Today Cem Karsan and Niels Kaastrup-Larsen examine a market environment where politics, geopolitics and liquidity are becoming harder to separate. Cem argues that recent market strength is not just a reaction to better news, but part of a broader effort to manage risk, support collateral values and prepare for deeper geopolitical stress. From rising military spending and the Strait of Hormuz to treasury demand, QIS growth, AI and the next inflation wave, this conversation is about what happens when markets stop being passive observers and become tools in a larger strategic contest.

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Episode TimeStamps:

00:00:01 - Introduction to Top Traders Unplugged

00:00:35 - Niels and Cem reconnect and set the stage

00:01:51 - Truth, narratives and the blurring of reality

00:04:15 - Fed independence, politics and credibility

00:07:45 - The rise of QIS and demand for alternative strategies

00:12:52 - Trend following update and current market performance

00:15:23 - Framing the disconnect between markets and reality

00:20:09 - Liquidity, market rallies and strategic positioning

00:25:08 - Are markets being actively managed

00:34:51 - The real geopolitical battle and the role of China

00:40:32 - What investors may be underpricing

00:52:55 - Why markets can rise despite growing risks

00:55:56 - Treasury demand, intervention and future policy paths

00:58:04 - Inflation, debt monetization and long term outlook

01:02:16 - AI, deflation and the political response

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Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

Welcome and welcome back to this week's edition of the Systematic Investor series with Cem Kassan and I, Niels Kaastrup-Larsen, where each week we take the pulse of the global market through the lens of a rules-based investor.

Cem, it is really wonderful to be back with you this week. It's been a little while. How have you been?

I’ve been great, Spring in Chicago, you know, a lot of wild things going on both in the geopolitical and, and systematic world. So busy, busy, busy, but things are great.

Absolutely. You look great. We are both wearing vests today. I think you picked the wrong one for this show, but there we are. You can make up for that another time, I'm sure.

I do love that vest.

I'm just teasing here. Anyways, before we dive into some really important topics that you brought along, and we've got, yeah, quite a lot to go through. I was just curious, as always, kind of what's been on your mind or what's come across your radar the last few weeks. Maybe nothing really to do with the topics we're going to talk about, but just something you find interesting at the moment that caught your attention.

Yeah, I think the biggest things right now, that are not maybe in the mainstream, are really thinking about how much of what's happening is geopolitical versus orchestration. And I think this understanding of reality, this ability to once-upon-a-time put this general conspiracy world in a corner and think about things rationally. Now, what is a conspiracy? What is not? The line is so blurred. The nature of truth is really probably the biggest thing that's on my mind.

And I think we'll dive into that in some way or another. But I think there's certain things happening in the last two weeks to three weeks, so very short period that really, really start breaking down some of those things.

No, no, I'm excited about that. What's been on my radar is not. Well, some of it is very serious. The first thing was not that serious, but then again, it's kind of giving you a hint of where the world is going. I just saw a headline that actually there is now a robot that has set the world record for a half marathon. So, imagine that, it has beaten the fastest man on earth in a half marathon.

And “all” they did (and I say all in quotation) was they just specifically focused on developing it on just doing one thing, that was to run, instead of these things that can do a lot. But anyways, that's pretty, pretty amazing.

Another thing that was pretty amazing to watch, and I have to admit I did not watch all of it. I only saw some headlines. So, it might be very biased from the media outlet, of course, but I could not help seeing some of the headlines from the Kevin Warsh hearing, and specifically the questions that Elizabeth Warren was posing to him.

You know, this is really not a political statement as such, because it could go both ways for sure. But I just found it to be challenging to watch someone who will take, perhaps, the most important job in finance and not really being willing to answer some fairly simple questions.

Speaking truth. Right?

Yeah. So maybe we, maybe we need to leave it there. But only just to say to people that if you have not watched it, you should. It tells you a lot about where some of these things are going.

And so, that narrative, not being able to answer the very simple truth there, as a fact, speaks the lack of independence of Warsh and the nomination there. And he was prompted many, many times about that. And so, clearly I'm not saying that that position was never political. I want… People say that's the responsibility, like, well, it's always been political. And yes, true to some extent, but at least the mirage of some level of independence which I believe did exist. Not just a mirage, but maybe there was some level of independence to political outreach has clearly broken down dramatically.

But here's something that maybe I also took away from it. You know, there's the political side, but, you know, as you said, they're all political appointments in some ways. The other thing I found to be kind of interesting was just all the comments about Stanley Druckenmiller and his relationship with Stanley Druckenmiller. I mean, there's nothing wrong to learn from the best, for sure. But when he was asked about whether maybe some of his own financial assets, that he has to offload, would be “parked” in with some other billionaires.

We will talk about this at length.

Oh, we'll come back to it.

But the thing I want to point out, which we're going to get to just a little teaser, is we once had a Treasury, which, in theory, was there to deal with monetary operations and, in some basic terms, keep the plumbing going. It was more infrastructure with a little bit of management on the edges.

The adoption of Bessent, a hedge fund manager, as the Treasury Secretary, and another hedge fund manager now as the head of the Federal Reserve says all you need to know about trying to battle on outcomes of markets and understand full outcomes of markets themselves in an attempt to pressure supply and demand in those markets on equal footing to hedge fund managers and others.

And I think that's the real story here. This is no longer about infrastructure or money supply. It is about managing outcomes as aggressively as possible and the coordination between those two. So, we will get more. I think that's the key story.

Another article that came through my radar this week is one by Gregory Zuckermam, who famously wrote the book about the Medallion Fund, if I'm not mistaken, and Wall Street journalist. And he was writing an article about the rise of QIS strategies. Now, we've touched upon it the last few episodes on the show.

But it is extraordinary to see how large this industry is. Certainly, a lot larger than the CTA industry. I mean, they're quoting numbers where they say that Goldman Sachs alone manages US$175 billion in QIS funds. I don't know. I can't verify these numbers. I'm sure the Wall Street Journal can. But that's massive. I mean, that's half the official CTA industry just by one firm. And this is only 5% of their overall assets, of course. So, yeah, it’s huge.

Yeah. So, this is the big takeaway and it's one we've touched on before, but I want to just hammer on it because it is the most important thing possible. The growth for the last four years, now; we've been talking about it for four years. We talked about it before it started, of non-correlated strategies, were doing it, tripling to quadrupling now. And again, we talked about this in terms of precious metals, in terms of crypto, as assets, but importantly hedge fund assets.

And all these went from straight line, much like precious metals and hedge fund assets were kind of very much straight line to rocket ship. This is not some secular growth story that just has been happening over time. There is a dramatic shift. What I would constitute a regime change, in terms of demand for things that allow a move away from a stock and bond world. And the biggest, what I call a technology, or infrastructure, or a way to do that is to deploy these, whether it's options, and structured product, like non-linear strategies, or again, non correlated kind of combination strategies. This is the cheat code.

We have never, in the history of this world, seen one of these regimes which is likely coming (as we've talked about), where these things are available to the masses. And we've seen the gold and, and the gold part, that was alone. But now all these other tools are entering the sphere, and their adoption and need are clear.

But when you talk about the size and scale that you're talking about, by the way, this applies to trend following CTAs, this applies to QIS strategies, options, structured products, all of these things, when you look at the size and scale, it seems crazy, but it is such a small sliver relative to the whole asset management world.

Again US$500 trillion of the whole asset management world, those are like the long assets primarily. And this sliver, which if you take precious metals and crypto - which you could argue has nothing to do with these other ones, has gone from essentially US$6 trillion to US$20 trillion and again depending on where you cut those. My estimation (I've been saying this for some time) is that number is going to go to US$100 trillion plus. And you could argue, if this goes on for 10, 15 years, like I think it will, it could eat the whole… it could become closer to 50% of that whole market.

It is a superior way to invest on a risk adjusted basis. Risk didn't matter. It was complicated. It’s easier to sell a simple product (number go up) to people and do it at low cost. But the second risk matters, and particularly interest rates become a problem, that whole landscape changes.

So that's what's happening. QIS is a subplot within that story and we can get into the details of whether QIS is going to be the long-term winner. I actually have a separate opinion of what's going to be a long-term winner, one that I'm betting on personally. Yeah, but we can talk a lot more about that.

Absolutely. I thought it's very interesting. One other thing I took away from the article, I just thought it was kind of interesting, is that the Chief Investment Strategist at American Red Cross actually says that his organization now largely relies on these types of strategies.

Now, as both you and I are obviously involved in the alternative investment space. And I know you're building your wealth management business on “slightly different things” and QIS. But alternative investments are definitely something we both believe in and we will talk much more about for sure.

I think that was pretty much it. The only other thing, and this is not for something we need to debate, was just another article where I noticed that Byron Gilliam, who I like to see from time to time. I think he writes about all sorts of interesting things. But he did mention, in a recent article, about how big another industry that's growing a lot, the sports betting industry in the US, how it kind of has an impact on the investment industry as well. Because every time money goes to betting it's going away from somewhere.

We've got so much to cover. From a trend following point of view, let me just mention that Q2 has started on a strong footing after a solid Q1. Some of the same themes, we're seeing equities now back in vogue of course with a very strong April so far. We also see good trends in what you mentioned, Cem. Metals, both precious and base metals, are doing well and, of course, energies continue to be an interesting place to be for trend followers so far this year, and a few select currencies.

The really one big sector that's challenging for us is really the fixed income sector. It keeps gyrating from long to short signals, and we'll see where we go. But right now it looks like our industry is kind of in more of an inflationary stance, so, more of a negative bias on fixed income markets. But we'll see what happens.

My own trend barometer finished yesterday at 48. So, that's a little bit of a neutral reading, but on the more positive side of neutral, I would say. As of Tuesday, the BTOP 50 index was up 43 basis points in April, up almost 8% so far this year. SocGen CTA index up 55 basis points, up a little bit more than 8% so far this year. SocGen Trend index up 36 basis points, up 7.5% this year. And the Short-Term Traders Index, even though they had good moments, they're now a little bit behind, but they're still up 32 basis points in April, up 4.74% so far this year.

Big winners, of course, in April. MSCI World up 8.85% as of last night, now up 5% for the year. The S&P US Aggregate Bond Index up only 64 basis points in April, and that's pretty much also what it's up so far this year. And then the S&P 500 a whopping 9.39% in April and that brings it to positive territory for the year, up 4.65% so far this year.

With that done, we still have three quarters of an hour with you, Cem, and we're going to dive into some topics that you brought along and of course they are, to a large extent, you know, geopolitical, at least from the outset. And I'll try and also bring in some, some questions along the way. But set the stage and tell us where you want to go and what the big picture is and let's dive into some of these more details.

Yeah, I think the story that is not being told nearly enough is, you know, there's this dramatic departure between narrative and kind of what's happening behind the scenes. If you were to lay out the facts and just strip away Twitter commentary, or just verbal kind of commentary that's daily, multiple times a day from the administration.

These are some of the facts, the main facts. One, in the last two weeks, call it three weeks, there has been an emergency meeting on cyber security and threats. They’re tied to the Claude release and all the things that have happened there.

There has been an emergency meeting on private credit where they've convened all… These are 08 level emergency, everybody, all the leaders in the Oval Office tomorrow type meetings. These are not typical things that you see.

At the same time there has been an increase in the proposed (and not just softly proposed), an actual on the floor proposal of a 50% increase in the US military budget to US$1.5 trillion. GM and Ford, in the US, have been brought in and asked to rework supply chain… not supply chain, sorry… manufacturing for military production.

We have also had Hank Paulson, the former Treasury Secretary, come out and talk about a need to prepare for potential lack of demand for US Treasuries, and prepare an emergency kind of solution to meet that issue. Meanwhile, we have seen, since this “ceasefire” (I use air quotes if you can't see the screen), we have seen a dramatic uptick in military equipment being sent to the region.

Some of these had begun to start before the ceasefire, but you've seen a 60%, 70% increase of troops and infrastructure brought to the region since the beginning of the ceasefire. And this is in terms of daily volume, as well, of flights in and out. So, there has been a dramatic uptick.

A ceasefire would imply a slowing down or a ceasing of firing operations and military operations. The exact opposite is what has happened. I am not trying to imply anything. I'm giving facts. These are the facts.

And can I ask, just because people might ask, where are these facts coming from? Where do you find these facts?

Each of them are kind of independent, but a lot of them, the GM and Ford, a lot of them are public knowledge, I would say. But I think anything, other than maybe the troop information, is very clearly public. I'm happy to send over the troop information. That’s pretty clear as well.

So, anyway, the point here is there are clear, in my view. Preparations. When I say preparations, attempts to buffer potential risk, and there's an acceleration in those preparations, in multiple facets, which by the way is smart at this point. Honestly, it’s a little late to be preparing. You don't usually go to war and then prepare. You prepare beforehand. I think China's been preparing for five years.

But I do think the preparations and the acceleration, the frenetic acceleration of those preparations is abundantly clear. I would argue as well that the market action, and this is the part that will become a little bit more controversial, is also a preparation.

We have talked at length here that the largest driver of liquidity in the world is markets themselves. It's not the Federal Reserve, it's not the QE that you see that the Federal Reserve has done, it's not the Treasury itself, which by the way is also bought US$15 billion back in treasuries, the biggest ever in one day, yesterday. So liquidity is being… Why are we pumping liquidity into the market when markets are at all-time highs and just rallied 13% in 14 days?

So, there's actual liquidity. But more important than that is, as we've talked about, call it US$250 trillion dollar equity market, global equities, you pump that 13% and that's a US$37 trillion collateral boost. And to start that.. And we'll get into the actual mechanics on why I feel like this, you know, I'm not just speculating on that this is coordinated. Now, we'll get into the details of why I believe that's the case. But I want to just make that clear point that that also is a preparation. It's smart.

You put me as a hedge fund manager into the treasury and we're making preparations for what's coming. One of the first things I'm going to do is talk about how we need to boost equity prices, and how we need to create a buffer to potential risk that's out there, from a liquidity perspective, in the markets. And so, we can get into the details but that, itself, I see as a preparation.

When you create a squeeze, you take CTAs and trend followers, you force them to buy back into the market. You force a short volatility squeeze, a short interest squeeze, which clearly there was in there for obvious geopolitical reasons. If you can force that, if you can do that, which they have orchestrated this, you create, under demand underneath the market, that needs to buy back over a short period of time. And you also create higher collateral values. And to do it, by the way, starting March 30th at the end of the quarter to allow balance sheets to market higher prices also buys you three months.

Just on that point, actually it's an interesting point. Further down in my notes for today, I did make a screenshot of, I think she's called Caitlin McCabe from the Wall Street Journal, that had a tweet out a few days ago. These are comments that I don't, personally, think are great or necessarily correct, but she was quoting Goldman Sachs saying, In the next three days CTAs are likely to buy $86 billion worth of exposure in equities. So, exactly to your point, that's certainly some of the narrative that I notice as well.

Yeah, the flows can be manipulated. This is part of what allows me to do some of the predictions I do. Right?

There is a clear supply/demand, reaction function, if you understand what you're doing, to different strategies. And the bigger ones, and these have all grown; the vol strategies, the vol supply, the CTA and trend following, all these things we just talked about are growing and those flows are manipulable if you can, if you're big enough and you can. I mean, obviously you and I can't manipulate them, but if you're big enough and you can drive narrative, you can do tremendous things there.

And I think it's becoming clear, clear at least to me, given how clear this manipulation is, that this has also been a hallmark of what happened last April and this is a clear process that they're following. And again, nobody wants to be the crazy tinfoil hat guy, but this is the problem with what's happening nowadays.

And again, it's smart. This is not an indictment of Trump and the administration. If we're going to war (Right?), all is fair in love and war. And this is not about fairness, you know, but if you think these are free markets, that's another story. And you have to model the incentives based on what's happening, based on the players at the table. And the players at the table are much more aggressive and using very different tools than they ever have. And you better be aware of it.

Yeah, interesting, interesting. Well, why do we go next then?

Well, I'll add some facts to that because I did say, well, we might as well do that while we're here.

Okay.

The part that makes it clear to me that this is structure manipulation is not just the obvious multiple date/time tweeting throughout the day, particularly right before the market open, right before the market close, which are the critical moments. Okay.

It is also, importantly, if you take a 24 hour period from towards the end of the day, March 30th, into the evening, into March 31st close of trading, okay, what happened there, If we were to zoom in?

We had a tweet from the Trump administration, very odd, that was Great Depression picture. And talking about, you know, like, insinuating that some type of Great Depression is on; a clear, fear inducing tweet with no explanation. It was followed, almost immediately, by a tweet that said something along the lines of, “the end of a civilization is coming, blah, blah, blah, blah.”

I mean, if you put those tweets out of all the tweets, I mean, a lot of crazy ones, those are by definition fear inducing. And what we saw coming into that day, actually… I apologize, going into the 30th, the night before morning, on that day vol exploded and the market continued its second kind of steep decline. That was a manufactured fear that was directly a result of those tweets and the threats.

Right.

Then, within 24 hours, a complete reversal tweet that is ‘peace in our time’. Not like, hey, we might be reaching a peace deal. Which, by the way, all was dispelled by Iranians and all other media afterwards. But we have a full peace deal and we've reached peace in our times.

Clearly, if you look at the history since then, you go back and there's no one that's going to say that that tweet was representative of reality, of some type of peace. So, both of those things were clear, dramatic, over exaggerations of the circumstances.

And why do you do 1/2 dramatically, like, great Depression/end of like great civilization, playing nuclear, and then, within 24 hours do that? And by the way, why do you do it into the end of the quarter? It's pretty obvious. And the price action tells you all you need to know. We had a V bottom.

By the way, it's almost identical to what they did last April, which is 150% tariffs on the world, fear inducing, vol expansion, decline; capture shorts, we have a deal.

Yeah.

And, and the result is a V bottom. And that's how it works. You expand volatility, you capture shorts, and then you change the narrative 180 degrees. That's what happens.

And so, again, you put me in that situation. This is not an indictment. And, you know, I have a mandate to try and support the market in a situation where we believe things are going to get more stressful in the oil market and broad geopolitical. And we know, because we have the information, that we need to put more pressure, escalate this conflict to gain an outcome that we wanted. What am I going to do? Same exact thing.

And by the way, these guys are hedge fund managers. They get it. Okay? These are not academics. And so, what's clear to me, and what's clear to me since then is, once they capture shorts and the CTA is good going the squeeze, the vol compression comes in. Now the key is to keep it going. And that's a much easier thing than to induce the V.

And so, what you've seen since then is an orchestrated daily flow of well-timed information to continue to orchestrate a continuation of that squeeze. And so, when you see the things like this is historic, we've never seen a rally like this, ever, not come from some dramatic decline in markets.

We've seen things that you can kind of generally (not exactly, this is still historic even in the context of those things) you've seen, out of ’08, ‘09 short covering rallies given all the short interest and things in ’08, ’09. Some of them, by the way, also orchestrated, like we saw with the short covering ban in September ’08. By the way, that happened on September expiration, that was also orchestrated. But we've seen these things in the past, but they've always been in a crisis, coming from a major decline. We've never seen a 5% to 10% decline in markets and then this type of a rally. It doesn't exist in the data set. You can look at 100 years, 125 years of data and it doesn't exist.

So, that historic nature is very much tied to the historic nature of the orchestration within markets, which I don't think we've ever seen. And I don't think enough people talk about this. And I think people know it, and people talk about ,ah, this is manipulated market, blah blah, blah. But it gets swept under the rug as if it's, like, these are the tinfoil hat guys talking about, yeah, it's not fair. And I'm not saying it's not fair. I want to be clear. This is not sour grapes. Like this is not some guy who's short, who's like, oh, this market's manipulated. No, I'm quite factually telling you they are manipulating the market.

And by the way, you should take advantage of it, or you should put it in your algorithm. You can't trade this market without that incentive and understanding that's the reality. So, we just need to say it out loud, and understand it, and see it for what it is.

Okay, now what do you do under those circumstances? Understand that the geopolitics is likely continuing to get worse, that the crisis geopolitically is not coming to an end.

But if you're drawing a line between that and then the market reacting one to one with that without the main person, sitting on the other side of the table, reacting, knowing that, then you're living in a very naive trading world. You have to understand that the geopolitics will likely get worse. So, things like oil, etc. Those will be hard to control. Particularly non-US WTI.

We can get into what islikely to happen there. I really think that there's going to be a continued expansion between WTI, and Brent, and others. There was an expansion that reduced. I think one of the easier trades out there is get convexity to that expansion because the US is going to continue to control what it can on that end. And I think this clearly, to me, points to a continued longstanding conflict that that's not about to end anytime soon.

But also know that there's going to be an aggressive attempt to control the market outcomes in the context of that, in the ways that the administration can. And for indexes, that's definitely a place where that's possible.

Sure, I mean you mentioned that, even back in the great financial crisis and surely before that, markets are manipulated and obviously some administrations are better at it maybe than others.

It's not apples to apples. I want to be clear.

Right.

Those were emergency situations under real time…

I wanted to ask you about, actually, the difference you see from the kind of manipulation you're observing now versus what you've seen prior to this, what feels different to you? And one other thing that I was just going to mention is, you know, manipulating with a “a peace deal” that's not so easy because there are two sides to the deal.

So, it's easy in that…

It's kind of a bravery…

Clearly, there are no continued negotiations happening, really. I mean Iran just sent drones to push back the blockade, and with some success.

Sure.

There's a kinetic conflict.

Yeah.

And they just laid new mines across the street of Hormuz within the last 24 to 48 hours as a part of that. So, that's another thing that's not being talked about. The drones came in, pushed back the blockade, and allowed the mine sweepers to come in and lay new mines. And so, we're getting to more and more elevated…Like, the Iranian National Republican Guard is now running the country.

Right.

There's no entity possible that's really willing or even in the negotiation. Right? They're very clear what they want and that is not a negotiation. So, this whole facade of a negotiation is just not happening. There's no actual negotiation. And this is what we've talked about since the beginning. This is not really a negotiation with Iran anyway. It's a negotiation with China.

Right. That's kind of the next thing, yeah.

And China is not going to… This is the Strait of Hormuz, and China is not going to let the US control if they get oil or not. And the US… The whole point of this whole exercise is not the nuclear… I mean, again, maybe for Israel, and we're supporting Israel. But, largely, the incentives for the US is to control the flow of oil to China. That's what this is about. It's become clear, we talked about it before more publicly. Like, they've said it out loud now. Right?

It was not out loud when this started. But Rick Scott, go through all the core… You know, it's publicly being talked about, now that's the clear goal of what's happening. And the blockade, as the primary thing right now, is also, you know, why are we blockading the Strait of Hormuz? Why is that the primary… Think about it, why are we blockading the strait of Hormuz

If we're trying to get the oil flowing, if that's the goal, why are we blockading the Strait of Hormuz? And the answer is, you know, again, they're saying, well, you know, to pressure Iranian… and, by the way, there's some truth to this pressure, the shut-in of Iranian production. And if they shut it enough, they don't have enough storage so they have to shut it off and they can't start it back up.

And that's true. And that will hurt Iran. But the goal here is, again, to stop Iran sending oil to China and more importantly controlling that flow of oil, very large in the Hormuz strait.

Yeah. And of course, this is happening like a month before Trump is going to China to talk to them. So, is this all about just the ‘art of the deal’ having leverage when he goes to China?

Listen, the art of the deal is essentially the law of the jungle. Asserting power and trying to create leverage to get your outcomes. You can call it the art of the deal and paint some… Really, the goal here is there is a tremendous amount of leverage, we want certain outcomes, and we are going to start military, and economic, and any power we can to achieve those outcomes.

The important part is what outcome are we trying to achieve and who are we negotiating with? And I'm telling you the outcome we're trying to achieve is a control of the flow of oil, whether it goes to China and what the terms of that are. And we're negotiating with China. And if you think, okay, that's great. If you think we're going to win that negotiation in some way, like, how? And you think that that's a simple negotiation… Do you think China's just going to say, okay? No.

We went in there to change an outcome. The outcome was not what the US wanted. China doesn't want that outcome changed. I'm guessing there's an impasse. And the answer is power and continued conflict. This is not a battle with Iran. That's the big picture idea. This is a proxy war, much like Russia/Ukraine is a proxy war.

Right.

And the second you begin to realize that all of this is what we've been talking about for years, by the way, it's just accelerating step-by-step. If you can't see it, I can't help you. There is a major source of conflict that's happening that is not the minor conflicts.

These are minor conflicts in the context of a much bigger war. That's what the Greenland thing's about. That's what Venezuela is about. That's what Ukraine, Russia is about. That's what Iran is about. They're all connected by that fabric.

And to look at this as some naive story of we want regime change in Iran, we wanted it, we're finally doing it to get the nuclear… No. This is the most critical oil message way in the world. The reason we're blockading it and they're trying to blockade it is because we're battling over who's going to control it. It's that simple.

Who's going to control it? And do you think China is going to be okay with the US controlling it? And the answer is absolutely not. So, this war is not over untill that gets somehow determined. And by the way, the reason the US is willing to do that is because actually, for them, the worst case is it stays closed.

The worst case for the US Is the Strait of Hormuz stays closed. That's what the blockade's all about. And that is a better outcome than all of the oil, 40% of oil flowing through the strait to China because it doesn't affect the US. And again, this is why Trump is saying these things out loud.

The US had bigger issues like reputational issues, allies, all kinds of things to potentially lose, and get into why they're willing to risk that or not, whether they should do that or not. But from a just a simple risk, game of risk, real politic perspective, the US was not okay with that amount of… You know, they needed leverage.

The Art of The Deal, you want to talk about of the deal, the art of the deal is where is your greatest source of leverage and how do you deploy it? The greatest source of leverage for the US, vis a vis China, is energy markets and the petrodollar. That's what this is about.

So, let's assume you're right. Where does that take us? Where does that take us as, maybe not so much as a globe, but as investors? What are the things that the markets are completely underpricing in this scenario?

So, in the short-term, market is a voting machine. In the long-term, the market is a weighing machine. And now that voting machine is being managed and manipulated in supply and demand, and very smartly so by the biggest hedge fund in the world. Let's call it what it is, okay. Who is trying to force outcomes and achieve optimal outcomes for itself, which is the administration of the US.

So, you have a push/pull of one bigger structural set of geopolitical pressures and an attempt to counteract that in markets by the entity that is forcing those geopolitical outcomes. You tell me how that turns out. These are the biggest questions.

What I can tell you is it likely creates what I've called a sumo market on steroids, which is massive. You know, you think the pressure is… the tectonic plates were big before. You know, the tectonic plates here are price of oil potentially going to US$150, US$200 outside the US, and remaining at US$90 in the US.

You're seeing, you know, the tectonic pressures here are likely to show like mass starvation, in a year from now, when the next planting season comes through because of fertilizer prices, massive breakdown in supply chains, all kinds of really dramatic historic outcomes, while at the same time the administration is trying to control markets and having more tools at its disposal than ever, more control than ever, to do so. And so, for me, that looks like building pressure for a quarter or two.

Generally, an ability to control the outcome and then an eventual shift in those tectonic plates, which was the risk that was there all along, presenting itself in price eventually. Now how do you manage when you're trying to manage a market for day-to-day, week-to-week, month-to-month and there's all of this underlying risk?

Well, you have to take a bigger, structural, long-term risk management approach because things in a more longer-term are very inexpensive given the amount of risk and realities underneath the hood. In the short-term, you know, be very active and dance on the tip of a pin, knowing that the macro is bad and going to get worse and the responses from the administration are going to come in before the morning open, and before the close, to try and manage those outcomes. This is both from a more traditional liquidity perspective, whether it's the US$15 billion buybacks from Treasury, or whether it's the Warsh and what he's going to be doing. And the context of also tweeting and front running those tweets to help squeeze and push outcomes, etc.

And there's a lot of money to be made if you build this construct, and you understand generally these push/pull, and you play in and out with these pressures. So, you’ve got to be active in the short-term, but take some big long-term structural convex bets that are, I would say, a year plus out.

So, you know, we'll come back to this and kind of talk about these things. But, but when I was listening to these sort of potential disastrous outcomes that you were mentioning, and I'm certainly not saying that it couldn't happen, but you know, it was reminding me about a conversation you and I recorded just after the Ukrainian war started with Peter Zeihan. And Peter, I mean, he's wonderful with narratives, and I remember he was talking about, you know, within six months, Boeing and Airbus, they won't be able to build any planes. There won't be any of whatever metals they were relying on. The corn in Ukraine is gone, or the wheat, whatever it was. So, you know, there are all these, you know, sensational negative outcomes, so to speak.

And we're five years in, Airbus and Boeing still build planes, we still get corn. In fact, you could argue that Russia is getting more for their oil now, not because we want it, but because of other events. So, I'm not disagreeing, I'm just saying that…

And in a sense, because we are going through the fourth turning, I mean, I'm kind of expecting something really, really bad to happen, as you and I have talked about many times. And also the timing of it, the US turning 250 years old, I mean, there are lots of things that could really fit into a big, big moment in history.

But I also kind of, maybe for my own sanity, want to keep like an optimistic view where I'm thinking, something's going to happen that will avoid us from this… And we could say the same thing about AI, by the way, where we think, oh, this is going to be you know, mayhem. And I'm kind of hoping that, again, we're going to find solutions.

How do you balance that in your mind? And what would make you a little bit less worried?

By the way, I completely agree with you. I think that's what I'm actually trying to say. I think, if you have a kind of intellectual lens from which you're listening to what I'm saying, versus a little bit more emotional, good/bad, I'm telling you that they are going to continue to manage this.

Right.

I'm saying things are going to get worse and worse, but we're going to muddle through because they know what they're doing.

But again, sorry to interrupt, because I think this is critical. And again, I don't want to be political because that's really not the purpose of it. But I was listening to an episode with one of our previous guests, Demitri Kofinas, and he had an interesting conversation recently with a Financial Times columnist or journalist, and I think he was called Edward Luce. And he made this point about that democratic administrations, they are very procedural, they take time, they plan, but nothing really gets done.

Then you have the current administration. Probably not very procedural, but, you know, things happen, and I'm not entirely sure which kind of administration would you like to have in this situation? Someone who does a lot of planning but maybe not a lot of execution, or someone who does very little planning and a lot of execution?

Neither, both.

And is that, do you think, where we…? Oh, well…

Speak softly, carry a big stick, be aggressive, deploy, leverage, do it quietly, do it…

Sounds like another country than the US you're talking about here.

It was the US once upon a time. That's a quote that comes from a US president. Right?

All right. Okay.

Speaks to carry a big stick. And I think that's Teddy Roosevelt. Right?

The reality is that was build allies, work together, deploy real geopolitical leverage with force if needed, be aggressive to turn the course of history if necessary, but do it in a way where you don't shoot yourself in the foot as you do it, and maintain, you know, the moral high ground. You know, all these things are critical.

And so, my indictment for the Trump administration is actually not that they're not… I've told you it's smart that they're managing markets. I actually believe that this is generally a tactical great move vis a vis China.

I also think it is a time, personally, to confront China. I've said that for five years on this show. Right? I don't disagree with the real politic and the geopolitical. It's just the lack of rigor, and preparation, and deploying it in the smartest way long term. There are dramatic negative consequences for the US, as we've seen, undermining the exorbitant privilege of the US dollar.

It's your most important assets. You're losing potential allies and losing the moral high ground. You can do both. We have, in the US, done both for a long, long time. But yeah, the milk-toast democratic institutions who are unwilling to often take those more aggressive stances, to do the things that need to be done in the hard times, is also a problem.

So, it's honestly a problem with the system, the structural breakdown and too much control being given to one executive in the current system. And we can get into all the reasons for that. I think we've talked about…

No, I want to get back to your train of thought and your outline. I didn't want to completely interrupt it, but I do think these are important nuances to understand all of these things.

Yeah, and great questions and great points. I mean, again, it sounds like I am anti Trump, in some way, and that's just because Trump's the current president, and some of the things he's doing are against the best interests of the outcomes they're trying to achieve. But I want to be clear, there are also certain things they're doing from a pure power perspective.

They're very transactional, you know, from a just a strategy perspective. Again, if we're playing a game of risk, I get it, and I actually tend to agree with the things they're doing. It's not a game of risk. We're not on a board. There's a lot soft power that is more powerful than hard power in certain ways, especially over the long-term and not over the short-term. And those things are critical.

And if you can't take that second degree thought from just like, you know, strong… we powerful… have leverage… bang country on head… You know, you're going to end up with a worse outcome.

And so, you can be strong and smart. You know, real power isn't always yelled from a microphone.

Very true.

And so, I think that's my point there. And anyway, we went on again, a little bit of a political or kind of strategy perspective.

But yeah, I also want to go back to your thought before, which I think is very, very important. Which is, you know, we're talking about markets as Top Traders Unplugged, If you're talking about short-term outcomes, we are going to muddle through. This is a boiling of the pot of a fourth turning.

You can see everything we've talked about for five years. If you go listen to the podcast and, you know, they're all happening. Every single piece of it is happening. Markets, though, are at all-time highs.

Yeah.

And that doesn't change the reality of what's happening. And I think that's what I'm talking about. There is this dramatic deportation of the realities of what's happening in the world and markets. But that is not a bug, it is a feature.

That is a feature of what's happening because the liquidity and the administration's incentives are, particularly, as we go into a period of risk trying to create that liquidity and that support.

The question is, things will eventually (probably longer than you think, it almost always is), get worse and the dimensions of control will break down. Which is happening over time, some of it reflexively, because people like myself will notice what's happening and speak to it, and people will believe it less, and there will be some more balance in the reactions to those things, but those things still will matter.

And again, we could be at this for years. Things could get dramatically worse. To your point, we could go another five years down this road. Things could get dramatically worse. You could see the dispersion, the oil prices, all the things underneath the hood, but the indexes and the world could continue to levitate in odd ways because the incentives are there for these outcomes.

If you want… What is the most important thing that happened this week? We went through a lot of things, Hank Paulson coming out and saying we need to prepare basically for the biggest QE that's ever happened on the planet to help backstop the US, that's a detriment. He's saying, out loud, that we need to prepare for the reality that we can no longer find buyers for our debt and we need to buy our own debt.

That's what Hank Paulson said. The fact that I didn't get more press… the Treasury Secretary…

I was going to say, what is Hank Paulson doing today? Because I haven't heard his name for many years.

Well, that's the amazing thing. Right? And you better believe that's a trial balloon. I'll call it what it is because Hank Paulson is not coming and speaking to the public, saying those things without conversations with the Treasury. He literally is the guy who came out in ’08, ‘09, you know, created this liquidity to help, and, you know, that's, first, a threat to the market, which is, this is the Draghi “whatever it takes speech”.

Right.

But proactive, which they know they need to be. That's also why they're manipulating the market proactively as opposed to waiting like, oh wait; where it's like then they have to do it when things get bad. They are getting ahead of it. They are being proactive. That's smart.

So, part of what Hank Paulson's saying there is, hey, we're going to deploy the biggest bazooka of all times. If this thing happens, we're going to start preparing for it. Right? But it's also a threat to help prevent it because the best offense is a defense.

If you prepare the bazooka, you probably don't have to ever use it. Right? But the big idea is, if it ever happens, then they're basically telling you what they're going to do. And the more we have a clear path, now, to understand what that is, that's part of why markets are still up as well. Again, this is part of the whole preparation, whatever. But I think that's the most important thing that happens.

A lot of crazy things happen every week, and this week more than usual. But the fact that there's not more of a conversation about that Hank Paulson interview and what he said there, I think is probably the biggest thing that's not spoken about.

And what that tells me is inflation… we've talked about this, you know, debt jubilee reality coming at some point being the only way out. Well, you're starting to see the actual quiet part out loud, and what the path out of this is likely.

Do you think (and now we're obviously completely just guessing), do you think this means that large correction in equities are kind of called off because we know they're there, they're thinking, they're preparing.

However, we also know that if it really is inflationary, then, at some point, equities do tend to react once we get to a certain level of interest rates, certain level of inflation, is that what we're just going to sit and wait for? You know, yields hitting 6, 7% in the long end. You know, the new Fed Chairman having to disappoint Trump and not lower rates? I mean, how do you… or how has this changed your thoughts on the future path?

These, by the way, with future path, we're talking five plus years on this stuff. Because these are the big, big… This is not one week, two week, one month.

Right.

The pressures are as follows. And the highest probability path over the next five, ten years… write it down, come back, let's talk about five years, okay? But it is a situation where there is a buyer strike and interest rates are going higher on the back end of the curve, tied to fiscal spending, increase in government spending on military, breakdown, and all the things we've talked about for a long time, increasing global conflict, commodity prices continuing to surge, all the things by the way, we foresaw. I want to be clear, that is only going to get worse. But those structural inflationary pressures are going to be… clearly, this is what Paulson and everybody's saying, it's going to be managed.

We are going to do what amounts to Project Twist or, you know, what the Japanese did in terms of buying, you know, we're going to monetize our debt, we're going to buy all the debt and take it in house and then eventually go poof. We don't actually have to go poof. It'll just sit there, owned by us, and work its way off in 30 years or whatever it will.

It's just a line item on the balance sheet owned by the same entity. So, that's where we're going. Now. If you can control the 10-year bond, you can control the equity market. And if you can keep those yields low enough, then great.

Now the problem here, the problem that nobody talks about is inflation will do its thing regardless of what that 10-year bond will do. Actually, ironically, it'll be worse because you're unnaturally keeping that 10-year bond lower. So, over some period of time, once we get down that path, the more and more the Treasury and the Federal Reserve are going to force that 10-year lower and accordingly support markets.

We are going to go more and more down this path, like they saw in the ‘70s, right, where, eventually the whole world will front load demand because of inflation, drive more growth, A, and B, everybody, every hedge fund manager… There's a very financialized world. Every private equity shop will buy anything pinned down that has a fundamental value at interest rates that are lower because relative to… if you have negative real rates, what's the incentive?

The whole world is going to borrow money, leverage, and buy things that are pinned down, that are going to inflate; kind of drive asset inflation, more commodity. This is a reflexive loop. The reason you cannot forever control a long end of the curve is because, just like anything, you pin something unnaturally, even if you're the United States. Eventually it forces a reflexive breaking of that unnatural kind of resistance.

So, the path here is inflation gets worse. The reality is the world, it takes time. The US responds because it's a situation it has to manage, otherwise the market collapses and there's all kinds of issues. So, it naturally does what Japan did, does what all the incentives, the only way out controls that long end. And eventually controlling that long end leads to more and more inflation, which eventually is a monetization of the debt itself, by the way, but eventually leads to a forcing of those interest rates higher. And when that actually happens, and the administration has to say, well, we can no longer continue to hold these long ends down. We have to raise interest rates. That's when the, the cat gets out in the bag.

That's how this is going to play out. I mean, I've talked about it for five years. That's where we're heading. It's going to take another however many years because we haven't yet seen that second spike of inflation. We saw the first one. I told you second one's coming. Here it is. But, you know, again, this is a muddled path, as you highlighted. And they're going to attempt to control it.

They're showing more and more that the attempts to control it are not just subtle, they are explicit. Right? And that's in equity markets as well as bond markets. That's what the Hank Paulson comment is about.

The introduction of Warsh is also the Arthur Burns moment. Right? We're going to come in and, you know, we're going to cut in a political way.

All of this is, we've seen this playbook. We see the incentives, we see where the way out is. So, the big picture to me is quite clear. Now, the path there with the administration entities who are very powerful, who are incentivized to control the outcomes as long as they can, is not as clear.

So, I want to slowly start to wrap up. I want to make sure there's nothing else you want to say, but I do want to bring up one topic question. You mentioned, I think in the beginning, another thing that you had noticed. And I think it was relating to Anthropic and I don't know what it is, but when it comes to AI, something inside me, even though I'm not an AI expert at all, and I hear both arguments, I hear the fear of AI, maybe I feed it a little bit myself, but I also hear the people talking about all the opportunities, all the great things it's going to do.

And one might say that if there's one thing it could potentially do, would be to help with inflation because we're going to be able to do more without having to hire armies of people and whatever. Is there anything in this scenario that you are thinking of, or any of scenarios (I'm sure there are many of them)? How do you incorporate, let me put it like that way, how do you incorporate AI into this geopolitical world? Because I don't think we can ignore it.

No, we absolutely can't ignore it. And, by the way, we just had a wonderful conversation on U Got Options, with Lyn Alden, about this topic as part of it. So, definitely go check out that conversation.

But, I will tell you that there's a reason that Warsh is talking about AI and the deflationary pressures. You know, that's like the big argument. There's no way for me to tell you, 100%. This is a new technology. It is different this time in a sense, but it's always different ‘this time’. And the one thing I can tell you is that I don't know how fast that deflationary pressure will be. But what I can tell you is, in history, there has been… We may think this is the greatest advancement in speed at the time the wheel was the greatest advancement in speed, unfathomable in terms of how much dramatic change it made. It's just all relative to the moment you're at.

And since the beginning of time, the thing that people don't think enough about (they focus on the technology and its effects because that's the first order effect), people don't think enough about the system; the machine that it all operates within, and the natural reflexive effects of that. It is not a coincidence that AI and this technological boom is happening right as populism and the breakdown of global borders.

Everything we've talked about that leads to this fourth turning always comes with a technological boom at the same time because the supply side economics, the natural system that we've deployed comes with technological evolutionary advancement. But it's a winner take all system and that leads to vulnerability of the masses and hence the populist impulse.

AI is a creation of zero percent interest rates.It's a creation of pumping dramatic amounts of money into a venture capital system and sending all stimulus to push us through this period to the top. The net result is globalization, technological development.

So right as we're at this extreme moment of technological advancement and it's going to change the world, we're also at the highest moment of populism. And if you think populism itself, at this moment, is not going to try and tear down the effects of AI and how it's tearing apart society, you're living in a very one dimensional world, or two dimensional world, where you're not looking at the complex system and the reflexive effects of it.

Absolutely.

So, my view is very clear that people are overestimating the deflationary impact of this. Not because it's not deflationary, but because they're not thinking about the inflationary impacts of the populism and the reflexive effects on AI. If you think people are going to just willy nilly go to, hey, we'll just, you know, we'll just let AI take all the jobs. And we'll just take a check. By the way, checks themselves are inflationary. Right? If we're going to just take all this output and just push it back to the people at the bottom, you're going to get inflation. I don't care about the deflationary forces.

But the reaction during populist time is what matters. And the generational demands politically is what matters. The only question to me is, will the will of the people be seen. And again, we talked about that with Lyn Alden on U Got Options. You know, are we going to full authoritarianism where the will of people will be maybe circumvented? And that can happen.

And so, if AI is allowed and, by the way, more real than people realize, especially with the entry of Palantir and David, you know, Peter Thiel and you know, we'll see what happens with the Vice President of the United States if he becomes President.

But, if AI becomes instrumentally used for, much like it is in China, for watching and controlling. Obviously, we know that the tools are there to go more full authoritarians, but that's a whole other conversation. But if the incentives are seen much as they have been, within the democratic history of the US, and even a bit prior, the incentives are clear. The question is only, you know, will those incentives and the will of people be seen and will it be seen…

Yeah, well, let's leave it there for today. But in addition to plugging your recent conversation with Lynn Alden, which everybody should go and, and watch, it's, it's brand new, just came out.

I would actually also mention our conversation with Peter Atwater because it touches on some of the other things, and the K shaped economy, and how a lot of the things you mentioned today will affect the masses and what happens then? So, there's definitely a lot of relevant conversations to be listened to.

Anyways, before we wrap up, let me just mention that in order to get more people to listen to Cem, I would suggest that you appreciate all the efforts that's going into producing these conversations by heading over to your favorite podcast platform and leave a rating and review. It really does help and it also actually cheers us up that we can see the people enjoying the content.

So, I would certainly recommend that and also recommend that actually follow the podcast. It turns out that when you follow a podcast, you are more likely to be shown the relevant content for you. So, I would recommend you doing that.

Next week. I'm joined by Mark. That will also be a very insightful conversation. Different topics of course, but do send your questions to the usual email info@toptradersunplugged.com and I'll make sure I bring them up with Mark.

From Cem and me, thank you ever 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 each other.

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 so that you'll be sure to get all the new episodes as they're released. We have some amazing guests lined up for you and to ensure our show continues to grow, please leave us an honest rating and review. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged.

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