SI397: The Market Isn’t Free Anymore, It’s Being Managed ft. Cem Karsan

Welcome to Top Traders Unplugged. In markets, success doesn't come from predicting what happens next. It comes from being prepared for what you can't predict. In each episode, we go deep with some of the world's most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence. Welcome and welcome back to this week's edition of the Systematic Investor Series with Jim Kasang and I, Neel's Kastrelason, where each week we take the pulse of the global market through the lens of a rules-based investor. Jim, it is really wonderful to be back with you this week. It's been a little while, have you been? Great, spring in Chicago, a lot of wild things going on both in the geopolitical and the end-systematic world. So busy, busy, busy, but things are great. You look great. We are both wearing vest today. I think you picked the wrong one for the belt. I feel bad when there we are. You can make up for that another time, I'm sure. I do love that vest. I'm just teasing here. Anyways, before we dive into some really important topics that you brought along and we've got quite a lot to go through, I was just curious as always what's been on your, or what's come across your radar the last few weeks. Maybe nothing really to do with the topics we're going to talk about, but just something you find interesting at the moment that caught your attention. Yeah, I think the biggest things right now that are not kind of maybe in the mainstream are really thinking about how much of what's happening is geopolitical versus orchestration. I think this understanding of reality, this ability to once upon a time put this general conspiracy world in a corner and think about things rashly. Now, what is a conspiracy? What is not the line is so blurred? That's the nature of truth is really probably the biggest thing that's on my mind. I think we'll dive into that in some way or another, but I think there's certain things happening in the last two weeks, three weeks. So very short period that really, really start breaking down some of those things. No, no, I'm excited about that. What's been on my radar is not, well, some of it is very serious. The first thing was not that serious, but then again, it's kind of giving you a hint of where the world is going. I just saw a hit line that actually there is now a robot that has hit the world record for a half marathon. We imagine that it has beaten the fastest man on earth in a half marathon. And all they did, and I say all in quotation, was they just specifically focused on developing it on just doing one thing that was to run instead of these things that can do a lot. But anyways, that's pretty, pretty amazing. Another thing was pretty amazing to watch. And I have to admit, I did not watch all of it. I only saw some headlines and so it might be very biased from the media outlet, of course. But I could not help seeing some of the headlines from Kevin Walsh hearing. And specifically, the questions that Elizabeth Warren was posing to him, you know, this is really not a political statement as such because it could go both ways for sure. But I just find it to be challenging to watch someone who will take perhaps the most important job in finance and not really being willing to answer some fairly simple questions. Speaking of truth, right? Yeah. Yeah. Yeah. So maybe we maybe we need to leave it there, but I know it's just to say to people that if you have not watched it, you should. It tells you a lot about where some of these things are going. Yeah, to be direct because we need to be should dance around it. You know, to at this point, challenge whether the election, the last, you know, 2020 election was rigged or not. It's a it's a farce. We all know that it's well documented. I don't think we need to dance around whether that's truth or not anymore, right? It wasn't even close. And so that narrative, not being able to answer the very simple truth there as a fact speaks to the lack of independence of that of Russia and the nomination there. And he was prompted many, many times about that. And so clearly, we I'm not saying that that position was never political, right? I'll pick that's the responsibility. Like, well, it's always been political. And yes, true to some extent, but at least the mirage of some level of independence, right? Which I believe did exist, not just a mirage, but maybe some even there was, you know, some level of independence to political, not reach is clearly broken down dramatically. But here's something that maybe I also took away from it. You know, that's the political side. But, you know, as we, as you said, they're all political appointments in some ways. The other thing I found to be kind of interesting was just the, all the comments about Stanley Drock and Miller and his relationship with Stanley Drock and I mean, there's nothing wrong to learn from the best, for sure. But when he was asked about whether maybe some of his own financial assets that he has to offload would be called, you know, parked in with some other billionaires. We will talk about this at length. Oh, we'll come again. But the thing I want to point out, which we're going to get to, just a little teaser is, we once had a treasury which in theory was there to deal with monetary operations and some basic term, keep the terms, keep the plumbing going. It was more infrastructure with a little bit of management on the edges. The adoption of the, a hedge fund manager as the treasury secretary and another hedge fund manager now as the head of the Federal Reserve says all you need to know about trying to battle on outcomes of markets and understandable outcomes of markets themselves in an attempt to pressure supply and demand in those markets, right, unequal footing to hedge fund managers and others. And I think that's the real story here. This is no longer about infrastructure or money supply. It is about managing outcomes as aggressively as possible and the coordination between those two. So we will definitely call that the key story. Another article that came through my radar this week is one by Gregory Sockerman who famously wrote the book about the medallion fund, if I'm not mistaken, and Wall Street journalist. And he was writing an article about the rise of QIS strategies. Now, we've touched upon it in the last few episodes on the show. But it is extraordinary to see how large this industry is. Certainly, a lot larger than the CTA industry. I mean, they're quoting numbers where they say that Goldman Sachs alone manages 175 billion in QIS funds. I don't know. I can't verify these numbers. I'm sure Wall Street Journal can. But that's massive. I mean, that's half the CTA, official CTA industry just by one firm. And this is only 5% of their overall assets, of course. So it's huge. Yeah. So this is the big takeaway. And this one we've touched on before, but I want to just hammer on it because it is the most important thing possible. The growth for the last four years now. We've been talking about it for four years. We talked about before I started of non-correlated strategies. Right. We're taking it tripling to a country rupling now. And again, we talked about this in terms of precious metals, in terms of crypto as assets, but importantly hedge fund assets. And the audience went from straight line, which is like precious metals and hedge fund assets who were kind of very much straight line to rocket ship. This is not some secular growth story that just has been happening over time. There is a dramatic shift, what I would consider a regime change, in terms of demand for things that allow a move away from a stock and bond world. And the biggest, what I call a technology or infrastructure or a way to do that is to deploy these, whether it's options, right, and structured product like non-liter strategies. Or again, non-correlated kind of communist strategies. This is the cheat code. which was likely coming as we've talked about, where these things are available to the masses. And we've seen the golden, and the gold part, that was the alone, but now all these other tools are entering the sphere, and their adoption and need are clear. But when you talk about the size and scale that you're talking about, by the way, it's a price that's run following CTAs, it's a surprise to QIA strategies, structural products, all of these things. When you look at the size and scale, it seems crazy, but it is such a small sliver relative to the whole asset management world. Getting $500 trillion of the whole asset management world, those like the long assets primarily. And this sliver, which I, if you take precious metals and crypto in which you could argue has nothing to do with these other ones, right, has gone from essentially $6 trillion to $20 trillion. And again, depending on where you cut those, it's my estimation. I've been saying this for some time, is that number is going to go to $100 trillion plus, and you could argue if this goes on for 10, 15 years, like I think it will, it could eat the whole. It could become closer to 50% of that whole market. It is a superior way to invest on a risk adjusted basis. Risk didn't matter. It was complicated, easier to sell a simple product. That number go up to people and do it at low cost. But the second risk matters, and particularly interest rates become a problem at whole landscape changes. So that's what's happening. QIS is a subplot within that story. And we can get into the details of whether QIS is going to be the long-term winner. I actually have a separate opinion of what's going to be a long-term winner, one that I'm betting on personally. Yeah, I know. But we can talk a lot more about that. No, absolutely. I thought it was very interesting. One other thing I took away from the article, I just thought it was kind of interesting, is that the chief investment strategies that an American Red Cross actually says that his organization now largely relies on these type of strategies. Now both you and I are obviously involved in the alternative investment space. And I know you're building your wealth management business on slightly different things, and quote unquote QIS. But alternative investments are definitely something we both believe in. And we will talk much more about for sure. I think that was pretty much it. The only other thing, and this is not for something we need to debate, was just another article where I noticed that Byron Gilliam, who I like to see from time and time, I think he writes about all sorts of interesting things. But he did mention in a reason article about how big the another industry that's growing a lot is the sports betting industry in the US. And how it kind of has an impact on the investment industry as well, because every time you money goes to betting, it's going away from somewhere. And he says that there was a study from 2024 that found that financially constrained household for one dollar of sports betting, it cuts their net investment. I estimate is $3 actually. So it has a very negative impact for certain parts of the demographics. Anyway, let's move on. We've got so much to cover from a trend falling point of view. Let me just mention that Q2 has started on a strong footing after a solid Q1. Some of the same themes we're seeing equities now back in in Vogue, of course, with a very strong April so far. We also see good trends in what you mentioned. Jim metals, both pressures and base metals are doing well. And of course, energies continue to be an interesting place to be for trend followers so far this year. And a few select currencies. The really one big sector that's challenging for us is really the fixed income sector. It keeps gyrating from long to short signals. And we'll see where we go. But right now it looks like our industry is kind of more of an inflationary stance. So more of a negative bias on fixed income markets. But we'll see what happens by on trend barometer finished yesterday at 48. So that's a little bit of a neutral reading. But on the more positive side of neutral, I would say. As of Tuesday, the beat up 50 index was up 43 basis points in April up almost 8% so far this year. Such and CT index up 55 basis points up a little bit more than 8% so far this year. Such and trend index of 36 basis points up 7.5% this year. And the short term traders index even though they have a had had good moments, then our little bit behind. But they're still up 32 basis points in April up 4.74% so far this year. Big winners of course in April, MSCI world up 8.85% as of last night. Now of 5% for the year. The S&P US aggregate bond index up only 64 basis points in April. And that's pretty much also what it's up so far this year. And then the S&P 500 a whopping 9.39% in April. And that brings it to positive territory for the year up 4.65% so far this year. With that done, we still have three quarters of an hour with you, Jim. And we're going to dive into some topics that you brought along. And of course, they are to a large extent, geopolitical, at least from the outset. And I'll try and also bring in some questions along the way. But set the stage and tell us where you want to go and what the big picture is and that's diving into some of these more details. Yeah, I think the story that is not being told nearly enough is, you know, there's this dramatic departure between narrative and kind of what's happening. Behind the scenes. If you were to lay out the facts and just strip away Twitter commentary or just verbal kind of commentary that daily multiple times a day from the administration, these are the some of the facts, the main facts. One, in the last two weeks, call it three weeks, there have been an emergency meeting on cyber security and threats. There have tied to the cloud release and all the things that have happened there. There have been an emergency meeting on private credit where they've convened all these are 08 level of emergency. Everybody, all the leaders, you know, in the Oval Office tomorrow. Type, you know, okay, meetings. Okay, these are not typical things that you see. At the same time, there has been a increase in the proposed and not just softly proposed an actual on the floor proposal of 50% increase in the US military budget to one half trillion dollars. GM and Ford in the US have been asked to re, but brought in an aster, re work supply chain, not supply chain, sorry, manufacturing for military production. We have also had Hank Paulson, the former Treasury Secretary, come out and talk about a need to prepare for potential lack of demand for US Treasuries, prepare an emergency kind of a solution to meet that issue. Meanwhile, we have seen in since this cease fire, I use air quotes if you can't see the screen, right, we have seen a dramatic uptick in a military equipment being sent to the region. The, some of these had begun to start before the cease fire, but you've seen a 60, 70% increase of troops and infrastructure brought to the region since the beginning of the ceasefire. And this is in terms of daily volume as well, of flights in and out. So there has been a dramatic uptick, not a, you know, a ceasefire would imply a slowing down of a ceasing of firing operations, military operations, the exact opposite is what has happened. I'm not trying to imply anything, I'm giving facts. Okay, these are the facts. I can be asked just because people might ask, "Where are these facts coming from?" "Well, you know, where do you find these?" Each of them are kind of independent, but a lot of them, the GM and Ford, these are a lot of them are public knowledge, I would say. But I don't think anything other than maybe the troop information is very clearly public. But I'm happy to send over the troop information that's pretty clear as well. So anyway, so the point here is, there are clear, in my view, preparations. Yeah. When I say preparations, attempts to buffer potential risk. And there's an acceleration in those preparations in multiple facets, just by the way, it's smart at this point, honestly. It's a little late to be preparing. You should go to war and then prepare before hand. I think China has been preparing for five years, but I do think the preparations and the acceleration, the frenetic acceleration of those preparations is abundantly clear. I would argue as well that the market action, and this is the part that will become a little bit more controversial, is also a preparation. We have talked at length here that the largest driver of liquidity in the world is markets themselves. It's not the Federal Reserve. It is not the QE that you see that the Federal Reserve has done. It's not the Treasury itself, which by the way is also buying back $15 billion, about $15 billion back in Treasury's biggest ever in one day yesterday, which are also, so liquidity is being, why are we pumping liquidity into the market when markets are at all time highs and just rallied 13% in 14 days. So there's actual liquidity, but more important than that is as we've talked about a, call it $250, like trillion dollar equity market, global equities, right? You pump that 13%. And that's a $37 trillion collateral boost and to start that, and we'll get into the actual mechanics and why I feel like this is, I'm not just speculating on this is a coordinated, and we'll get into the details of why I believe that's the case, but I want to just make the clear point that that also is a preparation, it's smart. You put me as a hedge fund manager into the Treasury and we're making preparations for what's coming. One of the first things I'm gonna do is talk about how we need to boost equity prices and how we need to create a buffer, right? To potential risk that's out there from a liquidity perspective in the market. And so we can get into the details, but that itself, I see as a preparation, there is a, when you create a squeeze, you take CTAs and drug follower, you force them to buy back into the market. - Yes. - You force a short volatility squeeze, a short interest squeeze, which clearly there was in there for obvious geopolitical reasons. If you can force that, if you can do that, which they have orchestrated this, you create under demand or need the market, right? That needs to buy back over a short period of time and you also create higher collateral values. And to do it by the way, starting March 30th at the end of the quarter, to allow balance sheets to market higher prices also buys you three months. - Just on that point, actually, it's an interesting point, because further down in my notes for today, I did make a screenshot of, I think she's called Caitlin McKay from the Wall Street Journal that had a tweet out a few days ago. And these are comments that I don't personally think are great or necessarily correct, but she was quoting Goldman Sachs saying in the next three days, CTAs, I like to buy $86 billion worth of exposure and equities. So exactly to your point, that's certain to some of the narratives that I notice as well. - Yeah, the flows can be manipulated. - Yeah. - There are clear, this is part of what allows me to do some of the prediction I do, right? There is a clear supply demand reaction function. If you understand what you're doing, two different strategies in the bigger ones, and these are all grown. The wall strategies, the wall supply, the CTA and trend following, all these things we just talked about are growing. And those flows are manipulable. If you can, if you're big enough, and you can, I mean, obviously you and I can manipulate them, but if you're big enough, and you can drive narrative, you can do tremendous things there. And I think it's becoming clear, clear, at least to me, given how clear this manipulation is, that this has also been a hallmark of what happened last April. And this is a clear process that they're following. And again, nobody wants to be the crazy tinfoil hot guy calling for, but this is the problem with what's happening nowadays. And again, it's smart. This is not an indictment of Trump of the administration. If you are, we're going to war, right? All is fair in love and war, right? And this is not about fairness, you know, but if you think these aren't free markets, that's another story. And you have to model the incentives and what's happening based on the players at the table. And the players at the table are much more aggressive and using very different tools than they ever have. And you better be aware of it. - Hmm, yeah, interesting, interesting. Well, why do we go next then? - Well, I'll add some facts to that 'cause I did say, well, we might as well do that while we're here. The part that makes it clear to me that this is structure manipulation is not just the obvious multiple date time tweeting throughout the day, particularly right before the market open, right before the market closed, which are the critical moments, okay? It is also importantly, the, you know, if you take 24-hour period on, from towards the end of the day, March 30th into the evening, into March 31st, close of trading, okay? What happened there? If we were to zoom in, we had a tweet from Trump administration, very odd, right, that was create depression picture, right, and talking about, you know, like, insinuating that some type of great depression's on it, both of you clear fear and do seen tweet with no explanation. Followed almost immediately by a tweet that said something along the lines of the end of a civilization, you know, is coming blah, blah, blah. I mean, if you put those tweets out of all the tweets, I mean, but a lot of crazy ones, those are by definition fear inducing. And what we saw coming into that day, actually those were on the, I apologize, going into the 30th at the night before morning, on that day, VAL exploded in the market, continued its second kind of steep decline. That was a manufactured fear, that was directly a result of those tweets in the threats and most of that, right? Then within 24 hours, a complete reversal tweet that is peace in our time, not like, hey, we might be reaching a peace deal. Uh, oh, there, which by the way, I was dispelled by Iranians and all of the media, meaning afterwards, but we have a full peace deal and we've reached peace in our times. Clearly, if you look at the history since then, you go back and you could, there's no one that's gonna say that that tweet was representative reality of some type of peace. So both of those things were clear, dramatic over exaggerations of the circumstances. And why do you do one, two, dramatically, like great depression, end of a civil, end of like great civilization, playing nuclear, right? And then within 24 hours do that. And by, by the way, why do you do it into the end of the quarter? It's pretty obvious, right? And the price action tells you all you need to know. We had a V-bottom. By the way, it's almost identical to what they did last April, which is 150% tariffs on the world via inducing ball expansion decline, capture shorts. We have a deal. Yeah. And, and the result is a V-bottom. And that's how it works. You expand volatility, you capture shorts, and then you change the narrative 180 degrees. That's what happens. And so, again, you put me in that situation. I'm not, this is not an indictment. And, you know, I have a mandate to try and support the market in a situation where we believe things are gonna get more stressful in the oil market and broad geopolitical, and we know, 'cause we have the information that we need to put more pressure and escalate this, this, this conflict to gain an outcome that we want to, what am I gonna do? Same exact thing. And by the way, these guys are hedge fund managers. They get it. Okay? These are not academics. And so, what's clear to me, and what's clear to me since then, is a continued, once they capture shorts, and the CTs go going to squeeze, the volc compression comes in, now the key is to keep it going. And that's a much easier thing than to induce the V. And so, what you've seen since then is an orchestrated daily flow, right, of well timed information to continue to orchestrate a continuation of that squeeze. And so, when you see the things like this is his story, we've never seen a rally like this ever, come from, not come from some dramatic decline in markets. We've seen things that you can kind of generally, not exactly this is still historic even in the context of some of the things that we've seen. those things. But you've seen out of a O809, short covering rallies and given all the short interest and things in, you know, in O809, some of them, by the way, also orchestrated, like we saw with the short covering ban in September, by the way, that happened on September expiration. That was also orchestrated. But we've seen things, things in the past, but they've always been in a crisis when coming from a major decline. We've never seen a five to ten percent decline in markets. And then this type of a rally doesn't exist in the data set. You can look at 100 years, 125 years of that. It doesn't exist. So that historic nature is very much tied to the historic nature of the orchestration within markets, which I don't think we've ever seen. And I don't think enough people talk about this. And I think people know it, and people like talk about, ah, this is manipulated market blah, blah, blah. But it gets sleeped under the rug as if it's like, ah, these are the tinfoil hat guys talking about, yeah, it's not fair. And I'm not saying it's not fair. I wouldn't be clear. This is not sour grapes. Like this is not some guy who's short, who's like, oh, this market's manipulated. No, I'm quite factually telling you they are manipulating the market. And by the way, you should take advantage of it or you should put it in your, you know, your algorithm. You can't trade this market without that incentive and understanding that that's the reality. So we just need to say it out loud and understand it and see it for what it is. Okay. Now, what do you do under those circumstances? Understand that the geopolitics is likely continuing to get worse, that the crisis of geopolitically is not coming to an end. But if you're drawing a line between that and then the market at reacting one to one without some other, the main person sitting on the other side of the table, reacting knowing that, then you're living in a very naive trading world. You know, you have to understand that the geopolitics will likely get worse, something's like oil, etc. Those will be hard to control, particularly non-USWTI. We can get into what's like that happen there. I really think that there's going to be a continued expansion between WTI and Brent and others. You know, there was an expansion that reduced, I think one of the easier trades out there is get complexity to that expansion because the US is going to continue to control what it can on that end. And I think there's this clearly, to me, points to a continued longstanding, right? You know, conflict that's not about to end anytime soon. But also know that there's going to be an aggressive attempt to control the market outcomes in the context of that, in the ways that the administration can. And for indexes that's definitely a place where it's possible. Sure. I mean, you mentioned that even back in the Great Financial Crisis and surely before that markets are manipulated and obviously some administrations are better at it, maybe than others. It's not apples to apples, I want to be clear. Those were emergency situations. That's what I'm asking you about. Actually is the difference you see from the kind of manipulation you're observing now versus what you've seen prior to this. What feels different to you. And one other thing that I was just going to mention is manipulating with a what I'm called a peace deal. That's not so easy, meaning because there are two sides to the deal. It's easy. It's kind of a braille. Clearly, it's there's no continued negotiations happening really. I mean, Iran just sent drones to push back the blockade and with some success. There's a kinetic conflict. And they just laid new mines across the Strait of Hormuz within the last 24 to 48 hours as a part of that. So that's nothing that something talked about. The drones came in, pushed back the blockade and allowed the minesweepers come in and lay new mines. And so we're getting to more and more elevated, like the Ryan National Republican Guard is now running the country. There's no entity that's really willing or even in the negotiation possible. They're very clear what they want. And that is not a negotiation. So this whole facade of a negotiation is just not happening. There's no actual negotiation. And this is what we've talked about since the beginning. This is not really a negotiation with Iran. Anyway, it's negotiation with China. Right. That's kind of the next thing. And China is not going. This is the Strait of Hormuz. China is not going to let the US control if they get oil or not. And the US is the whole point of this whole exercise. It's not the new clear, I mean, again, maybe for Israel and more supporting Israel. But largely the incentives of the US is to control the flow oil. To China, that's what this is about. It's become clear. We talked about it before, or more publicly, like they've set it out loud now. Right. It was not out loud with the started. But Rick Scott, like all the go through all the core, you know, it's publicly being talked about now that that's the clear goal of what's happening. And the blockade as the primary thing right now is also you know, why are we blockading the Strait of Hormuz? Why is that the primary, you know, think about it, why are we blockading the Strait of Hormuz? We're trying to get the oil flowing and that's the goal. Why are we blockading the Strait of Hormuz? And the answer is, you know, again, they're saying, well, you know, to pressure the Iranian and by the way, there's some truth that's to pressure the shut-in of Iranian production. And if they shut it enough, they had don't have enough storage, so they have to shut it off and they can't start it back up. And that's that's true. And that will hurt Iran. But the goal here is again to stop Iran sending oil to China. And more importantly, controlling that flow of oil very large in the hours. Yeah. And of course, this is happening like a month before Trump is going to China to talk to them. So is this all about just the out of the deal having leverage when he goes to China? Listen, the out of the deal is essentially the law of the jungle, asserting power and trying to create leverage to get your outcomes. You can call it the art of the deal and paint some really, the goal here is there is a tremendous amount of leverage. We want certain outcomes. And we are going to assert military and economic and any power we can to achieve those outcomes. The important part is what outcome are we trying to achieve? And who are we negotiating with? And I'm telling you, the outcome we're trying to achieve is a control of the flow of oil, whether it goes to China and what the terms of that are. And we're negotiating with China. And if you think that's great, if you think we're going to win that negotiation in some way, like how? And you think that's a simple negotiation? Do you think China is just going to say, okay, or or no, right? We went in there to change an outcome. The outcome was not what the US wanted. China doesn't want that outcome changed. I'm guessing there's an impasse and the answer is power and continued conflict. This is not a battle with Iran. That's the big picture idea. This is a proxy war. Much like Russia, Ukraine is a proxy war. Right. Okay. And the second you begin to realize that all of this, and this is what we've been talking about for years, by the way, it's just accelerating step by step. If you can't see it, I don't think I can't help you. There is a major source of conflict that's happening that is not the minor conflicts. These are minor conflicts in the context of a much bigger war. Okay. That's what the Greenland thing is about. That's what Venezuela is about. That's what Ukraine Russia is about. That's what Iran is about. They're all connected by that fabric. And to look at this as some naive story of a, we want regime change in Iran, we want it. We're finally doing it to get the nuclear. No. Right. This is a critical, the most critical oil message in the world. The reason we're blockating it and they're trying to blockate it is because we're battling over who's going to control it. It's that simple. Who's going to control it? And you think China is going to be okay with the US controlling it. And the answer is absolutely not. So this is what's not over till that gets somehow determined. And by the way, the reason US is willing to do that is because actually for them the worst case is it stays closed. The worst case for the US is the state of hormone stays closed. That's what the block gates all about. And that is a better outcome than all of the oil, 40% of oil flowing through the straight overmoves to China because it doesn't affect the US. And then again, this is why Trump is saying these things out loud. The US had a bigger issue like reputational issues, allies, all kinds of things to potentially lose, get into why they're willing to, you know, risk that or not, whether they should do that or not. But from just a simple risk, game of risk, real, politic perspective, US was not okay with that amount of, you know, they needed leverage. The art of the deal, you went talking about art of the deal, the art of the deal is where is your greatest source of leverage and how do you deploy it? Greatest source of leverage for the US, vis-à-vis China is energy markets and the petrodollar. That's what this is about. So, let's assume you're right. Where does that take us? As maybe not so much as a globe, but as investors. What are the things that the markets are, you know, completely underpricing in this scenario? So, in the short term, market is a voting machine and the long term, the market is a wing machine and now that voting machine is being managed and manipulated in supply and demand and very smartly so, you know, by the biggest hedge fund in the world. Let's call it what it is, okay? Who is trying to force outcomes and achieve optimal outcomes for itself, which is the administration of the US? So, you have a push-pull of one bigger structural set of geopolitical pressures and a attempt to counteract that in markets by the entity that is forcing those geopolitical outcomes. You tell me how that turns out. These are the biggest questions. What I can tell you is it likely creates what I've called a sumo market on steroids, which is massive. You think the pressure is underneath us. The tectonic plates were big before. The tectonic plates here are price of oil, potentially going to 1.5200 in, you know, outside the US and remaining at 90 in the US. You were seeing, you know, the tectonic pressures here are likely to show like mass starvation and, you know, in a year from now when the next planting season comes through because of fertilizer prices. Massive breakdown and supply chains, right? All kinds of really dramatic like historic outcomes. While at the same time, the administration trying to control markets and having more tools at its disposal than ever, more control than ever to do so. For me, that looks like building pressure for quarter or two, right? Generally, an ability to control the outcome and then an eventual shift in those tectonic plates, which leads to, which was the risk that was there all along, presenting itself in price eventually. Now, how do you manage, and we're trying to manage a market for day to day, week to week, month to month, and there's all of this underlying risk. Well, you have to take some bigger structural long term, risk management approach because things in a more longer term are very inexpensive, given the amount of risk and realities underneath the hood. In the short term, you know, be very active and dance on the tip of a pin, knowing that the macro is bad and going to get worse. And the responses for the administration are going to come in before the morning open and before the close to try and manage those outcomes, both from a more traditional liquidity perspective, whether it's the 15 billion buyback treasury or whether it's a war show what he's going to be doing, and the context of also tweeting and front running those tweets to help squeeze and push outcomes, etc. And there's a lot of money to be made. If you build this construct and you understand generally these push pull and you play in and out with these pressures, so you've got to be active in the short term, but take some big long term structural convex bets that are, that I would say, a year plus out. So, you know, we'll come, we'll come back to this and kind of talk about these things, but when I was listening to these sort of potential disastrous outcomes that you were mentioning, and I'm certainly not saying that it couldn't happen, but you know, it was reminding me about a conversation you and I recorded just after the Ukrainian war started with Peter Sian. And Peter, I mean, he's wonderful with narratives, and I remember he was talking about, you know, within six months, Boeing and Airbus, they won't be able to build any planes, there won't be any of whatever medals, they were relying on, the corn in Ukraine is gone or the wheat, whatever it was. So, you know, there are all these, you know, sensational negative outcomes, so to speak. And, you know, we're five years in, Airbus and Boeing still build planes, we're still get, you know, corn. In fact, you could argue that Russia is getting more for their oil now, not because we wanted, but because of other events. So, I'm not disagreeing. I'm just saying that, in a sense, because we're going through the fourth turning, I mean, I'm kind of expecting something really, really bad to happen, as you and I have talked about many times, and also the timing of it, the US turning 250 years old, I mean, there are lots of things that could really fit into a big, big moment in history, but I also kind of made before my own insanity, you want to keep like an optimistic view where I'm thinking, something's going to happen that will avoid us from this, and this could also, we could say the same thing about AI, by the way, where we think, oh, this is going to be, you know, mayhem. And I'm kind of hoping that, again, we're going to find solutions. How do you balance that in your mind and what would make you a little bit less worried? By the way, I completely agree with you. I think that's what I'm actually trying to say. I think people have a, if you have a kind of intellectual lens from what you're listening to what I'm saying versus a little bit more emotional, good, bad, right? I'm telling you that they are going to continue to manage this. Right. I'm saying things are going to get worse and worse, but we're going to muddle through. Right. Because they know what they're doing. Yeah. But can I again start to interrupt because I think this is critical. And again, I don't want to be political because that's really not the purpose of it, but I was listening to an episode with one of our previous guests, Demetri, Coffinus. And he had an interesting conversation recently with a financial times columnist or journalist. And I think it was called Edward loose. And he made this point about that democratic administrations. They are very procedural. They take time. They plan, but nothing really gets done. Right. Then you have the current administration, probably not very procedural, but you know, things happen. And I'm not entirely sure what's which kind of administration would you like to have in this situation? Someone who does a lot of planning, but maybe not a lot of execution or someone who does very little planning and a lot of execution. Neither. Both. And is that do you think where we are? I'm going to be. Softly. Carry a big stick. Be aggressive, deploy leverage. Do it quietly. Do it. Sounds like another country than the US you're talking about here. It was the US once upon a time. That's a quote that comes from US president. All right. Okay. Speak softly. Carry a big stick. Yeah. And I think that's Teddy Roosevelt. Right. Okay. The reality is that was, you know, build allies, work together, deploy real geopolitical leverage with force if needed. Be aggressive to turn the course of history of necessary. But do it in a way where you don't shoot yourself in the foot as you do it and maintain, you know, a mass, maintain the moral high ground. You know, all these things are critical. And so my indictment for the Trump administration is actually not that they're not I've told you it's smart that they're managing markets. I actually believe that this is generally a tactical good, great move. He's every China. I also think it is a time personally to confront China. I've said that for five years on this show. Right. I don't disagree with the real politic and the geopolitical. It's just the lack of rigor and preparation and deploying it in the most smart us way longer. There are traumatic negative consequences for the US. As we've seen, you're under undermining the exorbitant privilege of the US dollar. It's your most important asset. You're losing potential allies and losing the moral high ground. You can do both. We have an US done both for a long, long time. The Milka-toast democratic institutions who are unwilling to take those more aggressive stances to do the things that need to be done in the hard times is also a problem. It's honestly a problem with the system, the structural breakdown and too much control being given to one executive in the current system. We can get into all the reasons for that. I think we've talked about that. I want to get back to your thought and your outline. I didn't want to completely interrupt it, but I do think these are important nuances to understand all of these things. No, great questions and great points. Again, I'm not here. It sounds like I am anti-Trump in some way. That's just because Trump's the current president. Some of the things he's doing are against the best interests of the outcomes they're trying to achieve. I want to be clear, there's also certain things they're doing from a pure power perspective. They're very transactional. From a strategy perspective, again, if we're playing game of risk, I get it. I actually tend to agree with the things they're doing. It's not a game of risk. We're not on a board, whether there's a lot of soft power is more powerful than art power in certain ways, especially over the long term and not over the short term. Those things are critical. If you can't take that second degree thought from just strong, weak, powerful, have leverage bang country on head, you're going to end up with a worse outcome. You can be strong and smart. Real power isn't always yelled for a microphone. I think that's my point there. Anyway, we went on again, a little bit of a political or strategy perspective. I also want to go back to you a lot before, which I think is very, very important, which is we're talking about markets as top traders unplugged. If you're talking about short term outcomes, we are going to muddle through. This is a boiling of a fourth turning. You can see everything we've talked about for five years. If you go listen to the podcast and talk about what we, they're all happening. Every single piece of it is happening. Markets though are all time highs. That doesn't change the reality of what's happening. I think that's what I'm talking about. There is this dramatic deportation of the realities of what's happening in the world and markets, but that is not a bug. It is a feature. That is a feature of what's happening because the liquidity and the administration's incentives are particularly as we go into a period of risk to try and create that liquidity and that support. The question is things will eventually, probably longer than you think, almost always is, get worse and become the dimensions of control will break down, which is happening over time. Some of it reflexively because people like myself will notice what's happening and speak to it and people will believe it less. There will be some more balance in the reactions to those things, but those things still will matter. Again, we could be at this for years. Things could get dramatically worse to your point. We could go another five years down this road. Things could get dramatically worse. You could see the dispersion, the oil prices, all the things underneath the hood, but the indexes and the world could continue to levitate in odd ways because the incentives are there for these outcomes. What is the most important thing that happened this week? We went through a lot of things. Hank Paulson are coming out and saying, "We need to prepare basically for the biggest QE that's ever happened on the planet to help backstop the US." That's identibly. He's saying, out loud, that we need to prepare for the reality that we can no longer find buyers for our debt and we need to buy our own debt. That's what Hank Paulson said. The fact that I didn't get more press. What is Treasury Secretary? He's going to say, "What did what did Hank Paulson do today because I haven't heard his name for many years?" Well, that's the amazing thing, right? And you better believe that that's a trial bullet. I'll call it what it is because Hank Paulson is not coming and speaking to the public, saying those things without conversations with the Treasury. He literally is the guy who came out in the way he don't mind saved, created this, the liquidity to help. First of all, a threat to the market, which is this is the drug-y whatever it takes, a speech, but proactive, which they know they need to be. That's also why they're manipulating it, proactively, as opposed to waiting like, "Oh, wait." Then they have to do it when things get bad. They are getting ahead of it. They are being proactive. That's smart. Part of what Hank Paulson's saying there is, "Hey, we're going to deploy the biggest bazooka of all times if this thing happens and we're going to start preparing for it." But it's also a threat to help prevent it because the bit best offenses a defense of you. If you prepare the bazooka, you probably don't have to ever use it. But the big idea is, if it ever happens, then they'll basically tell you what they're going to do. The more we have a clear path now to understand what that is, that's part of why markets are still up as well. Again, this is part of the whole, whatever. But I think that's the most important thing that happens. We have a lot of crazy things happen every week and this week more than usual. But the fact that there's not more of a conversation about that Hank Paulson interview and what he said there, I think, is probably the biggest thing that's not spoken about. What that tells me is inflation. We've talked about this debt jubilee reality coming at some point, being the only way out. Well, you're starting to see the actual quiet part out loud and what the path out of this is likely to be. Do you think, and now we're obviously completely just guessing, but I mean, do you think this means that large correction and equities are kind of called off because we know they're the thinking they're preparing. However, we also know that if it really is inflationary, then at some point, equities do tend to react. Once we get to a certain level of interest rates, certain level of inflation, is that what we're just going to sit and wait for, you know, yields hitting six, seven percent in the long end, you know, the new Fed Chairman having to disappoint Trump and not lower rates. I mean, how do you, how do you, has this changed, or how has this changed your thoughts on the future path? These, by the way, future path we're talking five plus years on this stuff because these are the big, big, this is not one week, two week, one month. The pressures are as follows in the highest, probably path over the next five, 10 years of falls, right? It down, come back. Let's talk about it five years. Okay. But it is a situation where there's a buyer strike and interest rates are going higher on the back end of the curve tied to fiscal spending, increase in government spending on military, breakdown, and all the things we've talked about for a long time, increasing global conflict, commodity prices continuing to surge, all the things, by the way, we foresaw. I want to be clear that are only going to get worse. But those structural inflationary pressures are going to be clearly this is what Paulson and Ray saying is going to be managed. We are going to do what amounts of project twist or, you know, what the Japanese did in terms of buying, you know, we are going to monetize our debt. We're going to buy all the debt and take it in house and then eventually go, we don't actually have to go poop. It'll just sit there owned by us and it, you know, work its way off in 30 years or whatever. Right? It's just a line item on the balance sheet owned by the same entity. So that's where we're going. Now, if you can control the 10 year bond, you can control the equity market. And if you keep those yields low enough, then great. Now, the problem here, the problem that thing that nobody talks about is inflation will do its thing regardless of what that 10 year bond will do. Actually, ironically, it will do, it'll be worse because you're unnaturally keeping that 10 year bond lower. So over some period of time, once we get down that path, the more and more, the treasury and the Federal Reserve are going to force that 10 year lower and accordingly support markets. We are going to go more and more down this path like they saw in the 70s, right? Where eventually the whole world will front load demand because of inflation, drive more growth Okay, and B, everybody, every hedge fund manager, there's a very financialized world, every private equity shop, will buy anything pinned down that has a fundamental value at interest rates that are lower because relative to, if you have a negative real rates, what's the incentive of the whole world is going to borrow money, leverage, right? And buy things that are pinned down that are going to inflate. I drive asset inflation, more commodity, this is a reflexive lip. The reason you cannot forever control a long into the curve is because just like anything, you pin something unnaturally, even if you're the United States, eventually it forces a reflexive breaking of that, that unnatural kind of resistance. So the path here is inflation gets worse, the reality is the world takes time, the US responds because it's a situation it has to manage otherwise, the market collapses and there's all kinds of issues. So it naturally does what's a pandid, does what all the incentives, the only way out controls that long end, and eventually controlling that long end leads to more and more inflation, which eventually is a monetization of the debt itself, by the way, but eventually leads to a breaking of, a forcing of those interest rates higher. And when that actually happens and the administration has to say, well, we can no longer continue to hold these long and down, we have to raise interest rates, that's one the cap gets out of the back. That's how this is gonna play out. I mean, I've talked about it for five years, that's where we're heading, it's gonna take another however many years because we haven't yet seen that second spike of inflation. We saw the first one, told you the second one's coming, here it is. But again, this is a muddled path, as you highlighted, and they're going to attempt to control. They're showing more and more that the attempts to control it are not just subtle, they are explicit. Right? And that's in equity markets as well as bond markets. That's what the Hank Paulson comment as well. The introduction of a Worsh is also the Arthur Burns moment, right? We're gonna come in and, you know, we're gonna cut in a political way. All of this is, we've seen this playbook, we see the incentives, we see where the way out is. So the picture to me is quite clear. Now the path there, right? With the administration entities are very powerful who are incentivized to control the outcomes as long as they can, is not as clear. So I wanna slowly start to wrap up, I wanna make sure there's nothing else you wanna say, but I do wanna bring up one topic question you mentioned, I think in the beginning, another thing that you had noticed, and I think it was relating to anthropic. And I don't know what it is, but when it comes to AI, something inside me, even though I'm not an AI expert at all, and I hear both arguments, I hear the fear of AI, maybe I've feed it a little bit myself, but I also hear the people talking about all the opportunities, all the great things gonna do. And one might say that if there's one thing it could potentially do would be to help with inflation, because we're gonna be able to do more without having to hire armies of people and whatever. Is there anything in this scenario that you're thinking of, or scenario, some sure, there are many of them? Or how do you incorporate, let me put it like that, how do you incorporate AI into this geopolitical world, because I don't think we can ignore it. - No, absolutely can't ignore it. And by the way, we just had a wonderful conversation on you got options where Lynn Alden about this topic is part of it. So definitely go check out that conversation, but I will tell you that there's a reason that Orch is talking about AI and the deflationary pressures. That's like the big argument. - There's no way for me to tell you 100% this is a new technology. It is different this time in a sense. But it's always different this time. One thing I can tell you is that I don't know what the how fast that deflationary pressure will be, but what I can tell you is in history. There has been, we may think this is the greatest advancement and speed at the time the wheel was the greatest advancement speed, unfathomable in terms of how much dramatic change it made. It's just all relative to the moment you're at. And since the beginning of time, the thing that people don't think enough about, they focus on the technology and it's effects 'cause that's the first order effect. People don't think enough about the system, the machine that it all operates within and the natural flex of effects of that. It is not a coincidence that AI in this technological boom is happening right as populism and the breakdown of global borders. Everything we've talked about that leads to this forth turning always comes with a technological boom at the same time. Because the supply side economics, the natural system that we've deployed, right? That we deploy comes with a technological evolutionary advancement, but it's a sort of winter take-all system. And that leads to vulnerability of the masses and hence the populist impulse. AI is a creation of zero percent interest rates. It's a creation of pumping dramatic amounts of money into a venture capital system and sending all stimulus to push us through this period to the top. The net result is globalization, technological development. So right as we're at this extreme moment of technological advancement and it's gonna change the world, we're also at the highest moment of populism. And if you think populism itself at this moment is not going to try and tear down the effects of AI and how it's tearing apart society, you're living in a very one-dimensional world or two-dimensional world where you're not looking at the complex system and at the reflexive effects of it. Absolutely. So my view is very clear that people are overestimating the deflationary impact of this, not because it's not deflationary, but because they're not thinking about the inflationary impacts of the populism and the reflexive effects on AI. If you think people are going to just willing to really go to, hey, we'll just let AI take all the jobs, we'll just let, and we'll just take a check. By the way, checks themselves are inflationary. If we're gonna just take all this output and just push it back to the people bottom, you're gonna get inflation. I don't care about the deflationary forces, but the reaction during pop-up of time is what matters and the generational demands politically is what matters. The real only question to me is will the will of the people be seen? And again, we talk about that with Lynn Alden on you got options. Are we going to full authoritarianism where the will of people will be maybe circumvented and that can happen? And so if AI is allowed in, by the way, more real than people realize, especially with the entry of Palantir and David Peter Teal, and we'll see what happens with the vice president of the United States and if he becomes president. But if AI becomes instrumentally used for much like it is in China, right? For watching and controlling, obviously we know that the tools are there to go more full authoritarianism. But that's a whole nother conversation. But if the incentives are seen much as they have within the democratic history of the US and even a bit prior, the incentives are clear. The question is only, will those incentives and the will of people be seen and will be seen sped up? - Yeah, well let's leave it there for today. But in addition to plucking your recent conversation with Lynn Alden, which everybody should go and watch, it's brand new, it just came out. I would actually also mention our conversation with Peter Atwater because it touches on some of the other things and the K-shaped economy and how a lot of the things you mentioned today will affect the masses and then what happens then. So there's definitely a lot of relevant conversations to be listened to. Anyways, before we wrap up, let me just mention that in order to get more people to listen to Jim, I would suggest that you appreciate all the efforts that's going into producing these conversations by hitting over to your favorite podcast platform and leave a rating and review. It really does help. And it also actually cheers us up that we can see the people are enjoying the content. So I would certainly recommend that. And also recommend that you actually follow the podcast. It turns out that when you follow a podcast, you are more likely to be shown the relevant content for you. So I would recommend you doing that. Next week, I'm joined by Mark. That will also be a very insightful conversation, different topics of course. But do send your questions to the usual email infoatoptoritusonblock.com and I'll make sure I bring them up with Mark. From. Jim and me, thank you, FSM, for listening. We look forward to being back with you next week. 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