How will populism reshape the markets? Kai Volatility’s Founder, Cem Karsan, explains the economic impact of populist leaders like Donald Trump and their demand-side policies, including tariffs, fiscal spending, and deglobalization. He joins Wealthion’s Andrew Brill to analyze how these shifts will drive inflation, challenge the Federal Reserve, and create market headwinds. Cem also breaks down key seasonal trends, such as the Santa Claus rally and re-leveraging effects in early 2025, and shares why investors should approach 2025 with caution. This in-depth discussion provides valuable insights into inflation, market cycles, and how to navigate the future of investing. Don’t miss this insightful discussion on market cycles, inflation, and the growing dominance of options trading from a true master of the trade.
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Cem Karsan 0:00
Trump is not the cause of a lot of these things. He is a vehicle of what is a much bigger populist movement. It’s an old playbook. It’s not good for markets. It’s not good for GDP maximization. Sorry, a profit maximization. But the net result of us is inflation. The net result is a less efficient capital market machine.
Andrew Brill 0:29
Welcome to wealthion. I’m your host. Andrew brill, if you need help being financially resilient, go to wealthion.com. Forward, slash, free for a free, no obligation, portfolio review. We’ll talk about analyzing the markets coming up right now,
Andrew Brill 0:47
I’d like to welcome Jem Carson to wealthion. Jem is the founder CIO and managing principal at CHI volatility advisors. He has several decades of experience and a host of the degrees from prestigious institutes of higher learning. Jim, thanks so much for joining me. Thanks for having me. Good to be here. So, Jim, I always like to start out by asking everyone what their impression is of the economy as we sit here today. Oh,
Cem Karsan 1:12
the economy is not the market. I’ll start there. So the economy actually is on relatively good footing, I would argue that we are running a very different type of economic model. We have been now for about four plus years, which is a very demand based model, right? We are, we are sending money to people. We are broadly in a period of populism, and that is creating relatively strong, historically speaking, above trend GDP growth. So the economy is good despite what people may feel, or you know, you know what may be going on in terms of sentiment markets, however, which is this is very counterintuitive. Often do very different things than the economy. And actually that can happen over decades. The last time we ran a demand side economy, we’ve been running a supply side economy here for about 40 years. The last time I ran a demand side economy was really 1968 to 1982 and that period actually, despite growing above trend in real terms, it got very counterintuitive, we had higher GDP growth in real terms than we have in the last 40 years. Despite that, the markets actually lost 70% over 14 years in real terms and went nowhere in nominal terms. So the economy is good. I think the economy will continue to be good. Unfortunately, I don’t think markets will necessarily do as well if we continue down the
Andrew Brill 2:48
path we’re on. And since, since you mentioned it, and it was one of my last questions, from 68 to 82 I think you said was the time frame markets lost value, but in those 40 years since 82 to 2022 we’ve been on a steady growth market wise, and we’ve seen really good returns. So we’re now in that
Cem Karsan 3:11
market wise. That’s exactly right. But counterintuitively, in real terms, the economy has been growing below trend. We have actually been in a very slow growth economy, but companies are making a lot of money because profit margins are at records. So very different set of things that we have to keep in our
Andrew Brill 3:28
minds. So as you look at volatility and time, the next 40 years, or the next cycle, as you would look at it, excuse me, you would think isn’t going to be good, as good as the last 40 years, is that if you look at the eight to 82 range and the 82 to 22 2022 range, that the next range we need to be a little bit worried about,
Cem Karsan 3:54
yeah. So to be clear, it’s not like 40 years and 40 years. The way these generally work is that you have longer periods of expansion and supply side economics, that’s kind of the natural state of the world is, you know, money flows to capital. Corporations are dominant, absolute power corrupts absolutely. This is the general way, you know, towards lower interest rates is historically like the way the world tends to, but the way all systems work is, is, if that gets too far, the the net effect of that is inequality. And when, when you get inequality, you get politically you get, you know, there are human beings in the system, you get periods of populism and move a move away from that. Those are usually shorter periods. They’re they’re periods of crisis. They’re periods of rebalancing, D globalization, we can get into kind of like some of the 68 to 82 and again, there are other periods prior that are similar, but those, importantly, are periods where interest rates rise or inflation are. Also becomes entrenched in secular because the demand side economic model, where you’re sending money to people, as opposed to capital, drives different outcomes. And so we’ve had secularly, not a coincidence, decreasing interest rates since 1982 which is the end of that last period, and that decreased all the way to zero in 2021 and we have since, through both fiscal spending, de globalization, protectionism, had increasing interest rates and secularly increasing inflation. And so we believe this is the beginning of this cycle. There’s lots of reasons to believe that’s the case. It’s not a this is not just looking at charts. This is a political reality. We’ve seen the left and right move left. A lot of the things that we’ve seen in these last periods are also happening, and it’s a generational issue, because at the end of the day, the voters that the people that are now becoming voters, millennials on down, are the ones who lived through the 40 years of supply side economics, and were labor essentially during that period, and have suffered the inequality the greatest. So those, those people are now voting, and they’re voting, voting in a different type of economic model, and that, that’s a critical distinction. So not 40 years percent, but I would expect some secular, secularly, increasing inflation and higher interest rates over the next 10 to 15 years from now, which would probably mark a one generation about 20 years period.
Andrew Brill 6:31
So talking about interest rates, this week, we’re embarking on another rate cut, possibly, I think that the Fed has said it looks like it’s all baked in. Another interest rate cut coming this week, but Gemma, from what you’re saying, that could be the end of this. Do you think that we do get this rate cut? And do you think that it is the end? Could we start seeing a move back up at some point next year,
Cem Karsan 7:01
to be clear, when we start talking about 20, you know, 20 year outcomes, that is not the same thing as one Fed meeting or one outcome, right? You know, the problem here is, as we go to a, you know, a demand side model, where money is being sent to people, where we’re fiscally spending money and we’re putting up borders to protect our people versus other people. We go through a period of of of not just broad de globalization, but but competition globally with other countries and other other countries, people. So globalization, corporate, corporations are global, right? They the water flows to, you know, to the lowest place. So we will source the cheapest of everything in a globalist, capitalist society. But the more we move to populism, it’s about our people, and ultimately that creates global conflict. Inflation less efficient in order to rebalance. The problem with the Fed, right is that the Fed is a capitalist supply side model. When they lower interest rates, or they do QE, that money flows to capital, by definition, that’s flowing to the people who borrow money the most or who get the most capital, and that is the people at the top, and that’s corporations. So the Fed would do that all day long, because that will keep inflation low, because those entities don’t spend, they invest while stimulate at the same time, that hits both of the feds to mandates right, what they’re not in charge of is inequality, right, and Federal Reserve policy, supplies and economics, if done long enough, creates a lot of inequality as we’ve seen, and so at the end of the day, once the government starts sending money from capital down to people, right? Corporations, which is government’s role, right? Not corporations, individuals, then we see a period where the Fed has a problem, because now their inflation, their price control mandate has to be watched, right? They have to manage that. So they can’t just stimulate monetarily while fiscal stimulus is happening at the same time that puts the Fed in a box. They have two things now that they have that are in contrast to it, that they have to manage, and that’s what we’ve been seeing, right? CPI has been stickier than people expect, particularly services. Inflation is still running close to 5% that’s four years in, right? That’s pretty crazy. And if we’re going to put tariffs up, and we’re going to also protect the border and, you know, send have a tighter immigration policy, this exact inflation, that’s a problem, which is the services inflation, the domestic inflation, not the goods inflation that we’re importing, will continue to stay hot. And that is a problem for the Federal Reserve. They cannot continue to stimulate and monetarily while fiscal stimulus is also happening. And. That will create more inflation. So at the end of the day, the Fed’s in a box. We’ve seen this now how many times we have to see it where they’ve said inflation is transitory. I think this is the this is transitory. I call it 4.0 at this point again, economy is picking back up, inflation sticky and hotter than expected again, and and that puts the Fed in a box. So the Fed will continue to do what it what it’s done, which is stimulate monetarily until inflation becomes a problem. Then they’ll have to reverse. And what we’ll see, in my estimation, is a continued steepening of the yield curve, where longer term rates continue to work their way higher while the Fed tries to stimulate in the short term, but ultimately unhinges long term inflation expectations. And I think that’s the next shoe to drop here. My personal opinion is that that you know, longer term, which we’ve been seeing, by the way, for about six months, only, will we continue to see a steepener But But importantly, underneath the hood, break evens will continue to expand and cause the Fed real concerns, real problems with being able to continue to stimulate the way they have.
Andrew Brill 11:08
Yeah, it’s interesting. You talked about, you know, 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 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 11:51
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
Andrew Brill 11:57
political preference, and
Cem Karsan 11:59
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, since 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 imgion 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 there’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 of the political party in
Andrew Brill 14:47
terms so let’s get back to the markets for a little bit. I did my homework a little bit, and you have a fascinating view of the markets with respect to volatility and time. Can you elaborate? On how you derive that and what it all means for us.
Cem Karsan 15:03
So we’ve talked macro until this moment. Right? The interesting thing is, when I started in this in cap in the capital markets, 26 years ago, at this point, I started on the floor of the Chicago Board Options Exchange as a derivatives market maker. I grew one of the biggest market making operations in the equity index world. We’re 13% of the volume of the S and p5 100 options at our peak and major player in the space. So we actually much more than macro. Even are experts in derivatives markets, options in particular, and an understanding of market liquidity and how the what I call the voting machine, or I guess what Benjamin Graham calls the voting machine, actually, you know how that works much more than the weighing machine even, which is the macro we’ve been talking about. Them both matter, right? But the reality is that the voting machine is not a function of a lot of the things we’ve talked about, like the short term, day to day, week to week, month to month. Flows of supply and demand are not a function as much as you would think about what matters in a 1020, 30 year, 40 year time frame. It’s a matter of some often structural realities of flows that are happening in time, the options market has become an increasingly large part of of markets writ large, right. And so understanding positioning and how these instruments work and how positioning affects day to day supply and demand is critical to trading and managing money on any period, in my opinion, shorter than than 345, years. So we can talk about, and I know most people more enjoy talking macro and big picture, and that will matter in the next 1015, 20 years, right? Your final outcome and destination will be in line with the weighing machine. But the path there has could be completely different. It is not a direct path. It’s often goes in the opposite direction, you know, for a long time before it actually kind of catches up and things come back in the line. And so that derivatives world is actually what we’re experts at, and those flows broadly in markets are what we’re experts at. So,
Andrew Brill 17:20
yeah, go ahead. So the volatility 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.
Cem Karsan 17:43
Yeah. So 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 them, and 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. Data may be long dated. 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, they’re 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. Up 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, and by 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 express 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, at all kinds of muddiness, 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 better 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 has a derivative of these options and the actual underlying so I think that’s an important thing to express here and 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, 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 the 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. 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 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 more, 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 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, you know, in terms of their non linear optionality and how they’re all related and interconnected.
Andrew Brill 26:21
So is there a way to since the options seem to be the way the markets or the 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 to that 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 is going to go.
Cem Karsan 26:54
So 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, 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 27:50
Can it be a lot less expensive to buy an option than it would be to buy an actual stock?
Cem Karsan 27:55
Not even 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, 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.
Andrew Brill 29:32
So what is your options and volatility telling us about the end of this year and the beginning, I guess, for next year as well, in the market. So,
Cem Karsan 29:43
yeah, absolutely. So the end of the year is a very important period when we think about things like seasonality. What most people think is that that’s a magical construct. They’ve seen some chart trend or historic data that tells them that this is a good time on stocks. But the why is largely. Lost on most people. This is why we put names on it, like the Santa Claus effect. It’s like a magical thing. We don’t understand why it is. Well, the truth is, there are clear explanations and reasons for these things. And the options markets are a big part of it. They’re not the only part of it, but there are definitely a big part of this. Most of the derivatives, options, structured products, all kinds of multi dimensional positioning that is time sensitive to assets comes at the end of the year. These leaps and these options are listed for years, and people make that multi year bets on these things. And that positioning is is not only has always been quite large, but it’s been, it’s been increasing dramatically within the last several years, as as we kind of hit, as I mentioned, this tipping point where people are getting more involved with these products, that positioning structurally, because the world is long assets, but by definition, right? They’re long. You know, they work a job, you own a company, you don’t generally, overwhelmingly go short everything, because that’s the world we live in. Options tend to be more long put for people and short call it’s an insurance contract. People are getting convexity to their portfolios, generally speaking, because of that, the dealers and the warehouse the dealers. Knows that a warehousing risk. When I say dealers, I mean the banks, the market makers, hedge funds that are willing to do the carry trade, to sell the higher vol, to buy the lower vol. Essentially, the ones that are profiting over off of this, this higher downside versus upside, are short stock and other things against it. And as time passes these this skew and this downside rolls off, and that leads to buying of options, buying of the underlying asset, or upward push in markets, and a compression of volatility. That’s the general way these things work. And at the end of the year, that positioning is the biggest So, and we have a lot of holidays, so time kind of accelerates during these periods, there’s less volume, there’s less liquidity to balance against it. So you tend to get this real positive structural flows that come into market, particular markets, particularly as you approach holidays in the end of the year, that are very, very positive. That is what leads to one of the bigger parts that leads to this positive structural support during this period. On top of that, the end of the year, slash, beginning of the year is a time of re leveraging. Most managers. People think in terms of individuals. It’s very, kind of simplistic, like, Oh, if the market’s up, I’m just have more money, maybe I’ll sell some to take down my risk. That’s not actually how the world works for the most part, the big institutional flows, banks, everything else is built on leverage. If, if I, if I have one chair of s, p, but I borrow, I’ve borrowed a margin. Or the way the trade is structured, I have four times the exposure, which is every bank has leveraged 10x every most hedge funds are are more than that. If the asset goes up right, in order to stay risk consistent, I now have more money, right? I’ve made a ton of money in terms of collateral. I have more collateral, much like a real estate deal. I have to now go buy more real estate or more of the market in order to stay risk balanced, in order to still have the projections of making if the market goes up 10% more of making the same amount per amount of actual asset. It’s a function of leverage, and because of the because of that fact, there is a re leveraging effect at the end of the year, where it happens throughout the year. As assets go up, it generally tends to happen the beginning of the month, the beginning of the quarter, but the biggest time for reinvestment and re leveraging effects are January 1, because you have the new launching of funds and new reinvestment that happens for new products. That reality when the markets are up right, like they are almost 30% is dramatic. Equity markets in the US are about $50 trillion globally, about $100 trillion the market’s up 30% that’s $30 trillion of new collateral, right? $30 trillion of new assets, new money. And so the leverage redeployment on that money is, is 30, you know, dramatic. It’s $30 trillion of re leveraging. This is in a market, by the way, that average daily net volume that pushes markets one direction another is about, you know, 75 billion. So, you know, incredible amount of re leveraging. And so end of the year, beginning of the year, people know this, so they get in front of it, and they’re long going into it, so there’s enough liquidity to absorb some of this often, but, but in a world where you now have historic, you know, flows coming from the derivative side during this period, and a year that the market’s already up 30% and you have massive now re leveraging effects coming in, it’s a hard period to bet against, right? You should be very much going. Going with the flow. No pun intended. You know, this is, this is a very structurally positive period. Now doesn’t mean that we’re going up for the next year, right? These things can work the opposite way too. Once you know, we we get past the beginning of the year, and that’s part of why Santa Claus those two last two last two weeks of the year and the first two weeks of the year, which is called the January Effect, together, are the most positive month by far of any other period of the year, because that reinvestment happens not just on the first day of the year, but also, really throughout the first week or so. And then once those flows are off the table, they’re gone. That re leveraging has happened. And so markets become more vulnerable as you get to the back half of January and then February, and this is a consistent trend. It’s very exaggerated even in big up years and periods of big structured product issuance. So that’s the flows we know. And you can watch what’s happening in the markets as a function of this too. And given how positive those flows are you can watch as almost like a litmus test, what’s what’s positioning like, how far ahead of these are people? How far have we got to get a sense of what might come afterwards? And so late January, February is often a mirror image, like a reflected, opposite reflection, right of of what happened in the period before it, and why you can get significant volatility as you get into late January and then February in particular. So given that you know that’s that’s been our view, we’ve been pretty spot on throughout the year with the these flows and where things are going. But the early, early January 13 or so, which is the Monday of January, OPEX, would be a good time to start turning significantly more conservative, if not bearish, and as we move into January, February, and this is not just a seasonal reality, it’s particularly pronounced again, given both the structured product volatility positioning and the dramatic up year that we’re seeing in stocks. So you
Andrew Brill 36:56
think that there’s a bearish situation coming into next year at some point into
Cem Karsan 37:02
the early months of next year, yes, I would say through, from you know, again positive here, into the end of the year. I want to be clear, and even early into next year again, when that line actually gets drawn. Is it hard to say, but January 13 would probably be my most likely if I was to circle it. And then there’s another period of February near OPEX that becomes another potential period for a decline. But I would be, we’ve been bullish all year, to be clear and very productively bullish. But that really we will. We were aggressively turning on that as we get into January and February, and I would be very cautious, you know, as we until we get to march, and then in March, based on what’s happened, we’ll be, you know, potentially looking at opportunities, either to buy the dip or become more proactive with markets based on what we see from both a Weighing effect, weighing model right based on what’s happening in the new administration, what we’re seeing, as well as based on what markets have done and what’s going on with the flows at that juncture that was
Andrew Brill 38:09
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.
Cem Karsan 38:24
Good 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, you know, 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 medding, betting just on up, down, and, you know, waiting for that time to come.
Andrew Brill 39:23
This has been a fabulous education. I hope you don’t mind me calling you professor gem, because that’s what it’s been. It’s been like a master class in in, you know, how to actually look at the market. So I appreciate that very much.
Cem Karsan 39:37
Well, kind words. Thank you. I think, I think they say 10,000 hours makes you an expert. I did the calculation. I think we’re up to almost 300,000 so at some point you’re speaking a different language. But I think just like anything, it’s you dig in and you learn as you go. So happy to educate and be part of this. Thank you,
Andrew Brill 39:57
Jim. Where can we find your research? Or find you on social media so we can follow you along the way. Yeah,
Cem Karsan 40:04
so we’re on X or Twitter at Jam Jam underscore croissant. It’s a play on my name, but you can also find us both@chivolatility.com and Chi wealth.com we have a family of hedge funds that are non correlated, and also hedge instruments, as well as a wealth advisory offering. And feel free to reach out there. You can sign up there on those websites for email and information from us, but always, always good to be involved here. And feel free to reach out any of those spots. Well, Jim,
Andrew Brill 40:44
thank you so much for joining me. I want to wish you a happy holiday season, and we’ll talk again very soon.
Cem Karsan 40:51
Happy holidays. Take care. Thank
Andrew Brill 40:52
you so much for watching our discussion here on wealthion with Jim Carson. If you would like help being financially resilient, please head over to wealthion.com forward slash free for a free no obligation, financial review. And of course, if you could like and subscribe to the channel, we greatly appreciate it. Don’t forget to hit the notification bell. So you know when we post new videos on the channel, and please do the social media thing with us. All the links are below in the description. And if you like this content and are looking for more ways to achieve long term wealth. Watch this video next till next time. Stay informed, be empowered and may your investments flourish.
