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KAOBOY MUSINGS and its associated podcast KAOS THEORY focus on the intersection of Financial Markets, Macroeconomics and Geopolitics. I've spent 30+ years as a trader/hedge fund manager and now manage money for my family office across many asset classes.

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Michael Kao

Nov 11, 2023

5/21/21 - Re: Mental Models-Bubble Assets As Capacitors.

Re: Mental Models-Bubble Assets As Capacitors.

Michael Kao

May 22, 2021

Re: Mental Models-Bubble Assets As Capacitors.

I mentioned that there many examples of “Financial Hernias”: “Bubble” assets that have benefited most from low/neg risk-free rates and too much EXCESS LIQUIDITY: Crypto, NFTs, SPACs, high tech stocks/stonks, etc. The problem with the “Hernia” Mental Model is that Hernias are injuries resulting from excess pressure. In financial markets, the injury comes …

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5/28/21 - Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

Michael Kao

May 29, 2021

Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

In computer science, a RECURSIVE function/algorithm involves a function that calls itself, much like the mythological “Ourobouros” consumes itself — there is no seeming end to a recursive loop. A simple example of a problem easily solved by recursion is a function that computes the factorial of a number n. Recall that factorial(n) is mathematically repre…

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12/4/21 - Re: Mental Models-Financial Assets As Levers.

Re: Mental Models-Financial Assets As Levers.

Michael Kao

December 5, 2021

Re: Mental Models-Financial Assets As Levers.

The other day, this Musing invited some questions: Let’s briefly go back to business school and touch on the basic DCF (Discounted Cash Flow) equation, where i = interest rate, CF = cash flow for period n, TV = terminal value at end of term t:Kaoboy Musings is a reader-supported publication. To receive new posts and support my work, consider becoming a f…

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12/10/22 - Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Michael Kao

December 11, 2022

Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Econ cycles come in varying wavelengths; LT cycles = long wavelengths & ST cycles = short wavelengths. ST cycles often oscillate within LT cycles. In Oil, LT cycles are driven by capex cycles that have 5-10 year gestation periods and primarily affect SUPPLY. ST cycles are driven by the macroeconomy and primarily affect DEMAND.

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2/12/23 - Re: Mental Models-The Macroeconomic Pond & The Big Chop.

Re: Mental Models-The Macroeconomic Pond & The Big Chop.

Michael Kao

Feb 13

Re: Mental Models-The Macroeconomic Pond & The Big Chop.

I’ve been thinking a lot about the low signal:noise ratio in the market lately.

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3/6/23 - Re: Mental Models-Orthogonality & Portfolio Diversification.

Re: Mental Models-Orthogonality & Portfolio Diversification.

Michael Kao

Mar 6

Re: Mental Models-Orthogonality & Portfolio Diversification.

Everyone in finance understands the broad concept of Portfolio Diversification. Whether you’re talking about a portfolio of stocks or a portfolio of managers or even a portfolio of asset classes, the general idea is that picking assets with low (or even negative) correlations with

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11/11/23 - Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

Michael Kao

Nov 11

Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

I know the title is scary, but if you bear with me, I think this is the most powerful Mental Model I’ve introduced yet, because it ties together so many equivalent concepts from not just different fields but different Asset Classes from within Finance/Economics.

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