Crisis Is Coming In Early 2027 | Cem Karsan

Oracle

Across the shows: 38 speakers in other episodes, 9 bullish and 34 bearish calls, past 30 days

• Cem Karsan · Kai Volatility AdvisorsBearish

  Oracle is mortgaging its business with debt to fund AI capex, which Karsan finds somewhat irrational.

  Karsan says Oracle, whose chairman Larry Ellison is close to the administration, has taken on large debt to fund AI infrastructure spending. He calls this mortgaging the whole business at scale and says it looks somewhat irrational from outside. He argues Oracle is relying on an embedded put, the expectation that the administration will backstop it. He notes this was fine while hyperscalers had large cash piles, but cash has since fallen to zero, so the debt route carries more risk as yields rise.

  “Larry Ellison is one of the closest people to the administration, has basically mortgaged the whole business at scale. I mean, from afar, it's somewhat irrational to the extent that they're going and taking debt.”at 46:26

Market sentiment, positioning & volatility

• Noel Smith · Kai Volatility Advisors

  Volatility being drained from the market will support stocks into year-end and the January option expiries.

  Smith says vol is leaving the market because the election has turned unknowns into knowns. Market makers who were short stock to hedge options now need fewer shares as vol falls. Their hedge ratio changes, so they buy stock back, which supports prices. He says this is a traditionally bullish setup into year-end. As January LEAPs decay and lose value, their vol also gets pulled out, which adds more supportive flows. He says the main driver of the market going up is vol draining out into year-end. He is careful to frame this as a flow effect and not a statement that everything is now safe.

  “the most important part for the market going up is the vol getting sucked out going into end of year. Traditionally, it is a bullish setup.”at 7:27

• Cem Karsan · Kai Volatility Advisors

  Current options skew matches 2019 and 2021 levels, which preceded rougher market periods.

  Karsan says skew is high because investors are hedging the event and worrying about structural problems. He checked recent data, where options have been more dominant, and found skew this high only twice: late 2019 and mid-2021. He admits the sample is only three data sets and does not want to overstate it. Both earlier episodes were followed by rougher markets. In 2021 he flagged storm clouds before the 2022 decline, which he says he called within a week. Late 2019 led into the COVID crash. He says COVID was already a risk before the news broke, which is why skew was elevated.

  “we've only seen skews this high broadly twice.”at 27:39

• Cem Karsan · Kai Volatility Advisors

  Dealers' hedging can keep vol compressed until a quarterly OpEx, then drive a sharp reversal.

  Karsan explains that when investors buy protection and sell upside, dealers end up short puts and long calls. Dealers hedge by shorting stock, and the resulting open interest builds up. In early 2020 the market rallied and vol compressed into February. Then the open interest, concentrated at the March quarterly OpEx, unwound. He says the decline began the day after February OpEx and the COVID-era decline ended the day after March OpEx, which he calls no coincidence. He argues the tail event could be timed through positioning even when the macro risk is known. Noel Smith backs the mechanism by pointing to options traders being faded when their flow is visible.

  “you get this OpEx reversal literally the day after OpEx.”at 32:14

• Cem Karsan · Kai Volatility Advisors

  Policy has repeatedly engineered crises and reversals, pumping volatility to drive flows and liquidity.

  Karsan says the administration has run the same playbook at least twice: a crisis such as Liberation Day tariffs, a reversal such as the nine-month delay, then a squeeze. Each cycle pumps volatility, moves flows and restores liquidity. He notes the Treasury secretary and Fed chair are hedge-fund managers who understand this. He says the claimed deals, such as 'a deal in two weeks', were narrative, and the playbook will return during a crisis as they 'tell you when to buy stocks again'.

  “this has become a feature, not a bug. The liberation day, world is on fire, 150% tariffs, like nevermind, nine month delay, 10% tariffs on some of those. Create a crisis, resolve it, pump vol”at 52:57

• Cem Karsan · Kai Volatility Advisors

  Start buying longer-dated puts now as a crash hedge, not short-term bets, and fund them with other holdings.

  Karsan says the current setup is a chance to start collecting long-tail protection, not to bet everything on a one-month trade like the COVID trade. He wants longer-dated puts funded in part with other positions, and he will add to them as the flows line up, which he expects from January. He says options give precise, asymmetric exposure to fat-tail outcomes, while outright short or long stock positions are harder to time.

  “this is an opportunity to start capturing, collecting long tail, not putting it all on for, you know, one month.”at 1:00:53

• Noel Smith · Kai Volatility Advisors

  Combined S&P options, VIX options and variance futures hedge catastrophic drawdowns and profit when volatility spikes.

  Smith says his firm's hedging product uses S&P options, VIX options and variance futures to protect against catastrophic drawdowns. He argues the combination is structured so that a volatility spike cannot leave the position losing money, which lets investors act without being paralyzed. He also says the strategy can capture crisis alpha. He pairs it with other strategies to reduce sequencing risk.

  “So the combination of those things, the idea that volatility goes up and you don't make money is mathematically impossible.”at 1:08:44

• Cem Karsan · Kai Volatility Advisors

  Long-volatility hedges on S&P and VIX can be monetized aggressively if the expected decline plays out.

  Karsan's portfolio uses convex long-volatility hedges, such as options on the S&P and VIX, that pay off if the expected crisis happens. He says that if it plays out, the firm will take profits from these hedges and aggressively redeploy them into equities, possibly increasing equity exposure substantially. The hedges give asymmetric payoffs: if he is wrong, the setup should still make money, and if he is right, the convexity can change long-term returns and let him buy at sale prices.

  “you better believe if it plays out, we will, this is critical, monetize the hedges, be very, very aggressive taking our profits”at 1:16:56

• Cem Karsan · Kai Volatility Advisors

  Most investors hold long stocks and bonds, which he says gives poor risk-adjusted returns.

  Karsan argues that most of the world, about 95% by his estimate, is long stocks and bonds. He says these have poor volatility dynamics relative to their return. He prefers a liquid, low-risk, steady-reward portfolio that is diversified and convex, which he says allows more risk to be taken when the right moment arrives.

  “Everybody follows a very poor risk adjusted return. I say everybody like 95% of the world is long stocks and bonds, right? These things have awful risk volatility dynamics relative to return.”at 1:18:31

US stock market outlook

• Cem Karsan · Kai Volatility Advisors

  Positive options and structural flows should support US stocks into year-end, a Santa Claus-style rally.

  Karsan argues that flows are structurally supportive into the end of 2026 regardless of macro. Vol is compressing, which lets dealers unwind hedges and buy back shares as their delta needs fall. Year-end structured-product issuance and LEAP expiries add supply of vol that compresses further. Investors who are up on the year and earning about 4.5% on cash have to re-lever into year-end, which he calls the main driver of the January effect and says is growing as markets rise. He notes that every election in the last twenty years has seen positive flows afterward, as long as the result is resolved without contest or a surprise. The November-to-December seasonal pattern adds to this, though he flags a weak Thanksgiving window. He calls the flows 'meaningfully positive' but keeps this separate from the macro, which he says is getting worse.

  “Flows are, I characterize them as meaningfully positive.”at 17:22

• Cem Karsan · Kai Volatility Advisors

  Post-midterm US market outlook is poor over a much longer horizon because macro conditions are deteriorating.

  Karsan has been publicly bearish on a longer horizon after the midterms. The macro backdrop, covering interest rates, oil and inflation, has not improved and has been made worse by the election outcomes. He says the macro is getting considerably worse as time goes on. Supportive short-term flows, meaning positioning and hedging, will eventually fade, so the flow-driven near-term support is not a lasting trend. He separates the near-term flow view from this longer-term macro view and says each has to be modeled on its own timeframe.

  “I've been very vocal about a broadly post midterm, poor outlook on a much longer timeframe.”at 24:33

• Cem Karsan · Kai Volatility Advisors

  A sharp, fast market crash is coming, likely starting by March–April 2027, possibly as early as January.

  Karsan argues the administration's incentives point to a sharp, quick sell-off before it steps in with rescue measures. Liquidity mechanics matter: a 25% fall removes about $75 trillion of equity liquidity, and banks deleverage when losses hit quarterly leverage ratios. He wants the crisis done or started by March or April, and the Q1 flow window is dangerous. He says he has no inside information, but the signals from officials point to it. He calls it a big call.

  “So my view, it's a big call, is that something's coming sooner rather than later.”at 59:26

• Cem Karsan · Kai Volatility Advisors

  The coming policy rescue will be bigger than any before, with equity buying never done at this scale.

  Karsan argues that after a sharp decline the government will step in with large support, and the scale will exceed earlier rescues. He says the Fed and Treasury have already done incremental steps like buying long-end treasuries, buybacks and stock purchases such as Intel and MP Materials. He argues the US will go much further, buying equities at a scale never seen before. He says the crisis may be contained by the authorities, but notes the administration's control is weakened by the midterms.

  “I think I would expect this bigger than anything we've seen, particularly in, you know, we've never seen the equity buying piece of it.”at 1:05:02

• Cem Karsan · Kai Volatility Advisors

  Expects a major market decline within roughly seven to eight months, a short window his portfolio is hedged for.

  Karsan says the risks he sees make the portfolio need to be better hedged now, and that it is a very short window, roughly seven to eight months, when these events should happen. He says that if he knew with certainty a 40% to 50% decline was coming, he would hold no equities. Because of the risk and distribution he sees, he wants the right liquid assets in the portfolio to sell if the decline happens.

  “It's a very short window. We're really talking about seven, eight months that should be happening.”at 1:17:22

US Treasuries & yields

• Cem Karsan · Kai Volatility Advisors

  A debt or Treasury market crisis is coming sooner rather than later, probably starting in January.

  Karsan opens by citing Hank Paulson's April warning of a coming debt crisis, and Paulson's call for a facility to backstop the Treasury market. Karsan says he agrees and calls it a big call. His view is that something is coming sooner rather than later. He pairs this with positioning flows that he expects to turn in January, which he gives as the timing for stress to begin. The transcript here is thin on the mechanism, so the case rests mainly on the Paulson call and the timing.

  “So my view, it's a big call, is that something's coming sooner rather than later.”at 0:33

• Cem Karsan · Kai Volatility Advisors

  Long-end yields are rising because new debt issuance crowds out the bond market; credit spreads are widening.

  Karsan says the refinancing wave, sticky inflation and new debt needs are pushing up long-dated yields, and new issuance crowds out the wider debt picture. He says credit default swaps and credit spreads are starting to blow up. He cites the 10-year yield reaching about 5.35%, which broke bond markets before a brief pullback and a move into the dollar as investors de-risked. He sees a catch-22: growth and valuations need more debt, but higher yields make that debt harder to sell.

  “And the word crowding out government debt too. That's that's the point. The long end of the curve is is pushing up because now we have even more debt that people need to take out.”at 47:43

• Cem Karsan · Kai Volatility Advisors

  Paulson's April debt-crisis warning was a trial balloon preparing a Treasury market backstop facility.

  Karsan says Hank Paulson, who had not spoken to media in years, went on Bloomberg in April to warn of a coming debt crisis and called for a facility to backstop the Treasury market. Karsan says the coverage faded within a day. He argues this was not a coincidence but a trial balloon, because the government has signalled it will run hot and there are not enough buyers of its debt to sustain growth without intervention.

  “Do you think that was a coincidence? ... My opinion is no, absolutely not. And if anything, that's a trial balloon.”at 49:45

US dollar

• Cem Karsan · Kai Volatility Advisors

  Dollar's reserve status rests on commodity trade in dollars, a multi-decade structure, not a short-term effect.

  Karsan says the US can print dollars without a meaningful currency hit because global demand for dollars is structural: trade has to be settled in dollars, and commodities are priced in dollars under the petrodollar arrangement. He calls this a moat that the US could not allow to be breached, and says it is a fifty-to-hundred-year structure rather than a one-to-two-year trend. He cites China's yuan trade with Iran and Venezuela as the kind of threat the US resists.

  “This is true by printing dollars without a meaningful effect to the currency of The United States, because there's natural massive demand for our currency, because people have to trade in our currency.”at 40:34

• Noel Smith · Kai Volatility Advisors

  Currency debasement and a Bretton Woods unwind make logical sense from both Austrian and Keynesian views.

  Smith says the debasement idea and the possibility of a Bretton Woods-style unwind, which people have been discussing, make logical sense from both Austrian and Keynesian standpoints. He finds it hard to argue against them. He says his main function is working out how to time the trade and profit from it, rather than whether the thesis holds.

  “it all makes logical sense from both an Austrian and a Keynesian standpoint. So it's very hard for me to argue against those things.”at 1:22:04

US tax & spending policy

• Cem Karsan · Kai Volatility Advisors

  Trump accounts and a sovereign wealth fund will let government own stocks on citizens' behalf.

  Karsan says the administration is building tools to buy stocks directly. Trump accounts, once discretionary for under-12s, are becoming mandatory for under-18s and may extend to age 40, and the sovereign wealth fund is being prepared. He says these let the government buy stocks for citizens that they cannot sell for twenty years, which he calls right-wing populism. He argues this is more popular than cash transfers and could be used to fund the rescue.

  “right wing populism is right wing populism, they're gonna buy stocks for you as opposed to send you money.”at 57:04

• Cem Karsan · Kai Volatility Advisors

  A US sovereign wealth fund buying American stocks could reach $10 trillion-plus over a decade, a megatrend.

  Karsan argues the US will deploy a plan over the next year or so and expects it to run about ten years, with the current period as just the beginning. He expects it to ultimately bring $10 trillion-plus of US equity investment. He calls this a megatrend and says his firm wants to own the businesses that will receive that money, rather than just tracking the S&P 500. He also says that if a sovereign wealth fund is created to buy American stocks, it will target companies serving the American people.

  “we believe this will be a ten year, by the way, this is just the beginning. We think this will be ultimately $10,000,000,000,000 plus of US equity investment.”at 1:14:11

US rates & the Fed

• Noel Smith · Kai Volatility Advisors

  Falling rate expectations favor homebuilders and small caps, with the Russell 2000 gaining more than QQQ.

  Smith points to futures markets. Early in the year traders were pricing cuts, then hikes, and now they price only about 50bp of hikes through next September. He says this explains why homebuilders are doing well, since rates coming down help them. He also argues the Russell 2000 has more upside than the Nasdaq (QQQ) in a lower-rate setting. He ties this to credit and equity being linked: if borrowers can service debt at lower rates, their creditworthiness and equity both improve. He calls this a mechanical effect of the market, not an opinion on the election.

  “The Russell probably has more upside with a lower rate environment.”at 11:51

Middle East & Iran

• Cem Karsan · Kai Volatility Advisors

  Strait of Hormuz stays shut unless the US controls it or political upheaval forces a US withdrawal.

  Karsan argues the Strait of Hormuz will not reopen on its own. He says the US has in effect taken control of commodity and dollar trade through Iran and Venezuela, and that the Houthis have allowed only US passage through Bab el-Mandeb. He concludes the strait reopens only if the US controls it or domestic political upheaval forces the US to withdraw. He says an attack on Iran could also accelerate risk.

  “But I'm telling you, the Strait Of Hormuz is not opening unless it's controlled by The United States Of America. Or there's a political upheaval that says enough is enough and forces The US to withdraw”at 43:08

US inflation

• Cem Karsan · Kai Volatility Advisors

  Commodity supply shortages will make inflation inelastic, pushing rates higher while Hormuz stays closed.

  Karsan argues that with the Strait of Hormuz closed, low commodity flows and depleted inventories mean prices become inelastic. Most commodities, including fertilizer and diesel, ultimately trace back to energy costs. He expects fertilizer cost pressure to show up in the spring. He says the inflation pressure also raises the cost of money, because interest rates have to rise when inflation expectations rise.

  “what I can tell you with a 100% certainty as if the straight up Hormuz is not going to open... that at some point, inflation becomes inelastic because commodities themselves are almost all, not all, the majority of fertilizer, diesel”at 43:46

Credit markets

• Cem Karsan · Kai Volatility Advisors

  Cheap 2021 debt maturing now creates a one-sided global debt supply-demand imbalance.

  Karsan says companies and governments borrowed at near-zero rates in 2021, with average debt durations of five to seven years. That debt is now coming due across sovereign, corporate and municipal borrowers, creating a tidal wave of refinancing that began this year. He calls it a one-sided supply and demand imbalance for debt globally. He says the administration knew about it and tried to manage it.

  “So this we've known this is a one-sided supply and demand imbalance for debt writ large globally.”at 45:25

AI infrastructure & data centers

• Cem Karsan · Kai Volatility Advisors

  The administration pushed hyperscalers into massive capex, now increasingly debt-funded, which Karsan sees as fragile.

  Karsan says the administration gathered hyperscalers and pushed them to raise capex from around $400 billion to $600 billion a year, citing a Zuckerberg hot-mic moment. The companies' cash has since gone to zero, so they now borrow heavily to keep growth going. He says Elon Musk recently said all funding for neoclouds has dried up. Karsan concludes this fragile AI-driven growth depends on rising debt, which only works if yields rise and credit stress grows.

  “The administration's actively been pushing these companies to do more CapEx.”at 46:22

US elections & politics

• Cem Karsan · Kai Volatility Advisors

  The midterms have reduced the administration's control and raised structural risk to the market.

  Karsan argues the midterms have diminished the administration's control over markets. He says that if the administration cannot save the market from a bad outcome, the structural risk rises. He adds that a Democratic Congress will eventually need to buy in, which makes a rescue harder to pass without a visible crisis first.

  “I would argue also the midterms has made their control, like has diminished their level of control.”at 1:02:49

US–China relations

• Cem Karsan · Kai Volatility Advisors

  US must invest in strategic firms through equity markets to compete with China's state-directed investment.

  Karsan says China has funded solar, electric vehicles, nuclear and rare earths without a profit motive because these sectors are strategic. He argues the US has a hard time competing with that at scale unless it invests through the equity market. He sees the administration's stock purchases as a way to drive investment into strategic businesses and respond to China.

  “China has been sending money to solar businesses, to electric car businesses, to nuclear, to rare earth... without a profit incentive because they're strategic.”at 1:05:39

Commodities (broad)

• Cem Karsan · Kai Volatility Advisors

  Owning producers of hard assets like miners is preferred as a hedge against debasement and structural inflation.

  For the debasement trade, Karsan says his firm primarily positions in equities rather than the metal itself. He prefers owning businesses that pull hard assets out of the ground, such as gold miners, and also farmland, lumber and other commodities and energy producers. His reasons: these producers have an embedded yield because many have generated strong cash flows and are cheap, and their cash flows are resilient to structural inflation. He says these are part of a larger equity portfolio, not all of it.

  “So we like to position in equities primarily for the debasement trade. ... I'd much rather own a business that invests and pulls gold out of the ground, for example.”at 1:12:51

Defense & Aerospace

• Cem Karsan · Kai Volatility Advisors

  Strategic sectors funded by the US government budget, including defense, are areas his firm wants to own.

  Karsan says his strategic focus covers anything in the current US government budget, which he says would probably include defense. He also widens the strategic bucket to competition areas such as AI and AI infrastructure, noting some have been hot but that there are ways to bet on those trends that have not performed well. This is part of a concentric-circle portfolio with debasement and healthcare as other buckets.

  “This is actually pretty wide, meaning go down the budget, the current budget of the US government. Everything that would be included on that budget would be probably on that list.”at 1:14:41

Healthcare system & insurers

• Cem Karsan · Kai Volatility Advisors

  The US needs more investment flowing into healthcare to reduce costs, and it is a populous trend to back.

  Karsan argues the US needs more capital flowing into healthcare to reduce costs, which would create more room in the broader economy. He describes this as a populous trend. It is one of the strategic buckets in his portfolio alongside commodities and defense.

  “In The US, we need more kind of money flowing to healthcare to reduce those costs so we have more room. And it's a very populous trend as well.”at 1:15:14