Crisis Is Coming In Early 2027 | Cem Karsan

Host Adam Taggart introduced volatility specialist Cem Karsan, known online as Cem Croissant and sometimes “Mr. Volatility,” and his new partner, Noel Smith. Karsan said Kai Wealth and the broader Kai family of investment solutions had grown substantially and needed a stronger team; he described Smith as a volatility expert with six or seven more years of experience than himself and named him co-CIO. Smith said he began as a Cboe market maker in 1996, helped build Susquehanna’s proprietary and market-making operations across major exchanges, launched a hedge fund roughly seven years earlier, and had been discussing trading philosophy with Karsan for six years.

Smith explained that market makers care less about the story attached to a price move than about “how we’re actually getting there.” Headlines are human narratives; flows are the observable monetary decisions created when people place and execute trades. He watches prediction markets such as Polymarket and Kalshi, options, stocks, commodities, and bonds to determine where money is going and extract something actionable for a trading book. He considers options especially useful because their forward-looking structure gives them a predictive quality. His central rule is to watch what market participants do rather than rely on what they say they believe.

After the election, markets reversed from a large overnight decline to a strong gain. Smith attributed the move to volatility falling as the election’s uncertainty became a known outcome. Lower volatility changes dealers’ hedge ratios and creates buying flows; it also encouraged rotation into rate-sensitive areas such as homebuilders, while defense stocks and some hyperscalers weakened. He said January options and older leap options naturally decay as year-end approaches, further reducing volatility and supporting equities. Karsan added that election-related downside hedges had produced unusually high skew, and once the event passed, dealers could buy back stock hedges.

Karsan clarified that volatility is not a single number: skew reflects the differing implied volatilities of options at various strikes and maturities. Before elections, investors commonly buy downside insurance and sell upside to fund it, leaving dealers short puts and long calls and therefore short stock as a hedge. Once the election is resolved and implied volatility compresses, the required hedge may shrink. Smith illustrated this with a dealer short 10 million shares who needs only 6 million after volatility falls: the dealer must buy back 4 million shares. The move is therefore mechanical risk reduction, not a declaration that markets are safe.

Smith said the key signals intersect in rates and volatility. Markets had shifted from expecting rate cuts, to discussing hikes, to pricing only about 50 basis points of hikes between the discussion’s date and the following September. A lower-rate environment helps homebuilders and should favor the Russell 2000 relative to the Nasdaq 100. Karsan added that November and December traditionally bring positive structural flows if volatility stays compressed and no surprise breaks the market: structured products continue supplying volatility, December positioning is supportive, and year-end gains plus roughly 4.5% interest income can force investors to re-leverage in January.

Smith rejected the idea that he could profit reliably by listening to persuasive political arguments. He recalled shorting Herbalife after hearing Bill Ackman’s compelling bearish case, only to watch the stock rise; coincidentally, Smith had also encountered Herbalife’s CEO while viewing a Los Angeles house. Karsan agreed that positioning and flows are measurable short-term drivers, whereas political and macro theses often take quarters or years to work. He said a long-term correct trade can suffer poor price action before eventually multiplying several times, so the firm combines macro distributions over longer horizons with flow analysis for daily and weekly positioning.

Karsan and Smith used COVID to show how being right about fundamentals does not guarantee an immediate profit. Smith, who had biochemistry training, military biowarfare training, and colleagues with direct China contacts, bought volatility in late December or January, including a Broadcom position tied to Apple earnings. Apple did not warn about a China supply-chain problem, and the trade failed for roughly 60 days. The market decline began after February options expiration and ended after March expiration, which Smith said was not coincidental. Karsan said the macro danger was visible, but crowded positioning and options open interest delayed the move before forcing a tail event.

Karsan described three interacting forces: flows, macro conditions, and the actions of major players—especially the Treasury and administration. Flows were currently supportive because investors were hedged and volatility was compressing. Macro inputs include rates, inflation, economic growth, and earnings growth, while government actions increasingly matter because the administration is actively influencing markets. He warned that positive flows do not erase structural risks: they can dominate over a day or week while a bearish macro distribution becomes more likely over several quarters. Options let investors express that distinction more precisely than simply going long or short stock.

Karsan argued that the Strait of Hormuz is unlikely to reopen unless it is controlled by the United States, because the deeper issue is dollar control over commodity trade rather than nuclear weapons alone. He cited China’s commodity dealings with Iran and Venezuela in yuan as threats to the dollar’s long-standing role. With commodity flows constrained and inventories drawn down, he expects energy, fertilizer, diesel, and other costs eventually to become inelastic, producing supply-driven inflation. Higher inflation would push up interest rates, adding a major headwind to equities and to the cost of refinancing debt.

Karsan said the economy faces a large refinancing wall because governments, companies, and municipalities borrowed at near-zero rates in 2021, with average debt duration of roughly five to seven years. At the same time, the administration encouraged hyperscalers to expand capital spending; he recalled a hot-mic exchange in which Mark Zuckerberg asked Trump whether $600 billion was the desired investment figure. Companies such as Oracle have increasingly financed this spending with debt after exhausting cash reserves. The resulting demand for capital competes with government borrowing, pushes up long-term yields and credit-default swaps, and threatens the fragile AI-led growth narrative.

Karsan cited former Treasury Secretary Hank Paulson’s unexpected Bloomberg appearance in April, when Paulson warned for 45 minutes about a coming debt crisis and urged preparation of a facility to backstop the Treasury market. Karsan interpreted that as a trial balloon because the debt supply needs a buyer. He expects policymakers eventually to allow a rapid, painful decline—likely within a one- or two-quarter window—then intervene with new liquidity or a Treasury backstop. He believes the incentive is to resolve the crisis by mid-to-late next year, ideally before the 2028 political cycle, though he stressed that plans can fail once markets are “punched in the mouth.”

Karsan said a rescue could exceed prior interventions because the administration may combine market support with a sovereign wealth fund, expanded “Trump accounts,” and strategic ownership of American companies. He described this as right-wing populism: the government would buy stocks or fund businesses for citizens rather than simply distribute cash, while restricting immediate sale. The approach would also help the United States compete with China’s state-directed investment in solar, electric vehicles, nuclear power, and rare earths. Karsan compared the possible model to “socialism or communism with American characteristics,” but warned that corporate, political, and geopolitical conflicts could make the intervention difficult to control.

Smith said the main portfolio problem is sequencing risk: a 20% decline is very different for an investor who can buy the bottom than for one fully invested and unable to add. Kai uses S&P options, VIX options, and variance futures—volatility squared—to seek convex protection whose value should rise when volatility expands. Karsan said the firm is increasing allocations to such hedges without betting everything on one forecast, while shifting equities toward resilient businesses, hard-asset producers, inflation hedges, and strategic industries. The plan is to monetize hedges aggressively during a crisis and redeploy the proceeds into equities at distressed prices.

Karsan said Kai prefers owning businesses that produce hard assets rather than holding commodities directly, because miners, farmland, lumber, energy, and similar companies can provide both exposure to debasement and an operating yield. He also favors companies likely to benefit from government-directed investment in defense, healthcare, AI infrastructure, and other strategic areas. The portfolio is not intended to be a simple crash bet: diversification should still work if the forecast is wrong, while convex hedges create upside if the decline occurs. Smith added that options are tools to be used precisely, not instruments to fear, because they can limit losses and magnify gains when the distribution is asymmetric.

Karsan directed high-net-worth investors, family offices, and people seeking broad wealth-allocation advice to Kai Wealth, while investors seeking a more institutional, quantitative, fit-for-purpose hedge could contact Kai Asset Management. He and Smith said the asset-management offering includes a fund-of-funds approach and a direct long-convexity hedge. Karsan emphasized that the forecast is not based on inside information but on incentives, positioning, debt markets, and policy signals. Smith’s closing view was that a debasement or Bretton Woods-style unwind is logically plausible from both Austrian and Keynesian perspectives; the difficult part is timing it and profiting from it.