Strategic Assets Are Convex: Cem Karsan on the Rotation That Started Jan 2, 2026

Introduction and Setting the Scene

Casual Banter and Location

• Jim joins from Chicago, where both hosts express a desire to meet at the Bean in warmer weather.

• The current temperature is noted as frigid, but they are comfortable inside their studios.

Reflection on Previous Episode

Audience Engagement

• The host mentions reading audience comments from the last episode, which he admits is something one should avoid.

• A humorous take on comments includes references to ASMR-style delivery of disturbing news, suggesting a calm demeanor amidst chaos.

Transitioning to Market Discussion

Excitement for Collaboration

• The host expresses gratitude for being invited back and excitement about future collaborations with Jim.

January Market Overview

Observations on Market Trends

• Discussion begins on January's market performance; S&P has dipped slightly while other sectors have seen declines if not involved in essential goods like soup.

• Notable mention of a significant shift in market behavior starting January 2nd, indicating a clear change in trading patterns.

Strategic Assets vs Hard Assets

Importance of Asset Types

• Emphasis on the growing importance of strategic assets amid rising interest rates and supply constraints due to globalization shifts.

• Highlights that these strategic assets include technology and defense-related items, not just traditional commodities.

Demand-Side Economics Shift

Structural Economic Changes

• Acknowledgment of a broader move towards demand-side economics influenced by political changes since 2010 (e.g., Occupy Wall Street).

• Discussion about how younger generations have only experienced low-interest rates and globalization, shaping their economic perspectives.

Historical Context of Economic Policies

Critique of Supply-Side Economics

• Analysis of past economic policies under Trump as an attempt to counteract demand-side pressures through supply-side measures like tax cuts for corporations.

• Recognition that such policies may lead to painful adjustments for markets as they navigate shifting political winds toward demand-driven growth strategies.

Political Populism and Economic Trends

The Rise of Populism

• Discussion on how populism has influenced political perceptions, with a focus on the discontent among voters regarding promises made by leaders like Trump.

• Many Democrats initially hoped for positive change under Trump's leadership, but this optimism proved unfounded as his popularity declined significantly.

• The resurgence of distrust in government is linked to long-standing issues, leading to feelings of betrayal among citizens who feel they have been misled.

Historical Context and Predictions

• Reference to historical patterns during populist eras (1962-1982), highlighting instability with frequent changes in leadership and the potential for violence against leaders.

• A prediction made about rising public dissent towards Trump, indicating that societal tensions are escalating.

Economic Shifts and Market Reactions

• Introduction of a shift back towards demand-side economic models, impacting market trends such as bond yields and commodity prices.

• Notable recovery in previously struggling sectors like consumer staples indicates a cyclical shift driven by both defensive market strategies and inflationary pressures.

Strategic Economic Movements

• Emphasis on the need for the U.S. to adapt its economic strategies in response to global competition, particularly from China.

• Discussion on Trump's tactical pivot back towards supply-side economics while needing to address demand-side factors ahead of midterm elections.

Implications of Populism on Global Relations

• Analysis of how protectionist policies tied to populism may lead to increased global conflict as nations become more insular.

• The U.S. is urged to recognize its position within global markets and respond strategically as it begins moving toward necessary investments in infrastructure.

Future Outlook

• Anticipation that U.S. actions will have significant implications globally due to its economic dominance; caution advised regarding potential conflicts arising from isolationist policies.

• Assertion that fiscal spending will likely increase as part of a populist agenda aimed at stimulating the economy through direct support for citizens.

The Impact of Populism on Political Cycles

Importance of Election Cycles

• The period from 1962 to 1982 saw a significant increase in presidential turnover, with an average of five presidents serving four-year terms compared to the average of 7.2 outside this timeframe, highlighting the critical nature of elections during populist periods.

Performance Trends During Elections

• Presidential years between 1962 and 1982 yielded double-digit returns, averaging 21.5% annually, while midterm years experienced negative returns averaging -8.5%, indicating a stark contrast in market performance based on election cycles.

Political Influence on Market Dynamics

• The speaker notes that political events significantly impact market outcomes, especially during populist times when risks are heightened; thus, understanding these dynamics is crucial for investors.

Parsing News Signals

• Investors face challenges in distinguishing between noise and meaningful signals from political news; recognizing structural trends versus temporary distractions is essential for informed decision-making.

Generational Economic Disparities

• There is a growing inequality affecting younger generations who have not had the opportunity to accumulate capital like previous generations (e.g., baby boomers), leading to significant economic dissatisfaction among youth.

Populism's Roots in Economic Inequality

• The discussion emphasizes that current political sentiments stem from generational experiences with increasing inequality and globalization, driving demands for fairer systems as younger generations struggle with wealth creation and household formation.

Political Anger and Its Consequences

• The anger directed at political leaders stems from unmet promises to fix systemic issues; this frustration fuels further populism as citizens feel increasingly disillusioned by traditional politics.

Protectionism and Global Conflict

• Populism also manifests through protectionist policies and domestic focus over global concerns; leaders prioritize their constituents' needs over international stratification, impacting broader economic strategies.

Global Capital Flows and Political Dynamics

The Impact of Global Conflict on Capital

• Money tends to flow towards regions with lower global peace, highlighting the importance of safety in capital allocation.

• Increased global conflict and protectionism lead to a supply-demand imbalance, resulting in higher interest rates and slower economic growth.

• Prioritizing median outcomes for fairness can slow growth, while focusing solely on growth can exacerbate inequality.

Philosophical Perspectives on Resource Allocation

• A philosophical question posed by Socrates: Should the best violinists receive the best violins or should everyone have access to violins?

• The discussion suggests that increasing production (more violins or widgets) benefits society as a whole.

Geopolitical Considerations: Iran and Venezuela

• The speaker discusses the geopolitical implications of U.S. actions in Venezuela and Iran, emphasizing strategic interests over humanitarian concerns.

• Both countries are significant due to their energy resources; controlling these supplies is crucial for U.S. interests.

Energy Resources and Strategic Advantages

• The U.S. has abundant oil resources compared to China, which relies heavily on energy imports from Russia.

• China's limited energy access makes it vulnerable; they are encircled by geographical barriers that complicate resource acquisition.

Challenges Facing China’s Energy Strategy

• Despite attempts to diversify through nuclear projects, China's energy strategy faces long-term challenges due to project timelines (10–15 years).

• Iran's relationship with Russia complicates its role in global energy dynamics; both nations' cooperation is driven by mutual needs rather than ideological alignment.

Regional Dynamics in the Middle East

• Understanding Middle Eastern geopolitics requires recognizing various players with differing incentives; historical alliances shape current relationships.

• Saudi Arabia's collaboration with Israel represents a significant shift in regional politics, impacting U.S. foreign policy strategies.

Middle East Dynamics and Power Shifts

The Role of the UAE and Internal Conflicts

• The UAE has historically supported anti-Iran and anti-Russia actions, aligning closely with the United States. However, internal conflicts among Emirates have weakened their position.

Turkey's Strategic Positioning

• Turkey has been maneuvering between alliances, acting as a vassal state in Syria to counter Russian influence while maintaining ties with the US.

Changing Alliances in the Middle East

• Relations between Turkey and Saudi Arabia have improved recently after a period of tension, particularly following events like the Khashoggi incident.

• Turkey has formed a strong alliance with Qatar, especially during past blockades by Saudi Arabia and the UAE.

Regional Unity Against Israel

• A notable shift is occurring where countries like Saudi Arabia, Turkey, Qatar, and Syria are uniting against Israel despite historical tensions.

• This coalition aims to prevent Israel from gaining excessive power in the region while also being cautious about Iran's potential collapse.

Implications of Iran's Stability

• The stability of Iran is crucial; its collapse could lead to significant regional instability and refugee crises that neighboring countries want to avoid.

Future Prospects for Peace Deals

• There is an increasing likelihood of peace deals emerging from these new alliances rather than regime change in Iran.

• The US may be losing leverage over Iran due to regional unity against it but still seeks to redirect oil flows away from China.

Market Reactions and Predictions

• Achieving a peace deal could stabilize oil markets; however, current market predictions may not align with actual outcomes regarding military conflict or oil prices.

Conclusion on Geopolitical Trends

• Overall trends suggest that while there are high probabilities for diplomatic resolutions in the near future, unexpected developments could alter this trajectory significantly.

Discussion on Market Trends and Geopolitical Impacts

Key Insights on Market Movements

• The speaker discusses the implications of going short into a Friday, anticipating potential deals over the weekend that could influence market dynamics. This situation is contrasted with previous discussions about Venezuela, highlighting its unique impact.

• A structural rotation in global assets is noted, emphasizing the importance of geopolitical realities and volatility. The speaker questions whether upcoming discussions will focus on a peace deal or other significant events.

• The ongoing conflict between China and the US is identified as a persistent trend affecting markets, overshadowing specific events like the SB peace deal.

Economic Policies and Their Effects

• Increased fiscal policies are anticipated for the year, particularly concerning housing affordability. The speaker suggests that addressing this issue may lead to populist measures such as financial assistance for first-time home buyers.

• Such fiscal spending could significantly impact inflation rates by injecting money directly into the economy, leading to increased demand and economic activity.

Interest Rates and Market Predictions

• A warning is issued regarding rising interest rates compared to historical lows in 2021. As debt rolls over at higher rates (5% vs. 0.5%), liquidity issues may arise in markets.

• Historical context is provided by comparing current market conditions to those from 1962 to 1982 during midterm years, suggesting potential challenges ahead for market leadership.

Long-Term Outlook

• The discussion highlights ongoing trends that have been developing over several years, indicating that some sectors may continue their upward trajectory despite recent downturns.

• A broader perspective on future societal changes is presented, suggesting that current events are just early signs of more significant transformations expected over the next decade or longer.

Conclusion and Future Discussions

• The conversation wraps up with reflections on historical societal unrest and predictions about future developments being part of a long-term process rather than immediate changes.

• Closing remarks express gratitude for insights shared during the session while hinting at more engaging discussions in future episodes.