Brutal 2027: How The Next Financial Crisis Starts

Cem Karson (0:00)

All of these hyperscalers, I brought them into a room and said, how much capex are you gonna do? You gotta do more capex. And what did all the hyperscalers do? Take all their cash down in the last year from to zero and then negative and started borrowing at scale. But they've reached their limit.

There are very few things they can now do. If we see a reflation here for the next couple months, we tend to get a cash squeeze. We could see close to six. I could see five and a half to 6%.

David Lin (0:25)

The inflation numbers came out on Tuesday, November 10th, and it was probably the reason for why markets came down as of the end of the trading session. Month to month, CPI was hotter than expected at 0.4% in October.

Christopher Waller, Fed governor, actually said that if we were to get a hotter than expected inflation print, that could be justification for why the Fed would raise the Fed funds rate by 50 basis points, not 25, 50 basis points by December. So are we getting 25 or 50?

That is a critical question. Right now on prediction markets, Kalshi in particular, traders are predicting an 86% chance that we're gonna get a 25 basis point hike in December, and only an 11% chance that markets, that the Fed will raise by 50 basis points, or above more than 25 basis points. So markets aren't really considering Waller's statements as very critical yet, but if you do agree with those odds, and if you do agree with Waller's outlook, and we're gonna talk about this, then a $50 trade could potentially yield a payout of $427, if you're right, if that raises by 50 basis points. Either way, it's not gonna be good for the economy. And our next guest will tell us why 2027 is gonna be a bad year for markets, and what we should do in anticipation of that and to protect ourselves. This video was sponsored by Kalshi, largest prediction market in the United States. Unlike a sportsbook, 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, or scan the QR code here to get started, and use my code LIN. New users can get $25 in app credits when they use my code and trade $25. Kalshi is CFTC approved and available in all 50 states, including California and Texas. Our next guest join is now Jam Carson, founder and co-CIO of Kai Asset Management, and his new co-CIO and head of portfolio management, Noel Smith. Welcome back to the show, Jam. And good to see you, Noel. Welcome to the show.

Cem Karson (2:29)

Thank you. Thanks for having us, buddy. Good to be back.

David Lin (2:31)

Storm clouds are brewing is what you told me offline. Now, you actually did warn us back when you were on the show earlier this year that after the midterm elections, it could be troublesome for the markets. Jam, I want to start with you. Today, we're speaking on the 10th of November. CPI came in harder than expected. We'll go through the numbers in just a minute. But just broadly speaking, based on your overall macro thesis, do you still hold the view that after the midterm elections, which saw a democratic sweep of both chambers of Congress, markets could face more headwinds, stock markets in particular, could face more headwinds than before the midterm elections?

Cem Karson (3:01)

Absolutely. I think of this as really a three-legged stool. The three major sets of pressures. When we're modeling forward predictions, which is really how we think about, what is the forward distribution of outcomes in a week, in a month, in a quarter, in a year? When we start looking at these things, there's really three pieces. One, from a macro perspective, what's happening to interest rates, inflation, economic growth, all of these major, major forces and broader liquidity? That's one. Two, what are the incentives of the players at the table? Treasury, Federal Reserve, what are their likely actions and what is driving them to do, interact with the outcomes in front of us? And lastly, flows. This is the most short-term, most measurable thing. I think that's something that we excel at and that is a core competency for us. What is happening with the structural flows and how is that interacting with the distribution of outcomes? All of these things are interacting with one another. And it sounds like a lot, but you can really think through the higher probability outcomes based on each of these and then really force a forward distribution based on this. So this is how we kind of came to this broader conclusion that the midterms was an important inflection point.