You're about to join Niels Kaastrup-Larsen on a raw and honest

journey into the world of systematic investing and learn about

the most dependable and consistent yet often overlooked investment

strategy. Welcome to the Systematic Investor Series.

Welcome and welcome back to this week's edition of the Systematic

Investor series with Cem Karsan and I, Niels Kaastrup-Larsen,

with where each week we take the pulse of the global markets through

the lens of a rules based investor. Cem, as always, great to

be back with you this week. How are you doing? How have you been?

Well, I'm in Dallas on the road today, going to see family in

Houston. So, back down in Texas and nice warm weather down

here. So, it's, you know, getting away from Chicago in early

March is not the worst thing. But yeah, speaking at my alma mater

at Rice, which will be kind of fun in a kind of full circle moment,

which is always good.

Very cool, very cool. Good to hear. Great. Well, we got a great

lineup of topics that you brought along. So as usual, we'll

be tackling them in today's episode.

Butas always, I think maybe

at the moment, in a sense, with all the things that goes on

in the world, I'm always curious as to kind of what's caught

your attention or what's been on your radar the last week or two

that's not necessarily related to what we're going to talk about,

although it is difficult to separate the world from the topics

we cover. But still, is there anything that in particular sort

of caught your attention?

Yeah, I think really for the last month or so, the kind of move

from the crack in the armor of kind of that American exceptionalism.

I think we’re starting to see some other markets perform better

is a big part of it, which is, you know, in the context of America

first is an interesting, reflexive development. One that we

actually kind of talked about, by the way.

Notsomething that is

a complete surprise to us, but I do find it interesting. I think

there's a lot to talk about and unpack about kind of what's happening

and why and how we're likely to kind of mean revert from some

of these records in the years to come.

Yeah, I agree with that. And, and I hope I wrote down to ask you

towards the end because now people love to hear your thoughts

about what may happen in the near future. But we'll come to that,

more about that later. Now, for me, I mean, I completely agree

with you. There are a couple of short things that I'd noticed

on my side.

Oneis that when you look at what's going on right

now and all the various leaders around the world doing their

thing, something that maybe not so many people talk about, but

it's almost like President Xi is kind of becoming a little bit

of the anti-Trump. He's kind of really trying to fight for free

trade in an odd way and trying to push lower tariffs on some of

their trade partners.

So,I just thought that's an interesting

little thing that maybe not too many people are noticing right

now. We'll probably come to that later, and feel free afterwards

to comment on it.

Theother thing, of course, I noticed, I think

it was last night Trump signed some kind of another executive order

to establish this crypto reserve in the US. Not a total surprise,

but interesting development. I noticed something maybe closer to

my side of the table, that Bridgewater, and actually this is

not new news, but it's news to me. And that Bridgewater I think,

has been working on coming out with their all-weather product in

an ETF form with State Street. I thought that's interesting for

various reasons.

Andthen finally, and this is maybe a bigger

topic which we don't have to discuss today, but I always love

to hear your thoughts. It's something that it really settled

for me in my own mind on a flight back earlier this week when

I was listening to Grant Williams latest episode on his podcast

with Ben Hunt. I mean, both of them have been guests on our show

and they're very interesting, very thoughtful people. And I think

what they hit on the nail is really this thing about that moral

is fast disappearing out of this world.

WhatI mean by that is

that, and I've talked a little bit about it in the last few weeks,

but it's actually something that I've observed for quite a while,

and that is that we are now seeing people just do things because

they can, not because it's the right thing to do. Which of course

ties a lot back to, from a European point of view, at least,

what we are seeing happening after the change of administration

in the US. You name the Mexican Gulf, the American Gulf,

because you can. You want to meddle with Greenland because you

can. You probably want to take over the Panama Canal because you

can.

Imean,so for me, it's really interesting and it's something

that I think has much wider consequences. You've talked a lot

about populism over the years. This is Maybe a part of that wave

we're seeing now. In any event, it's something that is taking

up a lot of my thinking because I think we're very much at

the crossroads in many ways.

Yeah, I mean, I think, you know, this is all driven by one man.

I want to be clear. It is a response to the populism and the

‘burn it down’ mentality, and where we are. But I do think it,

it is a move that is transactional. You know, we're moving

to a world that is transactional. That's essentially

what you said.

Andnot that it hasn't always been that, but there's

been some semblance of, hey, you know, give up something in the

short term to maybe get something better in the long term,

and we work together, and maybe one plus one equals three,

opposed to trying to get one and a half and get you to a half.

And,I just think, yeah, we're in a transactional mode because we

have a transactional leader and you can argue whether that's

good or bad or not.

You know, but in fairness, in a sense, for me, this is actually

something that has started way before the last change and maybe

even before the last time Trump was in the office, frankly.

I mean it has been brewing for a while. It's also this, you know,

dramatic decrease in trust in what we are told, even by authorities,

all of that.

Soanyways, it's not for today's conversation, but

you know, these are the things that I'm thinking about at the moment.

I think they're important and I think that they will play a role

as we go forward. Before we dive into the topics, let me just

quickly give an update from the trend following world, so to

speak.

Ithas been a difficult few weeks in trend following land,

mainly currencies, US Fixed income, and US equities in particular

have been kind of where the challenges have been. But there's

also been some interesting currents starting to happen, not

least in Europe where the wave of debt that's probably going to

be offered to pay for the expansion of their defense over here

is certainly having an impact on long term bond yields in Europe.

And so interesting evolution right now.

Myown trend barometer

finished at 50. That's kind of an improving level in the last few

days. Hopefully we'll see that in performance in the next week or

so. From a performance perspective, The BTOP50 index is

up 46 basis points for the month, up 34 basis points for the

year. The SocGen CTA index up 31 basis points for March, we're

in March, but down 1.46% so far this year. SocGen Trend index

is up 16 basis points, but down almost 3% for the year. And

the Short-Term traders index up 1.2% in March, but flat for the

year.

Intraditional world, MSCI World is down 1.96% for the

month, but up 62 basis points for the year. 20-year Bond index

from the S&P in the US is down 1.83% this month, but still up 4%

for the year. And the S&P 500 Total Return index down 3.6% as of

last night, and down 2.22% so far this year.

Allright, Cem. So,

in a sense, I think the first topic you brought along is something

I think we can all feel at the moment, but we may feel it and we

may think about it a little bit differently because it certainly

seems like that the world and the world economy is facing some

headwinds at the moment. So, talk to us about the current state

of play from your perspective.

You know, let's start in the US There, you know, we have a new

administration obviously that realizes that the next four years,

the setup is very bad for them given that there is a stagflationary

setup. Inflation was starting to break out as they came in. Again,

the 10-year was breaking higher. There was a significant move

coming into January, over the course of a month, month and a half.

And,you know, that was forcing monetary policy to not just

pause but think about, okay, do we need to go the other way? How

are we going to deal with this inflation?

Ontop of that, I had

mentioned this separately here, and in other places. But, you

know, starting in about three to six months there is the five year

anniversary of the low in interest rates and a massive bubble

of refinancing and people coming to market, whether it's venture,

or private equity, or in bankruptcies, were it’s starting

to tick up. So that whole setup, they fully appreciated, was

very dangerous. And, you know, this isn't the same administration

from 2016 to 2020. You have a big corporate elite involved in it.

You have Bessent and some adult leadership on the Treasury

side.

Youknow, you have an administration that is really thinking

and has had time also to think about where things are going and

where things go. And so, Bessent has come out and been very,

very vocal, very clear about what they want to do in order to

get out of this mess.

Andthat is look, we need to get demand down,

we need to get the 10-year under control. That’s the first priority,

only priority for them right now. And the way they're going to

do that, and again he's been very clear. There are many videos

I can source and point to that show the same exact kind of direction.

They say, they obfuscate the language a little bit to your average

person but it's pretty clear if you listen to it which is we need

to take money away from people at the bottom, we need to pull demand,

and we need to respond with supply side economics. They're like,

well, it worked for Reagan, you know, this is the only way we're

going to turn this boat around.

No,I don't think they have

as good a demand, an understanding of history and, and

kind of the political whims or maybe they think they can control

the political whims, and that's up for debate. We could talk

about that. But they do know that the only cheat code in the whole

system is supply side economics.Why? We've talked about

that here. But just to be clear, because if you send money

to the top, it's not inflationary, those people don't

spend. It's asset inflationary, and asset inflation

actually reflexively pushes kind of demand in the whole system

as things go up - provides more and more capital to the top

and corporations and bigger profits etc. So that's the response.

And they've also shown us through the budget, right?

Youcan

tell me what you want to do all day long but, you know, show

me, right? You know, we have a saying here in the US, I'm from Missouri,

which means it's the ‘show me’ state which means like show me don't

tell me. This is not a political comment, these are facts.

They’re shutting down Snap payments, so, payments of food to

the poor. They're cutting housing, poor housing support. They

are taking away school lunches from public schools. They are cutting

Medicaid. And then they are on top of that cutting government workers,

from the system. Those are all taking directly away from demand.

Additionally,separate from the budget, they stopped all payments

to Ukraine, which are meaningful, significant that were

in process. Everything that's been kind of sent, which is actually

going to US contractors, right here in the US as well.

So,there's

a direct attempt to really cut any fiscal money coming out and particularly

to the middle to lower cohorts. And then, you know, what

are they doing in terms of stimulus?

Well,they're continuing

the massive tax cut for corporations. 90% of those tax cuts

go to corporations. They are taking down regulation, so they're

cutting the IRS and, and tax oversight. So, that's actually an

even bigger tax cut. They are thinning out consumer financial protections.

Theyare taking out any regulation tied to, again, the beneficial

ownership of companies which was required to be disclosed has

been removed. So, there's a full kind of deregulation of corporate

oversight as well as stimulus. So now the problem here is twofold.

Ifyou do supply side economics and you kind of, go away

from sending money to demand instead of to supply, yes, that's

a cheat code. It works for, in the long term, getting things going

in the right direction for markets, and you can bring down inflation

at the same time.

There'sa big problem is, one, that's not what

they voted him in for. You know, that's not populist. That's

the opposite of populist. And my guess is that people could have

the wool pulled over their eyes with social issues and other

things for some time, but at some point, you know, this is not

a 70/30 Trump world. This is a 50 to 48 Trump world. And, and with

time, that, I think, will be a problem and there's precedent for

that. We can dive into that in a second.

Butthe other problem,

which is more timely and more kind of short term is those two things

don't work on the same timeline. The demand removal, you

take checks that people were getting away next month, that money

just isn't there and it cuts demand dramatically. We've seen GDP

expectations for the first quarter in the US go from around

3.5% positive to almost 3% negative in like two months.

It'sdramatic.

Real estate values in Washington D.C., which is obviously

very specific to the DOGE kind of cuts and everything else, are

down 20% in a month. 20%, that's a huge move for a major metropolitan

center.

Andthat demand cuts very quickly. So, GDP, you know…

And they're doing it early. This is on purpose. They're doing

it early to, you know, be able to point the finger at the last guy

and you know, then take credit for fixing the problem.

Onthe other

end, the supply side stuff takes a while. It doesn't happen

overnight unless it's QE. QE can hit markets a bit quicker, but

particularly to the economy It has a lag. It can get corporations

moving, but the, you know, kind of trickle down and whatnot

is less severe.

Andso, my guess is that they're hoping the

markets go down so they can also do QE and balance this quickly.

And they want that sooner rather than later. Actually, Bessent

has been quoted, maybe 20 times at this point, as saying 6

to 12 months, 6 to 12 months, like our timeline is 6 to 12 months.

So,I think they really are looking to manufacture a decline

in markets and the economy to force the Fed on board and also,

you know, not only stop QT, which I think will stop in March

here, but quickly.

AndI think it's probably in three to six months,

because he says six to 12 months, that they'll be responding

with QE before too long, or at least some version of it. There are

a lot of ways to express that, that's not directly QE. So, again,

this has been well telegraphed. I'm not like projecting.

There are plenty of things pointing in that direction. But again,

the problem is twofold.

One,there's a timing issue, and

markets themselves reflexively take out liquidity from the system,

and you have to respond with a lot of QE to move things. And you

know, is the Fed willing to turn that quickly and to be that

aggressive?

Howdeep is a recession, and how deep a market

decline do you need for that? It could be dramatic, could be significant

before that comes on. And you're dealing with this, as I mentioned

before, at the top of the show, that with a big liquidity overhang

that already exists, the world needs to come back in.

Andwhether

it's IPOs or venture capital, private equity, or commercial real

estate, there's a massive refinancing reinvestment cycle where

liquidity is kind of coming off the table. And that's happening

right at the same time. And that's actually starting, not right

now, it's starting in about three to six months.

So,are you

going to be able to counteract all of that overhang of liquidity?

It's a good plan if it works, but can you control it? And then,

lastly, what about all the other effects that we're not talking

about, like the dollar?

Whatif the dollar doesn't cooperate?

And they're starting to talk more about the dollar, by the way,

just this last couple days. They want a strong dollar all of

a sudden. They're being very vocal about that.

Theyknow that

the Achilles heel of this whole strategy is if the dollar sells

off, they're not going to be able to control the inflation. It's

going to be a real headwind, a major way. And austerity plus QE

plus… tends to correlate with a weaker currency.

So,obviously,

in the US, you could argue, a reserve currency, maybe not. But

there's plenty of a cases out there. If we, if the US, starts to

go into massive kind of free fall economics, GDP wise, and the

rest of the world is kind of hanging in, and we're responding

with QE and lower interest rates, that's not good for the dollar.

Everything points to the dollar kind of coming down if that's

the case.

Yet,they're sitting in there starting to say we want

a strong dollar. Well, I mean, okay, maybe you can manipulate the

markets and try and hold them and who knows. There are plenty of

levers of power, but sometimes the markets are bigger than you can

manage.

Ifthe Fed and the government could always handle the

volatility in markets we would never have any. And we know that's

not true. So, color me skeptical. What’s clear is the first

step, which is moving demand out of the system and that moves

very quickly. And GDP is, you know, we're heading into something

that looks like a recession very, very quickly.

But isn't it a little bit counterintuitive? You think you can

lower yields and maintain a strong dollar.

Correct, that's what I'm saying. Yeah, I'm saying the same

exact thing.

Yes, I mean, but it sounds crazy. You have these smart guys

coming out with that objective.

The reality is markets are relatively efficient and you can

try and manipulate, and try and do X, Y, and Z, but market adjustments

on the other side, unless you run a kind of a closed system where

you can control everything like China, you know, it's very hard

to control the rebalancing that then takes away the benefit

of what you're doing. That's just how markets work. And so, yeah,

it's going to be harder than they think, in my opinion.

Andyou

know, there's, like I said, historic precedents for this. Nixon,

and we've talked to Trump as Nixon as an analogy, maybe beat it

to death at this point. But I do think it's incredibly relevant.

We keep seeing the same dang things. And what did Nixon try and

do when he came in in 1969? What were his policies?

Bythe way,

the real push, inflation started during Nixon. It had started

before, but it was really kind of coming down. And then it really

took off during Nixon's administration.

Andwhy did it start

during Nixon's administration? It's weird because think about it,

Nixon came in as a Republican. He said, look, this inflation's a

problem. I need to do supply side economics. What did he do? He

opened up China. He did Bretton Woods, which is the original

QE, allowed the US to readjust their payments.

Andthen on top of

that, he brought in Arthur Burns, and started doing heavy kind

of monetary policy. You can argue he definitely didn't try and

cut demand as much as this administration is. He tried to keep

that demand going while still stimulating on the other side - the

monetary policy side. But he really did that in the face of a

recession that was already happening. So, he didn't have to

slow demand. Demand was already slowing on its own. You know,

we had a recession in ’69, ‘70.

So,you know, we saw this and,

and how did it work out? Well, it ended in price controls, and Watergate.

And the angry mobs only got angrier as we went into the early

‘70s. I think it's important to politically not lose sight of

the things that we know. Politically, every four years we

have a dramatic increase and it's an increasing rate of increasing

of baby boomers die and millennials increasingly becoming

the dominant political force.

Trump'saverage voting age, the average

supporter is 52 years old, 53 years old. That's because he has

a lot of older voters, a lot more. And, you know, he came to power

with a ‘burn it down’ kind of mandate, and he's burning it down

all right, but is he burning it down in the way… Do people understand

what burn it down means?

Idon'tthink so. I think they're just

angry. And you know, that anger, that emotion is leading to

a window to dismantle a lot of the services that actually go to

those people. And if you respond to a populist rhetoric with

the opposite of populism, which is, you know, supply side economics,

that's the thing that caused all the anger in the first place.

And so, you're not solving the problem. It's only going to make

people more angry.

Andpolitically, you know, the odds

aren't, in any administrations, whether it was Trump

or somebody else, the odds aren't in the favor of making people

happy regardless. You know, there was actually populist progress

despite a lot of the dysfunction of the last four years.

People were still unhappy because of the inflation. So, this

has got to play out over a period of 10 to 15 years, this kind

of populist thing that we've talked about.

Andyou can divert

the path, you can try and fix the rock in a hard place that puts

the administrations in. But the more you do that, the more you're

going against the political will and making people angrier.

So,I

think that's a problem. I think, you know, there's one of two

paths, to talk short term path, because I know people always

want to think about that, like what does that mean for the next

year? I mean, I think they both lead to the same place.

Butone

is, you know, the 10-year continues to come down as GDP responds

even worse than expected here in the US, you know, and then QE

isn't big enough. You don't have enough of a response. And so,

markets kind of fade because of just a deeper recession than people

expect, coming quicker than people expect.

Butthere's another

one which is, okay, they get the markets down, they get the economy

down, and in a couple of months when we're officially in recession,

QE or monetary policy responds aggressively, and aggressively enough

to really juice markets. But then, right as that happens, you're

getting this big refinancing period where there was a ton of demand

for debt, and the 10-year then goes back above 5 relatively quickly.

I think that's the one thing nobody thinks is possible right now.

I think that's a higher probability than people expect right

now.

Verycounterintuitive into a potential recession. But I

think again, it's a supply and demand story. And if that were to

happen with a recession and the QE response, I mean that's really

bad, that's even worse for markets.

Soyeah, you get a rally

back and a knee jerk and you know, everybody's oh, maybe things

are not so bad and then it gets worse because you know, the

ten-year kind of brings things down.

So,I think those kind of both

lead to a bad place. Again, our view has been pretty clear that,

you know, we think that a bigger decline is coming. I'm not

saying that this is it, here. I think this is kind of that warning

shot and we again, we time this to the almost the day Feb Opex

was the start. Not a coincidence everybody points to but

the window had opened. All the mix of a combination of things that,

you know, this macro stuff I was talking about was all on the

horizon. We could see it coming but the timing is very important.

So,I think yeah, Feb, March here has been the window for some

pullback, some initial kind of vol expansion, a bit of a, again,

warning shot which we often see before a bigger move, months

before a bigger move. Whether it's ‘99, you know, or you go into

‘07, you have similar things like that.

I'mnot saying that, you

know, these are the same, it's a different kind of move, but I do

think a bigger one is coming and I think it's coming in this year

or sometime in the next, call it 12 to 18 months, I think. And

we're not talking about garden variety 10%, 20%. I'm talking about

something bigger.

Yeah, so we'll definitely come to that. I want to flush out a little

bit more about this. I mean, you know this much better than I

do. You follow it probably also much closer. But, in what you're

saying is yeah, they can kind of engineer, or they'd like to engineer

some kind of recession. Okay, that's fine. Ten-year yields can

come down like that.

Partof it is, also, I imagine that they

probably realize that they need to get the current account deficit

down, save some money. But there's another way of saving money

and I think it's been talked about as the Mar-A-Lago Accord, something

to replace the Bretton Woods Accord, meaning forcing your, I don't

know if allied, former allied (whatever we define them as) to basically

buy 100-year bonds and get zero interest on that debt. So essentially,

in this case, the US would save a hell of a lot of money in

financing the deficit. Is that something you pay attention to? Do

you think it's realistic or is this just kind of the rumor mill

and saying, oh, yeah, they can get away with something like that?

Yeah.

I mean, I know it's pure speculation.

You're the third person who's asked me about this in 24 hours,

which I think is very interesting. It's always interesting

when that happens. Yeah, I think it's a lot of… First of all,

do you think Europe's going to do it?

At this moment in time? I'm not so sure. Had you asked me a month

ago, maybe.

Yeah. Not too politically popular. You know, it's a bad look

for everybody. And at some point, you know, everybody, all the

“allies”, like you said (I used air quotes) will get together

and just say, hell no, we won't do it. And the US can't do

it fully alone as much as it likes to think it can.

Atsome point,

the rest of the world combined is bigger than the US. Like, it's

that simple. And I think it's super naive to think that you can

bully everybody into doing whatever you want. You can't.

Atsome

point the rest of the world will get together and just say no,

and you know, start pulling you back. So, yeah, I mean, again,

I think that's highly unlikely. I think it's speculation.

Now, I do think, you know, where there's smoke, there's fire.

I think things like that are on the table.

WhenI say things like

that, what am I talking about? I think we are heading towards a

likely (for lack of a better term) debt jubilee. That sounds really

dramatic. But what does that probably look like in practice?

Ithinkit looks like what Japan did, or something along those lines.

And it's not overnight. Jubilee makes it sound like it's

instantaneous event. I think it's a slow rolling train wreck.

I think, you know, we're going to monetize our debt in some form

or another. There's only one way out. And with the exorbitant

privilege of the US dollar, or at least while we still have it,

you can do that. And if Japan could do it, I'm guessing the US

can do it. But understand, Japan did that and was able to do

that with the backing of the United States. And I thought it was

really when…

When you say they did that, I want to understand exactly what you

mean because from my understanding is that they haven't

done it technically. They're just… It's just a BOJ buying all

the debt.

What's the difference?

Well, it's not canceled. Do you know what I mean? They could

probably cancel it out, I imagine. Of course with a piece of

paper.

Yeah, of course they could. They could hit a button on a computer,

and it would be gone tomorrow.

Yeah.

And it would have zero effect. It'd be just like from one or the

other.

Sure.

That's why that 250%, whatever it is, GDP…

In their case it doesn’t really matter.

It's irrelevant. And honestly, it doesn't mean that much in the

US. We have, I think it's 27% of US debt is external of which,

by the way, Japan I think has 8%. So, you know, and again, going

to Japan early, and those conversations, and then coming back

and saying things like, turns out we don't have as much debt as

we thought. You know, I don't think that's a coincidence either.

Ithink,I think the roadmap is Japan's going to play a much bigger

role in this whole debt jubilee than people realize, first

of all. There's going to be some cancellation of external debt

from Japan. You can bet your life on that. The Japanese central

bank will be involved in doing whatever it needs to do along the

way. And again, I think we'll cancel the other 73% of internal

debt in some form or another.

Again,it's not this simple. Again,

people are going to at me and kind of be like, come on, you can't

do this. Blah, blah, blah. Technical, this really talking like

big picture. Like, there are ways, and in a world where, you know,

in a Trump transactional world where you don't really care about

orthodoxy, you're going to do whatever, they'll do it. They'll

find a way. Just like Nixon, by the way, found a way. like Bretton

Woods would never have been… You know, everybody would have thought

that was insanity to just unpin us from gold. But they did

it.

Yeah. And I think actually that you're right in saying that.

I think the last few years have shown us that, you know, the

unimaginable can happen, right? I mean, we have to be really

careful about putting limits our own imagination. That's for sure.

Yeah. And honestly, Niels, it's, it's logical. Like, it's all

incentives. The whole thing is incentives all the way down. And

if you're the US, and you have this kind of debt that's been built

up, and interest rates are going up, the payments to the budget

are XYZ and you are in an America first world, right?

Yeah.

Your objective is to get rid of those debts and to take care of

it by, you know, pushing and calling in favors and using your

muscle and your central bank to do it. And so, they're going to

do it. Just talk about how - get to the details.

Revalue the price of gold, the book value of your gold.

I've heard that argument too. I just think that gold's not as relevant

as it used to be in that context. If gold was really relevant…

No, no, but it might help on the accounts, of course.

Sure, sure, you can do that.

Okay, well, I mean, I know we've got other topics to go through,

but I actually want to maybe, stay on this but move across the

Atlantic, because the other things we're going to talk about

are maybe not so much focused on sort of the economy, and so on,

and so forth. And, obviously, you have roots in Europe, as do I.

And I think we are really also at a crossroads over here.

Andso,

from your perspective, sitting where you do, keeping an eye on the

things, in the last few days we've heard some incredibe announcements

being made in this rearming of Europe and the cost associated with

that, and everything that comes with it. Really a lot of us,

in a sense, we focus on the military side. But there's a lot

of other things that come with a change like this.

I'veseen some

people say that this is for Germany alone, it's a potential expansion

of 10% to 20% of GDP. I mean, this is not small change.

I'djust

love to hear your thoughts, if you have some, in terms of what you

think this change might lead to from a European perspective and

maybe the role Europe could play. I mean, we talk a lot about

a new world order.

Imean,are we seeing a new, new world order?

And could this be the beginning of a different power balance

if Europe succeeds with this? If they fail, okay, not good. But

hey, they might pull it off. Who knows? So, I'm just curious about

this because we often talk just about the US but I know you

have good views on more than that.

Look, Europe has… There’s one thing I think Trump has gotten right.

Europe, I think, by all measures, and it's not just Europe,

there are other entities outside of Europe, but Europe is

kind of historically our greatest ally. And, you know, our

close relationship has depended on the US way too much.

It's made it complacent.

Yeah.

It's made it unwilling to make the hard decisions because it wasn't

under pressure to do that. These are hard decisions. Like you

said, 20% of GDP like, that's hard. But resilience and strength,

more broadly, comes out of leadership. It comes out of making

the hard decisions. It comes from having a meaningful seat at

the table because you are doing what you need to do.

Andso,

I think this is a wakeup call to Europe, and I think it's a good

one. Not as an American, but as also a European. I think it's

a good one.

Yeah.

I think America needs strong allies. Not ‘me too’, allies. And

not just America, the world needs that if you believe in kind

of Western democracy and individual freedoms. And so, yes,

I think Europe, which is right there at the scene of where things

are actually happening, probably needs to have a bigger military

and probably needs to be able to take care of themselves. And I

think building that resilience, in the long run, is probably

a good thing for America as well.

So,I think the same is true

in Japan, and the same is true in other places in the world. And

I think those conversations are also happening, which I think

is important, especially given what we see in the world broadly

and how dangerous the world probably is for the next 20 years.

So, that's just the military part.

ButI think, from an international

law, from a global leadership perspective, from a business perspective,

Europe also needs to take leadership. If it doesn't, by the

way, it really is a big global question between freedom and authoritarianism

in this world. I really believe that. And I think if it doesn't,

I do think there's a risk of a bigger problem beyond 20 years.

And,you

know, Europe, which of all places kind of is the seat of liberalism

and democratic values in this day and age, needs to take responsibility.

And, hopefully, this starts at least having making those hard conversations

happen. So, I think it's a good thing for Europe too.

Inthe

short term it feels painful. But, it will get, I think, Europe

more likely out of the mud, and making kind of the harder decisions,

and being more strategic. We'll see. On the short term, obviously,

change is good in Europe. Things have been kind of dragging

along the bottom in a lot of ways. And so, I think this is probably

a good thing. And, probably again, crisis brings people together.

We've talked about this again and again, like you kind of need

crisis to get things moving in a good direction eventually.

Yeah. I don't disagree with the fact that Europe needs to be

able to fend for itself much more, and the reliance on the US

has been way too big. I guess I wish for two things.

One,that

the European politicians, although this was obviously (for

those who may not be aware of it, I hope I recited correctly),

it is kind of part of the agreement between the US and Europe

that the US would do one thing, namely the protection part,

and we would do other things.

Unfortunately,Europe should have

realized decades ago that you can't just leave everything for the

US to do and you have to, you know, do your own stuff as well,

in that sense. So anyways, that's that.

ButI agree with you.

I mean, this could be a good wake up call, but it'll be painful

and, of course, the circumstances and the way it's being

done is probably something that I…

That we can agree with. It could have been handled better.

It could have been handled a little bit differently, yeah, for

sure.

Allright, okay. So now we move to more sort of different

type of topics that you wanted to talk a little bit about. What's

really interesting, the one thing I really thought about last

week when I saw the president of TSMC or whatever they're called,

the chip maker in Taiwan, standing in the White house, signing

another $100 billion investment in addition to the $65

billion, I think he said, they had already invested in the US. Now

we're going to be producing all these chips. Now, of course,

it's a super smart thing for the US and for Trump to be able to

force them to, or maybe I should say invite them to do this.

But,the first thing I thought about was, okay, this will maybe

also change the appetite from the US to come in and defend Taiwan

should something happen. Anyways, you have something about

China and Taiwan you wanted to talk about.

Yeah, look, we haven't talked about this for a while. And actually,

when nobody's talking about, it's actually the right probably

time to talk about it. But you know, I just want to raise the specter

of, if China still wants to move eventually. They’ve, I get it,

vocally said this for some time. This is not just that that

Taiwan is a part of China and will eventually be fully integrated

into China one way or another. That's the view.

Andso, if we believe

that and the question is, well, when? Can you tell me, if you're

sitting in Xi's seat, like just in terms of incentives, when

would make sense?

Imean,if you're talking about, well, you know,

last year, right, we talked about, or last two, three years,

we said, well, they're definitely not moving until they

know the results of this election. We were very vocal about

that. You have a new president.

Andagain, similar to

what we said in December, I said look, there's a likely coming

“détente,” and like a softening of rhetoric with China

tied to the Russian kind of also relationship. That's part of

why we kind of gave the big green light on Chinese equities.

One of the reasons.

Butthat also means that… And, by the way,

Trump said this in July last year. It's actually part of what

caused a little bit of volatility to start, and then had

that August dip, was China very vocally said, well, Taiwan,

if you want help from us, you better pay for it.

AndI think Trump

has totally telegraphed that he's not doing anything in Taiwan.

He's not even sending military support because he's just removed

military support from Ukraine. If he's not sending military support

to Ukraine, do you think he's sending it to Taiwan?

So,all right,

if you single all this, and you're pretty clear and open about

this, what is the deterrent to China? Is Europe going to go defend

Taiwan? Who is going to defend Taiwan? No one. The Taiwanese. Good

luck.

So,it doesn't mean it has to be a military incursion. I

don't want to like… It may make sense. You know, it very well

could be an embargo. It could be other kinds of pressure that eventually

end in that.

Butif you think, it's eerily quiet over there, given

the incentives, isn't it? And my guess, some people might think

this is conspiracy, is that Russia wants this deal in Ukraine

done, finished, cleaned up. There's a timeline for that to happen.

It's happening. And then I would expect the next order of business

to begin.

Soput on your radar, you know, if you're not thinking

about it, you know, now you probably should be. This is the time

to be thinking about that. And I honestly think that could be this

Q4 of this year.

There'sa lot of kind of talk about… By the way,

if the US goes in a recession, the US government saying 6 to 12

months and the markets are swooning, and the end of the year,

and the US is kind of dealing with its own mess., it kind of sounds

like a perfect time to kind of do whatever you need to do to take

advantage of that big strategy.

Let's just pause with that a little bit because you say, put it

on your radar. Okay, but what are investors to do? Are they just

going to take any investments out of that region or what are you

thinking when you say that?

There’s any number of trades there and we could go…

Well not specifically in a sense because obviously we don't

want to give people investment advice and all of that stuff. But

just generally speaking, I mean are you thinking of this as

a kind of a strategic tilt to a certain part of the world, or out

of a part of the world, or what do you, what would you expect?

Maybe we should frame it like that.

Ifindthat very difficult

nowadays to actually, even if you know what the event is, it's

sometimes very surprising in terms of how the markets react. I

mean, I think a lot of people maybe were a little bit surprised

and as soon as the Fed cuts of yields on the ten-year went sky high.

Imeannot exactly what we talked about it maybe. I know but

I think you're very…

We talked about it, we were very vocal about when they do that,

the ten-years going higher.

Sure, but still, these are not kind of…

Sure, but still, these are not kind of …

Yeah, yeah, intuitive.

Yeah, fair, well, here's a small one again. This is just something

that's in the back of my mind, but how this information helps and

how you should be thinking about these things. You know, by

the way, I think it was on this show that called almost an exact

top on Nvidia when it happened, in real time. You know,

kind of on the top but is very much been pressing and we called

that as it was, you know, really…

This was related to Taiwan, right? This was when they came out

and said, if you want protection, you need to pay for it.

That was how and when you framed it back then.

Still relevant.

Yes.

And so, when people look at this Nvidia movement and they're

like, this is crazy. Look at the growth we're seeing in Nvidia.

This is a value stock now.

Youknow, first of all, everyone's

bullish and it seems like it's an obvious buy, yet it keeps going

down. Maybe you should be careful. Maybe there's something

that you're not thinking about.

So,one, I think Nvidia is

tied to all the AI stuff. If the market goes down, that liquidity

will be a problem to Nvidia. The spend, which has been dramatic

there, will get pulled back very quickly. I think that's part

of, you know, the move.

So,expectations of growth, which

are at X, just like they dramatically increase, could dramatically

decrease. But I think the other big one is, you know, there's

another shoe to fall. There's another thing sitting out there which,

you know, imagine a scenario where, you know, Nvidia is swooning

still. It continues to swoon as the market does, as the leadership

people start, you know, getting forced.

Theybuy it here,

and then are forced to liquidate even lower. And the market's

swooning. And then all of a sudden, imagine something happens

in Taiwan. Well, where's the last place you want to be?

Imean,that

might be the buy the dip event. But it's going to be a big

dip. If that's the case. You know, maybe you need to be more careful

with that Nvidia trade.

Yeah.That's one example of how to

be mindful and thoughtful of maybe risk you're not thinking about.

Yeah, no, fair enough, fair enough. All right. Then you brought

something in your notes that is kind of close to your own roots

because you talk about Turkish debt.

Yeah, I don’t talk about Turkey very often, right?

No, exactly.

Partially because it's, you know, it's an emerging, it's a bit

kind of smaller player in the grand scheme of things. But, just

to give people a little insight into something they probably

don't know much about, you know, Erdogan is up for an election

in about three years, two and a half years. And it's for the first

time in really like 20 years. There have been like, minor, okay,

is he going to get reelected, blah, blah, blah. But, like, he's

amidst a two year economic crisis. Inflation has been completely

out of control.

Imeanwe talk about inflation in the US and Europe,

you know, we're talking about 80%, 100% inflation which, by the

way, wasn't the case. It wasn't standard in Turkey for quite

some time. Inflation had been very stable, and he's managed it,

and he's done a lot of things throughout that two year period,

or two and a half year period, because he's been able to manage

it, actually, honestly, shockingly well given what's going

on. It's because of not just a strong political base but importantly

a lot of support from Russia.

Russiawas sending oil and gas to

Turkey for free, basically, not only at reduced cost but not

asking for payment. And so, there's a massive debt there. You

talk about transactional, Putin's no dummy. He knows that he

doesn't have to charge now. He's building up a debt that will

come due. And more than in financial ways. The question is when

do you call that debt and you use that debt as a bludgeon when

it suits you just right. And so Erdogan is going to be coming

under increasing pressure here.

Hiscentral bank has done something

that they haven't done in a while which is dramatically increase

interest rates in the last year. You know, hurting, yes, it

is having effect on inflation. Interest rates are 40%. He doesn't

like it. That's not what he does. The way he's built his economy

is essentially running really loose monetary policy in the face

of all these things. That's why we have inflation.

So,the question

is, you know, is he going to be able to continue to keep rates

that high? As things get worse here, you know, is he going to be

able to manage it? And again, he's managing it with external help

because he's valuable to both sides and he's been playing both

sides.

Butinterestingly, and this is, I think the important takeaway

is, what if, now, Russia and the west are not at war? What if

we're now friends, right? What if Russia doesn't need Turkey as

much and the West doesn't need Turkey as much?

So,all of a sudden

who loses power in that situation? It's the swing players.

Same applies to India as it relates to China, by the way, there's

truly going to be some detent. So, it's not a surprise that Indian

markets have not been doing well. I think India is also in bad

shape in this environment given the run and excitement there's

been around it too.

ButI actually think Turkey can really

be hurt in that environment. And, unlike India, which, its economy

has been doing great and things are, you know… Turkey's economy

was already in the gutter and everyone's coming up for reelection.

So, it's a particular kind of perfect storm in Turkey.

Now,there's

also this element of Syria and not many people talk about what happened

in Syria. We kind of skipped over that pretty quickly. But I have

a theory in Syria, again, some people will disagree with this. There's

no way to know for sure. But I have a theory that the Biden administration,

who essentially removed military support, pulled away from

holding back ISIS and kind of those forces who, by the way, for

a decade plus had been held back consistently, no problems, to

the point that all of a sudden, shockingly, they just, you

know, made their way all the way to Damascus and took over the

administration.

IthinkRussia was also busy at the time, in Ukraine

and other places. So, there's an opportunity, but the US clearly

let that happen in my mind. It doesn't happen that quickly after

all that time. And those forces were backed by Turkey. Like,

they're a Turkish vassal group, basically funded by the Turkish.

That's pretty open. That's not like a unknown thing.

Whywould Biden,

all of a sudden, do that at the end of his term? To me it's pretty

clear. You see a Trump administration who's friendly with

Russia coming in, right. And you know that the US and Russia are

going to make good and that probably means Syria goes to Russia.

Pretty clear. So, what do you do?

Well,you take the old NATO counterweight

of Turkey and you try and give them Syria to help be a counterweight

to Russia in the next administration. I think that's what

happened. I don't know that. There's no way to prove that. It

makes complete logical sense.

Ifyou just walk through the progression,

it's seems like a no brainer. You, you know, and Syria is an important

counterweight in the region for lots of reason reasons in the

Middle East. And you’d rather have a strong Turkey. At least Biden

would have, right, to counterweight Russia. And so, Turkey

of course, saw this as wow, this is a huge opportunity for us.

Erdogan is very, you know… But now, it puts him in direct opposition

With Russia as well. At a time when he already has problems. So,

he got stuck in a bad position.

So,I think Syria and the

fate of Syria could also hang (this is more of a political than

economic thing) in the balance, and become a chip as part

of this Russia. US pressure. Russia is going to also want to lean

all over Turkey. Sorry, Russia/Turkey. Russia is going to

want to lean all over Turkey for that as well.

So,I think Erdogan

is in a tough spot and I'll call it now. I think there's a decent

chance of a currency crisis in Turkey, which is the odds of that

are increasing globally with a lot of the things going on. We've

talked about that with David George. I think Turkey is a particularly

dangerous spot there in the Middle East.

Last question on Turkey. Just for my own knowledge here. Is Turkey

more important to Europe today, given the fact that it has,

I think, the second largest military in NATO and given the “scratches”

that we see in the alliance, so to speak, between the Europeans

and the US? Is Turkey more important now because of that?

It's always been important. But yes, yes, when Europe is, you

know… It’s that Turkey is in such a strategic position in the

world. It's a big, relatively big population. It's almost 100 million

people. And, yeah, I think it's always been a very strategic,

important ally, particularly for Europe, given a counterweight

to Russia. That's why it was brought into NATO. And yeah, if the

US is not going to support as much, that would be very strategic

for Europe to try and shore up. And maybe that's where the help

for Erdogan comes from, you know, counterintuitively.

Asmuch

as he's really tried to push Europe away and appeal to other countries

and other things. So, TBD. But something to watch and an important

kind of linchpin in the whole kind of global strategic geopolitical

landscape.

Let's tackle two small things before, and I say “small” in air

quotes before we wrap up today. We've talked a lot about a

few different things. But you also wanted to talk a little bit

about oil.

Imean,oil, surprisingly, we've seen all this

tension in the Middle East, and, well, globally, really. We had

Adam on, I think, last week I spoke to him.

Interestingly,unlike

gold, that has had some pretty good days and a good period, oil

has been pretty subdued in terms of volatility.

Yeah. Well, we've been saying for how many years now, three years,

the trade… And we actually said this, by the way, I don't know

if you remember, when oil vol was high because it had just rallied

big and then come off big, and gold was in the gutter and had been

very nonvolatile. Do you remember? You know, this was three

years ago or so. We were very vocal. We said look, this is all

backwards. This is raw.

Goldis not just the thing that's

going to perform better in the long run. They'll both perform well

in this decade plus environment, but it's going to be

the one that is much more volatile in the trade. We've been

very vocal, which has been an amazing trade for three and a half

years is to buy gold calls and sell oil puts. And those are very

different ways to be long of an asset.

Andso, I still believe

that to be true. I think oil has supply issues that will support

it. It also has geopolitical deglobalization, global conflict

that help underpin it. And you know, gold, as a currency, gold is

not an industrial commodity that has anything to do with demand.

Idothink oil, I'm still bullish of oil in the next, you know,

this whole kind of longer multi year period. I don't think

the ‘drill baby drill stuff,’ all the things that are kind of putting

it under pressure are the things that ultimately matter. I

think it's a short.

Theenergy trade is becoming more unpopular,

which I love. Again, I think the dollar, which is the one thing

that you're going to hear the administration try and talk more

about, is in for potential for the first time in a while, in for

some potential pain. And if that's the case, that's very supportive

of oil.

IfChina's coming back online, it's been the one thing that

in theory has been keeping demand, global demand down. Yeah,

we could go into a recession here in the US but maybe a billion

people in China are now consuming more.

So,there are some

counterintuitive things here that, again, I understand on a superficial

level does not look like a good setup for oil. I get it. But

if you start seeing kind of continued unrest in the Middle East,

stuff starts happening in other parts of the Middle East as

I mentioned, which I think probably will because, again, Russia

is not going to kind of stop despite Its newfound relationship

with the US.

Ithinkthere's a lot of reasons to believe that that

oil could, again, I don't think it's going to be a spike, it's

not going to be volatile, but could really find its footing and

go higher back towards the middle of its range that it's been

in and eventually work higher.

So,I think, particularly relative

to other assets, I think that the way it probably plays out candidly

is markets come down in the next year and energy actually kind

of hangs in and then coming out of the next, whatever this decline

is, I think energy, and oil broadly sees a really positive performance

coming out.

So, one last question, and it may sound political, it's not meant

to be political, but I'm trying to think about sort of other

things that may surprise us a little bit.

So,we know, of course,

most people listening to this podcast, of the involvement of Elon

Musk in the US administration. It strikes me, frankly, that a lot

of people do things that may benefit themselves.

Also,I think

the way that the whole tech sector in the US has kind of lined

up with Trump, I think they realize it's probably better to be

on his side than against him. And of course, Elon Musk has done

lots of things already.

Andwhat we are seeing, over here

at least, I don't know about the US, is that consumers are starting

to vote with their feet. The sales of Tesla is down a lot in the

last couple of months. The stock price of Tesla is down quite

a lot in the last month or so.

AndI'm just wondering, I mean, it's

pure speculation, of course, but I'm just wondering, can things

like that, do you think, the fact that his company comes under

so much pressure, which by the way, you would think maybe at some

point some of the larger investors, like, I don't know, the

Norwegian sovereign wealth fund, might say, well hang on, you're

spending way too much time away from Tesla on other things.

Anyways,could things like that… It's almost to the point where

you think if markets really tank, could Trump, because he loves

to be at all-time highs in the markets, even though he says I don't

look at the market. I mean, I'm pretty sure he does. Do you think

things like this could actually change policy just because

they're kind of coming under pressure in their businesses, so

to speak?

Yeah, I think if the market drops 40%, which I think it will

in the next year and a half, or 30% to 40% call it, I think there's

going to be a response. People are going to be a little bit less

friendly to the administration. And that's political

from people who are losing their jobs, but it's also going to

be from wealthy individuals who…

But I mean, also to a point where people like Trump and Musk

will change their policies because they feel that.

I don't even think it's a question. 100%.

Yeah,this is the

whole Nixon, the whole point with Nixon, like he started with

supply side economics, and I can't think of a more populist kind

of response than price controls. So, yeah, I think it's

inevitable.

Ithinkthe market, I've said this before, leads

the economy. Market also leads political outcomes. You know, actually,

I think somebody, I forget who it was, I think it's the, an economist,

who’s opinion I think I may have mentioned on here, which referred

to the market as the fifth state. You know, the fourth state

being media, which largely doesn't have as much control as it

used to. And could be a check and balance on government. And I

think it will be. I do think markets will become a check on Donald

Trump in this administration.

Very cool. Well, appreciate your insights all the way from Texas

this morning for you, this afternoon for me. And I'm sure everyone

listening out there also appreciates all of these thoughts

and insights. And of course it will be fascinating to see how this

story unfolds, the market reactions.

Andas you said, so far,

it's playing out to the way you saw it. And, of course, we will

follow up with Cem on a regular basis to see if things changes

from his point of view.

Ifyou want to leave a rating and review

in appreciation for Cem putting all this work into these

conversations, by all means head over to your favorite podcast

platform and leave a rating and review. We very much appreciate

that, and it helps more people actually discover the show and listen

to conversations like this.

Nextweek I'm back with Andrew and

Tom and that will be an interesting conversation. It's obviously

a little bit more in the CTA space, but nevertheless super interesting.

We did mostly global macro today.

SoonI'll be back with something

new together with Cem. We'll tease that a little bit very shortly,

but keep your ears out for something very special coming soon.

And I'll leave it at that for now.

Iwilljust say from Cem and

me, thanks ever so much for listening and we look forward to

being back with you next week. And until that time, take care of

yourself and take care of each other.

Thanks for listening to the Systematic Investor Podcast series.

If you enjoy this series, go on over to iTunes and leave an honest

rating and review. And be sure to listen to all the other episodes

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we'll try to get it on the show.

Andremember, all the discussion

that we have about investment performance is about the past, and

past performance does not guarantee or even infer anything

about future performance. Also, understand that there's a significant

risk of financial loss with all investment strategies, and you

need to request and understand the specific risks from the investment

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Thanks for spending some of your valuable time with us and we'll

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