With a wealth of experience as a market theoretician and a prolific contributor to financial discourse, today’s guest is uniquely positioned to guide us through the complexities of index fund dynamics. Joining us to discuss the problems that passive investing may be causing in financial markets (and what people should do about it) is Michael Green, Chief Strategist and Portfolio Manager for Simplify Asset Management. Tuning in, you’ll learn about the ramifications of the surging popularity of indexing and the sobering reality of mounting market inelasticity, backed by compelling evidence that underscores the challenges facing today's financial landscape. The insights in this episode extend beyond mere observation, with Mike offering policy recommendations and strategies to address the structural issues affecting our markets. While this conversation is certainly challenging, philosophical, and even alarming, it isn't purely theoretical. It’s a call to action to safeguard the integrity of our financial systems. So, be sure to join us as we navigate the nuances of indexing and passive investing at large, guided by the expertise and foresight of one of finance's most respected voices!
Key Points From This Episode:
(0:05:48) The negative effect that the growth of indexing is having on financial markets.
(0:07:37) Insight into the XIV trade that strengthened Mike’s belief in this view.
(0:13:49) Defining the problem that indexing is causing (which might seem like a good thing).
(0:15:57) How market cap-weighted index funds differ from closet index funds.
(0:16:57) Indications that markets are becoming increasingly inelastic over time.
(0:19:21) Why flows into cap-weighted index funds differ from the overall aggregate of active.
(0:24:21) Active versus passive investing in public versus non-public markets.
(0:25:57) The catastrophic event that could be caused by index funds (and how to avoid it).
(0:30:51) Why we need to rethink the definition of passive investing and the value of diversity.
(0:36:10) Market inelasticity versus inefficiency and the impact of active manager performance.
(0:41:38) How investors should shift their strategy to respond to the current market structure.
(0:53:01) Regulatory recommendations: who actually needs to step up and do something.
(0:54:30) Mike’s outlook on US expected returns, market volatility, and 401(k)s.
(1:01:50) Why Bitcoin isn’t the solution to all of our monetary and fiscal policy problems.
(1:05:22) The definition of success in Mike’s life (and why it’s completely non-financial).
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
‘Yes, I give a fig… Thoughts on markets from Michael Green’ — https://www.yesigiveafig.com/
Michael Green on Substack — https://substack.com/@michaelwgreen
Michael Green on LinkedIn — https://www.linkedin.com/in/michael-green-9a15142/
Michael Green on X — https://twitter.com/profplum99
Nassim Nicholas Taleb — https://www.fooledbyrandomness.com/
Valentin Haddad — https://sites.google.com/site/valentinhaddadresearch/
Jean-Philippe Bouchaud — https://bouchaud.substack.com/
Marco Sammon — https://marcosammon.com/research/
Ralph Koijen — https://www.koijen.net/index.html
David Einhorn — https://twitter.com/davidein
Books From Today’s Episode:
The Black Swan — https://www.amazon.com/dp/081297381X
Adaptive Markets — https://www.amazon.com/dp/0691135142
Papers From Today’s Episode:
‘How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3821263
‘How Competitive is the Stock Market?’ Slides — https://drive.google.com/file/d/1QTxuFI7eK_RJwaV3ncAjX41pEb1anLeM/view
‘Do Active Funds Do Better in What They Trade?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4624934
‘The Passive-Ownership Share Is Double What You Think It Is’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4188052
‘The Arithmetic of Active Management’ — https://www.jstor.org/stable/4479386
‘Sharpening the Arithmetic of Active Management’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849071
‘Long Volatility, Asymmetric Alpha, Negatively Correlated Alpha, Convex Crisis Alpha’ Slides — https://www.macrovoices.com/guest-content/list-guest-publications/3860-logica-capital-active-to-passive-for-macrovoices/file
‘The Greatest Story Ever Sold: The Impact of Passive Investment on Markets’ Slides — https://utahfpa.org/images/downloads/Library_Documents/market_policy_presentation.pdf
‘The Inelastic Markets Hypothesis’ — https://www.nber.org/papers/w28967
Prof. Robert Frank: Success, Luck, and Luxury (EP.230)
The 2% (!?) Rule for Retirement Spending (EP.229)
Eduardo Repetto: Deep Dive with Avantis Investors' CIO (EP.228)
Who Should Invest in (Cap Weighted) Index Funds? (EP.227)
Colonel Chris Hadfield: An Astronaut's Guide to Life on Earth (EP.226)
The Index Fund "Tipping Point" (EP.225)
Prof Scott Cederburg: Long-Horizon Losses in Stocks, Bonds, and Bills (EP.224)
A Financial Goals Master List (n=310) (EP.223)
Cassie Holmes: Being Happier (EP.222)
Permanent Life Insurance (EP.221)
Jonathan Berk and Jules van Binsbergen: The Arithmetic of Active Management, Revisited (EP.220)
Understanding Crypto 17: Ari Juels: The Technical Case for Blockchain
Expected Returns for Alternative Asset Classes (plus Reading Habits w/ David Senra) (EP.219)
Understanding Crypto 16: Chris DeRose: Uncensored Crypto Perspectives
Colleen Ammerman: Gender and Human Capital (EP.218)
Understanding Crypto 15: Prof. Vili Lehdonvirta: Cryptocracy: The Obfuscation of Power
The Expected Returns of Financial Literacy (EP.217)
Understanding Crypto 14: Prof. John Cochrane: Money, (Fiscal) Inflation, and Political Freedom
Gus Sauter: Vanguard's Former CIO on Indexing, Active Management, and Private Equity (EP.216)
Understanding Crypto 13: Prof. William Magnuson: Blockchain and Democracy
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
U.S Property Podcast
Aligned Money Show
Dubai Property Podcast
The Ramsey Show
The Clark Howard Podcast