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Michael Kao: Inflation & Asian Financial Contagion

Tom interviews Michael Kao, a former hedge fund manager and commodities trader, about his views on inflation and the various forces that can affect the price of commodities such as oil. Michael explains the butterfly effect of the pandemic lockdowns, his “commodity inflation butterfly” theory, and how the Fed’s actions and OPEC’s decisions need to be separated. He believes China understands the geopolitical importance of oil and has begun an EV, coal, and nuclear push to potentially lessen its dependence on oil in the long term. Michael also talks about his worries regarding the Chinese economy and how tariffs and sanctions have dented Russia’s revenue.

Michael also talks about his take on the strength of the fiat money system. He argues that going back to a hard money standard would require severe austerity and is unlikely to happen in his lifetime. He believes that for a currency to gain wide adoption, it needs an elastic supply of said currency, which is something that the U.S. dollar has. Additionally, Michael has his doubts about the idea of bricks supplanting the U.S. dollar as a global reserve. He believes that because of the dollar’s strong network effects, it would be next-to-impossible for its rivals to take its place.

When discussing the potential of a Minsky moment for China, Michael notes that the cracks already being to appear, but no one knows when or which domino will fall first. He worries that OPEC+ has shot their wad too early and this time around have no Bullets to save them. He is not encouraged by WTI price action and is worried that OPEC+ will eventually have to increase production. All of these factors points to a lot of slack in the market which will push the singularity corridor way out.

Time Stamp References:
0:00 – Introduction
0:45 – Michael’s Viewpoints
5:00 – Dollar Wrecking Ball
6:45 – Hikes & Lynch Pins
13:00 – Gretaverse & Energy
23:22 – OPEC Cuts & the Fed
31:25 – Growth, Capacity & Supply
37:20 – Russian Oil Revenue
40:43 – China Debt Time Bomb
52:10 – Boiling Frogs & ESG
57:46 – Thoughts on Gold
1:05:03 – Dedollarization
1:10:23 – Fiat & Dollar Dominoes
1:12:06 – Wrap Up

Talking Points From This Episode

  • The US dollar has a strong network effect and is therefore unlikely to be supplanted as a global reserve currency.
  • OPEC cutting supply prematurely could cause high prices and damage demand while the Fed is currently using its tool of raising rates to combat inflation.
  • China has begun an EV, coal, and nuclear push to potentially lessen its dependence on oil in the long term and mitigate a Minsky moment.
  • The corridor of viability for a supply-demand singularity in the oil market has been pushed out to 2026.
  • Going back to a hard money standard would require severe austerity.

Guest Links:

Michael Kao is a seasoned investor and retired portfolio manager with 25 years of experience in commodities trading and hedge fund management. He has a lifelong passion for the markets and a keen interest in geopolitics, which has lead him to manage his own investments and publish his views on his SubStack Website – Kaoboy Musings.

Known for his out of consensus calls that often wind up becoming consensus later on, Michael Kao strives to cut through the noise in his musings by introducing mental models from other disciplines and injecting ideas from eclectic topics. He aims to educate, encourage out-of-the-box thinking, elevate above the noise and entertain.

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