Michael Green: Market Efficiency Is Not The Question | Rational Reminder 302
ฝัง
- เผยแพร่เมื่อ 10 พ.ค. 2024
- Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
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!
Timestamps:
0:00:00 Intro
0:06:49 The effect the growth of indexing has on markets
0:08:46 The XIV trade that strengthened your belief in this view
0:15:29 Beyond the XIV trade, the evidence we have that indicates this is a problem
0:19:07 How we know that index funds have less elastic demand than the counterfactual security holders in the absence of index funds
0:21:37 Why flows into a cap weighted index fund are different from flows into the aggregate of active, which holds the market
0:31:54 How much of an issue this is in markets outside of the US
0:33:46 How systematic firms like Dimensional and Avantis, that tilt away from cap weights, fit into these dynamics
0:40:55 How the issue created by index fund ownership is distinct from market efficiency
0:46:55 How investors should change their strategy in response to the current market structure
0:53:54 As a portfolio manager, how Mike incorporates his views on passive into investment strategies
0:59:20 Whose responsibility it is to fix these market structure problems
1:05:39 Separate from the index fund effects, what Mike's outlook on US equity expected returns is
1:09:04 Why Bitcoin isn’t the solution to all monetary and fiscal policy problems
1:12:50 Mike Defines Success in His Life
Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/
Rational Reminder on Instagram - / rationalreminder
Rational Reminder on X - / rationalremind
Rational Reminder on TH-cam - / channel
Rational Reminder Email - info@rationalreminder.ca
Benjamin Felix - www.pwlcapital.com/author/ben...
Benjamin on X - / benjaminwfelix
Benjamin on LinkedIn - / benjaminwfelix
Cameron Passmore - www.pwlcapital.com/profile/ca...
Cameron on X - / cameronpassmore
Cameron on LinkedIn - / cameronpassmore
‘Yes, I give a fig… Thoughts on markets from Michael Green’ - www.yesigiveafig.com/
Michael Green on Substack - substack.com/@michaelwgreen
Michael Green on LinkedIn - / michael-green-9a15142
Michael Green on X - / profplum99
Books From Today’s Episode:
The Black Swan - www.amazon.com/dp/081297381X
Adaptive Markets - 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’ - papers.ssrn.com/sol3/papers.c...
‘How Competitive is the Stock Market?’ Slides - drive.google.com/file/d/1QTxu...
‘Do Active Funds Do Better in What They Trade?’ - papers.ssrn.com/sol3/papers.c...
‘The Passive-Ownership Share Is Double What You Think It Is’ - papers.ssrn.com/sol3/papers.c...
‘The Arithmetic of Active Management’ - www.jstor.org/stable/4479386
‘Sharpening the Arithmetic of Active Management’ - papers.ssrn.com/sol3/papers.c...
‘Long Volatility, Asymmetric Alpha, Negatively Correlated Alpha, Convex Crisis Alpha’ Slides - www.macrovoices.com/guest-con...
‘The Greatest Story Ever Sold: The Impact of Passive Investment on Markets’ Slides - utahfpa.org/images/downloads/...
‘The Inelastic Markets Hypothesis’ - www.nber.org/papers/w28967 - แนวปฏิบัติและการใช้ชีวิต
Welp. This is wild. Honestly I'd just love to hear Ben sit and monologue about this topic by himself for 10 minutes afterwards, to help us interpret and digest this!
Same here!
Kudos to you Ben and PWL Capital for inviting Green despite... The Substack post you mentioned. 😬 It was not respectful but I appreciate that you don't care about that in the quest for knowledge!
Huge fan of the podcast here, I don't usually comment as I listen on Google Podcasts. Still this time I made the effort to do so, because I find it amazing how Ben proactively approached the guest even though he has bean so offensive against him, to say the least. Great testament to Ben's evidence based approach. Keep it up!
How has the guest been offensive? I missed that I suppose?
Mike wrote a post on his Substack about me. It was… something.
-Ben
@@rationalreminder I looked up "the post" (which in itself already is a revised post of the original) and his post that actually talks about this podcast and I have to say that the "tone" is somewhat unkind. Implying someone has "an agenda" without specifying what that agenda may be is just unsubstantiated and unnecessary. Am I save to assume you don't invest passively in index funds yourself because you:
- deliberately take on more risk for a potential higher return
- are actually more informed than the average retail investor and therefore are willing taking the risk?
Regarding mr Green's point about index funds, it really sounds quite scary to me. I remember the topic of "The index fund tipping point" on your other channel. Does it relate in any way to inelastic markets?
@@MailmanCornettoMike may have a point (I don’t claim to understand it) but he sure sounds paranoid.
Long time listener. I rarely comment but I just wanted to give you kudos for bringing in Mike Green. Civil conversations between people on different sides of an issue are rare these days. I have been looking forward to this one for a long time
I think I'll have to watch this again in order to understand it.
I happened across Vanguard's March 2019 research titled, "A drop in the bucket: Indexing's share of U.S. trading activity." In the paper they use several methods to calculate the share of trading volume that indexes may be responsible for. Vanguard concludes, "Even after accounting for indexed portfolio management activity outside of registered funds and removing trading volume due to HFT and shares of ETFs, we estimate that indexing represents less than 5% of overall U.S. trading volume."
Did Mr. Green provide us with his estimate of that number? It seems central to his model. Or does he claim the existence of 5% indexing volume is enough to drive valuations higher over long periods?
Also, how can we be sure that investors around the world are not simply attracted by two decades of US market outperformance? And how many investors believe the US is a safer capital market than the alternatives? He said it himself, people are narrative-driven.
Low cost of capital thanks to foreign investors bandwagoning on the US stocks might just keep driving the US market mostly forward for the next fifty years too. The fundamentals of tech might be out of whack but honestly that's pretty easily corrected. And there's not much to suggest the rest of the market is horribly overvalued.
I think we'll just see bear for a couple years and perhaps flight from tech stocks, then we go back to business as usual.
Thank you
It’s the wrong question. The index traders require others to arbitrage trade to keep the index aligned with individual stocks. According to JPMorgan, less than 10% of volume is now tied to fundamentals
@@michaeloconnor6683 I am 38 years old and I absolutely hope for a 40% market crash so that I can buy some more stocks with a major discount for my retirement. I don't know what makes you think that stocks wont recover after a major drawdown. Stocks have the intrinsic value of future earnings after all. Is there a reversed causality between the price notation and the earnings of that enterprise?
Listened to this one while traveling and it was a bit disturbing to say the least. It was an interesting discussion though and props to Ben and Cameron for engaging in a constructive way with someone who has been pretty harsh in their criticism. It's the kind of adult conversation I keep coming back for, even if its not something that is pleasant to digest. Look forward to understanding this more deeply in the coming weeks and months.
He makes it sound like everyone is buying until one day we need the money. But there are people retiring everyday and people entering the market everyday. That's how the market works, millions of participants transacting for different reasons.
Right? Very rarely does someone hit 65 and cash out entirely. They’re going to leave the bulk of the money in throughout retirement, not least to save on taxes. On a similar note, Runs on banks are far less likely today not because there’s now cash in them to cover all balances, but because everything is so digitized. If someone’s banking app shows a balance, they assume they have money. People rarely even use cash now and everything is bought on credit and paid for later. As long as your transfer from your account to your credit card keep working as it’s supposed to, nobody is going to withdraw their balance in cash. Not to mention every bank in existence now has daily and monthly withdrawal limits.
my mom is almost 60 and just started investing :)) but she does have government pension which is okish here so she is doing ok financially
AJ, this is not what I said. I said NET selling, which is the balance between buyers and sellers. That is shifting negative.
@@MichaelGreen-ProfPlum do we have data on Japan , which has a declining and aging population? That could be a litmus test on how withdrawals from retirement plans on a large demographic scale impact markets
Of course there are, But we do also have a demographic trend worldwide we can't really ignore.
Could the factors Green blames on Indexing (inflated valuations, momentum-over-value prioritization) instead be due to the rise of no-fee trading, online brokerages, mobile trading, higher rates of disposable income, and the general increase of the number of stockholders worldwide? Liquidity during a stock market crash is a short-term problem and over the long term is a self correcting problem because the lower the prices go, the fewer buyers are needed to fulfill the demand to sell to, as a dollar would buy many more shares at a 75% discount. Throw in the government's willingness to buy and provide liquidity during disasters, can't really see a long-term seizing up of the markets short of apocalyptic event. Corporations have insane amounts of cash sitting on the sidelines as well, imagine the buying spree they would go on. Berkshire Hathaway has been waiting for the last 30 years for Michael Green's liquidity problem to create the liquidity.
Ben, as a current or former skeptic (you are allowed to change your mind) I would like to see some push back against Mike's Narrative here. Even if you have come to agree with this stuff over time, play devil's advocate. Mike comes on every podcast and preaches to people who agree with him 100% and never challenge him. I think you guys missed a good opportunity here to get some back and fourth and really distinguish this interview from other interviews he has done in the past.
I understand that it's in the spirit of your podcast to let your guests speak but I think this one would be more valuable had you challenged Mike more. I've seen Mike do outright debates in the past so I don't think he would mind that type of discussion. Maybe you can bring him back in the future and revisit some of these ideas.
There’s nothing to debate. Mike makes an interesting case. We will carefully review the supporting evidence for his arguments in the future, but short of doing that I don’t disagree with what Mike explains in this conversation.
Edit to expand on this: my former skepticism about Mike was based on not having properly listened to his arguments.
-Ben
@@rationalreminderWell Ben, if he managed to convince you. Please do a 10 minute video summarizing this discussion on your personal channel.
If this scenario where the market goes down 85% due to the lack of liquidity of the index funds is possible, it would be good to know what percentage of the whole market is in index funds to assess how realistic this is.
Did this happen during March 2020 covid19?
What happened in China during 2015? Was index funds lack of liquidity responsible for this?
Investors shouldn't change their investment strategy so far, so do we push our elected officials for more regulations and oversight? What do we ask specifically?
This graphs were investing in index funds will eventually make active managers (in the traditional word sense) underperform, and will make FAANG companies outperform, has it been peer reviewed? Is the investing scientific community in agreement / consensus about this?
@@rationalreminder would love a recap video after you all review more indepth the claims. good podcast !
Damn, that was a great podcast!
Amazing Episode!
I was wondering when Mike would show up on your podcast. 😅
I recently stumbled upon other interviews with Mike through the YT algorithm, so by now I have probably watched most of the videos there are. But I still cannot wrap my head around it.
It really is thought provoking.
46:00 I think Mike here is fundamentally making the argument that efficiency gets lost by indexing, but one only needs to look at the Grossman-Stigglets model to understand that this isn’t true
Grossman-Stiglitz makes untrue assumptions about relative size of participants
I read discussion about this on the Boglehead's forum and research papers referenced there.
I'm not convinced that passive indexing makes the US stock market any "worse" or more volatile than it was across the period 1900-1999. I do believe crashes will continue to happen, regardless of indexing.
Good point. The “scary” 85% loss probability already happened in the US in the depression era and in Japan in the 90s. That is already built into the 4% rule, so it would have to be catastrophic and permanent to make a difference.
This is a problem I have been wondering about but also considering population growth (or lack thereof), is there a foreseeable time where we reach parity due to an aging population where their withdrawals equal the deposits of the working population? Should the government hasten this by asset testing the Social Security benefit which would force those with higher balances to live more from their savings rather than using the pension? That would potentially be a way for government to address the problem without direct intervention into the Blackrock/Vanguard ETF space.
"One of the interesting things about the presentation that I shared with you, is very few of these slides have actually changed in any meaningful way over the years. But one of the slides, I’ll just draw your attention to slide 14"
was there a link to this presentation? Is it the same one mentioned at the end where he provides recommendations for regulation and individual investors?
In Mr. Green's model, do cash, bonds, non-US equities, and real estate hedge some of the risk of a "warped" US public equity market?
Best episode this year! I think Mike’s concerns could be valid but it highlights a similar overarching issue that in my opinion investors believe the US market is ultra safe in the long run. Not much anyone can do about the risk as Ben noted. All assets would fall globally in a market collapse. My feeling is that one might to a small extent reduce the risk by investing internationally and only holding a set proportion of net worth in equities specifically.
Nobody uses more words to prove their ignorance than Mike Green. A truly generational talent.
Wow! What an episode!
It's quite funny to say that given that Ben and Cameron say that almost every time, but that's what I really felt like.
Huge fan. Thank you. Curious if tilting toward smaller index-style holding (something like VB maybe?) would be helpful, harmful, no-change. Thoughts?
I'm still confused as to what I can do, as an investor, to protect my money from the dangers Michael Green is referring to.
as if buying index funds is the best thing I can do right now? did I get that right? but what am I suppose to do when the bubble bursts?
It would be nice if a detailed explanation was given to better understand : "withdrawals are a function of asset levels while contributions are a function of incomes. Eventually, the withdrawals will swamp the contributions, and the system will start to fall. Unfortunately, with asset levels now higher relative to incomes than ever in history, we know we’re closer to the end than the beginning of this story. I wish we weren’t, but we are."
Why withdrawals > contribution, a world crisis?
Also, in modern society asset levels are higher than income, salary has not grown at the same rate as housing, etc. Will everyone at some point in the future sell their houses at the same time at the housing price will crash 85% too? Why?
I would think classic portfolio management - investors bank profits every so often, it’s why you don’t hear of a bunch of billionaires from bitcoin, because if you’ve made a a ten fold you tend to sell a large proportion out.
For those profits to make a difference to an investor they must be available to fund lifestyle in some way.
If the value of the market doubled over the next few months - wouldn’t uou consider taking profits? And when 1 million people consider taking profits - outflows will be greater than inflows
That’s how I read it - albeit very simply
this guy thinks you're the smug ones? lol.
I haven't watched the full episode yet, but I think the markets are broken, so give me that sweet, sweet confirmation bias.
At the end now, and man do I need a cigarette. There was even some blaming of the boomers, fantastic.
😂
Victor Hagani has responded to many of these concerns. If passive goes up and detaches value from price discovery, those who actually want to do price discovery will be arbitrage away those distortions. The other issues like retirement - selling down target date funds for example, just seem to be extensions of what was already going on.
That’s the standard EMH argument but it’s not the point Mike is making. That was formerly my pushback too, but it’s a counter to the wrong argument.
-Ben
@@rationalreminder Will give another careful listen through. I respect that he explicitly is not shilling you a magic disaster insurance product that only his firm supplies. He thinks people should carry on as normal but maybe we all get nuked at some future date. Still, very troubling.
@@rationalreminder I have no idea what he expects to happen in the real world. Insurance companies - 85% losses, pensions 85% losses, endowments, 85%. If he thinks this permanently wipes this much wealth then the real economy will implode with it. Baffling and would like to see some pushback after review of relevant evidence.
@@Mountainmaniavisionmaybe this is nihilistic to think but if there is another Great Depression, not having enough money will be one of a thousand problems. What if there’s no food to buy, regardless? What if your currency becomes more or less worthless? What if you can’t get clean drinking water because the city departments that oversee such things have all shut down because they can’t afford to pay their employees any more? Not being able to cash out my stocks really won’t be my biggest concern if the world does go to shit
@@rationalreminderI’m starting to understand. Actually, it is quite intuitive that buy and hold investors with low turnover would make markets more inelastic and push up valuations. Net inflow, all else being equal should increase market valuations. I don’t see how they could impact market concentration though, outside of pushing up large caps relative to small caps, given the prevalence of S&P 500 funds. Also, it doesn’t seem like index funds would be the only culprit. Actively managed funds with steady inflows and low turnover would create an issue as well, right? If so, it seems more of an indictment of using the stock market as a savings/retirement vehicle instead of a discounted claim on future earnings. I also generally agree with Mike’s perspective on human capital that we have historically underappreciated it and haven’t developed very sophisticated ways to value and track it.
absolutely fantastic and insightful discussion and insights! Thanks so much!
Wow - great show - amazing guest. Thank you.
I didn‘t quite get it. Following this logic - is factor investing other then momentum increasingly dead until the implosion? And will it protect in the said downturn?
I personally don't think so. But Mike's idea is that everything is dead except for levereged Beta. You have to keep in mind though that he is an options expert. Options will always be the answer if you ask an options expert so you might want to take this with a grain of salt.
Mr. Green mentioned that it's socially unacceptable for retirement mechanisms to fail, and the market is now warped to be a retirement mechanism. Is the same not true of real estate? And he mentioned fundamental value is human capital. How is retirement an unsustainable outcome when human capital has been multiplied by technology?
Is he simply suggesting that human capital is being over-leveraged to manufacture retirement outcomes? How do we know it's unsustainable? Population decline? Productivity decline? Life expectancy increases?
Well, as we have seen real estate isn't allowed to fail because the FED or the government steps in and save banks when things go badly.
@@Martin-qb2mwso wouldn’t they step in as well if everyone’s retirement savings go all to shit?
@@WillFast140 The global pension system is a much bigger problem than some regional bank going bust. Of course, you can print 2x US GDP and hand it out to everyone to cover their savings. The problem is that the currency becomes worthless once you do.
Can someone explain to me the VIX Trade he explained in the beginning? 11:00
Great but terrifying podcast this time!
First, I don't know if I'm just not smart enough to understand Mike's arguments, or whether he's just not doing a good job explaining them in simple terms. I think it's a bit of both.
Now for some ad hominem. This guy comes across as a bit of a know-it-all, and is very condescending. He takes a simple question and answers it as if he's offended it was even asked in the first place. It's like he has negative charisma. This is the guy you avoid at the cocktail party.
On the other side, his arguments are relevant to the experts and to regulators. He is mainly asking for stricter regulations to apply to individual funds as they did to investment banks themselves. He's basically saying "passive investments are a parasite that reduce the information/unit money in the market, which tends to increase its inertia both ways, ask them for hedging or cash reserves".
Haha the “negative charisma” I think comes from him thinking he is (and being) smarter than a lot of people. What is obvious to him he has to explain to others when he seems to think it should be obvious to everyone. His attitude reminds me of one of my younger brothers actually, who is kind of a dick but is highly intelligent. However, we do have to admit that his tone doesn’t negate his arguments here.
I'm a long time listener and recently started to listen on Spotify, but the episodes seem shorter every time. Am I missing something?
Would a 100% DFA/avantis global SCV allocation avoid this issue?
I missed the point made on DFA…
DFA and Avantis use price to book to signal whether securities should be bought or sold. When valuations rise, they sell. When valuations drop, they buy.
There is more nuance, but that was the gist. It's similar to reaping some kind of premium by selling puts and calls depending on fundamentals, which is why value correlated with volatility, since the flows are dependent on volatility
I'm not sure I understand what the ultimate disaster would be. As far as I understand, he's saying that as the market becomes more passive valuations will shoot up to crazy levels and at a certain point redemptions start, causing a huge crash. The thing is though, since people would be riding the bubble on the way up, after the crash people shouldn't be much worse off than a normal slow increase in stock values.
Mindblowing
59:38 Bullseye. So many good discussion points in this interview.
Perhaps I'm misunderstanding the problem, but wouldn't the solution (for the individual) to this be diversify away from the stock market? buy more real estate for example?
If this is true, why did the COVID-19 pandemic not trigger doomsday in the market? Or any other catastrophic event since widespread indexing began?
White collar folks with 401ks didn't lose their job and the vast majority did not change their contributions during Covid-19. In fact I think I've heard Mike say only around 1% of Vanguard's customers transacted during the covid crash in March of 2020. That crash was all active participants selling, passive kept doing it's thing.
I dont really understand a single thing he's saying but to buy index funds.
Go to 46:07 for a summary of his thesis in 10 seconds
instead of buying the VTI or S&P 500 index what if i buy the worst performing index fund like , Emerging market and long term treasury at this time , and continue to do this forever every quarter
I just hope this 85% crash happens in the next 1-3 years. Think of the buying opportunity!!
LMAO, his recommendation is to just continue buying index ETFs? What's the point of this podcast and all of his years of ranting against passive ETFs?
That's the irony of the situation. The optimal approach for every individual is to continue indexing. Meanwhile Mike is trying to rally the regulators so that it is not
Impossibility to produce more bitcoin is not a bug. It's a feature. It's actually close to being the whole point about bitcoin.
We do not want more human energy to be put into producing additional money. It's a waste. Worse, it's a fraud.
Money in itself does not bring value to the world.
Money is only an accounting ledger. How much value have you produced for the world?
When gold was the standard, and technology brought about additional supply, that was a good thing for gold-as-a-commodity, but a BAD thing for gold-as-money.
not really. What will end up happening is it will concentrate in the hands of a few as inequality deepens and there will be no recourse to that. I know it's the point of it, but it comes with a dystopia dark side.
If the total market goes down 85% there is nowhere you’re going to be able to hide. This guy is promoting active management and government regulation as a way to protect against catastrophic outcomes. Completely ludicrous. His slander at Vanguard did it go unnoticed
As diversity hires increase, profits will inexorably go down
I'm a long time listener and recently started to listen on Spotify, but the episodes seem shorter every time. Am I missing something?
The audio-only podcast is edited more heavily and sped up 10%.