SI420: The Market Might Be More Fragile Than It Looks ft. Cem Karsan

(upbeat music) We have a deal, two weeks, it's gonna be signed. Meanwhile, Iran, everybody else is like, "What are these guys talking about?" It is all a charade, guys. It is all very orchestrated. And the V-bottom is a feature. It is not a bug. You guys are hedge fund managers. He's literally saying, "I'm the house." (upbeat music) 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 shape how they see the world. No noise, no shortcuts, just real conversations to help you think better and invest with confidence. (upbeat music) Welcome back to Top Traders Unplugged where each week we take the pulse of the markets from the perspective of a real space investor. It's Alan Dunn sitting here for Niels again, and a lot of it be joined by Jim. Jim, how you doing? How's the whole in Chicago? Great, good to be here at Chicago in the fall. We just had a Monday night football, there's victory. The cubs are in the white socks are in the playoffs. So when sports are going on in Chicago, I admit there's the Midwest, people are very happy. So things are good here. Good stuff, well, it sounds like a good time to be in the windy city. We have, as usual, loads to talk about. We're recording a little bit earlier this week. We're recording on Tuesday ahead of Saturday release. So there could be plenty of market movement, but this comes out, so keep that in mind. But as ever, there is a lot to get through. We do like to start off by asking, what's been on your radar of late? Man, there are times when you're radar, you look, and there's nothing in the sky. And this is like, I feel like we're air traffic control. It's like every two seconds, there's a new military jet, new freight, freight, something new coming into the monitor constantly. But maybe the biggest new thing coming onto the radar, in my mind, is not just what the bond market's doing, but what the what percent is starting to signal. I think there is a boiling of the frog situation happening where the 369 billion of buybacks really doesn't move the needle, and he knows it. It is a really important signal that they will do whatever it takes, what to draw me, to hold down that long into the curve ultimately. And so I think that's the thing that people whistle by the graveyard on. Generally, it will take a tantrum right before the bazooka comes out. He doesn't want that tantrum to happen yet. But I would prepare-- and I think we'll get into this more as we get back to the show for a tantrum in a response. OK. Interesting. Yeah. Well, for a long time, we talked about the big bazooka in Europe. It was Mario Draghi. He was rolled at the big bazooka first. But that's-- You didn't say I'm a house now. No, you didn't say I'm a house now. No, no. But some more energy. Whatever it takes was where his immortal words, but good so. Well, listen, we have a lot of macro themes to get through. So I think maybe it naturally makes sense to just to give a quick update on performance in the trend following space before we get to that. As I say, we are recording a little bit earlier this week. So as of the 25th of September, which is still the end of last week, Seokjin CTN, X is of 4.2%, and up 15.8% on the year and Seokjin trend, up 4.45% and up 16% on the year. So obviously, playing out to be a very good year in the trend space. And this month, very much the story has been short positions across the fixed-income space, not just along end and not just US, but very much across the whole universe. And the short end, significant repricing there. So that's very much been the story of performance in the last couple of weeks. So not a whole lot to add there in terms of performance, but suffice to say, shaping up to be one of the stronger years for the index in the last week. I was chatting to Nick Balthus. I think he was making a point. It was maybe the third strongest in the last 10 years or so. So all good from that perspective. But you didn't mention the bond market. And obviously, we've continued to hit new highs in terms of yield today. The trend is very much intact. And if anything, the momentum is increasing. I mean, I've been saying to Nick Balthus, we could've been very interesting to me, the amount of heated debate I've noticed around. Like, what's driving this as a competition for capital, as a growth, as an inflation? Previously, it was the debasement kind of concerns. Growth seems to be the primary driver. I mean, from your perspective, what's your framework for viewing this rise in yields as a-- I mean, what is not driving? Yeah, OK. I mean, maybe that's a better way of raising it. Yeah. Let's make a-- there's a laundry list. Let's go through it. Right? First, and I think this is like 101. Everybody refinanced in 2021. Go look at the numbers. And by the way, do you know anyone who didn't refinance in 2020 or 2021, or take out as much debt as they could? Because if you don't, you don't have a lot of smart friends. The truth of the matter when interest rates are zero, people borrow. And the average duration of that debt is five to seven years. That's sovereign, that's corporate, that's private, and all kinds of ways, right? Real estate, obviously. Let's do some simple math. 2021 plus five to seven years is when? 2026 to 2028, OK? So this is what happens, by the way, if you have something that has a 5% yield, a business you invest in, and you borrow it at two and a half. That was pretty good. Pretty happy for last five, six years. Now, borrowing is seven and a half. You have a decision to make. Do you go borrow more? And keep though, as a negative yield now, do you sell the 5% asset, right, by the way? Those things are not doing well. This is how the world works. It's not rocket science, right? So there's a lot of malinvestment out there. There's a lot of refinancing that's happening. And so outside of the AI complex, which we'll get to, things are not sublito. There's a lot of just malinvestment liquidation having to be rolled over. And guess what? There's a lot of having to kind of refinance and come to the market at higher rates, which is a supply and demand imbalance. All right, that's 101. Let's keep going. There happens to anything going on in the world. Any like reasons inflation might be coming down the pipe. Obviously, we've talked about this since 2020, 2021. When we get to populist environments, we go to protectionism. And then protectionism leads to what? Global conflict. Here we are. 22, we had Russia, Ukraine. Well, after we started talking about that, here we are in the Middle East and Iran. Straight of Hormuz is not happening. I've now talked about this for nine months. Everybody was like, "But we're going to get a deal." "Look, we got a deal." There's no deal. Straight of Hormuz is not opening, probably ever. Or at least for years and years and years, ever is a lot. And by the way, Besent told you it's not opening. Go listen. We're just going to reroute everything out of the noise. And why? Because it's all about control and trade for controlling the absorbent privilege of the US dollar. All right? That's what that word's about. It's not about nuclear weapons. It's not about Israel. It's not about all the other things you hear about. It's about the real, most important thing on the world when it comes to power, the golden rule. He, who has the gold, makes the rules. US controls absorbent privilege of the US dollar so it can print at scale and do what it will get to later in the show, going to do. OK? But with that in mind, that Straight of Hormuz is not opening for years, which I've been yelling from the mount-tops on every podcast. Everybody let it all listen for now since the beginning of that war. Right? That's not good for inflation. And that's not just bad for inflation. That has a lag, which creates more and more problems. Energy is the root to pretty much everything, including, by the way, the AI tree. So two, structural inflationary forces. Three, given the debt issues that the US has, it's also trying to roll over its own debt. That's part of that roll over that we're talking about, right? How are we going to get out of this? Again, we'll get to this later in the show. The basement. Everybody knows it. It's not surprising. And by the way, the sense showing you and telling you-- This is the Great irony by doing bye-bye. Bye. and intervening in the end, what's actually happening? He's telling you they're going to print, right, money. And yeah, that is good for like a supply and demand. If and when he does it by force, but that is a debasement, that's the basement at score. It doesn't exactly engender confidence, right? At the long end of the curve. So counterintuitively, the realization that we're going to debase the money, which eventually will hold down the long end of the curve by force drives a debasement fear, which leads to the third problem, right, which is less international demand. Nobody wants to own US debt internationally because of the debasement trade, because of what the US is doing and because of the general like way it's doing it, right? So we're losing foreign buyers. That's not good for supply and demand. And then, right, we happen to have another thing happening that's demanding a lot of debt on its own, which is the CapEx investment. So all the private demand for all this yield, which is quite, interest rates are quite high, right? And is softly backed by the US government, by the way. The US is basically got September 25, what do we do? We got a bunch of guys around the table and said dear leader, I'm going to do $600 billion of CapEx, dear leader, I'm going to do $400,000, $400 billion of CapEx. Dear leader, I'm going to do $400 billion by 2028, why 20? Because that's when they're getting elected. And so, and very well documented, there's a reason they're flying on planes to China when we go to China together. There is a complex here where the AI businesses and the hyperscalers are working with the administration and really driving massive debt in order to drive this CapEx, which is driving earnings, which is driving the market, et cetera, but the cost of that is what? Cost of that is there's competition for capital. And you could call it an earning story, but it's really a competition for capital, right? And so this, and you're seeing it, by the way, in credit default swaps, and you're seeing like there are massive risk coming, but there is a massive demand for debt, right? Because the way we're driving this concentrated CapEx story and the AI is debt, right? And more of it. So, so, debasement, crowding out from the CapEx story, less international demand, inflation coming from, started from news and global conflict, and then just 101, the refinancing of all the debt that was taken five, six years ago. So I don't know what's not causing it to happen. The thing I found interesting, I mean, I agree with all of those kind of longer term structural factors. It's also interesting how much the market has shifted in terms of shorthand pricing. You know, I mean, two year yields have gone up, I think about 90 basis points since the middle of August, which seems a large. I mean, if you consider going into the last FOMC meeting until we had the CPI print, it was oh, they might, they might not. Then the CPI, of course, CPI came at whatever, closer to 0.3 and 0.2. Then it was a dondeal, net or hike in four times in the next year. So we've had this huge shift in expectations at the shorthand as well. Maybe so much justified. Maybe it's the realization that sort of our moves is going to stay short. Artists, CapEx, expansion will continue. But I mean, what's your perspective on that repricing? My perspective on all of the Fed kind of kabuki theater is, first of all, let's just step back for a second. Literally, the meeting before last. Worse came out and sided with the doves. And that projected that we were going to have no structural inflation and that we should be worth it. Then we got CPI, which showed, you know, in their numbers, that inflation was slowing. And then you came back and projected into a weakening dollar and all the issues, right? A conservatism at Jackson Hole and then followed up with this very hawkish kind of projection. What changed? Why? What happened? And in my view, it is-- first of all, we all know, and the set as well, that raising these interest rates at front of the curve has zero effect on inflation. This is a supply side inflationary story. This is not a growth inflationary story that we're experiencing. And you are not going to slow inflation by raising rates. So why do I do this? Well, what happened, right? When the US did this, when we needed this. Well, dollar strength, gold weakness, right? This is the whole game. If you want to be Japan and you want currency strength and then you want to be able to print at-- print a gazillion dollars, you can't look like a banana or a public. So you cannot have wars and beset despite as much as they are 110% you better believe. One on the same, there's zero independence. They come from the same school of hedge fund managers. That's not a coincidence. By the way, I want to be clear, Worsh's father-in-law is literally best-- college best friends with Trump. There is no light between the administration and the war. But the perception has to be-- you need breaks on that race car. If you were going to try and control, imagine you were in control of trying to navigate. What the US is going to try and navigate, which is printing money at scale to drive money into its own economy. At scale, I'm not talking about like a trillion dollars. I'm talking about tens of trillions of dollars. You better have a project kabuki theater like that the Fed is independent. And when needed, raise a quarter, do whatever. That you need to help manage the circumstances. There's a reason the two of them, Worsh, and beset, are again and again flying on Air Force 1 together from-- this is not like a casual like Powell. We had our quarterly meeting. I went to the Oval Office for 45 minutes. This is like they are continually. And by the way, if the US is trying to pull off what it's trying to pull off, this is not like business as usual. They're both in it not for anyone else. They're in it for the US. If you think the Federal Reserve of the United States is in it for fairness, and that everybody is better off, I got some beachfront property in Arizona to sell you. It's not how it works. So from my mind, along with the way of saying kabuki theater, I would not put too much into it. It achieved its primary goal, which is to create a appearance of independence, of a Worsh, to strengthen the dollar in the short term, and to drive an ability to now navigate what's coming. And again, we'll get to that more more at the other show. [MUSIC PLAYING] Going back to bonds and everybody's been talking about the bond equity relationship. I mean, obviously we've had a shifting correlation. That's one dimension to it. But I guess more importantly, there's a sense in markets. We have seen historically periods of time where we've had rising bond yields, and equities have held up. And then you have, at some point, you reach a tipping point and equities kind of just. I mean, it's not always the case. But we've definitely seen that before-- Q4 2018, for example, 1987 is the classic example, although that's extreme. You'll see 10% of the stock market. Let me just jump it out. That's not where we are. Yeah. And let me tell you why that's not where we are. We have the most concentrated earnings growth and economic, not to mention market allocation, right? Two, in the history of markets, not like 10, 20 years, literally like 100 years of market history. And Carlisle P. Firm did a wonderful report, which I encourage everybody to go read, that really dismisses this idea that the earnings growth that's coming from all of the-- by the way, where it's coming from, all the AI complex. There's literally zero to negative earnings growth everywhere outside of the AI complex. Yet we're seeing what looks like a tremendous burst of earnings growth year-to-year. And people are justifying these record valuations. By the way, when I say record valuations on a adjusted for the 10-year bond, which is how you need to look at valuations, because that's the discount rate, valuations have never been higher ever, like tight bubble slower. And depending on what metric you're looking at, definitely close. So there's no debate there. The way people are justifying that is saying, look at this earnings growth and projecting that earnings growth into the future. Like, we have an AI revolution, the earnings are going to have to stay. I hate to tell you that's not how it works and people have done the math and if you go read it, it's very clear. All of it, a hundred percent of the earnings growth is not just coming from this complex. The reason it's coming from this complex can be counted for by two major subforces. One is when anthropic and all these companies go from $380 billion to $2 trillion, those gains get marked as earnings. Sure, so revenue in day one. That's not our eggs. That's not, I mean, if it keeps going to infinity, but that's literally the definition of a bowl number go up. And it's happening where? It's happening all in that very concentrated space. And then when the when anthropic goal of sudden has $2 trillion in its pocket, no earnings. But what does it do with them? Well, it's got to go do cat facts. And by the way, dear leaders tap on one the shoulder, all the harpsicholes say go spend that money. And not like, you know, not like it's, it's go spend that money or hate to see what happens, you know, to that car outside. Um, you know, so that capex is in there's lots of charts, which I could share if we had the ability to hear that show that cash operating cash is doing one of these of those businesses. And up income, non cash accounting earnings is doing this. And so it's not just that it get, it's a sugar boost as well there because that capex is earnings because you can now depreciate that capex. And so taking all this depreciation, they're doing all of this accounting for all these gains. But I hate to tell you, if the market goes down, it's not like we stop that earnings growth. It actually goes the exact opposite way. It's not real sustainable earnings growth. Unless the market just keeps doing its thing. So it's not like the earnings is driving the, the market, you know, the market is driving the earnings. But it's suspending the spending that's driving the earnings. Is that not fair to which is now being coming from where? Where's that liquidity coming? Yeah, it was. We just went from 250 billion trillion dollars of equity valuation. In April and May of this year, in two months, it went to 300 trillion. What is that 50 trillion dollars? I'm telling you, the majority of it is showing up as earnings. That's going to drive some pretty good earnings growth, about 20%. And so again, this is not just me. You can go read the Carlisle report that breaks us down into a detail. But the fact that we paint this as somehow a sustainable level of growth that somehow connected to an AI revolution, it has nothing to do with the efficiency coming from AI. It literally has nothing to do with the efficiency coming from AI. And as everything doing to do with the CapEx spend, that's coming from the investment bubble, that's being inflated. By the way, this and this financialization of the market, I mean, it's hard to come even compare this to the 2000 tech bubble because the market is way bigger relative to the economy. And so the effect on the whole economy is literally a 5X relative to where we were in 2020. I mean, in 2000, I said 2020 in 2000. In 2000, though, similar effect, just to a much lesser extent, what was earning growth in 1999? Any idea, Alan? You're on year. 27% earnings growth. You think that's a coincidence? Where was earnings growth in 2000, 2001? What was it? Was it the market driving the earnings or was it the economy driving the market? This is what bubbles do. This is why bubbles exist. And by the way, there's always, always a justification for the bubble, which somehow points to earnings because those earnings are coming from the bubble. So it's always an argument that the valuations are justified because of the earnings growth. That is how a bubble literally, and it structurally works, but we we continue to do this very simple stupid kind of human math that like we project like this earnings growth is real. It's not real. The question is, how does it end? I mean, just because there's a bubble doesn't mean it ends in a year or two, by the way, and we're going to get to to how? What are the catalysts? I suppose that that comes to my point about, I mean, I don't think yields are going to dissuade 50-based ones right in the Roseals. That cap expand, but what is the thing that I suppose slows the trajectory of growth of the Capix? So this is the critical thing for people to understand. People think tolling at a bubble and not telling me what it's going to pop is worthless. It's not worthless because what's important is to understand the fragility under a system because investing is not just about returns. It's about risk relative to returns. And the fragility of the system by definition, because we are so concentrated, so focused on one thing. This is not broad-based economic growth. This is not diversified, you know, like healthy growth. This is dependent on the equity market itself and the investment that's driving into this part of the complex based on that growth. Okay. By definition, that creates fragility. So what I'm telling you is this is fragile. It does not mean that it's not an inelastic situation where things can go up big before they go down. That can happen. But understanding that distribution allows you to bet on the outcomes that are not just up down. Everybody is still not everybody, but the majority, I'd say 98% of the world is still playing into the world. But Jim, is it going up or down? You know why they do that? Because it's easy. Nobody wants to think. We have these incredible tools or liquid. We can do much better. We're literally on a podcast called a systematic investor, right? Which is think about distributions, think about the risk and the different sets of outcomes that are out there. And let's position accordingly based on that distribution. No, but I mean, I think it's fair to say that for the majority of people, their portfolios are going to be impacted as to how long this is sustained. I mean, equity risk dominates most portfolios. As you say, the equity risk is primarily been driven by this one team. You know, hyper-scaling spending is going to be 800 billion this year. It's supposed to rise to over a trillion in the next few years. Will that happen? Does that sustain us? Do we need to watch the second derivative, the third derivative? I suppose there are the things that investors need to grapple with to think about what are the signposts for that this is starting to. Let's get to the signposts. That's fine. If fragility exists explicitly in this very narrow part of the market, like everything depends on this one part of the market, which is driving this fragility, right? We should probably focus on that part of the market because the rest of the market is in a different. It's a completely different characteristics. I think there was a recent piece you mentioned that I think before we talked about what percentage of the market had and I was at negative beta. Any numbers like 40, 45%. 45% yeah. 45% of the S&B has a negative beta. Think about that. There's no better sense of fragility. What's driving? Well, it's one thing, one very fragile thing. And so the question is, will there continue to be massive investment into this piece? And where is that going to come from? Who is going to support it? And if markets decline, how's it going to happen? And now there's the good news. The government seems to be intent. And I think this is why the bubble ultimately exists is I think there's a lot of, hey, we got your back. Keep going. Hey Larry Ellison, really close friends with the Trump administration. Take as much as you need because the worst case, we will bail you out. We have your back. So that in my opinion, and again, you saw in September 25 on the sat around a table, you've seen kind of what's happening here. In my opinion, that's a big reason for why we are here and why they're willing to take the level of debt they are to invest in the stuff. It's not just the promises of AI, right? And being left behind. Yeah, there's some of that. But to the scale which this is happening is in my opinion very much driven by administration forcing the issue, and it will more explicitly back it if and when it's a problem. And that's the goodness. Assuming you think the administration has the ability and the power to control all of this. Which I know there's a reason we say don't fight the Fed historically, you know, US is the biggest entity in the world and has the power historically to to, you know, as in the words of the sent, I'm the house now, right, to be the house. And so they are going to do everything they want to or need to as they feel that the question is in a world with a China that is, you know, nipping on their tails and really intent to disrupt what they want to do, which I think is very important. In a world where, you know, there's internal political questions of whether Trump had all remained in control and want the same things as everybody, the other politicians in the system. There's a lot of things that are uncertain. And basically, the linchpin that the cornerstone that supports all of this, this bubble, the continuation of this, the ability for it to not fall down, it sits in besent and increasingly Trump's hands. So it is a incredibly fragile yet currently managed, proactively managed situation. And so you ask me what's going to happen, you know, imagine you have two tectonic plates and the pressure is immense and nothing's moving. It doesn't mean that that that the odds of an earthquake have an increased. I'm telling you the odds of an earthquake of a tale of it are increasing dramatically. But as long as that administration is proactive and wants to support that, right, they can in a short term and will. But no, there are other entities that are also very powerful who would like to undermine it. And there are things that are fairly uncertain about the political control of the administration and its ability to support these things. And that is where the risk lies. You want an early warning signal? Watch the politics. Watch the ability and control the administration if they can support it or not. Watch China. What China is doing. And I hate to say, and this is not the same free market of five, 10, 20, 30 years ago. It is a market of immense control and immense intentional proactivity to ruling its outcomes. That's why they just brought on servos, by the way, into the treasury. They're looking. That's why we have a hedge fund manager in each bucket, right, any side of the equation. But that does not mean they have infinite control. Well, you could say, I mean, look at this. I mean, the best since intervention was what mid-August yields are probably, but at least 50 basis points are in the 10 years since then. If not more. Okay, he's probably done an okay job again that has stabilized. The dollar has gone up against the euro against European currencies, but it has been stable against the end. So maybe he has an okay there, but I mean, dear point about control. And the long end, what comes next? Clearly, we've had the initial announcement around buybacks, which the market has kind of quickly dismissed. The problem hasn't got any easier for the administration. So what does it do now? So let's step back again and let's look at what they have done and what can we learn about how they operate and how they maintain control when it seems like they can't continue to get the control they want. And this has great effects and implications for trendfall. But trend, you know, this is no longer a free market, right, which is they have learned. And this is not 10-foil hat stuff. It's pretty obvious to me at this point. They have learned very well that there are lots of mechanically automated strategies that do certain things that they can use to their benefit. They can they can take markets down and turn trendfalling negative. They can turn a wall to the expand wall and create vault-argeting strategies to liquidate. They can, you know, there's skew in the market and at the end of the day, all the vana charm flows and things I talk about come back in the market if they can expand it and then compress it. A v-bottom exists for a reason. COVID was incredibly successful in terms of a v-bottom. Everybody thought that was the end of the world. What do that do? They drove a massive new refresh and a new bull market, right? This is well understood. The Senate all understand this incredibly well. I want to highlight in early 25 as soon as they came in. What do they do? 150% tariffs. Everyone, we're going to, you know, it was new. Nobody knew what to expect. How much do we believe them? So it's easier to do, right? 27% decline. Very early on because guess what? If you're going to take it down, when do you want to take it up? Right early on because the midterms aren't for another two years. I took it down 27% and then literally turned a switch on the market and said, all right, six months, nine months, we're going to, you know, put these off for a while, 10% on some people, maybe 15 other, we'll see. V-bottom completely squeezed the market, incredibly successful operation. All right, you could call that one off. Maybe it was an orchestrated blah, blah, blah, blah, blah, blah. What happened this fall? This spring, exactly the same thing. Same time early in the year, what do they do? End of a civilization will be here tomorrow, literally implying nuclear war. And what does that do? Vol expansion market down 10%. Next day, end of the quarter, day before the end of the quarter, a bunch of short game on the market because of the JP Morton drift, all the things what they do. We have a deal. Two weeks, it's going to be signed. Meanwhile, Iran, everybody else is like, what are these guys talking about? It's all a charade guys. It is not a bug. These guys are hedge fund managers. He's literally saying, I'm the house. Where is the V-bottom in Bonson? It's coming. Okay. What's that going to look like? It's going to look like somewhere between five and a half and six percent in the tenure. And it's going to be quick. And it's going to happen sometime in the next three months. And then they're going to come. And the market, by the way, is going to be allowed to also come down. Those two things will match at the same time. I think we're getting 25, somewhere to liberation day, 25 to 40 percent in the S&P. In the first two quarters of this year, could come in Q4 not likely, but it's possible after the midterms. They don't want it to happen for the midterms. And when it happens, that will give them the excuse they need. Much like COVID does, much like how these other crises have done to deploy, to bring the Fed and Warshon, the Kabuki Theater ends. And Warsh comes on with massive facility at the long end of the curve. Like, Hank Paulson literally came out five months ago and told you, we had a coming treasury crisis. I told you five months ago. Everybody was like, talked about that for two seconds. I'm like, that's important. Do you think Hank Paulson comes out of nowhere and goes on to Bloomberg and says there's a coming treasury crisis. And we need to prepare a facility for it, like, literally five months before what? And this looks familiar, guys. We have a coming treasury crisis. Is that happening? Wake up. Everybody's like in this like, no, this is, this is a free market. This is a managed market by two hedge fund managers that have been placed there, because they understand the things that I'm trying to communicate on here, that the earnings themselves are a function of the CapEx and driving investment directly into this channel. And that can only happen if markets go up. And the only way we can do that at this point is because there's not enough earnings coming to drive it itself. There's not no liquidity to do it itself. We got to print the money. But it is so it is hard yields that break the equity market is up you're saying. It is at least one of the reasons. It is the coming treasury crisis that has to, that's what drives the facility of, again, you need that to happen in order to have an excuse or reason to do QE to hold a long and critical. But that also needs to be matched with the equity market to climb. And that's what allows you to roll out the sovereign wealth fund to buy all the equities and drive direct investment to compete with, by the way, what China has been doing for two decades. How do we drive the scale of direct investment in the US that we need to [BLANK_AUDIO] to compete with what China has done for the last decade plus. Do you think solar investment in the growth of the solar industry there had anything to do with profits? Do you think the electric car revolution that happened in China has anything to do with profits? Do you think the nuclear infrastructure build out in China has anything to do with profits? How in the world can a free market compete with that? The answer is it can't. And so if you want to, if you're the Treasury Secretary, and you need to compete with that, and you need to drive growth, and you need to compete with China, you have one thing that is dramatically a massive leverage, a course of leverage, against China, and to grow out of this mess that you're in, and not too much, you need to monetize the debt. And that is an extraordinary US dollar. And by the way, that's why we're in Iran. China started trading, China knows this, China started a trade with Iran and you won, they started trading with Venezuela and you won. Immediately after, what do we do? We go into Venezuela and Iran. What was the trade from this? Why? Because the kill is heal of the US as the potential loss of its orbit. And it's the greatest strength, and without it, the empire falls. But we are a long way from QE at the moment. We are not. We are not, you call me on this. We are within six months. Well, okay, I mean, okay, six months. But I mean, you're talking about a 40% sell-off in the equity market to facilitate that. Is that how you face it? We have QE happening right now. You just, nobody calls it QE. Nine billion in treasury buybacks, just small to start, but they're boiling small. And a $60 billion facility to intervene in the Japanese. And the reason we haven't done it yet is because Warsaw, what would be the reaction now to this whole Kabuki theater? If Worsh came out and just started printing money and putting a cap along the curve, what would be the reaction? So that's why it's not happening yet. And it feels like we're a long way away. But when the administration is basically about post midterms, is ready. And it will not be past June next year because they have the 28 election happening. When they're ready, they will step away. They are the third leg of the stool. You have the macro, you have the flows, and then you have the administration and what they are doing proactively to be in a situation. And that leg of the stool is currently keeping the plates spinning going in the midterms. But at this point, they need to take it down to take it up and they need bigger, bigger guns. And they cannot deploy those guns without a crisis. You mentioned the midterms. I mean, how important are the midterms now, given Trump's popularity level is so low, the general expectation, I think, is for to say is poor performance for Republicans more likely than not. The highest standard shift to the Democrats. That's probably what markets are people expecting. But does it matter for markets? How does that impact everything? Everybody's still thinking about things from a prism of the last four years. That elections are still just like some type of thing that has ramifications. And these are free elections that happen in X, Y, Z, right? I think even though there is a level at which the will of the people goes far enough and targeted, that's not already far enough. But it's not to force a change, right? We are not even close to that now. And a loss in the Senate and the House on paper, in my opinion, given where we are now, regardless of these numbers, even if they're worse than they actually look within the realm of being able to control the outcome. The administration will. You have my word. Hold me accountable if they don't. Will manage this election. And when I say they will, I mean, the second, where do all the democratic votes come in? Late. That's a nice little advantage, isn't it? Because they come through what? Mail and ballots. Has there been any effort to kind of undermine the validity of mail and ballots? Has that happened? Anybody want paying attention to this? I think that's a surprise. The numbers are going to look better than expected, or as good, or whatever, not whatever. And then time comes time for the mail and ballots to come. And all of a sudden some mail and ballots are not going to appear. Some mail and ballots are going to be deemed that they're not fair or whatever if needed. Now they're not going to do this unless they need to do it. And I'm very much of the view that this is going to be a contested election. So I don't think people are whistling by the graveyard on that. I think this is just another midterm election. This is not your father's election. By the way, you know, this isn't new. Anybody, this is Watergate 2.0 on steroids. They'll do whatever they need to do. Okay. By the way, did Trump do something else kind of similar at some point? You know, like I love that this already happened. And we're like, no, no, he wouldn't. No, I wouldn't do that. So we all like to believe that this is, you know, it feels safe to assume that things are fair and things work. Like they used to work. And for reason, it's not just about corruption. It's not about the Trump administration. It's about where we stand, the pressures in the system and the incentives that it's driving. And so my view in the midterm is yeah, things are getting worse, which by the way will lead to a much higher probability of a contested election here in the fourth quarter, which opens the window for whatever said decline happening sooner. In this period, which would normally not be as dangerous, which is the end of the year, becomes a lot more dangerous. What, what are you seeing in the options market from that perspective? Is that being priced or not or what from a skew perspective? It is starting to be priced a little bit, but it is way too cheap. Skew is definitely popping, but implied volatility for these events has not yet been priced. I mean, again, when I started talking about this a month ago, it was absolutely not priced at all. It has priced a bit more, but it is still incredibly cheap, relative to the realities. In my opinion, March, January, February, March, all the way to June, Vol, across the board in the markets is way too cheap, particularly equitable. And I do think that more times than not, people assume because people are thinking that there's risk there that that's less risky. And generally, that's true. That's very much my story, right, about flows. People are positioned for something that's less likely to happen. And that is generally true. I would really reiterate here, if an administer, given the structural realities, and given that administration would want something to happen there, again, trust me, but send it all, turn from supportive and proactive to support the market to let it go down. If not, help it go down. For a period, it'll happen. You want to talk about, don't fight the fed. Don't fight them on that side. And that's what happened, by the way, in early 25. On the bon site, the move has been orderly, but what's happened from an implied perspective, I mean, are you seeing a reaction there in response to the break out, about 5% in 10 years? Yeah. The move index is starting to increase, like the implied fall, which I think is appropriate. I think this is like a rubber band co-saying. The more those yields go higher, I think the potential energy of a bigger reaction one way or another gets bigger and bigger. And I do think ultimately this goes to maybe at 6% before it snaps back to, goes down to 4. And then eventually comes back to 5. But I do think that the markets are pricing in this risk on this end of the curve. They realize move has not been that high, right? But this quote unquote fed book is sitting out there and they're projecting that that's going to be at 6 or so. And I do think that's the case. Now, I want to be clear. I don't think I think inflation, not tomorrow, but like after this refresh, right, is going to scream. you know, in 28, I think late 27 or the 28, we're going to get a real debatement trade like we haven't seen before. Inclusive of a string of hormones, you know, lag inflationary push. And I think that's why it is not because the last thing his administration wants is deflation of any kind at this point to take hold. That's the biggest risk because the debt is unsustainable and the US has to grow its way out and it's laid its way out that's the only way and it can drive that. All of that, this is where you don't fight the sympathies. Like if they decide to turn the money printer on full force and buy stocks, you know, at this point in history, they can still do that. I mean, I've heard you talk about this before, this idea of effectively money printing to buy public ownership of stocks. How does that, I mean, okay, I hear you, if we get the big equity sell-off, that justifies QE money printing, et cetera, that's plausible. Is that where this plays at or how can you justify that as an administration? Yeah, it's actually going to be very popular when they do it because they're not just going to buy, it's not going to be like a quote-unquote bailout. It's going to be sold as a sovereign wealth fund which is similar to Norway, sovereign wealth fund, sovereign Norway, sovereign wealth funds, 2.5 trillion, pays for all social services. It is stock ownership on behalf of the people. You're going to reiterate that with actual ownership where people get to see their own accounts and see what they have in the form of Trump accounts. The infrastructure's already been laid for both of these. I want to also be clear, Japan already owns 8% of the NICATES. This is not new. People are like, "Oh, I can't, I can never happen." It literally happened for 20 years in Japan. They printed money and they bought stocks. This will not be a new idea. By the way, it's been incredibly successful in Japan. How's that sovereign wealth fund worked out for Norway? That's worked out pretty well. Very easy to justify. In the process, it will not only allow the U.S. to compete with China and we're going to do a. America first will be strategic investments. It will be very politically popular within the MAGA side of things, but it will also be very popular among the populous because it's going to be right-wing populism up to the end of the day. It's going to be instead of taxing the rich to give the poor. They're going to take 10, 20% ownership in these businesses. Tax the rich, right? But they're going to essentially buy in the public into stocks. This prevents a too big to fail market going down. It drives economic growth. It allows competition with China. It short circuits the K-shaped economy by forcing everyone to be singly invested into the equity market. At the end of the day, it monetizes the debt. It's the way out. Now, the risk. I'm not saying this is easier. This is what they want to do. I said this before, but everybody's got a plan until they get punched in the mountain, right? In the words of Mike Tyson, what's the risk to this? China doesn't want this to happen. And as we already highlighted, all the fragility in the system means this is very dependent on control on the administration itself of being able to deploy this without being legally or, you know, what happens. In this world, there's all kinds of fragility. This is like Minsky, right? It's like built into the system. What drives the loss of control? It could be an assassination. It could be any number of things. It could be a cyber whatever. And I'm not going to point my finger on what that thing is because we don't know. But to say, "Oh, it's a black swan," is missing the point, is that the fragility is embedded in the system, and they are trying to shoot the moon, and they have more, they have good cards, and they can drive it, and they're going to do whatever they can. But if you think it's without risk, this is about as big a risk as it exists. This is risking the empire. This is risking the exorbitant privilege of the dollar. And this is the game we're in right now. Curious. I mean, obviously you're talking about control. I mean, there is a natural timeline on this for kind of halfway through this administration. So if this is the actual endgame, then presumably we're seeing this playing out, starting to play out next year. If things chug along, if the equity markets say that these levels, we don't see that big correction, then what? Then they're going to try and deploy this at all times. And they're going to have to manage and control the unpopularity of that, and what you can expect, regardless, by the way, is a trend towards greater and greater control and authoritarianism. Because they don't have a choice but to try to deploy it. They prefer to do it in a way through free markets, where they don't need as much control, where it's broadly monotonous. But you're getting this one where another, because they have no choice. Which, by the way, would not mean we have a crisis, that would mean like a blow off inflationary loop that starts with a crisis. An inflationary boom. Does that change your. It sounds like a change of view. For a long time, we've been talking about the inflationary period, the 1966 to '82 period, equities traded sideways, up and down. It's not a change of view. It's not a change of view at all. It's actually. I'm telling you inflation's coming. I've been telling you inflation's coming for a long, long time. Well, interest rates were zero for five years. So that's hurting you. We've been talking about this for six years. When interest rates were zero, we were pounding the table on this. But you got two very distinct scenarios. One is the prolonged bear market with punctuated by bull markets, bear market rallies effectively. And you look back after 15 years and the things happened. Or you're talking about an inflationary money-printed equity boom, which presumably would, like with Japan, you give the example, the public ownership of Japan. It's fuel and massive equity rally there. So which scenario is more likely? I want to be clear. You're focused on the equity outcome and nominal terms. I'm really focused on the equity outcome and real terms. And I have been from the very beginning. I've said very much from 1968 to 1982 that markets lost 40% of their value in real terms. But it's not. Again, we all live in a world of nominal illusion. 1962 to 82, 20 years, 60, 41, nowhere. And by the way, matches, that 20-year period matches 1929 to 1949 in real terms. But psychologically, and this is why we do this now, as opposed to. No, no. Psychologically, everybody thinks of 29 to 49 as the Great Depression. Which is a reason why we went off. The gold standard went to fiat and instead draw it through the inflationary rock. The two are the same. It's just a matter of doing it in a fiat world where you exert it through inflation as opposed to a nominal outcome. So I think the great. The flaw or the mistake in that question is assuming that the inflation is any. I mean, we're better than. But are we really going to see double-digit inflation then for a period of time? Yes. Well, that would resolve us. Fair enough. Yes. I think you're going to see inflation as bad if not worse. How'd it worse? In the '60s and '60s. Yeah. I'll have one little caveat to that. You're not completely. I didn't mean to completely dismiss that out of hand. I think it's fair. Up to some extent. Which is, we didn't buy equities in the '60s and '70s. We did, through Arthur Burns, drive real interest rates negative and drive an inflationary loop, which I think was very much on purpose. Okay. And we will do that again, but at greater scale. The difference is we are going to, instead of tax the rich, give to the poor, great society program Yada Yada, which we did in the '60s, because we've learned from that mistake. Try and drive not taxing the rich and giving to the poor. Instead, tax the rich, give to the poor, not allow the poor to spend that money. Because we're going to do it through the equity market channel. We're going to hold the sovereign wealth fund on your behalf. We're going to deploy Trump accounts where you can't sell. This is for your children for 20 years. Now, whether that flies, whether after two and a half years of this, whether the next administration says, whether the people are okay with this, what China does in response? My point is, we're going down the same alley. We're trying to historic, like, it rhymes. Everything's very similar. But this administration's trying to now react to what happened last time and say, okay, we had a better solution. I'm skeptical that it really works as smoothly as they're hoping. And my best guess is that we end up in real terms, which is really how you have to look at this. No, no, very similar outcome. Good stuff. I'm just conscious we're up at the hour. Was there anything else we had? I'm just looking at my notes. We had covered many things. Was there anything we missed or what? Any particular points you wanted to make that we hadn't got to? Well, I think anybody listening to this just feels probably like powerless. Like, what do I do? I think I'll end with 60/40 at its core. Successful last 40 years is a function of interest rates going top left to bottom. The reason we haven't seen a reset on the bond side, we keep talking about the bond side, but the reason we haven't seen the equity side is because of what we started the whole conversation with, which is this lag to the refinancing of the debt. We had a concerted effort by the administration proactively to try and drive CapEx to keep things going in the equity market. But know that at its core interest rates and inflation keeping the long end of the curve higher and higher inflation. Ultimately, the only way out of this is either equity markets lower because of multiples or massive inflationary outcome. Your greatest risk to your wealth, equities may not be answered for you, bonds definitely won't be the answer for you, is to hedge that structural inflation. And so, importantly, make sure you're diversified. Make sure that you can benefit from different outcomes of different things that are unrelated to equities and bonds. And I think that's something that most people aren't used to. And most people are recency bias machines. We just look at the patterns of our lives and say, "Well, this has worked, so this has got to work." But I really encourage people not to wait, you know, a year or two at this point, because I think, you know, we're up against those changes as we speak for the equicence of things as well. Good stuff. Well, diversification and looking at alternative sources of return is definitely a message for all of us here, top traders. So, thanks very much, Gem, for joining us again. Niels will be back next week. So, if you've got questions, it'll be Niels in the chair. But thanks for tuning in. We'll be back again soon. So, for all of us here at Top Traders Unplugged, talk to you soon. Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show. 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