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Michael Kao: The Four Horseman of U.S. Economic Resilience – Why The Market Hasn’t Crashed Yet…

Tom welcomes back Michael Kao, former hedge fund manager and commodities trader to discuss the FOMC meeting and its impact on the market. Michael shares his thoughts on why the Fed chose to not hike rates this month, despite the stimulants passed by the government to counteract their depressant measures. He believes that the Fed will continue to stay higher for longer, favoring cash flow over terminal value plays, due to four factors unique to the US economy. However, this could lead to wage inflation and a potential wage-price spiral. Michael also expresses concern that the Fed’s actions are creating a “recency bias” in the market, leading to overvalued risk assets.

He also discusses the changing environment for equity multiples and the impact of China’s labor force entering the market. The conversation then shifts to the role of gold as a hedge against inflation, deflation, and geopolitical uncertainties. They also talk about the potential for a resurgence of the US dollar and its impact on central banks and gold. Michael and the interviewer then dive into the macroeconomic issues concerning Japan and China, particularly their demographic changes and the potential consequences for their economies.

They also discuss the balance sheet recession in Japan and the need for a coordinated effort in China to find a solution. Lastly they conclude with a discussion on the long-term structural issues facing China and the potential for high inflation for the next 15 years.

Time Stamp References:
0:00 – Introduction
1:00 – FOMC Meeting Thoughts
7:05 – Wage Inflation Spiral
12:23 – Faith in the Fed?
14:16 – Q.E. & Risk Assets
18:16 – Long Curve Concerns
20:34 – Oil & OPEC Cuts
22:30 – Dollar Wrecking Ball
26:45 – Energy & Europe
32:50 – Japan’s Bond Market
36:33 – B.O.B. Rally & Gold
41:20 – Golden Opinions
48:06 – Sovereign End-Game
55:58 – Outlook for Japan
1:01:24 – Demographics & China
1:04:03 – China’s Big Problem
1:05:06 – Concluding Thoughts

Talking Points From This Episode

  • The economic resilience of the US, and how the Fed is staying higher for longer in favour of cash flow.
  • The risk of wages causing wage-price spirals and the danger of the Fed delaying responding to this inflationary pressure.
  • The large global economies of Japan and China’s demographic changes and their economic challenges.

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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