The Bear Trap Is Set. Cem Karsan Says the Window Closes Tuesday.

0:00 It's been an interesting week, man. I mean, uh, you know, gosh, I mean, we look back, uh, we were talking about 4.8 on on the 10-year. It seemed as though yesterday, uh, we would not be talking about that after Waller came out and said what he said, and now all of a sudden it's in focus once again. So, uh, sort of help me square the circle of how you started the week thinking things and how you're ending the week thinking things. Have they changed or are they the same? >> No, it's a great question. Um, Candly, uh, I'll take a little bit. I mean, we were definitely right on the Waller Jackson hole part, right? Uh and and the pullback that we saw uh in the markets uh you know, the the rally in in yields or or hitting bonds, hitting gold, all those things is exactly what we called. We called for a pullback and then a

0:46 venture bottom. The question is where is that bottom? Right? So, and this is the this is where the tough part comes in. uh the timing of this like we this is ultimately in my opinion going into the midterms it's got to be a buy in the market. It's got to be a buy in gold uh and and uh they're going to try and turn yields uh and that's going to be a major driver when they turn yields. I want to be clear like they there you don't get this market rallying without a turn in yield. So in my view this is still uh we're in this process of how do they make the turn and I think they're the interesting part is uh they got some help and and creating that turn from non-farm payrolls like that's what led

1:33 to this kind of little plus waller right coming in and said okay you know like no we're not going to raise rates um the interesting part is is the market you know is having a hard time uh finding that bottom and turning itself. Now, clearly the Fed meeting that's coming up. I I've been pounding the table. They are not going to raise rates. You know, I've been in the minority on that. I think we're hearing it that what we're hearing from Waller reinforces that. We're hearing from Bant saying, "Look, there's supply shock. Why the heck will they raise rates?" Like, everything tells you that, but the market just keeps pricing it. And um so I think when the market finally rep you know reprices that to zero when it when when they don't do it that's going to be supportive. Um so I at this point

2:19 as much as I was hopeful the part I'll take an L on is as much as I was hopeful for a bigger pullback and we got a pullback right just hasn't been much. Um I'm I'm of the of the view that um I've been saying you really want to be a buyer of this in time and price are you know lower by by 5% from here or this the important part or by the end of uh this expiration week uh there is a small chance in the two weeks after that you get a bigger slide and then you buy it but candidly based on everything I'm seeing you can't wait that long this administration is hellbent on turning this market gonna do whatever they can to whatever they they have to to to turn this thing, but they haven't done it yet. And I think they're just going to

3:05 need this Fed meeting. You got SEO optics here. Don't forget the va charm flows. I was very clear. You've either got to activate that downside open interest in the puts. This is critical in September uh quarterly that that expiration in September or what happens or they short put short stock at the index level that dealers have every day turns into buying uh for VA the VA and charm flows come in and and leads to buying. So V compression VA charm flows there they're going to start in earnest after um Labor Day. So candidly, as much as we were like, okay, we want a bigger pullback, we needed something Thursday, Friday, an extension, the bounce that we got, unless this unravels today,

3:50 like I'm talking unless it drops another 1% today, which could happen, not likely. Um, I think you really uh need to be looking to buy the dips here. Um, so yeah, you are you are hearing a turn for me. you know, it's not we needed to get an continued decline in activation of some of that skew and that vault. Um, but I think the odds are now starting to look more and more like you want to start buying into this. Um, and uh, you know, got to be water when the when the facts don't present what you're looking for, you got to be willing to turn. And I and I think the reality is uh, you would have expected a pullback here. you got a small small window here for that to still happen, but the flows now from the seopics are going to start coming

4:35 back. And if if I'm right, which I believe I am, that they're going to really start um leaning into, you know, like that the that that their wars is going to not raise rates, uh then I don't see how this doesn't improve when Bentad all start leaning into it later into the midterm season. >> Uh what's causing what's causing that change of of sentiment? Is it uh you know seeing the VIX barely moving after what is it? >> No, no, no. It's flows. Again, everybody wants to point to the macro. Okay. The the way this works, you're headed into SEO opex. You had this window of weakness. This period before the two weeks before opex where you need to get things going down in a way that can activate the the VA and skew risk that exists in those short puts. I want to be

5:21 clear that make sure that people understand this dealers are shortput short stock. Okay, that going down or sideways is very good for that position. Even up small is good for that position. Okay, the thing that hurts that position is a bigger down move and an activation of implied vault and an expansion and an appearance of real risk. In the absence of that in this window, this is what I've been trying to say, that is the thing that could trigger a bigger call it 8 to 10% sell-off. But in the absence of that, we start heading into SEO opex. All of the buyback flows from a SEO opex are going to come back in and buy this thing up. And uh and if you pair that now with the view that I have that this turn was

6:08 likely going to happen around that Fed meeting, right? Even if we got the decline, it was going to get turned at that Fed meeting. If I believe they're going to not raise rates anyway, which I do, um then what we're start to get into the late September, early October window, which is not where they want a big decline to happen, and they are going to do whatever it takes to keep this market moving. Okay. So, um and the other signal that they're they don't want this thing to come down before it goes up is quite frankly Trump came out and he's talking about how we're he's going to call declare well he didn't say it. We're we're hearing uh from back channels that he is actually talking about declaring an end to the war in Iran. Now, obviously that's nonsense.

6:53 It's nonsense. There's no war ending. I talked about why that is. yada yada. But you know how it is. The world's going to say, "Oh, end of a war. They're not doing anything. Okay, move on." Uh and they're going to try and, you know, maintain a cap on on these oil prices, etc. through that process. And that can goose the market along with all the other things that Bent will be doing to provide liquidity. So look, you you know this is the window v coming out of the summer should be expanding. Um you know this was the window it started we started to get that little trickle down. There was a window here. All we needed was another couple of half to 1% days in this window last couple days and a Friday into uh Tuesday here could have been a really interesting window for climate. It's not happening. Um this is not enough. Um and so when

7:39 you see that uh and it's not the flows the flows are not an up down thing. That's the thing that people have a really hard time understanding in an options market. It is if it is an if then if we can go fast enough then that that creates gamma uh you know a gamma effects and implied ball effects that can drive a bigger decline. If it does not happen even if it's going down but it happens slowly as time passes the buyback from bond and chart flows drives support. And this is the the dynamics that are hard for people to understand but that are critical when you're looking at prediction and path at flows and and what that's driving. >> Um I wanted to use software and discuss that because we did talk about that on Monday but we'll get to that in a second. I want to ask you about bonds and about gold. That's been some of the bigger movers on the week and again uh

8:26 seeing that earlier in the week we touched 4.8 big pullback yesterday but now we're hanging right in there. And um again, we got about 12 days or so until that Fed meeting comes and we've seen the big move with gold throughout the week. Um talk to us about your thoughts about gold and bonds. >> Yeah, I my view is that uh you know they're going to give some lip service. Wars is going to defend trying you know narratively defend the credibility of the Fed yada yada. But uh I am of the view he's going to continue to do what he has actually done. He voted with the doves last time. Why should we believe that he's going to turn and all of a sudden like what's changed? Nothing. It's just a Jackson Hole narrative. Uh and so uh there's no story here in my

9:11 mind where they actually uh raise rates and once we price out take out that those odds that should be stimulative to the market. Uh that should also be more volume compression. And again, now we start getting midway through September heading towards October with that decline. V still well supplied and we have midterm where the administration is hellbent on getting markets moving higher. So >> wait, uh just for window here, we >> just just for clarification, when you say they're not going to raise rates, you're saying for September, you're saying for September and de or you're just saying for September? >> Uh September and de we can we'll see. I I am I think de is unlikely as well. My view is that Worsh definitely for September my view

9:59 is adamant that they are not raising rates. I would argue that they're not going to raise rates at all. The signs of what worsh has actually done is he has removed forward guidance and he has removed the constraints of the inflationary targets and the issues that we've had the constraints that they could be on him by creating by going with a new measure of inflation that removes any shortterm kind of quote unquote outliers. This whole process is to remove accountability and pressure on him to do anything to react to inflation or policy. This is why would he do that? Pretty clear. He has been hired by Trump and you know the Senate to be in this role and he is again this uh he is he's

10:46 traveling with them uh in real time. You see them together all the time. That's like there used to be at least an attempt to show some independence or some space between the two. There's not even an attempt here. This is a this is a this is Kabuki theater, right? this is a a good cop bad cop routine. I'm adamant about that. Um and the narrative you hear from him is to defend and to be the steward and responsibility to preserve the exorbitant privilege of the dollar. But the reality is when you look at what he's actually doing, he's uh he's abetting and aligning with the with the scent and the treasury. And ultimately that's the thing. It's not a coincidence they came from come from the same lineage. are both hedge fund managers and quite frankly they both work for the US government right and

11:31 quite frankly their goals are to to to drive the best outcomes for for for the US and so yes they're going to be coordinating and coordination is uh they're going to as I've said before print print dollars at scale they're going to discuss they're going to need some type of real crisis some issue it's it's coming after the midterms to activate it and then drive the next like um but for now his job is to stay out of the way, let patent at all keep the plate spinning into the midterms. Um and uh and wait for what comes next. >> The software sector had a triumphant week, if you will. Um big moves on the heels of of snow earnings, but it's been a bunch of them. It started with Microsoft and then it happened with CRM

12:19 and um a couple of others, but uh Snow was the big one this week. Let's pull up that chart. You talked about software inflation earlier in the week. Uh give the people some of your thoughts again for those who didn't hear what you've expected more recently. >> Listen, from 30,000 ft, it is one of my favorite things in the planet or one of my general rules. I have a couple of them. Very general rules that when you when something gets ridiculously cheap, it's illogical where it's being priced. Uh you don't go buy it. You don't go catch a falling knife. you you kind of sit back, you let it digest, you put it on the shelf, and you make sure to not touch it for three months. Uh really six months is my general rule. And you you put it there and you watch and if it builds a base during that time, it starts to look technically better. All

13:04 the the shorts kind of liquidate, people give up on it. You don't what's what you should look for is not hearing about it anymore. When you stop hearing about it and it starts to base, that's your window. And this is what exactly what we saw in the software space. Classic the it it's cheap uh earnings have been good. Surprise surprise there isn't actually a short-term structural issue. Some businesses you got to take, you know, make sure you're not going for the business that can be dramatically disrupted tomorrow and go to zero. There are lots of great businesses here that have real notes that are going to benefit from AI. And so a lot of this was narrative, a lot of this was liquidation and overhang of of of you know people who were long and leveraged and had to get out. So that that that liquidation has happened and here we

13:50 are. Uh this is an opportunity to to buy in. So um I'll say one more thing which uh narrative changing is important. So the narrative of like AI is going to eat software is what it is. That's kind of faded. Some people like maybe it will maybe it won't. Okay. But there's a whole another narrative which I'm going to start introducing. I think you're going to hear a lot more of as it starts to perform is software is an inflationary hedge. Some software is strategic businesses whether it's infrastructure or manufacturing or whatever it is right and the more I'm telling you the two big themes that you should be 100% focused on are what are the strategic businesses

14:35 that government's going to be buying and what are the inflationary hedges that you need because they're going to debase the currency. And if you can do both those concentric circles and then find value, buy with four hands, right? And that's what software is. Software in the right software businesses are inflationary hedges. They can be strategic assets and they're cheap. They are very cheap. They've definitely been cheap on a relative basis. Uh you talked about debasement and is it seemed like as though that trade was was uh it seemed like it's been back this week. It wasn't the week before. What What do we What are we going to see in the the coming weeks regarding the debasement trade where we get to devaluation of the dollar, where we see Bitcoin, we see gold. Obviously, that's not the case

15:21 today, but is this just kind of something that's being played with is going to how are we going to see this play out eventually? >> I think what people are hopefully learning, one of the things I really want people to learn from from us on here is it's not just up down. It is timelines like path. And that's so critical. You can simultaneously say I think this is going to go down in the next week and two months into the midterm go up and then I think it's looking for a big decline. And most people are like that's the most smash like like you know milk and toast answer blah blah blah up or down. What are you bullish or you're bearish? Well, the answer is pretty real like things don't go in a straight line. So my my view here as it relates to this is into the midterms. Okay,

16:08 right now there's a little period of of um you know the debasement trade has has uh has worked well right before the wash comments. This is a a opportunity to buy the dip on gold uh to buy the dip on on crypto. This is an opportunity uh to um to kind of look for as the Fed comes in and backs up what Bent is saying um to um to you know play back into a debasement wave. Uh, that one I think is secular, but they're going to continue to try and play the back and forth on that. So, it's not going to be a straight line. Um, I do think the big move on that debasement trade uh both strategic assets and inflation is going to come after uh a big decline in the

16:56 midterm. So, I think it's going to outperform into a decline. I think all the other stuff that's expensive, that's bubbleicious. He's going to have a really hard time um in into whatever the bigger decline is post midterms. I think it probably comes in January, but maybe it's December, maybe it's uh you know um uh you know sometime earlier but when that decline comes which I do believe it's coming uh you are going to outperform by being in in these things and then they are going to absolutely rip uh when when the actual response to that which I think they are proactively prepared for they've shown you which is again putting a capital lung into the curves and buying stocks in the form of a sovereign wealth And when that starts happening,

17:42 look out. I mean, you you ain't seen nothing yet that the and I think people are waking up to it now. So, you'll get some move beforehand. Um, but again, dramatic outperformance into said decline and then I think once the actual rally comes, it'll continue as well. So, I think we're we're in a secular move there, but there's going to be a beta into a major liquidation next year. Um, that's my view. And all assets will, you know, go beta one. Uh but uh but outside of that market effect, this is on a relative value basis. The trade of the next two and a half years. >> Did you say milk and toast? Is that what you >> Milk and toast? >> Milk and toast. >> What is that? >> Go look it up. I can't. Uh it's kind of like kind of like it sounds like

18:29 >> go. It's a word. It's a thing. Milk and toast. Uh what does milk and toast mean? Milk and toast means uh kind of meh. like just not giving, you know, not being being mushmouth, uh being not not getting out there and speaking clearly. Um or or being having a clear sentiment. >> Um the last >> just like a milky toast would uh imply. >> Okay. Okay. Like milkweed kind of what it's one of those those uh what was the uh the uh Yeah, never mind. Um as as we wind it down here, volatility. Volatility. We got the weekend effect in full effect, by the way. And uh we'll see what that happens especially on a long weekend right we got a big long weekend coming up here for those who don't know obviously we're not markets are not open on Monday um but uh we got a big long weekend here and uh talk to

19:16 me about you know the vault complex what you're expecting and again uh no no midterm bump at all is that still something that's going to come to fruition at some point or another or are the markets just looking past the midterm? Uh I want to be clear this short-term decline again if anything feels uh felt manufactured they want to take it down to take it up now they're I think they're having a hard time taking it down or take it up you're getting kind of this you know uh knowledge is all dampening you know you're see you're seeing people talk about all this stuff and they're having a hard time managing it down to manage it up in my opinion. Um that said, you know, after this little period here, by middle of

20:02 September, uh and the Fed meeting, I would start to expect them to really really start pulling out all the big guns, uh when the season better now, but I think uh you I'd be shocked if they don't really really try and go all in uh guns ablazing to try and get this market really really moving uh midterms. Now, this this midterm is also I want to be um you're starting by the way to see the event fall of November on Beck start to firm up. I will say the event fall itself, not fall at large, but the event is starting to price more, which is what some one of the things I've been talking about that was cheap. I would expect uh

20:49 it's still got a ways to go, but I would expect more support there um you know, going forward. That's a nice secular way to buy V um post post midterms because I think it's going to get start getting pretty wild as we get closer and uh you know actually out of and it'll originally be up. They're going to try and squeeze this thing up but then eventually big down. >> I mean there is uh for those who know who but those who don't know there is uh some November 3rd and November 4th expirations in S&P for those for those midterms. Jim, are you like a guy who likes to trade an event or do you just like nah I don't really want to trade I just want to see what happens around it. >> Oh, I I think uh I love to trade an event if I what I like to do is buy the event V when it's cheap proactively.

21:37 What most there's a lot of mispricing that happens on V for events because other than market makers, there's a lot of confusion about what that ball should be relative to the balls rather. But if you know what you're doing, you can price very well what that day is relative to everything around it. You can isolate that event fall. And then that event volume, you can really determine at different periods if it gets really low or really high relative to what's around it. You can isolate that event fall for a really cheap price. So that that's my favorite way to do this. Once you do that, I love being long cheap ball for events. uh you know you often have to kind of wait till the event like you know itself to to to get benefit from the gamma uh but but yeah

22:23 owning that gamma for the event uh yeah obviously depends depends on the event and depends on how cheap you can get it if you have that chance but I'm always looking to do that when I >> yeah makes sense I think that's the way to roll a lot of times I mean sometimes you know being in the event when the event's happening isn't always cracked up to be as many times I've done that I can honestly say That's not necessarily all it's cracked up to be, man. Well, um yeah. Oh, you know what? Last thing before we go, I do want to get your thoughts on the yen intervention this week. Um big move we saw the other day, obviously. Is that more the US playing back into the yen or what's really going on there? What's your read? >> Yeah, my read is is uh you know, they have said they will do whatever it takes. They put a 60 billion dollar uh fund there. I mean, it's been very clear

23:10 there's it's it's not just that one intervention. and they've said they interveneed and then they said we've created a fund to continue to support it. They're not going to tell you every time they're actually intervening. They told you they they're doing it though and so 100% they're they're backstopping it. Part of that signaling part of it's actually doing how much is Japan doing it versus the US, you know, does it even matter? Uh the point is the point is they are uh intervening and doing whatever they have to do to make sure that Japan is not selling US treasuries. That simple. Um no they will increase that by the way uh they have been clear the Treasury general account right is uh you know essentially trillion dollars they have unlimited firepower if and when they want to deploy it question is they they want to

23:56 find the right point uh to deploy it you know if you're bes you don't want to be pushing on a string you want to wait till things get you know the shorts get in people believe things are going down. You build, you know, build risk in the system, turn shorts in, and then you can turn it. That's what they've shown that they do, and that's his approach. It works. I get it. Uh it's a smart move, candidly, if you're looking to control markets. Uh sometimes you got to let it go to turn it. And again, sounds sounds conspiratoral. We live this is the world. Clearly, they are invoking they are being public about that. They're intervening in markets and trying to control markets and we know why we have a hedge fund manager as

24:42 treasury secretary and as head of the Federal Reserve. So they are doing this. This is their methodology. Um uh and uh they will respond one way or another but they prefer right now for things to come down a little bit so they can turn it. If it doesn't come down in this window they are not going to wait till October. It's too close to the midterm. They don't want a crisis going to the midterm. they want things going in October into the midterms the right way. So that's not far away. That's less than a month away. So this is, you know, what drives my view that yeah, they'd like a decline here. Uh but but you want to be buying that dip is it uh you know and that window every day goes by closes and the best level of you know best period of uh kind of flow support is is in this

25:29 window. And so if we don't get going down and activate that downside, like I was saying before, uh the market's going to start buying and they're going to be buying on the back of it. But if you get a big dip, it's a dip to be bought. This is the period that it would have been happening. Let's see. You still have a chance here for a 1% type pullback today. That could start to activate uh that that decline Friday into Monday. Sometimes you get that, right? Uh but but if you don't, again, you're getting a nice little extension here. Let's watch. But if you don't late Friday here, you want to be buying it. Now, if you get a one and a half, one to one and a half% decline starts to activate. Volvall starts to pop, you could get an extension Monday, Tuesday, we could get that decline we've been talking about. But you're at this really important pivot point where um unless big words,

26:18 unless they get going today, literally today uh into Monday into Tuesday, I apologize. um you know not going to activate because once you get into Tuesday uh those flows start coming in supportive and then it's getting too close to that October window uh and they're going to start really plus you have the Fed which I believe will give positive news uh that Wednesday opex so it's like you look at the calendar times time is ticking and it's like now if they want that bigger decline that ball expansion to turn it's going to happen right now like today and I would say down a half a percent with V compress. That's a hard bet to make. >> Time is ticking indeed. Jim Carzan, thanks for your insight, sir. Appreciate you coming on. We're going to not we're

27:04 not going to be on Tasty Crumbs on Monday. It's a long weekend, but we will see you on the network next week. So, uh, have a great >> Have a great day. Long weekend. You, too, buddy. Talk soon. See you, Jim Carzan.