Today's number, 67,000.

That's how many miles per hour the Earth

travels around the Sun. Astronomers

tried for centuries to understand the

sun, including where it goes at night,

but eventually it dawned on them.

Welcome to Prof Markets. Scott is still

away. He will be back on Monday, but we

have a great interview today. We have

been spending a lot of time this year

thinking about how to invest in 2026.

We've been hearing the bull case. We've

heard the bear case. Still, it is hard

to know what to think. So, today we are

talking to someone who spent his whole

career studying this stuff. He's also

written a book on how to invest in

uncertain times. He's also written

another book about US market crashes.

So, we're very excited to speak with

him. We're going to get into it now.

This is our conversation with Scott

Nations, president of Nations Indexes

and author of The Anxious Investor.

Scott, thank you very much for joining

me on Profy Markets.

>> Thanks for having me.

>> So, a lot we want to get into here. I

want to start with some concepts from

your book and then I want to sort of

think about how we can apply these ideas

to markets and how we can think about

investing in 2026. But let's just start

with your book. Uh the opening line from

the anxious investor is quote the human

brain is ills suited for making wise

investment decisions. I love that. Why

why is the human brain so bad at making

investment decisions?

>> The simple uh explanation is that

investing is relatively new and

evolution is not. And so uh human beings

evolved when they faced very different

decisions uh versus you know what should

I do with my portfolio or that sort of

thing and let's face it that for a

100,000 years when humans were on the

savannah

uh they they had to become loss averse

or risk averse two different things but

they're related because the the cost of

making the right decision or the benefit

for making the right decision decision

would be relatively small. You might get

that night's meal, but the cost of

making a wrong decision could be

catastrophic.

And so, we've evolved and we've been

socialized in ways that just are not

really compatible with making great

investment decisions. And as I was

writing the book and researching the

behavioral

uh biases that we all display, uh it

dawned on me that of the 14 or 15 I talk

about in the book, none of them, not a

single one, Ed, makes you a better

investor. They all make you uh a poorer

investor. They all hurt investment

returns. And so that's why that is the

case because these biases were created

hundreds of thousands of years ago in

some cases. Uh but unfortunately

investing is relatively new.

>> The piece of data that you point out and

this is from Vanguard which I find

fascinating is that behavioral biases

these biases that you talk about on

average they reduce returns by 150 basis

points per year. So that's minus one and

a half% because of whatever these

evolutionary behavioral biases built

into the human brain are. Um what are

some of these biases? You mentioned loss

aversion, risk aversion. What are some

of the the really bad ones that screw

investors up the most?

>> There are a couple that are just

particularly fascinating to me. Now, I

spent 25 years as a proprietary option

trader at the Chicago Merkantail

Exchange. So, trading for my own

account, trading for my firm's

proprietary account. And so, I've seen

all of these biases in action. I will

say this, one of the ones that uh as a

proprietary trader, you have to really

disabuse yourself of straight away is

the disposition effect, and it's one of

the most insidious, but also common

biases. Let's define our terms and the

disposition effect is the tendency that

all investors have to sell their winners

and hold their losers.

>> And uh there is some research which

quantifies the the loss that most

investors experience uh by falling for

this that is by sell by selling their

winners and holding their losers. And

the reason I say it's insidious is

because it's so easy to rationalize what

you're doing. You're looking at your

portfolio. You want to sell something to

raise some money. And so you say, "Well,

this this one's done really well, so I'm

going to sell it, and I'm not being

greedy. Pat myself on the back. I'm not

going to be greedy, so I'm going to go

ahead and take my big win there." On the

other hands, you may be looking for

something. And you say, "You know what?

This one's a loser. It hasn't done very

well, but again, pat myself on the back.

I'm going to be patient. I'm going to be

patient, and so I'm going to hold on to

my loser." But Professor Terry Odin at

Cal Berkeley is the one who's quantified

the damage does to your portfolio and he

shows uh that over time the winners that

you sell will outperform the losers that

you hold. What about if it could happen

the other way where maybe I mean I I

don't know if this is a bias that

affects investors as much as perhaps the

disposition effect but you know oh the

line's going up therefore it must be

continuing to go up forever as an

example or the line's going down and so

oh no that that's a bad thing that's a

red flag. Is that another bias that that

we see in the markets or is that less of

a problem? That is certainly the case

and there are several biases at work

here. One is say availability.

So if you hear about the fact that uh

for example Google just became uh a $4

trillion company market cap wise. Well

that was in the news. So now if you're

looking to buy something Google will be

top of mind for you

>> whether or not it's you know had a

really great run and you think oh it's

top of mind so I'm going to buy it. And

so of that is certainly the case. But

there are other uh biases that kind of

intersect here. One would be hurting.

Investors love to buy what everybody

else is buying. Uh in the pit, you learn

that that's absolutely the wrong way to

go. But investors love to buy what other

people are buying. So, if they're piling

into meme stocks like AMC or GameStop or

Google or something else, it's done

really well, then they love to to get

into it. They love to follow the herd.

There's a social aspect to it,

particularly with meme stocks. And so,

those are all biases that will

ultimately generate inferior returns.

One of the biases that you talk about

which I find really interesting is this

idea of fantastic objects as fantastic

about PH. And basically this is this

idea that people will buy stocks not

necessarily because this it's a good

stock or because they've looked at the

financials or whatever it is but because

they want to feel connected to the

people who are behind that stock. So the

example would be like in the '9s you're

buying Apple cuz you love Steve Jobs and

you want to feel some sense of

connection to Steve Jobs. Um can you

talk more about this one? I find this

fascinating and are we seeing this

today?

>> You've explained it perfectly. It is a

situation where people investors

are enamored of some well-known founder

or business executive. U often they're

iconoclastic.

uh they're often a little bit outside

the box. They break the mold a little

bit uh in 1999 in that period. Uh Steve

Jobs, Bill Gates would have been the two

perfect examples. Uh and yeah, people

buy either the product or the stock

because they get this sense that in

doing so, they're closer to physically,

emotionally, socially closer to Steve

Jobs or Bill Gates. And so they they buy

the product, they use the product, or

they buy the stock. And obviously,

Bill Gates wants you to buy a Windows

computer. He wants you to use Windows.

He wants you to use a bunch of Microsoft

software, but he doesn't know that

you're doing that. He doesn't know that

you own the stock. Not certain he

particularly cares about that at this

point, but people do fall for that. And

the poster child right now would be Elon

Musk. He is he's in the news. He's a

kind of classic. He does things very

differently. Marches to his the beat of

his own drummer. Uh whatever you want to

say about him, but you know, he builds a

neat car and people feel like if they

buy a Tesla, they're a little bit closer

to him in sympathy with him. And often

they feel the same thing about the

stock. If they buy Tesla stock, then,

you know, maybe it's the Peter Lynch

thing from so many decades ago.

You know, I it's it's what I'm buying

what I know. Well, you don't really

know. uh but you you like the story and

that's fine and so you buy the stock.

One thing that's so difficult about

markets and about investing. I mean you

those those people who are buying Tesla

stock because they like the story

because they like Elon Musk they want to

feel close to him which I think is

definitely true and I think it is a

problem but they've been rewarded at the

same time. They've done pretty well if

you were a big fan of Elon Musk and then

it turns out a lot of people are a big

fan of Elon Musk even if that is the

primary force driving the valuation of

the company. Um, I'll get hate for

saying that, but let imagine it is.

You're still being rewarded. And I guess

this is the thing that I struggle with

markets is it's all stories in a lot of

ways. I mean, stories are what drive

markets. Stories are what drive uh

valuation. I mean, there's obviously

fundamentals, too, but increasingly

stories seem to be what determine price.

And so it sounds like part of the idea

of eliminating your biases is to

eliminate your susceptibility to

stories. But at the same time, that's

the whole ball game. So how do you think

about these concepts? How do you think

about the difference between I guess

narrative versus numbers? Which wins in

which situations? How should I think

about stories when I'm investing?

>> Sure. It's easy for an investor to say,

I I don't it doesn't matter why. Uh

yeah, maybe I am falling for this and I

buy Tesla stock because for all the

wrong reasons that Scott's just

enumerated. Uh but it works. I'm not the

only one. And if I'm not the only one,

and the same could be true for, you

know, GameStop during the meme phase, uh

I can make a bunch of money. And isn't

that where isn't that really what

matters? And that's absolutely true. And

um you know I remember being in the pit

and there were times when you knew the

pit was all one way and it didn't really

matter what the next print was 60

seconds later. If you know which way the

pit is leaning, then that's half the

battle. Um and and so it's easy to say,

well, you know, yeah, maybe it's crazy

to buy Tesla stock because Elon is a

kind of classic, but if it works, it

works. The the problem is that it works

until it doesn't.

>> Yes.

>> And then when it doesn't, we still hold

on too long because we have confidence

in the company or or the founder. And we

hold on. We hold on. We hold on. and we

go through a series of stages a little

bit like the Kubler rust stages stages

of grief and it's only when we've gotten

disgusted with ourselves that investors

pull the plug cell and that's often at

the bottom. So, you know, you there's no

way you can look at Tesla

and explain away the the premium that

that stock brings, the multiple that

that stock demands compared to the rest

of the world automotive business. So,

you know, if you want to buy it because

you love Elon, then okay, go ahead. But

I think you're setting yourself up for a

dynamic that will not work out in the

long run.

>> Yeah. I mean it seems as though because

of these biases and because you know I I

think the example of okay Google's in

the news a lot. I'm thinking about

Google more and now I'm inherently

biased towards Google just because of

this kind of arbitrary

uh fact which is I've been reading about

it a lot. I keep on seeing the name. Um,

it makes me think that we can't quite

trust our instincts or maybe instance is

the wrong word, but we can't quite trust

our brains all the time. Um, we can't

trust our view at any given moment. And

that leaves us with the question of

okay, then what should we trust? Um, and

I I guess I would put that forward to

you as a a highly experienced investor

and also as as a trader, someone who has

been in the pit, who's been in this game

for a long time.

What do you trust then if you can't

quite trust yourself? Or maybe there's a

way to trust yourself? Who are you

supposed to trust if you can't rely on

your own brain? I think one thing to do

is to develop a process, tweak the

process, and then when the process

works, tweak it a little bit more,

improve, but but start to rely on the

process. And you hear you hear

professional athletes talking about this

all the time. And so if your process is,

oh boy, Google just became a $4 trillion

company. Let me buy a 100 shares. Well,

that process probably needs more than a

little tweaking.

>> Yes. But uh you know Warren Buffett

probably put it most succinctly when he

says that in the short term the stock

market's a voting machine. Lately people

have been voting for Google. They've

been voting for Tesla. But in the long

term it's a weighing machine. That is

its objective. You know, if you were to

ask somebody to name,

say, the, you know, 20 companies in the

S&P 500, there'd be tremendous overlap

between the the the stocks that

everybody names, and they're either the

biggest stocks or the ones that have

been in the news. But, you know, that

leaves about 480 stocks that may be

great investments that just don't get

any attention that people just ignore.

And if you're going to limit your

your investment universe to a tiny

fraction of things that are available,

then doesn't it seem like you're going

to underperform from somebody versus

somebody who's looking at the entire

universe of stocks?

We'll be right back after the break. And

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>> We're back with Profy Markets. Just

thinking about herd mentality for a

moment, which you brought up as, you

know, one one of these biases.

How do you

counteract that bias? Uh I struggle with

this one because you know at the same

time

you you want to be informed by people.

You want to have a broad understanding

and a a broad base of knowledge. You

want to understand what's happening. So

you want to be listening to other people

but at the same time you don't want to

be following other people just because

that's what other people said. You don't

want to just be the sheep in the herd.

So as an investor and as a trader um how

have you experienced that bias

throughout your career? Um and are there

any processes you you employ to prevent

falling susceptible to that?

>> This goes handinhand with another bias

and that is availability.

So people tend to and this is related to

some of the other biases we've talked

about already. If a potential investment

is available to you, available to your

mind, your memory, then you're going to

tend to invest in that. And so, you just

have to ask yourself, I think you just

have to have a fearless conversation

with yourself. Why?

>> Yeah.

>> Why is this top of mind for me right

now? Uh, is it because my next door

neighbor or the guy across the street or

somebody else mentioned it or I saw that

it has rallied a bunch? uh is that why

it's available to me or is it available

to me because I think given the news

that oil field services companies are

going to do well and then I look at the

top two or three or four oil field

services providers and that's a very

different process.

>> Yeah.

>> And so I think you have to again tweak

your process but also be honest with you

why why am I thinking about this now?

Why am I doing this now?

>> Yeah. And if you can have that

conversation with yourself, then I I

think you're going to end up being a

better investor.

>> I do think this is also applicable to

life in general. It does seem as though

we can't quite trust our emotions from

any moment to to another. And so the

only real way to get anywhere is to have

some process or maybe some list of

values or some set of principles that

you always return to and then you can

sort of figure out whether this is the

right decision or the or the wrong one

based on what you've already written and

thought through uh on your own. So I I

do think it's it's great advice. I just

um want to think about how this all

applies to the year 2026

where I mean it we're going to see a lot

of these forces at play. I'm I'm going

to just list a few of the forces that I

think are going to be big this year

um and which happen to be uh subjects on

which you are an expert. So one is

extreme volatility. This is something we

saw in 2025. if we had liberation day

among other things that is likely to

continue. Uh two, a potential bubble.

This has been a big topic of

conversation that we've been debating

with various people on this podcast over

the past 6 months or so. Three, uh an

explosion in options trading,

specifically zero day options trading,

which we can get into. Also, an

explosion in retail trading and what

that might do to markets. And then uh

finally I would I would add into this

the arrival of prediction markets which

kind of became sort of a big deal but

now they appear to be a really big deal.

There are more but I mentioned these

ones because you're an expert in all of

them. You run a volatility index firm,

you're an options trader, you've written

about bubbles, you've written about

crashes. um which forces are the most

significant in your mind right now and

how do you see it playing out in 2026?

>> The one that's going to be most

important to most people is the second

thing you mentioned and that's the AI

investment thesis. I don't know if it's

a bubble yet, but let's let's let's try

and run down and I'll be real quick with

each one. So, extraordinary volatility.

We saw that in April surrounding uh

Trump tariffs. Uh markets been very

quiet the last was very quiet the last

half of 2025. We know it doesn't stay

that way. Volatility and when I talk

about volatility I generally mean uh

both implied volatility that is the cost

of options how risky option traders

think the next 30 or 60 days are going

to be and then realize volatility how

much the market actually bounces around.

So hasn't bounced around very much. Uh

it's done really well uh more or less

straight up. S&P gained about 17% last

year. Um so this is one of those things

that um it will stay quiet until all of

a sudden it doesn't. And there's a

really geeky word about volatility. Uh

volatility is heteroscadastic

meaning it'll stay low for a while and

then some shock will come along and it

will jump and it will stay high for a

while. the shock and the jump is going

to happen uh tomorrow. Don't know next

month. Is it next year? We don't know.

Uh but people have to be uh have to have

a portfolio that can weather that sort

of thing that's not overly uh not overly

aggressive. I'm interested to hear why

we've seen this transition in in in

volatility over the past year. I mean we

we had a very volatile first half of the

year um primarily due to the tariffs and

then gradually as you say it becomes

less volatile and actually what we're

experiencing now are some pretty big

geopolitical events political events

that you would think would royal

investors would would spark some

activity in the markets spike some

volatility

um but in many cases that isn't

happening and one thing that we've been

discussing this week. For example, this

criminal investigation into Jerome

Powell, which had a reaction from

markets, but less of a reaction than one

might expect in previous years, for

example. As a volatility expert, I just

want to get your views on why this is

happening. Um, is it maybe the

toxification of markets? Why is it that

we're seeing less volatility today?

Well, and I think another perfect

example is the incursion into Venezuela.

>> Yes.

>> Uh when I read about that, it was on a

Saturday morning. I thought, "Oh boy, I

got to watch the futures markets open on

Sunday night." And uh the

lack of volatility was really was really

staggering. It really was. Why is that

happening now? I think people have just

gotten inured to the fact that even if

markets sell off, dip buyers will come

in.

>> And among some of the people who just

blindly come in to buy stocks when

they're down, it's buy the effing dip.

And that's worked. It's worked for

years. It worked uh after CO. It worked

this April. And so I think people,

they're just fearless. They're fearless

now. uh and we have to unfortunately we

have to learn these lessons all over

again. Uh we will have some sort of ugly

debacle uh and stocks will probably fall

20 to 25% from their highs and it's only

then that people will learn the lesson.

Oh yeah, you know this does happen. You

know markets don't go straight up. I

shouldn't always buy the dip just

because I can buy the dip.

>> It's interesting because on the one hand

people seem to get very worried when

there's a lot of volatility. I mean the

VIX, it's literally people call it the

the volatility index, the fear index.

Like if there's a lot of volatility

happening, that's a bad thing. But on

the other hand, as you say, it's almost

more concerning if there's no volatility

in a situation like this because it

almost tells me people don't care or

they're not they're not even bothering

to price in whatever whatever downside

risk there might be as a result of

invading another country or threatening

the Fed chair with a with a criminal

investigation, whatever it might be. Um,

would you agree with that? I mean, one

thing that I I I often try to figure out

is why does it why is it important to

look at volatility and understand it?

How can it actually help us as

investors? I guess would you agree with

my framing that I just laid out? I would

but I would put it this way and I've

talked about this on Twitter uh for the

last say four or five years

when we've seen the price of options

spike that is implied volatility spike

and I'll try to do this without being

real geeky but there were times in the

past let's say two decades ago if we

have if we saw say the VIX spike um and

spike meaningfully it would take weeks

or months for it to come back to a more

normal level.

>> That's not the case anymore. There are

now so many people that are rushing in

to sell volatility that is sell options

whether it's for their own account or

one of these uh the mammoth uh number of

ETFs that are now engaged in volatility

selling that we're now to the point

where if the VIX spikes on Tuesday it's

going to be very very very close to

normal back to normal by Thursday or

Friday. just the the legion of people

who come in and sell these volatility

spikes uh because it's always worked in

the past. They want to sell options when

they're really expensive and and and

it's the first cousin to buy the effing

dip. Instead, this time they're talking

about sell the spike in VIX. Um and it

will work until it doesn't and some

people will really be hurt and that's

when we'll learn the lesson all over

again. We will get to the bubble, but

just continuing down this thread here,

this dynamic that you're describing of a

lot more this this huge inflow of

options traders who are trading off of

this volatility which is itself becoming

almost it's it's its own industry.

Something happens that gets people

anxious and you see a lot of movement

and activity and then people go in there

and try to scrape as much money as they

can. And we're seeing a lot of this in

the zero day options market which grew

to 59% of total options volume in 2025.

Um in other terms the these are the

shortest term options available to

traders. So I I guess I I as a as an

options trader what do you make of this

explosion in options trading that we're

seeing specifically really short-term

options? What does it tell you about the

state of the markets right now?

>> Yeah, I think there are let's say three

things going on that have that drive

this explosion in option trading. One is

that options can be a great tool and I

like to point out that you know if you

if you buy a stock or you short the

stock then you know your payoff profile

is it's a 45deree line. Uh on the other

hand, if you add options uh to some sort

of equity position, then you can create

superior completely different but

superior payoff profiles uh by combining

the two. And it it took a while for

people to really understand that and to

and to grasp that and to come on board.

Uh it also helped that all the the

online brokers now uh charge zero

commissions.

>> So if you were dubious before, uh you

have less reason to be dubious now. and

you might try your hand at option

trading. And then uh the the

gamification of zero DTE options. That's

an analogy to the meme stock craze. I'm

not a huge fan of zero DTE options

because of that. The things that really

make options a neat vehicle, they kind

of break down. Uh when you're talking

about zero DTE options, it's more of a

bet. It's more of a more of a

speculation. And I I understand why it's

happening and you can't ignore it, but

I'm not certain it's going to be good

for for very many people's portfolios.

>> Well, it seems that it it is another

part of the gambling trend at at large

in the stock market and in the options

market. I mean it seems as though

whether it's zero day options also

perpetual futures which we've been

starting to hear more about these these

basically no expiration date futures

where you can get like 20 to 100x

leverage and they're exploding right now

especially on decentralized exch ex

exchanges specifically in crypto

um and obviously we got the meme stock

craze obviously the prediction markets

as Well, um

are you concerned that this could lead

us to some I mean obviously a lot of

people are lead are losing money

probably on these trades is my

assumption but could this create

something larger is this a larger

problem than people perhaps think think

it is right now

>> yeah that's that's interesting so the

book that I wrote before the anxious

investor was a history of the US and

five crashes I write about the five

modern American stock market crashes.

And one thing I write about there is

that each one is is attended by a new

novel financial contraption that injects

leverage at the worst possible time. So

in 1987 was portfolio insurance. What

could be better than portfolio

insurance? Well, the way it was actually

executed was horrible because it just

drove the stock market nearly down to

zero. the guy responsible for running

portfolio insurance for the biggest

portfolio insurer at one point said,

"Nope, I'm going to stop because if I

sell everything I'm supposed to, I'm

going to drive the market down to zero."

That was his quote in in 2008. It was

mortgage back securities. So, are the

prediction mark could that be uh the

prediction markets this time? I'm not

sure they're going to have the

opportunity to get big enough to really

cause a problem, but um and you can say

what you want to about options or

futures, but uh when I became a member

originally of the Chicago Board of

Trade, they hammered home the point that

futures markets were there to help

people hedge risk. uh whether it's

you're a wheat farmer or you're flower

mill or you're an insurance company and

you need exposure to the S&P 500 or

whatever,

that's not going on with the prediction

markets. Nobody has a risk to hedge if

they want to bet on what happens in

Venezuela over the next 30 days. That

they don't have that. That's not a risk

that they need to hedge. And so it's

yeah it's gamification and

worries about insider trading abound

now. Uh worries that people are not

really reading the details of the

contracts. So they don't really

understand what they're betting on and

it's a bet. It's not an investment. It's

not a hedge. So I understand why people

are enamored because they're new and

these things are timely. They're

available. Uh they're salient. And so

the biases run away with us because now

we think we have an opportunity to

bet on something that's top of mind for

us. And our bias has run away with us.

What do you think about the fact that

they're now getting pretty significant

institutional backing? I think the most

important example would be

Intercontinental Exchange, which owns

the New York Stock Exchange.

they last year or earlier this year made

a $2 billion investment into Poly

Market. So when I look at what's

happening and the backing that we're

seeing of these platforms and you know I

feel like most of us agree that it's

gambling. I feel like most of us agree

that it's not really

investing or it's it's closer to

gambling than it is to investing. And

yet it does seem that we're all on board

that it's just gonna happen anyway. Do

you think that that is the case? I mean,

you don't want to infantilize

investors and say, "No, you're not

allowed to bet on stuff." But I don't

know. At the same time, there there

seems to be a lot of risk involved here,

a lot of downside, and people could get

burned. I mean, what do you make of the

fact that it seems that America has

decided this is fair game? we do this as

a society and as you pointed out we

don't want to tell people you we know

what's good for you. Uh, and so to the

degree that um somebody wants to make a

reasonable wager for entertainment

purposes on um on on Monday's national

title game, I'm like, okay. But to the

degree that um somebody tries to

convince us that we can fold uh

something on poly market about some

geopolitical event into a portfolio of

stocks and bonds, that's that may be a

bridge too far. What about um ICE

investing in poly market? You know, it's

it they think that there's something

there. They think it will continue to

grow. They may see other opportunities.

For example, there may be the

opportunity to do uh something that is

more strictly financial. Where will the

S&P 500 be at the end of the month? Will

the Federal Reserve cut rates uh before

the April meeting? For most people,

those are not hedges. And if you want to

hedge that, there are better venues than

a prediction market that's going to be

zero or 100 at the end of the day. And

that's why I say they're not hedges. If

it's zero or 100 at the end of the day

and there's nothing in between, that's

not a hedge, that's a bet. Uh and so ICE

sees some upside, they see some

opportunity. Okay? Even if you're not a

fan of crypto, uh you have to admit that

blockchain is a tremendous opportunity.

And so you might want to invest in a

blockchain company.

We'll be right back. And for even more

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We're back with Profy Markets. Let's

talk about the bubble. Uh the the

potential bubble.

um this has been kind of dominating the

conversation. What is your view on this?

Do you believe we are in a bubble? Are

we not in a bubble? Uh how do you think

it all unfolds in 2026?

>> If you've been paying attention in say

finance for the past 12 months, you know

that AI,

I was going to say has the capacity to

change things fundamentally.

I'll go further. I believe AI will

change things fundamentally in finance

in the next 5 years. Are we in a bubble?

In 1999, if you look at some of the

valuations for those internet

businesses, you know, a lot of them were

losing money and they were still trading

at 100, $200, $300 a share. Another

paper that I wrote about in my book is

in 1999 the average jump if somebody

just added com to their company name um

even if they had nothing to do with the

internet uh bobsplumbing.com

if it's publicly traded it would tend to

jump the next day. Uh that's clearly a

bubble. What about AI?

You know if you look at some of the big

names that are involved whether it's

Google or Nvidia these they're big

names. uh but they make good money. PE

ratio can be really high. So you gota

really believe the story. But you know

we've not had a bunch of crazy IPOs of

AI companies. And so are we in a in are

we in a bubble? I think we're in a

little bit of a bubble but this could be

a bubble that we grow into. I just AI

just has so much potential uh to change

what we do, how we do it that um if you

want to invest with a thesis that AI is

really going to change the world in the

next 5 years. I'm never going to try to

dissuade you from that. Although I would

hope everybody would do it in a sensible

way.

>> Going back to your point that you know

you've written this book about crashes,

a history of the United States of five

crashes. you say that there's always

this some financial contraption that

comes in at at the totally wrong time.

Um portfolio insurance was an example.

Um mortgage back securities in in the

previous crash. Uh looking at let's

assume that maybe it's a bubble

um or that we have one in the next few

years. What do you think the financial

contraption would look like in the next

few years? Or is there anything are

there any financial instruments that you

find more concerning than others right

now?

>> Yeah, and that's that's the question.

And the other question is when's the

next one going to happen? Yeah. And I'll

be the first one to to point out that I

am not a bear. Uh the stock market tends

to go up over time. I write about five

crashes. Uh and the first one happened

in 1907. So that's that's that's five in

in well longer than a century. So uh

they're rare which is great because they

crashes do tremendous damage to investor

psyche and for a long long long time.

People who lived through the crash of

1929 even if they lived uh another 30 or

40 or 50 years many of them just refused

to ever trust the stock market again.

These contraptions uh they inject

leverage at the worst possible time. Uh,

and you know, mortgage back securities

at the time they were invented, they

were a wonderful thing, perfectly

reasonable, great solution to a problem.

Uh, but now, uh, you do have to look

around every once in a while and see if

you can't find the contraption that

could cause problems in the future. Uh,

I don't think it's crypto because I

don't think people will be able to get

enough leverage in crypto. I don't think

it's prediction markets because I don't

think they can be big enough to bring

down the entire what is it $40 trillion

US stock market. But one thing that

could cause real problems is private

credit

>> for a couple of reasons is it's opaque.

It's huge and it has the potential to do

a little bit like what long-term capital

did in the late 1990s. And that is if

the problems in private credit get big

enough and again it's opaque. you don't

know how big the market really is. Then

it could it could come along and and be

sneaky dangerous for one of the big

pillar financial organizations, whether

it's a big investment bank or one of the

big commercial banks. And if that were

to happen, then again, we'd have

something like uh what happened with

long-term capital. Um S&P lost 14% in

the month that year. So I I think that's

the real risk and again largely because

it's opaque. This seems to be the story

that that needs a lot more attention in

2026. I mean, I think that when we when

we look at the possibility of there

being a bubble, I compare it to what we

saw in 99 and 2000, for example, where

there was way more leverage um on on the

biggest names. And so, it was a lot more

concerning. Also, the valuations were

were way higher and way crazy than we're

seeing today. So I'm not that concerned

about it right now to be honest. But the

part where I do get a little concerned

is a lot of the leverage is actually

tied up in these private credit firms

for which we we know almost nothing

about. Like you know Meta is building

these data centers and then we saw what

happened with Blue Owl where they're not

actually reporting the debt on their own

balance sheet. it's being outsourced to

all of these other private credit firms

and we don't really know where the debt

even is. And once I started to realize

that, suddenly I started to think, okay,

well, we we're trying to measure the

leverage. We have no idea. We don't have

a clue. So, it's almost moot to try to

do that right now. If you have this

massively expanding industry that is

private credit and which is new and

which has caused some bankruptcies that

we've seen, First Brands would probably

be the best example. Um, so I I I guess

I appreciate you bringing it up and I

appreciate hearing that it is a concern

to you. How big of a concern is it to

you?

>> It is a big concern. Unfortunately, it's

difficult to quantify now. Um,

why is it a concern? Well, not only is

it is it big, we do know it's big, it's

opaque, but also these are often uh

second and third tier credit risks. So,

if you're a AAA company and you want to

borrow money, there are lots of ways you

can do it very cheaply. Uh if you're

just a couple of notches above junk,

then that's when you go into the private

credit market. And uh so that's that's

why it's dangerous. Uh and the fact that

we're just now becoming aware of the

problem, I think, is a problem in and of

itself. for example, most people in

finance had never even heard of

portfolio insurance until the Wall

Street Journal started writing about it

in early October of 1987. Looking ahead

to the rest of the year, um any things,

any themes that you think that we should

be paying more attention to perhaps that

we're not talking enough about? Anything

that you're really focused on going into

the year? Yeah, I I think one thing to

pay attention to is the fact that the

Federal Reserve is going to lower

interest rates through the remainder of

the year. Um, Chairman Powell is going

to lose the chairmanship uh this spring.

Uh the new chair is almost certainly

going to have promised President Trump

that they'll drive to lower rates. Uh I

think they'll be able to do that. But

Ed, I would I would make two points now.

rates should not be lower because if you

look at the Fed's dual mandate, it's

inflation of 2% or less. Well, we

learned today that inflation's at 2.7%.

So the the way that you bring inflation

down is not to lower interest rates and

allow people to buy even more stuff.

Second thing is second part of the dual

mandate is is employment full employment

as generally considered unemployment

rate of 5% or below. Well, the

unemployment rate is 4.4%.

So lowering rates is just not

appropriate for the current environment

we're in unless you're looking at it

from a political point of view. Second

point about rates, the Federal Reserve

has done way more damage, way more

damage. And they did this in 2002

through 2006, and they did it in 1929.

They do way more damage when they keep

rates too low for too long than they do

when they hold rates steady or keep them

even a little bit too high. So, it is so

easy when money is cheap, it's so easy

to borrow and rush out and buy a bunch

of stocks.

>> It sounds like maybe your biggest risk

of the year, which I think I'd probably

agree with, would be inflation. Um, I

mean, that that is that is the downside

here is if we continue to lower rates.

Also, I mean, we look at the inflation

numbers that we're seeing because we

have all of this data that we didn't get

in October, it's likely a lot higher.

and you look at any third party uh firm

that's measuring prices, they'll tell

you it's 3% or higher, which all makes

me think, I mean, it makes me even more

concerned about the inflation problem um

that we're trying to paper over it with

this data that you can't really trust

right now. Plus, we've got this pressure

on the Fed to lower rates. Plus, this 2%

number, which is their stated goal, and

it seems they've just abandoned it.

It seems at least um is is inflation

sort of your your number one risk in in

26

>> inflation? Yes. But not just uh what it

costs to fill up your your supermarket

basket, but what happens when rates are

too low then all sorts of assets get too

expensive. And by too expensive, I mean

expensive beyond fundamentals in a way

that is dangerous. It doesn't matter if

it's the stock market or the bond market

or precious metals or crypto or

whatever. Um, I think I think that's the

real risk because once these get to

levels that are unsustainable,

then if there's a shock or people start

to backtrack a little bit or rethink,

then we get a you can get a really

violent reaction. And and that's the

danger. And again, there's no way to

reconcile the economic data we're

getting and a Federal Reserve that's

likely to cut interest rates by say 75

basis points through the rest of the

year.

>> Just before we wrap here, um you've had

an incredible career um as an investor,

as a trader. You're also a writer. Um

any advice for young investors who are

thinking about their portfolios this

year? What would your advice be to young

people today?

>> Yeah, to young people today would be

very simple. Max out your 401k.

Max out your potential IRA contribution.

Invest that money in a very reasonable

uh basket of assets. If you're not yet

30, that's probably 7030. If you're 30,

it's probably 6040. And by that, I mean

S&P versus bonds. Uh and don't trade it

if it's an investment for the long term.

Don't trade it. Don't think you're

smarter than the market because there

are a number of biases that convince

people that they should be trading out

their their retirement money, their

investment money all the time. Don't

leave it. Max out your contributions,

but then leave it alone and you'll be

amazed the the amount of money you'll

have in 10 years.

>> Scott Nations is the author of The

Anxious Investor, as well as a history

of the United States and five crashes.

Scott is also the president and chief

investment officer of Nation's Indexes,

the world's leading independent

developer of volatility indices and

option strategy indices. Scott, really

appreciate your time. Thank you.

>> Thanks so much.

>> Thank you for listening to Prof Markets

from Profit Media. If you liked what you

heard, give us a follow and join us for

a fresh take on markets on Monday.