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Michael Kao Profile picture
@UrbanKaoboy
Dec 10, 2022 • 21 tweets • 5 min read • Read on X
Musings of the Day, 12/10/22:

BOE is in same quandary as ECB/BOJ/PBOC — can they out-hawk the Fed?

Conversely, when we truly pivot, will RoW hold out and let Fed out-dove them?

#USDWreckingBall
Missed this Fir Tree lawsuit over $GBTC. Thanks for flagging this, @DoombergT. Must-read.
From GS this am:

“The last few weeks have demonstrated how prone the market is to FCI easing when the marginal policy decision becomes incrementally dovish.”
“As mentioned in prior notes, I believe this would be a mistake...FCI easing is NOT what the Fed needs at this stage of their inflation fight.” Image
“Based on the current/realised levels of FCI, the GDP impulse fades from close to -2% currently to -1.2% in Q1 and then turns positive by Q3 next year.”
“…risk is that when those negative impulses wash out (temporary on the way up so temporary on the way down), we are left with sticky inflation above the target range, largely driven by high wage growth.”

👆

+Core/Energy Tag-Team as Oil hits Supply/Demand Singularity Point.
How apropos for the times. Image
As a gamer I am pleased about this. I don't wanna see a whole bunch of games become "Xbox exclusives" especially since PS5 is a superior platform.
From Tony P/GS:

“we’re going into 2023 with a stock market that charges an 18 multiple for the prospect of ... 0% earnings growth."

Is that bad?
Re: Mental Model-Destructive/Constructive Interference In Econ Cycles

Thinking about where we are in the Oil Cycle reminds me of this this Mental Model from Physics.

(SHORT THREAD)
Econ cycles come in varying wavelengths; LT cycles = long wavelengths & ST cycles = short wavelengths.

ST cycles often oscillate within LT cycles.
In Oil, LT cycles are driven by capex cycles that have 5-10 year gestation periods and primarily affect SUPPLY. ST cycles are driven by the macroeconomy and primarily affect DEMAND.
In this Mental Model, I’m making a simplifying assumption that this complex interplay between Supply and Demand boils down to LT/ST impacts on PRICE.
Even this simplifying assumption is complicated by the differing wavelengths that result in periods where super-imposed waves are out-of-phase vs. in-phase.
Destructive Interference occurs when one wave is out-of-phase with another -> Overall superimposed wave is DAMPENED.

Constructive Interference occurs when one wave is in-phase with another -> Overall superimposed wave is AMPLIFIED. Image
Oil is going into a period of Destructive Interference now, but it will be followed by a period of Constructive Interference.
This is how it is entirely consistent to have a ST bearish view due to macro demand factors while still maintaining a LT bullish view due to LT capex trends.

(END THREAD)
The Structural Supply/Demand Singularity in Oil occurs when the ST cycles get back in-phase with the LT capex cycle.

I think there is a good probability of this occurring in 2024.
The Urban Kaoboy rides tonight! Image
One thing I didn’t mention in this Mental Model is wave AMPLITUDE.

LT cycle may have a very large ultimate amplitude but wavelength is long so an negative (out-of-phase) ST cycle of large amplitude can dominate for periods of time.

👆This is my biggest concern for Oil in ST.
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More from @UrbanKaoboy

Michael Kao Profile picture
May 15
Musings of the Day, 5/15/25:

Continued evidence of Net DEFLATIONARY impacts of Trump 2.0 Playbook.

Observations:

1. It’s hard to have runaway Inflation when one of its key linchpins, Oil, has become a Geopolitical Football.
2. The continued ME lovefest for Trump should have Oil Bulls worried.
3. Trump wants Oil to be < $50, and I think the Saudis will help achieve that because they alone can make for lost price with increased VOLUMES.

Result:

1. Inflation stays quiescent
2. Iran and Russia are in a weaker negotiating position that could catalyze peace settlements
3. Peace settlements would result in Sanctions relief, which means MORE OILImage
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Never quite seen anything like this.

The Geopolitical/Macro implications of a Peace Dividend + NATO shouldering more of its Defense Spending are BIG.

It means:

1. Lower Geopolitical Risk Premiums for Commodities like Oil and Gold due to Sanctions Relief
2. Lower Oil prices from Saudis (this has been a core thesis of mine for quite some time)
3. Lower Defense Spending needs for US

Outside of Entitlements, the two biggest line items in our Budget Deficit are Defense and Interest Expense — and both go DOWN with a Peace Dividend.

This is the path out of the Vodka Red Bull Economy.Image
Image
A ME Peace Dividend anchored around the US also cements the role of the Petrodollar, which has obviously implications on the USD’s status as GRC (Global Reserve Currency) and the UST’s status as GRA (Global Reserve Asset).

x.com/urbankaoboy/st… x.com/urbankaoboy/st…
Read 5 tweets
Michael Kao Profile picture
May 14
Musings of the Day, 5/14/25:

If you didn’t know this, you haven’t been reading Kaoboy Musings!

Here are the two most pernicious Perma-Bull arguments used to rationalize a Bullish Oil thesis I have heard throughout my career:

1. Saudi Fiscal Breakeven is XXX, much higher than current Oil prices.
2. ⁠Inflation-adjusted Oil price should be XXX, much higher than current Oil prices.

Oil Prices are based on marginal Supply/Demand. PERIOD.

And right now, Demand is faltering even as Supply becomes a game of Geopolitical Football because Trump 2.0 knows that:

1. Revenues = Price X Volume
2. Saudis are the ONLY global producer who can make up for lost Price with INCREASED VOLUMES

x.com/urbankaoboy/st…Image
Duration via Long USTs looks very interesting again.

Long Bonds look extremely oversold and yieldy even as that shiny alternative Supply Inelastic Reserve Asset seems to be losing its luster and looking toppy.

There's also an Economic Statecraft angle that I've postulated before:

What happens when Trump 2.0 offers incentives to hold Long USTs in lieu of anything else? How about tying FX Swap Line capacity to UST holdings?

I am buying $TLT Call Spreads.Image
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Qatar saw yesterday's Saudi deal and said, "CALL & RAISE."

Again, the implications for USD Petrodollar recycling are huge.

Image
Read 10 tweets
Michael Kao Profile picture
May 8
Musings of the Day, 5/8/25:

Here is some AI analysis of today's US/UK Trade Deal.

What I see:

US traded 10% Blanket Tariffs in exchange for allowing UK to keep PRE-EXISTING Tariffs on Auto and Ag.

This is a key observation:

For those of you who think that the US is the bully here, these Tariffs are actually seeking to redress PRE-EXISTING discriminatory Tariffs AGAINST the US.Image
This example shows the world that Trump is fine raising cash with Tariffs — even against an Ally (who is insistent on keeping Pre-Existing Tariffs).

Now imagine if you’re NOT an Ally that has huge Pre-Existing Tariffs/Trade Barriers in Critical Path Industries.

The UK produces nothing in Critical Path Industries. Watch out for the incoming Long Term Incentive Modifier Tariffs.👇
Two key observations from the Trump presser on the UK/US Deal:

1. “10% is a likely the lowest number, and they’re getting a good deal compared to those who have treated us very badly.”
2. Trump talked about China more than the UK in the UK/US Presser.

Make no mistake:

All of this is Economic Statecraft about CHINA.
Read 5 tweets
Michael Kao Profile picture
May 7
Musings of the Day, 5/7/25:

Saving Face is everything in the Chinese culture, so if this is the narrative that Xi needs to engage, my advice to Trump 2.0 is: Let the Wookie “win.” Image
Image
I completely agree with @michaelxpettis on the intractability of China’s fundamental problem, which is really a sovereign version of the Innovator’s Dilemma:

To transition to a Consumer Economy would mean that China must cannibalize its existing Top-Down Investment Led GDP-Targeting Economic Model.

But to do so risks slowing down the Runaway Assembly Line which must be kept humming to keep its already restive masses employed.

Scylla, meet Charybdis.Image
@michaelxpettis Join us as we discuss the transition of Pusillanimous Powell to Parsimonious Powell today:
Read 4 tweets
Michael Kao Profile picture
May 2
Musings of the Day, 5/2/25:

Some good color behind the recent dramatic downtick in GDP from @profstonge’s Substack today.

Reminder that the formula for Gross Domestic Product (GDP) is GDP = C + I + G + (X - M), where C represents consumption, I represents investment, G represents government spending, and (X - M) represents net exports (exports minus imports).

“The kicker is all the pain was caused by a 41% surge of imports front-running tariffs. Which GDP bizarrely counts as negative GDP. Drop those and actual GDP soared by a blistering 4 and a half percent.”

“BLS said investment skyrocketed on the quarter by 22 percent. Much of it driven, ironically, by the very same tariffs that took the headline number negative…So going by these numbers, America is re-industrializing at light speed. And the tip of the spear is foreign companies moving production here.”

You may disagree with the way it which they were implemented, but the Trump 2.0 Tariffs are working.Image
Image
“Trump is begging for a deal, and Xi isn’t taking his call.”

Uh huh. Image
Jensen is smart but maybe too cute by half. This needs to be stopped. Image
Read 7 tweets
Michael Kao Profile picture
Apr 30
Musings of the Day, 4/30/25:

I’ve been warning about the “Frying Pan Into Fire” risk of US companies moving their Supply Chains out of China and into neighboring SE Asian countries.

Be careful who you choose, because if they are China-aligned countries, you might find yourself shut out a second time.

Regardless of Transshipment Loopholes getting closed or other Trade Barriers getting erected, I believe Trump 2.0 is serious about closing off the Escape Valves for Chinese goods — especially in Critical Path Industries.

This article highlights Vietnam as a risk, although based on my talks with folks, I’d be even more concerned about Malaysia, Cambodia, Indonesia, and Singapore.

Remember the ultimate Economic Statecraft goal:

Re-Shore Industrial Capacity back to the US, and right now, moving your Supply Chains anywhere else entails Risk.Image
This is an account worth following in light of the Canadian election yesterday going to Carney, who has immediately doubled down on Globalization and Climate Change policies.

A Canadian friend who works in Geopolitical circles visited me this weekend and told me that not only does Alberta feel misrepresented by the “Laurentian Elites” of Quebec and Ontario, so too feels Saskatchewan and Manitoba.

Hard to imagine what happens to Canada if the 3 provinces that account for the bulk of its resource wealth, not to mention the entire Geographic interior of the country, want to separate.
My OPEC+ Mental Model pertains to Retailers as well.

The reason why I’ve been consistently bearish Oil especially after Saudi’s Unilateral Cuts is because in a world of slowing Growth/Demand, he who has the Spare Capacity can make up for lost Price with INCREASED VOLUMES since Revenues = Price x Volume.

Oil is ST Demand Inelastic, so if there is a Global Downward Demand Shock (left shift of Demand Curve) meeting a Saudi UPWARD Supply Shock (right shift of Supply Curve), you get a nasty double whammy on Price.

Now think about Retailers selling Chinese-manufactured goods. Tariffs have effectively wiped out their Spare Capacity, so they’re mostly running down their Inventories instead of Hiking Prices yet for fear of Demand Destruction wiping out Volumes.

Come Q3, if the Tariff War with China remains unresolved, these Retailers will have to make very hard choices, and the US Consumer will vote accordingly, depending on the Demand Elasticity of the goods. There will be a Global Downward Demand Shock (left shift of Demand Curve) meeting a DOWNWARD Supply Shock (LEFT shift of Supply Curve).

In general, I think this means that much of the UPWARD Price pressures from the Supply Shock will be neutralized by DOWNWARD pressures from the Demand Shock, which is why I’m not sure this will be that Inflationary net net, as the consensus thinks.

It gets even more nuanced than that, because the ultimate response will be based upon Demand ELASTICITY of the underlying goods. In many cases, I can see the Price response to be net DEFLATIONARY, as I have postulated at the outset. For instance, a left shift of ELASTIC DEMAND meeting a left of INELASTIC SUPPLY can easily land you with LOWER Prices from where you started.

Either way, I don’t think Equities are priced appropriately for what comes next.😬Image
Read 10 tweets

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