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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
Apr 16
Musings of the Day, 4/16/25:

Not an unreasonable list of asks, and I think the Admin will likely explore this off-ramp with China as a first step to a negotiated deal.

I would not be surprised one iota by a “US/China Reciprocal Tariffs On Pause” headline while they negotiate.

Remember that there will be Fat Tails in BOTH directions inside the Trump 2.0 Asteroid Field.Image
Not that there is a practical difference between 145% and 245% Tariffs — both are effective Embargoes — but here is a bit of “good news” before you believe the daily media-exacerbated hyperventilation:
Re-establishing my $HYG Short.

I view it as a cheaper way to buy Puts right now.

If you don't know what that means, please see my Merton write-up about why Long Credit = Short Put and Short Credit = Long Put.

Image
Read 8 tweets
Michael Kao Profile picture
Apr 12
Musings of the Day, 4/12/25:

Naysayers will be quick to say that Trump is “caving” again even as they are equally wont to criticizing the Admin for being intransigent — can’t have it both ways.

There is an extremely important Economic Statecraft objective here — to wean the US off China dependencies without tanking the Economy.

One of the keys to this negotiation is to preserve leverage while extending a face-saving off-ramp for Xi at the same time, which was my biggest concern.

Chatted with Lakshmi this am, and she thinks that the newly announced Tariff exclusions likely cover only 8-10% of total Chinese Imports to the US.

I believe this carve-out is strategically designed to help Taiwan, Japan, and South Korea and to ease input costs for US Tech and Manufacturing sectors while maintaining broader Tariffs for leverage in negotiations with China.Image
I see these exclusions as less about picking Big Tech over Small Businesses and more about what industries are Critical Path Industries.

I believe everything needs to be evaluated from an Economic Statecraft lens right now, and from that perspective, Chips >>> T-Shirts & Coffee Mugs.
Here’s my counter to the folks that think China holds the better cards here:

1. “They can endure more pain” — While I agree that Xi is cut from the same cloth as Mao, the Chinese population of today is NOT the same as during Mao’s time and would not tolerate another “Great Leap Forward” style austerity. Witness the uprisings in 2022 in response to the COVID lockdowns.

2. “Yes, the US Consumer accounts for 35% of Global Consumption, but only accounts for 15% of Chinese Exports.” — Do you really think the Rest of World (RoW) absorbs the other 85%? I believe that the “Leaky Sieve” of Transshipment Loopholes accounts for at least another 10-15% Indirect Exports from China. The mathematical fact is that China cannot get around the US Consumer Market. THESE LOOPHOLES ARE GOING TO GET CLOSED, IMHO.

3. “China’s balance sheet is pristine, and they can just lend Fiscal Support to create a Consumer Economy.” — If you believe that, I have a Bridge (To Nowwhere) and a Ghost City to sell you. The PBOC balance sheet is a farce, because its Real Estate Bubble has been financed by LGFVs that are now insolvent. With ~100 mm unoccupied housing units and TWICE that number in unfinished inventory, that jig is up, and nothing short of a DEBT JUBILEE will truly reignite Consumer Animal Spirits. And if it did that and took the off balance sheet debts onto its balance sheet, China’s Debt/GDP explodes beyond 300%. The recent Credit Downgrade (largely ignored by the media) is just the beginning:
Read 7 tweets
Michael Kao Profile picture
Apr 10
Musings of the Day, 4/10/25:

I’ve long felt that many sell-side research analysts are closet technicians, weaving whatever Macro word salad is necessary to rationalize their technical views.

The problem with this approach in a market that cares 99% about Economic Statecraft headlines over everything else right now is that the charts themselves can chop you to bits.

Two things make me optimistic that we will skirt a Recession despite slowing growth:

1. The US Economy has a turning radius more akin to an Aircraft Carrier than a Speedboat.

2. What I said yesterday morning about this crisis being manufactured means that it can go away just as quickly without lasting damage.

Expect a bumpy ride and continued Fat Tails in both directions.

Welcome to the Trump 2.0 Asteroid Field.Image
Image
Correctamundo.

I have been saying the same thing all along.

Image
Been catching up on podcasts and calls today, and I listened to this one with @MattSilver about Supply Chains twice.

The Auto example was particularly interesting, and here are some of my takes:

- It’s not yet clear if/when there will be a broad-based Price shock given that many are freezing activity until there is more clarity.

- Near-term, we will see Inventory drawdowns instead of Price/Cost pass-throughs since those tend are harder to undo.

- North America manufactured goods are far more resilient to Price shocks given the surgical nature of Tariffs applied to only PARTS of the fully assembled product.

- As KAOS THEORY 9 guest @TheMichaelEvery suggested, the Economic Statecraft goal of renegotiating USMCA is likely to close the transshipment loopholes on China and create a self-sufficient “North American Closed Loop.”

overcast.fm/+AA5AWMdx2TQ
Read 11 tweets
Michael Kao Profile picture
Apr 7
Musings of the Day, 4/8/25:

There is no better evidence of China’s Top-Down GDP Targeted Economy than this.

This is NOT Globalization based on Comparative Advantage between countries.

This is a Runaway Assembly Line that churns out an endless stream of goods regardless of economic losses or demand, because China needs to keep its restive masses employed and it can no longer to do so by building ghost cities and bridges to nowhere.

It’s fine and dandy when the $21T US Consumer was waving it all in, but eventually that gravy train had to stop given the resultant atrophy of America’s industrial muscle.

Good luck if you think the RoW will absorb everything.Image
Possible Key Reversal day in the Long Bond signaling the end to this particular Flight to Safety?

Something I will be watching closely. Image
A lot of folks reading Bond weakness as alarming. I’m not so sure.

I think it might be an early signal that we are about to hit bottom.

No conviction yet in this thesis but I am definitely adding to Risk.
Read 6 tweets
Michael Kao Profile picture
Apr 6
Musings of the Day, 4/6/25:

There were 2 keys Lessons I learned from Trump 1.0:

Lesson 1: Mosh Pit Theorem -- make others believe you're crazy, and even bigger guys won't fuck with you (I've personally used this at Slayer concerts).

Lesson 2: Art of the Deal -- open any negotiation with an outrageous ask with the intention of settling right on the original goal.

Imho, you can either buy into the notion that the entire Trump 2.0 Economic Team fucked up the Tariff formulas by accident and make linear extrapolations that it will bring about another Great Depression, or you can remember the Trump 1.0 Playbook to help navigate through the noise of Trump 2.0.
Ask yourself:

If the goal was Persistent Tariffs and to make the Tariff Formulas impossible to comply with, why is this happening?
China is the only country that the US has an Economic Statecraft goal to economically hobble, because of China’s own Unrestricted Warfare on the US over the last several decades.

I believe these Tariffs are designed to force RoW to pick sides and that Trump 2.0 is banking on the US Carrot of 30-35% of Global Consumption to win most of the converts.

x.com/urbankaoboy/st…
Read 5 tweets
Michael Kao Profile picture
Apr 2
Musings of the Day, 4/2/25:

Amazing how many people latched onto a headline put out by “Chinese state media” yesterday and held it as credible.

Imagine if “Chinese state media” didn’t give you that little clue and masqueraded as someone else.

Unthinkable right? 🙄

H/t @TheMichaelEvery
Bold Prediction:

The Nash Equilibrium of this game is ZERO Tariffs across the board.
And the dominoes start falling…

Let’s see how long before my Nash Equilibrium is reached.👆
Read 10 tweets

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