Special Guest Episode: George Kailas

🎉 Special Guest Episode! I recently spoke to George Kailas, the CEO of Prospero.Ai. Confused about the markets? Who isn't. Let's see if we can figure out what's happening beyond, "Well, I guess, umm, buy low, sell high."

Topics:

➡️ Are we in or headed for an extended bear market?
➡️ Anything that smells like 2008 is scary. Are we in Great Recession territory? Why or why not?
➡️ How do the Trump tariffs fit in?
➡️ If someone wants to be situationally aware and prepared - whether that person is invested or is living paycheck-to-paycheck - what are the options?
➡️ Follow the money! Who is benefitting right now?

Links:

https://www.prospero.ai/

Need more? You can visit the website at: https://consaracytheories.com/ or my own site at: https://saracausey.com/. Don't forget to check out the blog at: https://consaracytheories.com/blog. 

Sara's book Decoding the Unicorn: A New Look at Dag Hammarskjöld is available now! Click here to buy it on Amazon. 

Transcript

Transcription by Otter.ai.  Please forgive any typos!

SUMMARY KEYWORDS

Prospero AI, institutional analytics, everyday investors, risk appetite, bear market, options markets, net option sentiment, Trump tariffs, inverse ETFs, risk tolerance, job disruption, no code tools, AI investment, market signals, financial advice.

I'm joined today by George Kailas of Prospero, although I'm told if you maybe say Prospero, you have a Shakespearean background, that's probably okay too. I know I've been stumbling over it myself. We'll get into that with George in just a minute. But first things first, George, thank you so much for taking time out of your busy day to be with us.

Thank you for having me, Sara. And yes, I either, either works, but we do like to add the AI so people can actually find us.

Yes, Prospero AI, there we go. Good, okay, so on that note, for people in the audience who might not be familiar with you, and they might not know about Prospero AI, please give us what I like to call the proverbial 10 cent tour.

So yeah, the really easy way to describe Prospero AI is that we are trying to take institutional level analytics and make them available and simplify to everyday investors.

Good. Tell us more about you. If someone is listening to the episode and they're like, Well, who is George Kailas, and why should I be listening to him today? What's your 10 cent tour?

My 10 cent tour is I grew up in New York, and I actually started my career at Columbia Business School, at the value investing center when I was 16, I taught myself accounting to work at my first hedge fund when I was 17, and after working in various Wall Street capacities, I actually started my first AI company when I was 25 so about 14 years ago, and since then, I've been really trying to figure out how to take technology and make it more accessible and really level the playing field for for everyday investors. And we've got some really good systems in place, especially the way we really simplify where institutions are betting in the options markets. And yeah, you know, I set out to do that a long time ago, and we're doing that today better than ever,

So in other words, you know your stuff.

Allegedly.

I love it. So in the information that you sent to me, you mentioned that institutional players are pulling back hard, and that there's been a clear drop in institutional risk appetite, and this typically proceeds an extended bear market. A lot of my listeners are interested in this kind of thing. We'd like to be on the bleeding edge. We like to know what's coming. So explain to us in plain English what this means and what you think is on the horizon.

Yes. So what I love about this is in between when this is sent, and now things have really changed, but I can, I can really walk through, you know, what I saw, how to identify it again, because I'm not sure this is over, but you know, we seem to have a little reprieve here. And so when I said institutional players are pulling back hard, that was actually because for the first time in the history of Prospero, we've been doing these kind of metrics, I'd say, for four or five years, like solidly with the same kind of construction. For the first time, I actually thought there was an error in our calculations. But basically, we were seeing back in early February that institutions had stopped offering long term options contracts for many of the large cap names that we covered. You know, typically, what institutions will do is when you know certain options that are, say, you know older than a year, that time passes and they get less than a year you know, they'll, they'll issue new ones because they want to attract people that want to continue to bet on those companies long term. But we were seeing a lack of appetite to originate any new options, and that was a really big red flag, because a lot of people's, a lot of people's first reaction to that is, well, you know, maybe they're bullish on the market or bearish on the market, but, but no, if you have, if you know the direction of the market, you don't mind originating options, and just say, charging more for a call option, which is a bet that the stock will go up. But they weren't originating new ones at all based on, you know, what we discovered. So that was pretty alarming. Then the second part of what we saw are S and p5, 100, net option sentiment. Net option sentiment is probably our most popular metric, because it it pretty much summarizes all of the short term options markets in one number and scales things zero to 2000 so sorry, it scales things you to 100 in a population of 2000 stocks. So the second part of what you were saying, where you know the pattern that that we've seen in bear markets, is spy S and p5, 100, ETF, when net options. Normally, if I spend 10 15, minutes reading about something, by the time I'm done reading about it, I know what the deal is. And I think that right there is what makes this that that kind of encapsulates, what makes this period so difficult, where it's just like me, and, you know, institutions, a lot of people, you know, I would say me and I've institutions that would put like in similar situations, because I try to be very quantitative minded. And you know, one of the things I often tell retail investors is that, you know, the market runs on models, and one of the hard parts of this period is that people don't even know what the worst case scenario to model is. And we've kind of seen in the last two weeks, you're kind of vacillating between, okay, are we going back to a worst case scenario, or is there a best case scenario where this is all over soon? So I think that is the hardest part. And you know, to bring it back to, like, the tangible number, that spy and at option. Sentiment that we're talking about. After starting the week a little slow and low, it's moved up to, you know, it was like 37 earlier today, I've actually seen it cross above 40, which is in the bull zone. So that's kind of to put a bow on it. You know, where we are right now, and looking bullish. And that's why I have to say, like, I don't really have advice for anyone in the short term other than look at a signal like spy, net option sentiment in our app, or look at other quantitative signals. Don't look at the news, don't look at social media. Figure out a quantitative way to assess the market that resonates with you, and do it often if you want to invest right now or trade.

I'm glad that you brought up the Trump tariffs, because obviously they've been all over the news, and I feel like it is difficult to know which end is up. What? What should we expect? What's going to happen from one day to the next. So if somebody is trying to factor this in to their investment plan, or maybe they're going to be retiring soon, I mean, to give you an example, I'm seeing news stories that are all over the place, and some of them are very Chicken Little some of them are telling us that eggs will be $25 a dozen, and and that toilet paper will become scarce, it's it's sort of like priming us for Black Friday, or what things were like during the throws of the pandemic, when you went in the grocery store or the Walmart and people were fighting over the Charmin and everything was more expensive, and it was just sort of apocalyptic visions. And we know that the mainstream media has its own agenda, so we can't always trust what's coming out of their mouths, either. But for people that are listening and they're just trying, as John and Jane Q public, to figure out, how did the Trump tariffs fit into the picture, what can I really do about it? What kind of advice might you give to somebody who's just wondering, what the heck do I do here?

The first thing I would say is familiarize yourself with inverse ETFs, like Sq, Q and sec. I know some of this is kind of like more practical advice on like, what to do. I think that might be further down the question list. But in terms of investing, trading, familiarize yourself with those and and you really have to be, and I would say, ignore a lot of the noise in in the media, because, you know, just like we're talking about, I've been doing this a very, very long time, and it's difficult for me to sort through, because typically, you know, one of the things I wrote in my newsletter this weekend is I actually coined a term for this, which is inside out thinking versus outside in. And I'll give outside in first, because it's a little easier. Outside In is you're saying, Oh, this is what the economy is doing. Currency, maybe I should buy gold or or the prices of eggs are going to go up, so I should short companies that make eggs like that's a really, really good example of flawed outside in thinking. Because, you know, as I said, I don't really have the time to wrap myself my head around all this, and even if I spend all the time, I don't think I could do a very good job, because it's very hard to sort through what's rumor, what's policy and and even if you sort through those things, you don't know how quickly or sharply the policy might change, as we saw last week. So I would say, Don't spend your time doing that. That's the best advice. Get familiar with inverse ETFs, and whether or not you know you're looking at a signal like mine, that I'd recommend like net option sentiment on spy and GQ, which is the top 100 tech stocks in NASDAQ. You might want to go more simple. If you don't want to use prosperity, you might want to look at something like, you know, put call ratio in terms of just like a simple options metric, but I would recommend it being derivative of the options markets. Um, because that's how we actually can leverage bottom up bottle outside and thinking to our advantage, right? Because these hedge funds that are betting in the options markets, they do have a team of macro economics doing that. They do have access to companies. They do have access to people in the government. So the more you can leverage their research like, like we do in the options markets. But we're not the only ones that do it. The better off you're going to be. And then, if you want a simpler thing, you might just want to be very if you, if you're like, I don't want to look at Prospero, I don't want to read the options markets. You know, the easier way to do that is, I mean, the simplest way I can give this advice is, if you see, you know, a day where the market starts to go down, you know 5% you know whether it's spy or Q, you might just want to buy some insurance in the form of those inverse ETFs, just to make sure. You know, because we're in a zone where 5% we've seen, to quickly turn into 20, 25% so it's worth it to buy a little insurance, and those inverse ETFs is the easiest way to buy insurance on the market without having to sell any of the stuff that you own.

Got it. So I'm very big on situational awareness and emergency preparedness. A lot of my listeners are too. I have a two part question. I'll just start with part A, if someone is currently invested in the stock market, what can they do? I understand that we are not giving financial advice here. We don't know everyone's portfolio. We don't know their individual situation. But if someone is trying to make sense of it, you know, I mean, my portfolio is down quite a bit. I think around election day somewhere, somewhere around election day, it was like 60% up, and now I think it's like 30% up. And I was like, out. I kind of missed that 30% that evaporated. So if somebody is currently invested in the stock market and they're like, all right, where the heck are we? I'm still trying to look at the map and figure out where we're going, and it feels super confusing, and there's a Trump tariffs and all of this noise, as you're saying, I think great advice to tune it out. If somebody's invested and they want to be smart, they want to figure out, like, alright, well, there's money to be made right now. How do I make it? What suggestions would you have to them?

Well, first of all, I think it's this is a very important distinction that I've grown to love in just my personal tutoring of a lot of retail investors, which is that there is no objective smart. There is smart for your risk tolerance, right? So I'll give a few different examples of different risk tolerances that I would view as the smart way to handle this, right? So the first way is the inverse ETF, right? And if you are very nervous about the market and you just want to buy insurance, you could put, like we I was vague, but you could put 20 or 30% of your portfolio in that in that Sq, Q or SCC, and that will, you know, if you're worried, that will be good risk insulation for you, where, you know, if the market goes up a lot, you probably won't make much money, but if it goes down, you probably won't lose a lot of money. That's, that's a good way to just make yourself market neutral, um, assuming that you have kind of some high upside longs, which most people do, most people are going to own, you know, the big tech companies or the big consumer cyclical companies or healthcare. So most retail investors do actually have high upside longs, and that's why this is good generic advice. So the so kind of the middle of the risk aversion would be, you know, sell 50% of your portfolio and then put it in, and then put it, put it in, like, Sc, HD, I think it's should, Schwab dividend. I always forget, yes, S, E, h, d, and that's a way where you can, you know, stay in the market, but, you know, also, also, just make sure that you're getting those dividends, you're in a safer investment, and you're not in all the way in a high risk portfolio, you know, one level down. You know, one of the things that people showed that, you know, it's something that you know, is an advertisement for value investing. Warren Buffett has been in his largest cash position for, I think, something like nine months. And when it showed all the billionaires in their wealth recently and how they fared, he fared by far the best because he was sitting in cash. And if you're risk averse, it never hurts to sit in cash, maybe even 50% of your maybe even more than 50% of your portfolio sitting in cash, right? Because if the market recovers, you know, you see it go up 10 20% you know, these tariff years are gone, then you can get back in right? And you can see. Okay, whatever. But if it goes down, you're really going to be in a good, good situation if you went to cash. And that's why the risk level is so important, right? Because some people that like risk would be real pissed at themselves if they went into a bunch of cash and the market flipped around fast, but people that are very risk averse are are going to be able to frame that problem being like, well, you know, I might have missed that upside, but things could have gotten gone the other way, and I would have been a lot more unhappy if I lost money because I didn't go to cash. So that's kind of the step, the risk basis solution that I would give for different risk levels. 

That makes a lot of sense. It's a great explanation. I would say that part B of my two part question is this, if someone is not currently invested and they can't afford to be, maybe they're living paycheck to paycheck, and it's taking every dollar that they're making just to survive. I want to look at how the current situation, the current economy, affects them. I recently retired from staffing, recruiting and HR work, and one of the reasons why is because the job market is as bad as I've ever seen it, and you have a lot of positions that are not being back filled. You have positions that are now just being farmed out to AI. And I really think, personally, it's just my opinion, but I really think that we're on the cusp of, you know what? People like Klaus Schwab, and Yuval Noah Harari talked about the fourth industrial revolution, and Harari was interviewed by the Economist, saying that AI is really going to look like an alien invasion, that the day is going to come where so many jobs are absorbed by AI, and people need to be aware of that. But I think for people right now, they're living paycheck to paycheck, they're trying to figure out, well, what do I do here? What? And we've we've talked about the smart thing to do based on someone's level of risk tolerance. Let's say that John Doe is just at home trying to pay his bills, do what's best for his family, and figure out what's coming next so that he can be better prepared. What kind of suggestions or ideas might you have for that person?

So I think it's a great question, but, you know, I just have to start out by saying, you know, like before I answer this, it's hard, and I completely agree with you. I think there's, there's a much larger job disruption coming, and that, you know, not, while not to be alarmist, I think people should, you know, take that properly seriously. Because I think, like unless, unless the US goes to some kind of universal basic income, which I'd like to think they'd be willing to if so many people were going to be out of jobs, but I'm not sure. It's going to get ugly and we're going to see a lot of job loss and and I think a lot of difficult times ahead. But that being said, I really recommend that people learn, you know, there's tons of classes online learn how to use no code tools like so. I'm not talking about, you know, using chat, GPT to answer a question. There's a lot of tools now that teach you without any you know, without any ability code. Teach you how to start an E commerce business. Teach you how to, you know, make a website or an app or, you know, different things. And that's why it's like, worth it to Google, and you could Google, you know, no code, AI tools. You know, you've been thinking about starting a certain hobby or online business. You know, I give similar advice the job market, as I give to people in investing where it's just like, it's gotta appeal to you. There's advice that I can give you that is maybe good for someone else, but if it doesn't, if this process of learning doesn't excite you, or it doesn't at least interest you, then you're wasting your time. But yeah, like, that's anything no code, and, you know, no code, and then what would be your dream business, or something you've been interested in? Because it could be something, it could be like, you know, a job, like a regular job, that you can just enhance and make your application better by showing you could use, use these no code tools, or use Gen AI in a non generic way. But that's, that's really the direction. I hope. I wish I had better news than that. But yeah, if you don't know how to both use these tools and then distinguish yourself a little more than the standard like, hey, I need this question answered. Let me get it out of chat. GPT, I think there could be trouble ahead for you. Yeah,

I'd agree you mentioned Warren Buffett and and that is a great segue into my next question, which is, we've all heard the phrase follow the money. I remember shortly after the pandemic started to subside. I think it was maybe in 2023 Oxfam went to Davos, to the weft and, like, presented this report to the fat cats about how much money was sucked up. It was, I think of it as being like squeezing a tube of toothpaste so you get the last bit of toothpaste up to the top, or sucking milkshake through a straw. How much wealth was sucked upward. Like trillions of dollars of wealth was sucked upward. And I always laugh at that, because not at what they did, but at at Oxfam presenting it, because it's like as if they didn't know, you know they're at Davos. They know what happened here. So I want to get a sense of who is benefiting from this market, because it does seem to just looking at it on the ground level, John and Jane Q Public, it seems erratic. It seems unpredictable. It seems kooky, but we've heard a lot of famous investors say that they made the bulk of their fortunes during recessions and depressions. I mean, there were people that made good, even during the Great Depression. We I've heard Bob Proctor, for example, talk about everyone thinks that during the Great Depression, everybody went out of business. Nobody was working. Every single human was in a bread line. And that's actually not true. So what's the real scuttlebutt? I mean, from where you're sitting, you have a better bird's eye view than a lot of us do. I feel like an ant down here on the ground. So who, who's benefiting? Where? Where's the money going do you think?

A lot of good questions there. And like, Yeah, you look at some of the numbers. One of the ones that I came across recently was that it's actually median income relative to house prices people are. People were better off during the great depression than they are now. And that was the shocking stat that I came in. Sometimes you see those very sobering numbers, unfortunately, more and more. And so actually, you're kind of getting at like the very mechanical way that people increase their wealth. And so I'll give you like the general mechanic, and then I'll bring it a little more specific to now. So basically, the way the stock market worked in 1929 which was not all that different than when I first started working on the market. But there's, there's slight differences. Was that, you know, people would essentially call around to other, you know, market makers, their friends, the wealthy. And, you know, share stock ideas, and they would get inflated. It was basically like how meme stocks work today, except that was, you know how it worked leading up to the Great Depression. And you know how it works similarly, things are not that overt. And I would say, not that overt and not that coordinated, um, in the sense that, like, one of the things that I always tell you, retail investors, like, often be like, well, they wanted the price to go down, and they this, and they that. And what I always tell them, it's just like, there is no they, right? I'll tell you something about the they, they're more worried about each other than you by orders of magnitude. So there's no thing. There's people that are very hard, like working very hard, battling each other to get money, and they do not care about you. But so there was much more back then. There was much more collusion, coordination, that kind of thing that took place. But we've actually had, like, a lot of securities laws, and I would say part of it is just, like competition. You know, you don't necessarily have, like, Citadel calling up Renaissance technologies, being like, Hey, what are you buying today? What are your best ideas? Like, that's not going to fly. But as I said, the mechanics are the same, right? The powers that be, whether it be talking, or whether that be that they start to see the the prices go down of stocks, or today, like the algorithms, you know, are sensing that for them, that stocks have started to go down, you know, moving past their moving averages, you know, etc, etc. And you basically get, you know, not only do you start to get like, kind of a boulder rolling down the hill effect, you also get institutions buying put options. And when they buy put options, which is a bet that the stocks will go down, that actually forces, that basically forces the risk analysis basically to also, you know, create the the also basically work around those put options that expect the market to go down and prepare themselves. And that force actually drives the market down faster and stronger. So basically, you have all of these people that you know may have been long the market and very quickly are betting against or short the market, and that creates so much momentum down but where everyday people are losing money, everyday people rarely buy put options. You know it options are complicated, and I wouldn't really advise that. That's why I advise in. Versus ETFs, right? But they're losing money, losing money, losing money on the way down. Meanwhile, these institutions make more and more and more and more money as the market goes down, the more it goes down. And then, you know, when prices have bottomed, and for similar things, they look around and they say, either, oh, either I think my friends think it's near the bottom, or I actually start to see it recovering, in a way, moving back up above those moving averages, those exponential moving averages. And you know, all of a sudden they're buying again. And so whereas people are just making money as the stocks go go up, and even when the market goes up a lot more than it goes down, they're not profiting it the way down. And not only they not profiting, it the way down, all of these institutions that have made so much money while the stock goes down, they can buy that much more of the upside when it hits that bottom again.

That also makes a lot of sense. So this has been incredibly informative. We've definitely gone beyond the well, buy low, sell high, super generic advice that's out there. So if somebody wants to keep up with you and your work, or they're interested in Prospero AI, where should they go to learn more? 

So they can go to our website, prospero.ai and and there you can see how to like, look at our app and see things like spy and option sent a bit. Just type spy in, and you'll see that and our other metrics. And then also on that website, there's our newsletters. The investing Letter is free, and that's where I basically take all the signals and teach people how to use them and form portfolios um out of those signals. So that's a way to get more hands on help. And then I also say, you know, I I'm always happy to have people email me. George@prospero.ai and if you want to learn how to invest better, I love to help people one on one too. Because, you know, my main goal in this is just to help people do better with their investments.