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Mar 24 • 19 tweets • 7 min read
Musings of the Day, 3/24/23:

I said yesterday to a friend that I kinda miss being in the HF manager seat right now given all the opportunity.

Nah, I take that back. 😎
During GFC while domestic PBs like MS and GS were kicking long-time clients out (like myself and many of my competitors) in a desperate bid to save themselves in the wake of Lehman, it was BNP Paribas that allowed me to keep my positions.

I hope they don’t get dragged down by… twitter.com/i/web/status/1…
I will say that the one thing I miss right now is giving up my ISDAs (due to all the attendant hassles).
As someone who used to be very fond of complex capital structure setups, I will say that these environments are horrendously stressful for HF managers or anyone with complex setups due to mismatched liquidity and basis blowouts.

Simplicity is your friend right now.
USD be like Rocky Balboa.

You can keep beating on him, but he just won’t. stay. down. Even Ivan Drago went down first.

Who’s gonna OUT-DOVE the Fed?

#USDWreckingBall Image
Ah, my favorite word of the GFC era is back: “macroprudential.”

I remember Gentle Ben whispering that term in dulcet tones like a lullabye back in the day.
Pretty much confirms what I’ve been saying last 2 weeks:

Fed’s Tradeoff not even close to being here.

Watch out for the Pivot Posse — so many Assets are simply mispriced on the misguided assumption that it is. Image
Peet’s Coffee gal is a SITH LORD! Image
Note chart in lower right quadrant. I’m sure the BOE is watching. Gilt Crisis 2.0 coming?

Who’s gonna OUT-DOVE the Fed first?🤔
👆
Uh huh. From 10.5% to 10.4%?
😂😂
Wow. I look forward to buying more T-Bills!
Why do those “toxic” USTs that everyone is supposed to be dumping get A FLIGHT TO SAFETY RIP EVERY TIME THE SHTF?

As we said in our West Point paper, TRUST ultimately stems from NATIONAL POWER, and National Power has far deeper roots than mere Debt/GDP.

open.substack.com/pub/urbankaobo… Image
Yes. I am 💯 in agreement.

Don’t Shrug The Rug.
So so so true. @BurggrabenH
Yep. If I was a betting man, and I certainly am, this is exactly where I think we are headed:
I've been saying to watch out for problems in the SHADOW BANKING sector, and this is an ominous sign.

And yet I wonder what the forcing function/crystallization event would be for Life Insurers? A sudden spike in deaths?

Well, well, well. You mean that quashing all ability to make a profit actually reduces what you need more of?

As Jules says, “Look at the big brain on Bret!!”

@BurggrabenH
There seems to be confusion with the notion of USTs being termed "Risk-Free." Hope this clears it up.

To conflate INTEREST-RATE / DURATION RISK with SOVEREIGN CREDIT RISK is grossly incorrect.

That's a wrap for the week folks. Not gonna get sucked into any more debates tonight!



Look out for my ORDERED KAOS WEEKLY WRAP on my Substack tomorrow.

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More from @UrbanKaoboy

Michael Kao Profile picture
Mar 26
Musings of the Day, 3/26/23:

Kashkari is 100% right on this.

If you don't understand that even "Risk-Free" securities can have interest-rate risk, then you should read my pinned tweet and maybe not run a bank (or write a financial newsletter)!

I call BS on "Blame the Fed" takes.

Remember when your mom asked, "If other people told you to jump off a cliff, would you?"

If the biz model is based on 10x leverage, maybe don't extend leverage at ATL yields with super concentrated liabilities?
🤔

meant to say "don't extend DURATION"*
Read 8 tweets
Michael Kao Profile picture
Mar 25
Kaoboy Musings -- ORDERED KAOS Weekly Recap: 3/19/23-3/24/23. urbankaoboy.substack.com/p/ordered-kaos…
THEMES OF THE WEEK:

THEME 1:

RISK-ON / RISK-OFF DRIVEN BY VOLATILITY IN RISK-FREE RATE EXPECTATIONS.

IF RISK-FREE RATE IS THE BEDROCK UPON WHICH ALL RISK ASSETS ARE VALUED, THEN THE VOLATILITY IN RISK ASSETS IS JUST THE “TIP OF THE WHIP”!
THEME 2:

RIFLE-SHOT POLICY PRECLUDES BAZOOKA POLICY.

THESE RING-FENCED ACTIONS ARE NOT QE.

DEPOSITOR BAILOUTS ARE USUALLY TERRIBLE FOR INVESTORS.

BTFP ≠ BTFD AND FED IS NOT DONE.
Read 13 tweets
Michael Kao Profile picture
Mar 21
Musings of the Day, 3/21/23:

PB analog for thinking about FX Swap Lines:

The Fed is PB to RoW's CB's.
CB's are SHORT USD, and it's become a hard-to-borrow.
Fed extends special borrow facility that is expensive but allows CB's to avoid getting bought in.
CB's still short USD.
Sorry for the inside baseball. PB = Prime Broker (where HF's custody their assets as well as borrow stocks for shorting).
When you consider that the Risk-Free Rate is the financial linchpin for ALL ASSETS, this is akin to repeated pulling out/pushing back in of the bottom-most Jenga Block beneath a teetering tower. Image
Read 9 tweets
Michael Kao Profile picture
Mar 19
Musings of the Day, 3/19/23:

Same Sentiment, Different Country:

Appending to my Investing Lessons Substack Thread:

3/19/23: Know When To Swing

This is a great variation of my Pelican Investing thoughts (4/6/22).

“A good hitter can hit a pitch that is over the plate three times better than a great hitter with a urbankaoboy.substack.com/p/re-investing…… twitter.com/i/web/status/1…
Even if I am wrong about the Fed NOT pausing, there are 2 things I am confident of:

1. A full-blown FED PIVOT is highly unlikely anytime soon.

2. If the FED pauses, it will be a RACE for other CB's to see who can OUT-DOVE the Fed.

Read 14 tweets
Michael Kao Profile picture
Mar 19
@PauloMacro This is where I'd rather make a lot of $ with you being right rather than me being right about Oil in the ST.

Alas, absent action from OPEC+, I would be very cautious of ANY PROCYCLICAL commodity bets right now. Even wholesale CB reversals can't reverse demand on a dime.
@PauloMacro
@PauloMacro For the record, I've been advising the management team of my Permian OilCo to extend hedges since last summer DESPITE the backwardation and numerous calls for $100+ Oil.
Read 6 tweets
Michael Kao Profile picture
Mar 17
Musings of the Day, 3/17/23:

If there's anything to remember from my Musings this week, it's this:

BTFP ≠ BTFD

☝️
☝️
Read 12 tweets

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