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Opto Sessions

Portfolio manager Michael Kao’s dollar wrecking ball theory

Michael Kao has been in the investment business for more than 30 years. Following time spent at Goldman Sachs and Canyon Partners, Kao has since set up the Kao Family Office. Kao joined Opto Sessions to discuss the key questions that drove his investments, lessons he’s learned and why the dollar isn’t depreciating.

LISTEN TO THE INTERVIEW:

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The child of two entrepreneurs, Michael Kao always knew he wanted to strike out on his own. He started out as a commodity derivatives trader at Goldman Sachs before deciding to get his MBA at the Wharton School of business.

Straight after graduating in the fall of 1997, he joined Canyon Partners, “just when the beginnings of what I call the ‘first Asian Contagion’ started happening”, he told Opto Sessions. His derivative skills helped him to hedge portfolios during that volatile period.

There he developed “Alpha with Asymmetry”, a thesis for combining long gamma of convertible and capital structure arbitrage, a propensity he picked up in an internship during his time at Wharton, with event-driven investing.

It’s also the name of an internal white paper he wrote detailing the strategy. In 2002, he followed in his parents’ footsteps and left Canyon to start Akanthos Capital Management, where he found himself asking the question, “how do I express the most asymmetric bet within the capital structure?” That lasted until 2009, when the financial crisis forced him to change his angle.

Following the times

“In the wake of the financial crisis, the real juice was in distressed securities”, he said in his interview with Opto Sessions. Following that nectar led him to become what he calls a “capital structure-agnostic value investor” from 2009 to 2018, a time during which he often thought of his portfolio as one of “diversified fulcrum securities”.

“In the wake of the financial crisis, the real juice was in distressed securities” - Michael Kao

But then 2014 came along, and with it a “protracted bear market in oil”, which until 2020 served Kao a lesson in “the difficulty of getting both the micro and the macro right”.

It can therefore be said that as much as Kao amassed fortunes for his clients, he has amassed an understanding of the markets. All the more fitting, then, that he has a massive Twitter following of 63,500, where he shares gems of insight gleaned throughout his career.

“I don’t ever want to be known as a stock pumper”, he says. Kao’s Twitter feed certainly isn’t a source for hot investment tips, but rather acumen harvested over the long haul. Take the US dollar, for example, and why it isn’t faltering any time soon.

“I don’t ever want to be known as a stock pumper” - Michael Kao

The dollar wrecking ball

Kao balances his social media activity with reading — he aims to read about 30 books per year. He particularly values learning from history. In his conversation with Opto Sessions, Kao explored the dollar wrecking ball theory, citing the 1994 Bretton Woods agreement as the beginning of the US dollar’s global reign. He contrasted that with the 1985 Plaza Accord, in which the US was “a willing volunteer to weaken the dollar”.

Though the latter may, from a distance, seem to have been against the dollar’s best interest, it was geopolitically advantageous at the moment. However, Kao says it may not be right now. He also notes that the US Dollar Index at the time was 165, and it’s currently at just 110, suggesting a horizon point Federal Reserve chair Jerome Powell may well be looking to as a limit for rate hikes.

In the interview, Kao goes deeper into why the dollar is the global “preferred vehicle of safety”, and why that isn’t likely to change anytime soon. “History doesn’t repeat itself”, says Kao, “but it does rhyme.”

For more ways to listen:

Apple Podcasts

Spotify

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

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