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Speaker 3Hank Paulson came out in April. This year on to Bloomberg out of the blue. Hadn't spoken to media in years to declare for 45 minutes that we are approaching a coming debt crisis and that we need to prepare a facility to, you know, to backstop the treasury market. So my view, it's a big call, is that something's coming sooner rather than later. You want to be start getting prepared, but also looking for when the flows like we talked about are just right, which are probably starting in January.
Speaker 4June. Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Welcoming you here for a very special discussion with Jim Carson, Jim Croissant, as he's known on X and across social media, sometimes referred to as Mr. Volatility. We're here to talk about. All sorts of things. Flows, macro, the repercussions of the most recent elections that were just held last night, as well as some brand new partnerships for his firm. Joining us is Jim Carson, but also his new partner, Noel Smith. These two great titans have recently joined forces largely around their company, Kai Asset Management. I'm going to let them both tell you what's going on there and then we'll dive into the discussion. Jim, pleasure to see you. Great. Great to be in here. Great to be back. Eventful day. Yes, very, very eventful day. And also, I guess a lot of news recently for Kai Wealth and the Kai family of investment solutions.
Speaker 3Yeah, it's exciting. We've been growing considerably less a couple of years and obviously getting to a point where we need more. A great team. Noel, who can speak kind of for himself, kind of a Vol superhero in his own right. Very fortunate to have him kind of join us as co-CIO. He's he's actually, believe it or not, got six or seven years on me in terms of all experience, and he really knows this stuff. So lucky to have him on the team, kind of both helping us get more solutions and also really think through these flows, etc.
Speaker 4Wow. No, that is high praise coming from a guy like Jim to say that you've got perhaps a superior experience there on the volatility side. Tell us a quick 60 seconds about yourself, Noel, and then we'll just jump right in.
Speaker 5Sure. I started out on the floor of the SIBO in 1996 and been trading ever since then. Really started out as a market maker on the floor. Started working with my partners out of Susquehanna, and we developed a prop trading firm and market making firm at that time with a large presence. Really, every major exchange that mattered, the SIBO, the Merck, the Board of Trade, the NYMEX, the ComEx, the Amex, kind of sort of everything. And then I launched a hedge fund about seven years ago. And then Jim and I met in Florida. We met in Florida about six years ago. And we've been kind of chatting and discussing and talking about strategy, trade philosophy. And so this has been really more the maturation of that relationship and kind of taking two ideas and two trade styles and figuring out where they're most complementary.
Speaker 4All right. Fantastic. Well, look, as I understand it, which is only partially, and look forward to learning more in this discussion, one of the things that you focus on very closely are flows, capital flows. There may be some implications, some important implications amongst flows resulting from the election that we just had. So why don't we start with flows? Then we'll jump back up to the 30,000 foot macro level. We'll bring Jim in for that. And then we'll end with getting to kind of just the practical advice, which is, hey, how does one position for the type of future that you see going forward? So if that's all right, tell us a bit about how you analyze flows and what you see going on right now in the flow space.
Speaker 5Sure. As a market maker, you're not as concerned about the story. The story is the human words that people use in order to craft a narrative around price action.
Speaker 4These are the headlines we read in the papers, right?
Speaker 5Correct. Exactly. And from a market making standpoint, you're looking at just the minutia, the really looking at where the rubber is meeting the road and where we're going is less important than how we're actually getting there. So the flows is something like if you look at Polymarket or CalSheet, not a paid sponsor. Effect of people placing money into the marketplace, irrespective of what they may want. It is an actual monetary decision. And options trading and trading writ large is kind of the same idea. It is where people are putting their money and how you can interpret that information. How can you glean something actionable for yourself and for your book out of that information? And that's basically what I'm trying to do when I'm looking at flows. The flow is the from the idea of a trade to the actual execution. You know, that money. And if we can use that information for our benefit to craft something that is also profitable, that's the point. Options are a great way to do that because options have a certain predictive nature to them because there's a forward projection, whereas stocks are a little bit more less forward. And then, you know, obviously the rest of the commodity complex and bonds and whatever else. So looking at what's going on today, you see the market up after being down big last night, a very large reversal. And you're also looking at vol come in and everything. Interest rate is kind of gone to where. Frankly, a lot of people kind of expected it to go in this kind of an environment, which is to say, you know, a blue wave.
Speaker 4OK, so first off, I guess flow analysis. Tell me if I'm thinking about this the right way, but it's sort of the old adage of don't don't listen to what people tell you. Watch what they do. Right. At the end of the day, that that's really what matters. So that's kind of what you're doing with capital flows. Ignore the headlines. Just see where the money is actually going here. So, gosh, I guess with this post election. Move here in the markets, I guess, first off, markets up big after having been down last night, as you said, why do you think all of a sudden things turned around and now the tape is green here is there expectations that things are going to be more favorable for certain assets going forward or what really is driving that reversal? Do you think?
Speaker 5Yeah, there's a few embedded questions in there. So once the first thing is, I look at volatility as volatility comes out of the market. I look at volatility as volatility comes out of the marketplace because there is now more certainty within the marketplace because the unknowns have now been transmuted into the knowns, right? I know what's going to happen. So with that, some volatility gets sucked out of the market and that creates flows that will start to support market go up. And I think that is very much to be expected. And then the sector rotation that you're seeing, like defense stocks are going down. Interest rates, sensitive stocks like home builders are going up. Some of the hyperscalers might not get the data centers that they want. So some of those stocks have been kind of. Soft, so everything is kind of rotating under the hood, kind of where you would expect it to be based on the narratives that some of these candidates have been talking about during their campaigns. So I think from that perspective, things are going to plan. And the most important part for the market going up is the ball getting sucked out, going into end of year. Traditionally, it is a bullish setup and that is people are structuring for the beginning of a new year in January and all that volatility coming out of the market as it starts to come closer in time. Because those January options that were on the market or on the books from like last year or even the year before, those are leap options. They start to decay and they start to go away. And that ball, as we approach that time, also gets sucked out, which also creates more supportive flows.
Speaker 3OK, and I'm going to jump in here real quick, Adam, just because I want to let and I want to let Noel kind of riff on this just a little bit. But one thing that Noel didn't mention, which I think is, you know, is important, is is not just ball isn't a monolith. Right. There's skew in the market. Right. Different implied volatilities at different moneyness, different out of the money in time, et cetera. Skew has been very high because people are worried and going into events generally. It's high. Right. All of the past elections, midterm or otherwise, the last 20 years have experienced high skew because people are hedging. People are concerned about the event. That's that proverbial wall of worry that people talk about very kind of qualitatively. But quantitatively, it's an actual positioning of downside insurance that people are hedging and selling upside to carry it. And that ultimately means that dealers are short put long call. And and the way it is, this is hedged by dealers, market makers like Noel and I, you know, or banks is ultimately to sell to be short stock against that carry positive trade. Right. And to manage that. And those those flows I talk a lot. a lot about Vaughn and Charm, but those, I think, play a meaningful role. Every single election for the last 20 years has seen positive flows coming out of it. Regardless, think about all the outcomes. We've had really very positive, negative outcomes. And this is one reason for these elections. Regardless, as long as there is a resolution, as long as this isn't a contested election or something really unexpected happens, at the end of the day, that event passes, as Moll said, and that leads to structurally positive buyback in deltas as that ball compresses. And I think that's a critical
Speaker 4kind of. So my simple mind sort of just thinks of it as sort of it's the all clear, which is, hey, we didn't know what was going to happen. Everybody placed their bets and put their insurance in place. Now we know what happened. And those bets can be unwound. And now we have more certainty about what the world is going to be going forward. So let's now place our new bets. And that's the new capital flowing back in. As simplistic as that is, is that still pretty accurate?
Speaker 5It's actually simpler than that in some ways. So if you are a market maker and you say you have, you know, 10 million shares of XYZ short against your options book, and then the volatility comes out of that options book, now you no longer need 10 million short shares. So maybe that new number is 6 million short shares. So that 4 million share difference, you have to buy back. So it's not even so much that they're readjusting everything with volatility necessarily means the hedge ratio changes. So then those market makers will purchase those shares back, which just really means that that's the structural part that Gemma is talking about. It's not that the market's giving an all clear because when has anybody ever said it's all clear, right? Nobody ever says that. It's just a diminishment of the ratio of risk that is needed relative to the hedging
Speaker 4that's out there. Okay. All right. So what's, no, what's the effect of this from a time perspective? In other words, is this just sort of a short term reflexive pop and then once it's over, things re-equilibrate and we go back to where we were a week or two before? Or is this the start of some new trend? Do you imagine?
Speaker 5It's a good question. The reason I say it's a good question is because you have to look a couple layers deeper than that. You should be looking at something like the ZQ futures or something that shows you where our interest rate's supposed to be going. And at the beginning of this year, we're talking about cuts. Then we're talking about hikes. And now we're talking about less hikes. There's only 50 hikes or 50 bips of growth in the market place between now and next September. So that is why you see things like home builders doing really well because in that sector, things are going well because rates are coming in. So if you look at things like the Russell relative to the Qs, the Russell probably has more upside with a lower rate environment. So if you're trying to disentangle what is the signal here, you really just have to know where to look. It's not that hard, but rates and vol are the place where a lot of this stuff is going to intersect.
Speaker 4Okay. So in terms of what it's telling you about the future, what is it telling you about the future? The flows right now as you're looking at them. And maybe try to contrast this to where things were a week ago just before we had the results of the election in front of us here. You mentioned a couple of different sectors or parts of the market that should do well. Interest rates, hikes remain muted going forward. But are the flows telling you other stories in the midst of all this as well? I would say no.
Speaker 5It's not necessarily a different story. It's nuance of the same story. So as vol comes out, think about this. I like to speak in analogies because I think it's simplest and easiest for people to understand. If the rate volatility comes in, the stock volatility comes in because those two things are brothers, right? If Adam Taggart is worth $100 million and all of a sudden he's worth $200 million, he's more solvent. He's more likely to be able to --
Speaker 4I like this analogy, by the way.
Speaker 5It's a good one. I gave you a bump, right? So if your creditworthiness is going up because rates are going down, then your equity will probably also get a bump. So again, this is a more structural thing, which is something that Jem talks about a lot, which is something when we talk off camera, we totally agree about. So there is a reason. There is a mathematical reason for you to be more creditworthy with interest rates going down because the idea that you can service your debt at a lower interest rate is true. And the same thing applies for really the whole marketplace because credit and equity are interlinked, and then the volatility of equity is interlinked with that because one is a derivative of the other. So that's kind of what I'm saying. It's a structural thing. This is not really an opinion or a referendum on Trump or Tallarico or something like that. It's not like that at all. It is just a mechanical part of the marketplace that if you see volatility come out because rates are coming in, there will be a bid. So is that a referendum on the next? Between now and January, not really. There's probably not much that's going to happen. Trump is going to try to do whatever Trump tries to do. But as that government starts to really crystallize its picture of what is really going to happen with the new electorate, then things will start to crystallize and things will find their new safe space.
Speaker 3Okay. Sorry, go ahead. No, I was going to say, and I think there's another layer to be added here too, which is there is a set of flow dynamics. There's a set of flow dynamics at the end of the year that assuming vol continues to stay relatively compressed and there's not a surprise, meaning something that comes out of the blue that surprises the market. Right now, we've gone from a scenario where dealers were maybe not too long of all where they have now decayed much longer implied volatility and structured products will continue to come in every day and supply vol. So as we enter November, historically, especially, you know, we have positive structural flows that should continue into November. All things being equal into the November midterm, and then we have November, we have Thanksgiving immediately after when what would be kind of a weaker period, this kind of window of weakness. And then we get into big structural December positive flows followed by Christmas. So there's this very kind of it's a very much a headwind if you're trying to or a tailwind for beta, I would say, or a headwind if you're trying to fade this. So that's just a baseline. That doesn't have to do with interest rates or kind of macro outcomes. That's just a baseline. And given this event flow setup, if we don't reverse quickly, if something and some news doesn't come out to allow us, the day forward action here should be very supported into the end of the year because of a lot of those dynamics. Lastly, I'll say there's a re-leveraging effect at the end of the year, right? There's this, what is this, if the market's up on the year, plus interest rates are paying you kind of 4.5%, money needs to go back to work. And because most trades are a leveraged bet, which people forget, right, there's just more money that now needs to get invested. is structurally very supportive. Now, we'll get to the macro. I don't want to kind of put the cart before the horse. There's a lot of things to be concerned about more structurally. But from a positioning and flows basis, coming out of this election, given that we've had this nice positive move in vol, it's gotten sucked out of the market like Nils said. Flows are, I would characterize them as meaningfully positive.
Speaker 2Hiring now? Okay.
Speaker 4So I'm glad you clarified. I'm glad you clarified that and also mentioned the macro because I've been looking at some of your recent statements, Jim. And on the macro side, there do seem to be a lot of clouds out there looking through your lens. But what I hear you saying is, okay, those aside for a moment, just sort of structurally flow wise, the end of this year looks like it's probably going to be a Santa Claus rally. This looks like it's set up more likely than not to have a strong end of the year.
Speaker 3I like to kind of frame it as there's three. Legs to the stool, right? And they all matter. You can't look at one and just say, okay, the flows are positive, so we're going up, right? And they interact with one another, okay? And the way to think about this is, what does this likely mean for broader path? And we're also not just looking up-down, right? We want to be very thoughtful about what's the distribution of outcomes, what's the amount of risk that we have? have is this a left tail fat left tail right distributed what is the potential how should we be positioning to take advantage of these forward distribution so there's three legs of the stool are one the flows which i just mentioned are structurally and they'll mention is structurally very positive um you know vol compressed as well not just positive but kind of uh taking down risk because there's supportive flows there the second one would be macro would be and macro what do i mean by macro because that could mean a lot of different things i mean the things that hit like liquidity where where the rubber meets the road interest rates as no mention right that's a critical kind of input to the system inflation economic growth or earnings growth right like how much more money money is coming in to the system that can lead to buybacks other things that directly impact price right so macro and the third leg of the stool which honestly up until maybe a year and a half ago mattered a lot less but with this administration which has been very proactive uh is the you know what are the players at the play the table today and so what is that guy with that big stack sitting on the other side of the table to government that treasury what are they doing uh to push price or allow things you know what and what are their incentives so there's really three legs and i think those other two are are more important than usual flows are usually very very dominant in a world where otherwise the other stuff is kind of narrative and noise right often and moves more slowly but uh big macro things happening obviously which we should dive into as well as big incentives for the administration big actions from a geopolitical perspective that the administration is following so i think uh macro is is maybe we dive in there next but the flows are supportive and in the context of this let's now talk about kind of what lies ahead and how that's going to
Speaker 4play out okay great so we'll we'll do that with macro in just a sec i got one last question here for noel on the flows um which is um as i sort of said earlier you're really just watching the where money's going and basing your conclusions off of that i am curious with something like the election we just had where there's a big change of the guard so democrat sweep um a lot of those candidates have you know quite different policies than the people that they've replaced um and there's a lot of um at least talk about sort of political warfare you know we're going to impeach trump and his cabinet and um who knows if it's going to be this way but there's the potential for there to be a lot of um chaos drama whatever in in the political um system do you factor that in at all to do you factor that in at all to do you factor that in at all to analysis or are you just saying look analysis or are you just saying look analysis or are you just saying look that'll however that impacts flows i'm that'll however that impacts flows i'm that'll however that impacts flows i'm just going to know as the flows themselves just going to know as the flows themselves just going to know as the flows themselves start to change
Speaker 5start to change start to change so listening to cogent arguments and then so listening to cogent arguments and then so listening to cogent arguments and then trading off of them is not something trading off of them is not something trading off of them is not something i've ever been able to make money from i've ever been able to make money from i've ever been able to make money from so the short answer is no i'll give you so the short answer is no i'll give you short thesis on Herbalife. And then I was just at the same time shopping for a house in LA. And then my realtor's like, Hey, do you want to go look at this house over down the street? And I'm like, well, it's not really in my budget, but sure. I'll go take a look at it. And so I'm at this, I'm in this house and the realtor's like, this is the CEO of Herbalife. I'm like, no way. So this guy's selling his house. Bill Ackman's telling me to short the stock. So I short it and it goes straight up. So, I mean, those types of things are maddening when you think you really do have something that's like you can sink your teeth into and it just doesn't work out. So from that story, I typically only look at what is, what is, and what is the math and the stories while I find them as interesting and compelling as anybody else. I tend to not act on them because I've been wrong and it's cost me money. So it's difficult for me to really get behind a narrative. Like there's going to be gridlock or Pete Hegseth is going to be impeached or something like that. How does that, what's the trade there? If you told me tomorrow, what Trump is going to do, if you told me today, what Trump is going to do tomorrow outside of like nuclear war or whatever, I don't know that I would be able to trade it. It's very difficult to know how to do those things. And then also know that how the market is going to interpret it.
Speaker 3And I think this is what makes for such a great partnership. Cause I think Noel's a hundred percent right. At the end of the day, there's one thing that I think we can measure, uh, with great level of accuracy, uh, and that has a direct one-to-one, uh, impact on price in the short term, which is positioning, which ultimately also drives flows. Right. Um, you know, that is what we can look at and say, this is if people are, the world is long and hedged, that is supply and weight, right. And vice versa, right. That is, that is a, and in the option space, that's become bigger than ever and incredibly useful tool. Um, that said, I do think that, uh, you know, big picture incentives, incentives, what, what administration may or may not do, what the macro is, uh, is doing and turning to, those are valuable things, but they work over much slower, longer periods. So when we're looking at those, those need to be looked at on a quarterly annual, sometimes multi-annual basis. And many, many times the correct long ends up with poor price action before it three, four X's right before you're approved.
Speaker 4Right. Yeah. Right.
Speaker 3And, and, and so that's where the flows become incredibly helpful. It's managing these short-term distributional effects, understanding where, what may need to happen before. And this is kind of some of that nuance we'll probably get into here as we start talking about, you know, I've been very vocal about a broadly post midterm, you know, a poor outlook on a much longer timeframe. Now people often say, well, Jim, we're up today. Right. Like I also said that expect positive flows coming in the short term and in support of structural flows here. So you have to put these together and the best approach, the most successful port approach, modeling forward distribution means modeling one day, one week, multi-week quarterly. And these, uh, distributions, these pressures, both a multi-quarter annual view on some macro outcome puts pressure on a one day, two day, one week outcome, but the flows are overwhelmingly dominant in that scenario. So it's melding these together into a forward distribution and look probabilities that over a short period might be very right distributed while in the, over a multi-quarter period, it might be left distributed. Right. And understanding these, these dynamics and how they interact is critical, but the flows, when people are asking daily, weekly questions, how do I trade this now? Those, those are overwhelmingly going to be impacted by the flows as, as Nolan stated. Yeah. He's so, he's so right.
Speaker 5Like there's the fundamentals of a stock like apple, right? So if there's an antenna gate or there's a, you know, a crack in the new duo fold or whatever else, those are small things. And those are things that can be traded in the next 24, 48 week hour, whatever. But when it comes to the trajectory of the economy, whether it be through interest rates, politics, or geopolitical forces writ large, the more tectonic type of shifts and fighting those and having a perspicacious view of those things where the tides are kind of moving overall, not worrying about the day to day. Those two things work in synergy and
Speaker 4are complimentary. So the, the vision I'm getting in my head here of your two partnership is like, uh, James Kirk and Mr. Spock, right? And no, you're kind of Mr. Spock there, you know?
Speaker 3Yeah. I was about to say, I think we know who Spock is.
Speaker 4Yeah. Yeah. You're, you're, you're keeping Jim grounded. He's gonna, you know, think about everything in the universe and in the mix, but you're saying, look, this is what the logic says, and we gotta pay attention to logic. You're just keeping him grounded. Um, and I hope that's a good analogy, cuz that was a great partnership obviously. Um, all right, well then let's use that as our entry here into the macro world, uh, captain Jim. Um, so okay. Short term, more likely than not, you think the market's gonna enjoy a, an end of the, to the year, a good end of the year here, but you got a lot of other bigger structural concerns as we move forward in time.
Speaker 3Yeah. So I'll set this up beginning with those flows. Again, we've seen very high skew because people were hedged, right? Not just for the midterms, but because there's a lot of structural skew in the market because we're at the end of the year. Yep. Uh, big structure product issuance, a lot of, a lot of, uh, options that have been on the board for years as leaps right here in December. Um, but so those, those things are structurally supportive. Uh, and, and that's essentially the way to think about that is people are worried. All right. Uh, there's some structural elements, but people are also worried because of what I'm about to talk about in terms of that. Mm-hmm and, and when that happens historically, if we look at the last seven years of data, just recent data with options, markets have been more, uh, slightly more dominant. I've only seen skews this high broadly, uh, twice. And those two times were, uh, late 2019. Think of it as like September, October, not too different than now. Um, and, uh, really starting in maybe about July or so of 2021. So, uh, you do your own kind of mm-hmm and it's three data sets. Yeah. I don't want to overstate it at three data
Speaker 4points, but they precluded, they, they, they proceeded some rougher times in the
Speaker 3markets and people ourselves included, we're talking about, you can go back, this was early days of one jam croissant but we were talking about in mid to late 21 about hey storm clouds not happening yet uh storm clouds uh early 22 we actually called the 22 decline the beginning of it within a week and we did that six months forward similar in that 2019 now people would argue covid come on you couldn't have known covid was coming we knew about covid in december january and we were talking about the risks also facing you know markets even before the covid news came out because there was a lot of things going on under the hood that weren't covid related right as well and so that skew was higher even before the covid news really hit and yet it took when when do we top actually i'm gonna let noel tell his story noel has a particularly insightful view on on the covid action before we get to the macro i'd love for you guys to hear a little bit of his experience there yeah
Speaker 5sure so uh at the time of covid i'm working in the bay and i would say 60 or 70 percent of the office is chinese and you know they had a lot of direct contact with mainland china talking about wuhan i have a degree in biochemistry i'm trained in bio warfare by the military and i also worked in a lab that was adjacent to a virology lab in university i'm pretty acquainted with the concept of gain of function and that kind of stuff so as this stuff is kind of you know getting into my brain you know we're starting to get into the brain and i'm starting to get into the brain and to buy some s p puts and the exact first covid trade i did was um broadcom on apple earnings so
Speaker 4and i'm sorry when did you place it january that year it would have
Speaker 5been late december or january to be honest
Speaker 4oh god so really early it didn't
Speaker 5seem that early but yeah i guess right and that's kind of the point right this is the point yeah so um i what i anticipated was is tim cook to come out on camera and be something like hey you know iphones are amazing you should buy some but we have this little supply chain problem coming out of china and we really can't get some of our products to market so we think we're going to miss our number that didn't happen and my broadcom long volatility position did nothing it was a complete whiff and the market didn't really start paying attention to this until the subsequent month so even though i would consider myself to be as informed and as educated on this as frankly most people than the front end of this it was still very difficult for me to trade and i was wrong on that trade for a good 60 days yeah and to
Speaker 3be clear when did it start no when did the decline actually begin oh the day the day after february opex yeah and when and when did the decline from covid end so it started the day after yeah the day after march opex yeah that is not a coincidence i know that's a fact because i was actually talking to i won't say the name of the bank because they had all they were clearing all my trades and i as a long vol guy was up a gazillion dollars they were begging me to let them out that was march opex no it's it's totally
Speaker 5the flows if you're a pit trader and you're standing in the pit and you have you know 10 000 shares to sell or buy or whatever and you see the stock going against you because they can see what you're doing they see the options trade come in and then they fade you so you know becoming a believer of flows is just using your eyes and your ears it's not like it's religion or you have to just kind of take faith i mean it is a mechanical thing that
Speaker 3exists but macro and flows right because the reality is the macro is true we knew that to be true i was managing money for mckinsey we think somebody had some good you know insights on what's going on underneath the hood with covid like we were having conversations daily about covid in december um but the market did what vol compressed people were trying to position and hedge skew went i just told you skew was exploding higher it already was quite high but what that led to was people scratching their heads as the market rallied and vol compressed in defense until the exact moment that all the open interest which was massively at the quarterly opex in march where dealers were short put right fat left tail and you get this opex reversal literally the day after opex and then it forced all of that that open interest all that risk into those books to explode right and so understanding that that's why we have talked distributionally too it's not just up down it's like if that decline was going to happen it was going to happen it was going to happen in march it was going to be a tail event i could have told you that we did tell people we were long ball for the for the clients there so can
Speaker 4i just interject for one second because i think this is so important um i think people get the idea of capital flows and yeah where where money flows that's where money is going to get made um and i think most people most regular retail investors for the vast majority of folks we've got some professional traders but but most people watching this are regular retail investors they understand more the macro side i've got a hypothesis i think i'm going to be right on it so let me position for it and what you guys are really making clear here is the money is made in the overlap of the two which is understanding what is most likely to happen but not betting super big on it until the flows are confirming that your thesis is now starting to matter now right so you're not pulling a broadcom like you didn't know where you were just too early in the part of the market that didn't move um but you're to your point jim you had a story you had a story and you had a story and you made a strong sense of where things were going to go so you you got ready and then when the flows started mattering after the options expiration that's when you went big and were able to ride the arrow am i capturing it generally
Speaker 3correctly that's absolutely right and and of course if we had the perfect crystal ball it always knew exactly at what moment you know we would we would bat a hundred sure you have an infinite number of dollars but the reality is probabilities increase dramatically for certain types of moves right under certain types of positional outcomes and uh that's true for not just a tail move but that's also true for supportive of all compressing which happens you know in these scenarios when people are broadly hedged that's what we are seeing right now the macro realities of what happened at the midterm the the macro realities of what's happening underneath the hood with interest rates and oil and inflation have not changed today right nothing has changed right uh what has changed actually i've anything they've been accentuated made worse by some of the outcomes but yet they've all been accentuated the markets up and i'm telling you the supportive flows up very well because people are hedged and there's worries etc that are likely to cause support i'm also going to tell you here shortly that the macro is getting considerably worse as we go forward and at some point that those supportive flows will i can give you a general sense of when those probabilities increase will generally fade right and i certainly interrupted i get the sense
Speaker 4too that part of your firms um competitive advantage here too is is you understand the dynamics of the flow side of the market so that um kind of like with the options explorations and things like that you have a sense of what's maybe bottling up flows that will then maybe unleash them so you know unlike most retail investors we just make the trade and we cross our fingers and hope we're right at some point you guys have a good sense as to when the dynamics are creating an environment where the flows are going to start getting unleashed um and and i presume that's sort of where you start to take your positions correct yeah
Speaker 5that's correct so consider you know when you when you're standing in the crowd on the trading floor and you got the guy next to you and you know he's got like a a 10 million dollar maximum bankroll and he's already nine million dollars into his trade you know he just doesn't have that much more marginal room or say you want to buy your neighbor's house because he has you know um he he wants to sell it but he doesn't have to sell it because he's got plenty of other money but now you've learned that he's he's a smart guy he knows he's going to sell it but he's he's he's a smart guy he knows this house is worth a million dollars there's no way he's going to sell it for a half a million but other things have changed in his life now all of a sudden he has to sell his lawnmower his you know his pool his pool you know his his house and all that stuff so what you can do is you you know that smart people will make rational decisions because the alternative is even worse so it's not so much that a guy is selling his house for a half a million dollars when it's worth a million is all of a sudden dumb it's just that he knows if he doesn't it's going to go to 250. so you have an opportunity to come in there and use the structural part of that decision tree that he has to make you can disentangle where the positions are for the market makers and then you can place your bets as accurately as you know how and that is a superior trade in conjunction with the overall mindset that the macro flow or the macro is going to push things a certain way it's the the nexus of those two things i'll add one more thing which is a great explanation i just want to note one
Speaker 4thing which is that's information that you're going to have to make sure that people understand what's so special about you know kind of asset management and whatnot is that you guys have that that visibility and expertise i think that's right i think there's one other
Speaker 3important thing which is a little less nuanced honestly which is in order to express these views which are very nuanced you want more precise tools so you don't want to just say okay i'm going to go short now or i'm going to be long now right you want more precise tools so you don't want to just say okay i'm going to go short now or i'm going to be long now right you're going to be long now right we're talking about okay we're entering a period for example which is going to become increasingly fat tail right and what that means is maybe it's not time too short quite yet but you better make sure that you're prepared for if something happens it is going to be then an explosive which would be obviously a put position options broadly allow you to be incredibly precise with betting on parts of the distribution that are credibly undervalued right or overvalued and the ability and expertise to be able to position appropriately Understanding how to use these incredible tools, which are a much more precise form of positioning, which is options themselves, itself is an incredible source of alpha.
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Speaker 4Yeah. And they give you the. A great opportunity to, when you lose, not lose a ton, and when you're right, you can make an absolute killing. Because they're precise.
Speaker 5Yes. They're a tool in the toolbox. And people that are afraid of options, frankly, should give themselves an education. To say that a Phillips head screwdriver is better than a flathead, it just makes no sense. They're just different things. You know, why would you not want to have hex wrenches, torx wrench, torx, you know, a torque everything. You should be able to use exactly the tool that is fit to purpose for the problem. And that's what options and the reason that I pay attention to options because it just adds granularity and specificity to our trade so that we can maximize our outcomes.
Speaker 4Okay. Well, I'm glad I scratched at this because I think this was really important clarification. I did sort of prevent you from getting to the meat of the macro gem. So why don't we go back to that? And I don't necessarily want to preset this by saying you are super negative for twenty twenty seven. But as you look at the macro side, what trends do you think are the most important and how are they trending?
Speaker 3Yeah, I think. So a couple of things. One, I've said for now nine months that the Strait of Hormuz is not opening and it's not opening any time soon. There's going to be lots of signs and positioning, you know, and commentary, narrative, whatever you say from the administration along the way. But the simple fact is that we are in the Strait of Hormuz, not because of nuclear weapons, but because of the U.S. dollar. China started trading. With Iran and Yuan started trading with Venezuela and Yuan. And if there's one kind of trump card, no pun intended for the United States of America, it's the same trump card, I would argue, for any empire since the beginning of time, which is the control of money. We are able to tax the world, solve our problems essentially by being able. It sounds too good to be true for people. It's not. This is true by printing dollars. It's not. This is true without a meaningful effect to the currency of the United States, because there's natural massive demand for our currency because people have to trade in our currency. OK, and so to underpin that, that is not just a one, two year thing. That is a 50, 100 year thing the U.S. has. And you can go read Kissinger's kind of commentaries from the 1970s, has had a direct policy of making sure. That commodities continue to be traded in dollars. This is the concept of the petrodollar, because the majority of trade happens vis-a-vis or related to commodities themselves. So this is the moat to the U.S. dollar. What the U.S. could not allow to happen, period, point blank, was for a change in trade of commodities. And so, yes, Venezuela, perfect outcome for the U.S. You know, a dozen. It doesn't hurt economic growth or other issues globally, and the U.S. maintains control. But in terms of Iran, people, everybody thinks this has been a major loss, you know, for the U.S. I would argue that the U.S. went in very clearly understanding that their worst case was the Strait of Hormuz stays closed. And stays closed forever. And that's our worst case. And that the U.S. ultimately maintains de facto control. Of commodity trade in dollars. And that's what's happened. And one something that nobody's talking about, I don't spend too much time on this, is that the, literally the Houthis who have a flag that say, death to America, on the flag, have allowed only one country to trade and to have free passage in the Strait of Bab el-Mandeb, which is the other side. That's the United States of America. All trade currently is being controlled and managed by the United States of America. And it's being done. And it's being done. Now, how they managed to make that deal with the Houthis, I got some ideas. You make your own conclusions. But Houthis don't have the technology to bomb Saudi pipelines without somebody helping them. I'll tell you that much. And so, make your own conclusions. But somebody helped the Houthis. And the Houthis then turned around and gave the U.S. full access to the Strait of Bab el-Mandeb. This is real politique. Nobody likes to have these conversations and think about it. This is real power. This is what matters ultimately long term. And the world. But I'm telling you, the Strait of Hormuz is not opening unless it's controlled by the United States of America. Or there's a political upheaval that says enough is enough and forces the U.S. to withdraw despite its better interests. This is the reality. So, what does that mean from a macro perspective? That means there's only a certain number of molecules in the world as it currently stands. The global flow of commodities is poor globally. And we're getting to a point. We're getting to a point of inelasticity in commodity prices because tanks have been drawn down to the bottom. And we can talk about should that have happened this time or that. But what I can tell you with 100% certainty is if the Strait of Hormuz is not going to open, and we believe it is not, that at some point, inflation becomes inelastic because commodities themselves are almost all, not all, the majority of fertilizer, diesel, all the. Everything at some point kind of boils back down to energy. And those energy costs are supply and demand-wise just.
Speaker 4So, supply-driven inflation across multiple commodities is what you can see is likely.
Speaker 3So, this is a major macro headwind to markets. Importantly, and this is just layer one, this is also a major input to not just broad inflation, but to the cost of money itself. Because what do we see?
Speaker 4Because interest rates have to rise if inflation expectations are going up.
Speaker 3And especially in the context. There are other inputs, to be clear, to the price of money. Inflation is just one of them. But remember, we have two other major, major forces on the long end of the curve. What are they? What are the biggest forces? Well, one, everybody borrowed money at 0% interest rate when money was cheap in 2021. And the average duration of that debt was five to seven years. So, we've known, and the administration has known, this is why they passed the Strategic Loan Ratio. This is why they passed the Stablecoin Act. At the end of the day, they've known they have a tidal wave of refinancing.
Speaker 4This is the.
Speaker 3That started this year.
Speaker 4The maturity debt wall.
Speaker 3Correct. And it's sovereign, it's corporate, it's municipal, you name it. Okay? So, this that we've known, this is a one-sided supply and demand imbalance for debt writ large globally. And again, the administration has known, so they've prepared and tried to manage it. It's a one-sided supply and demand imbalance for debt writ large globally. But now we have this other pressure, which is inflation. Now add to this bitch's brew another massive, massive thing, which is what? Well, we've been driving continued economic growth. The administration, and this is that third leg of the stool we'll get to in a second, has been pushing, right? Ever since September of last year, remember, they got all of the hyperscalers around the table and you got a lot of like, dear leader, I'll be doing $600 billion this year of, you know, the next two years of CapEx. I'll be doing 400. I'll be doing 500. And to the point where, I don't know if you remember, but Zuckerberg, who was sitting And right next to Trump, a hot mic moment where he said, boss, was that the $600 billion, the number you were looking for? That was the hot mic moment. And if that tells you anything is that they've been pushing, the administration's actively been pushing these companies to do more CapEx. To point Oracle, right? Larry Ellison is one of the closest people to the administration, has basically mortgaged the whole business at scale. At scale, I mean, from afar, it's somewhat irrational to the extent that they're going and taking debt. And the reason is they have an embedded put, in our view. The administration has been actively pushing them to do it and said, we got your back. Just keep going. The problem with that, and that wasn't a problem when all the hyperscalers had all this cash. What happened this year? All that cash went zero. And then they started taking on massive debt. We have hit, and that was, again, a cushion. To drive growth.
Speaker 4And they're tied to these massive spending commitments going forward. So they're going to need a lot more funding.
Speaker 3Correct. So that helped drive this earnings growth and the CapEx boom and the equity asset move that we've seen the last year. But what has it started to do as well? Well, not only has it pushed those interest rates higher, because it's now adding on to all these pressures that were already there. Refinancing. Now, straight up, Hormuz and all the inflationary pressures, yada, yada. yada, yada, yada. importantly it's starting to push on credit default swaps and credit spreads are starting to blow up yeah and it's crowding out
Speaker 4government debt too that's
Speaker 3that's the point right the long end of the curve is is pushing up because now we have even more debt that people need to take out it's crowding out the whole picture so couldn't be more right and and to the point now elon has said he said it two weeks ago neoclouds have just all funding for neoclouds is dried up doesn't exist anymore and so how do you keep driving a very fragile narrow economic growth right when the cost of money is just spiraling higher and yes we had this pullback but i think most people who trade bonds saw that pullback as exactly what it was which was we got to 5.35 in the 10 year and stuff just started breaking and then there was you know move back to safety in the u.s dollar right um as we de-rest so so the point here is we're in this catch 22 now where if you want to continue the growth you want to do keep justifying these valuations and the growth that we're that we need to see there just has to be more of that debt and the only way that we're going to get more of that debt is with higher yields and higher credit default swaps which are then creating more and more stress so there is a cap that is building on this market we uh without this is the big the big kind of payoff here without a bigger entity coming in and backstopping it right there has to be a buyer to this debt at the end of the day they refinancing debt the the the debt that's driving the actual ai growth and all the investment there has to be a buyer hank paulson came out in april of this year on to bloomberg out of the blue hadn't spoken to media in years to declare for 45 minutes that we are approaching a coming debt crisis and that we need to prepare a facility to you know to backstop the treasury market go go check it out it was you know we all heard it for like I think 24 hours the media cycle just digested it do you think that was a coincidence do you think do you think hank paulson came out of nowhere after two years to announce that we're having a coming treasury crisis to the world and that we need to prepare a facility my opinion is no absolutely not and if anything they this is that's a trial balloon uh they've been announcing and explaining that we're going to run this hot that we're gonna you know that is what is coming partially because there's no other way out of this so if we are going to see any continued growth if uh sort of who's going to stay close there just simply isn't enough buyers of the debt given the structural realities of where things stand so from a macro perspective given the lag and the commodity commodity market a lot of the fertilizer costs and stuff will be really experienced as we go in the spring a lot of these things again as I said are inelastic and unless we're going to solve this problem once and for all are only going to get worse at some point given those realities and the supply and demand and balances and need for financing this either goes down meaning the market goes down uh credit default swaps you know continue to get worse um and eventually get saved as we've seen in every other crisis for the last 20 years right uh or 25 years I guess I should say now um which is by money printing and this time around though buying stocks and supporting the market either that happens uh you know or uh things break hard enough as the market accelerates into growth that they have to kind of come in with uh policy into that growth to uh and and to uh and that's very hard politically I'll say to support kind of the debt of of these companies
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Speaker 4do you think is more likely
Speaker 3I haven't seen we haven't seen QE without a crisis ever and I think to argue in this populist environment for backstopping corporations backstop stopping corporate debt in this popular environment all you have to do is look at this election right and tell you how that'll go I think to make that argument without a crisis would obviously be the right thing to do and that's why I'm here today I'll be on nearly impossible and they know it and the amount and the scale that is needed here is not just incremental like they've been doing they've been boiling the frog and showing us the treasuries bought the long end of the curve they've done buybacks they've intervened in the yen uh that's on the money printing side we've been buying stocks like Intel and MP materials and taking ownership we've been boiling the frog and doing things that we're not usually doing at all-time highs but if they you can only do so much and and at some point the market naturally in my opinion given given how imbalanced the market is um has to adjust and in my view at some point they step away and let it happen it's not to say they're going to make it happen it's the natural course of where things are going so that they can come and save it um and and I want to be clear they've already done this twice uh like in a much smaller scale so the the feature this has become a a feature not a bug the Liberation Day world is on fire you know 150 tariffs like never mind nine month delay 10 tariffs on some of those create a crisis resolve it pump ball this goes back to flows and we'll pump the ball best and so so the reason we have a hedge fund manager as the treasury secretary and a hedge fund manager is the head of Federal Reserve markets are what matter at this point they are the primary driver of liquidity and they understand as well as Noel and I do that if they can expand vol if they can get the world scared and then reverse them on a dime and solve the problem and they can create a freeze and keep things going which drives liquidity uh to the whole system and they did it again this you know this this March uh you know end of a civilization will come tomorrow all by we have a deal in two weeks we got a deal in two weeks we got a deal in two weeks were any of those you know things true or was it all narrative and and what actually drove price down vol up and then re bottom reversal it's it's all been narrative it's all been you know uh clear kind of mapping out by the administration so so my view is that they're going to quite frankly allow this one to happen maybe not engineer crisis but
Speaker 4just allow it to happen that they can come rescue right so no I'm going to come to you in just a minute to talk about all right how does one position for this and of course you know not do so too early um but Jim a couple quick questions for you on this um one is is if they're going to allow it to happen so that there is enough pain that they can then step in to to be the the white knight we can only guess here um but what is your guess on what that pain will
Speaker 3look and feel like it's always about incentives they don't want to lose control right but they want it to be painful enough that they get buy-in from now a Democratic Party that's going to eventually have control of Congress that they uh get enough uh it feels like it has to feel like a crisis and so enough people
Speaker 4have to scream so is that a 25 decline is that uh there's another important
Speaker 3dynamic here because it's not just price a crisis is uh not just about how much down something it's
Speaker 4how fast it happens it's fast right like like 2022 was down 20 plus percent but it took the whole year whereas and I want to highlight
Speaker 3this is also a critical why you know you're saying what's what do you guys have how do you guys have an edge over others position being able to use options is critical here right because the asymmetry and the timing of this the path it's an incredibly asymmetric opportunity if you're just going long short stock it's going to be very challenging so um so what do we know I I would say they from an incentive perspective they really really want this to be resolved by June or September of this year because then they have 2028 right and they really want to get things this this new facility uh new liquidity uh all the control that also comes with it right imagine Trump with a 10 trillion dollar or five trillion dollar sovereign wealth fund imagine the ability to wield power that that gives um right so uh or all the trumpet in this crisis gives you the air power
Speaker 4to create that sovereign fund oh
Speaker 3absolutely I mean the Trump they're already laying the infrastructure the sovereign wealth fund has been already discussed yeah it's actually broadly popular they're trying to figure out how to get Fannie Mae Freddie Mac inside to kind of create the markets to then leverage there's already like lots of work being done there um but they've done the other part which is the Trump accounts Trump accounts were a discretionary for 12 and under became permanent for 13 12 and under then it became permanent for like for like required for 18 and under they're not talking about moving up to 40 this is the ability to buy stocks and send it to people directly right and this is very popular this is right-wing populism right uh so they are trying to make this popular the difference between left-wing populism and right-wing populism is right-wing popular they're going to buy stocks for you as opposed to send you money right and you're not going to be allowed to sell it you got to own it for 20 years same with sovereign wealth fund we'll own it on your behalf we will fund social services on your behalf yeah but it's not a direct uh but you cannot spend it that's the key and so this is this right-wing populism is going to be very popular so you you asked me about timelines ultimately uh they they want these tools uh in my opinion the incentives are there for this whatever is going to happen here to be resolved by by uh mid to late next year um uh generally speaking the incentives are sooner rather than later is better so we're talking about something in my opinion that is six months or later there's also the control element you don't want to lose control which means you want it to be fast because the way liquidity works is it's not just the market goes down 25 all of a sudden liquidity comes out you know 25 of 300 trillion in equities so you know uh 75 trillion dollars of liquidity comes out no it happens on a quarterly basis if the market goes down 25% all of a sudden liquidity comes out the market is down a bunch but on a multi-quarter basis yeah then banks have to rebat you know re uh account for it in their leverage ratios they have to deleverage there's all these things so so they were going to want this to happen arguably within a quarter but at the minimum in two quarters and you're going to want it to be done by let's say or at least have started i would argue by march april of of next year oh my gosh wait
Speaker 4when you say it started do you mean the rescue starting or do you mean the crisis starting because if the if the rescue is starting then the crisis has to come soon
Speaker 3it's going to be quick in my opinion and they're going to want to similar to the last two kind of declines but this is going to feel like a real crisis um again i would argue if anything there's this has been training and boiling the frog trying to get markets to follow the grooves of what they're um what they've shown people works remember trump told us to buy stocks at the at the bottom in uh you know early 2025 they will tell you when to buy stocks again um when this happens they will give you the risk on because they want to have the control ultimately um in this management of the market so my view it's a big call is that something's coming sooner rather than later um i believe that the flow you know if anything besant understands what we understand and he understands when the market is more ripe for it he's more likely to have control it's part of why they've done each of the last two in the q1 q1 becomes a much more dangerous place from a flow's perspective for the market uh and uh they also prefer not to that you know the end of the year can be a dangerous thing if you lose control at the end of the year there's funding issues all things they can potentially lose control i don't think they want that but they would like to operate in this kind of window uh jan feb march um ideally um but that's that's that's where the incentives are i don't have inside information um on this i want to be clear this is not nobody's told me this this is but if you listen closely they've been telling you this all of the signs point to this is what is coming and the incentives point to a q1 uh you know could start sooner i want to be clear there's these positive flows that the uh you know here right now are not impenetrable and if the administration decides that they want to attack if they want to push you know several outcomes here that can accelerate risk you know it can happen here um i you know i would argue that um that that this is an opportunity to start capturing collecting long tail um not putting it all on for you know one month this isn't the the covid uh you know uh trade that that noel was talking about that you put on in december uh and watch it all go away you want this to be longer dated puts and you want it to be funded somehow um with other things but this is the tail that exists uh you want to be start getting prepared but also looking for when the flows like we talked about are just right which are probably starting in june
Speaker 4okay um super interesting um and again uh this is something that you're putting together looking at all the constellations here um so i'm going to put some words in your mouth feel free to change them anyway uh you you see an uncomfortable possibility and uncomfortable odds that a painful market correction that will be relatively sharp and sudden is going to happen in q1 maybe as early as january um then eventually you know they'll get bad enough that the powers that be will ride to the rescue in terms of the scope of the response
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Speaker 4assessment on how large you're going to be relative to say like what we saw coming out of 2008 versus what we saw coming out of COVID, right? The COVID was just bananas. Would it be as large, not quite as large?
Speaker 3Every single one has been bigger than the one before, right?
Speaker 4And you would expect this one to be even bigger then?
Speaker 3I would, but I don't think the crisis will be nearly an 08, right? I think they're gonna be very proactive as they have been here to managing price. Now, I wanna be clear, this is the plan. And in the words of Mike Tyson, everybody's got a plan until you get punched in the mouth. This is what they would like to accomplish. I would argue also the midterms has made their control, like has diminished their level of control. And you could argue that there's much more structural risk here. If the administration doesn't feel like it can actually or won't be able to potentially save the market into a situation where things get out of control. I'm not saying that's the case. I think the base case has to be that you don't fight the Fed, you don't fight the treasury, especially if they've been proactively prepared and are ready to deploy. But you have to be open to those risks and those distributional realities. But yeah, my view is-
Speaker 4But there's a risk that this could get away from them. So in other words, this crisis that's allowed could get a lot worse than they want because their coordination isn't as good.
Speaker 3And there's all kinds of things that they can't control. That other, by the way, they're sitting in that ring. You know, I have a plan. But there's China on the other side who doesn't want them to accomplish these goals, right? And outside of China, there's companies and AI businesses probably don't want some of the, you know, there's going to be some, also some issues under the hood of when they take ownership, populist, like politically, they're going to not be able to infuse this money without maybe giving, taking a 10, 20, 30, who knows percentage of these businesses along the way. And they've kind of signaled that that's their plan, right? That's what makes it populist, right? If you're buying those stocks, you know, you better be getting terms for it. Otherwise, that's not as popular, right? And so there's going to be some conflicts of interest from corporate interests as well, right? Okay. And so my point is, it's not a simple thing to do. They're trying to do something very historic and at a scale that we've probably never seen before. Well, not never. I would be clear. Japan has bought 8% of the Nikkei, owns 8% of the Nikkei and printed, you know, ungodly amounts of money to buy all their debt or essentially doing the same thing Japan did. But I will say that like for, you know, at the scale, because the U.S. is so big that we're going to do it, it's definitely historic for the U.S. And so there's a lot of risk there for sure. But yeah, I think I would expect this bigger than anything we've seen, particularly, you know, we've never seen the equity buying piece of it. And I think to be clear, I didn't say this, but I do think this is important. Another major benefit of this, it solves several problems. It's not just supporting equity markets and driving growth and structural inflation to monetize the debt. Those are all true. It's not only popular, kind of disrupts the K-shaped economy from a right-wing populist basis, but it allows the U.S. to compete with China because we will be driving that investment to strategic businesses to compete with China. This is, like I said, right-wing populism. I mean, it's at the end of the day, China has been sending money to, solar businesses to to electric car businesses to nuclear to rare earth to you name it without a profit incentive because they're strategic and the u.s has a very hard time competing with that at scale if it's doing it if it's not doing it within the equity market channel so this is essentially a you know just like china adopted uh what did it call it in the in the early 2000s uh free markets with chinese characteristics okay we're gonna we're gonna adopt uh socialism or communism with american characteristics yeah
Speaker 4the the command and control with the american flag stamped on
Speaker 3the side of it that's exactly right and almost because we have to because if you don't how do you compete in a world where the competition is doing that jim i'm
Speaker 4not sure if you're familiar with michael levery's work but um he would be listening to this and nodding vigorously um while
Speaker 3listening to you several others are starting to pick up on this for sure we're not the only ones nowadays starting to talk about it we've been out there talking about for about nine months and and i think it's uh everything we've seen is now falling into line i think we're trying to be very precise with what we're telling people too this is not a wishy-washy uh they may be doing this this might be their plans you know we believe they do have us you know all the incentives point to soon and we've been saying nine for nine months it would be after the midterms so you know we are here yeah now it's a matter of navigating this and the precision of options and looking at flows becomes
Speaker 4incredibly important okay and that's why i'm going to pull noel back in here all right so you you presumably at at kai asset management um you've you've got this um probability set that you're looking at and what what jim just laid out for us i'm guessing is sort of probability number one um most likely number one um how are you walk us through how you position for this or how you plan to position for this um how are you walk us through how you position for this or how you plan to position for this so it's a simple
Speaker 5question with a lot of nuanced answers um the problem that really anybody listening will have to solve for is sequencing risk right so if you're 20 years old and listening to this or 75 years old and listening to this you're you know setting yourself up for a very different outcome even if you're investing for the next 10 years irrespective of of those two things um because if we draw down 20 percent you know tomorrow um and you can buy the bottom that's and you're not able to buy that bottom and you have to you know wear that whole 20 so that's kind of where options come in one of our products is a is a hedging product and what we're doing there is we're trying to solve for you know catastrophic problems that can be very beneficial for your book if you have those proper hedges on so we're using a combination of options in the s&p options on the vix and also variance futures as kind of a way to get some extra convexity variance is just volatility squared so the combination of those things the idea that volatility goes up and you don't make money is mathematically impossible so that in conjunction with other strategies that we're currently deploying is a superior and smoother way to invest and diminish some of that sequencing risk so that you can make a decision in the here and now without being you know petrified and also potentially capitalize on crisis alpha
Speaker 4mm-hmm so walk me through um how the how you how the flow monitoring is going to work here so presumably i'm going to guess you correct me if i'm wrong i'm going to guess you might even have some preliminary options trades on just because you don't know when this is going to happen and maybe it could happen tomorrow um but presumably you've got a bunch of dry powder that's on the side that says okay when the flows start really going the direction that we think we're going to really double down on this trade and and bring new capital in am i thinking about this right or a different approach i
Speaker 3so it's it's interesting that you asked us i want to jump in here uh not to speak to you but i want to jump in here uh not to speak to you but i want to speak over noel because this is really a concert approach um noel uh you know in their funds and and the uh what they're managing on the actual trade level are actively looking at flows and structurally positioning with these uh in the more optimal place on the curves where things are the cheapest where they're the most uh precise uh the most convex and asymmetric um on our end our allocation to those strategies because we're not just allocated to those strategies they're a tool for many tools in the toolbox is increasing here right that doesn't mean we say okay this is happening we're going to put all our money on black right right the probabilities have increased to this we are now we are also on our equity side of the portfolio transitioning to things that we believe will be much more resilient to this and benefit coming out of it which are strategic businesses that they will ultimately be buying right as well as structural debasement inflationary hedges but businesses still that are kicking off yield and are great businesses and have growth so this is kind of a on our equity side portfolio what we're doing uh and then and then again giving much more of a a meteor allocation in preparation for what the the risk we see coming as we allocate to the strategies that noel uh for a more convex side is managing for us as well so uh just like any good team you need you need several pieces they uh noel and his team uh and our broad team are experts who are now solely focused on optimizing that hedge given what we see happening but it's not that they are only going all in in this right we are right in
Speaker 4a concert approach and so just to my question there um with your team is it correct that you've got some reserves in in play in other words they're not going to come on until the action really starts getting
Speaker 3hot yeah the the truth when you say reserves you know these are embedded hedges right so the amount of expansion of the hedge as we go in right that's the beauty of the asymmetry of what we're talking about is is significant and to be clear no uh you know we're talking through this working through it real time always um but are are leaning in and increasing and uh you know and modeling the the perfect hedge given the scenarios more and more as we as we move forward so it's less about uh bringing an x investment when the time is just right it is modeling it now so as we move towards that it naturally decays into and creates a much better uh distributional outcome
Speaker 4for us okay and um just to help people sort of understand exactly what you're talking about I get the options on the S&P and the VIX right if you think the market's going to go down I'm sure it's much much more more complicated than this but you buy puts in the S&P and therefore you'll make money if that goes down by calls on VIX because you expect volatility to pop during that when you talk about debasement hedges obviously my mind goes um what else would you put
Speaker 3in that bucket so we like to um uh we like to position in equities primarily for the debasement trade um so uh the idea here being that um there's an uh I'd much rather own a business that invests in you know pulls gold out of the ground for for example right so the miners uh the miners but that's one example we're also just farmland we're doing it plumber we're doing it you know across other commodities uh energy Etc but these are producers
Speaker 4of hard assets essentially right
Speaker 3why do we like that move more one because there's an embedded yield these things are a lot of them are cheap because they've been kicking off great cash flows for a time but they're also if anybody has better information about kind of when to hedge or when not uh they do they do and so it's
Speaker 4existential for them right
Speaker 3that's exactly right so I'd much rather from a long-term risk to return much like out we outsource you know to team that can do the best part of each piece at a time to to the actual businesses that we think are top performance and yet diversify to those commodities that we think can be convex within an equity portfolio so I want to be clear that's not the whole equity portfolio yeah as a part of it and that is one of the major themes that we focus on but we are also again very focused on strategic businesses for America because we believe if the U.S is going to deploy this plan over the next uh year or so and we believe this will be a 10-year by the way this is just the beginning we think this will be a you know ultimately 10 trillion dollars plus of U.S equity investment so this is a mega trend this is a mega trend so that we really want to be in the businesses that we think that they'll likely be or areas they'll be pouring money into right because we don't think they're just going
Speaker 4to go by the S&P and can you give me a sector two is this is this military and defense is this
Speaker 3there this is actually pretty wide uh meaning go down the budget the current budget of the U.S government everything that would be included on that budget would be probably on that list okay um I would also uh expand that to strategic in terms of competition like AI and infrastructure for AI I think some things have been very hot but there are also ways to bet on those Trends like uh that that maybe you haven't performed so you know draw concentric circles the basement because so good cash flow kind of uh you know resilient to structural inflation um two strategic anything even a health care right if we're gonna in the U.S we need more kind of money flowing to health care to reduce those costs to so we have more room uh and it's a very populist trend as well so those things you better believe if we create a sovereign wealth fund to and buy American stocks that we are going to buy those stocks that are ultimately going to serve the American people yeah and I think that needs to be to be the core focus We'll see you next time.
Speaker 4Hiring now? Okay, and I think this is implied in what you've said, but I just want to clarify it. So the options on the S&P and the VIX, that's kind of playing the plunge. But what we're talking about here with the strategic businesses and the debasement businesses, that's playing the rescue, correct?
Speaker 3That's true, but these are these businesses. Remember, there's nothing is guaranteed in this world, right? And so we definitely want to be playing in a way that's asymmetric. If we are wrong, this setup should still make money, right? The question is, how convex will it be otherwise, right? If we knew with 100% certainty that we're going to have a 50%, 40% decline, right? We wouldn't have any equities in the portfolio, right? The key is using the power of diversification, using the power of the asymmetric information we have distributionally across the portfolio in a way that we can now create a more neutral setting to this portfolio at base, while still taking advantage, taking advantage of if these things happen in the way we believe they're going to happen and outperform. So we have a lot of asymmetry in the portfolio and you better believe if it plays out, we will, this is critical, monetize the hedges, be very, very aggressive taking our profits and taking all those gains and diving back into and even dramatically increasing the equity exposure at that point, right? But the key here right now is given the risks and given the distribution, to be better, hedge to have in the portfolio, the right type of things to be liquid in the case of these things happening. It's a very short window. We're really talking about seven, eight months, right? This should be happening and to be have optionality and not just in options themselves, but in lots of other ways, because ultimately having cash in the portfolio, if and when that happens and the, and not just, not just cash, but the actual payout that would come from that convexity would ultimately be not just, you know, helpful, but can dramatically change your long-term return profile and, and the ability to kind of buy things at exactly when they're on sale.
Speaker 4Okay. I envision you here, I love the team analogy. You know, you're the, you guys are the football coaches and you know, you're determining, you're building your offensive team, you're building your defensive team, you're figuring out when they should be on the field versus others. And essentially you're, you're, you're trying to create a strategy here. As I hear you, Jim, that says, look, even if we're kind of wrong, it should still do kind of okay. But if we're anywhere, right. Given the asymmetry, it's going to be a bonanza.
Speaker 3That's exactly right. And that should always be, you know, you should always be looking at, at asymmetry in the portfolio. Everybody follows a very poor risk adjusted return. I say everybody like 95% of the world is long stocks and bonds, right? These things have awful, awful risk volatility dynamics relative to return. And particularly at this moment, the risk we see happening, you want to be in a very, very liquid and low risk, you know, a steady reward kind of a portfolio that's very diversified and convex that then will allow you to take much more kind of risk with that when the moment presents itself.
Speaker 4All right. Fantastic. This is super interesting and really just, I mean, I could talk for another two hours on this, but we've already gone long. So I got to wrap you guys up. I hope you guys, if you're right, and I don't, I don't want to say I hope you're right because it means there's a lot of pain that's coming and a lot of devaluation of our currencies. But if you are right, I hope you guys make a mint off of this. For folks that would like to learn more about your firms and what you do, and maybe might want to ride your guys' coattails through this, if it indeed plays out the way you think it does, where should they go?
Speaker 3Yeah. To be clear, this is not just us positioning for ourselves, right? This is, we have a large, large book of clients as both a wealth advisor, we have kaiwealth.com. This is for high net worth, super high net worth and family offices, more multifamily office. We have an asset management firm that allows, that allows entities to a la carte by these long convexity hedges. We have both a fund to fund that invests across other convexity funds and our own, a direct hedge that Noel and our team is managing as well in the way that we describe. So there is a ton of tools for those that do not have those tools and we would be happy to partner with people. That's kaiassetmanagement.com and obviously you can always find Noel and I on socials. I'm @jam_croissant and I believe Noel, you're @noelsmith.
Speaker 5I'm @noelsmith, just my regular name.
Speaker 3@noelsmith and please find us there. But if you'd like to kind of meet with us, we have, you can go to our website and sign up for a conversation there.
Speaker 4All right, fantastic. So I will put the links to all those up on the screen when I edit this. I just want to make sure folks understand who should knock on the door in kaiwealth.com versus who should knock on the door at Kai Asset Management.
Speaker 3Any RAA who's looking for help for their clients or a family office or high net worth that's looking for broad asset allocation help, and wealth advisory help should go to kaiwealth.com. For anybody who's looking for a tool, just that long ball hedge or wants to bet on that specific outcome alone, or needs those tools should go to kaiassetmanagement.com.
Speaker 4Noel, Jim, who always has wonderful things to say, but had a lot to say, any closing perspective on your end before we wrap up?
Speaker 5I have a thing that I'm trying to push. The Kai Asset Management aspect of the business is more institutional, and that's going to be more niche-y for people. It's probably not a one-size-fits-all type of thing. It's going to be a little bit more quantity and a little bit more fit to purpose for the institutional investors.
Speaker 4Okay. How about just on the whole thing that Kai and I, Jim and I talked about in terms of just where he sees markets going next year, any parting bit of investment perspective for folks you want to put out there?
Speaker 5The idea that there's a debasement, the idea that there is a Bretton Woods type of unwind and all of those things that people have been talking about, it all makes logical sense from both an Austrian and a Keynesian standpoint. It's very hard for me to argue against those things. I guess my main function would be to figure out how to time it and how to make profits from it.
Speaker 4All right. Well, to mix some original Star Trek and Next Generation Star Trek, Mr. Spock, make it so. With that being said, folks, please join me in thanking Jim and Noel for providing so much of their expertise for us here, and delivering what could be a really important warning about what the beginning of next year might be like, and want to make sure that folks don't get caught unawares by that if indeed happens. Please express your appreciation by hitting that "Like" button, and then clicking on the "Subscribe" button below. What was that little bell icon right next to it? All right. Well, in wrapping up here, folks, obviously, if you want to talk to the folks at Kai Wealth or Kai Asset Management, go check out those resources. If you've got perhaps more general questions about how you might want to reposition your portfolio, given everything that Jim and Noel talked about here, or any other questions that you might have about getting your portfolio set for 2027, I recommend that most people watching this make those changes in their portfolio under the guidance of a good professional financial advisor. If you've got one who's playing that role in your life, fantastic. Don't mess with success. But if you don't have one, you'd like a second opinion from one that Thoughtful Money endorses, consider talking to one of our endorsed financial advisors. These are the firms you see with me frequently on this channel. To do that, just fill out the very short form at thoughtfulmoney.com, and these firms will be in touch with you right away. You'll have a bespoke. personally customized discussion about what they think you should be doing, given your exact unique financial situation and your goals and your risk tolerance. It only takes you a couple seconds to fill out that form. There's no cost to these discussions. There's no commitments either. It's just a service these firms offer to be as helpful to as many regular investors like you as possible. Jim, Noel, such a great discussion. Could be a really important one if things play out the way that you guys think they will. Wish you guys all the best. Like I said, love to have you back on the program. Maybe at the end of this year, early next year, especially if you start to see increasing signs, things are heading the way you think they will. And again, just a big thanks for sharing all your expertise with this audience. Of course. Always great being here, Adam. Thanks for having us. Thank you. All right. Such a pleasure, guys. Everybody else, thanks so much for watching.
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