‘It Will Eat The Whole Market’: Fund Manager Reveals What’s Driving Stocks | Cem Karsan
Summary
Liquidity-Driven Rally: Guest argues the administration and Fed are proactively managing markets to create collateral and fuel CapEx, driving an unprecedented, bubble-like rally.
Oil Shock: Expects a supply disruption larger than 1973 centered on the Strait of Hormuz, with petrodollar and global power dynamics at stake, yet markets are being managed to mute reactions.
Options Dominance: Options volumes are exploding as a superior, more precise technology for expressing views; adoption has hit a tipping point and is set to keep growing.
Zero DTE: Zero-day options are gaining share due to simplicity and focus on realized volatility, reducing exposure to harder-to-forecast implied volatility dynamics.
US-China Trade: Trump’s Beijing trip with top CEOs (e.g., Nvidia’s) signals potential deals to channel profits to U.S. firms and possible tariff reductions tied to Chinese CapEx investment.
Semiconductors & AI: An uneven rally led by semiconductors (up sharply) and AI-related beneficiaries; examples like Anthropic’s soaring valuation illustrate how equity gains accelerate CapEx and earnings.
Market Outlook: Near term, continued squeeze and summer volatility compression likely; caution rises into fall/election as 1999-style bubble risks build.
Wealth Effect & Inequality: Gains accrue mainly to top wealth cohorts and corporations, amplifying inequality and making consumer-level benefits uneven.
Transcript
We have never seen such a proactive response to markets before a crisis happens. As you get into fall, particularly near the election or post-election, you have to be incredibly cautious trying to pick the top in what is a dramatic bubble driven by liquidity is a very dangerous thing to do. But I would be very surprised and actually mildly concerned >> [music] >> of why a deal gets done on the long-term of what's happening in the street. What's happening in the markets is truly unprecedented. What is driving this historic rally? Who is causing this rally? And what's about to come next? Why is the S&P 500 still at an all-time high despite the ongoing war with Iran? Our next guest, Jam Carson, CIO and founder of Kai Volatility Advisors and Kai Wealth, will have the answers. And this is one of the most fascinating interviews I've done in a while. His answers truly shocked me. I'm on the road right now. As you can see, my background's different. And I've had a chance to speak with a few interesting people all week, and Jam is certainly one of them. This video was brought to you by Kalshi. It's a prediction market and the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real-world events from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below and use my code LIN l i n or scan the QR code here. New users will get $10 when they trade $10. For example, you could put $50 down on what the Trump administration is going to announce for a deal with China, a potential deal with China this week as Trump meets with Xi Jinping in Beijing as we speak. This actually is one of the topics of our conversation today. You could potentially make up to $62 in return if that is correct. Well, we'll find out what the answer is and what Jam thinks is about to happen. This is a very exciting episode and as always please do subscribe if you haven't already. Jeff, welcome to the show. Good to see you. Great to be here. Thanks for having me, David. Let's pull up a chart of the S&P 500 and we can walk through this together. This has been one of the most significant rallies in recent market history. Uh since the bottom, the recent trough in late March, the S&P has rallied 16 and a half, almost 17% depending on the time of the day. In a in a span of a month and a half, 6 weeks. Uh this has been on the back of a rebound following and less than 10% correction. Um can you just explain to the layman investor out there the significance of this type of rally and how common or rare it could be. Yeah, so um we have in the last uh almost 100 years had only nine rallies of greater than 17% from bottom to top in a 1-month period. Um so already quite rare. But what is exceedingly rare and a data set of one um in a a century of market data is a rally of this size and speed that has come out of a decline as shallow as the decline we've had. The other eight instances of this type of speed and size of ra- lly have all come from a 20% decline or greater. So, this decline was 9%. Uh-huh. Why? Why have the other eight rallies of the sea- the size and speed all come out of uh you know, a big decline? Well, obviously if you have a 20% decline or more, that is a something meaningfully bad is happening in the world or some crisis or fear exists. And in those situations, what would you expect? You would expect positioning to get short, hedges to be entering the market, some type of stress. And that stress creates a short interest and a under leverage into the market that can I and under investment in the market that when responded to said crisis or concerns uh is you know, in response to that, you have a generally government of Fed Federal Reserve Treasury governmental response, which then uh offsets that risk and creates a turn and squeeze the markets. A size and speed of move of this Sorry, please continue. >> Go ahead. No, no, I was just going to say so so um obviously that response is happening um that liquidity that's coming in is is an an attempt to turn the tides on on said crisis. So, this is different in the sense that we never had the crisis happen in terms of market action. Right? But if you look at the data, the short interest and the positioning in preparation for what people were seeing already, the facts on the ground of a cri- crisis um was actually there. And the other part, which has happened on this listeners, also happened, which is a a a orchestrated uh response of both liquidity and other things which we can get into from the government to help respond to what they saw as the crisis that is coming. It is a the difference between the other eight times is this is proactive. Proactive. We have never seen such a proactive response to markets before a crisis happens. And that is really what defines this data set and why this is happening at this at this time. So, can you just elaborate on what what this crisis is? Are you referring to um The biggest oil shock that's ever that's ever happened. Yes, that is a crisis. >> Hasn't that already happened? Jim? No. No. No, not yet. No, it it is a it is something that is happening. Um if you look at what happened in 1973 in the um uh in the OPEC crisis, uh markets actually went sideways, slightly up, slightly down for many many months before the real crisis actually hit. And this by most sources and you you can tell me your thoughts, David, but um is is a bigger oil shock than in 1973. And in terms of the supply shock itself. I'm not talking about the price of oil, but the supply shock. Okay? So, the big difference here is a really focused uh uh uh intention to create some type of market buffer and liquidity buffer to help manage what's coming ahead. We can go through all of the other things that the administration has done, historic responses and preparations across many many different categories, which we can get into in the last 6 weeks. But but the critical part to understand is if you look at that data, it speaks volumes and it makes sense. All of them fit the same criterion, which is short interest and size of position getting really bad uh and a response from government to squeeze the market, push it higher, respond to the crisis, however you want to say, but all those were reactive. This was proactive. And response by the government. Can you Can you just explain to us how the government is exactly responding to this crisis by injecting liquidity and the mechanism with which they're injecting the liquidity. Yeah, several several different paths. So, it's not just shooting money in liquidity. The biggest part of which is reflexive is managing the market itself. I want to highlight 300. Most people don't understand. People think of markets as a ticker that is an output to what's happening in the world. If you listen to CNBC, you listen to most sources, markets are the market went up today because, right? It is a response or an output. I I want people to fully appreciate and understand that more important nowadays given the size and scale and leverage of financial markets and how critically they touch everything in America in particular, not all over the world. How critical they are to outcomes themselves. You have a three 300 trillion. I want to repeat, 300 trillion dollars of assets in both equity markets, about 150 trillion in public equity markets, private equity, private businesses, everything that is tied to the valuations of public markets, 300 trillion dollars. When you rally the market almost 20%, that is a 60 trillion dollars of new collateral that you've created. And a system itself that's incredibly leveraged and tied to leverage. Majority of money is leverage. Not actual dollars. So, and again, to put that in context, 60 trillion dollars of new collateral in the world is an over an order of magnitude more than all the liquidity that was pumped into the system through the Federal Reserve and fiscal spending during COVID. Now, obviously there you also had a market that rallied tremendously, all right? Which is also the point which that reflexively leads to the liquidity comes in but but the Federal Reserve and the Treasury's primary role now is to manage markets. They could pump in 20 trillion dollars but if the market doesn't go up in response to it if it goes down 5 10% that offsets the liquidity that's coming into the market itself. >> Wait a minute, how is that part of their How does that even relate to the mandated Why does the Federal Reserve into a certain extent the White House why do they care how financial markets behave? Yes. Several reasons. One CapEx cycles growth of the economy is tied to liquidity. I'll give you another a great example 1999. Guess what CapEx growth Sorry, guess what earnings growth was in 1999. 30% earnings growth was 30%. Dramatically exceeded expectations of 20 15 to 20% we had a massive CapEx boom happening in 99. Why did the CapEx boom happen in 99? Everybody attributes this growth to some magical Oh, that's just what growth is the economy is growing because good things are happening and so the market reflects it but they keep the people don't believe >> that is this year. Let me take a guess because I don't know the number and this is fun for me. Let me just take a guess. So it was 30% in 99. Is earnings growth yeah. If earnings growth The S&P The S&P 500 It is near 100% now? No, CapEx Sorry, earnings growth just last quarter annualized at 27. But way up from the expected again 15 to 20%. So point is the earnings growth that you see tied and the revenue growth tied to the CapEx structure is a function of valuations and equity markets going up. When you take an Anthropic that goes from a $350 billion dollar private market valuation to a $1.4 trillion dollar valuation in 3 to 6 months, that new money goes somewhere. Where does it go? Goes to CapEx build out. Goes to building and and creating the product that doesn't exist yet. Which then drives new revenue, which then for certain entities, new new growth, new new you know, capital being pushed in the system. So so that's just an example with Anthropic, but it's across the whole thing. Now, what do you think happened to earnings growth in 2000 after the market declined? I'm going to say um negative 20%. >> Imploded. 95% of internet startups went bankrupt in '95. Yeah. >> I ask you, was that because the economy just slowed all of a sudden went from massive breakneck speed to just decrease or was the market's allocation of liquidity the primary driver? We know this. This is in 2000 and the point here is that very few people look at it this way and understand look look at the world through this vantage point. That said, the Treasury Secretary and the Federal Reserve, you better believe understand these dynamics. This is critical to the way markets and and the and the There's a naive view in the world that markets themselves are not being somehow managed or that they themselves are not the target. Because of course, nobody no administration wants the world to think that that that is our goal. But when you have 50% of all consumption, by the way, outside of the corporate part I talked about where you have this investment, right? Just from a corporate level, which then you can put to work and invest into your business and then grow the business. That's a kind of a B2B uh From a consumer perspective, now, 50% of all consumption comes from the top 10% of the wealth distribution. So, what happens if the market drops 20% or rallies 20%? Well, those people are uh 20% uh wealthier, and we call it the wealth effect, but the wealth effect has never been bigger than it has from a just an economic uh revenue perspective. So, there's two different parts, but the bigger part is the just pure amount of liquidity pushed into corporations and the amount of um uh capital investment and and and the the flywheel that that drives. Now, that is not the only thing that matters. I'm not saying it's the only thing that matters. I'm just saying the growth and importance of it uh it's always mattered, but the growth and importance of it has become dominant in the system. And this is why we have a hedge fund manager as Treasury Secretary. It's why we have a hedge fund manager now starting as federal head of the Federal Reserve. >> I I understand your your your your your rationale. Uh the wealth effect is going to impact all levels of the economy is your thesis, and so if the stock market collapses, then the Federal Reserve has to deal with higher unemployment, which is one of their mandates. However, the Trump literally just said to a reporter when asked the motivation behind making a deal with Iran, um does he look at the financial position of American citizens? And he said, and I quote, "Not even the little bit. The only thing that matters when I'm talking about Iran, they can't have a nuclear weapon. I don't think about Americans financial situation." Your response? >> Um you I'm going to quote a couple of other loosely quote a couple other Donald Trump quotes, and you you tell me if we should be listening to all of Donald Trump quotes as fact. Um uh uh this this uh we have a deal with Iran, and it'll be done in 2 weeks. That's from s- [snorts] 8 weeks ago. Um I we uh you know, we will uh bomb a civilization into oblivion tomorrow. Followed by we have, you know, we have a a deal peace in our times. Trump's primary objective and actually his primary tool, which is a great transition point in the administration's primary tool of managing markets, is actually not the core liquidity itself. It's not It's not driving, you know, trillions of dollars of liquidity into the market, you know, and manipulating markets from a from a buying markets and front running. It is understanding market flows and releasing in a very coordinated way, which is well documented across 50 different aligned Twitter accounts and and media sources, orchestrated set of messages to manage the market. The words he says, as any good poker player would be would would do, right, is not an intent to tell the world what he's going to do, unless that achieves his outcome. It's to convince the market that they're better off listening and following that path. This is the Draghi whatever it takes type comments. People in power have the ability, particularly if they have a high stack at the poker table, and can bully people around to push markets. But the key part here is that that message or that bullying itself is not creating the liquidity, the market is. And the reflexive effects of markets is the key. It is the target. It is It is the goal. And And so, this is a very sophisticated administration. The scent is broke the pound. We're talking about somebody who understands markets and liquidity intimately well. And they have a And by the way, it's not a coincidence that the V-bottom we had was on March 31st, the end of the quarter. We can go through all the liquidities and the exact reversal and timing and in coordination of of the messages that went from end of a civilization Great Depression tweets followed by peace in our time will be done in 2 weeks. We Both of those things were nonsense, much like 150% tariffs last April followed by, you know, 10% for some, 0% for others. We'll see. Things are good now. The V-bottom that house orchestrated last April is now seen through the vantage point of what was happened now, which was much more clear and coordinated even than the first one, right? And now we have a a pattern. is a very clear, sophisticated, thoughtful way of moving markets. The release of the tweets in the morning right before the open, right before the close, the reversal of of information, the getting markets on off foot, and then pushing positive outcomes will be done in 2 weeks, it'll be done in 2 weeks, we're almost there, it's done, it's all be done soon, followed by anytime the bad news comes out. Have we had any reactions negatively in the market on the back of all the bad things that have happened in the in the Strait of Hormuz since? Did the market go down when we when they they they moved to expand their control Iran expands its control of the Strait of Hormuz and started to control the the under under wa- underwater wires that are that are cables that are that are controlling all internet and all data throughout the region? No, there's been zero response. Why? Because each day a message, much like the message you just read, by the way, are put out there so that markets and media sources say, just like you're saying, "Hey, look, that's not reality. Reality is blah." So, can't take the Donald Trump tweet and use that as some source of truth. That is actually the whole method of the madness. Um it is it is actually a sophisticated thoughtful approach. If you put me in that in that same space, knowing what I know, I do the same thing. Okay, let's talk about um Trump to deal with China. This week uh China actually uh so Trump just landed in Beijing earlier today. Um accompanied by a host of American CEOs, he's set to meet with Xi Jinping. This is from Kalshi Prediction Market. What will Trump announce as part of his China trip? We have a series of uh you know, events or uh deals outcomes uh on the table here. Now, this is significant because talking about front-running news, traders would like to be positioned ahead of what may be a deal. So, what do you think is the most likely outcome from this meeting? Just a few options ahead on my screen. US soybean purchases, Boeing aircraft purchases, fentanyl precursor crackdown, rare earth export extension, just to name a few. Anything else on your radar? Yeah, first of all, to follow on what I was saying, is it a coincidence given everything I just said that uh the CEO of Nvidia uh is on the plane, that Elon Musk is on the plane? This is not uh an administration uh that is just going out there from a policy perspective negotiating. They are bringing along corporate interests on the plane for the negotiation. Why? Uh what is that signal? That we are going to drive profits to American companies. Particularly they the the sector here that, right, that is flying. And uh you know, we're going to find some type of deal here that is going to provide profits to that sector. Now, does that Is that going to, in my opinion, um resolve the larger crisis between the larger proxy war between China and the US. That's what is happening in the Strait of Hormuz. This is not about nuclear, again. Just because he says this is about nuclear weapons in Iran, Mhm. uh you know, this is not about nuclear weapons. This is about the Strait of Hormuz has been from the very beginning. It's about the petrodollar. It's about the exorbitant privilege of the US dollar in maintaining the grand leverage uh that the US hopes to maintain in a larger global conflict. It's about who's going to control power of the world for the next 50 100 years. The move in Iran, much like the move in Venezuela, it's not a coincidence they came back-to-back. Mhm. Did Did Venezuela have nuclear weapons? I don't believe Venezuela had nuclear weapons. Is it a coincidence that we went to Venezuela and then we went right into Iran? It's not. Is it a Is it a coincidence we're talking about Greenland? Does Greenland have nuclear weapons? So, my big point here is I think the this whole narrative that this is about nuclear weapons or that, you know, Israel kind of cajoled and took the US military and administration is incredibly naive. This is a a larger, much bigger global uh leverage point and conflict in Iran. And so, the reason I dive into that, to answer your question now, I apologize if I've diverged a bit digressed a bit, is um is to maintain that leverage. So, I personally do not believe the Strait of Hormuz issue gets solved there. But, I do believe that um that there is some type of uh investment that comes from China uh into some of these in coordinations on an economic front. Uh not economic, I should say, from a financial uh corporate front. Right? Um but, I would be very surprised, and actually mildly concerned, of of why a deal gets done on the long term of what's happening in the Strait of Hormuz. So um >> trying to solicit Chinese investment into US manufacturers. And perhaps if this particular deal gets done, we could see a reduction in tariffs. What do you think? Will it get done? >> I think I think that I think a reduction in tariffs could very well happen. Uh-huh. Um tied to tied to an actual investment, capex investment from China. Um so I do think there can be a significant divergence between kind of tariff policy and some of the economic policies and actually physically what's happening with oil and the Strait of Hormuz. Um Okay, I want to comment on a few data points concerning options markets, of which you're an expert, before we close off the interview. So I have in front of me, I'll pull up the screen here, zero day to expiry options, which for the audience are contracts that expire the same day the trading. Now, let me just take a look at what's on my screen here. So trade volume data um This is what's in front of me and this is significant because we have here a situation in which 63% uh zero day to expiry options hit a record of 63% of the SPX volume in March per the CPOB CPOE. Why is that significant? Um I think the most significant thing is actually not that the zero DTE is becoming a greater percentage, although I'll address that. It's that options volumes writ large are uh exploding and have been exploding higher for 5 years. And exponentially so. Um options are and again, this is a little out of the box for most people. They are a dramatically better way to position in the market. It's like a better technology. It's like saying, "Hey, there's candlelight or there's electricity." Uh objectively, electricity is more efficient and more and is a better way um to light your house. Um uh Uh like any technology, you need network effects. You need adoption, you need standardization, you need access in order for technologies to hit a tipping point and inflect higher. This has happened for options. Options have been growing structurally for a long time, but they when I started in the business 27 years ago, they were simply quarterly options at, you know, 1% width in just the S&P. I mean, imagine the infrastructure growth. Why is this a better technology? I want to be clear. When you buy an asset, any asset, stock, bond, commodity, you take on the full exposure of that asset. It goes down one, you lose one, go up one, you lose you you gain one. You are short a put, uh you're long a call at every expiration. When you choose to buy an out-of-the-money call, you only take on the those moments of the distribution, a very small part. And what And depending on the time that you choose, you only choose that part. They're much more precise. I can have two stocks that I put in front of you that are the same comp same in industry, same market cap, and you would think, "Oh, those are you know, I don't put a name them. You think all those are the same stock. Peel back the option chain, one is right distributed, left tail, one's left distributed, right tail. One is a company that pharmaceutical company that is has a a long-standing very profitable um uh drug that has the potential to be disrupted and lose all of its money. The other one has a is is a oncoming likely not to succeed uh drug that will likely make the company go bankrupt eventually, but if it's right, it will take over the whole industry. Point is the data set underneath the market and the ability to bet on the different moments of this distribution, the realities of these are much more sophisticated, much more detail. And so adoption has gone to the roof because it is a more precise, better way to express all a stock or a bond or an asset any kind is just the expected value of that incredibly rich three-dimensional distribution. When people talk about options as derivatives, they miss the point. The options chain is actually the three-dimensional dog, it is the greater picture of the actual asset in all its forms. And the asset itself price is the derivative. It is the expected value of that whole distribution. And the way those those stocks or assets move are a function of the moves in the much much greater, much more detailed um rich data-rich options chain, okay? So I I say this to to explain to people that this is not something that's just oddly growing as a corner of the market. It will eat the whole market, and it is in the process of eating the whole market. I've been saying this for 5-6 years. If you understand what options are and the power they have, the only problem was they didn't have enough volume and enough liquidity and enough infrastructure to absorb that uh for a long time, and we have now hit a the network effects and the flywheel that will create more more and hence and hence from there. So, now having said that, why zero DTE? >> [clears throat] >> Zero DTE is simpler by definition. It is already hard to look at a distribution and say I want this part of the distribution. When you bring in time, you can create you have implied volatility and the move of implied volatility to understand and to manage. And that has been proven as in 2019 2022 to be very difficult for hedgers. And so they've increasingly moved away from that because just want to express their time their their bets in terms of realized bets. Implied volatility is hard to express. So, the early volume and the success that people are having using options has been focused on the much easier first order effect of realized volatility, which is what's happening. There's very little implied at the zero DTE. When you move to one month, two month, three month, a lot of the returns of options become tied to the actual implied volatility itself, which again people have less knowledge or opinion on and don't want to bet on. And that is what's driven the dramatic increase in the flywheel zero DTE. Two follow-up questions before we close off. We only have a few minutes left. Jim, thank you very much. So, putting all this together, direction of markets, what do you think is going to happen next? You have the management of markets, as you would put it, by the government, um um you know, probably one of the largest and most significant rallies in recent history following a short decline. And uh your explanation on the significance of ZTD options. What is about to happen next? What are these signals telling you? Yeah. So, um highest probability is uh is an intent to continue to squeeze and support liquidity into what is a deteriorating broader structural picture. Uh it is a pricing bubble. Uh it is the only data sets on multiple levels that compared to now is exactly that date 1999 to 2000 that I put in front of you. But the path on a bubble is incredibly unpredictable by definition. You can have a 20% rally before you get a decline. In early '99, if you knew that this was a bubble, which we did, I was trading at that time and said, "Look, this is a not going to end well." You could still you know, we we still saw a dramatic rally. Even more detailed, I'll give you couple quick data points. In October of 1999, the Dow Jones topped. The structural stocks and the and the pressures in the system were already very clear. The Nasdaq and they declined together 10%. Actually, Nasdaq declined maybe 12 to 15%. But then what happened? Then the market rallied back. Nasdaq rallied 28, 29% into March of 2000. And the Dow never topped again. The Dow itself saw its top in October. But the Nasdaq rallied almost 30%. Sound familiar? Does that sound familiar at all? We just declined 10% across the market and and we have a incredibly uneven rally where semiconductors are up 60% in 6 weeks. While we sit at record valuations. So, my answer to you is that's the data set. Okay. And there are the it rhymes incredibly well. Now, and it also timing-wise lines up very well with the November midterm election, which drives incentives. So, you know, as you get into fall, particularly near the election or post-election, you have to be incredibly cautious. What happens between now and then? Very well could see a little bit more of this, but trying to pick the top in what is a dramatic bubble driven by liquidity and an attempt to you know, kind of driver of liquidity into what is a massive bar uh uh bubble is is a very dangerous thing to do at all. >> I have a final question. >> said, lastly, very short, yeah, last 2 seconds, sorry, cuz I want to give everybody the crumbs. We're heading into the summer, historic vol compression. This is what's different than '99. Options, all these other things are different. The amount of vol compression in the summer is likely to hand also help hold things at bay and allow the administration to continue to keep the plate spinning while the geopolitical realities of the oil cost, etc., are on a lag and are going to take some time to hit as well. So, if you put those all together, you see a timing window of after the summer as more likely. >> Excellent. Final question, 30 seconds before you go. We talked about the wealth effect. If the stock market collapses, the rich stop spending more money, and we understand what happens next to consumer spending overall. Does the opposite apply? If the somebody if somebody were to explain to you, probably not even an investor, just somebody observing the markets were to ask you, "Jim, if you look at my screen right now, the S&P 500 has grown almost 200% in the last 5 years. Why hasn't his wealth grown proportionally by 200% over the last 5 years? How would you explain that question? Why isn't his income double? Why isn't his, you know, RSP double, right?" Yeah. Uh again, the amount of liquidity is not driving to people. It's driving to corporations. It's driving to the holders of corporations. When when the market goes up, uh Elon Musk, you know, 200% Elon Musk net worth quadruples, just like it has, right? Does he Does he become Does everybody else become more wealthy? Inequality in the United States has exploded higher and is only accelerating as a result of all of this. And so, the average person is being left behind, and the economic growth or or consumption is actually a small percentage relative to the actual cap ex growth, the corporate growth, the business-to-business growth, and that's the story. Okay. Excellent. Thank you very much. Where can we follow you, Jim? Uh you can find me at Kaiwel.com or Kaivolatility.com or on Twitter at @jam_croissant. We do some of our own podcasts as well. Oh, and you can find us on YouTube under Kai Media. Excellent. It was a pleasure to host you. Nice to meet you. Welcome to the show and I hope to speak with you again. Thank you. Thanks for having me, David. Thank you for watching. Don't forget to follow Jim and Jim Croissant in the links down below. And uh we'll speak to you again soon.
‘It Will Eat The Whole Market’: Fund Manager Reveals What’s Driving Stocks | Cem Karsan
Summary
Transcript
We have never seen such a proactive response to markets before a crisis happens. As you get into fall, particularly near the election or post-election, you have to be incredibly cautious trying to pick the top in what is a dramatic bubble driven by liquidity is a very dangerous thing to do. But I would be very surprised and actually mildly concerned >> [music] >> of why a deal gets done on the long-term of what's happening in the street. What's happening in the markets is truly unprecedented. What is driving this historic rally? Who is causing this rally? And what's about to come next? Why is the S&P 500 still at an all-time high despite the ongoing war with Iran? Our next guest, Jam Carson, CIO and founder of Kai Volatility Advisors and Kai Wealth, will have the answers. And this is one of the most fascinating interviews I've done in a while. His answers truly shocked me. I'm on the road right now. As you can see, my background's different. And I've had a chance to speak with a few interesting people all week, and Jam is certainly one of them. This video was brought to you by Kalshi. It's a prediction market and the largest prediction market in the United States. Unlike a sports book, you're trading peer-to-peer on real-world events from economic data to political outcomes, and the price moves based on public opinion, not a house. Go to the link in the description down below and use my code LIN l i n or scan the QR code here. New users will get $10 when they trade $10. For example, you could put $50 down on what the Trump administration is going to announce for a deal with China, a potential deal with China this week as Trump meets with Xi Jinping in Beijing as we speak. This actually is one of the topics of our conversation today. You could potentially make up to $62 in return if that is correct. Well, we'll find out what the answer is and what Jam thinks is about to happen. This is a very exciting episode and as always please do subscribe if you haven't already. Jeff, welcome to the show. Good to see you. Great to be here. Thanks for having me, David. Let's pull up a chart of the S&P 500 and we can walk through this together. This has been one of the most significant rallies in recent market history. Uh since the bottom, the recent trough in late March, the S&P has rallied 16 and a half, almost 17% depending on the time of the day. In a in a span of a month and a half, 6 weeks. Uh this has been on the back of a rebound following and less than 10% correction. Um can you just explain to the layman investor out there the significance of this type of rally and how common or rare it could be. Yeah, so um we have in the last uh almost 100 years had only nine rallies of greater than 17% from bottom to top in a 1-month period. Um so already quite rare. But what is exceedingly rare and a data set of one um in a a century of market data is a rally of this size and speed that has come out of a decline as shallow as the decline we've had. The other eight instances of this type of speed and size of ra- lly have all come from a 20% decline or greater. So, this decline was 9%. Uh-huh. Why? Why have the other eight rallies of the sea- the size and speed all come out of uh you know, a big decline? Well, obviously if you have a 20% decline or more, that is a something meaningfully bad is happening in the world or some crisis or fear exists. And in those situations, what would you expect? You would expect positioning to get short, hedges to be entering the market, some type of stress. And that stress creates a short interest and a under leverage into the market that can I and under investment in the market that when responded to said crisis or concerns uh is you know, in response to that, you have a generally government of Fed Federal Reserve Treasury governmental response, which then uh offsets that risk and creates a turn and squeeze the markets. A size and speed of move of this Sorry, please continue. >> Go ahead. No, no, I was just going to say so so um obviously that response is happening um that liquidity that's coming in is is an an attempt to turn the tides on on said crisis. So, this is different in the sense that we never had the crisis happen in terms of market action. Right? But if you look at the data, the short interest and the positioning in preparation for what people were seeing already, the facts on the ground of a cri- crisis um was actually there. And the other part, which has happened on this listeners, also happened, which is a a a orchestrated uh response of both liquidity and other things which we can get into from the government to help respond to what they saw as the crisis that is coming. It is a the difference between the other eight times is this is proactive. Proactive. We have never seen such a proactive response to markets before a crisis happens. And that is really what defines this data set and why this is happening at this at this time. So, can you just elaborate on what what this crisis is? Are you referring to um The biggest oil shock that's ever that's ever happened. Yes, that is a crisis. >> Hasn't that already happened? Jim? No. No. No, not yet. No, it it is a it is something that is happening. Um if you look at what happened in 1973 in the um uh in the OPEC crisis, uh markets actually went sideways, slightly up, slightly down for many many months before the real crisis actually hit. And this by most sources and you you can tell me your thoughts, David, but um is is a bigger oil shock than in 1973. And in terms of the supply shock itself. I'm not talking about the price of oil, but the supply shock. Okay? So, the big difference here is a really focused uh uh uh intention to create some type of market buffer and liquidity buffer to help manage what's coming ahead. We can go through all of the other things that the administration has done, historic responses and preparations across many many different categories, which we can get into in the last 6 weeks. But but the critical part to understand is if you look at that data, it speaks volumes and it makes sense. All of them fit the same criterion, which is short interest and size of position getting really bad uh and a response from government to squeeze the market, push it higher, respond to the crisis, however you want to say, but all those were reactive. This was proactive. And response by the government. Can you Can you just explain to us how the government is exactly responding to this crisis by injecting liquidity and the mechanism with which they're injecting the liquidity. Yeah, several several different paths. So, it's not just shooting money in liquidity. The biggest part of which is reflexive is managing the market itself. I want to highlight 300. Most people don't understand. People think of markets as a ticker that is an output to what's happening in the world. If you listen to CNBC, you listen to most sources, markets are the market went up today because, right? It is a response or an output. I I want people to fully appreciate and understand that more important nowadays given the size and scale and leverage of financial markets and how critically they touch everything in America in particular, not all over the world. How critical they are to outcomes themselves. You have a three 300 trillion. I want to repeat, 300 trillion dollars of assets in both equity markets, about 150 trillion in public equity markets, private equity, private businesses, everything that is tied to the valuations of public markets, 300 trillion dollars. When you rally the market almost 20%, that is a 60 trillion dollars of new collateral that you've created. And a system itself that's incredibly leveraged and tied to leverage. Majority of money is leverage. Not actual dollars. So, and again, to put that in context, 60 trillion dollars of new collateral in the world is an over an order of magnitude more than all the liquidity that was pumped into the system through the Federal Reserve and fiscal spending during COVID. Now, obviously there you also had a market that rallied tremendously, all right? Which is also the point which that reflexively leads to the liquidity comes in but but the Federal Reserve and the Treasury's primary role now is to manage markets. They could pump in 20 trillion dollars but if the market doesn't go up in response to it if it goes down 5 10% that offsets the liquidity that's coming into the market itself. >> Wait a minute, how is that part of their How does that even relate to the mandated Why does the Federal Reserve into a certain extent the White House why do they care how financial markets behave? Yes. Several reasons. One CapEx cycles growth of the economy is tied to liquidity. I'll give you another a great example 1999. Guess what CapEx growth Sorry, guess what earnings growth was in 1999. 30% earnings growth was 30%. Dramatically exceeded expectations of 20 15 to 20% we had a massive CapEx boom happening in 99. Why did the CapEx boom happen in 99? Everybody attributes this growth to some magical Oh, that's just what growth is the economy is growing because good things are happening and so the market reflects it but they keep the people don't believe >> that is this year. Let me take a guess because I don't know the number and this is fun for me. Let me just take a guess. So it was 30% in 99. Is earnings growth yeah. If earnings growth The S&P The S&P 500 It is near 100% now? No, CapEx Sorry, earnings growth just last quarter annualized at 27. But way up from the expected again 15 to 20%. So point is the earnings growth that you see tied and the revenue growth tied to the CapEx structure is a function of valuations and equity markets going up. When you take an Anthropic that goes from a $350 billion dollar private market valuation to a $1.4 trillion dollar valuation in 3 to 6 months, that new money goes somewhere. Where does it go? Goes to CapEx build out. Goes to building and and creating the product that doesn't exist yet. Which then drives new revenue, which then for certain entities, new new growth, new new you know, capital being pushed in the system. So so that's just an example with Anthropic, but it's across the whole thing. Now, what do you think happened to earnings growth in 2000 after the market declined? I'm going to say um negative 20%. >> Imploded. 95% of internet startups went bankrupt in '95. Yeah. >> I ask you, was that because the economy just slowed all of a sudden went from massive breakneck speed to just decrease or was the market's allocation of liquidity the primary driver? We know this. This is in 2000 and the point here is that very few people look at it this way and understand look look at the world through this vantage point. That said, the Treasury Secretary and the Federal Reserve, you better believe understand these dynamics. This is critical to the way markets and and the and the There's a naive view in the world that markets themselves are not being somehow managed or that they themselves are not the target. Because of course, nobody no administration wants the world to think that that that is our goal. But when you have 50% of all consumption, by the way, outside of the corporate part I talked about where you have this investment, right? Just from a corporate level, which then you can put to work and invest into your business and then grow the business. That's a kind of a B2B uh From a consumer perspective, now, 50% of all consumption comes from the top 10% of the wealth distribution. So, what happens if the market drops 20% or rallies 20%? Well, those people are uh 20% uh wealthier, and we call it the wealth effect, but the wealth effect has never been bigger than it has from a just an economic uh revenue perspective. So, there's two different parts, but the bigger part is the just pure amount of liquidity pushed into corporations and the amount of um uh capital investment and and and the the flywheel that that drives. Now, that is not the only thing that matters. I'm not saying it's the only thing that matters. I'm just saying the growth and importance of it uh it's always mattered, but the growth and importance of it has become dominant in the system. And this is why we have a hedge fund manager as Treasury Secretary. It's why we have a hedge fund manager now starting as federal head of the Federal Reserve. >> I I understand your your your your your rationale. Uh the wealth effect is going to impact all levels of the economy is your thesis, and so if the stock market collapses, then the Federal Reserve has to deal with higher unemployment, which is one of their mandates. However, the Trump literally just said to a reporter when asked the motivation behind making a deal with Iran, um does he look at the financial position of American citizens? And he said, and I quote, "Not even the little bit. The only thing that matters when I'm talking about Iran, they can't have a nuclear weapon. I don't think about Americans financial situation." Your response? >> Um you I'm going to quote a couple of other loosely quote a couple other Donald Trump quotes, and you you tell me if we should be listening to all of Donald Trump quotes as fact. Um uh uh this this uh we have a deal with Iran, and it'll be done in 2 weeks. That's from s- [snorts] 8 weeks ago. Um I we uh you know, we will uh bomb a civilization into oblivion tomorrow. Followed by we have, you know, we have a a deal peace in our times. Trump's primary objective and actually his primary tool, which is a great transition point in the administration's primary tool of managing markets, is actually not the core liquidity itself. It's not It's not driving, you know, trillions of dollars of liquidity into the market, you know, and manipulating markets from a from a buying markets and front running. It is understanding market flows and releasing in a very coordinated way, which is well documented across 50 different aligned Twitter accounts and and media sources, orchestrated set of messages to manage the market. The words he says, as any good poker player would be would would do, right, is not an intent to tell the world what he's going to do, unless that achieves his outcome. It's to convince the market that they're better off listening and following that path. This is the Draghi whatever it takes type comments. People in power have the ability, particularly if they have a high stack at the poker table, and can bully people around to push markets. But the key part here is that that message or that bullying itself is not creating the liquidity, the market is. And the reflexive effects of markets is the key. It is the target. It is It is the goal. And And so, this is a very sophisticated administration. The scent is broke the pound. We're talking about somebody who understands markets and liquidity intimately well. And they have a And by the way, it's not a coincidence that the V-bottom we had was on March 31st, the end of the quarter. We can go through all the liquidities and the exact reversal and timing and in coordination of of the messages that went from end of a civilization Great Depression tweets followed by peace in our time will be done in 2 weeks. We Both of those things were nonsense, much like 150% tariffs last April followed by, you know, 10% for some, 0% for others. We'll see. Things are good now. The V-bottom that house orchestrated last April is now seen through the vantage point of what was happened now, which was much more clear and coordinated even than the first one, right? And now we have a a pattern. is a very clear, sophisticated, thoughtful way of moving markets. The release of the tweets in the morning right before the open, right before the close, the reversal of of information, the getting markets on off foot, and then pushing positive outcomes will be done in 2 weeks, it'll be done in 2 weeks, we're almost there, it's done, it's all be done soon, followed by anytime the bad news comes out. Have we had any reactions negatively in the market on the back of all the bad things that have happened in the in the Strait of Hormuz since? Did the market go down when we when they they they moved to expand their control Iran expands its control of the Strait of Hormuz and started to control the the under under wa- underwater wires that are that are cables that are that are controlling all internet and all data throughout the region? No, there's been zero response. Why? Because each day a message, much like the message you just read, by the way, are put out there so that markets and media sources say, just like you're saying, "Hey, look, that's not reality. Reality is blah." So, can't take the Donald Trump tweet and use that as some source of truth. That is actually the whole method of the madness. Um it is it is actually a sophisticated thoughtful approach. If you put me in that in that same space, knowing what I know, I do the same thing. Okay, let's talk about um Trump to deal with China. This week uh China actually uh so Trump just landed in Beijing earlier today. Um accompanied by a host of American CEOs, he's set to meet with Xi Jinping. This is from Kalshi Prediction Market. What will Trump announce as part of his China trip? We have a series of uh you know, events or uh deals outcomes uh on the table here. Now, this is significant because talking about front-running news, traders would like to be positioned ahead of what may be a deal. So, what do you think is the most likely outcome from this meeting? Just a few options ahead on my screen. US soybean purchases, Boeing aircraft purchases, fentanyl precursor crackdown, rare earth export extension, just to name a few. Anything else on your radar? Yeah, first of all, to follow on what I was saying, is it a coincidence given everything I just said that uh the CEO of Nvidia uh is on the plane, that Elon Musk is on the plane? This is not uh an administration uh that is just going out there from a policy perspective negotiating. They are bringing along corporate interests on the plane for the negotiation. Why? Uh what is that signal? That we are going to drive profits to American companies. Particularly they the the sector here that, right, that is flying. And uh you know, we're going to find some type of deal here that is going to provide profits to that sector. Now, does that Is that going to, in my opinion, um resolve the larger crisis between the larger proxy war between China and the US. That's what is happening in the Strait of Hormuz. This is not about nuclear, again. Just because he says this is about nuclear weapons in Iran, Mhm. uh you know, this is not about nuclear weapons. This is about the Strait of Hormuz has been from the very beginning. It's about the petrodollar. It's about the exorbitant privilege of the US dollar in maintaining the grand leverage uh that the US hopes to maintain in a larger global conflict. It's about who's going to control power of the world for the next 50 100 years. The move in Iran, much like the move in Venezuela, it's not a coincidence they came back-to-back. Mhm. Did Did Venezuela have nuclear weapons? I don't believe Venezuela had nuclear weapons. Is it a coincidence that we went to Venezuela and then we went right into Iran? It's not. Is it a Is it a coincidence we're talking about Greenland? Does Greenland have nuclear weapons? So, my big point here is I think the this whole narrative that this is about nuclear weapons or that, you know, Israel kind of cajoled and took the US military and administration is incredibly naive. This is a a larger, much bigger global uh leverage point and conflict in Iran. And so, the reason I dive into that, to answer your question now, I apologize if I've diverged a bit digressed a bit, is um is to maintain that leverage. So, I personally do not believe the Strait of Hormuz issue gets solved there. But, I do believe that um that there is some type of uh investment that comes from China uh into some of these in coordinations on an economic front. Uh not economic, I should say, from a financial uh corporate front. Right? Um but, I would be very surprised, and actually mildly concerned, of of why a deal gets done on the long term of what's happening in the Strait of Hormuz. So um >> trying to solicit Chinese investment into US manufacturers. And perhaps if this particular deal gets done, we could see a reduction in tariffs. What do you think? Will it get done? >> I think I think that I think a reduction in tariffs could very well happen. Uh-huh. Um tied to tied to an actual investment, capex investment from China. Um so I do think there can be a significant divergence between kind of tariff policy and some of the economic policies and actually physically what's happening with oil and the Strait of Hormuz. Um Okay, I want to comment on a few data points concerning options markets, of which you're an expert, before we close off the interview. So I have in front of me, I'll pull up the screen here, zero day to expiry options, which for the audience are contracts that expire the same day the trading. Now, let me just take a look at what's on my screen here. So trade volume data um This is what's in front of me and this is significant because we have here a situation in which 63% uh zero day to expiry options hit a record of 63% of the SPX volume in March per the CPOB CPOE. Why is that significant? Um I think the most significant thing is actually not that the zero DTE is becoming a greater percentage, although I'll address that. It's that options volumes writ large are uh exploding and have been exploding higher for 5 years. And exponentially so. Um options are and again, this is a little out of the box for most people. They are a dramatically better way to position in the market. It's like a better technology. It's like saying, "Hey, there's candlelight or there's electricity." Uh objectively, electricity is more efficient and more and is a better way um to light your house. Um uh Uh like any technology, you need network effects. You need adoption, you need standardization, you need access in order for technologies to hit a tipping point and inflect higher. This has happened for options. Options have been growing structurally for a long time, but they when I started in the business 27 years ago, they were simply quarterly options at, you know, 1% width in just the S&P. I mean, imagine the infrastructure growth. Why is this a better technology? I want to be clear. When you buy an asset, any asset, stock, bond, commodity, you take on the full exposure of that asset. It goes down one, you lose one, go up one, you lose you you gain one. You are short a put, uh you're long a call at every expiration. When you choose to buy an out-of-the-money call, you only take on the those moments of the distribution, a very small part. And what And depending on the time that you choose, you only choose that part. They're much more precise. I can have two stocks that I put in front of you that are the same comp same in industry, same market cap, and you would think, "Oh, those are you know, I don't put a name them. You think all those are the same stock. Peel back the option chain, one is right distributed, left tail, one's left distributed, right tail. One is a company that pharmaceutical company that is has a a long-standing very profitable um uh drug that has the potential to be disrupted and lose all of its money. The other one has a is is a oncoming likely not to succeed uh drug that will likely make the company go bankrupt eventually, but if it's right, it will take over the whole industry. Point is the data set underneath the market and the ability to bet on the different moments of this distribution, the realities of these are much more sophisticated, much more detail. And so adoption has gone to the roof because it is a more precise, better way to express all a stock or a bond or an asset any kind is just the expected value of that incredibly rich three-dimensional distribution. When people talk about options as derivatives, they miss the point. The options chain is actually the three-dimensional dog, it is the greater picture of the actual asset in all its forms. And the asset itself price is the derivative. It is the expected value of that whole distribution. And the way those those stocks or assets move are a function of the moves in the much much greater, much more detailed um rich data-rich options chain, okay? So I I say this to to explain to people that this is not something that's just oddly growing as a corner of the market. It will eat the whole market, and it is in the process of eating the whole market. I've been saying this for 5-6 years. If you understand what options are and the power they have, the only problem was they didn't have enough volume and enough liquidity and enough infrastructure to absorb that uh for a long time, and we have now hit a the network effects and the flywheel that will create more more and hence and hence from there. So, now having said that, why zero DTE? >> [clears throat] >> Zero DTE is simpler by definition. It is already hard to look at a distribution and say I want this part of the distribution. When you bring in time, you can create you have implied volatility and the move of implied volatility to understand and to manage. And that has been proven as in 2019 2022 to be very difficult for hedgers. And so they've increasingly moved away from that because just want to express their time their their bets in terms of realized bets. Implied volatility is hard to express. So, the early volume and the success that people are having using options has been focused on the much easier first order effect of realized volatility, which is what's happening. There's very little implied at the zero DTE. When you move to one month, two month, three month, a lot of the returns of options become tied to the actual implied volatility itself, which again people have less knowledge or opinion on and don't want to bet on. And that is what's driven the dramatic increase in the flywheel zero DTE. Two follow-up questions before we close off. We only have a few minutes left. Jim, thank you very much. So, putting all this together, direction of markets, what do you think is going to happen next? You have the management of markets, as you would put it, by the government, um um you know, probably one of the largest and most significant rallies in recent history following a short decline. And uh your explanation on the significance of ZTD options. What is about to happen next? What are these signals telling you? Yeah. So, um highest probability is uh is an intent to continue to squeeze and support liquidity into what is a deteriorating broader structural picture. Uh it is a pricing bubble. Uh it is the only data sets on multiple levels that compared to now is exactly that date 1999 to 2000 that I put in front of you. But the path on a bubble is incredibly unpredictable by definition. You can have a 20% rally before you get a decline. In early '99, if you knew that this was a bubble, which we did, I was trading at that time and said, "Look, this is a not going to end well." You could still you know, we we still saw a dramatic rally. Even more detailed, I'll give you couple quick data points. In October of 1999, the Dow Jones topped. The structural stocks and the and the pressures in the system were already very clear. The Nasdaq and they declined together 10%. Actually, Nasdaq declined maybe 12 to 15%. But then what happened? Then the market rallied back. Nasdaq rallied 28, 29% into March of 2000. And the Dow never topped again. The Dow itself saw its top in October. But the Nasdaq rallied almost 30%. Sound familiar? Does that sound familiar at all? We just declined 10% across the market and and we have a incredibly uneven rally where semiconductors are up 60% in 6 weeks. While we sit at record valuations. So, my answer to you is that's the data set. Okay. And there are the it rhymes incredibly well. Now, and it also timing-wise lines up very well with the November midterm election, which drives incentives. So, you know, as you get into fall, particularly near the election or post-election, you have to be incredibly cautious. What happens between now and then? Very well could see a little bit more of this, but trying to pick the top in what is a dramatic bubble driven by liquidity and an attempt to you know, kind of driver of liquidity into what is a massive bar uh uh bubble is is a very dangerous thing to do at all. >> I have a final question. >> said, lastly, very short, yeah, last 2 seconds, sorry, cuz I want to give everybody the crumbs. We're heading into the summer, historic vol compression. This is what's different than '99. Options, all these other things are different. The amount of vol compression in the summer is likely to hand also help hold things at bay and allow the administration to continue to keep the plate spinning while the geopolitical realities of the oil cost, etc., are on a lag and are going to take some time to hit as well. So, if you put those all together, you see a timing window of after the summer as more likely. >> Excellent. Final question, 30 seconds before you go. We talked about the wealth effect. If the stock market collapses, the rich stop spending more money, and we understand what happens next to consumer spending overall. Does the opposite apply? If the somebody if somebody were to explain to you, probably not even an investor, just somebody observing the markets were to ask you, "Jim, if you look at my screen right now, the S&P 500 has grown almost 200% in the last 5 years. Why hasn't his wealth grown proportionally by 200% over the last 5 years? How would you explain that question? Why isn't his income double? Why isn't his, you know, RSP double, right?" Yeah. Uh again, the amount of liquidity is not driving to people. It's driving to corporations. It's driving to the holders of corporations. When when the market goes up, uh Elon Musk, you know, 200% Elon Musk net worth quadruples, just like it has, right? Does he Does he become Does everybody else become more wealthy? Inequality in the United States has exploded higher and is only accelerating as a result of all of this. And so, the average person is being left behind, and the economic growth or or consumption is actually a small percentage relative to the actual cap ex growth, the corporate growth, the business-to-business growth, and that's the story. Okay. Excellent. Thank you very much. Where can we follow you, Jim? Uh you can find me at Kaiwel.com or Kaivolatility.com or on Twitter at @jam_croissant. We do some of our own podcasts as well. Oh, and you can find us on YouTube under Kai Media. Excellent. It was a pleasure to host you. Nice to meet you. Welcome to the show and I hope to speak with you again. Thank you. Thanks for having me, David. Thank you for watching. Don't forget to follow Jim and Jim Croissant in the links down below. And uh we'll speak to you again soon.