Buckle Up! Markets To Get More Volatile From Here | Cem Karsan
A number of factors should drive increasing volatility as we head into the new year
After a long slumber, volatility has started returning to the financial markets over the past month.
Why?
And is this just a brief episode?
Or the start of a more turbulent era for investors?
For answers, we welcome back to the program Cem Karsan, Founder, CIO, and Managing Principal of Kai Volatility Advisors, widely known as @jam_croissant on X/Twitter.
Cem looks at the markets through a different lens than most others that's truly fascinating.
He sees a lot more volatility ahead & provides a number of specific ideas on how to ride it.
To hear it all, click here or on the video below:
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Adam’s Notes: Cem Karsan (recorded 9.9.24)
EXECUTIVE SUMMARY
The global economy is entering a period of secular regime change, marked by slowing growth and increased volatility. Cem highlights that the markets are struggling to adjust to this new reality, which is being complicated by structural shifts and uncertainty ahead of the U.S. election. The outcome of the election could further exacerbate these changes, making this a crucial inflection point for financial markets.
Volatility remained low throughout May, June, and July due to compression in the options markets, creating a buildup of latent risk. Periods of low volatility, much like a coiled spring, set the stage for sharp volatility spikes, as we saw on August 5th. The structured products, quarterly options expirations, and lack of hedging liquidity contribute to this, especially during Fall. Historical trends show that low volatility breeds excess leverage, which eventually leads to violent corrections, as witnessed in previous volatility events like the 2018 "volmageddon."
Historically, U.S. election years have often produced strong short-term market rallies, especially in periods of populism, from 1968 to 1982, the average market gain during election years was 21.5%, but this performance masked broader economic struggles, as the market saw a real decline of 70% during that era. It appears that during contested elections, administrations often juice markets through short-term stimulus, but these rallies are unsustainable, resulting in longer-term declines once the election period passes.
Cem draws parallels between the current AI boom and the dot-com bubble, where only a small fraction of companies ultimately succeeded. He believes that while AI will transform industries, most of the current investments may not generate immediate profits. Furthermore, the value may not accrue to AI companies directly, but to adjacent sectors like energy and data. Valuations, particularly for companies like Nvidia, are extremely high, and the market may be overestimating short-term earnings potential, creating a significant risk of correction.
Cem warns of
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