Tom welcomes back Michael Kao, former hedge fund manager and commodities trader to discuss the policy dilemmas facing central bankers worldwide and the implications for gold. Central banking challenges, including the Federal Reserve’s higher-for-longer policy and potential risks for reserve asset holders, particularly those of BRICS countries, are explored.

Michael argues against the adoption of alternative reserve assets like gold or Bitcoin due to their supply inelasticity and potential for sharp price fluctuations. The conversation touches upon geopolitical implications of central banks’ search for alternatives to the US dollar, the challenges posed by illiquid reserve assets, and the inflationary environment. Michael believes we might be experiencing a new inflation trajectory between low inflation and stagflation, with unemployment currently in the middle.

Michael also discusses the dynamics of treasuries versus gold in relation to currency devaluation and central bank interventions. The effectiveness of interventions like those by the Bank of Japan is questioned, suggesting potential selling of reserve assets, including gold, to fund these interventions.

He introduces the concept of the ‘Goldilocks trade’ and its opposite, the ‘anti-Goldilocks trade.’ The Goldilocks trade refers to an economy not too hot or cold, allowing the Fed to cut interest rates without causing inflation. In contrast, the anti-Goldilocks trade is characterized by stagflationary conditions. Michael expresses concern about the widening wealth divide and pockets of weakness in certain sectors while larger institutions remain unscathed.

Lastly Mr. Kao shares his investment strategies, emphasizing the importance of information asymmetry and understanding underlying capital structures to find true alpha opportunities. He warns against commodity beta pitfalls and encourages listeners to explore different perspectives on investment topics.

Time Stamp References:
0:00 – Introduction
0:56 – The Battle of the Bads
7:43 – Reserve Assets & Risks
16:24 – US Gold Reserves & Backing
20:10 – Fiscal Dominance & Debt
24:52 – Fed Response & Guidance
26:13 – Four Horseman of Inflation
36:06 – Fed Cuts & Yields
42:08 – Weak Currencies
45:28 – The Goldilocks Trade
50:27 – Alpha Vs Beta Returns
1:00:30 – Identifying Alpha Plays
1:05:47 – Wrap Up

Talking Points From This Episode

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• Central bankers face challenges with inflation, reserve assets, and geopolitical implications.
  
• Goldilocks and anti-Goldilocks trades represent contrasting economic conditions neither too hot or cold.
  
• Why having information asymmetry is crucial for finding true alpha in investments.
  

Guest Links:
Website/Substack: https://www.urbankaoboy.com/about
Twitter: https://twitter.com/@UrbanKaoboy

Michael Kao is a seasoned investor and retired portfolio manager with 25 years of experience in commodities trading and hedge fund management. He has a lifelong passion for the markets and a keen interest in geopolitics, which has lead him to manage his own investments and publish his views on his SubStack Website – Kaoboy Musings.

Known for his out of consensus calls that often wind up becoming consensus later on, Michael Kao strives to cut through the noise in his musings by introducing mental models from other disciplines and injecting ideas from eclectic topics. He aims to educate, encourage out-of-the-box thinking, elevate above the noise and entertain.