A Perfect Storm Of Troubles Is Brewing | Cem Karsan

**Cem Karsan** (0:00)
Supply-side economics is efficient. It creates better profits for companies, creates greater technological development, creates global expansion and peace, but it creates massive inequalities and halves and half-nots and the second we move back towards that pendulum swinging the other way, which is where we are now, right? This is when you start to see global conflict, is when you start to see commodity scarcity, because if we start splitting up and doing protectionism, inflation through fiscal spending and fiscal dominance ends up slowing things, the broad growth and definitely profits down, and not to mention higher interest rates leads to multiple contraction and profit margin contraction.

**Adam Taggart** (0:49)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. Today's guest sees the US financial markets entering the final stage of a multi-decade topping process and in the early innings of a 15 to 20 year regime shift driven by demographics, populism, deglobalization and rising structural inflation.
He believes that we're on the cusp of a lost decade plus in nominal equity returns and meaningful real losses if investors keep using the same old 40 year buy the dip, stay long growth playbook.
How can we position ourselves to sidestep the worst of this and perhaps even prosper in the years ahead? Well, let's ask the man himself. We're very fortunate to welcome back to the program Cem Karsan, Founder CIO and Managing Principal at Kai Volatility Advisors & Kai Wealth. He's widely known as Cem Karsan on X Twitter. Cem, thanks so much for joining us today.

**Cem Karsan** (1:45)
Always wonderful to be here, Adam. Thanks for having me.

**Adam Taggart** (1:47)
Hey, it's my pleasure, my friend. And you're one of those guys where once enough time has gone on since your last interview, the comments start coming in fast and furious when you get in jam back, when you get in jam back. So I think hopefully we're going to scratch that it's for folks today.

**Cem Karsan** (2:01)
We got to give the people what they want.

**Adam Taggart** (2:03)
Yeah. Now first and foremost, did I accurately describe your general outlook in the intro there?

**Cem Karsan** (2:09)
Absolutely. That's the 30,000 foot view for sure.

**Adam Taggart** (2:14)
Okay. So if we could, just for folks that haven't perhaps watched our most recent couple of interviews together, could you just give a quick recap of the regime shift that you see underway and what key forces are driving it?

**Cem Karsan** (2:28)
Yeah. From 30,000 feet, we've entered a generational time of populism. It's been driven by 40 years of increasing inequality.
That's been driven by what we'd call supply-side economics. Starting in 1982, the 10-year bond peaked at almost 20 percent in the US.
We have seen it moved to zero and some places below zero, that now is in the process of reverting. We talked about this five years ago before that reversion started. Why is that supply-side economics? I think you throw on words like that, people think, what does he mean, supply-side economics? When you lower interest rates, that is not like fiscal stimulus. That is, who borrows money? When we create new money and we lower interest rates, or do even better, QE, what are we doing? We're sending that money to people who borrow. The bottom 50 percent of people do not borrow money. They cannot borrow money. The overwhelming majority, 99 percent of money gets borrowed by the top 5 percent.

**Adam Taggart** (3:35)
Let me just make a mathematical note too, and I don't want to get too wonky. But those policies not just make it cheaper for those people to borrow, but they are asset supportive.
100 percent. QE, obviously, more liquidity comes in, it pushes asset prices up. But even just reducing the borrowing costs, when you are doing a discounted cash flow, which is the way in theory that most people are supposed to value an asset, you project those cash flows out in the future, then you have to discount them by some factor. And if you reduce the factor by which you're discounting them, and oftentimes the 10 year is a big part of that calculation for the discounter, if you're reducing that, you are mathematically increasing the value of the asset. And so to your point, those with assets disproportionately benefit here.

**Cem Karsan** (4:26)
We've seen a 400% multiple expansion, some would say 500 The low in 1982 price to earnings ratio of the S&P 500 was four and a half. I don't know why we talk in price to earnings ratios. I think it's very confusing. We should talk in earnings yield, right? We talk about interest rates. Why don't we talk in earnings yield? The amount of actual percent you make on your money. It's just the inverse. The price to earnings ratio was four and a half, which meant you were making about 22 and a half percent yield. People think, wow, that's crazy. I would have bought that forever. No, you wouldn't have because you could have locked in a 10-year guaranteed bond from the US government for 20 percent. And so as interest rates go to zero, not surprisingly, that price to earnings ratio has gone to what? 27