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
Timestamps
00:00 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