YouSaid · the spoken record

Michael Kao

lines on the record: 103
first: 2022-06-06
most recent: 2022-06-06
sittings or episodes: 1
sources: podcast

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“Grades from the Middle East. And so, in return, we are net exporting what you see as our exports are mainly our light grades that the shale industry produces. If there was an export ban, this is exactly what would happen. The refiners in the Gulf Coast, which are already running at capacity, would basically”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Of our refining capacity resides is tooled to refine heavier grades than what shale oil produces, which are light grades. And so if we now, and this is also very interesting, prelifting of the export ban, we were importing roughly the same amount of oil from the Middle East as we're importing now even years after the export ban got lifted. Why do you think that is? Again, it has to do with what our refiners need. We need heavy crudes from the Middle East. We would have been able to get a bunch of these heavy crudes from Canada had some of those pipelines been greenlighted, but they weren't. So we need to import.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Well, yeah, so from 1975 to 2015, this export ban really didn't make a difference to us because let's face it, this was pre-shale revolution and we really didn't have any real net exports to ban. So it was kind of no skin off our back to make this big political statement, right? But the reason why the Obama administration lifted it is because the shale revolution was just starting. It's ascent. And in a way, it was the relaxation of the export ban that really created the accelerant to the production, the shale production. So our refinery network, which is mostly based in the Gulf Coast, which is called Pad 3, probably where 80%”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Stupidity hedge. It's this ban on exports because, see, here's the thing. An export ban, there are some geopolitics experts out there like Peter Zahan, who I respect very much for their political geopolitical views. But Peter thinks, for instance, that an export ban is going to imminent. And because we are energy self-sufficient, that we could be a sort of bastion of self-sufficiency and basically cut off our flows from the rest of the world, right? Because after all, we had an export ban in place for 40 years until from 1975 to 2015. And then it got relaxed.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Well, so back in November, I wrote this thread called the Administration's Kobayashi Maru. And Kobayashi Maru reflects, you know, it harks back to this old Star Trek episode, even though I'm more of a Star Wars fan. I quoted Star Trek here. Anyways, Kobayashi Maru was this unwinnable scenario that Captain Kirk was facing in this simulation. And so I basically in this thread I painted four no-win options that the administration was facing with respect to how to deal with high oil prices. And the fourth option, which is the biggest black swan of all that I will sometimes hedge, I call it my administrative”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Doubt it. I just doubt it. So yeah, I think that'll be pretty interesting. So my base case is that we're not going to see that the escalation lead to actual, going back to oil now, lead to actual significant losses of Russian supply. And so if that's the case, I feel like we might be a little bit overdone in oil in the short term.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“I don't know the European natural gas fundamentals as well. So I can't really speak to the specifics there. But for sure, the gas dependency is far greater than the oil dependency. And, you know, I think this is why I feel like nothing short of a true escalation is going to matter because if the EU is having this much trouble in the summer to get any sort of solidarity on oil sanctions, can you imagine what's going to happen when it's November and this war is still raging and we're about to have winter come and you think that the EU is going to have any solidarity in terms of sanctioning gas?”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Right, right. It's a true outage hedge. So for instance, if the Russia situation that really does escalate and two and a half to 3 million barrels per day gets taken offline, that's where I see the GCC countries especially tapping into their spare and trying to make up for that loss.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“I would argue that we're not in deficit because I would argue that right now I'm going to quote Lakshmi at capital one. She loves saying that spare capacity is not a consumer call option. It's not meant to basically bail out stupid energy policies of the West. It's really meant for true geopolitical disruption for instance when App Cake got bombed by the Houthis, right? He literally saw Saudi Arabia not skip a beat. There was never any force majeure declared on any Saudi Arabia barrels despite a disruption of close to five million barrels per day of capacity, right? That's what true spare capacity is meant for. And so I think”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Think about Russia oil flows to China, the only landborne routes are via the Espo pipeline, the East Siberia pipeline. And that's currently flowing out around a million barrels per day. It maxes out at 1.6 million barrels per day. The rest of Russia's call it barrels per day of exports are seaborne. So the bulk, the majority are seaborne. So if we actually have a material disruption of seaborne routes of more than, say, 2 million barrels per day, that's really going to challenge all of the spare capacity within the GCC countries. The GCC countries, as well as outside the GCC countries, capital one would say that global spare is closer to four to five million, not the one to two million that some people tout.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Now, if we actually see a real escalation of blockades or whatever you want to call them, right? Because like blockades, everybody pretty much agrees is almost, you know, a reason for outright war, right? Forgetting the fact that Russia is already blockading the Black Sea. And they did this back in 2018 as well. As of right now, NATO and the EU are doing different types of financial sanctions and embargoes, but none of that is really disrupting Russian flows. If we actually do blockade seaborne routes, to me, why am I harping on seaborne routes? Because if you”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, look, the simple narrative would be that, oh, well, whatever we sanction or embargo from Russia will just easily get routed over to China and India. And you're definitely seeing some of that. You're seeing, for instance, Indian refiners really, really picking up the slack and getting more crudes, et cetera. You're definitely seeing more cargoes bound to not just China, but the rest of Southeast Asia. And that's part of the reason why I'm a little bit leery to believe the current price spike in oil because I'm not really seeing any real Russian disruption.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Longer term structural thesis, but in the shorter term, I do see some headwinds with oil, mainly because of part of the dollar wrecking ball, partly because of China, but also partly because I don't really see Russian oil flows getting materially disrupted as the market seems to imply unless we actually Escalate to actual blockades of seaborne routes. So part of this recent oil spike, I feel is more sentiment-driven than real fundamental. So that's just my short-term view. But that said, since I have a ton of exposure to that, I'm not complaining either.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“In particular, already had major issues of its own given Evergrand last year and then these perennial COVID lockdowns. And so their monetary policy is going the exact opposite direction as ours. And they've been naturally pegging the yuan at a and artificially strong rate. And so as you've seen in recent weeks, that Yuan has been weakening. I personally think that the Yuan is going to go north of seven before all is said and done. But ultimately, that will self-correct because it's going to produce a recession and some demand destruction in oil. Oil, I think you asked me earlier. Oil is a little bit complicated. I believe in this.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“And the biggest asset bubble, biggest everything bubble of all time meets this structural inflation that we haven't seen since the 70s. We've got the makings of an energy crisis that's as bad as the 1973 embargo of oil. The difference this time being that maybe the oil spike isn't as bad as 1973 in percentage terms, but this time the energy crisis involves not just oil but all energy. Natural gas, coal, uranium, everything. And then this is driving also this dollar wrecking ball, which ultimately the dollar wrecking ball is going to be self-correcting because I feel like it's going to really hurt China, for instance. I keep honing in on China because I think that China”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“No, so I think that is exactly the type of moral hazard that has been ingrained into the system over the last 15 plus years that needs to be wrung out of the system. The assumption that the Fed put is always there around the corner. We're in a different regime. It's a different regime that none of us, frankly, have lived through. I mean, I've technically lived through because I'm 51. But I was a kid. Star Wars just came out. So I think this is a brand new regime. And it's kind of got some scary implications. You know, it's something unlike pretty much all of us that are active market practitioners, something unlike we've ever seen before, really. It's this confluence.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Dollar bill and then it buys $100 worth of treasuries, and it's just a swap of $100 bills. However, if you have the treasury issuing debt at the same time and also you have the government Making loans that are forgivable. I mean, that is just we've had a money printing bonanza over the past two years. To me, it's undeniable, not by the commercial banks, but by the government and the Federal Reserve definitely helped play that. And yes, I mean, the US is not used to having fiscal constraint for what? 30, 40, 50 years because we...”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Is gone forever. I think it comes back at a certain point. But I think for anybody thinking that it's around the corner and, oh, yeah, the Fed might pause in September and that might be it and we're off to the races again, I think that assumption is subject to major, major rug pull.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Usually, the fiscal drain would be some measure of high taxes or whatnot, right? But we didn't have that this time around due to just political gridlock. And so it's basically left on the Federal Reserve to use the only blunt tool they have, which is monetary policy, to essentially create enough demand destruction to counteract both QE and MMT. And the level of demand destruction necessary to offset this structural long-term structural supply deficit we have, I think foretells much, much lower asset prices, a much lower level of where that Fed put is ultimately struck. I'm not saying the Fed”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“These supply driven structural deficits in OPEX commodities are not going away anytime soon. I think they could be with us the entire decade, as a matter of fact. And so if that is the case, QE cannot fix this ill. The other thing I'll say is that the expansion of the balance sheet is a combination of outright QE plus MMT, right? So if you think about what QT has to do, QT has to try to undo both QE and MMT. I recently listened to a podcast about MMT and with MMT, you would think that usually the way to drain”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“A massive mountain of the expansion of the balance sheet that it just makes me kind of laugh that, you know, we are, what, two days into the official start of QT. And I'm already hearing people saying, you know what, given the equity returns this year, the Fed, you know, really needs to take a pause here. heck are you talking about i mean i think i think it works in an era of sub 2 percent inflation but if you think as i do that this um structural commodity inflation which has been years in the making and exacerbated by crazy esg policies and now super exacerbated by this war”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“A pricking of equity or crypto bubbles, the Fed is always going to come back. Well, here's where, again, I think I have an out of consensus view right now. I think the assumption that the Fed put is there or nearby is really, really subject to rugpool because what enabled this massive balance sheet expansion from 2008 till now was just an unprecedented period of low to almost non-existent inflation. We just had no inflation. And so every financial ill was curable by this panacea of flooding the markets, including the recent COVID experience. And you see that step change in this chart. This chart, I think, should scare everybody because this is”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“By basically just massively expanding the Fed balance sheet and saving the system. What I wanted to highlight was that since that application of QE, the Fed has totally gotten addicted to QE and essentially prompted the invention of Bitcoin, right? As a way of hedging against forever debasing of the US dollar. And so it shouldn't surprise you that Satoshi's white paper came around at exactly that time, 2008. And it shouldn't surprise you that since 2008 till now, there has been this deeply embedded feeling that whenever there is any sort of crisis, no matter how small the crisis is, if it's just like a”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“In banks, unlike most businesses, what I call perception to reality risk is very, very real, where you might have a couple of bad apples like Lehman that fail, but then what happens is it creates a whole crisis of confidence that leads people to effectively pull their deposits, right? And so when you've got banks that don't have a ton of customer deposits start experiencing the proverbial run on the bank that you saw back in Mary Poppins where the two kids are demanding their coins back from the bank, that's basically what happens. And perception becomes reality. And the banking system, the entire banking system was at risk of a systemic collapse. And that's basically when they took out the big guns and arrested this whole crisis of”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“So I'll say that look at least the QE that we all know and love was basically invented during that crisis, right? The massive flooding and outright asset purchases like represented by TARP were absolutely necessary because that was really the only quote legit use of QE.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“He drew an arbitrary line between the prefs and that next rung, which is that 15 billion of sub-debt, and said everything above the line gets a government guarantee. So I actually lost money. It went from LIBOR plus 35 to LIBOR plus zero, right? Became government credit. But then everything road line. Everything below the line basically collapsed down to like two cents on the dollar. So even though I lost money on my row hedge by a little bit, I made a bunch on my capital structure are because that 20-point basis between prefs collapsed down to something like two cents. And that's a whole other story, but that's how I eventually got involved in this whole GSE pref trade. But it was through this capital structure ARB that I had on that big row hedge.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Capital structure arb where I was long there was there was a bunch of dislocation this was already like in the summer of 2008 there were cracks appearing in the agencies so there were huge capital structure dislocations between different tranches of preferreds and fannie maize so I was short and on the run straight preferred at say 90 cents on the dollar and then I was long the convertible preferred which was a peri-passue preferred at maybe 70 cents on a dollar so this the spread was pretty big right which is why I had that trade the week after Lehman Brothers went bankrupt and I sorry sorry the week before Lehman Brothers went bankrupt if you remember Hank Paulson put Fannie Mae into conservatorship and so what he did was something no one expected”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Yes. Beneath that sliver of the 900 billion, you had basically 15 billion of senior sub that was trading at maybe LIBOR plus 35. So an additional 15 basis points to be on that lower rung, right? So I thought, well, shit, these are pretty liquid agency bonds. And for an extra 35 basis points, I can basically be short a super levered agency credit at LIBOR plus 35. And if the shit really hit the fan, I just might get lucky. And by the way, because the spread is so, the credit spread is so tight, it would basically, I replaced all of my treasury hedges with this massive, massive short in Fannie Mae's subpaper. As my row hedge for my convert portfolio. As luck would have it, Murphy's law always strikes, right? So I also had on this.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Diversify along the curve, but also try not to be caught in being short, certain on-the-run treasuries that would basically be the focus of safe haven buying if there was like a major sell-off. So in 2008, I found a really, really interesting way to kind of kind of protect myself. This is before the Fannie Mae conservatorship. Fannie Mae was a super, super levered capital structure, right? If memory serves was like something like, you know, there was something like 900 billion of senior notes. Then there was a small sliver of senior sub. I think it was something like 15 billion or something. Like that. And then there was a sliver of preferred that was $35 billion. The senior notes, the 900 billion or so, because they were kind of implicit Fannie Mae agency credit, they were trading at something like LIBOR plus 20.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Fellow X convert ARB are saying, Holy shit, this current environment right now, I kind of missing my days as a convert ARB right now because for the first time the fucking row hedge works. Sorry, pardon my French, but I mean, you know, it's awesome that there's credits are relatively holding up equity vols off the charts. And my row hedge works. But like in the 2008 timeframe, I had to resort to creative ways to hedge the row. So for instance, I had a big convert book at the time, right? So we use leverage obviously as a convert arb. And so I had a multi-billion dollar notional long to hedge in converts. And so I basically had to”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“I'll give you just a quick example of how I was thinking about the interest rate risk. So as you alluded to, the row risk of converts is the underlying interest rate risk. And so for the longest time, it's kind of a joke amongst us convert ARBs that the row hedge never, ever seemed to work because every single time there was a major credit crisis or equity crisis, you would have this safe haven bid and bonds, right? So whatever money you might have made being, you know, short equity against your convert, you would give it up on your bond hedge because bonds would spike in a safe haven. So I was recently just having a conversation with another.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“But I mean, I just want to pull on a thread that you just said. I think the way you just teased out the different components or risk is a very important way of looking at the markets. And so in a way, my career spent looking at the convertible asset class has forced me to have macro views along all sorts of different risk dimensions, the equity dimension, the credit dimension, the interest rate dimension, the VAL dimension, right? So you have to pay attention to all of those. And so, you know, I can even give you some worse stories about in 2008 how by having that holistic”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Interest rates in a whole different level. If you had, oh, I issued debt at 2%, well, if it wasn't a bond and it was a bank loan, and if it was like sofa plus 5%, as in the case of, let's say, micro strategy, you have to pay your interest rates go up and up and up. So I just think you have sort of this house of cards where there's so many things that are lining up.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Versus 2008 from that one perspective. What's different though, because as Mark Twain said, history might not repeat itself, but it often rhymes this particular cycle is complicated further by the fact that not only do we have insane bubble valuations, not just inequities, but also in crypto and real estate and all sorts of assets, but on top of that, we've got a very, very strong dollar reminiscent of that 1997-98 period. And we've also got an energy crisis and a stagflationary environment representative of the 70s. And then on top of that, we've now got the complications of geopolitical escalation. With Russia-Ukraine situation, possibly escalating. I think it's going to escalate into something more serious.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“More often than not, your bond prices dropped much more than the equity, underlying equity prices, which doesn't really make sense if you think about it from a liquidation perspective because bonds always rank senior to the equity, right? But you had all sorts of crazy capital structure dislocations like that in 2008 that you did not really have in 2000. And so right now in this current environment, even though you have some storied credits like micro strategy, for instance, in some of their bonds, we can talk about are definitely in that distress category. For the most part, you're not seeing a major sort of credit meltdown like we did in 2008. So that's what I mean by the current environment being more like the dot-com bubble.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Most region, that distressed territory where the convertible bond no longer behaves like an option, but behaves more like a distressed bond, which is much more like a short put on the assets of a company. And so in 2008, right, when I say credit vol became higher than equity vol, I meant that, you know, in a lot of, because of the credit metastasis from Lehman Brothers spreading to all sorts of credit markets, there were most convertible bonds. Their underlying bond floors could not hold. And so if you were a convertible arbitrageur banking on the convert being like more of like an option and being able to arbitrage the stock against it, you're out of luck.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Behaves relative to the horizontal axis, which is where the stock price is. And I basically broke it down into four sections. On the left, distressed and uncredit sensitive and imbalanced and then equity sensitive. So in the rightmost three columns, credit sensitive balance and equity, if you look at that curved line that represents the convertible price, what you're seeing is a positive gamma profile, that curvature that kind of is concave up, convex down, right? So that's positive gamma, that the convertible behaves like an option. And so when equity ball is high, you can basically hedge your convert with a short stock position and make money by monetizing the volatility. The problem is when converts go into that very left.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Index level hedging and maybe some hedging, but usually a very healthy net long component. So that was the case back then too. And a lot of these types of strategies got caught with their pants down. But convert ARB back then did really, really well because number one, the asset class was still relatively nascent and inefficient. But more importantly, equity vault was much higher than credit vol. Let me say that again. Equity vol was much higher than credit vault. So this slide is a slide from an investor presentation that I gave back in 2010 or 2012 just explaining what a convertible bond looks like. And so what you're looking at here is on the vertical axis, how the convert”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“So, like, even when you talk about equity long, short strategies, let's face it, when you've got like a 15, 20 year sort of equity bull market, most equity long short strategies are not really equity long short.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“There are lots and lots of anecdotal parallels for why this is like 2000 versus 2008. Here's another big differentiator. In 2000, remember, around, I was at Canyon from 97 to 2002 building my convert ARB capital structure ARB business. Around 2000, during the time when the bubble crashed, traditional sort of directional hedge fund strategies, whether they were equity-based or credit-based, did very poorly, as you would expect, just like now, right?”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Law S curve adoption network effects. Any of the sounding familiar yet? So back then, one of the biggest bubble blowers was this guy named George Gilder, who, you know, I feel like there are a thousand George Gilders today, especially in the crypto space, preaching new paradigms and, oh, you know, you just, you're just a boomer, you don't understand how Bitcoin is valued and you don't understand the network effects. You know what? I think I've been around in the capital markets long enough that I can say that the one thing that doesn't ever change about the capital markets is greed and fear, which is why that famous book, Reminiscences of a Stock Operator, was a required reading for all analysts that I hired back in the day.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Bubble that we have in crypto, where around the 1999, 2000 timeframe, you had all these B2B and B2B companies like Ariba and Commerce One, most of you guys haven't even heard of these companies. You had also the Fiber Optic companies like JDS Unifase. Jim Kramer had always remember Jim Kramer used to call JDS Unifase. The ticker was JDSU. Just don't sell us. Famous, famous last words. So all of these companies were bubble companies trading at crazy, crazy revenue multiples. And they floated very, very low floats. Their valuations made no sense, but they were justified by all this new paradigm talk about Metcalf's.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“The consensus is that I think that the Fed is going to remain hawkish for much longer than most people think. And to your question about why this current market reminds me of the dot com bubble versus 2008, well, I would say this. In 2008, you had a lot more banking leverage, right? And so when that bubble burst, you had major, major credit problems. The dot-com bubble was much more of a valuation sort of in the equity markets. And so the thing that one of the things that reminds me most of the dot-com bubble is this.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Was how that was the beginning of my very, very hawkish view on what the Fed would have to do. And as a result, I then wrote a number of different threads talking about the linkage between oil leading to an hawkish Fed, leading to a major headwind on risk assets, leading to a very, very strong dollar, which I called dollar wrecking ball, which would create all sorts of problems for risk assets around the world, especially emerging market economies that are net importers of OpEx commodities. Most of that has come true. I think where I differ today is from perhaps the”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Reallocation in the space and just poor investor returns. But the long-term capital starvation of this sector has produced what I think is going to be a long-term structural supply deficit in oil, which is the most important Opex commodity, right? OPEC, I differentiate between OpEx and CapEx commodities because unlike Capex commodities, like, for instance, copper, steel, et cetera. Those tended those tend to be fueled more by sort of growth capex and home building, and they tend to be more pro-cyclical than an op-ex commodity like oil that is by far the largest OPEX commodity that has to be consumed on a daily basis. That's a factor of production and just about everything under the sun.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Okay, so I'm going to just take a quick step back for a second and talk about when you and I last chatted, we talked about this thread that I wrote last year called the commodity inflation butterfly. And so the premise of that, I wrote that, I think, in March of 21, when it was still very much and out of consensus that the Fed would turn very hawkish. And the reason why the Fed, I forecasted that the Fed would turn hawkish was mainly because of inflation of OPEX commodities. Because, you know, having delved deeply into the macrofundamentals of oil for the last several years, I've seen the capital starvation. And, you know, it's getting the timing right is everything and very, very difficult in this market considering the record of poor capital.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“I return most of my LP money back in 2019. I essentially spent most of the day though having fun on Twitter and trading my own capital these days. But because of my outsized position in this oil private equity, I focus a lot on the macro fundamentals of oil, which in turn lead me to have other macro views with respect to the dollar and interest rates and whatnot. All of the above are fair game, I guess. Can go macro, micro, whatever. Yeah, so we definitely want to talk about oil. We're going to talk about convertible bond. We're going to be talking about liquidity bubbles. We're going to be talking about crypto. You've got a lot of thoughts on all of these. And It's going to do a little tease where that.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“And so the sliver of outside capital that I still manage to this day happens to be a post reorg energy equity that we originally, when I was still running my fund, we got involved in the senior unsecured bonds of a company that went bankrupt that had crown jewel assets in the Permian Basin. And so I was part of a group of hedge funds that recapitalized this entity and formed a new company. And today that new company is the basis of my personal largest risk asset, which is this Permian Basin-based private equity. And so this is kind of a long-winded answer to your question of my career arc.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“Problem of that problem being how to extract money from this capital structure in some way or another. So sometimes I would have trades that would involve being long a convertible bond short of high yield bond, long convert, short of a stock, long convert, have options overlays on top of it, et cetera. And then eventually got very post-2008 when the opportunity set really changed and became less arbitrage friendly, we were much more fundamental distressed investors. And that's eventually what brought me back into the energy space because as you know from the period of 2014 to basically 2020, the energy space has been in a protracted bear market.”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT
“That I then ran for the next four or five years. And when I branched off in 2002 to start my firm, Acanthos Capital, I basically was doing what I call a sort of multi-strategy arb. I was also focused on certain types of event ARB. So most of my professional investment career has been more in the world of micro analysis analyzing individual companies and credits and structuring what I would say what set a canthos apart back in the day was that I took a very holistic view of the capital structure and was very, very creative in piecing together different parts of the capital structure to solve a specific”
2022-06-06 · Forward Guidance · Inflation Is Popping The Biggest Asset Bubble Of All Time | Michael Kao · IDENTIFIED FROM THE TRANSCRIPT