Interview: "On The Tape" with Danny Moses & Guy Adami -- How Contagion Happens.
Glad to be back on again with Danny and Guy to talk about Macro, JPY, CNY, Gold, Oil but perhaps most importantly -- HOW CONTAGION HAPPENS. We end with an Idiosyncratic Event-Driven idea.
I am grateful to Guy Adami and Danny Moses for having me back on their show again to discuss some of the top Macro Challenges facing the markets now. This was a short but densely packed conversation, and it inspired me to write a whole thread around the topics we covered.
“On The Tape” Podcast Notes:
We’ve got a podcast unlike any other this week featuring Guy Adami and Danny Moses. The guys start the show by digesting a litany of economic data released this week (5:00), what retail stocks say about the consumer (7:30), concerning price action in commodities, gold & silver (12:00), recent treasury auctions & dollar/yen (18:00), energy (23:15), Chinese equities (26:00), the importance of bank earnings (28:00)
Michael Kao joins Guy and Danny after the break to discuss moves in the Japanese Yen (34:00), global currency concerns (40:00), the potential for a run in gold (45:00), gold vs crypto (48:15), downside risk for oil (50:45), an idiosyncratic long idea (54:40).
My segment starts at 34:00, and we talked about Macro, JPY, CNY, Gold, Oil but perhaps most importantly -- HOW CONTAGION HAPPENS. We end with an Idiosyncratic Event-Driven idea.
As always, I follow up with detailed Show Notes at the bottom of this post that contain new charts and content. This one evolved into a full-blown thread, so I encourage you to read along as you listen.
YouTube:
Apple Podcast:
Show Notes THREAD:
I start by talking about last weekend’s post entitled, “The Battle of the BADS”:
BOJ and USDJPY Discussion
We first talked about the Scylla/Charybdis Dilemma facing the BOJ between Defending JGBs or Defending JPY.
USDJPY’s Breach of the 152 Intervention Zone was a BIG DEAL this week:
Why now? From “Battle of the BADS”:
How Contagion Happens
Devaluation is the LESS BAD Choice for each of the individual actors (BOJ/PBOC/ECB) acting on its own because even though these countries run the risk of importing Commodity Inflation, they also benefit from Export Competitiveness:
The PROBLEM for Risk Assets globally is that when all of these CBs make the decisions that are most optimal (LESS BAD) for themselves, they can trigger COMPETITIVE DEVALUATIONS, which is what led to the Asian Contagion 1.0 of 1997-1998.
One can’t just look at these currencies against USD. One must also consider a country’s EXPORT COMPETITORS.
Weak JPY → Weak CNY
For instance, look at how a Weak JPY pressures CNY from an Export Competitiveness perspective by looking at this chart of JPY/CNH.
We didn’t talk about this on the show, but check out what happened to the Korean Won (KRW) against CNY this week as well (KRW/CNY):
Transmission Mechanisms
The Immediate Impact of CB Intervention to prevent a Disorderly Devaluation comes from CBs needing to sell Reserve Assets (mostly USTs and to a lesser extent Gold) to buy Local Currency/Sell USD.
The Knock-On Effects come if/when JPY or EUR becomes a DOMINO that careens into CNY and other currencies with weak fundamentals.
In this way, Competitive Devaluations can pose CONTAGION RISKS FOR ALL RISK ASSETS, because USTs represent the Bottom-Most Jenga Block of the Risk Edifice, since they effectively determine the world’s Risk-Free Rate that serves as the linchpin for ALL Financial Assets:
Here’s a piece I wrote about the different layers of the Risk Edifice:
USD Wrecking Ball 1.0 came in 2022 when the Fed Out-Hawked RoW.
USD Wrecking Ball 2.0 comes from RoW OUT-DOVING the Fed.
Silver Lining?
Competitive Devaluations against USD will send a Deflationary Pulse into the US Economy, serving as an EQUILIBRATING MECHANISM to import Deflation into the US and export Inflation out of the US.
When it spirals out of control, it can lead to a CREDIT CRISIS which is what we saw in 1998 with Russia’s Default and subsequent collapse of Long Term Capital Management.
Yet, a Deflationary Pulse is potentially what the Fed needs in its Inflation Fight:
Gold’s Parabolic Ascent
A lot of folks are watching Gold’s recent parabolic ascent with great trepidation:
From “Battle of the BADS”:
I warned that even Gold is not a sure thing for a Tail Hedge against Asian Contagion 2.0, because Gold went DOWN during Asian Contagion 1.0:
For the record, I think a Bear Steepener is coming as a result of the Fed’s irresponsible December Rhetorical Pivot and the untethering of Resurgent Inflation, and given how steeply Gold has run and because of what happened during Asian Contagion 1.0, I worry about what happens to Gold if/when USTs become more attractively priced and therefore more competitive as a Reserve Asset.
For these reasons, I prefer being SHORT BONDS vs. being LONG GOLD as a Tail Hedge for Asian Contagion 2.0.
Chameleon Trades
To further muddy the picture, Gold’s move might also be GEOPOLITICAL given Yellen’s headlines about potentially sanctioning Chinese banks for China’s military aid to Russia.
In this regard, I consider both Gold and BTC to be CHAMELEON TRADES, with theses that change color to match whatever narrative one wants.
I own neither because I have a hard time figuring out what they represent and when. I understand why people like them, especially given the Reflation Narrative, but because they have inherently Unfalsifiable Theses, I prefer Investments/Hedges with more well-defined Exit Strategies.
This is not to denigrate Gold and BTC at all and anyone who trades them — there are many ways to make money, and one has to find ways that are most suitable for one’s demeanor and psychology.
I didn’t have time to go into it on the show, but I wrote a treatise about the importance of Exit Strategies and why I derive more conviction from Investments/Trades with explicit Exit Strategies and Fundamental drivers like CASH FLOWS. That’s just what works for me.
Oil
For an example of an Inflation Hedge derived from real CASH FLOWS, since 2018 I’ve had an long-term Oil PE that is a full-harvest play on a specific Permian asset. It was my expression of a long-term Bullish Oil thesis (even though I’m short-term Bearish).
I don’t trade it, but every quarter I get distributions that are derived from production cash flows, so I have significant Oil & Gas exposure, which is why I seek to find hedges when I see risks to Commodity prices. I believe Oil has significant MACRO AND GEOPOLITICAL DOWNSIDE RISKS in the short-term.
Guy asked me about why I think Oil has GEOPOLITICAL DOWNSIDE RISK, referencing this tweet I made recently:
I explain my reasoning in my “Battle of the BADS” piece:
There is significant Signal Content when Oil first flips from Contango to Backwardation, often pointing to significantly higher spot prices one year out.
I wrote a piece about this back in 2021, when I was “Texas Hedged” (Long Oil and Long Oil PE):
The problem is that there is no analogous signal going the other way, and Downward Demand Shocks into an Inelastic Supply Curve (we have an artificially engineered one now) are very difficult to forecast, so one must make inferences from other Macro factors.
I wrote a thread about the Lack of Holy Grails for forecasting Downward Demand Shocks in 2022:
An Idiosyncratic Idea — MBIA Inc. (MBI)
Finally, Danny surprised me at the end with a question about one of my Idiosyncratic Micro Bets, which I didn’t expect after only talking Macro for most of our conversation.
I don’t often talk about my Idiosyncratic bets, because they are usually off-the-beaten-path and less liquid. Because this is an Event-Driven situation, however, I wrote about it in my Year-End Missive, which makes it fair game for discussion:
I think MBI is an extremely cheap Event-Driven Special Situation Equity that has multi-bagger potential, but one has to spend the time and get into the weeds on Puerto Rico’s PREPA Bankruptcy Process in order to derive conviction:
I won’t go into details here since I talk about specifics in the podcast, but you can read about it in more detail here:
Great interview. Thanks for taking the time!
Pretty good listen… and there’s a bonus in the last few minutes. 😉