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In this episode, Cem Karsan returns to Excess Returns to break down the market through the lens of liquidity, reflexivity, and options-driven market structure. We cover why he believes we are in a bubble but still early in its trajectory, the mechanics behind today’s volatility dynamics, the role of AI spending in sustaining the cycle, and why traditional 60/40 portfolios may face major challenges in the years ahead. Cem also explains how investors should think about tail risk, true diversification, and building portfolios for a world where liquidity flows dictate outcomes.
Main topics covered
- Why we are in a bubble but still likely to go higher first
- Fundamentals vs liquidity as drivers of returns
- Options as the “3-D” market and how they now drive equities
- Reflexivity and how option flows influence asset prices
- Retail adoption of options and misperceptions in the space
- AI investment boom, tail risks, and market liquidity feedback loops
- Historical valuation regimes and recency bias in markets
- Portfolio construction beyond the 60/40 model
- Tail hedging and the role of long volatility
- Importance of true diversification and managing interest-rate risk
Timestamps00:00 Bubble dynamics and why being bullish can coexist with danger 03:00 Fundamentals vs liquidity as market drivers 08:00 Rise of options and how they now influence markets 14:00 Reflexivity explained in simple terms 19:00 Mistakes investors make with options and structured products 24:00 AI spending, liquidity expansion, and similarities to 1999 31:00 Tail risks, China/Taiwan, private markets, inflation signals 38:00 Why 60/40 has worked recently – and why it may fail ahead 52:00 Inequality, cycles, crisis as a clearing mechanism 54:00 Building a portfolio for the next decade: diversification, tail hedging, box spreads, and non-correlated strategies 1:04:00 Closing thoughts and takeaway for investors
