Why America Is Rewriting the Rules of Capitalism ft. Cem Karsan

[00:00:01] Intro

Welcome to Top Traders Unplugged. In markets success doesn’t come from predicting what happens next, it comes from being prepared for what you can’t predict.

In each episode we go deep with some of the world’s most thoughtful minds in investing, economics, and beyond to understand how they think, how they prepare, and how they decide, and the experiences that shaped how they see the world. No noise, no short-cuts, just real conversations to help you think better and invest with confidence.

[00:00:35] Niels

Welcome and welcome back to this week’s edition of the Systematic Investor series with Cem Karsan and I, Niels Kastrup-Larsen, where each week we take the pulse of the global markets through the lens of a rules-based investor. Cem, it’s great to have you back on this series. It’s not been too long since we last spoke. It’s only been a few days because we just had Pippa on together. But it is great to have you back to hear what is going on. How are you doing?

[00:01:02] Cem

Doing great. We are here, back in Chicago after being in Turkey for two weeks with family, which was wonderful. And with the World Cup going on and 4th of July, it’s quite the summer here.

[00:01:16] Niels

It is quite the summer. Yeah, absolutely. Well, it’s also quite the lineup of topics that you kindly brought along. So, we’ll dive into those. They are very important. So, I know people will pay attention to that.

But before we do, as you know, I’m always curious if there’s anything outside what we normally talk about that is on your radar at the moment.

[00:01:39] Cem

Well, there’s this little thing called the 250th anniversary of America. And you know, I think the thing we don’t talk much about is, that 250 Year mark is, you know, around that time where a lot of empires start to have, you know, not always, question marks, and things begin to… You know, these aren’t… You have fourth turnings but then you have this bigger, longer cycle of 250 years.

And we are at a critical juncture here in the US. And I think one of the interesting things there seems to be this kind of zeitgeist, with the World Cup happening as well, this debate about who are we right now? And America’s doing a lot of soul searching, I would say, right now. And some of it positive, some of it negative, a little messy.

So, I think it’s an interesting moment, I think, for all people here in the US One to kind of, you know… I rolled out my American flag off our house this morning. You know, I don’t do that. And I just had a lot of introspection about what it is and what I love about America. The amazing things that it’s done in so many different ways, but also kind of the things that it can improve on.

[00:03:14] Niels

Yeah, it’s definitely important time to reflect and, I mean, in a sense, you know, what better way to time it than when the World Cup happening at the same time.

[00:03:25] Cem

Yeah.

[00:03:26] Niels

So, lots of focus on the United States at the moment. It’s almost like, I hate to say it, it’s almost like we’ve forgotten everything that happened in the Middle east just a couple of weeks ago, frankly. And then if you look at the news flow. But there we go.

[00:03:42] Cem

That’s by design, I’m sure.

[00:03:43] Niels

Probably is.

You know, so on my radar, actually, the first point I had was a little bit related to the thing about Iran, because I don’t know about you, but I felt that there was a lot of experts that came out, in April and May, talking about how it was inevitable that oil would go to $200 or $150 or $200. And I did see that some other podcasts, at least have invited some of them back to explain how they were wrong, which I haven’t listened to yet, but I kind of feel I should.

But I am surprised in some ways. And maybe you see this more with the kind of a different lens because of your volatility background, but markets… and we’ve seen this before, that you are kind of, yeah, this must happen because of such and such crises. But as soon as there’s like an inch of clearing the air, markets are super quick to remove that risk factor and bring things down to a more normal level.

[00:04:58] Cem

So, we’ve talked about this at length before, but I just want to be very clear. Nothing, literally nothing is more important than positioning itself. It is the only thing that you can rely on reliably to have a meaningful effect on the outcome. This is the wall of worry that we know about. It’s what George Soros wrote about in terms of reflexivity. All of this is, it’s not sentiment, really. We talked about it. We talk about so softly. It’s literally how are people actually positioned? And if the world is long, the odds are much higher that it will go down. And if the world is short, the odds are much higher that it will go up. That’s just the reality.

And positioning importantly, that’s always been the case, but markets have become so big, so dominant in everything (again we talk about all the time), markets go up 20% in two months that they just did. That’s $50 trillion of collateral. Now think about how big that market is and how big that positioning is and how much of a net effect that has relative to liquidity goes up a little bit, it goes down a little bit. There’s a war in the Middle East. There isn’t war in the Middle East..

It’s not to say it’s inevitable that things will always happen the opposite side of positioning, but it is a major, major, major tailwind to the outcome or headwind, depending on the case, always. And so, quite frankly, everybody thought they were positioned for something that was obvious and inevitable. So, once again, the opposite happened.

Now, I will highlight how everybody seems to have thrown in the towel and we have oil shorts at record highs now very quickly. Wouldn’t it be interesting if, right after everybody threw in the towel, that it would start working? Right. And that’s just kind of how markets work.

[00:07:14] Niels

True. Anyway, before we jump into kind of a quick trend following update, the other thing I thought of was just, you know, what’s been on my radar. Well, what came on my radar only a few minutes ago was of course the latest US job numbers. And I will say, I’m not an economist and it doesn’t really matter too much to me what a single number is. But it was a little bit surprising, I guess, to me that it was a soft number given the fact that you have the World Cup at the moment. You would think there would be lots of people kind of getting involved with that even if it’s just temporarily. But anyways a soft number nevertheless.

[00:07:53] Cem

Yeah, it’s been actually chopping lower for a little bit. This is kind of a trend in that kind of K shaped economy. Right? And the labor numbers, you know, CapEx is driving everything.

But it’s CapEx that’s not a very labor heavy CapEx . Right? This is build out of, you know, AI infrastructure and whatnot. So, it’s a very concentrated market with a very few set of names doing a very few set of things. And at the end of the day the rest of the economy is just kind of meh. And we’re getting that across the numbers now.

Reality is the market doesn’t really depend on that. That’s not really what’s driving earnings at all. Earnings growth is 100% coming from that CapEx build. And it’s a reflexive loop.

I mean Microsoft showing 60% of its earnings, last quarter, was from the increased value of Anthropic. It’s not earnings because of demand on its demand for the capital investment. And so again a place where the market itself is the biggest driver of outcomes, not necessarily the economy.

[00:09:15] Niels

And just to be clear, did you mean to say open AI? Because I think Microsoft is linked to OpenAI.

[00:09:20] Cem

OpenAI. Yes, I apologize.

[00:09:23] Niels

Yeah. I just want to make sure okay.

So, as we just finished the month of June, which of, course also, was the end of Q2 and the end of the first half of 2026, I will just focus the trend following update on June performance. Overall, a pretty solid first half of the year for and trend followers even though there are, of course, dispersion between managers and all of that.

But the indices did pretty well even though June was a little bit of a challenging month with some reversals, as we just alluded to, not just in energies but actually also especially in metals, saw some massive reversals in silver and gold and some of the other commodities, some of the base metals as well. And I think the only bright spot for trend followers really was in the currency sector of any size, perhaps maybe 1 or 2 of the interest rate markets as well.

But nevertheless, if we look at the numbers, the BTOP 50 was down 1.76% for the month of June, still up 7.76% for 2026. SocGen CTA index down 1.09%, still up 9.27% for the year. SocGen Trend down 1.29%, still up 9% for the year. And the Short-Term Traders index down 31 basis points and still up just shy of 5%.

In the traditional world MSCI world equity index was down 69 basis points, still up just shy of 10%. World government bonds not having a good year, down 75 basis points in June, down 37 basis points so far this year. And the S&P 500 was down just shy of 1% in June, but still up 10.21% so far this year.

Now I don’t know how much you follow generally the vol space outside what you do, but I was just curious when you look at vol managers, if you do, do you have any sense of how they navigated what can only be called a pretty interesting (I wouldn’t even call it unusual because the whole world is unusual) the first six Months of the year? It was not in a straight line, let’s call it that.

[00:11:40] Cem

Yeah. I think it was way less negative beta than it is normally, meaning the move was so slow, and into that 9%, 10% decline that we had into March, that there was no real money to be made from a long vol trade.

[00:12:00] Niels

Right.

[00:12:01] Cem

Even though a lot of our hedges tend to carry a little bit shorter delta, if anything. But from what I saw, it was a pretty zero performance there, which, you know, with the market down 10% is frustrating for people.

[00:12:15] Niels

Yeah.

[00:12:15] Cem

Even though that’s not what it’s intended to do. But then we had a very fast move up. And so, depending on the vol, equity wise, at least we’re talking here. Right?

[00:12:24] Niels

Yeah.

[00:12:25] Cem

Meanwhile, there’s a little bit, if you were in certain pockets, you did have a little bit of a nice opportunity in oil, and kind of rates there for a little bit in the initial inflation, but then a very quick controlling of that volatility and compression of that volatility. So, I think it’s been a bit of a frustrating (as it has tended to be more lately) outcome, you know, hedging and using long vol is always frustrating. But I think, you know, if you look at ‘22 was frustrating for people. You had that kind of April ‘25 moment again, and then now, again, people with their hedges not working once again, broadly.

[00:13:09] Niels

Yeah.

[00:13:10] Cem

So, vol has been, call it, vol is inordinately cheap. We’ve highlighted this now for a while. You know, you’re getting bigger and bigger fast moves to the upside. That right tail tends to pay quite well, especially in pockets with dispersion. Right? I mean you have, you had pockets of, you know, up 50% in two months.

Like, you know, the AI kind of hyperscaler world was doing incredibly well for two months. So, there were definite opportunities and I think those that kind of get that, and are using that, which I know several groups I’m in have done very well accordingly.

So, vol, as you know, is not one thing. You know, vol’s kind of a distribution of all outcomes and it’s the more convex outcome, and that could be right tail and left , and we definitely had some right tail. So, if you played on that tail, you know, you’ve done reasonably well. But otherwise, I think there’s been a lot of kind of frustration out there on hedges, probably.

[00:14:13] Niels

Yeah, that’s perfectly fair. Now, we’re going to dive into your topics and there are, as I mentioned, some very important ones. And I will , when I looked at the list I received from you, it felt like you’re really describing one big regime shift. America is no longer acting just as the neutral referee in global capitalism. It’s becoming more strategic, more interventionist, and more willing to use markets, the dollar, technology, policy, as instruments of power. And I know we’re going to break it down one by one. So, I’m not trying to overload you with too many things at a time.

So maybe we start out with this ‘Chinafication’ of America. Is America actually becoming more like China or is great power competition forcing every major economy towards more state dictated capitalism, do you think?

[00:15:14] Cem

Yes, that’s exactly what it is. So, I think that the term that the Chinese Communist Party called its adoption of capitalism as capitalism with Chinese characteristics, what America is starting to do is, you know, is socialism/communism with American characteristics. What do I mean by that?

At the end of the day, democracy is constructed. You go back to Plato as a slow-moving outcome that responds to crisis, but lasts, in theory, meant to last and meant to avoid revolution. But crisis necessitates change, so it moves slowly.

I think it’s Churchill who said something along the lines of, you know, America always makes all the wrong decisions first before making the right decision. You know, the US is always late to the party, but once it acts, look out, you know, and so that’s very much true in the last 10, 15 years.

And what you’re starting to see is a realization of hey, something has to be done. And this happens again and again in America’s history. And once America starts moving and makes a decision to move aggressively, that’s when regimes, at least the last 250 years, begin to change aggressively, and you have to watch out. So, good or bad, that’s a regime change.

And so that is what is, in my mind, happening. We’ve been pointing to this regime change and the pressures underneath the hood that would likely force certain outcomes, but they had not yet come to a head and they were slowly moving in that direction. The pressures in the system are so big and are coming to a head altogether at the same time that they are forcing significant action.

And we can get more specific. First of all, what are the pressures? Unsustainable debt. Populism, which we’ve talked about at length. So, a need… And by the way, these are all accelerating. It’s not just that they exist, it’s that they are Increasing, it’s that they are accelerating as well. So, the populism as we’ve talked about, baby boomers are dying.

And over the next decade we’re going to hit an even greater populist impulse. Just look at the proposals by Gavin Newsom, who’s considered centrist on the left in the US. He’s talking about a billionaire tax. Talk about Bernie Sanders, for the left, taking 50% ownership in all AI businesses on behalf of the government.

So, the point is that is accelerating and it’s becoming more and more accepted by both sides. We’ve talked about that obviously for six years and if you can’t see it now, I can’t help you.

Three, structural inflation, which is not going away and, if anything, accelerating due to all the factors we’ve talked about at length: global conflict, protectionism, fiscal spending, populism, etc.

The last two, very important, a financial market that is becoming way too big to fail. We can no longer allow a two-quarter decline of more than 20% because the amount of liquidity that draws and the effects on not just liquidity but economic growth is dramatic. And then lastly, an intractable conflict with China to decide who is going to make the rules over the next 40, 50, 100 years. And who is going to have the exorbitant privilege of their currency being the primary currency of trade.

These are all coming to a head exactly at the same time. And it is a bunch of tectonic plates that all affect each other and are pushing greater and greater. It is unsustainable and you would think there’s no solution. But I think the US has one potential solution at least. They seem to see it and they’re starting to tell you, very vocally, what they’re going to do. And that solution is leaning all over their greatest source of current leverage, which is the exorbitant privilege of the US dollar.

It is the trump card, for lack of a better term, pun intended, which is the US can actually print money. That’s what Japan did to get out of their situation. But the US is a much bigger force and it can do even more. I’m not saying it’s fair, I’m not saying it’s okay. I don’t represent America on this. I’m not saying it is what it is. But the US is in a spot and they are going to, I’m telling you, they’re telling you out loud the sense telling you there are several different, very clear indicators that they’re doing this.

They are going to backstop the treasury market, and they are going to create a sovereign wealth fund that buys, within the next decade, US$10 to US$15 trillion dollars of equities. And they’re going to do it by printing money. Now that sounds crazy, but it’s not. Japan owns 8% to 9% of the Nikkei. It’s already been done before. Norway has a $3 trillion sovereign wealth fund. Norway? You don’t think the US can create a US$10, US$15 trillion sovereign wealth fund?

[00:21:07] Niels

True, but can I just ask again for clarification? So, the Norwegian sovereign wealth fund comes because they have so much oil that they’re selling, they’re earning. They want to secure the future of Norway.

[00:21:22] Cem

The US wants to secure the future of the US .

[00:21:26] Niels

Yes, but where exactly is the money going to come from? Do you know what I mean?

[00:21:29] Cem

Yeah. The US has its greatest reserve. Its greatest asset is the exorbitant privilege of the dollar. It’s printing money, to be clear. Printing money cannot happen in England, or Turkey, or Zimbabwe, because they don’t have natural structural demand for the currency, as we saw in Japan, with support of the US. And this is actually more so, even in the US, it can print inordinate amounts of money. And again, that may undermine the exorbitant privilege of the dollar. There are lots of risks. This is not without risk at all. I’m not painting it as such. But the way out, you know, you’re of these… it’s by far… It’s a exit that is closing, and all the pressures are coming, but my point is there has to be something done.

By the way, I want to be clear, China has already been doing this for a decade. They just have been doing it, creating a sovereign wealth fund to do it because they don’t operate in the same free market system. They’ve just been sending direct investment, printing money, and sending direct investment to these companies to build strategic assets.

So the US is doing it. They’re starting to take 10% of Intel starting to take 5% stake. And today was Open AI, I believe…

[00:23:06] Niels

They took 5%. Well, at least open AI. I thought that the US government should have 5%. That sounds better than 50%. So, I’m sure that’s why they’re offering 5%.

[00:23:17] Cem

It will be 10%, 15%, 20% before it’s all done. But my point to you is this is just the beginning. This is the fifth stake they’ve taken in a company. There is going to be a moment, and I believe it’s in the next year. I think it’s before June of next year. And we’ll get to the timing of that later, here, maybe, where there is a moment where they need to do something and they will be very aggressive, not just buying a little bit here or there at a 5% or 10% discount, but taking massive stakes in a broad swath of businesses at over a trillion dollars, and it’ll probably be trillions, within a year or two.

I want to be clear, this is the only way to drive investment. So, this solves… It’s an elegant solution. And they’re telling you this is the way they’re going. They’re showing you this is where they’re going. This allows for competition with China. Very important.

[00:24:20] Niels

Okay, I get that.

[00:24:21] Cem

Two, it supports an equity market which is too big to fail, which is driving liquidity, which is critical. Three, it short circuits populism. Because the whole reason the K shaped economy is happening is you have those who own equities and you have those that don’t. And when you create a massive sovereign wealth fund on behalf of the people, as the Norwegian government has discovered, you can fund it. They fund 85% of their social welfare through the sovereign wealth fund.

So, you are essentially, instead of taxing the rich and giving it to the poor in the traditional way, you are taxing the rich by simply taking stakes in those equity businesses. But you’re forcing an ownership on behalf of the people of that equity. You’re buying everybody in, basically. So, you short circuit that populism issue. It’s very popular. There’s a reason Bernie Sanders is talking about it.

And again, this is that socialism, communism American characteristics. You are buying corporations on behalf of the people through the “free market system”. But it is government picking winners and losers, and is government creating direct investment into these businesses. But you short circuit populism. You compete with China, you support an equity market that’s too big to fail. And yes, you drive massive inflation, but that’s kind of the point because the only way you get rid of the debt is through monetizing it anyway.

[00:25:58] Niels

So, I’ve got a couple of questions on that plan. One is, I get your point about this is a way to maybe overcome some of the populistic pushback and all of that. I understand that. Although I do think there’s a difference between a country like Norway and the US. Norway has, I think, demonstrated that there is definitely a social welfare mindset. I don’t honestly, as a European, I don’t see the same mindset in the US So even if you can buy stakes in companies, does it really mean that people are going to benefit from it? I doubt it a little bit. Even though the narrative can be powerful enough. Maybe.

But the other thing I want to ask you is, okay, so let’s just say they buy up lots of stakes in profitable companies and that’s all fine, but that money will then be taken away from… not taken away in that sense, but if people sell their shares (let’s call it that) then they get money back.

So, the billionaires who probably made a lot of the money in Silicon Valley, they’re going to suddenly be sitting with lots of new cash because the US Government bought some of their shares, making it very simplistic to visualize. What’s going to happen with that? And aren’t we just going to see new similar companies being built and the billionaires making more billions? But then the billionaires are going to be just making more billions. It doesn’t make their country more fair.

[00:27:32] Cem

Listen, these are facts. If the US government drives massive dollars, buys 10%, let’s say buys 10% on average, US$7 trillion of the US equity market. And let’s say it’s 15% to 20% of some and 0% of others, okay. What happens is that market goes up. That drives more investment in US businesses, which drives growth, and the inequality of that growth is less than it would have been because you are buying it, you know, you have 20%, 15%, 20% in those businesses. Look at Intel. Intel was trading US$18 when they took a 10% stake. It’s trading what, US$140. Yeah, that was really great for people who owned Intel.

It’s a pretty extreme example. But it was also, you know, a 10% windfall to that US$140, US$130 valuation. So, now where is that money going? Well, that money’s going straight to the coffers of the Treasury. Which can now send that to backstop Social Security, can do any other number of, you know, fill the gap.

Now that’s one. Two, Intel now, which is an American company and has now ownership, importantly… and I think, increasingly, the US will have more say in these business as well… it now has a bit of a mandate, to hire Americans to do things that are more at the behest of what’s good for America, not just Intel.

[00:29:25] Niels

Yeah.

[00:29:26] Cem

And so again, I’m not sitting here arguing that this is the panacea or it’s going to solve all the problems. The problems are big and the tectonic plates are moving quickly. I’m just saying this is, given the size of what’s needed to subside some of these pressures somewhat, and to try and start… Again, this will happen for 10, probably 20 years, and start incrementally making progress on these things.

I think this is the plan and I do think, if you put me in as Treasury Secretary, this is the right plan. It is not without risk and it is not fair on a global stage. And definitely China, quite frankly, doesn’t want the US to do this. Because they see it as a risk to themselves. And also, the rest of the world doesn’t want it, but they’re also stuck in between China and the US. And so, there is a bit of a, “what are we going to do?”

[00:30:36] Niels

Well, it sounds like we’re also going to allow (I say we), but the US will allow China to buy into more businesses in the US. Maybe that’s part of the trade, that they allow them to become more active owners.

[00:30:52] Cem

Sure, and I think that that’s likely, and, again, as long as there’s no influence. Which I think is the line that will be drawn. There’s no reason the US shouldn’t. I will argue it’s not without risk. Like I said, I will now back up and I’ll kind of take this whole… assuming this is where we’re going and we’re going… But I’m going to argue it starts happening, but after the midterms and before June, in a meaningful way because they also want to get… it’s always about incentives… they also want to keep this market moving for, you know, the election in two and a half years.

[00:31:30] Niels

Sure.

[00:31:30] Cem

And again, a feature not a bug that they keep taking it down to take it up again. You should expect the same again. But importantly understand that they’re setting the table. That’s what Iran, and Venezuela, and Panama, and Philippines are all about. They are creating a moat (we’ve talked about this on here before but not directly tied to this), you’re creating a moat for the US dollar. They are doing everything they can to push back on China, who’s trying to do the opposite to undermine the US dollar.

[00:31:59] Niels

Right.

[00:31:59] Cem

To do trade… they’re trying to do trading in yuan, and the US is saying no because we need the exorbitant privilege of the dollar and we’re not going to let that happen. And this is why Iran’s not ending. It’s not ending anytime soon. The only reason that we’re in a, you know, a deal and we’ve been in a deal. Yeah. And then two weeks forward now, you know, four months, is because we have a midterm coming up. But there’s this period, November to June, where again, you should expect full throttle re-engagement in Iran.

[00:32:35] Niels

I mean, given the fact it’s only been two or three days since we spoke with Pippa, and I remember that offline, after the conversation, we talked to her about what about the midterms? Because we didn’t bring it up in the conversation, which by the way, everybody should listen to if they have time. But her view, as far as I recall, was just, they know it’s probably too late, so they’re just going to govern two years with executive orders like so many others have done in the past.

Is that your view or is that your feeling as well that actually, regardless of any deal or no deal with Iran now, that oil is kind of down to reasonable levels? It is what it is.

[00:33:17] Cem

No, that’s not my view. My view is very clear. The US wants to control trade as much as it can and it wants to make sure, most importantly, that trades continues to be done in dollars. That’s their singular focus on the world stage. And Iran was always, never about nuclear weapons. We’ve talked about nuclear weapons being around for 60 years now. That’s a cover for why to paint this as a win for the midterms, and the short term. They’ll talk about it, but that has nothing to do with the real reason we’re there, which is the same reason we were in Venezuela, which is to control trade and make sure commodities are traded in dollars.

And if you think the US is going to be okay with a tax, and hence, by extension, control of trade through the Strait of Hormuz, by Iran, and by extension China, it’s not going to happen. So, that’s the breaking point. And they’re probably not going to be okay with just shared control either. Maybe, but definitely not any level of leverage over control of that strait in any way or determining, you know, what currency or how that is taxed or managed. They want control of the strait, at least by proxy.

[00:34:56] Niels

Can I ask, it’s maybe a little bit of a naive question here, but I get your plan and I don’t disagree with that’s the plan. But in two and a half years, we may have a different administration in the US. Do you think that it’s a plan that, actually, deep down (regardless of what the Democrats are saying), they kind of think, yeah, this is probably not a… we can’t admit that it’s a good plan, but it is a plan we’re going to continue because otherwise, you know, it’s just going to be, okay, so, we got started on a plan and then, in two and a half years, we’re going to go with another plan. And it’s not really going anywhere.

[00:35:40] Cem

So, we’ve talked about this in other episodes, but the greatest risk to the hero’s journey, rising to the challenges, and making the hard decisions, and competing in the way that you need to is not an inability to summon the courage, summon the connectivity of the people for a common goal. And the reason this is an elegant solution is because it does fit that bill of unifying two sides.

The administration also needs to and will, in my opinion, move more to the center. It always happens in the midterms in the US. it sounds crazy, Trump moving to the center. That’s going to happen. And the way it happens is by linking markets to populism. This is going to be, and you’re already starting to see that Bernie Sanders and Trump are saying very similar things and Trump is saying nice things about Bernie Sanders all of a sudden. So, it’s all about incentives. And this is the only solution, the only way out.

Now the question is will the US… And this is what China’s hoping for and China and Russia have been working on fomenting internal cohesiveness in the US for a long time. But will the US, will there be so much infighting on exactly how it works and who gets how much that we don’t come to a solution? And I think this is exactly why we’ll probably get a pretty ugly November to June, because nothing brings people together like a crisis.

[00:37:28] Niels

Another topic, and I think we can bring that up now, maybe, and it is, in a sense, somewhat already mentioned by you. But you talk about the current CapEx cycle, which I think a lot of people are, you know, thinking straight back to the dot com bubble and seeing the same thing happening. But what are your thoughts on that and how does that fit into all of this?

[00:37:52] Cem

Very elegantly. Why do you think somebody like Larry Ellison would mortgage everything they’ve built for 80 years to go all in on borrowing money to do CapEx at the scale they’re doing? Why would a Zuckerberg do the same?

Do you remember the hot mic with Zuckerberg where, about nine months ago or so, Trump had Zuckerberg and a bunch of AI execs at a table and after the conversation ended, they left the mic on and Zuckerberg said, sorry, boss, I didn’t know what number you actually wanted me to say in terms of total CapEx.

[00:38:35] Niels

Oh my God. Okay.

[00:38:37] Cem

They have an implicit, if not explicit, wink, wink, nod, nod, keep going. We got your back.

[00:38:45] Niels

Okay?

[00:38:45] Cem

Because they do, because they’re going to buy their stock and they’re going to bail them out and do whatever they need to do. And the worst thing that these guys can do, given the AI push, is not be involved.

And there’s another side which is kind of how people are like this. But, you know, it’s kind of how Trump operates. It’s a protection racket. If you don’t do it, you don’t play along, and the government’s going to be driving outcomes, we’re not buying your stock. So, CapEx is different this time because there’s an implicit guarantee the US government’s going to keep driving that CapEx.

[00:39:22] Niels

Interesting.

[00:39:24] Cem

Again, some of that is speculation, but you know, when there’s smoke, there’s fire, and there’s a hell of a lot of smoke. And we’re starting to see actually little blips of fire where people are literally saying these things as well. And again, it’s all about incentives. So, if you run an AI model, and put these five pressures in the system (I know, I’ve done it), and you run models, this is the only way out, and they know that.

[00:39:51] Niels

But if we think about it, I mean, it all sounds great, right? There’s a guarantee and things can go crazy. We already know that valuations based on old metrics look ridiculous. Maybe it’s a new world and that doesn’t mean anything. But I guess, to some extent, history tells us that at some point things might go back to what we would say long term (and that could be very long term) is more normal conditions.

Do you foresee that as well? That, okay, so they’re going to drive this up for a while. And you talked about. Yeah, it’s interesting. It’s 250 years anniversary. That’s often when some dominant country has kind of started to slide a bit. I mean, is that part of your much bigger long term, 10, 15, 20 year scenario that it all ends badly because it’s just too much leverage, too much…?

[00:40:52] Cem

This necessitates a level of control to execute. You know, if this was done 10 years ago, or 20 years ago, the US had much more control. And so, this makes it more necessary now and more likely to be good because the US moves slowly. The US should have acted 10, 20 years ago and invested the way China has and dealt with the inequality. And this is a great, elegant, long-term solution. But the point is there’s less control now, and that means more risk.

This is far from guaranteed to work. Any loss of control under these circumstances would lead… And, by the way, you better believe China’s intent to not just create uncertainty within, but to create more lack of control to try and disrupt this. Which means there’s all kinds of, you know, black swans that are really probably gray swans that might be kind of poked by others.

So, my point to you is we are definitely in a bubble. Without the investment, and the promises, and the control of the most big bully dominant force in the world, which is the Federal Reserve and the Treasury (the institutional US kind of power), this goes very badly without it. So, the real question is, you’re sitting in a room and, you know, does that bully, does that entity have supreme control and can they control the outcomes? And the answer is we’ll see. But they’re intent to, because they have to, and they’re worrying about losing control.

[00:42:47] Niels

I mean, I’m not a China expert, but looking at China as some kind of role model for this, to some extent, a couple of things spring to mind. One is they have far more control over the narrative of what’s being shared. I don’t think you could get that kind of control in the US simply because people are used to having completely free access to information. Now, it can be steered in a certain direction, I just don’t think it can be controlled to the same degree.

The other thing I’m thinking of is that, depending on who you ask, it’s not like China is doing that well. And we also know that for sure their property sector has had, and maybe still does, has tremendous challenges and that people have lost lots of money even though initially it all looked great. So, I don’t know if that’s…

[00:43:42] Cem

Yeah. To be clear, the US approach, even though it has barely started, has started, is currently working. It’s forcing strength in the dollar. It’s forcing more control and less… You know, they’re responding to, they haven’t responded to the Chinese kind of pressures. And they have very powerful incumbent advantages. Not to mention, you know, despite Trump doing a lot of things to undermine it in the last several years, you know, they do have a system that, given the choice, is at least more popular globally,
more open.

So, those things are working, leaning into those strengths are working and the plan… And this is why maybe one should have optimism that if the US implements this that it will work. And I think that’s more likely than not.

But again, I want to be clear, it’s not without risks and those risks could lead to a lot of worse outcomes. And if the US, as the big bull in the room, this is the don’t fight the Fed thing, but on steroids with the whole US system. Right? You know, at least in any short to medium term, you should pay attention. Right. And you should be betting accordingly.

So, yeah, but the point is, will things mean revert in a natural system? Yes. Is this going to be a natural system? (That’s why I give the air quote on free markets.) Probably not.

[00:45:23] Niels

Yeah. Now, two people who will be very important for this plan to work is Warsh, Kevin Warsh and Scott Bessent.

[00:45:36] Cem

Yes.

[00:45:38] Niels

And you mentioned in your notes that you see them play this role of good cop, bad cop. Tell us more.

[00:45:46] Cem

Absolutely. So, first of all, it’s not a coincidence that we have two hedge fund managers at that for the first time, you know, in each role at the head of the Treasury and the Fed, and the markets are too big to fail. We are about to deploy a massive market focused, strategic kind of plan.

It’s no coincidence that they come from the same general Druckenmiller kind of sphere, that there is a broad connection between the two. If you look at policies that are being passed, the “independence” of the Fed, despite the narrative and what they’re trying to push, is becoming smaller and smaller, and smaller. They’re becoming more connected, and the ways that they could work together are greater and greater. That is, in my mind, the clear goal.

But if you want to do it, and you want to support the dollar in the meantime, and you don’t want to lose complete faith of the dollar, what do you need to do? You need someone at the head of the Fed that at least appears, and can initially act, as if they are independent and that they have the strength of the dollar and the sound principles, you know, in place. Without that it just becomes narratively Zimbabwe, pr wherever, you know, Weimar Germany.

And so Warsh is the good cop. That’s all he is. They’re connected. They run the same organization, they’re working together. The outcome and the goals are laid out by this administration, and by Bessent, and you better believe Warsh knows about it and is on board.

So, good cop/bad cop, that’s how you get to the best outcome. Bessent will be bad cop. He will, you know, he’ll buy stocks and he’ll demand printing money, and at first he will actually be the one, by the way, that will buy back debt. The Treasury will buy back its own debt first, and then into crisis the Federal Reserve will hop on and begin to backstop the long end of the curve.

That’s my view. But there will be a bit of a dance where Warsh gets to play, you know, defender of the fairness for lack of a better term. And he has been brought on as that. But he is incredibly connected. His father is incredibly connected. Sorry, his father in law, I apologize, father in law is best friends with Trump.

You know, there’s zero chance that he’s not in on kind of the plan, and where they’re going, and what’s happening. And he should be, by the way. If they’re going to do this, they need the Fed on board.

But you know, again this is important, you know, this appearance of fairness is so critical. Some type of, you know, you have to defend against the perception of the rest of the world and the willingness for people to go along with this at some point. And so, you have to paint, I’m trying to paint it in clear picture but this was what will happen. This is why, by the way, they’re also not doing what the Japanese central bank did, which is just buy stocks themselves. They’re going to have the Treasury buy a sovereign wealth fund which seems much more fair. Right? And then they’re going to borrow money and the bets get printed.

[00:49:26] Niels

Of course there is more than one person on the FOMC committee so we’ll see how quickly they get on board or if they do get on board, everyone, enough to execute. But I don’t disagree that obviously his appointment is part of that. Let me switch up a little bit to the last two topics we have.

You’ve used this term before, ‘The summer of George’, but for listeners who don’t speak fluent Seinfeld and option markets Greek, what exactly do you mean by ‘The Summer of George’?

[00:50:03] Cem

The summer of George is, we spoke about reflexivity, is really about doing the opposite. Markets themselves become a dramatic period of vol compression, volumes drop in half, yet structured products stay the same. And those effects create greater and greater compression during the summer. And when that happens, positioning is everything.

What happens if positioning is everything? Well, whatever people are long, particularly hedge funds who have to trade aggressively, you know, whatever they’re long tends to go down and whenever people are short tends to go up. And you get massive dispersion, because we’ve talked about this at length. But if you have vol compression at the index level, that tends to mean if something goes up, something else has to go down, because the net has to be zero. And so, you have massive correlation breakdowns in the summer. You’re seeing that again this year.

And so that’s what The Summer of George is about. It’s about everybody goes to the beach. There’s nothing to do. People climb under the, you know, desk for a nap in the middle of the day. And in that process you should do the opposite, which is, you know, I think there’s also a separate episode that’s not The Summer of George.

[00:51:23] Niels

I was just going to say there’s definitely a separate episode.

[00:51:25] Cem

George Costanza says, if everything I’m doing is, you know, isn’t working, that, I mean, I just do the opposite. And so, he just starts to do the opposite and it starts working. He starts, you know, getting the girl, and doing all the things. So yeah, that is The Summer of George, and so far playing out once again. And I would expect more of that for the next month and a half.

[00:51:49] Niels

Sure. Now, before we get to… I know that listeners really love when you kind of set out, if you do have sort of a more specific view on where equity markets specifically are heading. But before we get to that, you also mentioned the importance of the coming midterm elections. So, are the midterm elections kind of like the political option expiry for this whole regime?

[00:52:22] Cem

I think that’s one way to put it. So, there are three legs of this stool. When I’m looking at how markets are moving in the short to medium-term, there are three major.. So, there are flows. Think of The Summer George, these dynamics, I just said, fast flows, end of year flows, or flows around the midterm election itself and the all compression that’ll come after the election. And so those are important. They don’t have to do with what’s actually happening in the world really. They have to do with structural dynamics.

Two, there’s macro. That’s a broad term. What do I mean? I mean things that actually have effects on markets directly, not generally, like soft macro, interest rates, inflation, economic growth. Right? The things that drive demand ultimately, but in a little bit slower fashion. And those things are getting worse.

So, flex structural flows are very positive until, let’s say, September. Macro is getting worse. Inflation’s still working its way through the boa constrictor. We just had a number today where economic growth is slow.

And then we have the third stool which has mattered less, historically, because they’ve been more predictable. But now, as we enter regime change and a much more activist administration, is the administration itself. And so, that’s why the election matters more than ever. We’ve talked about how, in populous periods, elections matter more than ever.

Right now, the election matters tremendously, even more than usual for a midterm, because Trump is at risk, if he loses both houses, of losing control, at a time where he needs control if he wants to deploy the plan. So, they have every intent to do anything they can to keep the plate spinning and get the best outcome for markets to make sure they, at the very least, win the Senate.

So, this is a very important midterm for the administration and not just important so that Trump could pass them all, but so they can deploy the plan that they need to deploy to get to through this next period.

And so, three legged stool: flows positive, administration very positive – administration positive till November. Flows very positive till at least September. Right? And macro slowly degrading, but not accelerating per se yet, negatively.

And, by the way, markets go up because we’ve talked about how big they are, you can support the macro as well. There’s a reflexive loop there. So, for now, until September, or so, it could be choppy, but you know, don’t expect any negative fireworks.

You know, don’t fight the administration. The flows are on, they have their flows on the back behind them. But September to early November, you had a two-month period where the flows are less positive, but the administration is very intent to keep it going. And the macro’s getting worse. That’s a dangerous period for the administration. They’re going to do all kinds of… Expect that they’re going to start preparing to do whatever they have to do in the fall to make sure.

So, I wouldn’t bet against administration, but it’s going to be more volatile and you know, particularly if, for some reason those polls are looking worse and worse going into the midterm, that could be a very dangerous period. The polls are holding in there, you know, and the administration is doing everything it can to keep things going. Then, you know, volatile, but probably not the end of the world.

Post midterms, the macro should be getting meaningfully worse towards the end of the year. The flows will be essentially gone after mid December, but it could even be not great there at that period. And all of a sudden you have an administration which might not mind if they’re going to have another take it down, to take it up, to allow that to start to reset a bit. And you have an administration that probably wants a bit of a crisis, a controlled crisis, but a crisis. They don’t want to lose control.

Now, this assumes they win the Senate. If they lose the Senate, then it could be worse, because then they could actually lose control. But this is a period, November to June, where the three legs of the stool start to say, wait a second, like this is not given valuations, given administration, that’s not necessarily going to be looking to support the market during this period. And given a period where the macro, from an inflationary perspective and other issues, especially if they do the other thing that I think they’re going to do, and Trump has said as much: “if I was going to play this game (quote unquote, Donald Trump), I would wait till the midterms, then I would attack Iran. So, you draw your path from there.

[00:57:13] Niels

Well, speaking of path, I remember our conversations prior to or around the time of the election, the main election, and you had done a lot of research in terms of how markets actually behave in the year of the election and you had gone back and you’d done your analysis and you also concluded that during populist periods they did 20%, 25% or something. I can’t remember the numbers, but something like.

Anyways, I was just curious and maybe I should have asked ChatGPT to do this for me in preparation of our conversation, but I’m kind of interested in what the statistics look like for the midterms in a period of populism. What does that year typically look like?

[00:57:59] Cem

So, midterm years, which is this year, are historically the worst. And we would have expected this year to be worse. And it was going down that general path, particularly Q3 and Q2 are bad.

And I think the administration, very aware of these things, has been very proactive, very proactive. And part of what you’re seeing with that, you have to deal around, we’ve got to deal around, because they couldn’t solve it quickly. They were hoping to get a big win, and if it didn’t, they knew they needed to pivot. And they pivoted to doing everything they can to control the macro. And this is a big part of why you ask, why did the oil thing not work out? It’s not just positioning, which is the biggest part, but it’s also administration doing everything it can to stabilize the ship for the short-term because of the midterm. Two legs of that stool were, you know, pushing the other way.

And doesn’t mean that won’t be right eventually. Which is also why, now the position has turned, a little bit more interesting to start taking that bet.

[00:59:07] Niels

Well, certainly lots of things to follow, lots of things to consider as we head into the second half of 2026, which will no doubt have some explosive moments along the way.

Thank you Cem for your time, for your insights, for your views. And for those of you listening who want to show some appreciation for Cem in addition to following him, which I know hundreds of thousands of people already do, find your favorite podcast platform and leave a rating and review. That also means that more people will be able to find these conversations and listen to Cem’s nuggets.

Next week I’ll be joined by Alan, which is always also an insightful conversation. So do send me your questions and you can use the email info@toptradersunplugged.com and I’ll do my best to bring them up.

From Cem and me, thanks ever so much for listening. We look forward to being back with you next week. And until next time, as usual, take care of yourself and take care of each other.

[01:00:10] Ending

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