Markets Are Entering A Wartime Economy | Cem Karsan

You know, this is a wartime economy. If people don't see that yet or think about it in that way, they're missing the boat. This is not a normal economy. We are in a distinct global conflict that is economic, that is military, and that is strategic asset focused. It is likely to continue to get hotter, not cooler. And this is a preparation for that.

In my opinion, we can move from a republic to an empire, which is what we might be doing, but that generally is the beginning of the end.

All right, everybody. Welcome back to another episode of Ford Guidance. And joining me today is one of my favorite guests, Jim Carson, Kai Volatility Advisers.

Jim, you were last on a year ago, just about now, right after I think the day after the election we recorded, and it's been a big year. I feel like we got a lot to catch up on. It's like simultaneously like flown by and how much news can we get in a year, right? It's wild.

Yeah, it's insane. Just thinking about all the headlines and we had liberation day we were down market was crashing came back like so much stuff has happened. What do you think about the last year? Was tariff wars to the degree that we're experiencing on your bingo card? How did things play out for the markets and the economy side of thing relative to your expectations?

You were on this show kind of hitting a bit of a somber tone, but just a common realization of everything that's about to happen. And yeah, here we are 12 months later. What's your read?

Yeah, just to kind of review from our end just over a year ago, we were very adamant that there would be a bumpy ride that it's going to be a pretty wild 2025. We actually like to kind of pat ourselves in the back called a February decline.

We said it probably 15% ended up being 25 literally started the day after Feb opex which is kind of when we were looking for it we thought it would end by March opex lasted till April basically another couple weeks and again like I said went deeper than we thought but our call was then for rally back to the highs it went well beyond the highs that's what we got wrong.

And you talk about the why and how but there's clearly been a concerted effort understandably not it's not just the Trump thing, an administration to keep the plate spinning. There was a pretty dramatic effort, both via liquidity, in terms of swinging the longer end of the curve to the shorter end and absorbing kind of the reverse repo liquidity that was there.

That helped in that process. There was a wonderful little reverse kind of squeeze, right? the institutions were at the zero percentile in June and are now back to about the 50th 40th or so. So that was forcing hands back in definitely played by the administration and the powers of be.

But in the meantime, we've also seen continue to see under the hood like step away from the markets everything we've talked about, right? We talked about three years ago now precious metals start to catch a bid. You know, we've been adamant about owning longdated calls and precious metals since the bottom.

This is a wartime economy. People don't see that yet or think about it in that way. They're missing the boat. This is not a normal economy. This is economy where where where the biggest powers of the world bid for strategic assets and that's what we've been trying to say for a while now.

This is a time of delobalization and global conflict. It is a tied to populism and the driving forces of our people versus your people. And again that again we've talked about this for four or five years but a year ago you're like Trump you know here we go now.

I think the things that we maybe got a little wrong are the level, I was a bit surprised by the extent and level of the supply side economic approach with the build big beautiful bill that we saw. And the second we saw it though, we were very clear that like this is good for markets in the short term, but like if he thinks pitchforks won't be on his lawn in a year, and we said this a year ago, I think on this podcast among others, good luck.

And exuberance in January, by the way, not just from the Trump faithful, the MAGA faithful, but even the people I talked to who were kind of anti-Trump the last time around came in like, well, maybe, this is pro business. This could be, this could be really great.

Again, I cautioned, and this is not an anti-Trump thing. I want to be clear, people will come at me for that. That's not this is not a political thing. The reality is this is a political, populist wave that isn't inevitable.

To the extent we are going to try and zigg or zag against that populist trend, the political forces at be will overcome that trend over a course of multi-year periods. And that's what we're seeing, with the release of the Epstein files or the voting for it.

We'll see if they ever get released with the actual defection of a big chunks of his base for other pieces of legislation recently. The polling numbers and the increasing which I called for Nixonian move after a initial attempt to send do supply side economics moved back to the populace by by necessity.

Populism a necessity that we're now seeing will drive back to the longer multi-year trend that started in 2020 of higher inflation steepening yield curve in our opinion and again a continued flight with an acceleration as people begin to realize it's not just it wasn't just a short-term thing but a secular trend towards strategic assets and hard assets so that's how I would paint it I think this was a a Zigg in a in a in a context of a much bigger broader secular trend.

And one that everybody thought could turn into a new trend or go back to the old way. And I think what we're discovering is that what we will discover this year is is no. This is just much much like what happened with Nixon. This is an attempt to, you know, a a Republican supply side attempt to move against what is a political tidal wave and will largely be unsuccessful.

The last wrinkle I'll add to that before we kind of look ahead here is the one caveat to that is the move towards authoritarianism. So, the one thing that could circumvent the larger secular move of populism and the desire to politically by the masses to prioritize median outcomes as opposed to mean outcomes.

The only thing that can ultimately get in the way of that is a circumvention of the political will. That is what authoritarianism is. And that is going to be I think the next lever. I've been calling for this now for a little while as well as you know. But I think that's probably what they're going to be significant attempts to that.

So that only should increase the volatility and the structural unrest that I see unfortunately coming our way.

So, it's it's really interesting to hear all that amidst we're we're recording actually this week during the World Economic Forum in Davos. And so, you it's it's been really interesting to me to hear some of the world leaders start to begin to say the quiet parts out loud finally. Some of the quiet parts that you know you've been you've been saying on on these shows for the last year.

Now, you I'm a Canadian, so I was listening pretty closely to what Mark Garnney was saying out there today. And it's sort of this this this common realization of of the the rules rules-based order is is over and we're moving into this new regime.

So, want to start the conversation out looking forward here of just how are you thinking about the geop political situation right now? You have all this push back, you have the Greenland situation with with NATO against the US. What's the framework for how to think about all this?

Yeah. So the framework right now in my opinion is that you have a bifurcation of the world economy and that bifurcation is is China and allies versus the West and allies in the context of that which has been what we've been talking about for again for four or five years is a Venezuela move which supports that again strategic assets a effort in Iran which supports that thesis.

Again, this is not a political comment. And a simple, China/Russia versus the West. That is a second front or call it the third front after after Ukraine. In the context of that story, the Greenland thing doesn't make sense.

And it only makes sense in my opinion and this is what I think it is personally is an effort to give Europe cover to increase military spending to force Europe to deploy troops to Greenland and to get on a war footing themselves.

It is my opinion that this is a negotiation to build up similar to what we've started to do in Japan and we started actually prior to the Trump administration a military buildup. I have by the way opinions of certain assassinations that happened in Japan and the and the what that's kicked off in Japan.

But it is a concerted effort by the powers that be here in the west and people will call us a conspiracy. If you if you don't believe conspiracies now, you're you know, everything's just just take a look at what's happening. But but the reality is it is a strong armed tactic to get what the is in the US's best interest from a east versus west perspective and it's going to work.

The US is not invading Greenland. That's not the real story. But it sure as hell looks like it is believable in the context of the Venezuelan invasion and what's going on in Iran, which we wouldn't have believed this and we didn't believe it just six months ago when he said, "Right."

And that's why it's such a great move right now because it comes across as believable. It is a distraction as well and we all know why distractions are important right now. Um, but importantly, it is it is a tactical move to to get people moving in that direction.

We are, as I've said for years now in a global conflict. You can call it World War II. You can call it whatever you want, whatever images that puts in your mind. We are in a distinct global conflict that is economic, that is military, right? And that is strategic asset focused.

It is likely to continue to get hotter, not cooler. And this is a preparation for that in my opinion.

Okay. So, Greenland's a distraction that tracks well with how often Trump operates, which you know, chaos which veils the parts of the strategy that are underlying it. And so, so where does where does that lead? You mentioned what was occurring in in the other world powers.

So you have the US which looks like it's trying to or and and perhaps as you're saying secretly still working with the European Union to organize their block whether that's going after Venezuela they have that now and then you know if you get Greenland you have that regional block and then perhaps Russia's organizing their block by trying to get control of Ukraine and and and those priorities and then last segment is obviously the China question and Taiwan and you mentioned Japan in there like is that the third block is this is is this the right way to think about it is that they're just all gathering their blocks and that you know just organizing their their hubs their regions of influence as they say.

Yeah. I think quite frankly, and I I said this in other places as well, but I'll just say it here to to be clear, is you know, if this is a game of risk and you tactically, by the way, I I don't think this is the optimal way to play the game of risk because in the game of risk, like if it was risk, it would make sense.

The g the world is not actually a game of risk. There are much bigger long-term consequences. The game doesn't never ends. Um, and if you degrade your long-term soft power, you do lose in the long run. So, for those reasons, I don't think this is the right approach.

But if this is just a real politic game of risk, and you look and you say we're not going to be able to, you know, to influence the outcome in Taiwan in the long term and we probably won't have the political will even if we thought we could because US never moves fast. and and you know in the words of Winston Churchill always does the right thing eventually after doing all the other wrong things first.

But if you take the thought that like the resources and the speed of deployment and the ability to defend Taiwan is not practically realistically feasible if China decides to do it, but you think they're going to do it at some point. Well, you should probably take other efforts like go go go invade the largest resource rich country in the world in terms of oil at least and not to mention rare earths and other strategic assets.

Secure your your corner of the world part of the world knowing that there is an expanding desire for influence there and a bifurcation of the world economy as a function of an invasion there. Anyway, I don't know if it is or is not a complete handshake deal. Right. I don't think it necessarily is. Could be.

At this point, at some point you just make a decision of how to move and the signal itself is a handshake. I don't know how you move on Venezuela and don't open the door for China to invade Taiwan. You've basically given them the green light, right? So whether there's a handshake explicitly or not, a move on Venezuela has a handshake to Taiwan to China regarding Taiwan.

I have people I talked to globally that believe that that move to on Taiwan was slated for last year and it didn't happen for reasons that completely are unrelated to a desire to move, right? political forces which I won't get into right in terms of people in China will probably have a better sense of this but Z's wife has her own power center and there's an internal struggle among among kind of military there and so but that likely points to an imminence which I think the administration is also familiar with and why you're seeing the pace of movement on some of these things this year but point is you know these moves are part of a global desire ired to kind of stabilize your footprint and protect kind of your domain.

You can be the police officer of the world and then at some point if you can no longer police the world then you better shore up kind of surrounding areas, right? And so I think that's more what's happening than just carving the world, but it's also kind of just a reaction to the realities on the ground. But I I think you know this is not a one-year thing and again we've been talking about it for five years and and there's another 10 years ahead at I would say at a minimum.

That's a great segue into what you mentioned earlier in the conversation around how we are shifting into a wartime economy and and therefore we need to start thinking with with our investor brain on of of allocation and how to think about that. And the way I think about this is it feels like the first few years people took that that shift as thinking about it as fiscal dominance in that, you know, the the government is going to have a heav heavier hand.

We're going to run wider deficits and we are going to just run the economy hot as a way to run away from the debt issues we might have. But it feels like there's this other level on top of it now that we're starting to all come to this common understanding of which is that yes there is that component but there's also this component of the US government is taking active positions in strategic priorities whether that's you know taking a a strategic positioning in intel because semiconductors are important or rarest etc etc.

So yeah, like how do you how do you see what's happened in the last couple years in terms of this transition and then how yeah as an in with your investor hat on how do you think about the next few years of of this wartime economy that we're all kind of realizing we're in right now?

So we said this about three four about four year five years actually ago now and I want to reiterate it now because it's coming to fruition and very clear now to people. The two are inseparable. The fiscal spending and the global conflict are one and the same.

If you go ask somebody what caused the or ask chat GBT, go do it after this call. If you go if you go ask what drove the inflation of the 1960s and 70s, it'll give you three answers. It'll say the Great Society program and fiscal spending. It'll say the Vietnam War and then it'll say the oil OPEC oil crisis.

They're all part of the same thing. The OPEC oil crisis was a function of entities flexing their muscles where they could to combat global conflict. The OPEC reaction was a function of the global conflict. The Vietnam War is a function obviously of global conflict.

Global conflict happens when you're in a populist period which is what drives the fiscal spending sending money to people. That's why government exists to rebalance the natural effects of free markets which is money going to the top. Populism by necessity by definition the only way you can maximize median outcomes is by protectionism.

Protectionism is intrinsically connected to populism. You cannot have populism without protectionism. And so the second you put up protectionism, we were great fast friends with China till we stop telling them we can't do free market business anymore. Fast friends for 40 years.

All of a sudden we're not friends anymore because our people are no longer okay with sending all the jobs overseas. And so when you head to populist periods which are a natural result of the free market supply side economic model when it goes this long 40 years is a longer than usual but when it goes this long you have now people anybody who was born in 198082 who all they've experienced is increasing inequality increasing technological innovation increasing globalization and they look at it and they say this system is broken I can't buy a home I can't have kids that can't afford all these things.

And that's what sets off this thing. And it's generational because those people also were labor all the way through because they graduated high school and college and trying to get jobs and they've been unable to make it 40 plus years. Who benefited from all this last 40 years? The retirees, the the boomers.

And so as the baby boomers die and the millennials on down come to political dominance, the new great society programs begin. And that's what 2020 was all about. Great society program came on the back of it was waiting was building. But when Kennedy got assassinated, LBJ was able to get that passed. It took an event. We had co that was our event.

But once that starts, it doesn't stop. And it actually is building. And every time a politician tries to go back to what we were doing because they have to, they're stuck. They can't go forward because the economic consequences are dramatic to go right to the populist front. They try and go back to survive to keep markets going.

The populist wave comes in and holds their feet to the fire and pushes them out. We can talk about the election cycles which are critically important in the 60s and 70s. I I've highlighted this before. The data screams at you if you look at what happened during that period. We can dive into that.

But we are experiencing the same exact the numbers are almost identical when you look at the election cycles and what's happening in that period as well. And that's a function of this populism and the global conflict that is driving.

So my point to you is yes, fiscal spending and dominance 100% big part of the story. It has been. But there's a reason since 2020 we've been saying just wait, global conflict's coming next. That was well before Russia invaded Ukraine. That was before well before any of this happened. And it's not stopping and it's not going away because if we believe in immediate outcomes of the political dominant group which turn millennials on down says the system is not fair.

I can't afford a home. I can't you know I can't pay for school. I can't I can't uh survive in this world. by definition that means we have to shut borders and compete with the world and that nobody nobody wants that nobody wants America uh you know sending money to its people because that means they're not getting the money and then that becomes kind of uh you know what we're seeing now.

Let's let's talk about the election cycle thing because we are now in 2026. Midterms are coming and everything you just talked about the the reflexive loops that are are occurring from that. It feels like the the net effect of that is the further perpetuation of the K-shaped economy that we're experiencing where the the upper in income classes that own assets are are doing well and you know if they they have extra cash they can buy gold and precious metals which are going to be doing well within this regime and then those that can own assets it's this is everything you just talked about is is going to lead to stickier or higher inflation which is going to be bad for people that can't protect themselves from that situation.

So you just have this further perpetuation and it feels like over the last year or so the Trump administration has doubled down on the okay if we just try to just keep the stock market going as high as we can non-stop and the top income classes are happy making money we can make everybody happy and win the midterm. And now you contrast that with the approval ratings that we're getting right now and it feels like that approach is is starting to it's you know we're pushing on a like on a on a thread right now and it's it's not really working and so now you have the situation where it feels like okay if they want to win the midterms they need to focus on that lower leg of the K.

Yeah that becomes the question of okay we're we're people that participate in markets that's going to be a big question to answer. So yeah what's your answer to that question?

Yeah. The the reality is is the the Biden and Trump 1.0. By the way, this is not a Biden versus Trump thing. Trump administration did the same exact thing. And you could argue is building even before Trump, but the move towards a more populist fiscal policy.

And again, Trump has departed from that now until recently for a year, but up until that year, the move was more spending and sending money to people. And believe it or not, it was making a difference. The problem is the inflation as you mentioned is a flat tax. So the great irony here is if you send money to people, people spend more and that pushes the price of things up, right? Which hurts the people at the bottom disproportionately.

So it's a tough it's not a simple you can't use a simple toy model on this one. It's a little more less less black and white. But the reality is if you send enough money from the top to the bottom even though you'll get more inflation the net benefit in terms of rebalancing should improve inequality.

The problem there is it also tends to slow the total real growth and it can pop liquidity bubbles and all the other stuff too which you know is a problem especially when your debt is where it is now and all the other things we're talking about. But the big point here is that K-shaped economy although it until about a year ago although al although still very much a K-shaped you know the economy there was some real improvement against that and now not surprisingly that we went back with a big beautiful bill to supply side economics we've gone to an acceleration of the K again and that is again what is driving the political anger and frustration.

You can continue to drive growth from the wealth effect in the top 10% right spending but you are going to and this is what like K scan and a couple other people you know the underneath the hood like the economy is quite strong why are people so like you know it's a vibe session right like that's what it is it's that K and it doesn't matter how high the market goes or if GDP growth looks great if all the profits are going to corporations the majority of the people median outcomes are getting worse and politically that makes people incredibly unhappy.

And so there is a big adjustment that needs to happen much bigger than what happened from 2016 to 2024 and it need to be and we've gone taken a step back in the context of that. And so, you know, politicians, it's not just Trump, that that go against that will of the people is either are either going to have to crack down, in an authoritarian way, which is what we're starting to see, I believe. Or they're going to have to let the markets kind of clear and they're going to have to send money from the top to the bottom.

And that's coming to a head in one form or another. in my opinion. So so the K the K-shaped economy is was again we're making slow but progress year-over-year particularly for the last other than the kind of some of the co effects you know last four years but I think we're we're right back into you know kind of the thick of it and so I my guess is that politically that that's unsustainable and we're we're going to have to kind of you uh face those realities.

Yeah. It needs to be it needs to clear one way or another, I guess.

Yes. And what's so interesting is these days, you know, we can go half an hour here talking on a macro pod and we haven't mentioned the Fed or monetary policy once. And so I I I do want to ask you about like where where does it fit within this regime? Is it just subservient to these fiscal priorities and wartime economy footing? Like the 1940s was the last time that the Fed was subservient to the to the Treasury. Are we just going to go back to that regime?

We are in a fiat world which is very different than the 1940s and that dramatically increases the power of the Federal Reserve. The Federal Reserve was a shell of what it is now in the 1940s because it was constrained by gold and a real asset valuation.

That said, in a multipolar world, the greatest res, you know, asset of the United States by far is not its military or its rule of law or, you know, some of those things underpin something important, which is, you know, the reserve in the reserve currency of the United of the world. The exorbitant privilege of the US dollar is by far our largest and most powerful asset.

The degrading of that asset is is of the ultimate biggest concern. And although that won't happen overnight, we have done permanent damage to to that both by damaging the rule of law, by degrading the trust of of some general sense of fairness.

At the end of the day, we can move from a republic to an empire, which is what we might be doing, but that generally is the beginning of the end because if you lose the buyin from the rest of the world, ultimately another power will gain that that support of the rest of the world.

So this is one year. we we can turn back and things might change and four years is not or whatever you know is not the end of the world but it is a slippery slope and and and it's one we are definitely slipping down as we currently move forward in the same vein I feel like many just hold on to this idea of yeah three more years of this priority and then we we'll go back to whatever we're going back to but are you of the opinion that you know parts of these dynamics are they they feel inevitable.

I mean when you talk about a republic to an empire I think of Rome obviously and and back then you know there was multiple characters that led to the transition. It wasn't just one person. It was it almost felt like this eventuality that occurred.

This is not the longer term picture which is like the hundredyear picture is not and one year will not take us down that path nor will four, five, six years but a decade or two will or could. What we're experiencing now is a combination of a call it a 40/80 year I would say an 80year cycle right which is not does not in itself mean the falling of the empire it could but it's not likely to you know world war II was not the falling of the empire the civil war was not the falling of the empire right they were 80ear cycles though as was the revolution.

So they can be but they aren't necessarily. And so what I what we're experiencing now much like Arthur Burns spoke about like 40 years ago which is kind of a mid midcycle of that 80y year is is a movement a political reality once fiscal and global conflict and all these things start the Federal Reserve to me in many ways has their hands tied. they cannot they can no longer control the outcome because it is not as simple as monetary policy you know pumping money in and out of the machine.

This is a political movement that says we don't just want money. We don't want to just stabilize markets. We need to fix who's getting the money. And that inflation that comes the inflation that comes from that puts the Fed in a box.

The Fed was created and again we talked about it here before and we've talked about any time so I'll be quick but the the Fed was created with one tool which is monetary policy which is supply side economics by definition does not have the con the ability to send money to anybody but the rich it's in its construct and it has two simple guidelines price stability they say maximum plant but it's the GDP growth.

And when the inflation problem is not a problem because you have a structurally deflationary supply side economic model, pretty easy. You just pull this lever up and down to to smooth the business cycle. But when you take the inflation and it's structurally going higher because people in the middle the velocity of the money goes up and when government starts saying hey we got to send people money or we put up borders to get people in our country more money and inflows inflationary structurally inflationary pressures and put the Fed in a very difficult situation.

So, the Fed has lost, again, go read, please go read the the papers of Arthur Burns in the 1970s. He basically says this exact thing throughout his papers, like we have nothing we can do. We're stuck, which is almost impossible people people to understand that have lived through the last 40 years. Like, why? Because of politics.

Because we are not cogs in a wheel. We're not cogs in a machine. If we were all cogs and there was no idea of fairness, which is what it's like in the real world. There is no thing is fair. Like fairness is not a thing. We live in a free market system. If we were just cogs, the Federal Reserve would just do what it's done for 40 years forever.

And that would create more technological innovation and uh you know, survival of the fittest and you know, it would be we'd have evolution faster than you can possibly imagine. Yeah. But the truth of the matter is, and by the way, that's what we've been seeing for 40 years. That's why we're seeing the technological development and all the things that we've seen for years.

But at some point, it breaks down the fabric of society and what it means to be a human being. We have a larger frontal cortex. We see ourselves as as self and that you are also a self, Felix. And we are have some form of equality and justice that runs between us. Uh there must be something called fairness. What world is there without fairness? Like the smallest baby says it's not fair.

Yeah. Yeah. It's a human trait.

So, but in a system of fairness or or at least some semblance of fairness, the Federal Reserve is powerless.

Yeah. I want to for the last part of our conversation here boil down everything we've been talking about in terms of these frameworks into how to how to think about it about in terms of market structure and day-to-day because I think it's actually a really interesting day today to talk about that because the correlations are fascinating. It was one of those days that reminded me of April today where we had US equities down, bond yields up, US dollar down, precious metals up and it's sort of this capital outflow type correlation coming out of the US.

And I'm just curious like what is how do you how do you think about that dynamic when you see a day like today?

Yeah, it's it's not just today. It's been building over the last year and it's almost like January 1, a gun went off. If you go look at the underlying moves since the beginning of the year, it has been dramatic. And that's not just the Venezuela move and everything. the capital allocation game has completely accelerated.

You know, there are parts of the market with the S&P up 1% now or whatever it is for the year that are up like broadly 15 20%. And there are parts that are down 25%. Right? It is a massive rotation and it is a continuation of a broader trend than paired with a little bit of flight to safety at the same time.

So I think uh yeah how do you read it? As I' as I've said like this is this is just the beginning as January goes generally goes the year. I think expect a lot more of this. We didn't get to talk election years, but midterm is people talk about, oh, midterm years are the worst. You know what's worse than midterms in general? Because actually midterms in general over the last 100 years, if you take out a 20-year period are average.

And if you take out uh midterm presidential years outside of a certain 20 years over the last 100 years, presidential years are actually below average. All of that dramatic difference between midterm years and president presidential years is from 1962 to 1982. It's the period that most dramatically most looks like what we're going through in recent history in last 100 years.

And that's not a coincidence because again populism is driving political cycles and capital flows. I'll give you a couple quick stats. I've said elsewhere, but critical to understand, presidential years from 1962 to 1982 were all up double digits. Not midterm years, presidential years were all up double digits and on average 21 a.5%.

In a 1962 to 1982 period that went nowhere, nowhere in real terms and up small and nominal terms, okay? meaning up 50% over 20 years in in nominal terms. That is a dramatic stat because if you remove those in in nominal terms all the years lose money.

And the messed up part is if you go look at midterms midterms every single one of the midterms during that period had