Cem Karsan - Derivatives ARE The Underlying
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+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This is a bonus episode featuring Cem Karsan. Cem is a different type of investor than is typically featured here. He is a volatility guy. He's focused on things like dealer positioning, and he has a passion for macro, and I enjoyed talking to him immensely. I will tell you this is not an uplifting conversation at the end of it, but Cem is very thoughtful, he's super smart, and you can't find somebody that says something bad about him that knows about his career. So, that's a pretty good thing. I don't know what else to say. I hope that you enjoy this and I hope it sparks some thoughts. Probably, the biggest takeaway that I had was the idea that equities are really just a derivative of the options market, which is the probabilistic expression of what the equity valuation implies. I've always thought of options as the derivatives, I've never thought of the equity market as the derivative of the derivatives market. If you find that thought interesting, you're going to love this episode. That's all I got to say on that.
Excited to be joined by Cem Karsan today. An investor that is I would say a different style from the typical fundamental investor that may be featured on the show, but I'm super excited to introduce your style and you to my listeners, and I appreciate you saying yes. Also, you're in Chicago. So, you're inherently a good person.
Cem: Thanks for having me, Bill. Good to be here.
Bill: Do you want to give a little background on who you are, and what you do, and how you view the world, so that people can frame the conversation?
Cem: Yeah, let's start from the beginning. I came up to Chicago in 1998 on the tail end of Long-Term Capital Management. It was an interesting time at the end of the tech bubble. That's definitely shaped the way I see some of the things in the world. I came into the market making vol, particularly options in vol space and eventually built one of the biggest market making operations in the equity index vol space. We are at our peak 30% of volume in the S&P 500 options. One of the-
Bill: Wow.
Cem: -biggest players toe to toe. The Citadel, and Cisco, HANA, and all the other big boys, quite a bit less capital, but they're really great quantitative models. Really, I think what made us unique from the very beginning is the edge that we have in quantitative models, our approach to reading dealer positioning in the option space and the effects that has had and that's something we still very much talk about and use in our current business, as well as really just this deep understanding of relative value structures and how everything connects-- how the inner plumbing of the market connects. That's how I grew up in the business. It's still a big part of what I do, sold that business in 2010. Really took my small family, office, and eventually started running some strategies that were created on the back end from the market making operation. And eventually that became an asset management business because we have people co-investing. Now, we run three non-correlated strategies that focus on the vol space, the dealer positioning in it and positioning quarterly as well as again relative value vol arbitrage. We have a long vol version and a vol neutral version of that. So, I've been living in this non-correlated world creating real alpha for a while nobody seemed to care for the longest time, because stocks go up and now that stocks don't go up, people seem to care again. So, it's an interesting time to be in space.
Bill: I have typically only focused on value investing, stock picking, but I would say it was some time last year I started to talk to Jason Buck a lot and he got me interested in different asset classes and I have twiddled my thumbs thinking about allocating to vol and vol strategies, and I continue to think about it. It would have been a very smart decision about nine months ago or so to actually follow that thought, but I'm not sure that we're done with this whole allocation opportunity. So, we'll see how all that goes.
Cem: Yeah.
Bill: I appreciate it a lot more.
Cem: Well, here’s the thing. Yeah, people are starting to tune in. We'll get into macro probably a little later in the conversation, but it's important to note that what's happening here is not your run of the mill pullback market says, big structural issues at hand here that really speak to big flows, not just matched up with the Federal Reserve, but from a fiscal perspective, from a macro global flows perspective that really changed a lot of the dynamics that we've seen before. We'll dive into at some point, but I do think it's important to note that and it may seem like, “Oh, no, I'm too late,” but there’s a lot afoot here and this is really an initial amount of volatility that could be a lot more here.
Bill: Well, I think something that's interesting is, we're in a period where, for lack of a better term, pixie dust and hope got really rewarded and people were willing to look out forever. I tried to get my brain to look out, too. Thankfully, I avoided some of that. But now, it seems to be the market is saying, “Okay, well what can you prove that your business is today?” There's still a lot of air on a lot of these valuations. I don't know at what point this ends necessarily for certain companies and then conversely, there's these value stocks that have just not been able to catch a bid for a long, long time. To Ukraine to get some of that moving and it's just had me questioning a little bit more of the fundamentals versus flows questions and how markets work. So, I'd be interested to hear you talk about your theory of the case on that.
Cem: Yeah. I've talked about this, but I think it's important to step back and look at the big picture. One, fundamentals do not matter directly to capital markets. I know that sounds crazy. The reason how they matter is to the extent that they create demand. At the end of the day, people lose sight of the fact that markets are simply much like the wrong [unintelligible [00:07:57] buyers and sellers, it's a function of supply and demand. Wherever the price clears is where things are and people lose sight of that. Fundamentals do matter to the extent that they create demand or supply. In a market where money is free, interest rates are zero and liquidity is widely available to individuals as well as institutions. Cashflow and the fundamentals that drive discounted cashflows that concept does not create demand or any demand that's really ultimately meaningful. The value of money being at zero means discounted cashflows are zero. We know that in terms of a spreadsheet, but in terms of actual supply and demand, it actually creates almost zero demand relative to how much demand there is. Think of it. I've used this analogy before it's kind of hokey. Some people listening for probably heard me say it, but I'm going to repeat it here. Imagine you're on an airplane, and you're thousand feet off the ground, and those jet engines are firing that thousand feet off the ground is the value of your valuation. That's your cushion now. It's cheap. You're not far off the ground. But what's actually projecting you in a certain direction is the liquidity is the demand. The more you get off the ground, you go to 10,000, 20,000, 30,000 feet, things get expensive but as long as there's demand driven by liquidity, you're going to keep going in certain direction. If you're on that plane, you probably don't. Yeah, you're not 30,000 feet off the ground, that seems scary. But it really doesn't matter to where you're going. What matters is the demand itself.
Now, the second that those jet engines start to sputter, there's less liquidity or some reason or another, the Federal Reserve decides to pull money off the table, you have a liquidity crisis for some reason or another, how high you are off the ground is the only thing that matters. If you are on the ground and you have unlimited cashflows where you have enough fuel on board that you can keep shoveling into your engines, you're going to keep going in a good direction. Actually, it'd be better for you in the long run, because you'll be able to buy growth names, and you'll be able to buy back your stock when nobody else can, and yada, yada, yada. The value of cash matters. Fundamentals and cashflows matter to the extent they help you provide liquidity they're put on your business. But they do not determine the long-term trajectory per se demand broadly does. And so, liquidity is ultimately the only thing that matters, demand is only thing that matters, but to the extent fundamentals create liquidity and drive liquidity at a time of illiquidity, they do obviously matter. That's what happens. Eventually, you get a liquidity crisis.
When you get a liquidity crisis value and discounted cashflow names, not just outperform, they dramatically outperform and they actually not only survive, they end up being able to-- when all the creative destruction happens from all the growth, names that don't have cashflows, etc., and they get to pick up all those pieces and benefits. I think that's the broad mental framework to use when you're thinking about fundamentals versus flows. Flows are ultimately the final say. What takes one flows right up, fundamentals are the only flows and that's what matters.
Bill: Huh. That's interesting. I have a buddy, RJ that sent me a note and it's from a well-known forecaster, and I'm pretty sure he said that, “In tightening cycles, there has never been a tightening cycle that didn't result in some form of a financial--” I don't want to say a crisis, but I do think that's the word to use. But he defined “1987 The Crash” is a crisis. So, I'm not sure whatever the word needs to be. But what I'm hearing you say and that quote is ringing out to me, it seems as though you come from a period where liquidity work, I mean, we were certainly a washing liquidity before, and people aren't ready, and all of a sudden, people are looking down and they're saying, “Wait, I'm 40,000 feet off the ground here. That is not fun.” Then I would think that it creates even more of a liquidity tightening, because people want to hold on to the cash that they have potentially. [crosstalk]
Cem: Yeah. Valuations on a not just a weekly, or monthly, or quarterly, but even annual basis, valuations are-- There was plenty of research about this do not have predictive value. They do however, on a long-term have predictive value. The reason that they do over multiyear, decade long periods have predictive value is because ultimately, you do generally in a decade long period at some point get a period of illiquidity and things come back into line. So, they're really a risk management tool. They are not good for investing in the short term, but they are a risk management tool.
Bill: Interesting. Okay. So, just playing back where we were, macro was said to be dead, shorting was said to be dead, no one cared about vol. Didn't we have that year where stocks never went down more than a percent in the entire year or whatever? Yeah.
Cem: 2017, [crosstalk] 30% of any other year in these 150 years.
Bill: Yeah, that's crazy. What creates a year like that in retrospect? Did you—[crosstalk]
Cem: You know exactly what it was.
Bill: Okay.
Cem: We have proof. I can talk about that. Yeah, we can dive in. That's my bread and butter. [crosstalk]
Bill: Yeah, I'd be super interested.
Cem: That's the vol space. There's so much liquidity in the market but there was a search for the TINA effect people call it. There is no alternative. What that led to is a reach for yield, where people started selling implied vol, essentially risk collecting, risk premia in order to capitalize companies like Allianz, which is in the news now for other reasons. Catalyst fund was a big one. A lot of big entities started selling really tremendous amount of index vol. Diversified selling vol, it's an insurance product at the end of the day, they became insurers. The problem with selling insurance is it's intrinsically connected to the markets themselves. There's a reflexive effect. It's not you sell tornado insurance and then so there's less tornadoes that there are unconnected things.
But when you sell insurance in the market and do it in mass, somebody has to buy that insurance and that ultimately are banks, dealers, market makers, somebody has to hold the other side of the trade. If it's all selling or overwhelmingly so, new dealers and the market makers, whoever buys that stock those options has to buy when the market goes down and sell when the market goes up in order to capture a profit. When it's that low, too, it doesn't take much. There was so much vol supplied in the market at the index level, not the single stock level that it essentially pin the index for over a year. A lot of this supply was not just coming from-- started with these big funds, these insurers selling it in these funds, but it also was short vol ETFs. A lot of retail is an easy game. You just went sold vol and every day you came home and you collect the money. That creates a moral hazard broadly for funds that are selling it, because they're probably not going to be around in two three years after it blows up.
Bill: Yeah, there’s the one that blew up, right?
Cem: But XIV in particular in February of 2018 was the one that imploded that created the volpocalypse, Feb 2018. We know how much open interest there was. We had an order of magnitude more vol selling than we have now and it reflexively pin the market. We know that because the index level had the lowest realized volatility by 30% as I mentioned at any other time in history in 125 years. It's out of sample with hundreds of years of history by a lot. At the same time, we had the lowest correlations of underlying stocks in the indexes by 25% and 125 years of history. Why is that? How are those two things connected? Vol signs happening at the index level, the index gets pinned. But idiosyncratic risk still exists. Stocks still go up--
One standard deviation of historic norms, single stock vol was not weird. It was the index that was not moving. If the index is pinned, everybody thinks the index is a calculation that summarizes the individual stocks total net worth. The opposite is actually true. The index has become such a center of trading more so than the single stocks actually. Now, what the index does? It actually affects the single name stocks themselves. If you have idiosyncratic risk, a stock comes up with a cure for disease or a new technology is still in up, right?
Bill: Yeah.
Cem: The problem is the index is pinned, which meant other stocks had to go the other way. It drove the lowest correlations between underlying stocks in history. We have that that's very well documented. People who come from single stock land think, “Oh, well, correlations were just really low for some really intrinsic reason” and that cause really low vol. No, it was all because of vol selling the index itself was pinned. We know that within one standard deviation that single stock vol was still within historic norms. It was really a function of the index itself not being able to move.
Bill: All right, I'm going to risk sounding like an idiot here, but I'm going to go through this like I'm five. Vol selling, are you selling puts?
Cem: You can sell up. You can sell puts or calls. Anything, a put is a call when hedged This is put call parity, which means a put and a call are the same thing that they're of the same strike if hedged with one share of the underlying itself. I know it's confusing, but it’s options 101-- [crosstalk]
Bill: No, it's not that confusing because if you own a share and you sell a put, then you basically want to call. Is that what you're telling me?
Cem: That’s correct.
Bill: Yeah. Or a hundred shares and you sell a contract or whatever.
Cem: Correct. That's why you're ultimately call it a put, put have the same implied vol or priced on the same vol. They are ultimately, the way you price insurances is not a function of the strike or anything else. It's really what implied volatility are we on. That's the same whether it's call or put.
Bill: If I'm selling a put that means a dealer is buying a put. In order to offset their delta position [crosstalk] they are buying stock. Yeah, because they're long to put. That makes sense. So, you get into this scenario where the hedging of the dealer positions impacts the index. Is that where you're going with this?
Cem: Correct. In 2017, imagine. Let's do the simplest example. Let's just say they were selling straddles. They're selling a call and a put of the same strike at the money. Let's just say. It's the simplest. Selling a call and a put at the same strike essentially is like an upside down V. If you buy a straddle it's up you make money in either direction, but you pay a premium for each of the call and the put. If you're selling that, ultimately, the buyer is along that vol along the V and in order to-- they paid very low price for it because vol’s lower than it's ever been and maybe by straddling S&P 500, let's say it's trading 4,000 and maybe they only have to pay for the next week. They only pay $25 to own that straddle. That's how cheap stuff got. It was crazy. But that means that the market goes down $10 that they probably are going to buy because if it happens that quickly they have a whole week to make $25. It goes up $10, they're going to sell it again.
Now, imagine the whole world is long incredibly cheap insurance that’s hedging. Market goes down, they buy, market goes up, they sell, and everybody's long, so, the market just can't go anywhere. Ultimately, it's also a race to the bottom because if the markets not moving even if it's cheap, they're always losing money. Then they sell it lower, and lower, and lower, and it ultimately gets to a point where somebody says, “Well, you know what, this is the historically the lowest it's ever been by far.” Guess what? I'll just own it and at some point, it'll make money. In order to do that all those people own it and they probably still lose money out, because they realized vol itself would still get even more and more pinned. So, this was the death-- [crosstalk]
Bill: That's crazy. Yeah, because my mind would be like, “Who is selling vol that cheap?” Because you're not getting much premium, but what you're saying-- [crosstalk]
Cem: It’s incredibly profitable because reflexively the more it got sold, the more it pinned the market, the more it got sold, the more it pinned the market, the more it was up. Actually, ironically, people think because vol is reverting people were not in the space. Think you want to buy vol when it's cheap and sell it when it's expensive. That's the broad thought out there.
Bill: Yeah. That’s what I would guess.
Cem: Actually, if you look at risk adjusted returns, you actually want to sell vol when it's very low and you want to sell it when it's very high. But in the middle, you want to be-- analyses rarely goes to the high end of the curve, the really high level that it's actually generally inverse for the most part between 17 VIX to a 30 VIX, you really want to be long vol and you really want to sell it below a 15 VIX. And then again you want to sell, if it gets enough 30. Again, it's not exactly. Those aren't exact numbers, but it depends on the realizable environment, it depends on what's happening. But that's the general rule historically that's more of a you, you really want to sell it when it’s low because reflexively when it's low, it's actually stable and it's pinning the market and it is reflexive effect of low vol on the underlying machine itself.
Bill: That's fascinating. I always think of the index is a derivative. You've got derivatives of derivatives actually impacting the underlying stacks and then you've got a bunch of these fundamental guys like me trying to figure out what's going on here. [laughs]
Cem: Yeah, it’s a whole machine work. Actually, I'm going to really blow your mind. Derivative is a term that was created for these things because they were originally made-- The world of stocks and bonds started from companies. I want to own the company or I want to give you debt. But if you think about it as a capital market thing, you don't have that core perspective. All assets and the way people think about them is they either go up or down. It's two dimensions. The markets are much more complicated than that.
Markets are a distribution of outcomes. All things are distribution of outcomes. If I could give you two stocks from the same sector it would cover up their names, and they have the same market cap, and you'd think they were the same. But online, you could have a totally different distribution of market outcomes. It could be very right slanted with a big fat left tail, it could be very narrow set of outcomes, very low volatility. But yet, not a lot of positive upside and yet you have the same market cap because that market cap, that stock price is ultimately just a summary of the distribution of its outcomes. What options are--
These options represent every single point on that distribution of the outcome of every asset. “Oh, vol is an asset class." Vol is not an asset class. Vol is the asset class. Vol is the distribution of all outcomes for every asset. I can look under the surface of every option chain and I can bet on every five -point move or one-point move in a stock, or a bond, or in an interest rate, whatever it is based on the distribution of the option chain. That's not just in time. That's also in moneyness and it's really a three-dimensional picture of what the stock's potential outcomes are.
There's a reason. People like, “What is going on with all this options volume? Why is this happening?” Simple answer. There're superior products that give you much greater flexibility and much greater picture of what an asset is and what its risks and returns can be. At the end of the day, options are not really the derivative. Options are the set of outcomes and the summary is the stock, or bond, or asset value, it's just the expected value of that distribution. There's a reason that we're having more notional trading of options nowadays that we have single stock. Because single stocks are two dimensional, simplistic summaries of the full picture. In a day when we have a factor and a style ETF two-dimensional for everything on the planet. Almost insane that it's taken this long for people to open their eyes to the fact that there's a much more data rich, more flexible way to play the value of any asset other than just buy a stock or buy a bond. [laughs]
Bill: That is super fascinating. It actually makes a ton of sense to me because to your point, you're just basically summarizing a probability distribution in an expression of an asset value with stock at any given time. I do have an issue when retail gets involved, because I have a suspicion that retail has no idea about any of this stuff. I spent a decent amount of time studying some options and I'm barely literate or competent in a conversation.
Cem: Well, that’s true for stock, too, right?
Bill: Yeah, that's fair. I guess with options, it's the speed at which they move. I had a buddy who wants told me, he was like, “I think the stock is going to go up to here. So, I'm going to buy a call.” Say it was like a 25 and he wanted to buy a 23 call. I don't know. He had to pay four bucks. I was like, “You're going to get destroyed by vol crush.” I don't know that people understand how the Greeks work as well as they should.
Cem: Absolutely. Probabilities themselves.
Bill: You obviously do. [laughs]
Cem: The probabilities themselves are people think that's too complex for most people. But people have an intuitive sense. We make decisions. If you ask somebody, a little kid who's 10 years old, who might be very smart, mathematically minded, but have never been taught what a stock is, it's confusing at first. What’s a stock, what's a bond, what does it mean? But we learn. The reality is with options and probability, again, it seems confusing, because we all get caught up in the math. But intuitively, we all make decisions and waiting decisions based on probabilities every day. Our minds are probabilistic waiting machines. What are the odds of this, how is that, what do I think's going to happen, and why? What are the chances of that happening? That's how we make decisions. I think anybody who's ever really taken some time with options, eventually, it's like a framework, it's like a language of how we actually think. It actually is something that I think a lot of people are learning and opening your mind to.
I think of it like a technology. I think it's a superior, more flexible technology. It just takes time, it takes network effects. It takes more access to these things, it takes more education, it takes more products, it takes more liquidity. Liquidity in terms of people trading in and doing it to get involved. I think we've really hit a tipping point with that stuff and people are learning, but there's more. It also doesn't hurt that we're in a time of more nonlinear outcomes because of the removal of liquidity and record valuations and record leverage in the system. But yes, to your point, there are always new participants learning, making mistakes, and there are several dimensions to how you price options, which can be a little bit more confusing.
But I think intrinsically, people understand that. I'm better off if I think there's a chance of a big up outcome of something to spend less money for a nonlinear, no convex bet. That is the nonlinearity. That's saying, “Hey, the distribution has a very fat right tail. There's a high probability of something happening that seems unlikely, but it's very far away. If it happens, I get a big payout. Concept is not wrong. It's right actually. The actual math that goes behind it might take some time for people to put their head around and understand.
Bill: When you said that what went to my mind is tech stocks last year seem to have been pricing in this right tail as if it was objectively going to happen, but obviously not so. Your answer probably has to do with liquidity. I'm not sure. But how does the probability skew if we accept that world, like, if we accept the world where options chains create the equity value, how equity values moves so fast, so far?
Cem: We’ve touched on this a little bit earlier, but the difference between just looking at a distribution and looking at the outcomes relative to an asset and keeping them separate would be one thing. That's the first step. But there's more to it than that. There's a reflexivity, which we also touched on earlier. This is not tornado insurance. Buying tornado insurance does not affect the outcome of a tornado. However, buying calls does affect the effect. The tech stock does affect the outcome on that tech stock, because ultimately, the dealer who's selling it has to hedge that risk and that has an underlying effect on the outcome of that tech stock. There's a circular reflexive effect in markets.
Now, people have always under like big, good invest like Soros. They've always understood that there's this reflexive effect to markets and there's a reflexive effect in life broadly. Right now, we have inflation. Guess what there's going to be effects? People are going to react to the fact that we have inflation to probably try and lower it. That decreases volatility, etc. There's mean reversion and reflexive stuff, but it is embodied in markets. In the option space, if you go and buy calls like I said it all affect the underlying, buy, put some ongoing affect underlying. Those probabilities themselves ultimately are affected by the supply and demand. That's where the dealer flow comes in and it's something that we've been doing for quite some time understanding the market structure, understanding the reflexive effects. “Oh, that positioning on the underlying is critical to being an investor in this day and age.”
Bill: If people are buying these out of the money, long dated calls say, correct me if I'm wrong on any of this, but you're going to have less delta and more gamma, so gamma is the percentage of the option that increases for the next dollar move and this is where we get these gamma squeezes, right?
Cem: Yeah, so, the gamma squeeze piece, this is the first thing that people started thinking about in terms of options recently. If you get enough volume on the tail and you get entities you have to sell enough of it, if there's an imbalance to a point something that has maybe a 2% chance or a two delta of being in the money. As you start to approach it, the people will just walk through an example. If a bunch of people bought one delta call out of the money, dealer sells all of these. They have to buy some stock against it. So, that's one. Okay, you have a hedge of one delta, but now you go up, and you go up quickly, and start squeezing.
Bill: For those playing at home, it's a small amount of money. One delta is 1% of the contract roughly.
Cem: Correct. Sorry, one delta means per point move in the stock, the price of that option moves one cent. It's like one percent [crosstalk].
Bill: Yeah.
Cem: Now, gamma, just to be clear is the change in that delta, that percent probability, that percent change in the price. As you go closer to something, especially something becomes at the money or at the price of the stock. It has a 50 delta, it has a 50% chance of being in the money, and it has a 50% chance of being out of the money. That 50 cent, that 50 delta means that if the market goes up by one, the price of that option goes up by 50 cents. Then eventually it becomes in the money, becomes hundred delta, it essentially become stock and so far in the money. No different than stock and moved by the same stock.
Gamma is the change in that delta. When you start with one delta, eventually, you move quick enough, it'll become a two delta, and everybody will have to short those calls on long stock will now have to buy when the market goes up. It is the opposite example of the thing that of pinning we talked about in 2017, right? Market went up, they got to sell them all, because they were long vol, the market went down, they got to buy the market and sell the market and sell the market [unintelligible [00:35:01]. Now, the dealers are short gamma, which means that the market goes up, they got to buy more stock. The market keeps going up, it goes from a two delta to a three to a five to a 20, to a 40, to a 50, to a hundred. This is when people refer to as the embedded leverage of options. As you get closer to whatever that call was making the money, it is intrinsically creating a greater and greater percent short in the market. There's so much leverage behind that. If they do that big enough size, there aren't dealers that are big enough that eventually those dealers have to buy calls.
In the case of Melvin capital, who basically got blown out by being short all of these meme names that have no real intrinsic value, but they went to infinity. They got caught up in a gamma squeeze, and they had to buy back the calls that they were short, and ultimately that even only exacerbated it more and made it go up even more. There's a reflexive, again, effect here by buying gamma, especially on the tail and as high convexity, you can force short gamma by dealers, which means that the market goes up, it goes up more. Again, there's an opposite cost of that and I don't want to go into all the details and all the Greeks, but as options decay, there's a separate effect that's not just based on price, that's called [unintelligible [00:36:24] or charm, which is the opposite [unintelligible [00:36:24].
If I trade a 30-delta call, and I bought them and dealers were short that call, but the market didn't go anywhere or vol decreased, that 30-delta might go to a one delta, just based on time and the reduction involved. As the vol reduces or the time passes, over time dealers who were short that 30 delta call on long stock now have stock to sell. And so, those are opposite effects, their function out of the market move, but the move in time and move in implied volatility expectations for the market. It becomes a little bit five-dimensional chess in some ways, but by understanding the effects of time, the effects of implied vol, and the effects of market move, knowing those positions, you can now map out what the dealers have to do and what the effects of that will be as time, the market moves [unintelligible [00:37:17]. [chuckles]
Bill: This is blowing my mind.
Cem: It’s a fun game. [laughs]
Bill: My takeaway is, unless you're flying low to the ground, you're very subject to all this stuff. Then even if you're flying low to the ground, you better hope you have a management team that understands to buy stock.
Cem: Correct. But to be clear, understanding this stuff is critical and I think there's been a lot of education around it lately. Listen, you're trading in markets in the short-term again [crosstalk] to be clear. A year or two is still short-term. Not just daily, weekly, monthly but if you're looking multiyear and you're subject to valuations within that short period, fundamentals aren't going to really help you. You need to understand where supply is and where demand is and why it is the way it is. Part of that is options markets, part of that is the Federal Reserve and liquidity. All these things are critical to be a participant in the markets.
Bill: Man, I could listen to you go on like this forever. I don't want to run the conversation too far forward, but I know one of your passions is macro and it feels macro is driving a lot right now. What's going on out there because it seems there's nowhere to hide, except for the US dollar?
Cem: Oh, [crosstalk] It’ll take a little bit longer, but let's start from the beginning. I think it's very important to start from the very beginning.
Bill: Okay.
Cem: When we talk about macro, it's less about geopolitics. I think the most important thing that geopolitics affects it, but the most important thing is to start with the machine, and the liquidity, and how it's driven, how the economy is driven. Here in the US, our founding fathers created a system to make it very difficult to pass policy and to pass laws. That was on purpose. They didn't want a situation where the elite the wealthy and the powerful could affect laws. They put a lot of checks and balances in place. So, absolute power do corrupt absolutely. That was on purpose. The problem with that is it created a situation where we would only pass laws and make changes if we had a crisis. We ended up having a lot of crises over several hundred years, a lot of booms, a lot of busts. I'm starting here at the beginning. I think it's important to understand. Those booms and busts eventually, people got sick of and people said, “Look, we can't seem to--
Bill: Yeah.
Bill: and Cem: “This is not fun.”
Bill: [laughs]
Cem: We understand that like you need checks and balances, but there's got to be somebody who's watching the economy who can react more quickly and not in a time of crisis. They created something called the Federal Reserve. The Federal Reserve, they didn't want to give all the power in the world, because that would be extra governmental in total and that would ultimately be dangerous as well, because of ultimately absolute power in theory could corrupt that and take the reins of the economy. But they did give it quite a bit of latitude. They said, “Look, we're going to give you one tool monetary policy. Not fiscal policy.” We could keep the power of the purse in Congress, but we are going to give you two objectives. So, we're going to give a very simple function that you can aid the economy with. Somebody's going to tie one hand behind the back in the monetary policy and we're going to say, “Hey, the only things that you have to worry about are price stability and maximum employment.” It’s a very simple function to run the economy. I think the current economy might be a little more complicated. I don't know.
Bill: Yeah, it seems so.
Cem: What happened? Well, eventually, when we got taken off the gold standard by Nixon, there was no longer a more imminent move to a fiat-based system. There was only one entity really running the economy. Monetary policy became dominant. The Fed became the only game in town. Anytime there was a slight issue or hiccup, the Fed would come in, and it would stimulate, and it would create a monetary response. Now, monetary policy is not the same as fiscal. Most people don't understand this, but it's very important. Monetary policy, what it does is it controls interest rates or in recent history it buys assets to reduce interest rates as well and provides liquidity. Stimulus that's coming from monetary policy goes to capital. It goes to corporations, it goes to entities that can borrow money. The only entities that can borrow money are wealthy individuals and/or corporations. 50% of the United States, medium person, very little debt, if not no debt.
If you are sending money to capital, if you're sending money to the top what that does is it and we talked about this at the top of the show, it reduces the cost of money. It allows corporations to bet on 20- or 40-year outcomes, it creates infinite liquidity, and that's essentially trickledown economics. It's supply side economics. You're sending money to supply. I've given this analogy. We call it sending money to Planet Palo Alto. We send money to all the corporations. It's another planet. Imagine San Francisco and Silicon Valley is another planet, might as well be. You send that money to Planet Palo Alto and that money never hits our shores. The velocity of that money is zero. But that money that goes those corporations creates crazy new technologies and new ways of doing things. It creates Tesla's, and Ubers, and Amazons, and all kinds of incredible things. All of a sudden, from Planet Palo Alto, this advanced society, they send back these technologies to our shores and those things are not money. That money never hit our shores. And those things are supply, those things reduce the cost of things that make things faster.
Bill: Yeah, their consumer surplus basically or had been.
Cem: [crosstalk] Sending lowering interest rates sends money to wealthy people who only invest in or they buy luxury goods and get inflation, that stuff, but that's not really [unintelligible [00:43:38]. You send money, if they buy more investments. We send more money to capital, which creates more technologies. What we've done is since 1980, since going up gold standard and making the Fed dominant, we've created a technological revolution. Again, I don't know how old you are, Bill, but I'm 45, and I was born in the 70s, and I know well enough to read--
When I started reading books, it was all about the future and stuff that never happened. I watched The Jetsons, it never happened, I read Nineteen Eighty-Four, it never happened-- I’ve watched 2001: Space Odyssey and it never happened. The future can never come fast enough. Guess what? Monetary policy and limited capital we created, 40-year time horizons for investments for four years, and we've created Amazon, and we've created Tesla, we created Uber, and a million other companies that never would have existed because they never created cashflows, but created advancement and better supply. That is deflationary.
On top of the technologies and advancements we've created, we've created massive globalization. Because when you send money to corporations in unlimited amounts of it, they want globalization. They want to export them and reduce their costs. It is natural selection. It is free market economics on steroids. It is the reason we as human beings that advanced over hundred million years to what we are today competition, free market economics, nature is powerful, it’s raw in tooth and claw. It is a great system for optimization. The problem is-- [crosstalk]
Bill: Real quick. I just want to double click on something. Why do corporations want globalization just to--?
Cem: Reduce competition.
Bill: Yeah. Okay, just want to-- Okay.
Cem: Yeah, the profit maximizing entities at the end of the day.
Bill: It makes sense.
Cem: They want to create a better good for cheaper and it's incredibly competitive. Again, it's competition, it's survival of the fittest. You put a system in competition, survival the fittest mode, and you create crazy outcomes because people especially if you add unlimited money into it. At the end of the day, we have gotten a system broadly that has created historic margins, where price to sales has been at record levels for a while, but people still talking about price starting to be not that far off, because we've created infinitely better order of magnitude higher margins because we've reduced cost dramatically in the system by creating new technologies. Again, globalization as well reducing labor costs.
Now, that's all great. It's pretty market economics, we've seen significant technological advancement, it sounds great. That's doing its job. It’s doing what's been told. It's maximizing employment, at the same time, price stability. It's actually the deflationary to do this. They've been able to do ad nauseam more of it. The problem is we had two objectives, price stability and maximum employment. We do this for 40 years, which is what happened, there are people and human beings in the system and all the money went to the top for 40 years. We had 1.75% GDP growth for 40 years in real terms. About 0.75% of that in real terms went to the median person. The other 1% went to the very, very, very, very top and 1% of the whole economy to the top, 100% growth a year for 40 years. That's what we've experienced. We've totally hauled out the middle class.
Again, this is not a judgment political statement. It's just is what happened. About I don’t know, seven, eight years ago, you start hearing a lot about inequality. There are books are written about it and you started getting something called populism. Populism did not just happen here in the US, it happened globally, because everybody was subject to the Federal Reserve and Central Banks. Activism over those years and importantly that populism was not just in the left, the left and the right. Donald Trump was a populist. I think we know that now. He's not right, he's left economically. Bernie Sanders was left. Now, he's even more left, right? The whole system shifted [crosstalk].
Bill: Yeah.
Cem: And founding fathers going back to the very beginning. We create a system to respond to crises and it takes crises to make change. That builds up big to a point where inequality got to something that the left and the right everybody was concerned about, and then COVID hit, and all of that Trump brought the right, left, and the left was in charge and now, we pass $12 trillion of fiscal stimulus. It is an order of magnitude more fiscal stimulus in real terms than we've ever gotten. The New Deal in 1930s, which filled a decade long hole called the Great Depression was in real terms about $1 trillion. Now, that was 1/10th economy, 1/10th the size. You normalize for the size economy, let's just say more or less, this is the size of the New Deal.
The difference is that plugged the hole called the Great Depression of decade. We're not in the depression. Look around you. What fiscal stimulus does unlike monetary is it doesn't send money to capital. It sends money to human beings. People got a lot of money, particularly on the bottom and there all of a sudden, for the first time in 40 years looking around saying, “Wow, I have money in my pocket.” Now, look at this and they started spending. That was the goal originally of it. But it was also to help with inequality, because populism was the name of the game and fixing that. But it really did way too much, way too quickly. It was response to just built-up problems and economy for four years. That demand push, which is again, velocity of one, this money is not going to Planet Palo Alto. This is helicopter. This is going directly in the pockets. It creates that that inflationary push.
Now, that happened at the same time as supply problems globally because of COVID and created a massive- [crosstalk]
Bill: Yeah, I got constricted. Sure.
Cem: -supply and demand imbalance. We call for this well before it happened, actually back in 2020. Not a surprise, this is where we are now. Now, the problem is that's not all that's happened now. Now, we had supply demand imbalance and a shift to fiscal inflation. The response now for the first time in 40 years, the Federal Reserve which has two mandates. Price stability and maximum employment, now, just keep doing monetary policy to stimulate and get a deflation response. They have inflation to deal with.
Now, all of a sudden, 40 years of monetary policy has to be pulled back in order to deal with inflation. Now, the problem is the Federal Reserve, as we talk about, if you stimulate monetarily you send money to a Planet Palo Alto, that is deflationary. Taking money away from Planet Palo Alto is not deflationary. It's actually taking money away from supply. We are not in the same economy we were in the 1970s. The system does not work the same way. Labor for most of these corporations is mostly abroad, it's not here domestically. If you pull away from these corporations, you're going to get less supply. You're not necessarily going to hurt demand that much. The way you put demand on us, ultimately, it is through the wealth effect. The Federal Reserve essentially has one tool now in which to combat inflation. This is a wealth effect in capital markets, and the reality is most people in the bottom 50 percentile, sucks anyway for the most part, they've just entered-- [crosstalk]
Bill: Huh, interesting.
Cem: And they are not really, ultimately-- [crosstalk]
Bill: You're attacking something that doesn't really actually accomplish the goal until you create a huge recession or something.
Cem: That’s exactly right. The only way they can affect ultimately inflation in this environment is essentially to pull back away from supply and demand and crash markets. It's like dropping a nuclear bomb on a forest to clear the underbrush. Yes, it will clear the underbrush, but is that really what we want? There's some real confusion in the Fed and policy in general, and how these tools work, and how they're supposed to work in their mandate, and how they can even control inflation in this environment because they really can't. Yeah, we started at the beginning and now we're here, but we are essentially trying to unwind 40 years of inequality and can combat populism, which is not going to go away overnight. It's all been exacerbated the same time, by now, macro geopolitical issues.
When we're getting inflation and this is not a coincidence, if you ask me. We don't know this, but Russia understands that inflation is underway. It understands some of these issues that work. They understand that their strength ultimately is through their dominance in commodities across the board, particularly, as it relates to Europe's dependence on them during a time of inflation. They saw it as his opportunity that he had leveraged in a situation to go into Europe and make [unintelligible [00:52:42]. now. Obviously, these things have not gone exactly as planned. But now that we are here, we are seeing even greater inflationary push from the commodity side because Ukraine and Russia ultimately are-- not only Russia is one of the biggest energy exporters in the world, but also, wheat and fertilizer, which are foodstuffs. Portlet, incredibly important to long-term sustainability, particularly outside of the US in less developed markets are also something like 40% of worldwide grain consume from those two places.
The commodity push has gotten worse, which put the thing in the bigger box, which is causing even bigger problems, Now, that wasn't enough. China has supported Russia, admits that they also see this as an opportunity to prepare to counter the west for long-term strength and stability, you also realize that inflation regime. They're at risk if they don't have a partner, though they have stable exports. They see themselves at risk and they see this as an opportunity at the same time. So, they pair with Russia and now, we have the risk of the unwind of globalization, which was one of the three legs of the stool that created something in the first place. So, I don’t mean to scary you, but this is a dangerous time.
Bill: No, no. On top of all this, whether coincidental or not, I have no idea. My tinfoil hat thinks maybe it's not, but the zero COVID policy in shutting down the ports only exacerbates the supply chain issues that are currently going on. I guess, maybe now the target saying they have a little bit of over inventory, because food is eating up people's wallets. Maybe some of that pressure stops or whatever, but yeah, this seems you want to be flying close to the ground or not flying at all. I'm not sure.
Cem: That's right. Now, let's step away-- Also, things that are connected to this whole picture, right? One, monetary policy has created a technological revolution for 40 years. It's also created a great distrust about government because it has created this inequality. Those are two things we just talked about, right? What generations are hurt the most by this inequality? The generations that didn't have assets that were coming into the labor force during this. There's been no capital appreciation until really-- no building of nest eggs by millennials on down. Whereas baby boomers, who had all the assets have dramatically benefited from all this. It's created a schism between boomers and younger generation, it's created distrust by the younger generation of government broadly, and right at a time when these 40 years, these generations have thought technology can solve all of our problems. What does that sound like? Little crypto, right?
Bill: Yeah.
Cem: This is the reason crypto has been the religion of this generation of why it has seen such meteoric growth. It is also a group of people who has underperformed and has needs to catch up desperately. They're in the 30s now. And so, what do you bet on? YOLO calls and crypto convex outcomes. You do it through Wall Street bets. Sometimes, religious and almost existential, and that's what created crypto. It is now tied to that generation. I'm not here to say it's not going to be a thing, because that generation has adopted it as such a critical part of who they are and what they want in the future is an expression of who they are. I think that's important to realize, “What is crypto, where did it come from, why is it here?” It came from monetary policy dominance for 40 years.
Anyway, we can go on and on. There're other pieces to this picture, but there is monetary policy and those effects have affected every facet of our lives over this period, whether it's globalization, whether it's technological booms, it's crypto, it's growth. As that begins to unwind and you start to get rebalancing, we're in such a tail end of the pendulum swinging, that things get a little messy on the way back. So, I think it's not going to-- [crosstalk]
Bill: I missed inflation mostly because I am like the goldfish that swimming around that doesn't know he's in water. I had seen so much monetary policy not result in inflation that I almost thought and I still have to get it out of my head. [crosstalk] Yeah like, “Oh, inflation is dead, right?”
Cem: Yeah.
Bill: Even if we send this money somewhere on the back end of this, we're going to be back to the same regime in two years or whatever. I'm beginning to realize how hard an inflationary spiral is to stop.
Cem: This concept is very straightforward concept of monetary policy versus fiscal concept that just money printing is the same no matter who you send it to is a major cause of confusion by most people. People just think, “Oh, there's more money, so, it's worthless.” If that money does not enter the economy, it doesn't matter how much is printed. Yeah, I could print a gazillion dollars, and put it in a box, and hide it under my bed, and it won’t change the value of the dollar. The question is they caught velocity of money. I think that's confusing, but how much money is entering the economy. But really what it is, who's it going to? It's going to people who spend it, then buy stuff with it, then the assets increase money supply. But if it's going to entities that are just creating more goods, that's not inflation. That's actually the opposite. It's deflationary. I think that broad understanding is completely lost on most of the public. Honestly, it's lost on policymakers as well. It's part of why we're here.
Bill: Yeah, as you're talking, I'm really fearful of the people that have started to invest in the market at the time when monetary policy is potentially going to get quite tight and they probably already have some distrust in the system. I don't know. There's some risk out there that I feel I have underappreciated in the past at least.
Cem: Yeah, absolutely. Look, it's actually in the long run good that we are not going to an even greater extreme. The more people can listen-- Again, our founding fathers created a system that's supposed to respond to crisis is. If it's flexible well enough, great. A rejuvenation of some of the ideals and the things that make us who we are and we'll fix things. I think part of the problem is the Federal Reserve muted that response for 40 years, and that's part of why there's greater instability, and there are cracks that have been created in the system because of it as well. Whether you look at citizens united or gerrymandering in the political system, all of these things happen because of the corrosive power of money and politics. The power that's been concentrated on the top because of inequality has been driven by the Fed.
At the meantime, we haven't passed any laws or been able to pass laws because the Fed has come to the rescue every day. It's good to have some crises now and then and just don't want to keep letting the system build up with bigger and bigger problems again, it's good that these things are happening now and not in 20 or another 40 years because heaven forbid what that would look like. It has been a long time, it's going to be scary. Hopefully, it's not existential. I'm optimistic that it won't be. We are lucky to back away here in the US to be on an island with the greatest, biggest economy in the world, biggest military in the world, are self-sufficient in terms of commodities, and food, energy. That’s is why the dollar is going through the roof right now. We are a safe haven in an otherwise very turbulent world. It doesn't work without risk. There's no risk of the internal strife. Again, if we have a problem, ultimately, internally, but at least, we have a flexible enough system to fight autocracy, rebalance and not cause a revolution, but more of an evolution. And so, I'm actually long term, more bullish, and optimistic about US and its outcome because we're having this crisis as opposed to if we continue down the same path.
Bill: The other political shame of where we are is, I've seen Bezos speaking out about inflation and whatnot, and the perception that I think people can have, and perhaps rightly so, is it's like, “Oh, well, now, it's a problem. Now that people that needed the money, have the money. Now, it's a problem that we're getting money.” It was never a problem when the wealthy were getting wealthier, but now that people actually got some help, now, we have to really worry about inflation. I'm confused on how much is reality and how much isn't, but I know perception is important in politics and I've seen that come back from a number of my friends have commented on some of the threads that I've seen lately in Twitter.
Cem: Yeah, absolutely. Listen, most people don't understand how the machine works, and they're never going to, and you can try and educate. That'll help a bit, but it's confusing. There's a lot of different levers. But the reality is, this dynamic between populism and optimal outcomes, fairness, if you will, for lack of a better term and maximum growth or best outcomes is a tension that's existed since the beginning of men and actually any community even before men, even the nature. Survival of the fittest, ultimate outcomes are best in a competitive world of survival of the fittest. But your mom told you when you were a kid that life isn't fair. Nature is raw in tooth and claw, but that's what creates progress.
The same time the community and society, people look at that system and say, “Hey, that's not fair. I can't let the--" To give an example, Socrates, he had a statement that the [unintelligible [01:04:01] question was, do you give the best violin players the best violins or do you give the worst violin players the best violins? His answer was, you give the best violin players the best violin, because you get infinitely beautiful music and you get the best outcomes. But what happens to all those other violin players? That's not fair. This tension between nature and free market economics, and whatever you want to call it, which is the ultimate best system for growth and this leaving other people behind is the tension between left and right. It is communism versus full of adultery libertarianism. It is right versus left and it's a tale as old as time. This pendulum swings because ultimately at some point, absolute power corrupts absolutely and they say, “Let them eat cake," and then they burn it down. Here we are. It was let them eat cake and now there's a burn it down mentality. Luckily, democracy is generally suited for not burning it down, but just putting small fires around, and then putting them out until we fix the system enough that people are able to handle it. That's why the founding fathers created a system.
Again, this is not a new thing. What we're going through is not a new thing. The details are different, it rhymes, but they're all related and will be back here again, hundred years in the future, we'll go through another set of this the back end of the next 10 years, rebalancing, and populism, and rebuilding the middle class, or whatever it is, interest rates will be higher and we'll have room to do supply side economics again, and promote nature, and free market economics on steroids, awesome growth, the next cycle will begin, and eventually it'll go too far because those people the money that they've gotten feel like they're entitled and the people on the bottom one will start over.
Bill: I think you may be just answered the question of how does this end, but it sounds in a potentially cathartic, but scary, I don't know, the evolution, I guess is probably the best way to say.
Cem: It’s always balancing it. You hope it's not complete burn it down. You hope it's not a revolution. It's a revolutionary impulse that at least leads to a revitalization, rejuvenation of other structures and things that we have. Again, I believe that's the case. Our system will not last forever, but it is thankfully, a system that was created to be fairly robust, and flexible, and allow for us to rebalance. Again, I hopefully will get rid of some of the problems that the cracks that we're creating the entropy that's happening this system. Again, I'm not going to preach about this stuff, but citizens united, like I said, gerrymandering, money, and politics, all of these things, voter rights, this is not a Democratic or Republican thing. These are our system making sure operates for everybody and it doesn't get corrupted ultimately, and fall apart. But if we can keep this system in place, it is meant to rebalance and allow for revitalization and a new path forward.
Bill: My buddy, Bill, he's into the monetary plumbing, he loves this stuff, and he is always sending me the tax receipts up to the day. He has pointed out how much money is going from society to the Treasury right now. He's like, “This is massive fiscal tightening that no one's paying attention to.” I think it's interesting that you're talking about the monetary tightening going on at the same time, if he's correct, the fiscal tightening, certainly on a rate of change basis, we're getting tighter. Then if you think of inflation as a tightening force as well, I could see how that could create some downside risk. But I guess, some people would tell me, “Well, you're late on that thought. You should have thought that in 2021.” I'm not sure it's over.
Cem: Yeah, if at the end of the day, we're pulling money out of corporation’s hands and reducing supply. That's going to exacerbate inflation because there's less supply. If you're adding money in the same time, sorry, to people's hands via fiscal, you're creating demand. Now, inflation ultimately is a resolution of that. Ultimately, it is a flat tax and takes money back from these people. I think in the US, we are going to have secularly increasing inflation. However, like I mentioned, we are fortunate to be in a position of strength. As the raises rates, we're getting massive dollar strength and expected to not only continue but accelerate, which will allow us to export a lot of that inflation. And so, the dollar strength will ultimately make us the best place for inflation in our neighborhood and it will make it a lot worse overseas.
Bill: This is going to crush importing emerging markets, won’t it?
Cem: It is going to crush when it gets worse, because as the dollar gets stronger, dollar denominated debt becomes eventually a crisis all over the place.
Bill: Yeah, that sucks.
Cem: [crosstalk] Not to mention now talk about all the weak problems-- The food issues and food insecurity, we are as a country, we have our own food and our own commodities, lot of other countries don't and that's the problem. Now, the fertilizer problem, not enough people are talking about it. Next planting season, we are going to have a major food crisis and we will be fine here in the US, but overseas we're going to have mass famine and that sounds scary, but billions of people-- [crosstalk]
Bill: No, I think it's true, man. That I've been thinking for a while because I used to bang food production companies. I know how important natural gas is to nitrogen. You can skip a year of potash. I'm pretty sure it's potash that you can skip, but you can't skip too, and you need phosphate all the time, and it's like, “This stuff really matters.”
Cem: Now, imagine you don't have a democracy that's flexible. You have an autocracy and imagine you don't have food security in your country, and now, imagine that you have dollar denominated debt. It’s going to be a lot of new countries on the map in about five years and there's going to be a lot of not evolution, but revolution abroad, and that stuff will be a problem here in the US. That's how we're going to have problems in market instability over this period. Expect a lot more in 1998. Long-term capital management blew out here not because of problems in the US, but because of Asian financial crisis, because of Russian ruble crisis, because of dollar strength, because of a tightening cycle in the US exported inflation. It won't be the first time, it won't be the last. Again, these are bold stories. This one's particularly bad because it's the first real inflation we've seen in 40 years that's likely to be some of the worst. [laughs]
Bill: Well, this is depressing, sir. I'm going to need a drink. [laughs]
Cem: But it’s like the cycle life. This is good in the broader sense that we are in need of rebalancing. It gets worse if you don't. It's all about the life, like the balance. Everything, eventually has to come back, because you can only go so far and we've got to.
Bill: Yeah, on Value: After Hours, my cohost, Jake has been talking about concepts like this forever and I've been the guy that's been a little too dismissive of them. But thankfully, I'm smart enough to wake up occasionally, even if it is a year later.
Cem: What if it takes longer than you-- [crosstalk]
Bill: What a wild time?
Cem: It usually takes longer than you think for these things to happen. It's probably better to be in your shoes. I've been sitting here talking about these things for three years and who knows how much returns I've missed in the markets or whatever. So, being late a little bit, it's not the end of the world. Honestly, being early sometimes in financial markets is worse.
Bill: I think the interesting thing about all this is, I used to complain a little bit about-- A younger me really complained about what Netflix was doing and I was like, “Look at how much cash they're burning, and the debt market is taking equity risk, and this is nonsense.” But there's going to be a group of companies, if this theory proves out correctly that is used the last 20 years to establish a competitive position that's pretty darn strong.
Cem: It’s exactly right.
Bill: Because it's going to be hard to attack.
Cem: A 100%. Not just that, some of those places will be the only place to hide, honestly because they won't have inflation, but technology will actually have a massive headwind from inflation. People want to reduce costs.
Bill: Yeah.
Cem: In a world, where globalization is unwinding and inflation is a problem, how do you solve in the US? We don't have enough people, who want to get paid too much. There's a massive push by corporations to try and reduce costs through technology and innovation, etc. There're corporations that will weather the storm that have enough cashflows that they might be in the best position of all. Yeah, you are right. Again, Amazon may never have existed. Now, it's hard. Not many people are going to listen to that and believe that. But if we hadn't been in an unlimited monetary stimulus mode, where they could essentially not have to worry about having cashflows for 20 plus years, but now that they are Amazon, you better believe Amazon is going to be the Walmart forever until the next cycle and somebody else has a better solution.
Bill: Yeah, that's wild, man. I guess, I get it. I don't know, you shook me.
Cem: [laughs]
Bill: I'm just sitting here thinking about whether or not that I need to pour a drink if we're going to talk anymore whether or not I should wait. What else fascinates you?
Cem: Oh, my God, I eat, sleep, and breathe this stuff, man. The macro thing, if you think about it, it's not where I've been in the business really for all this time. It's been in the plumbing. But I was born in London, lived in Turkey as a kid, and moved to Texas when I was five. I was that kid, C-E-M? Trying to wear cowboy boots, and fit in Texas, and always like a square peg in a round hole. So, I ask lot with parents. I’d look at my parents and be like, “Who are these people? Who am I? What is this place?”
Bill: [laughs]
Cem: I think I just asked a lot of existential questions at a very young age and asked a lot of-- I didn’t grow up with a certain religion, I grew up on the border of religion. I was always very [unintelligible [01:15:27] as a kid and you ask a heck of a lot of questions that people don't ask till they are 18, or 16, or whatever it is. I felt a lot about this in my 40s, but as a little kid that was just trying to figure it all out, and very lost, and confused at a young age. I think that's driven a passion for understanding how the whole machine works and it takes a while to figure it out. But once you get to find out more and more, it's really fascinating. It's a wonderful hobby or love to have been fortunate to have it-- [crosstalk]
Bill: Yeah. It's amazing, man. What were your parents like educators? What made your parents move around so much?
Cem: My dad’s a PhD structural engineer. He designed offshore oil platforms for oil companies.
Bill: Oh, wow.
Cem: Hence the connection between London, Turkey, Texas, and then eventually, Norway. We moved to Norway, and I went to boarding school in East Costa outside of Boston School called Andover, which also opened my eyes and a lot of ways.
Bill: Yeah.
Cem: Because I got to really interesting people from all over the world. I tell people I went from-- It was the Saturday night lights. Football and chicks to Dead Poets Society.
Bill: [laughs] Yeah. A man from Texas to Andover, that would be a change.
Cem: Yeah, that’s a big change.
Bill: [laughs]
Cem: A little bit better, I think, being at Andover because it was more like people from all over the world that thought a little bit differently, I think. Not for everybody, it was definitely a good fit for me. Anyway, so, my dad, [crosstalk]
Bill: That’s awesome.
Cem: He always taught policy and politics over the-- Turkey is an interesting place too because it's at a crossroads itself. It’s has always been on the border of Europe and Asia, and never quite been just one thing. It's a couple different things. It's secular, but it's Islamic, it's a free market economy, but at the same time, it's always been at the center of trade, it’s always been there. The Crossroads from Europe to Asia because of the Ural Mountains, the Black Sea, and Africa. Asian minor was the only place people could go from east to west. I really grew up with this culture that really appreciates the connections between different cultures and different things. And so, we would sit around the dinner table, and talk politics at a very young age, and slightly different cut the book that way as well.
Bill: It's cool. Well, I try to do it as it is, but I'm going to really try to lean into my kids’ questions. My oldest asks a thousand questions, and they're all adults, and rather than letting myself get frustrated, I'm going to hope that I can foster curiosity that leads him to become you-- [crosstalk]
Cem: Yeah, this is a shoutout to my mom. My mom, I will say as a kid, early on I said, really encouraged me to ask lots of questions. She was so good about just answering everything. I got the bug where I just ask questions. This is pre-internet. This is like, “I couldn't go look stuff up.”
Bill: Yeah.
Cem: At least, you could go point your kid to google. Back then, my mom would just answer them and answer them again. She's an engineer, but she was a stay-at-home mom, but she was an engineer by trade. Very bright woman as well. I'm just very fortunate to have somebody really foster that curiosity and push along. So, yeah, if you ever, like well, is it making a difference? It makes a difference for sure.
Bill: That's awesome. And then, and Chicago is now home? Are you going to stay in Chicago?
Cem: Yeah, I’ve here for, it's crazy, 24 years. I never lived anywhere longer than four years, anywhere, before moving here. I came out here straight out of college, had an incredible opportunity, and I started having success in business here, and I met my now wife, I have two wonderful kids, a 10-year-old and an 8-year-old.
Bill: Nice.
Cem: The great thing about Chicago, again, once you have a family, I can't think of a better place. It really is, especially here, a city person living in New York or London is very hard. Living in San Francisco, it’s not just expensive. It's just hard. You have less space, and everything's difficult, and I get the best of all worlds here. I have a house right by Lake Michigan, right by the beach. My kids’ school’s walking distance. We are in the center of a cosmopolitan city with the incredible-- All the trappings that come with it. So, just like anything balances, there's good, bad to everyone playing a lot of people like, “Chicago? Why Chicago?” [crosstalk]
Bill: Oh, Chicago is the best, man. I lived there for 17 years, came down here in the pandemic. I'm in Florida now, and I realized, after we moved, one, my wife got super cold in Chicago. She grew up there, but she realized how cold she actually gets a lot. Then part two is, I’ve realized my grandma needs a lot more help than I had appreciated when I was remote. So, we're here until she passes at a minimum and then we'll see what happens.
Cem: Yeah, I think there's like a Boaz Weinstein song or something where he's like, “You got to go live on the East Coast. At some point, leave before it makes it too hard living on the West Coast. At some point, leave before it makes you too soft.” I think everywhere is wonderful in some way or another. I was very fortunate at a young age to live abroad, Turkey, Norway, Texas, East Coast, all that stuff. I got a lot of that on my system, found a place that was good for me and my family. Again, I think maybe eight, nine, 10 years from now, maybe there'll be a point where my kids go to school, and then we go elsewhere for a little bit again. But it's been wonderful being here.
Bill: Yeah, well, I miss West Randolph like crazy. I tried to speculate on real estate and I bought across from Cabrini-Green when it was still standing. There were four towers standing and I should have just bought the West Loop. Oh, that one hurts.
Cem: [crosstalk] Our offices are in River North, not that far from where-- on the south side of Chicago. Not know where that's really come into its own and I'd see-- [crosstalk]
Bill: Yeah, it’s nice.
Cem: Illinois is actually really nice nowadays. But yeah, it's still evolving. It always takes long and bring back Cabrini-Green stuff happened 20 years ago and it's still stuff there and still hasn't been developed.
Bill: You know what screwed it, well, a number of things, but I didn't realize that my side of the street had a different Alderman than the side of the street across from me. After living in Chicago for long enough, I realized how much that matters.
Cem: Totally. It's all politics. Chicago has changed a lot of ways, but that's still very much a part of what it is.
Bill: Indeed. Well, I'm going to let you go. I have enjoyed this immensely. I hope you'll come on again sometime after I can calm down and get my emotions. I don't know. Calm down is the only way I know what to say, but I really appreciate it, man. Thank you.
Cem: Always a pleasure, Bill. Thanks for having me. [unintelligible 01:22:19] seeing you. Take care.
Bill: All right, cool.