ORDERED KAOS: Themes of the Week (3/12/23-3/17/23).

This has been an INSANE week, so I’m trying something new by making a Weekly Recap and putting a bit more effort into organizing all of my thoughts into THEMES.

This has been an INSANE week, so I’m trying something new by making a Weekly Recap and putting a bit more effort into organizing all of my thoughts into THEMES.

I will link each of my DAILY “stream-of-conscious” Musings of the Day and then tease out key THEMES that emerged from the week. I am doing this for my own mental hygiene to help organize my thoughts so I can make better investment/trading decisions, hence the name ORDERED KAOS.

If you like this, please let me know. Depending on the feedback, I may make it a weekly endeavor. Thank you!

3/12/23:

Michael Kao @UrbanKaoboy

Musings of the Day, 3/12/23: And so the Sunday night vigils begin again...🙄

I spoke on 2 Twitter Spaces today, one hosted by Rahul and one hosted by Mario Nawfal:

Twitter Space: Double-Header on SIVB Fallout & Fed Implications.

3/13/23:

Michael Kao @UrbanKaoboy

Musings of the Day, 3/13/23: Early thoughts: -Risk-On in progress, except in banks which is understandable given BTFP only helps depositors but could be very bad for bank STOCKS. -$BTC, Gold, and now broader Equities rallying on knee-jerk expectations of Fed Pivot.

I spoke on 2 Twitter Spaces:

Twitter Space: Double-Header on SIVB Fallout & Fed Implications.

3/14/23: CPI Day

Michael Kao @UrbanKaoboy

Musings of the Day, 3/14/23: Here we go:

LiveSquawk @LiveSquawk

US CPI Core (Y/Y) Feb: 5.5% (est 5.5%; prev 5.6%) - US CPI Core (M/M) Feb: 0.5% (est 0.4%; prev 0.4%) - US CPI (Y/Y) Feb: 6.0% (est 6.0%; prev 6.4%) - US CPI (M/M) Feb: 0.4% (est 0.4%; prev 0.5%)

Interview on Forward Guidance with Jack Farley:

Interview: Forward Guidance with Jack Farley / BTFP does NOT mean BTFD!

3/15/23:

Michael Kao @UrbanKaoboy

Musings of the Day, 3/15/23: A day late, but I’ll take it! https://t.co/umhbbvlh7N

Michael Kao @UrbanKaoboy

Prediction: If $SPY can't breach 393-394, it will fade HARD and take all "Fed Pivot" plays down with it. https://t.co/6akpVvkxWG

I did a Twitter Space early in the am with Unusual Whales to discuss the CPI print and its implications on Fed Policy:

Twitter Space: Panel with Unusual Whales / CPI & Banks.

3/16/23:

Michael Kao @UrbanKaoboy

Musings of the Day, 3/16/23: Has anyone considered the possibility that we're still feeling the "long and variable lags" of DECADES of ENDLESS LIQUIDITY LOTTERY?

I spoke on a Twitter Space early in the morning right after the ECB hiked 50 bps:

Twitter Space: Panel hosted by Mario Nawfal / ECB Hike, Inflation, Macro.

I did an Interview later in the day with WTFinance:

Interview: WTFinance Podcast with Anthony Fatseas / Macro, Shadow Banks, China.

3/17/23:

Michael Kao @UrbanKaoboy

Musings of the Day, 3/17/23: If there's anything to remember from my Musings this week, it's this: BTFP ≠ BTFD

Michael Kao @UrbanKaoboy

Almost seems like people have totally forgotten that SHOTGUN MARRIAGES between banks scare the SHIT out of markets. Does anyone remember Bear Stearns? WaMu? Wachovia? Countrywide? This market is not ANYWHERE CLOSE to capitulation, imho.

I was the featured speaker on a Twitter Space hosted by Grizzle Media, covering everything macro, where I explain why this setup reminds me more of 1998 than 2008:

Twitter Space Interview: Hosted by Grizzle Media / Macro Wrap-Up For The Week.

THEME 1:

• SURGICAL ACTION WILL OBVIATE NEED FOR SHOTGUN ACTION AND ALLOWS FED TO STAY THE COURSE ON FIGHTING INFLATION.

• BTFP = LIQUIDITY AT A RESTRICTIVE PRICE = “CONTROLLED BURN” / “FIREBREAK.”

• AUTHORITIES MUST AVOID INCONSISTENT POLICIES.

• SIVB IS MORE IDIOSYNCRATIC THAN SYSTEMIC.

Michael Kao @UrbanKaoboy

My guess is that the Fed/Tsy/FDIC will be as surgical as possible and ring-fence depositor angst (which is NOT anywhere REMOTELY close to 2008) WITHOUT sacrificing its hard-fought Inflation Fight. Look to some of the localized interventions by BOJ/BOE late last year.

Michael Kao @UrbanKaoboy

I see very little probability of a Fed Pivot and/or a bailout here. When faced with the choice of the many (EVERYONE is hurt by Inflation) vs. the few (hypocritical, belly-aching VCs), the Fed/Tsy will choose the many, imho. My 2c.

Michael Kao @UrbanKaoboy

Musings of the Day, 12/5/22: I spoke of the Bifurcated Economy recently in Space, observing the sky-high prices for premium concert/airline/travel packages, but Inflation is a REGRESSIVE tax. Implication: The Fed will outweigh the needs of the many over the needs of the few. https://t.co/iv1MF9CyRf

Michael Kao @UrbanKaoboy

H/t @CMcgarraugh for this. Folks, this is about as surgical as it gets. It means that shitty banks can be resolved without creating cascading runs. It ALSO means the Fed can continue its Inflation Fight, so think long and hard about what assets have been pricing in a Pivot.

Michael Kao @UrbanKaoboy

INCONSISTENT POLICY is what you wanna look out for going forward. As distasteful as I find unlimited depositor backstops, it is a FAR BETTER solution to the HAPHAZARD policies during 2008 when the Fed/Tsy/FDIC ARBITRARILY chose winners/losers.

Michael Kao @UrbanKaoboy

This was the MOST damaging aspect of 2008: -Putting GSEs in conservatorship unnecessarily -Saving Countrywide but then killing WaMu which had far stickier deposits and then saving Wachovia -Killing Lehman and then bringing out the bazooka for everyone else -List goes on and on

Michael Kao @UrbanKaoboy

BTFP does NOT equal BTFD, folks:

Michael Kao @UrbanKaoboy

@ZlotlB @BobEUnlimited @IvanBrian9 @DiMartinoBooth @FedGuy12 Interesting way to put it but yeah, I see it as a way to effectuate a "controlled burn" of the irresponsible banks without letting the fire rage out of control.

Michael Kao @UrbanKaoboy

"Liquidity at a price" = "controlled burn" = no reason to Fed to emasculate credibility for what it's been trying to do the last 15 months

Joseph Wang @FedGuy12

If the problem is higher rates causing insolvency in the banking sector, then the new bank loan facility patches that up. Fed has the option to keep hiking without fear of bankrupting the banks Similar actions can be done if other segments break https://t.co/3M5J04bTKd

SIVB WAS IDIOSYNCRATICALLY DEVOID OF RISK MANAGEMENT ON BOTH SIDES OF ITS BALANCE SHEET:

Michael Kao @UrbanKaoboy

First, the LIABILITY side of the balance sheet. Take a look at the DEPOSIT BASE:

Michael Kao @UrbanKaoboy

Now, look at the ASSET side:

Michael Kao @UrbanKaoboy

Bottom-line: $SIVB was an OUTLIER OF HORRENDOUS RISK MANAGEMENT on BOTH sides of the balance sheet. This is NOT a systemic issue, ESPECIALLY with the BTFP firebreak in place. BUT this is also why the Fed is UNLIKELY to Pivot and undo the efforts of the last 15 months.

THEME 2:

I DON’T TRUST THE BTC/GOLD/YIELD CURVE MOVES AND THINK THE USD WRECKING BALL WILL STAY STRONG BECAUSE:

1. OTHER CB’S LIKELY TO OUT-DOVE FED FIRST.

2. INFLATION IS STRUCTURAL AND AFFECTS 100% OF PEOPLE.

3. FED WILL NOT PIVOT AS SOON AS PEOPLE THINK.

4. TRADEOFF BETWEEN PRICE STABILITY AND MAX EMPLOYMENT IS NOT HERE YET.

Michael Kao @UrbanKaoboy

Here's the thing about the USD Wrecking Ball: The Fed doesn't need to Out-Hawk everyone else. By the time, things catch on fire here, it will likely be SCORCHED EARTH everywhere else, so perhaps the new question should be: Who's gonna start Out-Doving the Fed?

Michael Kao @UrbanKaoboy

Same old, same old. Doesn’t seem like Kuroda exit has heralded a new era, imho. @acrossthespread what do you think?

LiveSquawk @LiveSquawk

Minutes Of The Monetary Policy Meeting - BoJ - Important To Continue With Monetary Easing - Members Agreed Japan's Economy Expected To Recover - Members Agreed Japan's Inflation Likely To Slow Toward Latter Half Of Next Fiscal Year https://t.co/Pjqgt62mZe

Michael Kao @UrbanKaoboy

Dear Fed Pivoters, When you zoom out and look at the Big Picture, does this look like a picture of financial stress that derails what the Fed has been trying to do for the last 15 months? It's as if people have completely forgotten the 2007-2008 period. This is NOWHERE CLOSE.

Michael Kao @UrbanKaoboy

My belief is that this Inflation is STRUCTURAL in nature. That and the magnitude of it compared to past regimes changes EVERYTHING imho.

Cameron Dawson @CameronDawson

Discussing Fed's tradeoff between inflation fighting and financial stability on @rhemrajani9 spaces with @BobEUnlimited and @UrbanKaoboy. Past pivots occurred with benign inflation backdrops, which allowed the Fed to prioritize financial market stability. https://t.co/i7SY4U8h5r

Michael Kao @UrbanKaoboy

Many think we've reached the point where the Fed is facing a real TRADEOFF between hiking vs. not hiking/easing. The SURGICAL nature of BTFP just ELIMINATED that tradeoff, and the hot CPI just insured NO PIVOT, imho.

Michael Kao @UrbanKaoboy

An inconvenient truth… Fed Pivot -> Fed Divot https://t.co/0bMwnD68IJ

KKGB Kitty (Carlo Casio) @INArteCarloDoss

Inflation is in a much worse place in February 2023 than in February 2022. These are the facts. Tightening cycle cannot stop. Clearly this increases the odds of a recession in the not too distant future. https://t.co/ddOnMtkCQC

Michael Kao @UrbanKaoboy

I'm not buying what the market is implying for Fed policy here, but it's interesting to compare the US Yield Curve (Yellow) and the UK Yield Curve (Pink). Again, I ask: Who's gonna OUT-DOVE the Fed? #USDWreckingBall

If the ECB doesn’t see the TRADEOFF yet, will the Fed?

Michael Kao @UrbanKaoboy

This sums up my belief: The TRADEOFF between Fighting Inflation vs. Financial Stability is NOT here. If it's not here for the ECB, it DEFINITELY is not here for the Fed.

Michael Kao @UrbanKaoboy

Amazing chart from Lakshmi at Capital One this am: There will be NO PIVOT, imho. Don't Shrug the Rug (Pull).

Michael Kao @UrbanKaoboy

Umm…Madam Secretary, what exactly do you think the Fed has been trying to accomplish the last 15 months?

Breaking Market News @financialjuice

US TREASURY SECRETARY YELLEN: I AM CONCERNED THAT IF BANKS ARE UNDER STRESS, THEY WILL TIGHTEN CREDIT. TIGHTER CREDIT COULD BECOME SIGNIFICANT SOURCE OF DOWNSIDE ECONOMIC RISK.

THEME 3:

• SAFETY FOR DEPOSITORS DOES NOT MEAN SAFETY FOR INVESTORS.

• BTFP ≠ BTFD!

• RING-FENCING CONTAGION DOES NOT HERALD A RETURN TO QE!

• WATCH OUT FOR SHOTGUN MARRIAGES OF BANKS SPOOKING INVESTORS (BUT NOT NECESSARILY DEPOSITORS).

Michael Kao @UrbanKaoboy

In the end, don't conflate safety of DEPOSITORS with safety of Bank Equities. Also don't conflate weakness of Bank Equities with Fed needing to Pivot, especially now that they've protected depositors.

Michael Kao @UrbanKaoboy

H/t @CMcgarraugh for this. Folks, this is about as surgical as it gets. It means that shitty banks can be resolved without creating cascading runs. It ALSO means the Fed can continue its Inflation Fight, so think long and hard about what assets have been pricing in a Pivot. https://t.co/0oI5Ekcmnc

Michael Kao @UrbanKaoboy

Folks, this is as much of a “bailout” as it was for Bear Stearns and WaMu. Don’t conflate depositor ring fencing with a return to the Liquidity Lottery. Consider yourself forewarned.

Michael Kao @UrbanKaoboy

Reminder that: BTFP ≠ BTFD (Yes I just flexed my ability to use ≠)

Michael Kao @UrbanKaoboy

Almost seems like people have totally forgotten that SHOTGUN MARRIAGES between banks scare the SHIT out of markets. Does anyone remember Bear Stearns? WaMu? Wachovia? Countrywide? This market is not ANYWHERE CLOSE to capitulation, imho.

Michael Kao @UrbanKaoboy

☝️

Breaking Market News @financialjuice

SVB FINANCIAL: ANY SALE PROCESS WILL BE CONDUCTED THROUGH CHAPTER 11.

Michael Kao @UrbanKaoboy

💯 BTFP ≠ BTFD https://t.co/SRAPEerlTD

Markets & Mayhem @Mayhem4Markets

If you believe that the Fed program is QE then you will probably be someone else's exit liquidity who understands that it is not.

These “bailouts” are like the Pomegranate Seeds offered to Persephone from Hades; once accepted, she can no longer leave Hades at will.

Michael Kao @UrbanKaoboy

I have been emphasizing this point ALL WEEK:

FXHedge @Fxhedgers

FIRST REPUBLIC BANK SHARES PLUNGE 25% AS $30B RESCUE PLAN FAILS TO SOOTH FEARS

THEME 4:

• OIL COLLAPSE IS A TELL ON CHINA’S FLAILING RE-OPENING.

• CHINA MAY NEED TO DEVALUE CNY TO BOOST ITS ECONOMY.

• BUT CHINA DEBT BOMB COULD BE THE BIGGEST ICEBERG OF ALL.

China’s Re-Opening is proving to be a dud like Alex Stahel & I warned:

Re: Oil-The Great China Re-Opening (Or NOT).

Why China could be the ELEPHANT IN THE ROOM — this is my detailed piece from last week about the CHINA DEBT BOMB:

Re: Geopolitics/Inflation/USD-Ball In A China Shop.

Michael Kao @UrbanKaoboy

Oil getting slammed (and the fact that China has bought so much of our SPR bbls) leads me to think that China is incrementally LESS worried about CNY devaluation now. Maybe PBOC steers closer to Scylla?🤔

Michael Kao @UrbanKaoboy

This is AFTER the 6T CNY stimmy in Jan. See what I mean by “flogging a dead horse”? More CNY printing to come imho. @JackFarley96 @BurggrabenH @SantiagoAuFund

Meanwhile, China is cutting the world off from its economic data. I wonder what it’s hiding?

Anne Stevenson-Yang @doumenzi

Access from outside China to all economic databases is now totally cut off. No corporate information on Hong Kong or mainland companies, no Customs data, no financial information. I guess the goal is that no one develop an independent view of China.

Michael Kao @UrbanKaoboy

Another negative for Oil in the ST, ceteris parabus. I mentioned to @JackFarley96 the other day that the only thing propping up Oil was likely geopolitical premium. @BurggrabenH https://t.co/1sWpsEaT8L

Faytuks News Δ @Faytuks

BREAKING: Iran has agreed to stop arming the Houthis in Yemen as part of the deal to re-establish diplomatic relations with Saudi Arabia, U.S. and Saudi officials says - WSJ

I continue to think that China will have to DEVALUE CNY if it wants to revive its moribund economy:

Michael Kao @UrbanKaoboy

China Dead-Horse Flogging Update, courtesy of Jefferies (3/17/23): "The news of the ‘reappointment’ of PBOC Yi Gang has come not a second too late as the macro releases were showing a broad based recovery but by no means fast enough to lift the economy out of deflation."

Flog that Dead Horse:

THEME 5:

• SUPPLY INELASTICITIES ACROSS MULTIPLE ASSET CLASSES MAKE FOR VIOLENT PRICE MOVES IN BOTH DIRECTIONS.

• BTC HAS ARTIFICALLY INELASTIC SUPPLY DUE TO MATH/HODL’ERS.

• EQUITIES HAVE INELASTIC SUPPLY DUE TO PASSIVE INVESTING.

• BONDS/USD HAVE INELASTIC SUPPLY DUE TO COLLATERAL SHORTAGES.

• INCREASINGLY INELASTIC SUPPLY OF OIL CAN MAKE FOR VIOLENT CRASHES WHEN DEMAND SHIFTS DOWN:

  Michael Kao @UrbanKaoboy

  If you're wondering how Oil can collapse like this while in Backwardation, you did not read: urbankaoboy.substack.com/p/re-oil-forwa…

  

  I explained how this could happen back in September:

Re: Oil-Forward Curves & Holy Grails (or Lack Thereof).

THEME 6:

THIS PERIOD REMINDS ME MORE OF 1998 THAN 2008:

1. STRONG USD BUTTERFLY EFFECTS TAKE A LONG TIME TO FULLY MATERIALIZE.

2. RISKS THIS TIME AROUND LIKELY IN SOVEREIGNS & SHADOW-BANKING SECTOR (1998) RATHER THAN BANKING SECTOR (2008).

Please review these old threads for details:

Re: Inflation/Macro-Asian Contagion 2.0?

Michael Kao @UrbanKaoboy

Please also read my Next Shoe mini-thread. SHADOW BANKING SYSTEM is where the next icebergs are and NOT the banks, especially after BTFP imho. https://t.co/okdyUmxhwB

Michael Kao @UrbanKaoboy

Musing 2 of the Day: Here is the next shoe to drop for hedge funds: top quartile managers wind up becoming liquidity providers due to bottom quartile managers gating redemptions.

THEME 7:

RETURN OF CAPITAL VS. RETURN ON CAPITAL.

RISING RATE ENVIRONMENTS ARE NOT CONDUCIVE TO MAKING MONEY EASILY!

Michael Kao @UrbanKaoboy

This is the MOST IMPORTANT flip in mindset for me over the last several years: https://t.co/O31BcURU1G

Michael Kao @UrbanKaoboy

Musing of the Day: I've been an aggressive risk-taker throughout most of my career, but every ounce of my gut is telling me to focus on return OF capital now vs. return ON capital.

Michael Kao @UrbanKaoboy

Note the date of this tweet. Anyone claiming that all of this is the "fault of the Fed" and that $SIVB was innocently blindsided should be ashamed of themselves.

Michael Kao @UrbanKaoboy

Musing of the Day: Had lunch yesterday with a very savvy, grizzled ex-HF investor that started his career in 1980. He said to me, “All the $ I ever made was during declining rate environments.” Ponder that.