May 6·edited May 6Liked by Michael Kao

I agree that the "X" date isn't real and the announcement timing seemed more like a move by Yellen to influence the vote at the FOMC meeting where it appears to me that Powell had to make concessions to the doves in the Committee's statement. Yellen has tools like those used in the past to stretch out funding for a while. What has me bothered is the politics this time around. I know it's problematic to say this time it's different, but it seems that way to me. McCarthy's speakership is at the mercy of the Freedom Caucus, who can get rid of him with 1 member calling for a no confidence vote. Some of them like MTG strike me as having the "burn the house down" philosophy of government that Steve Bannon articulated. This could mean that McCarthy can't even get the votes to kick the can down the road to buy more time for a deal. On the other side, while I believe Biden believes in the system and maintaining its integrity, he's under a lot of political pressure not to give in from his fellow Democrats. They remember the 2011 budget "cap" deal Obama cut, only to have the Republicans ask for more concessions in 2013. Can't tell you how many Dems I've talked to trying to explain the downside of not compromising to get the debt limit increase passed who quote the Who's song lyric "Won't get fooled again" (OK they were all Boomers, but connected party officials in NYS, and they were all adamant about not giving any ground). I believe this why you see the White House floating the use of the 14th amendment to declare not raising the debt limit unconstitutional. It seems to me the Dems want to show the Republicans they don't feel boxed in and that Biden has called for a negotiation to say he tried, before resorting to "unconventional measures". If the Dems go that route, I'd bet that when it gets up to the Supreme Court that argument goes down in flames, given the dominance of the conservatives on the Court. What also struck me was the recent poll on who would be blamed if we default. It follows the usual breakdown in how Americans vote. So what's the political downside when you can blame the other side for the economic chaos that might ensue from a default and the party loyalists will vote for you again in the primaries and the general election (which most will win given how gerrymandered Congressional Districts are today). Nobody thought Brexit would happen, but the politics of that time were misjudged by the experts. So perhaps we ought to add some level of probability to the potential for a default?

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May 6Liked by Michael Kao

Thank you Michael. I appreciate your insights and perspectives. Having just finished reading Charles Goodhart’s “The Great Demographic Reversal”, I am curious to know how you see demographics playing a part in the current geopolitical mosh pit?

When I think about a global tug o war, its in the form of a venn diagram of energy, economy and demographics. Formulaically: GDP=Employed People x productivity. You either grow GDP by having more people produce, or each person becoming more productive. I see the productivity part as exogenous energy and intellectual capital, and is reliant on (relatively) cheap access to fossilized carbon. This aligns with your OPEC thesis. The people part is demographics - high working age population, young population relative to both young and especially older dependents. We know Japan’s working age population topped with the Nikkei in 1989, and their only saving grace has been to offshore production to better demographic lands. China’s one child policy has left it with a demographic time bomb, with fewer employed gradually supporting a supermajority of seniors. The US is in a slightly better demographic position, but along with most of the developed west, is in demographic decline (decreasing worker to dependent ratio). Poor demographics is by nature inflationary (young and elderly consume but don’t produce). Goodhart’s hypothesis is that the last few decades have been deflationary by nature due to the improving demographics, but the next few decades will be structurally inflationary due to the declining world demographics. This seems to align with the “sticky “ and “higher for longer” inflation. Thoughts?

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This question just came up:

Will China QE drive up Inflation?

My answer: NO, opposite quite possibly.

China QE -> CNY devaluation -> deflationary for all commodities -> deflationary for all exported goods

And lower Oil makes it that much more palatable for PBOC to devalue.

This is the CNY/Oil Doom Loop I speak of.

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Here’s the interview I did with Andreas Steno Larsen to preview this thesis:


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