Welcome to U Got Options, an exciting series right here on Top Traders Unplugged, hosted by none other than Cem Karsan, one of the sharpest minds when it comes to understanding what's really driving market moves beneath the surface. In this series, Cem brings his deep expertise and unique perspective, honed from years of experience on the trading floor to candid conversations with some of the brightest minds in the industry. Together, they unpack the shifting tides and underlying forces that move markets and the opportunities they create. A quick reminder before we dive in, U Got Options is for informational and educational purposes only. None of the discussions you're about to hear should be considered investment advice. As always, please do your own research and consult with a professional advisor before making any investment decisions. Now, what makes this series truly special is that it's recorded right from the heart of the action, on the trading floor of the Cboe. That means you might catch a little background buzz, phones ringing, traders shouting as Cem and his guests unpack real world insights in real time. We wouldn't have it any other way because this is as authentic as it gets. And with that, it's time to hear from those who live and breath this complex corner of the market. Here is your host, Cem Karsan.

Welcome back to another episode of U Got Options from the Cboe floor, brought to you by Kai Media and Top Traders Unplugged. Today we talk to no other than Rick Santelli of CNBC. He's the one usually asking the questions. Today, I get to ask the questions. We go back to 1979 when he started here in the pits of Chicago, cover his history, think about the future and where interest rates are going, unpack the Federal Reserve and how their role has changed over the years, you're not going to want to miss this one. Enjoy. Hello, and welcome back to another U Got Options. I'm here with the man. We always get Rick Santelli, here, interviewing other people. I get to hear the other side of the story today. I'm really excited to kind of hear that story.

Now you're making me nervous.

You're never nervous. You've done this a million times. Rick, I want to start out today by really getting a sense of how it all started for you. How did you get started in this business here in Chicago, and what are the underpinnings that kind of took you to today?

You know, I was always on my way to University of Illinois Law School When I graduated in 1978, ‘79, I just had a summer free, and I met a parent of one of my friends who was a pork belly trader. And the exchange floor at that time was much smaller, but it was very much a high density, very loud, chaotic situation. And the minute I saw all those trading jackets and all the people screaming and hollering at each other, it reminded me of Thanksgiving with my family, and I really loved it. So, I couldn't get it out of my mind. So, within a week, I decided against law school, and I took a job as a runner for $60 a week. And if you ever want to see or make your parents very depressed, go to four years of college, enroll into a great law school, and then tell them you want a job for $40 to $60 a week. Yeah, they were pretty disappointed.

What was the floor like back in 1979?

You know, it was such a different place. First of all, the old CME had a TV room. I mean, it really was like a fraternity had a TV room. And I remember because gold at the time really started making move in late ‘70s, early ‘80s. And the gold broker who had the biggest deck used to run out of the pit to watch reruns of Laverne and Shirley in the TV room - true story. You can't make this stuff up.

Laverne and Shirley, I love it.

And when things happen, like when Reagan got shot, or very historic moments, or the Pope, you would see half the pit just run into that TV room. Those are things that, you know, it was more like a club.

Right.

And now this new floor really, in many ways, reminds me of that. So, my hat's off to the Cboe.

Yeah, they kind of brought it back a little bit old school. They really did.

They certainly did.

I agree. And you were here in the Board of Trade building, right?

Yes. Well, I've been in a lot of buildings. The CME has moved several times since I started trading in ‘79. And even the membership I had at the time was called an AAM membership. Basically, it was lumber, eggs and potatoes. And they didn't have an egg contract, and they barely had a russet potato contract. So, it meant I was trading two by fours for the most part.

Amazing. How long did you trade two by fours?

Not very long because then I realized that gold was much, much more fun and a lot more volatile. But I do have one story about the first trade I ever made.

I'd love to hear it.

I walk in the lumber pit and there were only two guys in there. And I got my trading card out, and I got my pen out, and I was like shaking. And they both looked at me (and it's tradition, in these pits, to kind of give somebody a one tick winner on their first trade, okay). So, the broker taps me on the shoulder, introduces himself to me and he goes, okay, you're a buyer and I'm going to sell you this contract, blah, blah, blah. And the market was a bit higher. And within two minutes the market was limit up. And by the way, pork bellies and lumber, in late ‘70s, early ‘80s, had more limit moves than any other futures contracts. So, it was limit up. And he taps me on the shoulder (and I'm like thinking, how great this is, wow, this is an easy way to make a living) and he goes, you should get out of that now. And okay, so I was a little cocky thinking to myself, like why should I get out of it? A couple minutes later he goes, have you got out of it yet? I said, I think I'll hold a little while longer. He goes, it's up to you. He turns around and he offers the market limit down. Within four trades it's limit down. And that was how I learned.

Your first tranche! Teach you to learn how to manage risk. That's amazing. Yeah, Lumber and gold, right? Those things are kind of getting interesting again after a long time.

Yeah. And believe me, there was a stretch in the ‘80s where gold was like literally dormant, dormant, nobody... It became board trade. See people in New York, Comex especially, they really believe that they are the center of the universe for gold and silver. Sorry, sorry, sorry. Chicago was the center of the universe in gold and then they kind of lost it because gold kind of lost its luster after it hit, I think it was February 1980, it hit its all-time high and futures around $840, $850 bucks. And from that point, this was around January-ish, and this is one of the first weeks that the Iran Iraq conflict occurred, okay. So, everybody thought that was going to propel gold to a thousand dollars. It had the exact opposite effect. It didn't do anything to gold. Gold drifted lower, the contract became board traded, and Comex picked it up. And the next time it got active, the rest is history.

That's wild. You know, gold (you probably know this) from 1968 to 1982, (when interest rates went from bottom left to top right and peaked at 20%) was the best performing asset by far for that 15 year period. But it was also (most people don't know this) the most volatile. And you kind of highlighted it there.

And it wasn't really that good of an inflation hedge, all things being equal.

Well, nothing was, right?

No, that's true.

Except for maybe lumber, actually.

Yeah, yeah.

Lumber companies were really, really great.

It was because of its tie to housing and whatnot, absolutely.

I think that's the problem with assets in general. Right? When that interest rate, which is the discount rate, you know, hits every asset; you know, gold and whatnot, a little bit less. So, in nominal terms, that starts to look amazing. But in reality…

I was trading T-bills and the yields were, you know, 16%, 17% back then, okay. And the CME actually had a CD contract back then, but, you know, it didn't last long after we had our CD debacles.

When did you move over to interest rates? What was the year? How did that play out?

Okay, there used to be a firm that used to be a great firm was called Drexel Burnham Lambert. And anybody who is financial history interest would know that Michael Milken, of course, was part of Drexel and junk bonds and Beverly Hills and the rest is kind of history. But Drexel was really quite good in the interest rate game before junk bonds became the moving force. And they had a huge presence in the bond room of the Chicago Board of Trade. I was at the CME T bills, euro dollars, foreign exchange, lumber. And when I worked at Drexel, they put me on Eurodollar desk. And that's really kind of where I started to cut my teeth on interest rates, yield curves, volatility options. And the guy who was running the bond desk on the other side of town had a lot of errors in one week. So they decided to transfer me over there. And so right around 1984, I became the manager of one of the biggest bond futures desks in the world. And the staff of 15 people, the minute I went to the desk, they all quit.

Oh, man.

They all quit. They said, like, what, you're bringing in this guy? What about any of us? In the middle of a busy day? But anyway, within a day or two, I had a new staff. And there I was. Interest rates and back then, you know, mortgages, Volcker, inflation. it was a world that people today would be shocked to understand that things still worked when you had interest rates high, or you had a Fed overnight rate that was virtually in double digits. Things still work. You could actually get a mortgage of 14% and make it work.

Right. Talk to me a little bit about dislocations that happen at that time, how things operated differently. Obviously, you're a bond guy, right? You've been around. You've seen a lot of cycles. Most people haven't seen...

A lot of cycles.

So, what are some of the things that used to happen back then, maybe, that aren't happening anymore? When did it start to change in your mind? And talk to me a little bit about how the bond markets changed in your view and where we might be now.

The computer changed everything. You know, first of all, I bought one of the first computers ever. It was called, I think TSA. It was a Radio Shack computer, a Tandy computer. And I bought it in late ‘79, early ‘80. And it was basically just a glorified calculator. And it went into this little compartment that had a little dot matrix printer. And that combination cost me fourteen hundred dollars back then. Back then, yeah. That's real money for basically a calculator.

Right.

Okay. The exchange wouldn’t let me bring it on the floor. The CME would not let computers go on the floor in the very beginning.

Right.

They changed, obviously, quickly, but to me that's what changed everything. Because prior to that everybody was doing everything by hand. You know, there used to be charting books people bought every week, and then they get it, and they'd add onto it, and then next week they get a new book. I mean all that stuff now everything's computerized. But the other thing that's really changed is how markets move, and the Federal Reserve, and what the Fed does. Nowadays (and I don't mean this as insulting to the audience) the Fed leads everybody by the nose. When I was a trader, they did match sales, they did repos. And how did you know? You looked at your little green lit Teller 8 screen, okay, like an old fashioned TV; CRT tube, you know, cathode ray tube. And they didn't advertise. The Fed didn't tell you what they were doing. During Fed meetings they didn't tell you what they were doing. They didn't have a statement, they didn't have anything. You had to know what was going on. And only a certain select group of people were financially literate to know, at 10:20 every day watch to see what the Fed announcement was or their reactions. The markets would go subject or when T-bill issuance came out. All of this was very fresh. And people had to really understand it because, for the most part, the markets were making a transition from, you know, grain futures, livestock futures, to financial futures. And this was in its infancy. Foreign exchange futures at the CME, and Leo Malamed didn't start till the mid-‘70s.

Right. That's fascinating. And the truth of the matter is, the Federal Reserve was created to kind of smooth the business cycle. That was kind of the idea. It's like if we can stop crises from happening…

No, no, no, no, they were started as a nudger, They were only supposed to be a nudger.

I agree.

And they've turned into Superman on steroids.

I was getting there. I completely… You know, I agree with that. But the thing here is, you know, forward guidance, as you mentioned, is everything now - the dot plot and guiding. And that's why, by the way, Trump's talking about putting in a shadow potential Fed president.

Well, in a way, he is a shadow Fed.

Right.

Just by him saying he’s going to pick somebody to be dovish.

Right.

He's altering the future.

Right. And it's actually interesting that you mentioned that by mentioning that Bessent might be that guy, he's already giving Bessent…

How many jobs is this guy going to have? How many paychecks is this guy going to get?

I know it's effectively kind of putting in a shadow Fed president because if that's the guy who they’re already talking about, it kind of matters. But you're right, the forward guidance is so important and they're leading everybody by the nose, really trying to map out and control the volatility.

And why do you think they need to lead people by the nose? Because the system has gotten so large and in a way there's a certain fragility associated with it, a vulnerability that very few people talk about.

Now leverage in Banks is 50 to 1. So, you have to keep those plates turning. And the only way you can is by controlling that leverage. I mean, you’ve got 50 to 1 leverage. You better be… You better have some pretty big tools and you know, everybody better believe that you can control everything, otherwise things become very dangerous. And I think that's a big part of what we're seeing now. You mentioned before, I think when we were talking, that Alan Greenspan changed it all.

He did.

Talk to me a little bit about how you saw that transition, what you think about the change in the rates market with Greenspan's introduction.

You know, Alan Greenspan created a hypothecary situation in finance that, in many ways, did not exist. Okay. So, if you look at all the past Fed chairmen, what you'll notice is that Volcker was the last of the kind of what I say, just a true Fed chairman who was all about the meat and potatoes of it. Okay. When Alan Greenspan came into power, certain things changed. First of all, he did underscore that productivity was the special sauce of the economy, the secret sauce, and that was a good thing, okay. But he also brought up this notion of being able to create debt and for the Federal Reserve to start doing things and being a little bit more aggressive in how they control monetary policy. And he started creating this forward guidance. And I remember one of the first things that he did was he had like three categories. So after they'd have a Fed meeting, he'd say, you know, we're comfortable here. We're symmetric, we're asymmetric. Like they had three choices, and they would tell you which one it was. And over time, the guidance got much more in depth. And what they ended up doing is creating a form of communication because their job description got torn up. And they really did become a behemoth. And central banks around the world, right now, really, in my opinion, are largely responsible for all the debt in the world.

No doubt, no doubt. I think the big thing that, in my mind, Greenspan did was he lowered that natural rate of unemployment. And what that did is that allowed the Federal Reserve to ease at increasingly extreme levels. And you can argue that reality was reflexive. It was a function of them lowering interest rates that sent more money to the top. That's what interest rates do. If you lower interest rates, if you do QE, who gets the benefit of that? The very tip top.

If you're making test tube financial products, low interest rates, that's the first ingredient you need.

Yeah, I agree. And the reality is that nobody borrows money in the bottom 50%. Nobody. Very little. And all the assets are owned by, I think the stat is, the wealth owned by the top 0.1% in the United States is equivalent to the wealth that's owned by the bottom 80%. So, guess what? You push up assets, who benefits? And so that's the reality is that the Federal Reserve, by stimulating, and stimulating again, they had the benefit of maximizing employment (maybe not wages, but employment) whilst keeping inflation in a very deflationary environment. And they just kept pushing against that. And that's great for GDP or creating new widgets and technologies. But is that good for the median person? No. And that's what we've created. We've created a system that's for corporations first and individuals second. I know you agree with this, and I preach to the choir.

I mean, they're called a central bank, okay? They are a bank and they're working for banks.

Exactly. That's important to everybody to understand. I think people think the Federal Reserve is working for the people, and it’s not.

And when you listen to the chairman and the Q and A, I mean, listen, their hearts in the right place.

Oh, I agree. Not a conspiracy.

But here's the problem. When you have 435 guys, okay, in Congress, you have your senators, and you have the President and Vice President, how many of those do you think would like to have interest rates at zero and have unlimited spending power? I think they would all raise their hand out there. Their hands all went up. And see, this is the problem, okay. When you keep interest rates at zero for as long as they did, every zombie becomes alive. Companies that should have, you know, sailed into the sunset stay alive. And when things start to slip again, where the cost of money starts to go up, all of a sudden strange things start to happen. So, when I see people now say, oh, my God, look at what's going on with the dollar. It's having its worst start in 40 years. Yeah, that's kind of true, but it really isn't the story. The story is, pre Covid, how often was the dollar index above 100 from ‘04 to pre Covid, not very much. How often was the euro currency below 120 during that period? Not very often. So, what changed? What changed is that the United States went into hock up to their eyeballs to overspend in Covid - the last hurrah of much overspending. And we're going to pay the price for that overspending. Just look at what's happening with housing.

Yeah, I couldn't agree more. If you step back and just look at it philosophically, if you try and smooth the business cycle, you move crisis from a situation and you do it with one tool, which is constantly sending money to the top, and stimulating productive capacity and globalization and all of these things. Guess what? You never get a crisis. You never clear the underbrush, and so you never get any change. You can't fix the problem. And yes, you go to malinvestment. You go to all these things. You dig yourself a deeper and deeper hole. Meanwhile, guess what? A forest fire will happen at some point.

Oh, there's always exogenous issues, whether it's long-term capital, whether it's Covid, you know, whether it's the credit crisis. All these things will always continue to happen. Especially as the governments get a bigger appetite to control people’s lives and tell them exactly how to do various things. The bigger the presence of a government in various entities, the more prone they are to shocks in the system. Just think about it. The government moves into housing. What happens to housing? Government moves into college and educational finance. How many trillions of dollars do we have out there? We enabled young people to borrow money they could never pay back. Can you imagine being an 18 year old and going to the bank, okay, hey, I want to borrow $ 25, $30, $50 grand over the next eight years. What's your collateral? I don't have any collateral. How much you make in your job? Oh, I don't have a job. Okay. But the government, they were just, borrow as much money as you want, right? It's really sad.

It is sad. The question though is, and this is really where left and right kind of meet in terms of economic policy. This is not, in my mind, a political situation. The entities driving it… The Federal Reserve is a part of government. But the reality is that it's banks, it's power, it's entities that would do this for their own benefit regardless of the government being there.

Well, let's give the public an easy example. Doesn't anybody find it a little odd that you have a Treasury, and the Treasury sells securities to basically bring in money because for every dollar we're spending, we're probably borrowing $.35 to $.40, right? So, the debt comes from the Treasury. And all of a sudden, the treasury is issuing so much debt, it becomes a supply and demand situation and puts upward pressure on rates. So, then all of a sudden this wonderful idea of the Fed and says, the Treasury prints the paper and we're going to come and we're going to buy the paper and then we're going to store the paper. It becomes this kind of daisy chain of a closed circuit.

It's just money printing. At the end of the day we call it whatever you want.

And I don't know, the more you think about that, it just doesn't really quite seem right, does it?

No. I mean, goes back to the beginning of, you know, we can go to Greek and Roman times and a shaving of coins. It's the same thing at the end of the day. They'll never say that, and they'll never call it money printing.

No, and we invented a lot of these, but every other central bank in the world, they were all a quick study.

Right, right, but it's a story as old as time is the critical part. And again, whether it's a government getting involved or not, it is kind of absolute power corrupting absolutely.

Well, the Fed's balance sheet before the ‘06, ‘07, ‘08 crisis was about $750 billion. So, less than a trillion, let's say three quarters of a trillion. And then on its high side it ended up $9 trillion. Okay. Now it's in the sixes and that's it. It's not going to really go much lower. And in the last crisis they got it down around $4 trillion. The point is, that's kind of a fund for the economy that keeps getting bigger and bigger. And it really also isn't a good thing to have the central bank have that; to take those securities and basically put them in a corral.

Right. And so, the question is (and this is the big question affecting everybody), how does it end? How do we get out? You've dug yourself this mal investment hole. The leverage has increased to a dramatic level. The Fed has to be more involved. So where are we going?

That's why they have press conferences and that's why they have the Fed governors go out on speaking tours, because they need to definitely control the conversation. There could be no surprises in this system.

Well, you know, eventually there will be a surprise. And so, the question is, if you were Fed chair (first of all, you'd probably just disband the Fed, but let's be realistic)…

No, no, I wouldn’t disband the Fed.

Let's be realistic. How, how would you respond to the situation? I respect the fact and I agree that probably we shouldn’t have gotten ourselves to this point to begin with.

Right.

But you're here, today. How do you deal with this situation?

I personally wouldn't have the Fed governors go out on the road giving speeches. That'd be the first thing I'd cancel. And I understand that Fed chairman, current Fed chairman Powell and the previous Fed chairmen, they thought it was a very good thing, but I think they thought it was a good thing for the obvious reasons. The Fed's grown, their power's grown. We need to, you know, stay and communicate and share information. I understand that, but I also think there's a Complicated message there because they all think a little bit differently. The other thing is, when it comes to the relationship between any political administration in power and the Fed, this one in particular seems to get a lot of attention because the President is very disparaging to the Fed chair. And all I can say about that is, if I was running the Fed, I would ignore it. The press just eats this stuff up with a spoon. But in the end, Powell's going to do what Powell wants. It really isn't a big story. I wouldn't call somebody names, but that's who I am. I don't think it matters. But I think the Fed, right now, needs to be really careful because the entire world is buried in debt. The entire world needs to pay for that by issuing securities. And issuing securities needs to find buyers. And those buyers are like chairs and the music's playing and not everybody's going to continue to get a seat. And this is a big deal because all you need is one or two auctions in any of these big economies, whether it's the UK, whether it's Japan, whether it's the Eurozone, and it's going to make a very big noise in the government global system.

Yeah. At the end of the day, nothing stops this train. You are kind of heading off the cliff. And what that means, I think, is that we need some type… We're going to end up having some debt jubilee, some type of monetization.

Well, people out there, when you have a credit card, you get your monthly bill, right? Okay, so you have $25 grand in debt, you have a minimum payment, whatever. Okay, well, the United States has a minimum payment. That minimum payment right now is about $1 trillion a year to service that debt, a $1 trillion a year.

Right. So, it's got to be monetized. And the truth of the matter is you can do that over the course of two decades or something, or you can get it out of the way now and reset and move forward. And the question is, which one will they do?

But see, that's a joke. Right now (and I hate to get involved in politics), right now every country is steeped in politics and it permeates everywhere. So, we have large executives at very large firms, at large banks, large trading entities. And you've seen them all, they've been on TV the last three or four months. What are they talking about? Oh my God, the debt. Oh my God, the debt. And I'm glad because I've been going, oh, My God, the debt for 15 years and all of a sudden they just woke up and smelled the debt. Because it's political. They don't like this administration. The point is, whether you like them or not, we're not going to cure our debt by one budget, by this budget, okay? And it's silly to think we are. So, if this current budget is going to raise the debt, and this is static, it's not a dynamic scoring process, but let's say somewhere from $2 to $3 trillion dollars. Yes, that's horrible. But what's the actual number? If we did nothing, in 10 years they say the debts going to be $55 trillion no matter what this particular budget does. And my point is, we need to start thinking about a regimented amount of steps to lower the debt. But they got to be baby steps. I don't think the economy can take something any bigger, and we need to realize we now spend 20% to 25% more today than we did the year before Covid, and that’s the problem.

It's all great in theory. The problem is austerity is not popular.

It doesn't sell. We tried looking at it in Europe after the credit crisis

And it doesn't honestly work either because if you don't fix the growth problem, right, you just get slower and slower growth and a slower implosion.

And this is how the Fed ended up with a balance sheet, with this exact logic, oh, we can't do that. It'll hurt growth.

I hear you, I hear you. But you're kind of stuck at this point. And that's the big part that I think we're getting to. I've talked about this before on here, but I think the reality is for this type of environment, we're looking back at kind of where you started your career, the ‘70s.

Inflation

And you and I have talked about the stagflationary thing well before that word was on everybody's lips. But the reality is, if we are in a stagflation environment, all the things that have worked for the last 40 years, as Greenspan kicked down that natural rate of unemployment and started stimulating at record levels and then everybody after him as well, you know, the things that work during that period have gone too far. And the things that are going to work, as you know from the seventies, are much more likely to work. And that means, you know, stocks, bonds, right. All assets, real estate, private equity, private credit. Guess what? They're all leveraged to a point where, where are people going to hide?

Yeah, Unsustainable where they’re tossed around like a cheap coin.

Absolutely. So, the question is, what do you do? What do you do? How do you invest in this period?

Well, the investing's one thing, but the problem is that no politician, as you pointed out, is going to run on austerity. The general public at large never likes to tighten their belt much. And what's going to happen is there's going to have to be a financial heart attack somewhere in the system for anybody to pay any attention. And actually, it's a lot like that. I mean, how many people we know that aren't in good shape? Maybe they're overweight, they have a horrible diet and they know they're candidates for problematic health issues, but they never do anything until the bad thing happens.

This is why crisis is good. I think we need a crisis, in a sense, a wake up call, you know.

I think we have to get to housing. We need to get to housing. I think everybody that's going to be watching this has a vested interest in housing. And this administration thinks the answer to housing is what you know as well as I do.

Well, yeah, lower interest rates.

Right, Lower interest rates. Okay, so they are not very happy with J Powell because he's not lowering interest rates. But Cem, you and I are market guys, okay. What they need to understand is the Fed can put rates at 0 or they can lower 250 basis points like the President wants, but that doesn't mean a 10-year note yields going down at all. As a matter of fact, what did the 10-year note yield do when the Fed cut 50 basis points?

Yeah, exactly.

It went up.

And there's a swap market, right, that's much bigger than the stock and bond market combined. And that's the thing that people miss, right. They can do all the issuance they want, move it to the short end of the curve. That is not going to solve the problem. The swap market will become unbalanced and create all kinds of other problems.

So, then the Fed will come in and try to buy those securities that might have a life of their own in the market. And then their balance sheet gets big and that creates a whole… So, in other words, it's like a water balloon. And the water balloon is getting filled with much more water. And that's not a good thing. And as you squeeze it, to try to manipulate it or get the situation in your favor, it pops out somewhere else.

That's exactly right. You know, the reality is you can't get rid of risk. You can only transform it to other parts. And if you keep pushing it into the tail…

And transfer it.

Yeah. Transfer. If you keep pushing it to the tail, guess what? Eventually that tail becomes much bigger and a much bigger problem. I couldn't agree more. And you know, that's where we are right now. This is the conversation that we're having. What are we going to do about the 10-year yield? And they're having a real housing…

We’ll have to go through, in my opinion, another several years before you separate a 2.5% to 4% mortgage where that person or that group of people don't want to sell because they can't replicate that rate.

Right.

But there are going to be reasons over time where the people get transferred, they age out of their house. There are going to be reasons to loosen that market up.

Oh, I agree.

But I don't think you're going to see mortgages much less than 6% for a very, very (let me underscore), very long time.

I completely agree with that.

If ever, maybe.

Yeah. But to your point, you have a political group, which are millennials on down, which are rising to political dominance as baby boomers pass on, that are having to start households at a much older age than ever before because they can't afford it because they've been…

Well, but yeah, that's easy. We fixed that. Just look at New York. They have a candidate. No, but I mean, come on.

Oh, I'm not talking about...

He's going to… No, no, no, but the point is, what this creates. We have generations that can't afford to do what other generations did. So, their alternative is to try to find easy answers. And there's going to be a large group of political inspired candidates and personnel that are going to try to feed that.

Well, it's already happening. I want to be clear, my view… And we don't have to get into politics as to whether it's Biden, or Trump, or whatever. These are the political winds that are pushing all of that.

Yeah, but it's bigger than that. And I know you don't want to give out politics. Listen, this country built its future on capitalism - Capitalism.

We're sitting in a bastion of capitalism.

If we think that you and I shouldn't talk because the needle's going socialist. This is a big topic. It's a big topic because see, we don't teach kids history in school anymore. And I would defy all the people that want to vote for those easy solutions to look towards history and find one example that actually worked. Find me one.

The problem is the pendulum swings too far. And this happens again, and again.

Absolutely, and I feel bad for you. I have three daughters, and I get it. It's hard.

It's true on both sides.

Yeah.

The reality is the pendulum swings too far. The Federal Reserve, which is, by the way, a capitalist organization which is helping free market economics by pumping oxygen in the system.

Although how capital is it to buy from the Treasury?

No, I hear you. The whole system is… But the point is the pendulum has swung too far. And that inequality, which has been completely absorbed by that generation (not the boomers but everybody on down, has really been labor throughout that period) is really struggling. And so that is the political wind that's driving everything right now.

And it's the answer we need to debate because how many people out there think, hey, President's right, Powell needs lower rates to help me. Powell needs low rates to help me. I get the logic, but okay, what do you think an average credit card rate is now if you have a balance $20 grand and you're making, whatever? It’s probably in the 20s.

For sure.

Okay, so, what's a quarter point or two quarter point ease going to do if you're paying 22% or 23% on your credit card or you can't buy a car that without paying 7.5% or 8%? And this is the point. We could talk about the Fed easing, but the amount that they're going to ease, the incremental amount they're going to ease really isn't going to make a huge difference to the large group that needs the most help.

Yeah. And that's going to lead to not just problems with the 10-year, but credit problems.

It leads to crazy candidates running for office.

You talk about credit debt, you know, like the crazy thing is given all the stimulus that we've seen from the Federal Reserve, we've seen compression of credit rates. Right. Like the reality is that with the private credit onslaught and the search for yield, credit itself is getting compressed. So, there are all kinds of ways. People need to be mindful of the convexity that they need to hedge out these potential risks both for the 10-year and long-term bonds, which we talked about, but also for credit that's very much related. Cboe actually has a product called the Iboxx Credit futures which has options on it, everything else, the volume's going through the roof.

The cost of credit is going to be one of the most important financial threads moving forward. It's all about the cost of credit, the cost of capital. This is going to make a huge difference. And the more products you have that address that, the more you can transfer risk or try to control some of those costs. That's a good thing. These exchanges have really done wonderful things when it comes to the hedging. Now, sure, there's speculation, but without the speculators there wouldn't be enough liquidity for people to hedge.

Yeah. I think these, these I credit Iboxx Credit futures, in particular, are really interesting. They're a way to actually, you know, offset your exposure to some of these things with capital efficiency. And I think that's the other big thing that's happening. In the 1970s, we didn't have all of these derivatives. We didn't have at least not liquid, easy to use. Now you can make big convex bets. You can hedge all this exposure with a really concentrated bet without outlaying a ton of money. And that's a huge advantage that people have, institutions have relative the 1970s. Just think about ‘08 recently, even relative to then we have so much more product.

Oh, yes.

But if you had some of these products in ’08 they can create systemic issues if you're on the other side of it. But if you're on the right side of those things, they can completely pay out hundreds of X relative to your portfolio.

Well, that's why exchanges versus over the counter. I mean, if you really want to study where things kind of ran off the rails during the credit crisis, these bilateral arrangements, you know, when it's you against me, but when you have an exchange and you have all that clearing.

That's so true.

It makes such a huge difference.

Yeah. No, everything on exchange rate, your counterparty is the US Government essentially. And that makes for a totally different situation. Rick, awesome having you here. It's going to be a fascinating five…

Real quick, real quickly though, let's tell the audience what we think; generally, equities up or down, interest rates up or down, yield curve flatter or…

Absolutely. I know what I think, but I want to hear from you first.

Okay.

I don't want to bias you.

Anybody under age 50. Okay. And not saying that if you're over 50, that doesn't apply. But if you are a younger person out there and you want to retire someday, equities, you got to find a position in equities. You have to start contributing when you're young and don't look at it and let it build. Because there's always going to be a big crash, there's always going to be a big rally. But from generation to generation you need to save. And equity markets have an inflation adjustment process built into them. In terms of interest rates, the market's going to win. Long-term rates are going to remain stubbornly high no matter what. That's my two cents.

Yeah, 100%. If you look at 125 years of history, like 125 years, are you kidding me? You have to because the last 40 years have been interest rates from top left to bottom right. 20%, 10-year yield in 1982 to zero, in 2021 - .3. You cannot take that 40 years as representative of what happens in markets. If you take a broader lens and you really look at what's happening, 60/40, stocks and bonds, which by the way didn't exist till the mid to late ‘80s because it didn't work, the whole period is a 0.45 Sharpe. It's a very poor risk return from ‘68 to ‘82 alone. That 14 year period where interest rates went the other way, equities lost two thirds of their value in real terms. Never mind bonds. I mean we know the long bond went from 4% to 20%. How do you think that worked out? So, this is not the time, in my opinion, to be going long equities, long bonds, you need to be deleveraging and you'd be finding other forms of income. And there are ways. It's just not the traditional 60/40.

I agree with that.

And you need to be using products like this or finding people who can help you use products like this to actually navigate what is a much more complicated system. Everybody has been taught, which I think is completely absurd, that investing is easy. You just go buy stuff and you wait and over time everything goes up and you make lots of money. Guess what? If you need a surgeon, you go to a doctor. If you have a court issue, you go to a lawyer. If you need to invest right, you need to go to people who can help or educate yourself in a way that you can manage the products that things like the Cboe provide. And the Cboe provides tons of education, all kinds of other entities provide.

What year did the Dow go above a thousand, do you know?

Oh, the Dow. You'd have to tell me.

Well, I know in ‘79, 1980 there was a guy named Joe Granville who said the Dow can't go above a thousand. He was correct. It was a little past. My point here is that under a 1,000 in 1979, 42,000 now. I agree you need to be cautious, but trust me people, you want to own stocks. I don't care what people say. I don't care what's going on in the world. I don't care what financial debacles are out there. Come year in, year out, your young person has gotta have stocks.

All right, well, that's what makes the market.

That's right.

Thanks for joining me today.

Thanks, Cem.

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