SI323: From Politics to Profits: How Regime Changes Affect Your Portfolio ft. Cem Karsan
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You're about to join news cost of larson on a raw and honest journey into the world of systematic investing and learn about the most dependable and consistent yet often overlooked investment strategy. Welcome to the systematic investor series.

Welcome to welcome back to this week edition of the systematic investors with jim cousin and eyes nails cost last, where each week we take the pulse of the global market through the lens of a rules based investor. Jim IT is wonderful to be back with you this week. It's been a while. How you're doing is chicago all dressed up for Christmas?

Yeah, I got my plane on here. We got our first snow of the year last night. So nothing nothing that really stuck too much. But uh, IT has been seasonally warm uh throughout the year in chicago global warming of thing like come to chicago you know it's been beautiful here um but but no IT we get our first know so we're get ready for the holidays family in in all all the good stuff well that sounds .

very nice actually ah you know I was actually snowing uh when I drove down to my office um just a little while ago um but I will say I was in singapore last week and IT is really interesting. They they really go all in on Christmas. I've never been there this time of year before, actually.

And not only do they have all these decorations in the streets, I mean, it's insane and but they also played loud Christmas music in the streets. And then you walk around and as a european, and of course, you you're doing this while you're sweating at thirty three degree sales us and massive humidity, right? So it's such an on surreal experience but I often grow .

down to arizona to to my in laws for for Christmas and it's like inflated able cactus with like cina's hats on IT is but talk about surreal yeah it's a but yeah here in the U. S. That we do america, we do Christmas big uh, you know, in chicago i'm going to a tree lighting ceremony along miss gan avenue and there's like a whole we're going, you know, that is a whole to do and this is like literally the day after tekko ving. So IT will be quite some absolutely.

absolutely. okay. Well, we got uh a list of really important topics um that we're gonna tackling today. But as you know, I always especially uh at a time like this where it's been a little while since we spoke, uh, on this series, at least I would love to hear kind of watch uh, on your radar outside the topics we're gonna be uh, addressing, uh, latron today.

It's a it's a moment. It's a trajectory moment, right? And not just in the year, but really kind of in history.

And I think you if it's hard to not be aware of that and thinking about those effects, we've been talking about regime change like red, you know here, a broadly like that, that we are broadly in a very different environment than we've have been till last forty years. I think we've seen that as we've taught for us to three years. We continue to go down that path.

And those things are not linear when they happen. Sometimes a IT goes very slowly and then all wants. And I think you have to be prepared for the fact that things have gone slowly in that direction, but really had the possibility of accelerating all that wants here, uh, pretty quickly.

So I I really do feel in many ways that this is a calm before a bigger storm. That storm doesn't mean a crash necessarily were, but a bigger acceleration into a broader regime change. So is a lot of questions about that. What's on my mind as we head into the holidays?

Yeah no absolute dinner and will we'll touch on some of those topics for sure. Uh, today um I think as uh you know for me or talking about what's really been on my my rather I mean one is was just the experience of being um in west palm beach the day before the U S. Election and that was also an interesting experience I have to say. Uh luckily he was very peaceful. Um but then uh now that i'm back uh in europe um as european um I obviously are thinking about what will this new trump administration really mean for europe and of course as a starting point is the ukrainian situation um because if you go by what was discussed during the election campaign, um this support for ukraine can you know go away very quickly and and I just don't think europe is is ready um for that um and so a lot of that has to do with russia but of course then i'm thinking a little bit further down the road and i'm thinking why on uh I don't know if you followed the the news that it's maybe not world news but uh in my birth country of birth, denmark, in the last forty eight seventy two hours we have been holding back uh chinese ship that the the suspicion is that IT has caught a another two fiber cables in the bulletin sea uh in the last week or so um so if IT is the chinese now doing this, i'm not saying IT is but if IT is IT just opens a whole kind of a warm and I know we're going to be talking about all these geopolitical issues as we have done um in many of our conversations over the years um but IT is um is just super interesting time and I think you are wording of regime shift covers is so well because it's gonna different on so many levels that we can't imagine. I think i'm .

all right.

good time. All right, quick trend following update before we dive into all the juice topics. You know it's not always the train follows on the right side of an event, especially if it's one of these events that you know is going to happen like the election in the U.

S. But so far at least the U. S. Election has in large part been in line with the overall exposure of train follows in the aftermath of the election.

Long equities uh and the dollar has certainly been profitable. Avoiding long exposure bonds has also helped. Um but as fast as I can tell perhaps and even Better sector of a train follow so far, november has been soft commodities like coffee, like coco.

Both we drop about twenty percent so far this month. So that shows you the the power of being truly diversified. What seems to have heard trend follows a little bit following the um uh election uh is being long precious metals um and I think we're gonna talking about gold a little bit later on today.

Montreal boma stood at forty one last night. That's a neutral reading. Um IT does look like longer term strategies are doing a little bit a bit Better than what the reading suggest as of tuesday b fifty of one point of two percent in november of three pots, six seven for the year.

Socon C T index up about a percent, only up about twenty basis points for the year. Socon trend up about two percent and just slightly positive for the year now. And the suction instruction N T test index of about quarter percent and of about fourteen basis points so far this year. In the world of traditional investments, msci world is up about two and half percent, almost a in november of seventeen point seven eight percent so far in uh twenty twenty four. The S M P U S acquitted bonding dex is down about thirty one basis points this month and all about two percent so far this year and the S M P five hundred, of course, still pouring away um as jim, by the way, has forecasts for a long time, up three point eight percent and this month and up twenty five point six percent the abouts so far this year.

Now before jim, we dive in to the topics we did have a question in from adam h. Adam wrote A, I have a question for you. Not sure whether you trade or or know who does vick futures. Well, I sudenly know someone who does us trade vix future um but here's my question.

I'm trying to gain exposure to fix as a day daily swing trade now for a two and half three million dollar trade would IT be more efficient to gain exposure directly to the futures for a daily holding period or by the etp dash V X X. Curious about your thoughts on this around trading efficiency, given there are futures and etp that holds futures. M, P, S, he says, i'm a retail investor. All right.

yeah. So I always Better to go to the drug source. right? These etp are sitting on top of uh, these features, right? So uh, at the end of the day, there's uh there's your ten marker makers extranet you know in in in these etp because they have to rebaLance. There's all kinds of other costs on top about two D T P. So if you just pure fiction ency, a big futures are more efficient. There are also more capital efficient, right for their margin as opposed to, you know talking do IT this guy like capital efficiency matters, especially in a world where interest straight for five percent so um yeah not even a question for me administrated to the futures um I got a precent players okay.

So well on all right. So now we're into your topics and you gave me a few headlines and and then i'll try and follow along and also follow up with some thoughts and comments and questions for you. gym. But the first thing not surprising I guess uh that um we are going to talk about is volatility and the volatility compression and dispersion uh into a the end of this year. Uh you mention specific you just in video um so i'm excited to hear where we're gonna with this.

Yeah so one of the big concepts that we've talked about the show, but if you have a tune up for some time IT, is how corruption of constituent in stocks in the market are tied to volatility to break that down, a very simple sense, if the volatilities compressed is offered on the index level, if IT, if it's very well supplied, that the s marketing kers are law that pins the index, right? But the captured tive part is that the underlie constitutions actually get pushed away from each other.

Think of IT as a magnet with a with a positive and a negative. Uh if if the wall is really well supply to the index level, that means that index can't move. It's stuck right um but there's still something called idiosyncratic risk, right? Things still have to move.

The end of the day, a positive set of news comes out in in a name or something very bad happens. There will be a reaction to that single stock, especially if it's not a big ball center itself, right? That's not the major other effects.

If that happens, that means something has to go the opposite direction, like buy arbitrage ge constraints, if the index is pin and something moves one direction and another thing has to move the other direction. And so what that does that actually exacerbates volatility in the constitutes? Do you think about maybe not as a whole, right? Because I get the index is is but what that does is a breaks down coalition.

We've seen this at scale more, more if you look at a chart correlation, correlation is actually uh, you know breaking down. At the end of the day, there has been less correlation between constitutes than ever, and it's been secularly that way. And people point to, well, we live in a world of regime change.

Other, yes, that's true, that is happening. But before all this regime change that happening was also happening two thousand and seventeen, we saw a historic, we ve talked about this before. I think this is the most important data set for where this we have thirty percent lower implied and realized voluntier ity.

That any other time, ministry, hundred twenty years, you do a chart, a scatter plot. It's like a massive about later, right using massive lt layers like that don't happen without a reason, right? The other interesting part, right this is this is not coincident.

The odds of this being coincidence are sentience zero. Um you have twenty five percent lower correlation between underlying constituents that any other time one hundred and twenty five years look at the a plot master out those two things are trinny ally tied and I get they're tied for this reason. Particularly in the scenario where the index himself is pin by something, it's the index has been forced to be pin.

I do sync, read rise, you are never going to eliminate, right? That's the definition of videos in crazy risk. And if you have a ocn radic risk and the index is put out in things, that concept is incredible, powerful, incredibly important.

And that is an edge. IT is a source of alpha for people. If you understand that and you understand what's happening in the world to do, and you have an edge, you understand that things are gonna IT away each other.

It's not a directional edge per say, but I think so. So few people understand that most of the edges truly true alph a is generally not directional, right? It's generally marked structure, uh, dynamics that lead to different dining in in distribution outcomes.

And this is a critical and so having said that, now drilling down to now and what's happening, what is very well supply. Why is that often after a big event, this happens, right? We had the election, and the election is pass.

That event walls come out, and that was a very high wall, and the walls behind IT were lower. So there was this great opportunity to sell high all, to buy lower wall as long as you could manage a gamma, which was relatively ageless. All, all things considered, you haven't now been delivered longer, all at a much slower though.

And that brings the whole curve down. And this is that you get into a circle, right? Because the more comes down, the more dealers along.

The more dealers along, the more they are having to be on the offer and and till is a buyer to help. Believe that pressure aid cycles down, IT compresses, realized, which by actor, eventually this gets to a low, a low enough level. And markets, the way this genre resolves is on the upside.

The market realizes enough that the market slides to a lower empire volatile because calls are pricing a ball, and eventually becomes so low that there is inputs you, the realized volatility on the upside turns the outpacing and there's an inputs for people to comment IT bibo. Also, entities are short call. They write calls against our positions.

They have to buy back their calls. They're making money that you can go by puts to head as well as general as you rally any slide to a loan of all. There is a there is an impulse for the market to kind of come back and buy back that eventually.

Um and so until that happens, balls compressed um and we are seeing a mass amount of all compression across the board in the shorter data, meaning one two months later though um that's likely to lead to dispersion and that's the cy. And again, people will point to resume change and review like all these things that are happening. New administration.

True, those are true, but understand there's a structural reason there's a in the back of of those dynamic as well likely to push things away from each other. So this is these time to be times of rotation will likely to get increased rotation into the end of the year for the next several months. And that volker sh is only gonna exacerbated, by the way, by thanksgiving and Christmas and all the positive flows that don't just come out of these borne and charm flows from the skew, which i've talked about IT linked here right in december and all the structure products at the end of the year. But also that we leveraging effect that we've talked about that nozing that comes into the the this next next month that I have to two months really caught two months because it's really through early january, is likely to continue to annually push the market higher, but compressed volatility of the thrown into the curve and lead to this version. So that's the big, big take .

a can I can I ask a maybe A A silly, naive question, but I just want to try and understand this. So as markets move higher, we know that volatility often calm down, right? And and then at the same time, you're saying, well, this version is growing. So the correlation is is is breaking down.

So intuitively, you would think, well, if if markets move higher IT means that all stocks must be going higher, what do you saying that's not necessarily the case? And is this then if i'm if if i'm understand this quickly, is then this kind of also related to the fact that the rally is narrow? That's not a lot of breath.

okay. Yes, yes. This is a major driver of the break down of breath. There are other drivers which are also exacerbating, like passive loss, which other people have talked about and are definitely you as well, but uh one hundred percent vall compression interactions is leading to correlation breakdown which is also by definition hurting. Rt, um and uh and again, it's both.

I wear IT, right? Uh, all of these things are it's not everybody would say, well, this is this is what matters or this what matters. You can we can all be true and and this is a major force, is an important one that people need to be aware of. Passive flows are also important um but but a hundred percent um the breath break down in the break down a correlation are intrinsically taken.

So maybe as a follow, and I know this is we're not giving investment advice here, but i'm just curious about the the mechanics of this.

If fund managers out there are seeing this, how do they take advantage of IT? But also at the same time, how do you know when it's coming to IT? I mean, just saying, well, we have to wait for the markets to turn to see this reversal because you think maybe if if markets really say off, um that could also um well, I don't know about how how breath would be be affected by that, Frankie. But um so how how do people who want to who's observing this, how would you take advantage of that yeah .

um the way we take a binge of IT as we watch very close and what's happening in the mall markets, right, that wall supplies the key, right? Um you know in terms of how do you watch that, those .

several oh no.

no, no yes. So at the end of IT, but but to be clear, I want to make sure I am also clear both people and I really try and dispell this. This is so critical and it's easier than people think the vax.

Is that what you should be looking at to understand fully? I mean, yes, coral hit right all but but uh, IT is not a pure of what is happening in the wall market because there is you in options, right? There's a downside, much higher volatility, a volta and downside options versus upside.

So naturally, if you go down, the fix will show side like the vx s the fix. But often more times are not actually the actual underlying wall is coming down. And so understanding what that wall those wall dynamics are, Price, as most people know, another products matters, is a reflection of what supplying demand is telling you, right? Price is a great way to understand what's happening to supply demand in the wall market.

Uh, you can know the actual who the deals holder don't hold that the best. But if you are a retail player or don't know those things I can't track IT Price is also very helpful and that's kind of a little a chrome like people should be watching Price on the line options, not the fix under the underline options in what's happening to the fix strike war um of of the surface. And again, that's not as hard as not a two dimensional thing.

You have never got a lot of options. But in this day in age, you know getting options, print balls in and then taking one Price is set. And looking forward, the Price like you can do that those are things that even to retaking yeah no that that's recommend .

yeah no that that's amazing. And you mentioned in your a topic uh line in video, for example.

well rotation, right. So now the next step is we we know this dynamic is is in play here into the end the year. And I know people, I say no, we know this dynamics supply. Now you can things can change.

You can have other factors of all can go bid and that dynamic may change, but this is a high, high probability factor, probably the what so given that, what rotations are we likely to see? So let's the next step, right? And it's a harder question.

And again, not one that we have to say one hundred percent. This is going to happen. That said, you know, if you want to start trying to look for places where things can can rotate, one good place to look at short fall there is the market.

Because the long vom t areas, the market are likely to stay pin with the with the u rest of the market will not be the places where correlation breaks down in video clearly is one of those. Interestingly, the Russell has become one of us IT didn't use to me because of so much upside call buying and started last. I we talked about dynamics that LED to the that helped exacter abilities, the August uh, decline dynamics.

And so there there's a really interesting kind of by vocation in the market of different short fall areas. And the rotation that were likely to see is likely do with all those those uh, those entities are not only those entities, but those those things are are likely counterweight to one another. Now what's likely in between those two? And now next question to go up verses down.

Well, let's let's kind of we can go through the the analysis of that and there's no right answer here, by the way. But if you look at uh and video, you know H S, it's flagged in a lot ways it's tried to push up. It's had incredibly or momentum is slowing.

The earnings yesterday were, as I would have expected, good but not great, right? There are some worries. Are you get in all the games about accounting issues and all kinds of things, right? Is that I think our legitimate they're not just kind of nature. And you know there there are serious potential issues.

Now that doesn't mean, by the way, we're talking trading, that doesn't mean a enough you want to be the future or that know I think people come after me right away like how could you Better against AI? It's someone of betting against A I right um like please help come out to me on on social media about about any this is simply factors and unlikely probability. So and meanwhile we're talking about amErica first policy and um you know things that large you are more likely to benefit, uh, kind of smaller cap domestic stocks.

And so there are other pressures and narratives and things that have a wind at create a wind at at at the back of the Russell, as as opposed to a headwind, in my opinion, to in video at this point. And I can happen solely in all once, but I would not surprise me if we continue to have pressure, like all compression, steady ground higher in the S M. P.

Meanwhile, uh, things like a in video, uh, start to leg and then, uh, continue to do not, not as well. Well, well, things like like the Russell, broadly, I do Better. Now I can go pick your favorite ames in there.

I also think, uh, I mention this elsewhere like me names uh, you have have a tail in the form of uh the new pumper chief and mask uh and and you know ah you think the bully pulpit is important Normally now now take you twitter as a microphone and add that to uh to a doctor trump uh and and you want himself is not just twitter. You want himself is, well, we well, how do you feel about him? right?

H, he is an incredible job pumping tesla stock over the years. You could argue that test so would go bankrupt years ago if if he didn't wasn't able to get the cause eez and things going on in tesla early on. He is a narrative, uh, genus. He's been able to kind of push investment into his names a at low cost and go through years about with lack lack of profits uh and successfully and again, and this is not a negative commentary. Anyone is an incredible job of that.

It's genius ah but he is going to use that those tools ago and yeah and that's what he did politically by the way i'll trump politically is no doubt about IT and among the Younger cohort that is a in a support of dog, trump was increased powers well so so you know he that uh and think about again if we're getting rotation uh short virus again h there the names are are one of them. So running of the means is likely to be a thing again. sure.

Yeah we'll get to I i'll come back to elon in a slide different way little bit later. Um I just mention it's interesting you mention this. I was listening to uh professor um actually a previous guest as professor as worth uh the motoring and he was talking about specifically， uh you know what he thinks about A I and the max seven but um he he basically felt that that these things were over value in his view view and and he also mentioned that he had told half is in video position probably a little bit earlier than that now but but there we are.

So you know it's a fascinate the area before we before we go on to the next thing, while we are the topic of kind of stocks in gentle, first of all, I want to acknowledge you for being so consistently right for many, many months, talking about and guiding people through the the options that really a through the equity market. And I I wouldn't mind if you could just very briefly recap kind of why you keep that view and whether something surprised you or or or really just played out as as you expected because it's gonna set us up to when we get to the point about what happens next. I think.

yeah, good time to talk about the year. Yeah you know the whole year. And I think it's good to be to self reflect at this time a year.

You know we came into the year cautious. We were little wrong. I want to be clear. I was very, very precisely the wording for a reason coming into this year.

The fed pivoted in, in december of last year, and they really surprise us and everybody else. We Priced in six cuts last this summer. People forget years, years, quickly yeah. And all the sun they had to pay IT. We get we said when that happened, like the food like this is crazy.

Like the fed is no way the fed is going to be able stick to this like inflations going to be sticker than people expect, uh, you know the economy will be stronger than people expect um and part of that was reflective because they lower the rates. And I think they know that actually they they glower out the long term rates. And guess what, it's stimulus and IT at a quarter forward, all the demand comes back, right?

Um we saw A A massive amount of the quest red demand in the real state market here in the U S. Could be at least because people know mails on have been waiting for an interest break and I got early in the year and going into the spring. Yeah that was that was brilliant.

Um I think the fed is on to something here. If they every uh end of the year start, uh, you know we're flecking that they are going to cut aggressively and they can bring down the long into the curb that will do this time interest only to get there. Um they are going to push a spring push and get the the economy go into the begin of year.

IT works like it's not and by the way, it's just a narrative player than they can not do the six cuts. So that doesn't matter. And then things got a work themselves out.

And can I interpret you here just because you may not remember this? Um you were also very early. I remember from our early conversations, you were also very early out. Talking about be aware, this is an election year and i've done my study on that. So just want to .

make exactly I was gonna to that. So okay, so absolutely. So in january, we said, look, are these windows were after a big run at the end of the year, you have to be cautious.

We're talking about that to get next for next year. That's consistent and particularly consistent in in up years. And guess what, twenty three up really at the again this year, right? That's story we've talked about in this election years.

There was more volya mics keeps out worker this year, but know especially with the fed simulating late last year thirty, no one we call like a rotation, massive rally. Got all that spot on. Made a ton of money.

No one till jane like, okay, time to take a break. See if things kind of we can to pull back here. games.

And we were very tailor with the trade. We said, say, one in a half to two week window here. Are you GTA start seeing something, or this is because this is election here.

You know, you got to be careful. We took that short kind of a look at early bijan ear briefly, and I didn't happen literally the february. We said, you've got to go a long, you ve got to go aggressively long, and you're gonna be good long the rest this year.

And we were very adamantly pat of the table luri from february till August, right? A one. So we're probably right during that period, obviously, and right before we had a couple. Taylor, know this is the water thing like you you got a sometimes betting not long.

The market, by the way, is the harder thing you can do and and it's what where we have real edge, honestly because if you do in the tailored way in your very uh specific um you can you can really add uh great risk of justice, return and improve your short anyway. So we get to the summer. We are very clear sold or talking about now summer George vall compression, you're likely to see a much more of a grind to time to sell short date by long day, right? So import, we are not just even right dynamics of direction in the market.

Uh, you know, made a ton of money being we didn't have anything greater than a two a half percent pull back for three months, may, june, july. We were very clear ball compression. Was this plays in your question? When do you know? How does that? You know? Because when IT breaks, a breaks spectacularly, by the way, that two thousand and seventeen very do, we talked about IT broke with the apocalypse, right? That something you should be very rare.

And when the brakes is going to be dramatic. And this, again, ties into the end of the year, which will get to and january, february now. But but you know we said IT will IT we will get evolve that in the fall and that all of that will be a warble ten percent or so. We said we targeted likely september IT happened in August IT happened early.

So that was a get something we didn't get perfect right um again, getting every point of that exactly is essentially impossible right? Um but if you step back and look at what we said every single quarter with I say the exception that like that gene fab with a couple of weeks in their spot on not just what happened to actually, but what happened of all in the dynamics and the characteristics and distribution of the period of hundred percent ago. And and again, we ve got massive all compression and then we'd of all release ten, seven percent. And we said we were screaming from the rooftops. This is your opportunity, is what you were waiting for to get back in the end of the year.

Is gonna a massive rally and that we should hit six thousand and sixty two hundred and the year and that will be uh you know a uh you're not set of the year but by mid january may be even higher um and that that should be a period again to hedge and to be careful now we mean I get the decline in tub two people right now, by the way, we we called the twenty two a beginning of the decline to the day and go back we were on to the show, we were on other shows, literally call that six months out. Um so these DNA ics are real and they are periods to be very very um uh careful and and and you know look for convexity in those periods. H and M B hedge.

But this year in particular, a part of the reason we had such confidence in in the rally throughout the year, not just the wall dynamics, but the election year tax. And you and I talked about that at depth. The long and short of that was the data speaks very loudly about election years.

People think, generalize, electrons are very positive. That's not the case. A if you look back to the nineteen twenty to the president one hundred years of election history here in the us, um the number to say eleven percent, okay, every as well as are eleven hf percent that those are great numbers.

But what people don't realize if if they look at the data, if you if you take sixty four, sixty eight, uh, seventy, seventy two, seventy six, eighty, those five years out of that dataset, just five election elections, all of those together were up at average of twenty one and half percent. Uh, none of them were down. All of they were up double digits.

So incredible consist, and if you take those out of the data set, the number for the hundred years of of history is actually by person. So election years outside of that period, but not positive. And what makes IT so impressive? Again, you can kind of look at the dad and pull whatever that and get whatever result.

What makes IT so impressive is that if you look at that same period, that's the period where the market went nowhere. That's sixty eight to eighty tube or which we have highlighted at noisy here. The market went nowhere for fourteen years in last seventy percent of the real terms, yet all the election years during that period or up double digits and the average was twenty one to half.

So what do you think that, that data period looks like when you pull those election, you're out. And okay, this is data. Let's not talk about quality tail rented, this really qualities.

why? Pretty obvious, right? You're a populous period that we've talked about in debt actually before into this data.

I had this thesis s and I was the data and I was like, holy cow, it's right there in the numbers, right? So it's sound like I look at the numbers. Instead, I came up with this theis.

It's very clear, populous period. They these are contested elections. Uh, you have massive turn over again, data wise.

If you look at those all those elections, the average period that somebody stayed in office in that period was four years, either by, uh, getting kicked out of office assassinations or getting kicked out office. The city is right. So contested period, people are not happy. People want change populous.

And guess what? They're feeding money to people, feeding money to feed reserve policy and are pumping in the market to get elected. We're about tomorrow, later get the voters what they want, but eventually get to pay that bill and IT ends up getting paid in the years.

So here's your big picture kind of a and by the way, also probably not a coincidence, last two act elections, right, which I also defined as populist elections, that we're in this type of spirit. The last one was twenty one percent and this one were now twenty five percent, right? So maybe not a coincidence.

Maybe we should look at the data. So again, you kept all your eggs in one basket and go all in for that reason. But then you would take that as part of a bigger picture.

Look at the flows, understand the micro what's happening and the mess where you end up and and a good predictive kind of position and and end up getting IT right. Um so that said, I think you can insinuate what I think you know is likely to happen in in early next year. Um again, I see this end of year uh period as uh more positive with more positive flows than the summer but more impressionable to the summer. I see the um again, we really talked about the diversion and everything else, but I see this giving way a ultimately to about a volatility and about a and a decline and something that much more than a wab l that's to be aggressively bought.

So a word of caution on come january, that doesn't mean because is now because uh many, many times most times the best returns happened at the end and he got a lot of tail wins IT until mijares ary um and again, we can call people love IT when I call dates because when ends up being right, people are it's the precision that's important right sometimes so um but I can I would focus on A A january thirteen s to fifteen the window uh as being your first shot again Taylor trade. Uh you know it's a hedge. Look for convexity.

And in that portfolio, as you as we play IT time up, there is going to a lot of really important indicators. Again, we kind of talk about the tops and and what unpinning of wall looks like and important that is I think it's something you look for those things at that moment in those windows IT will never be easy, right? So uh something uh much like the the ten percent mobile came in August and september.

Look for some variation of this. That's not going to be exact in terms of timing or or or path um but the trend still holds. If that doesn't happen in january, I would be very, very much kind of february as well. January is is Better is a Better window in some ways because IT comes sooner after the rally and more likely to get that blow off and then a decline. But sometimes that happens in that figure exploration because marches, equality objects and and creates much more um uh dynamic kind of stress potential in the market um as we saw a covet crash, right we continue to rally despite knowing about covered into feb apex and then saw a feb march cycle to the day that represented over thirty percent decline in the market. And I had not a conscience of piloted the first.

Well good question for you um in your mind when your analysis when do you think the current populist period really began in this cycle?

So that's an interesting question. And obviously, that assumes that it's like .

has a start date, right, of course, which IT doesn't.

No um i'll tell you why .

I asked them. You can think about IT. The reason is i'm kind of curious because your analysis has been so accurate and and the fact that you vary very early on a this year started to talk about, you know be aware, election year.

He is the analysis. This is what the data tells us. You just point IT out before that through that populist period, sixty eight to eighty two or whenever equities overall did move, but they move a lot during the election years.

The question for me is i'm trying to and of course, there's no guarantees here so far IT looks like election years have been um following that pattern. At least my question is to the years in between follow the same pattern as they did in the last popular period. That's kind of what I was trying to think about.

Yeah um so in terms of timing populum, again, these are when you turn on big cycles, they ran. But it's not like something starts at one place in ends of the other. The reason is because you need something idiosyncratic happen to unless sh what is a secular .

trend right in our .

last dataset that we talk about, the sixties and seventies, Kennedy was assassinated in sixty. Kennedy had a, he was, he captured the imagination, the beginning of a Young populist feeling. His policies were incredibly popular.

He was the originator of the great society program idea. The reason I got instituted with his, his best, his passing, was A A unification of the country that allowed L, B, J. To pass that.

That fiscal policy was the beginning break of of the fiscal push that started the inflation. But if you look, IT was happening well before Kennedy. Kennedy was a vehicle.

Kennedy was A A much like trumpets, right? Use a vehicle for this sentiment. You know, the views, war and and all the protectionism and things that we're going on.

We're going on before can. But that swell is starting. I would argue that the populous pressure would have taken a longer of Kennedy, not they have started this policies.

Will they start in sixty four? They may have taken the sixty eight, and I may have taken another. Something else would have had to have happened to you. That's that one. Now lets look at our current situation, which we understand much more and or find away because we are the living through IT right to an extent right um here in the U S.

Starting in two thousand and nine, we started to get this beginning of this populist kind of push that's a long time ago right? Why do I think two dozen? I, that's when the tea party started.

That is, when at the same time occupy walls to cap, right the personality of those. Of those were a Young population who is disc runt LED, but yet not quite to political dominance yet. And there were still an air of political conservatism and worrying about spending, right, that was involved in that.

Ultimately, that was the beginning of kind of or or you could see IT out order coming at that point. But these cycles are tied to demographics. And demographics. The baby bombers had to start, you know, get to think about this, we've fifteen years, think about how many baby boomers have passed, and think about IT, how thought IT and retired or you know or no longer voting a in some for another, or or applying pressure to the political system.

And meanwhile, those those kids who are not doing occured, wall street and eighteen and year old old, eighteen year old are now thirty three, right? So the political winds have shifted as a function of democratic because, again, this is a critical thing that people don't understand. People think demographics is Richard vers poor IT is but it's also old versus yeah because it's capital versus labor.

As you get older, you are more generally capital and when you're Younger, your labor. And so the entities that have lived this period of being disadventure ge because of inequality are Young. And as they grow a political dmd for, like guys, the political winds shift.

That's a critical thing that people don't really appreciate. And so IT took every years for every election is four years. IT took several election cycles. And we started to see that people wanted change, that what obama was about, we think that was populist, right? change.

Why do we want change? Why do they want people to understand fully there? IT wasn't as we're fined, but IT was tied to this in inequality. And this feeling of the system does not work for me.

Well, that created more frustration by a lot of the entities and the the labor, the real labor, which was more rural, right? Because I didn't represent them. I didn't represent them.

IT wasn't male focus. IT wasn't White focused. IT was in all the things that we know about, right? And that created a backlash. By the same, by the way, people who have been here by the people who are also being disadvantaged, whether your poor White must Virginia or your poor black in chicago, like it's the same effect that that is making you disGraced the promise people start pointing at each other.

And at the end of the day, the most disGraced are probably the rested out cities, middle america, because male White have been, even though the primary reason that all of them are performing have been hurt problem more, because more female engagement last forty years in the workforce, more more minority involved in the workforce. So even though the dreams that were a promised in the thousand and sixties and seventies right to minorities has not come to pass, and they're largely discounted for that poor black, a poor White men are in the U. S. Are are looking at their fathers and their father's fathers and saying, we for two generations are have have seen mass d decline and um and so that that anger and that population in that population came created Donald trump in and the key and leaching here was was two things one bringing the right left so Donald trump brought the conservative side, the non popular side of politics, kicking and screaming to the left because he is a marketer and he saw he is really good at giving people or telling people is going to given more, they one, and he saw a truant and he told him, I know that he even realized that at first, but once he realize that he won't have long him to, i'd told them what they don't want, which point and and bringing the right left. Wow, that's up.

You know now the whole things left, whether your A O C or berny Sanders, we have all seen an absurd or interest a or Donald trump, your populist now and that paired with a candies which was covered our assassination knee was covered um and that released a massive m amount of fiscal spending and and by the way, those policies were not just focused on on that that period in turn coit IT was a crisis that was very much taking to be a jum by politicians to to institute populous policy and his policy that that you will stretch ten, twenty years. To be clear, like we're still we're just starting to see some of the fiscal populous impulses from code anyway. So that's how it's played out now. So make a simple question if you tend .

to do I just that, I think like this going to take .

five so the answer is twenty twenty a right because it's uh it's like to sixty four for me. So if you if you wanted, just kind look at arrive and see you what the verse may look like, which is that I think what you're going for, you know there's there's eighteen years and there are sixty, forty, eighty two um this probably goes to twenty thirty eight or so.

So what actually was trying to get that was to think about how equities have behaved. So let just say it's twenty, twenty. okay. Well, so far, equity have doubled since twenty, twenty. So for now, you could say, well, it's a little bit different from last time or maybe it's not I don't even know exactly what the equity markets were doing.

But what i'm trying to get to because I think that might be a nice, sick way to one of the topics that I wanted to touch on with you is the role of inflation, because you can have the populist in society. But the question is, in my mind, is, does that impact performance of equities? Or is this really what happens to inflation? That is the one that drives the return doing these period, that spot I was trying to figure out and and I wanted your thoughts of that.

Yes, inflation or interest strates, right? The two things are are critical, like that is where the rubber meets the road. That is, the supply in the name that drive the market outcomes.

But those are affected by the populism to such an extent that I would argue that this period, and I don't want to dive two deeper because this could be another two hour show. But the we had populous periods before the sixties and seventies, and they weren't inflationary, by the way, right? The great depression was a very different world, very popular people.

Interestingly, when you put markets in real terms, they have the same exact performance, literally the exact if you just took markets to real terms and you looked at charts literally that period, which is dramatically different because there was a deflation world um had had very you know I get real terms, the same dynamics and not completely different. So um important IT to note that that in real terms this popular m and the dynamic effects were talking about will likely play out this way. But but in Normal terms, you will have very different outcomes.

And even the interest rate inflationary dynamics will create slightly different supply them and dynamics as a function and change path. But the difference now in the reason were more likely be inflationary as opposed to simple, like the great depression is because of the first serve and and the power you know, the fed was not around at that time at least a dominant enough yeah and their mind is very clearly to avoid a Green depression's converter environment and to use Normal illusion, the lack of a Better term to manage the volatility of a cycle like this much Better politically. You could argue not just politically and in terms of real outcomes to to manage market volatility to these periods and and and have used the shaving of coins for a lack Better term to to to manage the loss of real well. Then there's something like the great depression.

But I I get the impression that you are expecting some changes, if nothing else, certainly the volatility of fixed income markets in currencies, which obviously related to fix income. How how do you see this play out or interlink with some of the other things we talked about?

Yeah so the federal reserves and incredibly tRicky situation here, take politics out of IT. Take the I may take the to do.

but we can try it's .

not out of IT but like take dog trump in his willingness to kind of right take over the rains, and you will talk about that as well. But you know, they have a dual Mandate. They have one tool, and they are being asked to do essentially impossible task, which is control both environment that we borrow from the future and created structural inflation, right? And that structural flaw is like going to hurt both right at the same time.

So they had an incredibly easy task last forty years. They they were able to creates Price stability with access growth through essentially infinite monetary policy because they didn't have a Mandate on in quarter and they kept that. Not I from our great.

But of course, if you're managing unit til, if you're removing crisis from the system, the political and political system set up to not be able to pass laws unless you do have a crisis, you're by definition, you you may not be your Mandate, but you're by definition, structure creating mass of inequality, and you will into IT all. And so now we are going to deal with the inequality, not political. Should now is the pop political site problem for going to deal with IT? Not of is completely has our hands tight.

So um given that um the fed is going to be forced to try to manage two sides of equation and when there's more inconsistency and and less ability to control, right volatility, we've talked about the fed put for forty years. If the fed put is no longer truly valid or clear what they can cannot do, what do you think that doesn't and and where does that volatility express itself for most? And the answer is, historically, you can look at the da, and we talked about this for some time.

We talked about IT about year a year and a half two years ago. Uh, historically, the greatest volatility during these poos period does not come in equality buckets, but IT does not come in commodity market like a uh, precious metals yet because those are more of a currency but does not come in energy markets or whatever. People would naturally think that that would be the case.

IT actually comes in F X yield loans, which makes sense. And precious metals you have a timely globalization, a time of great uh, global strife and go global conflict in on top of that, you have a time a bad that lack of control over over economic outcomes. And so so that's where you should be playing.

We've had a relative to to generally, it's been increasing the morally broadly of last two, three, four years in those areas, but a lot of time implicity there. And I think the coming of election, trump again as an acceleration point to that volunteering um and and and those assets will be be pretty well. And actually that dub tells our good conversation .

going to say because that's the other thing I really wanted to acknowledge, you fall because a long time ago, probably more than a year ago, you first started talking about the opportunities usual, uh, in a gold wall in particular, long dated gold wall in particular goal, uh, a coal long dated, uh, gold option so congrats on that but also what what .

now yeah, in twenty twenty one, twenty two, we started talk and about time is flying when gold was dramatically under perform and oil was at recd near record highs. Twenty two right in gold, gold ball was in the gutter because I was just kind of dead money, simple and and and oil wall was through the roof. We said, look, this is a massive structural secular audit.

And that was, you know, very an unpopular opinion now, now not so unpopular, which is a reason why it's gonna more about to. But, but, but we've also seen a massive surgeon and gold and gold upside called ball. The calls, importantly, is not just a general.

The calls were massive, a like that, the curve was flat, and go calls absolutely exploded part historically, actually, the artist, not the artist, the thing that I would most highlighted, people, and recently with the the goal decline, you know that after trump's election, people have been like always, never mind, called us in two on something different levels, like got the destroyer. People are out of all also on losing some confidence in the rally, in the the thing that taught actually is that we actually haven't seen much realized volatility. And golf in the israeli, I want to be clear when I say massive volatility, the best performing asset from the sixty daily tube, or not even close, is gold.

But IT was also the most volunt asset. Remember we had entire cell gold, you know like and U S means like fifty percent type decline. So so be prepared for volatility.

And and if you think this can be a straight line and you're gona sell IT as soon as IT starts moving down or you know, like you, you're doing IT wrong. And this is going to be as a reason we own calls and not duck right or not, the underlying asset, you know. So anyway, prepare for volatility.

Would IT surprise me if he dropped another twenty percent now? Would IT surprise me if that RAID fifty percent no IT. Won't the secular changes up? Uh, IT will continue to. And actually, by the way, the most likely time we get some votile other way, not surprisingly, is what everybody is all in. And these things cool down and get volatile.

When everybody has is on one side about and it's been a very popular trade where as IT wasn't when I first started to talking about IT and so yeah expect when you started hearing people turn negative on IT. That's when you start by IT with two hand again um and and I get focus on volatility and the calls they're still even though it's a lot are still cheap because I get me, uh, is we're not talking for data ult. We're talking along did IT cost maybe to run .

things off? I'm talking about things that is linked to volatility in many people's mind, is also linked to gold in many people's mind, but is not real gold, is virtual gold. It's bit going one hundred thousand pretty close to that level.

There's new bitcoin etf options coming. What are your thoughts about bitcoin? I don't even know whether we want to go further than bitcoin because maybe IT is different to the world of crp.

Yeah so more long term meaning meaning this period we've talked about right that were in are not long term fifty years but um your next decade bitcoin is moonie on down good um gold is not a commodity in the sense that it's valued because of its industrial. Yes, there that what important IT is a story life and IT has value because people believe in IT, right?

This is part of light of auto because I can not solve, people can lose belief, right? IT going has captured the belief of this, these generations. And if they are the ones that are coming to political dominance, the ones we want to be looking at IT like what? What they want is what's like you to happen, how you don't want to Better against bitcoin and IT.

Maybe IT takes some of goals upside on the table because people are buying bitcoin now the differences goals been around for you know uh hundred thousand years, right? This has been around for you know twenty years um and so we started talking about twenty three years of their bigger questions. I think until sovereign anties started adopting IT as a currency, I think there are concerns.

Ces, uh, the longer to i've talked about this, but I think you have to have a situation where the entity es empower don't see as a threat. There's a reason the U. S.

Unpinned itself from gold because IT constrained the U. S. Is power and nix is nick on s untying of the dollar from gold and gave the us.

Infinite power, essentially. And to be clear, if the U. S. Ever lost the observed priest of the U. S. Dollar, like, yes, incredibly, you never mind the size, the military, anything else that's by far the biggest power. But that's not going to happen overnight. And you Better believe whether you're china, which is already showed, that you know this is pretty band micco's, right, or the U. S, at some point, if IT gets big enough and IT becomes a threat to the disorder protege ustr, that's a problem.

And so there is a cap on is that thirty million, which I think Michael sailor is calling for and be going that maybe i'm skep portal of that high? 呃， you know, because again, at some point there is gravity to this in the sense that IT does not have a sponsor. Now to be clear, all these big things working that the serious ways and and I want to be clear, like Donald trump, elon musk, you know, bring an ill on into this picture in in the talk of adoption.

A bit coin again, I think it's completely not in the long term best interest of the united states, but maybe it's the short term best interest for for them politically and for centralizing their own power. And so yeah short term I don't get in the way a bit coin if the one big overhang is regulatory um and long term kind of um you know access and openness, you know that coins has been worried about the the c right and regulatory over a overarching kind of federal of control over IT up. That's the main headlines, right? But if that's why after a doon trumping elon Victory, this this is just taking off.

It's not just a narrative. Narrative matters, but it's truth. Like you're taking up the biggest risk off the table for bit coin and in the next four years.

One last thing i'm i'm i'm curious to know about and I would phrase IT as a kind of a neutral question even though you may have IT may um have certain feelings attached to IT because IT is about elon mosque but i'm curious about your thoughts about having someone like him. Whether you like him or or hate him, him doesn't really matter but someone with that mindset giving at least some kind of job description to make government more efficient.

And i'm kind and then he's being joined obvious ly by another silicon valley, a person for that a vivid. And i'm curious because for so many years, I think we we, we probably all feel that government is just growing and growing, and it's not as sufficient as you would think whether I look at denmark, whether I look at whatever a country. So the experiment, as I would call IT, having two people like that influencing efficiencies is interesting to me. And because if IT works, maybe that something the rest of the world should attention to. So politics aside, what do you think about that experiment?

It's a big question. We don't know. We don't know. But I find IT really, really, really interesting that at the same time that we are with this popular period, that IT is popular to get government. I think that's probably not onna end.

Well, those two things are in, in, in almost diametric opposition to one another. Donald trumped, regardless of how you feel about him. These are facts.

Came on board in two thousand and sixteen with a very populist mind and populist messaging, and did some very populist things, particularly terrifying and protectionism. However, his biggest policy change, which is the tax cuts, were the exact opposite. He, I get everybody like tax cuts, so and everybody felt like, h, we're getting something.

But ninety five percent of the benefit of that went to corporations and what the individuals, and you can do those things in cobo over a people's eyes. And but at some point that just exacerbates populism, makes things worse. Now, Donald trump might be able to gain more control is to the supreme court, you, and through other pathways now you trumper ces us, like legally has more a building to pull levers and insecure, more power in the system.

And trust me, he's going to try and do even more in the next four years. And so he might be able to overcome what's likely to become push back over time. Like to highlight that whether was nixon or Kennedy or L, B, J or ford Carter or 一辆， none of them lasted long in northeastern IT is .

a tough time to .

be president is a no already he's only .

going to last four years, right?

Well, d that's that's what other wants turkey, right? So no, I can. People think it's impossible.

but you mean if he changes the law and .

he could do another, there's all kinds of interesting things that can have what you can pin that of having talked about that and saying that's a higher product that people expect doesn't mean good change laws and make IT that could be IT but not put his child and office and bobble like is at some point get past right.

But the point is the the impulse and what he stand for, and in the point is that is likely to become his policy as well as likely become unpopular in four years. Now I can he can manage that with power and other things. And then now but am saying that in the sense that you know Donald trump could very well got the system and which is really good for business and wealth, individuals and corporations um not good for the populist. You're giving populist what they want and at the same time kind of give due tariff s and do stuff which are much more marketing wise. Oh, look, i'm doing populist things.

And so if he takes this kind of dual prong approach, which is not necessarily what happened during the sixty and seven years, my guess is that all extend the populist cycle a bit uh and and you know the path will be a bit different and I might actually make IT so that the kind of the poor performance we extend the cycle a bit in terms of equity performance, uh, any other things and then this kind of more that kind of cycle may get pushed up or be you were all to down the run, but know something. No watch for the impulses, the impulse, the political winds and the demographic realities are not going anywhere. That's not going to change.

And if you don't give the people what they want, it's going to use, stick around and get worse. And so I would watch the policy, you know pretty confident he will do some the public things like immigration policy and terrify to some extent and those things will continue to be populous. But we look under the hood and see, you know what is happening uh, on the other end and and the regulatory and is a big piece of that if if they completely do at the same, which is going to be hard for them to do, by the way, and just start getting you know different parts of the government and restructuring.

I don't think you to make people happy in law and get if you get social security, if you get a ea housing and urban development, people unhappy, if you if you get go to the budget, there's a reason government government exists because you know without IT, you know, wish people get richer and poor people get more. And it's survival. If IT is, you get me know part system and after or trying to fix.

So there is a popular samples he can do IT 啊 to to kind of getting the system like burn IT all down。 Is, is, is a feeling right? But i'm guessing if they don't burn IT down and build IT back up the right way, they just burn IT down and will be pretty, I think.

politically for them. Mila IT will certainly give us lost to talk about the next four years and this was this was an awesome conversation. I really appreciate uh, all of your IT was wonderful to review some of the old things and see how they played out so well.

Um obviously now people have come to expect just to listen to U G M and know what to do with the portfolios. So stay tuned. They'll be uh uh a lot more of of that coming. Um if you wanna show your appreciation um for all the work that gm puts into this, please go to h your favor.

Podcast player, leave a nice message reading a review um we saw appreciate that next week i'm back will reach and A A Price guest I think so that's gonna super fun um and if you have any questions you want us to tackle, feel free to set them uh to info a top 点 com from germany。 Thanks so much for listening. We look forward to being back with you next week and until next time. As usual, take care of yourself and take care of you.

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