Markets are caught in one of the most uncertain macro environments in years. With Trump’s disrupting policies, conflicting economic signals, volatile energy markets, and Federal Reserve uncertainty, investors are struggling to determine the right playbook. Michael Kao joins Maggie Lake to unpack what’s driving today’s macro confusion and where we might be headed next.
- How should investors think about inflation, interest rates, and the bond market’s fragility?
- Will Trump 2.0 impact global energy markets — and what does it mean for oil prices?
- Is the Fed at risk of losing control of financial conditions?
- What role will AI-driven disruption play in reshaping industries and capital markets?
Kao shares his insights on why macro is so difficult to read today, the shifting balance of power in global markets, and how investors can navigate a landscape where traditional models no longer seem to apply.
Watch now for a nuanced discussion on markets, policy, and economic forces shaping the future.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://bit.ly/4hBEHjW
Michael Kao 0:00
I feel like the long bond is really, you know, it’s a tell for pretty much every asset class under the sun, right? I call it the bottom most Jenga block. And, you know, beneath the the risk edifice, right? And, and the fact that I don’t have a strong view about where, whether it’s going up or down speaks volumes about how I think the macro has become so confused right now.
Maggie Lake 0:32
Hello and welcome to wealthion. I’m Maggie Lake, and today I’m joined by Michael cow, founder of akinthos, Capital Management. Hi, Michael. It’s great
Michael Kao 0:39
to see hello. I know it’s been, it’s only been a little over two months, but it feels like an eternity, doesn’t it? I
Maggie Lake 0:46
because I think it has been an eternity, right? Like we’re in a new era. In fact, I saw one of your tweets last week that I think really speaks to the moment we’re in. You wrote, I hate to admit it, but macro data doesn’t really matter much these days, and it’s it’s so true. We just have a fire hose of news coming out of Washington, and it feels like we are all scrambling to try to figure out how it might impact us, how it might impact our portfolios. So let’s just start broadly. What are you paying the most attention to right now? You know
Michael Kao 1:16
I was, I was literally just thinking about this. I was looking at a chart of the long bond, and I cannot decide whether or not I’m a better buyer or seller. That’s how that’s how confusing I find the macro to be. I feel like the long bond is really, you know, it’s a tell for pretty much every asset class under the sun, right? I call it the bottom most Jenga block. And you know, beneath the the risk edifice, right? And, and the fact that I don’t have a strong view about where, whether it’s going up or down, speaks volumes about how I think the macro has become so confused right now. Because, on the one hand, I see you know all you know. When we spoke back in November, we talked a lot about how you know this, this fiscal Red Bull, right? This massive fiscal tailwind has been fighting the fed the whole time. And then I’ve been calling him pusillanos, pusillanimous Powell, because I think that he gave up on the inflation flight, inflation fight too early and has just juiced all risk assets. But with the advent of Trump and a lot of his policies, I’m beginning to see how, you know, I when you consider the net, net effect of all of his policies, I think they’re net, net deflationary, actually, and, and, and I’m not sure that. So the bond market itself doesn’t really know what to do with it, and I don’t either right now, so, so I’m sort of honest, and I’m being very cautious and not being trying to not be strongly convicted in either direction, because I feel like we’re in the right in the mid you know how, like, I wrote a thread A while ago about how you know you have to pay attention to like turning points and cycles. And when you pay attention to that second derivative, right? There’s a point where at the top of a sine wave, if you’re drawing tangents, the slope is zero and and at that point, you don’t know whether or not you’re going to be on the downslope or or continue on the upslope. And I feel like we’re approaching one of these turning points right now, and I’m not quite sure what the what the big moves are going to be. All I know is that the the stated goals of the administration right? Are to, you know, cut, cut the deficit, try to address the deficit. And that’s, that’s, that’s a big kahuna that they’ve outlined as a policy goal. But when you look at the big drivers of the deficit, right? You know, we all know that. You know, the big line items are entitlements, defense and interest expense. And we all know that Trump 2.0 is not going to cut defense. They don’t want to touch entitlements. So that leaves interest expense. So so of course, you can’t just cut interest expense in a vacuum, because you’re going to again, create inflation. And plus, that’s not within the purview of of the executive, you know, office. So what? What do you do if that is your only true lever to cut the deficit? Well, then you have to take on policy measures that create the conditions. Allow for lower rates. And so I put out a tweet a couple of weeks ago, and I said that, you know, when you look at, you know, a lot of people have opined on what policies are deflationary versus what are inflationary. And I’m just going to read from the slide that I kind of borrowed from. And in this slide, it said that, okay, the deflationary policies or deregulation, okay? I agree, cost cutting, I agree. Agency purges, Doge, I agree. And then trying to get oil and gas down. Definitely agree. We can talk more about that later. I think that’s big, big kahuna. But then this slide also goes on to say that what the infl, the inflationary, uh, policies are deportations, tariffs, tax cuts and de globalization. Now, of those four, um, I only agree with two of them. I think that tax cuts and de globalization, I guess, are net, net inflationary, you could say. But I’m not so sure that deportations or tariffs are inflationary. And I’ll tell you why. I think with with deportations, the way it could be inflationary is that they are obviously going to reduce labor slack, right? But, but there’s also a very deflationary component to it, which is, it’s going to reduce demand for housing. That’s, that’s so it’s a double edged sword there, right? And then same thing with tariffs, tariffs, I don’t view as long term deflationary. I think I, when I think about things that are truly long term inflationary, they tend to be things that create, that make the supply curves more long term inelastic with tariffs, they’re actually the opposite. I view tariffs as really a demand rationing and demand redirection tool to influence a longer term trade pulp deal, and you might have a one term, one time price shock, but net, net, I think that that is going to be demand destructive in general, and that’s that’s deflationary overall. So out of these eight things that I’m looking at here, I really only think two tax cuts and de globalization are potentially longer term inflationary. The other four, I think, the other six factors, I believe, are more deflationary. Now the tricky thing here is, why am I not? If that’s the case, then why am I not going out there and buying bonds and putting on the deflationary trades well, because there’s still this lag effect of all of this fiscal Red Bull. And it’s, I don’t know what that lag effect is so, so we’re, it’s not clear to me yet what’s, what’s going to happen, and the energy one, you know, I many months ago, I think in well, July of last year, to be suspect specific, I wrote a thread. I called it from US dollar wrecking ball to US dollar pickleball, right? And so, so, so at that point, the purpose, the point of that thread was, okay, what conditions will will basically be necessary for a sustainably lower rate environment here in the US, and therefore a sustainably weaker dollar, right? And I basically laid out a couple of paths. And, you know, I talked about how, okay, look if Trump at that point, obviously we’re just conjecturing what might happen if Trump won, right? And he had previously talked about, people had conjectured about, oh, the dollar so strong, maybe we’re going to get like, another, you know, Plaza Accord. And I poo pooed that for a number of reasons, but first and foremost, saying that, you know, first of all, it doesn’t. It doesn’t back then, with the d x y at close to 160 versus now the d x y at like 108 it’s just totally, it’s not even an apples to apples comparison. And back then we, we the US, was the one that really, really wanted a weaker dollar here, it’s not entirely clear to me that a weaker dollar helps us, because it just imports inflation. We we still have right now. We still have in the inflation. The inflation genie has not been put back in the bottle. Obviously, right? We saw that the University of Michigan inflation expectations number blow out last week. And from that perspective, it looks like it’s becoming almost unhinged. Then, then the second, my second path in this, in this piece, was that, okay, well, a premature pivot. You. Would would also essentially import inflation and potentially cause a sort of global, a competitive, global cutting cycle, which that’s exactly what happened, right? But, but then the third path that I outlined was that if, especially if Trump gets, got elected, he would look to try to lower oil prices. That’s always been a huge policy platform of his, since Trump 1.0 Well, it’s not even drill baby drill. Because when you talk about Scott Besson, three threes, right? 3% GDP growth, 3% deficits and 3 million additional 3 million barrels per day. I will tell you that that additional 3 million barrels per day ain’t coming from us shale. I don’t think, I don’t think geologically, that is possible. I think when most people talk about that and talk platitudes that you know if, if we just deregulated and all of us, we can just coax out another 3 million barrels per day. That’s just not the case.
Maggie Lake 11:09
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Michael Kao 11:22
Well, so, so here with with oil revenues, right? Oil revenues equal price times volume, okay. And so the with with Saudi Arabia. Saudi Arabia is the, is the only producer with enough spare capacity to actually make up for lost price with increased volumes. And the reason why, yeah, go ahead, I’m
Maggie Lake 11:49
going to jump in here for one second, because when you I think you just laid out so many interesting things, and I just want to unpack them so people can follow along, because I think that’s a such a such a great overview of the kind of complexity that we’re dealing with and how much these issues are intertwined with each other. So if I’m if I’m understanding what you what you said, you’ve kind of laid out a scenario where under Trump, it’s possible that we see the US dollar treasury yields and oil all substantially lower than they are now, yeah,
Michael Kao 12:25
I think, I think though that. So I in this same piece that I alluded to, I say that low oil is a necessary but insufficient condition for sustainably lower rates, because there are, there are all these other inflationary pressures. Now the question is whether or not some of these other Trump 2.0 measures provide the other conditions for sustainably lower rates.
Maggie Lake 12:53
But I think this is where it’s so tricky that that it could go either way. So if they someone just said to me something so interesting yesterday is, I’m forcing myself to say, what if they get it all right? Meaning, like, what if these pieces fit together in such a way the 333 Scott bass gets it done that you can have the desired effect to get all these three. But it’s a really tricky road, right? And that’s what’s so hard, because you’ve got to imagine other scenarios where there is a problem, and the things that you say can go either way sort of don’t the conditions don’t fall into place. So I
Michael Kao 13:28
really think that there is a method to the madness in terms of the different policy levers that are that are being pulled and sequencing matters. Just to finish my thought on oil, I mean it. Oil is the linchpin of of everything, I think, in terms of, just, you know, the the root causes of inflation in so many, so many sectors. So why would Saudi Arabia come to the table, especially when Trump rug pulled them in 2018 okay? Because if you remember, I’m going to remind remind subscribers that in q4 of 2018 when Trump pulled us out of JCPOA, he promised that. He said that there would be no waivers on sanctioned Iranian oil. He got Saudi Arabia to flood the market, and then at the 11th hour, late October, he grants 11 waivers, and basically the price of oil collapsed. And that was brutal, because I lived through that. That was a tough period in the oil market, and totally unexpected. Now this time though, Saudi Arabia, you know, people ask, why would they willingly, you know, give up on on price here? Well, I think that the I would, I agree that Saudi Arabia would need to get something of value, and that something of value would be a security guarantee, or potentially even a nuclear secure, security guarantee. And T and, like I said, the the the reason why I think this policy makes a lot of sense, at least from the US angle and from a Trump administration 2.0 angle, is that it kills multiple birds with one stone. It it sets, it creates some of the preconditions for sustainably lower rates, and we talked about why that’s important, right? But it also weakens Iran and Russia, softens them up economically, if you will, to try to come up with some, some sort of negotiated peace in both of those regional configurations, right, both of those wars. So it makes, and of course, it lowers domestic inflation and allow us, allows us to refill the SPR which is another stated goal of this New Energy Secretary, right? So, so I think sequencing matters. I think that, I think that if they are able somehow to reach a deal with the Saudis, it solves a lot of it solves a lot of sticky issues, and frankly, allows the Trump administration to fulfill a whole bunch of campaign promises. So I’ve called it, you know, one, you know, it kills multiple birds, and it’s one big ass stone.
Maggie Lake 16:36
So I think this is, I just want to underscore this, I think you said something very, very critical. So we just talked about how there could be this condition where you see all of these things move lower, but the sequencing matters. So first you’re going to want to look for signs. If this is going to happen, that this that they’re able to pull oil prices down, that oil price going to move lower. How much lower. Do you think they go at what would be the sign to you, like that they’re making progress. This is moving in their direction and laying the groundwork for making strides on the other fronts. Are we talking $50 a barrel? We’re talking 40. I’ve had people tell me Trump really wants 30.
Michael Kao 17:15
No, I think, I think the sweet spot where for Trump, I think, is he would like to see it in the 50s and 60s. Because, you know, in the 50s and 60s, you’re not completely cratering shale. And he can do things on the on the deregulation side and cost cutting side to lower drilling costs for shale to help ameliorate that,
Maggie Lake 17:43
right? But breaking can help them be profitable with lower oil. That’s
Michael Kao 17:47
right. I mean, you know, look shale, shale is still one of the most expensive sources of oil, and so it will, you know this, especially with what I told you about. You know, the geology and how drilled out the Permian is, right? I do think that shale will probably be more disciplined than in past cycles, like, you know, 2014 2015 that was really, that was really the beginning of that shale revolution, and that at that point it was like, you know, the market got absolutely destroyed because there was no discipline. But, like right now, I think partially because of geology, partially because of just a more shareholder focused sector, the response, hopefully will be, will be better or quicker this time. But I think those people that think that an additional 3 million barrels per day are going to just come from drill, baby drill, that’s just not going to happen. So in my mind, that 3 million barrels per day can only come from external sources on a short term basis, within from from within this four year window that Trump 2.0 has it’s just not going to come, right? I mean, you can open up the Alaska north slope. We can do you can open up a lot more drilling in the Gulf of Mexico, or, sorry, Gulf of America. But again, those projects are going to take a lot longer time to come online.
Maggie Lake 19:24
Listen, I just finally stopped calling it Twitter, and I’m disciplined not to say x. It’s going to take me a while to get used to some of these names. Yeah, Google’s a lot quicker than I am. What? So would you feel like the threat of Canadian tax is helpful or a distraction in terms of trying to get that oil price lower. Okay,
Michael Kao 19:41
so, so that’s very nuanced, because so the our refinery network is tooled has not been retooled since the 70s, and so I wrote about this two years ago in my in my West Point paper, two. Talking about how the US can’t truly be energy independent until we retool and expand our refinery capacity, refining capacity, because our refining capacity, our refiners need to take heavier blends than what we are producing in the shell space, which are light grades, right? So even though we, the US produces 13 point 2 million barrels per day. We’re still net, net importing about 6 million barrels per day. And a lot of those imports are heavier grades from the Middle East, from Canada, from Mexico, right? So we do need those heavier crudes now, I found it kind of interesting that on the eve of Trump threatening the 25% tariffs on both Canada and Mexico, and, you know, Canada, you know, kind of beating their chest in response, you know, threatening retaliation. The next headline you saw was Trump saying that, you know, we’re going to secure our heavy crudes with a deal with Venezuela. So clearly, right? These are all these moves, right? You know, in business, in business school, one of the most impactful courses I took was, was negotiations. And there’s a, there’s a term called BATNA. BATNA stands for best alternative to a negotiated settle agreement. Best alternative to a negotiated agreement, right? So that is clearly a tactic to better our BATNA here, right? If we can secure our heavier crudes from other sources, then we don’t need Canadian heavy ostensibly, right? I mean, it’s going to be harder, harder, easier said than done, right?
Maggie Lake 21:38
It’s like saying I have options, right? I have, I have a plan, but I have options if this doesn’t go my way,
Michael Kao 21:43
yeah, but in the short term, what though, if, I mean, there was a reason why, right? When he was throwing 25% tariffs, the tariffs on the oil was only 10% right? Because there is a recognition that we need those heavy, heavy crudes, yeah?
Maggie Lake 22:00
So if, if, if they are successful, let’s sort of continue down this thought line. And by the way, this is why it’s really important to sort of separate noise and really try to face, stay focused on the strategy, because there’s a lot happening right now, right? Some of it’s really important, yeah, some of it’s kind of more theater. And so you really want to, for your portfolios purposes, try to stay really focused on this important stuff. So so say they are. We do start to see oil moving in this direction. Is the next thing you’re looking at, in terms of that, this domino effect and potential bets you put on? Are you looking then to Treasury yields? Are you looking to currencies next?
Michael Kao 22:41
Well, it’s, it’s, it’s both, because I think they’re totally intertwined. I mean, you know, for the first time in months, you know, I, I’ve been, I’ve been long US dollar cnh, right? Long, dollar short. Chinese yuan for two years, made a bunch of money on that trade and and then traded recently, given the tariff oscillations. But now I’m flat because even though I think China has still these long term structural pressures to potentially devalue, the reason why I’m flat is because I if I can’t make up my mind on where rates are going right now, it’s hard for me to take a stand on on the dollar, right? So, so I just haven’t made up my mind and but, but I want to say something else about yields, because, if you remember during the campaign, the other big thing that Trump was talking about is, you know, those BRICS nations, anybody who tries to basically create an alternative to the US Dollar as a reserve currency is going to, you know, suffer our wrath and blah, blah, blah, right? So, so I started thinking, okay, so how, how would we incentivize the the rest of the world’s central banks to continue to buy US Treasuries and and potentially, you know, you know, just try to, like, forestall this sort of move away from, you know, US dollar assets. Remember the the the US dollar system is not just about the US dollar itself. It’s, it’s the linchpin is that we have very, very deep bond markets. It’s the US Treasury system, right? That is, that’s behind it all. And so there are levers that the administration can pull there too, because imagine if Besant says, Okay, if you want access to the feds, this would require Fed and Treasury coordination, but they could say something like, if you want access to the. FX swap lines from the Fed. Well, then your your your access, is directly proportional to the amount of long term US Treasuries you hold. So imagine something, a lever like that. If they pulled it right, you would basically create a it’s a geopolitical incentive for rest of world’s central banks to go out longer on on our yield curve. And one of besson’s headaches right left in his lap from Yellen is that so much of our deficit is being funded by bills, and at some point he’s got to turn out that debt. Yeah,
Maggie Lake 25:44
they’ve continued that policy, though, right? Someone just said they continue because, I guess they’re waiting for something else, for one of these negotiating tactics.
Michael Kao 25:54
Well, exactly right. I mean, I would say again, hold your horses, because he’s had one QRA and and basically, you know, if I’m Besant, I’m not going to lock in term financing at, like, you know, four and a half, close to five
Maggie Lake 26:08
when I’m trying to get it, when I’m trying to
Michael Kao 26:10
get it down. So, so I when somebody said that, you know, a couple weeks ago, I said the reason is because he’s waiting for a three handle, right? And, and, so that’s
Maggie Lake 26:20
your goal, not just like hoping that’s
Michael Kao 26:25
right. I mean, it’s just like, Okay, if you’re, if you you’re waiting to refinance your mortgage, and you say that you want to refinance your mortgage, are you gonna, are you gonna refinance it at 7% or are you gonna wait until you know it makes more sense. So I think sequencing matters,
Maggie Lake 26:40
right? Michael, if they were to use that lever though, and say, use the swap lines as isn’t this a sort of further weaponization of the dollar reserve system, just like everyone said when they use Swift and the sanctions against Russia? Yeah, so I’m, I’m not
Michael Kao 26:55
necessarily condoning that. I’m just saying that it’s a, it’s a lever that’s there when I attended, when I went to West Point to present that paper, you know, two years ago, there was another paper that I thought was interesting, that somebody presented about how during, I think it was during the war, during World War Two, there were levers that were pulled by central banks that essentially greatly incentivized the banking system to hold more long duration treasuries, and That was a lever that has been pooled before, and so I’m just thinking that
Maggie Lake 27:44
that’s is a form of yield curve control
Michael Kao 27:47
in a way, in a way, but not explicit, not not like, not in the way that the Bank of Japan has been doing it, where they’re just, like, explicitly, you know, owning every JGB under The sun, but you can incentivize the banking sector to do that, to own more treasuries, right? But, but again, you don’t. I don’t. I think that’s that’s a lever that could be considered. But obviously the strongest lever is just to create the macro economic conditions such that the world will want to buy longer duration debt securities because they perceive that, hey, these are sort of, these deflationary factors are kind of, you know, these defl deflationary policy levers are being pulled so, so that’s why I’m really watching the bond market and staying confused right now.
Maggie Lake 28:48
Yeah, well, it’s very it’s really interesting, because I think that the we are in an environment now where there has been so much talk about higher for longer, right? We’re in a higher inflationary period, this would be something very different if we were to be entering into a deflationary type environment with all of these things moving lower. That is that in your mind, priced in at all.
Michael Kao 29:15
I don’t, I don’t think, I do believe in that, that there are structural elements in place that are going to prevent us from going back to zerp,
Maggie Lake 29:27
right? So it’s not, we’re not going back to zero interest. I don’t, I, yeah, but, but the very popular narrative was that we are in a, you know, bond yields could go to 10% that we are in an environment where inflation is going to run super hot, because a lot of these structural things, this now introduces another possibility. Yeah,
Michael Kao 29:46
it’s definitely a new variable. I mean, I’ve been, I’ve been in the inflation Easter camp for for quite some time, and I’m now really recognizing real that there. Is the possibility of some of these countervailing forces coming in to to temper that. But again, I don’t, I think the structural, the structural things that are in place. I’ve, I’ve talked about them before, like, there, there’s some, I think there are demographic reasons for why labor and shelter inflation have remained elevated the big fiscal you know, the vodka Red Bull analogy holds true. But again, I think that part is one of the the biggest about faces from a policy perspective, from the Biden administration to the Trump administration, right? So we’ll see. Are
Maggie Lake 30:42
we looking at, looking at a Trump administration that’s not planning on spending fiscally, or are we just looking at one that is finding additional revenue and or cost offset, cost savings to offset that?
Michael Kao 30:56
I think, I really think they’re, they’re going to try both. I mean, I think that, I think Doge is, is about, you know, they’re, they’re attempting to make government more efficient and cut along the edges the I think the naysayers of Doge will say that, okay, well, you know, they can. They can. They’re only very few things, very few recurring expenses that they can cut, which I agree with, right without touching entitlements. So that really the biggest line item by far is interest expense. But, but see, here’s the thing, if, during this, this honeymoon period while the Republicans have control of all three branches of government, if they’re able to roll back some of the three big Biden spending bills, right, the inflation Reduction Act, the bipartisan infrastructure bill and the chips act, I think that the inflation Reduction Act, obviously is going to be the one that’s most in the crosshairs. And of course, these expenditures total up to 2.2 trillion of earmarks or 10 years, let’s say, right, and, and, but, but the combination of Doge, the combination of some of these other policy levers that we talked about at the beginning of the conversation and the potential for rolling back some future earmarks that changes the rhetoric and changing the rhetoric, and it matters. It matters, right? If the market, if the if bond market, if the bond market starts to believe that, hey, the forward trajectory is not going to be as crazy from a profligate spending perspective as we’ve gotten used to. Well, that could put a ceiling on yields. So that’s all I’m saying. So Right? Which
Maggie Lake 32:56
would which would be welcome news to a lot of people who have you know are looking to finance because those are the folks who’ve been hurt and potentially would be hurt by these higher rates. What is the knock on effect? So we don’t know whether this can happen, but we are now in an environment where we have gone from being thinking about this being higher for longer, and an inflation Easter camp to maybe we are looking at a scenario, if they sequence and get it right, that you could see oil, treasuries and potentially the dollar moving lower. What are the knock on effects for other markets for that? Because a lot of people who are looking at their portfolio have a lot of equities in it, I’m sure they’re also thinking about, Do I need to increase exposure to commodities? If they’ve got an ETF basket oil might be in there. So that would be something that they would need to look at. What are the knock on effects for other asset classes? If you have that kind of environment where you see those three very important markets moving lower in terms of yields on the Treasury and then price on,
Michael Kao 33:57
well, clearly, you know, current valuations, notwithstanding, you know the I think obviously all things equal, right? If you have lower long term rates, especially long term rates, I want to emphasize that tends to be more bullish for, you know, longer lived risk assets, right? So whether it’s equities, you’re already seeing it manifested in gold, right? I feel like gold is one of the tells that maybe it’s maybe that market is sniffing out that we are, that there might be a ceiling on yields. But see gold, you and I talked about this in November too. I
Maggie Lake 34:38
always, I always quote you with this goal, I think you’re going to tell me, tell me what you’re going to say.
Michael Kao 34:43
I mean, gold, you know, gold, to me, is all it’s, it’s a chameleon trade, right? It’s, it’s it at times that inflation hedge, at times the deflation hedge. And I’m not smart enough to know exactly what, when it’s what. So I
Maggie Lake 34:56
think, I think, I think what I what I probably misquote you as saying, is I know. Ever gold is, is a hard one for me, because I never know if central banks are going to be buying or selling. That’s
Michael Kao 35:05
very, very true, very true, right? So, so on. So on the on the one hand, I could see why. You could argue that, okay, maybe gold has been rallying because it’s, it’s foretelling a cap on yields and and some of these deflationary pressures. But on the other hand, you know what could potentially be risks to gold? Well again, if, if we have any sort of pressure on trying to keep the dollar, the the global reserve right? Of course, you know, a lot of the the BRICS countries are that are trying to move away from the non, from the dollar system have been diversifying into gold,
Maggie Lake 35:43
right? That’s what’s so driving, right? And less treasury, less than for Treasury, yeah.
Michael Kao 35:47
So, so it’s a, it’s, again, it’s a super, super clouded picture there, and and the, the a lot of these Trump 2.0 directives almost seem, they seem contradictory, right? Because on the one hand, we want a strong dollar. We don’t want to see the the US lose its place as a global reserve currency, blah, blah, blah. But then, on the other hand, we are espousing, we’re espousing policies that are potentially deflationary at the edges and would weaken the dollar, lots of moving pieces. I mean, I think where, where it can all make sense in the end, is that the sequencing matters and and again, the first order of business right now is to lick inflation and to get get us on a path where we can actually make a dent in the deficit. So I think that’s where, that’s where I’m coming out of all this. And I’m thinking, Yeah, I
Maggie Lake 37:07
think that makes a lot of sense. Because not only does it make sense sort of to you from an investment lens, but if you’re thinking about polling and popularity, which, as we all know, is what politicians live and die for both of those things are why he got elected and why the Republicans are in power, right? Inflation, the anger over inflation and the cost cutting headlines that are coming out again doesn’t if you don’t touch entitlements and defense, it’s all around the itty bitty margins, but the headlines are very positive. People like the idea of getting rid of what they see as graphed and overspend. So it makes sense that that would be where the focus is, right? Yeah,
Michael Kao 37:46
and, and, I think it’s also very important to know I put out this other tweet a couple weeks, maybe last week, again, I’m losing track of time because, like the the we’re in a vortex this, this time dilation, this Trump time dilation is where, like, you know, every minute feels like hours, and every hour feels like days, and every day feels like weeks. So I say, I said that, you know, I view Trump from an options lens, right? I said, you know, you could argue that many of the policies from both sides of the aisle have kind of frog boiled us into this low vol death spiral, right, just like a low vol blue chip stock sees its its moats being eroded away in slow and steady fashion, right, due to due to upstarts, and in that scenario, you one actually needs a high vol CEO to take some bold and controversial moves to kind of break us out of the so called innovators dilemma. And I think what we are seeing here with Trump 2.0 is that type of disruption, that type of high vol strategy to to try to break us, to try to break us out of that Innovators Dilemma at a country level, I think really that is, that is what they’re trying to accomplish. That’s
Maggie Lake 39:09
a great way to think of it. Sort of move fast, break things, but just put a lots of things in motion and sort of, sort of break out of the style, as you said, sort of, you know,
Michael Kao 39:19
a low of all death spiral, right? It’s, it’s you can’t, and that’s, that’s the problem with, like, big, you know, fat and happy companies with franchises to protect, right? They’re unable to deal with upstarts because they don’t want to cannibalize their existing business. And at the, at the national, geopolitical level, it’s, you know, we’ve got, we’ve gotten so bloated, from a from an apparatus perspective, that we don’t, we don’t even know how to to cut, cut that spending anymore, right? So I think just, I mean, I think it’s
Maggie Lake 39:58
every. In finance reform, but that’ll never happen. So, I mean,
Michael Kao 40:03
I think it’s important that this Overton window of actually cutting spending is is reopened, because it just that, that it that has not been in the the rhetoric on either side of the aisle for so long, yeah, or looking for efficacy,
Maggie Lake 40:21
right? Like spending on things that get results, as opposed to, you know, that in a way that you would in the private sector. But again, you’re right to point out big companies that often stops happening as well. There’s a lot of waste on measures that are not helping you continue on a growth path. So I think that’s really interesting. When that happens, though, in disruption, things can get broken like things break when you, when you move like that, does the US economy get out of this without going into recession?
Michael Kao 40:50
That’s, that’s the gazillion dollar question. I mean, certainly Trump is known to be to pay a lot of attention to the stock market to markets, right? So the real test of this strategy of pulling these deflationary Levers is that if, if they actually get their wish, and, you know, and start creating these conditions for lower rates, right, and at the end of the day to cut spending, means that you’re embracing some measure of austerity. Austerity is almost synonymous with recession, right? So I think that the odds of a recession happening during the next four years have increased for sure because of these levers. But again, we will see that’s, I guess we’ll cross that bridge when we get to it. There’s no recession in sight, in sight, right? Now,
Maggie Lake 41:49
if there is a it’s, I guess it also depends on what that recession looks like, right? If there’s recession with also lower inflation and lower interest rates, that feels different than we had booming growth with high inflation, and people were really angry. It didn’t feel it didn’t feel great, right? Not everybody benefited. Do you see a leveling out, Michael in in the type of growth we’re having, because we often have people talking about the K economy they have and have nots rolling recession. People have described it to me a million ways, but people with assets benefited. People without without assets, felt the pain of inflation and were much less well off, or feeling well off, even though GDP growth was strong. Do you see a change in that? Is there any change in the makeup of growth in this, in this new era we’re entering in?
Michael Kao 42:38
Unfortunately, not really, because so so over the last several weeks, I’ve been doing a deep dive on AI, right? I’ve been taking, I’ve been doing these intensive AI workshops and and the the point of these workshops is to basically see how real businesses can use them to, you know, help their bottom lines, right? And some of the stuff that I’m seeing is just sort of mind blowing, just in terms of how, you know, these small businesses can basically optimize supply chains and reduce immediately, reduce headcount. And I’m just thinking to myself, Okay, on the one hand, this is, this has potential, the potential to unleash a big prototype productivity miracle. But is it going to exacerbate the wealth divide potentially? I mean, for the first time, I’ve always been a fierce opponent to this notion of universal basic income, but I worry that this next product, AI led productivity boom, will lead to that in certain areas, because I think that, you know, so so, like, friend of mine, runs a shoe retailing business, and he’s but he’s really, really experienced With how to use, how to use AI. And he was showing me how he was actually inputting his, you know, several million SKUs into in training, his this bot that he created to help him optimize his supply chains. And he was telling me how like his goal, and he fervently believed in this goal, that he thought that he could get his corporate overhead from about essentially 20 people down to one, and he thinks he can get it done. And I was like, and I believe him, because. When he’s when he’s showing me what he’s been able to do, my mind was blown away. I mean, I’m just like, wow, that’s, that’s insane. So So I think, I think that that’s going to present some new societal challenges, for sure, because there, you know, the the the people on the low end of the spectrum, income spectrum are are going to hurt in a situation like that, right?
Maggie Lake 45:30
So that’s that, you know, it is a whenever you’re talking about being in a disruptive period like this, the challenges are so enormous, and I think that’s what makes people, first of all, it makes them nervous about trying to figure out a path and what happens next, coming from Washington, because suddenly, as it was in the first Trump administration, Washington is the center of the universe again, because so many for investors as well, because so much is potentially impacted. But they’re also trying to think about how they protect their nest egg if we’re going into these really volatile times. So
Michael Kao 46:01
the optimistic take, of course, is that, you know, the for, if, the for all the low skilled jobs that get displaced by AI, right, then that it produces new opportunities and new new professions, and, you know, retraining, right,
Maggie Lake 46:16
dirty felt dangerous. Yeah,
Michael Kao 46:18
you can take, this concept of social media influencer. I mean, there’s so many people that are in their like, 20s, who’s, you know, their their vocations are social media influencer, like, like, I don’t know if I, I still don’t know whether you can really consider that a legit profession. But you know what? It’s something that came, came about because of this confluence of technologies,
Maggie Lake 46:42
right? Yeah, absolutely, a job that didn’t exist, you know, that many years ago. Let me throw another couple of just sort of generally accepted, not generally accepted thoughts, things people have said to me that I wonder if you agree with or push back on, far from generally accepted, just the opposite, but and then, and then I want to just round up with a with a sort of summary so people, we can leave people with something to go think about, uh, Europe very much going to be, you know, in the crosshairs as well value or value trap. People say to me that Europe looks cheap. And if you pay attention, some parts of it have actually been outperforming. And then I’ve other people have said to me, the EU is not going to make it out of the other end of this. They don’t even know if Germany will stay together.
Michael Kao 47:26
Yeah, I would probably be a latter camp. I mean, I can’t. I haven’t looked at the the valuation. So again, I hate to make these, these comments in a vacuum, because, you know, some some of my the best investments I’ve ever made were buying crappy companies, but at ridiculously cheap prices, right? So, so quality doesn’t necessarily mean a great investment. I’ll just caveat that, but I will say that I think that, yeah, your Europe, Europe, structurally, is is facing some serious issues compared to the US, you know, because of not just demographics, but because of a lot of These, these pretty bad energy policies that have been under undertaken, and they don’t, they don’t have they, you know, they just don’t have the despite this monetary union called the euro, it’s not a true there’s no Political Union. So you just don’t have the same, you know, job mobility, or just economic Dyna dynamism that the US has. So it’s a it’s a US is at a heat. The Eurozone is at a huge structural disadvantage. Yeah, that was part of, part of the reason why I’ve been so bullish the dollar in the last, you know, two years is that I just, I just thought that, you know, the because of the various, you know, ingredients feeding this strong dollar, the the the the transmission mechanism of tighter economic policy Is, is very, very uneven, and that the eurozone and really and China, of course, were those central banks were really ill equipped to to tighten, right? So you’ve seen China actually go the other way. But the Eurozone, I never thought could, could keep up with the Fed, so to speak, from from a tightening perspective, just because of all of these reasons,
Maggie Lake 49:44
I know you were a lot of times when you’re putting money to work, you’re doing it in in sophisticated instruments, or in private markets and or, you know, much with a much longer time horizon. But for the average investor, what do you think the greatest risk is right now, because there is so much uncertainty? Certainty.
Michael Kao 50:00
I mean, going back to the top of our conversation, the bottom most Jenga block of the risk edifice is the bond market. I don’t know whether the bond market is going up or down and so, so that bothers me, but what bothers me more, I guess, is just the the the equity markets themselves are are, from a valuation standpoint, they don’t leave a lot of margin of safety, and so I’m probably in a big minority of investors where, because I’ve spent my entire career looking for hunting for alpha type opportunities. I just never have historically invested in passive indices. I don’t, I don’t have big beta portfolios, both on the public side or on the private side. So like when I look for opportunities, I’m looking to find things that are that are uncorrelated and orthogonal to one another. So I recently wrote a piece on my sub stack talking about, like in the private you know what I’m doing in the private markets, but same I’m doing the same thing on the public markets. And the public markets, I’m looking for things that are very idiosyncratic, that really have that are that are driven by specific events. And honestly, I don’t really care whether or not the overall market will be down 20 or up 20. I’m thinking that my these opportunities that I’m looking for Can, can do very, very well, regardless of what happens on the macro, that’s the goal. It’s always easier said than done, of course, right? Because there’s, there’s hidden beta everywhere and, and I’m trying to be be wary of it. I mean, look, beta, beta itself has, it’s, it’s a, it’s a, it’s a, it’s a great thing for it’s been a great place to have, it’s been a great trade to have beta in portfolios over the long term. But you know, they’re at certain junctures. Beta could be a very, very bad thing, and I worry that we’re getting to a point where, you know, having that beta exposure could, could, could whip people pretty badly at some point.
Maggie Lake 52:30
Yeah, that’s why we’re having a lot of discussions about what you know, what active means, and the fact that you can’t just set and forget anymore. You’ve really got to dig in here and and pay attention to what’s happening. Did I hear a rumor that you’re doing a retreat with a complete blackout of technology?
Michael Kao 52:46
I am actually so that you know I’m, I’m, I’m go. I’m leaving on Sunday. I have to say I have a little bit of trepidation. I did, I did such a retreat in 2016 Okay, and where I had to basically give up my cell phone for a whole week, and that was when I was still running my fund, and I just remember having so much angst about it, but at the end of that week, when they handed my phone back to me, I’m like, I don’t want it, yeah, so, so I’m Actually, I’m feeling the same way, like, you know, I’m having a little bit of angst, just because, especially with these headlines coming hot and heavy. But I feel like, you know what, the fact that I’m having angst tells me that that’s exactly what
Maggie Lake 53:32
I need, exactly focus the mind. So come,
Michael Kao 53:34
so come this Sunday, I’m gonna be AWOL for a week.
Maggie Lake 53:38
I love it. Well, we are so happy we were able to catch up with you, Michael. Really fascinating conversation, and I think certainly helped sort of concentrate my mind on where we should be paying attention as we try to sort of filter through all of the news coming out of Washington. So thank you so much.
Michael Kao 53:55
Thank you. Always fun to chat. Yeah, and you
Maggie Lake 53:59
can find, I know people are going to be asking, you can find more of Michael’s analysis on cowboy musings on sub stack, and I am there as well, Michael. Thanks so much, and we’ll see you all again soon. Thank you. If you have any questions about how to navigate the current environment, wealthion can help connect you with a vetted advisor to get a free portfolio review, just click the link in the description below or head to wealthion.com/free there’s no obligation, and it will just take a few minutes of your time. Again, that’s wealthion.com/free. Thanks so much for joining us. We’ll see you again next time
