, so called continuing resolution that they’re trying to force through right before Christmas. This whole thing was a plan. They purposely released this right before the Christmas recess so they could threaten a government shutdown, send everyone into panic mode and say, We have to pass the bill to find out what’s in it, as Nancy Pelosi famously said, and by the way, this is not simply a function of Democrats here wanting to spend more money. This has a lot of Republican fingerprints all over it, what some people might call rhinos, Republican in name only, but whatever, it doesn’t matter at the end of the day, both people with a D and an R behind their name, both of those groups are behind this atrocity, and it is an atrocity, my goodness. Why does Congress deserve a pay raise right now when most Americans have been facing pay cuts and again, this thing is not a continuing resolution. What it is, is a new omnibus bill. If it was a continuing resolution, it would just continue current spending. Instead, it adds a ton of a ton of new spending on top of that. So look, if you want to continue inflation, if you want to continue this debt bomb, essentially that we’ve been broke, that we’ve been building, then go right ahead. If you want to change though, then I think you need to change things. So all right, so going back to your question, though, how on earth do we do it here? I think we do it. We repeat the Argentinian miracle by implementing the same kind of spending cuts, which means you can’t have things like these omnibus bills anymore. You need to start making precision surgical cuts throughout the budget. You need to for some departments, you need to just get rid of them whole cloth, because they’re not doing anything productive. They’re actually net subtractions to the economy and and again, a big thing here has to be going after waste, fraud and abuse, wherever it is, doesn’t matter. You can’t have any sacred cows anymore. For Republicans, you got to be willing to look at the defense budget. For Democrats, you got to be willing to look at entitlements. Now that doesn’t mean cutting legitimate payments here, right? It doesn’t mean that Social Security recipients are always. Sudden, not going to get their check anymore. No, getting rid of illegitimate payments is actually beneficial to legitimate Social Security beneficiaries, because it means that you’re increasing the solvency of that fund by reducing illegitimate money going out the door. So it means that for a long for a longer period of time, those social security recipients are still going to get their check. Now, don’t get me wrong, it’s a Ponzi scheme. It’s eventually going to fall apart. It can’t last forever. It’s going to need fundamental reform at some point, but that’s probably a decade off again. That’s not to say it shouldn’t be tackled. It will need to be tackled eventually, but for right now, it’s not the thing that’s breaking our back. Okay, the legitimate payments certainly aren’t. But look at the fence. It’s the exact same thing. The Pentagon has never passed an audit. I mean, how many stories do we need of them wasting $10,000 on a screwdriver before we can wake up and admit the fact that there’s a lot of illegitimate payments. There’s a lot of, frankly, money laundering going on in the Pentagon’s budget under the guise of things like foreign aid or whatever other kind of euphemism you want to use. I’m it’s an absolute joke. It’s a travesty. And again, the more you’re willing to to put the Pentagon’s budget under a microscope and get rid of all these these illegitimate payments, the more you are going to increase the amount of money available for tanks and planes, for military preparedness and the lethality of our armed forces. You know, might this hurt some some government contractors, sure, but they deserve to be hurt because they’re getting money that they shouldn’t be, and it’s taxpayer money. So
Andrew Brill 51:41
and I have seen vividx tweets about this 1500 page bill that they’ve put forward, where he said, This could be a 20 page spending bill. This doesn’t need all this. There’s farmland. There’s aid to farmland. They’re fixing the bridge that got hit by a barge. And why is that on the federal government? Why isn’t the insurance company for that barge paying for that stuff? So these are things that you and I as taxpayers pay for that we shouldn’t have to. So I get your point completely that, you know, there’s a lot there that we shouldn’t be paying for. Do you think that the incoming administration can be a little bit more fiscally responsible. You know, we’ve all heard the stories. Oh, Trump wants to spend. Trump wants to spend, but then he goes and he creates Doge to cut all this spending. So it appears that he trying to either save money someplace so he can spend it someplace else, or bring the deficit down,
E.J. Antoni 52:42
right? Yeah. So people forget that in the first Trump administration, you know, he only had control of Congress for the first two years, and during those two years, Republicans kept promising him. Congressional Republicans kept promising him. Look, we just have to get this big spending bill through, but then the next one, we promise we’re going to bring down spending. We promise we’re going to reduce the deficit. These were the promises that that were repeatedly made by clowns like Paul Ryan, and what ended up happening was Trump, Trump acquiesced and went along with it, with the understanding that the next bill would see the big reductions that he was, that he was promised, and that he himself had promised the American people, and Republicans didn’t deliver for him. Instead, they just kept sending bloated packages his way, many of which he actually fought against. But ultimately, Republicans didn’t have Congress that long. They they got shellacked in the midterms, right? And then obviously 2020 was, you know, he wasn’t even in office anymore after the 2020 election, so Trump really never had a chance to implement a lot of the policies that that he had campaigned on. And the other thing to remember is that the first Trump administration had a lot of political neophytes, certainly the first Trump campaign did, and this is something that you and I have discussed privately, the fact that the Trump transition team, the first go around, was virtually nonexistent. They didn’t even know many positions within the government that they could fire the incumbent and appoint someone else. Because, again, it was a group of outsiders. These were not swamp creatures who know how to navigate these waters so well. And this time around, it seems like I think they’ve put together a much better team, as far as I can tell. Now I’m not on the transition team. I know plenty of folks who are, to be clear, I’m not, you know, I’m not affiliated with them or anything like that, but what I can say is they seem to have incorporated many more folks who do know how to navigate DC and who are familiar with more of these government agencies so and that’s difficult, right? You’re trying to find a person who hits that trifecta of being actually conservative, which there’s not that many who. Also know how to navigate the bureaucracy, and on top of that, are loyal to the incoming President’s agenda. That’s That’s a tough sell finding someone who meets all three of those criteria, but it seems like they have found enough of those folks to fix the problem they had the first go around, which was even during those first two years when they had control of Congress, so many people within the federal government, at different different branches, I should say, at different agencies, rather, within the executive branch, were essentially fighting the Trump agenda and were stabbing the President in his back because they were a bunch of holdovers from the Obama years, and in fact, some of them were even dated all the way back to Clinton, because George W Bush didn’t remove many folks either. And so they stayed throughout the Obama years, and then stayed for the first Trump administration as well. But I’m really hoping everyone at this point has learned their lesson, and that they also are going to implement Schedule F reform, which will really allow them to just take an absolute chainsaw as well a did take a chainsaw to the federal government, particularly the executive branch, and get rid of all the bureaucrats.
Andrew Brill 56:10
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