Get Ready For A Wild Time In The Markets As Volatility Increases | Cem Karsan

**Cem Karsan** (0:00)
To bring up the specter of 98, 99, 2000, not that we're exactly in the same place, there's a lot of differences. In some ways, it's better, and sometimes, in some ways, it's worse than that period. But the trade then, for years, going into the top of the bubble, and almost every other major bubble is the same way, is not to try and short the market, it's to try and buy cheap volatility above the market to capture a widening specter, a megaphone, if you will, that happens before markets ultimately become unpinned in some type of bigger top. So it's a much better risk reward trade.

**Adam Taggart** (0:44)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. When today's guest was on this program back in September, he predicted the market would start to become more volatile. He didn't necessarily think that would mean lower stock prices in the end of 2024, and he was proven correct on that. But he did express worry that as we entered 2025, continued higher volatility could start to become a real problem for investors. Does he still think that? Well, to find out, we welcome back to the program Cem Karsan, founder, CIO, and managing principal at Kai Volatility Advisors. He's widely known as Cem Kwasant on X. Cem, thanks so much for joining us today.

**Cem Karsan** (1:26)
Wonderful being here. Thanks for having me, Adam.

**Adam Taggart** (1:28)
Such a pleasure. Happy New Year. Really looking forward to getting your thoughts here at the start of the new year as to where you think things are headed. Obviously, I want to get into your volatility outlook real quickly before we do just to set the stage. Let me ask you this question I like to kick all these interviews off with. What's your current assessment of the global economy and financial markets?

**Cem Karsan** (1:49)
Well, I think we're really heading to a place where ultimately the market itself is expensive. There are a lot of headwinds facing the market at a time when it's expensive. So from a weighing machine, kind of medium to longer term view, this is a market that is not in a very good spot, particularly after two 25% type years, 50% return after an election year, which are very positive, particularly in these populous periods, what comes next is not great. So there's a lot of reasons to be cautious.
That said, we also have the introduction of a big wild card and a new disruptive president and cohort of people who are surrounding him, including Elon Musk, that are intent to do things differently and are also focused on financial markets in many ways and liquidity and running kind of a hot kind of monetary machine. So it is a combustible situation for lack of a better term, hence the call for higher volatility late last year.
And again, that doesn't necessarily mean in the next year or six months that we get a decline. It could very much be higher prices. But higher prices at this point would not be a healthy thing, in my view, and could very well just be a sign of a kind of final topping process, and that can often last a year or two years. But again, our current view is that there's really two paths. And we can get dive into this a bit more as we talk, but there's really a path where if the liquidity doesn't come really in relatively short order in the next three months and a meaningful way, that a lower market will create poor liquidity in a very broadly negative situation and be very hard for the Federal Reserve and the Treasury and the administration to fix. But if they can choose the market, push it higher, again, given Elon Musk and his history with Tesla and their knowledge of markets broadly, if they take that approach, this market will go quite a bit higher and there's quite a bit of fuel to that in the short term. But again, that would ultimately to me feel something like 99, 2000 and really look more like a blow off top. So long-winded answer to a short question, and I'm sure we'll dive more into all those details. But it is a combustible situation and a time to be really focused on really inexpensive long-dated implied volatility and gamma. And you can bet on the market volatility that will eventually come through parts of the distribution, not necessarily just long or short the market. And I think there are real opportunities there.

**Adam Taggart** (5:15)
All right. I'm going to really look forward to digging into that with you. You used the term inexpensive not that long ago, maybe like a month or so ago. I remember it being talked about that like, you know, puts on the S&P or like the cheapest they've been in a long, long time. Are we in an environment right now where some of these bets on volatility are pretty cheap?