#1038 - Are There Speed Bumps Ahead for Bulls? w/Cem Karsan

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0:59Are there speed bumps ahead for bulls? Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Jem Carson, founder of Kai Volatility. Hey there. Great to have you back on. Good to be back, Maggie. Someone just put in the chat, they're so excited that you're on today and that you are generous when talking about your short-term market positioning. Add so much value with your long-term framework. A gentleman and a scholar. So I'm just going to embarrass you right in the front and say we agree. We agree completely. Well put, Sam. Very sweet. Yeah, there is there is actually really interesting.

1:33And we always say that our community is so great and the chat is so great. But just talking amongst themselves underscores, I think, the dilemma everyone's in and why it's going to be great to talk to you today, because the first comment we got, I hope you don't mind. I'm going to share was from Joseph saying, I see a 2020 style crash about to occur. Doesn't everyone need a crisis to stimulate despite it being an election year? And then somebody else replied right afterwards. Hi there. Hashtag team no crash from Quentin. So it's like, you know, everyone's trying to figure out what to make of this because, of course, it's subdued today.

2:11But we saw the S &P and Nasdaq hit record highs yesterday. Didn't pull back too much today. They're still sitting at pretty close to those levels. Little, little bit of selling. Dow briefly got above 40 ,000. 10-year treasury hanging right around that 4.38%. What do you make of this market and what you're seeing? So remember, in the short term, the market is a voting machine. Let's not lose sight. Let's not get so caught up in the macro that we lose the realities of supply and demand. What do I mean by that? look, at the end of the day, there's a reason, we talked about this last time, that in election years, particularly populist election years, that the market is up on average 21 % per year.

3:04Every single populist election starting in 64 all the way to 80 through 80, and then now recently in the last two times has been positive double digits. I know that sounds like we're cutting the data in some way. That's when the fiscal spending happens. That's when the massive supportive liquidity and demand comes to markets. And that's what's happening this year. They're doing it again. And we talked about it coming. This is what's happening. And what that ultimately does is you don't want to get in the way of that. Now, does that mean that in that period, We've talked about this before from 68 to 82 that the market was positive.

3:44No, no. These were momentary double digits, you know, on average 20 % gains in the context of a really bad environment for stocks. And that's OK. Don't sit in a bad trade, you know, because supply and demand is supply and demand is in your favor. Even if it's a bad macro environment, it's OK to trade that and to realize that, you know, You have to play it with stops and understand what the bigger picture is. And when you have the opportunity to play against that and get into a better long-term trade, you take that with two hands. But in the meantime, it's supply and demand. And the supply and demand is not just because of the structural support from policymakers.

4:29And again, I'll give some examples of that. We're hearing a lot of talk about how Freddie Mac and Fannie Mae are, you know, blowing out with potentially$2 to$5 trillion of liquidity to release second mortgages, to buy second mortgages, and to anybody who has a mortgage with them. And that is a massive source of liquidity, something that people are sleeping on and don't think much of. But those are sources of massive liquidity and fiscal spending. There's all kinds of things like this coming across the wires that nobody's really watching. You take with that the Fed's accommodative nature, right?

5:07Like even when inflation was hot, you know, January, February, March, April, like the Fed didn't. Yeah, we went from cutting, you know, the announcement in December that surprised everybody to like, oh, maybe we're not going to cut. But it was never was there a talk of raising rates in the context of sticky inflation, was there? I mean, the point here is they're leaning accommodative. They are dovish on all counts. And that's important. On top of that, we have now, from a shorter-term basis, have a lot of supportive structural flows. In the absence of something that's liquidity that's going to push the market down, the market marches higher.

5:45Vol gets compressed. There are structural VANA and charm flows, buybacks to stocks, all the things that we've talked about. And going into a quarterly OPEX, which we see here in June, those are only going to accelerate. We have a Memorial Day that's going to accelerate the time and those charm flows. We have some event ball and NVIDIA coming on end of the 22nd, which will come out of the market and push supportive flows. We have end of month, beginning of month flows where the market's up. And guess what? There's a re-leveraging. That's new money created. When the market's up, you need to buy more.

6:20Leverage entities, hedge funds need to buy more into that. And so all of these flows are the market machine at work. And that's the demand machine that will structurally push things higher. Importantly, since we've last talked, vol has compressed and compressed. And the vol supply is so strong in this environment. Because we've been dropping and going essentially net nowhere. And the sellers of vol have been making money. It is a reflexive machine. The more of that there is, the more pin the market becomes and the more skew is low, which has been very low in the equity world, the easier it is to hedge, which means, guess what?

6:58We're just going to keep grinding higher. So I've announced that officially it's the summer of George again. We haven't had this since 2021. What does that mean from old Seinfeld days? That means go to the beach. You know, you got a three-month, you know, pay package from the Yankees. Go do nothing for a while. And actually, one level up from that is do the opposite. If you're going to trade, do the opposite of what makes sense. And what do I mean by what makes sense? If hedge funds are massively, logically are short certain names because they're bad names like GME and AMC or whatever other name, right?

7:39And they're all piled into that. And it's in a liquid time and the market squeezes higher. This is a time where things, supply and demand matter more than macro, than anything. And those names are likely going to run and squeeze all kinds of things that, again, are counterintuitive. Again, vol's low. Well, you'd think buy vol. No, no. Sell vol because people are long it. And that means it needs to go lower. And it's that simple, really. Who is long and who is short? If more people are long, short it. If more people are short, buy it. And that's the environment we're about to be in for the next three months.

8:12This is not for the next year. This is where we are. But this is, you know, a very, very important kind of type of environment to be prepared for here. So I'll stop there. But that's where we are. And that's where we're going. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo.

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9:35It's amazing. And you always do this for us, but thank you for separating that timeframe. And I think that's where some of this comes in, right? You're right. People are rightly, you should stay focused on the macro picture, especially if you have a long-term perspective or horizon, but the short-term, you have to kind of take your, I guess your, I don't want to say common sense, but you're right. It does feel like the world is upside down. God, I miss Seinfeld, too. I always think there's so much they could be doing, right? There's so much good. There's so much material. If it's going to be a slow summer, let's at least talk about Seinfeld.

10:09At least talk about it. I love it. But some of it is what we might say counterintuitive, right? Bad news is good news, and people are trying to figure that out. Very interesting that you brought that up with Fannie and Freddie. I think you're right. And especially, let's remember, while there are these things that are sort of, you know, putting or plan to put liquidity in, you still have the Fed, even though they're doing, you have to watch what they do, right? Because they're doing, as you mentioned, they're not hiking. They kind of try to find excuses, at least Powell does. And then three presidents today are out saying hire for longer.

10:43It's like the exact opposite of what they signal from time to time. And I don't know if it's, you know, different factions within the Fed. But I mean, listening to them seems like an exercise in futility. Well, remember, the Fed uses their speeches to try and control the market. Again, people misunderstand this. People say, well, how could they be so stupid? The Fed's so stupid. They have now said that inflation is transitory three times, and the opposite keeps being true. Well, the reality is not that they think it's transitory. They don't think it's transitory. They want to tell the market that it's transitory because the worst thing that can happen is long-term rates run, and then they have a problem.

11:27And then that exacerbates inflation itself. So from the very beginning, this has been an effort by the Fed for now going on three years, four years of trying to talk down the long end of the curve so that inflation, they hope to keep down inflation by doing that. Now, that doesn't change the realities that it's not higher for longer. It is higher for longer. It has been, and it will continue to be. But they're going to at least make it a slow grind to those numbers and try their best to control it through that speech. But I think, again, don't listen to what they say. Listen to what they'll watch what they do.

12:08That's ultimately what really matters. It certainly does. I want to flip to the – we'll come back short term because we have some questions and comments about that. and also maybe how we navigate that. But for the macro long-term, because inflation was at the heart, or at least that was the narrative of so much that happened this week, obviously there's a lot under the hood that's really driving it. But Michael Cow sat down with Roger Hurst and they were talking about this inflation picture because you saw certainly softer than expected, but this issue about the sort of stubbornness and what we're potentially facing with inflation and the risks that are presented.

12:48Let's have a listen to that clip and then we'll talk on the other side. These rallies and risk have been, I think are somewhat self-defeating because I don't think that the Fed's job is done. Not with core inflation, essentially annualizing that closer to 4 % than 2%. And mind you, so this is another thing that just kind of makes me go bonkers because remember what the rate of inflation is, right? It is a second derivative of price. You have price change, change in price, which is the first derivative, and then you have the change in the change of price, which is the inflation rate. And so the market is literally was celebrating a flat change of change in price, never minding the fact that if you look at the cumulative effect of inflation over the last several years, absolute price levels are so high that I think that we don't just need disinflation, which is a slowing of the rate of change of inflation.

13:51We could use some deflation, which is an actual decrease in price levels. We're just nowhere near that. And so I just think that, yes, the Fed technically has a dual mandate, but for all intents and purposes until core inflation shows real signs of weakening. And with that, but to bring about that weakening requires job losses, requires unemployment to probably get up to 4.5%. We're at, what, 3.8%, 3.9%. I think for all intents and purposes, we have a single mandate fed. So I'm in the camp that we're not going to see any cuts this year. That was a great conversation. And Roger and Michael, Michael actually talked about how he's thinking about his portfolio and some of the positioning that he's doing, which he doesn't always do.

14:52So it's a really interesting conversation. If you want to check it out, it's on the RV platform. So I know that when we talk bigger picture macro, this is something that you've also been concerned about, this idea that we're in this structurally higher inflation environment. Do you think that we're going to get the market price back in the rate cuts, but we've been all over the place back and forth with this argument? Do you think the Fed will? Do you think they hold off? Yeah, listen, first of all, I totally agree with Michael. Michael and I talk a lot offline and on different platforms. I think very highly of them, and we are very much aligned on a lot of this stuff.

15:34Look, there's structural. We've talked about it here. There's structural inflation. What do I mean by that? There's secular things happening that have nothing to do with the business cycle that are a matter of more lower-paying jobs, manufacturing coming up back home, walls going up, deglobalization, global conflict, commodity prices as a function. All these things are the weighing machine, the longer-term realities of what's happening. And the Fed is trying to control that with cyclical measures. And they've been able to kind of take it down to a certain level. But with interest rates taking them up to 5.5%, we're still above the levels that we're even close to the levels like they'd like to be.

16:18And it's proven very sticky. And it will continue to. Now, that said, if they choose to really look at inflation and try and bring it down, they will. They can raise rates more and eventually cyclically prick the bubble or whatever you want to call it and bring down the cyclical liquidity bubble that's in here. But that'll be a short-lived thing. And the second they pivot and stimulate again, guess what? Inflation will come roaring back. And so the reality is that at this point, they're not attacking inflation. They are being accommodative broadly, right? And as long as that's the case, as long as they sit still or start lowering rates a little bit, at the end of the day, inflation will stay even stickier.

17:08and we will continue to have problems. Eventually, this thing will go too high and inflation will get sticky enough and probably next year or maybe into somebody else's presidency next year when we're too accommodative. And guess what? That's when we will have to turn and that will create a problem in the markets. But again, the structural sticky inflation is here to stay. It's going to mean that it's hard for the Fed to cut. But until that time which inflation gets really, really hot, continue as you were, right? And things aren't going to get better on its own. If people think that, oh, inflation is going to come down to 2%, but without raising rates, good luck.

18:02That's not going to happen. And that's the problem. The choices are terrible. High inflation is bad and the kind of, you know, killing the economy and jobs in order to get it down and crush demand is hard, too. And then you'd still, even if you get demand under control, as you say, there are these other forces that maybe are not related to that. So they're in a really tough spot. Doug asking, will positive liquidity run strong through the end of 2024? Yes. Pretty simple answer. The market machine is hard at work. The Fed is accommodative. And more importantly, the fiscal policymakers are accommodative.

18:39And everybody is incentivized to keep this going. And if the bottom, if the vol is well-contained and there is broadly supportive action from everybody else, the market goes higher. And it doesn't mean it's going all at once. It'll be kind of a very steady march from here, in my opinion, given where vol is. But I would expect it to be really kind of, you run on the video earnings, you sit, you know, for another five, six, seven, 10 days, you pull back, you chop, you try and shake longs, and then you run again. I mean, it's going to be this very kind of much more predictable market. I would see$55 ,75 to$5 ,600 by the end of summer, you know, with some pullbacks along the way in digestion, and then, you know,$5 ,900 to$6 ,000 by the end of the year.

19:28Wow. It's that kind of a, you know, get your 6 ,000 hats printed now, S &P 6 ,000, because it's coming. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

19:48You're referring to a time they used to give those out. I used to be down at the stock exchange. They'd give them out. And then, of course, the financial crisis is up. And they're like, we're never doing that again. This is like tempting fate. So don't print those hats, people. So you mentioned NVIDIA a couple of times. It's interesting. So how does the market seem in the lead up to that? Because again, from a larger picture, you have this debate about like, listen, this is just the early innings of this AI revolution. And other people are like, these valuations are a little crazy. I feel like it's like the hype is kind of peaking.

20:22How does it seem like the market is positioned going into that? What do you look for for an event situation like that. So when we're looking internally to like vol markets and other pieces, the vol is very compressed up until there. Like you can buy vol incredibly cheaply through the 22nd. And then there's a big kind of expectation of a vol, a big move, much like there was for CPI, by the way. And what do we get? Big move up. And then what happened? You sit. That's not coincidence. That's just the money. It seems rigged, right? Everybody's like, how could it be this? Oh, that's how it goes, right?

21:02That was the efficient outcome given supply and demand in the market. And here we are. So expect us to sit, chop, be right here within a small number of points until then. And then on that earning, we're going to get a decent size move. It will likely be up. if the news is neutral, we'll be up and we'll be up a good amount. And that's the, no, if it's a really disappointing piece of news, clearly we'll go down. But again, that will still be a likely be ultimately a buying opportunity that'll push us eventually higher again and catch us back up to that track. So, you know, the machine is, again, very efficient.

21:45And, you know, it's a simple measure of supply and demand. So I expect, again, all things being equal, us to be up another 50 to 100 points on that and then to sit all the way through Memorial Day and then grind higher from there into the June Fed meeting where the Fed will say much ado about nothing again. And then we'll get another hop and then sit, I'm sure, for another three weeks. And as long as there's a marginally dovish comment in the mix of all of it, it'll probably be enough to set folks off. So, Mark, it's very weird. I feel like you're reading my mind because this is the question I was going to ask.

22:27But, Mark, I'll put it in your words. Do you see any underlying rotation occurring under the surface or is it just more big tech through 25? So if we're in that kind of environment, does it flow back into that kind of mega cap tech or risk assets or everything? This is very important to people to understand. and I think we've talked about offline or even online here, it's been a while, but this idea of dispersion, right? When vol is very well compressed at the index level, that's where the compression is happening. That's where the vol complex, the structured products, all these, the zero DT, all that selling is happening at the index level.

23:05And when that vol becomes very compressed reflexively, that market gets pinned. But if that market is pinned, and let's say NVIDIA earnings are very positive, right? Let's just say that happens. NVIDIA goes up. Well, guess what? Something has to go down. If the market's not going to move that much, then NVIDIA is going to go up 5%, 10%, 15%, whatever percent. Something else in the market has to go down. That's arbitrage. That's not like it might or it could. It has to. The constraints of markets say that that has to happen. And so what you get in very, very low index vol environments is dispersion and a breakdown in correlation.

23:43In 2017, we saw the lowest implied and realized vol for the S &P 500 in 120 years by 30 % because vol was being sold at the index level and all dealers were at historically long implied volatility. And guess what? Correlations were 20 % lower than 125 years of history. That's not a coincidence. Having something that far out of line with long-term history doesn't happen. There's a reason for that. And that is this arbitrage constraint. So what you can expect, if I'm right, and this is the summer of George, is dispersion in the market, big rotations. you know something and generally it's going to be things that people aren't long that perform very very well you know we you could but but i it's hard to say exactly what's going to go up and what's going to go down but what i can tell you is there's going to be massive rotations you're going to have the index you're going to watch you're going to have days where you sit there and it's like watching paint dry in the index and meantime meanwhile part of the you know the dow is going to be up um one percent that day and the uh the russell is going to be down one percent You know, and the NASDAQ is going to be up one day, a percent and a half, and the Dow is going to be down one and a half percent.

25:00You know, you're going to have these significant rotations. Now, the big question is what's going to be up and what's going to be down? That's what everybody's going to ask me. It'll depend. But generally, the things that people are short, you know, in a very illiquid market, hedge funds are over levered. You know, they're on the top decile for positioning. You know, a basket of hedge fund shorts is probably going to perform pretty well on the upside. And, you know, keep an eye on what those are. You know, the hedge fund hotels are a dangerous place to be in the summer when vol is compressed. And so just keep an eye out there.

25:37And that's, I think, part of the story of why GME and AMC can pop 50 % to 100 % based on some tweet that is, you know, we're not even sure. Picture, cartoon, right. Exactly. We're not even sure what it was, right? So, yeah, that's a clue. And that's not, you know, this summer is, I've termed it also the running of the memes. Here we go, right? Yeah, and you see it, right? We've been talking about on our programs, whether you're talking about meme stocks coming back, which caught a lot of people by surprise, but not you. or altcoins. I mean, whatever part of the market you're in, there's a lot of that kind of activity happening again.

26:14But really interesting to hear that explanation because I think other people just simplify it into thinking, oh, this is excess. This is just froth or wild speculation, but you're giving a much more detailed mechanical view on what's happening, which I think is so different and so important. Positioning is critical. particularly in the liquid times, because positioning is potential energy, potential supplier demand, right? Depending on what the positioning is to the opposite. So if somebody's long, that means they need to sell at some point. If somebody's short, that means they need to buy to close it.