Financial markets always seem to hover between two competing narratives: one of rational, fundamentals-driven efficiency, and the other of speculative frenzy, bubbles, and collapses. Cem Karsan—options strategist, former market maker, and founder of Kai Volatility Advisors—has long been one of the most insightful voices on how market structure, positioning, and liquidity shape outcomes.
In a recent interview, Karsan tackled the question that everyone in markets wrestles with: where are we in the cycle? Are we in a bubble? If so, what does that mean for investors, for policy makers, and for the next decade?
The conversation ranged from analogies about airplanes running out of gas, to the reflexive loops of structured products, to the explosive rise of AI as a narrative comparable to the internet in the 1990s. What emerges is a fascinating framework for understanding not just the rally of the last several years, but also the risks ahead.
This post expands on those themes and organizes them into a cohesive look at the “Cem Karsan worldview”—why valuations don’t time markets, how liquidity and leverage drive prices, why reflexivity matters, and where bubbles end.
Valuations: Risk Management, Not Timing
One of Karsan’s first points cuts against much of traditional
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2 Responses
Kind thanks for your excellent synthesis of Cem’s interview, Jarrid!
Cem’s framework brilliantly captures how liquidity and reflexivity drive markets beyond fundamentals, echoing the Dot-Com era. While AI’s transformative narrative fuels today’s rally, its fundamentals remain more grounded than the speculative frenzy of 1999 (so far, that is). Yet, dizzying global debt and fragile market structures—amplified by structured products and passive flows—signal a looming risk far graver than the NASDAQ’s collapse, IMHO. A liquidity shock could unleash systemic chaos, broadcasting a catastrophic mayday across global markets. Cem’s focus on inflation as the ultimate brake underscores the urgency of robust risk management in this high-stakes environment. Silver Wolf’s recent planning guide is a good draft blueprint for readying our preparatory parachute.
A great framework because is simply and rotted in reality.