1 00:00:10,800 --> 00:00:14,080 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast. 2 00:00:14,160 --> 00:00:18,680 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, I 3 00:00:18,720 --> 00:00:23,959 Speaker 1: tweeted something recently and Uh, it provoked a large response 4 00:00:24,040 --> 00:00:27,360 Speaker 1: on social media. It's weird how that happens, Right, you 5 00:00:27,480 --> 00:00:30,760 Speaker 1: tweeted something that provoked a response. I find it very 6 00:00:30,760 --> 00:00:34,000 Speaker 1: hard to believe. I know it's outrageous. Um, but I 7 00:00:34,040 --> 00:00:40,800 Speaker 1: was talking about. Have you heard of the fire movement? Uh? Yes, vaguely, 8 00:00:40,920 --> 00:00:43,519 Speaker 1: like I am familiar with it. It has to do 9 00:00:43,560 --> 00:00:49,120 Speaker 1: with people retiring early, right, Yeah, So it's fire as 10 00:00:49,159 --> 00:00:52,360 Speaker 1: an f I R E. And it stands for financial 11 00:00:52,400 --> 00:00:57,040 Speaker 1: independence retire early. And the basic idea is you can 12 00:00:57,120 --> 00:01:00,720 Speaker 1: save a lot of money, and if you invest it wisely, 13 00:01:01,200 --> 00:01:04,880 Speaker 1: you can retire at an early age, like in your thirties. 14 00:01:05,240 --> 00:01:08,440 Speaker 1: And supposedly it's it can work out for for even 15 00:01:08,480 --> 00:01:11,720 Speaker 1: normal people or people on normal salaries. We're not talking 16 00:01:11,720 --> 00:01:14,360 Speaker 1: about really wealthy people. And the thing that I always 17 00:01:14,400 --> 00:01:17,560 Speaker 1: find really interesting about it is when you go and 18 00:01:17,600 --> 00:01:21,640 Speaker 1: read about how people are actually investing that money so 19 00:01:21,720 --> 00:01:25,639 Speaker 1: that they can retire early, they're almost all talking about 20 00:01:25,680 --> 00:01:30,399 Speaker 1: doing it a themselves and be through passive investments like 21 00:01:30,520 --> 00:01:35,040 Speaker 1: e t s right, exactly right. So people think, okay, 22 00:01:35,400 --> 00:01:39,520 Speaker 1: they live frugally, they work for several years, they live frugally, 23 00:01:39,920 --> 00:01:43,000 Speaker 1: but then they sort of have this confidence that historical 24 00:01:43,280 --> 00:01:46,240 Speaker 1: returns that we've seen in stock and bond markets throughout 25 00:01:46,280 --> 00:01:48,640 Speaker 1: the world will just always be there for them in 26 00:01:48,680 --> 00:01:50,640 Speaker 1: the future, and so they just put a bunch of 27 00:01:50,640 --> 00:01:53,560 Speaker 1: money in passive e t F or you know, passive 28 00:01:53,680 --> 00:01:56,000 Speaker 1: ish e t f s, and then they count on 29 00:01:56,080 --> 00:01:58,280 Speaker 1: that existing for the rest of their lives. And then 30 00:01:58,440 --> 00:02:00,400 Speaker 1: they do something I don't know, they go read it 31 00:02:00,480 --> 00:02:04,080 Speaker 1: or tweet for the next from thirty five until that's right. 32 00:02:04,600 --> 00:02:06,760 Speaker 1: And the reason I find this, you know, it doesn't 33 00:02:06,760 --> 00:02:09,280 Speaker 1: sound bad to me, to be honest, I would be fine. 34 00:02:09,320 --> 00:02:11,480 Speaker 1: I would do that if I if I had confidence. 35 00:02:11,800 --> 00:02:15,160 Speaker 1: You can see the allure for sure. But the reason 36 00:02:15,240 --> 00:02:17,760 Speaker 1: I find it so interesting from a market perspective is 37 00:02:17,800 --> 00:02:20,760 Speaker 1: to me, it hits upon like a number of very 38 00:02:20,880 --> 00:02:24,320 Speaker 1: very important themes, But really it hits upon this question 39 00:02:24,440 --> 00:02:28,839 Speaker 1: of whether or not the fire movement can exist without 40 00:02:28,880 --> 00:02:33,360 Speaker 1: the bull market that we've seen for the last ten years. Right, Like, 41 00:02:33,400 --> 00:02:36,680 Speaker 1: it's very easy to say dump all your money in 42 00:02:36,880 --> 00:02:41,360 Speaker 1: something like um, you know a vanguard total stock market 43 00:02:41,360 --> 00:02:44,440 Speaker 1: e t F and just watch it sore when that's 44 00:02:44,520 --> 00:02:48,480 Speaker 1: the thing that's been happening for years and years and years. Well, 45 00:02:48,600 --> 00:02:51,120 Speaker 1: I'll say two things. So one is it certainly raises 46 00:02:51,120 --> 00:02:54,560 Speaker 1: the question about whether this subculture can continue to exist, 47 00:02:54,960 --> 00:02:57,720 Speaker 1: But it also raises another question about people who aren't 48 00:02:57,720 --> 00:03:01,000 Speaker 1: in that subculture but in a way of effect brought 49 00:03:01,040 --> 00:03:05,359 Speaker 1: into it. Because this mantra that we've gotten from uh 50 00:03:05,520 --> 00:03:09,280 Speaker 1: sort of the media and the fund management industry is okay, 51 00:03:09,480 --> 00:03:11,560 Speaker 1: most people aren't saying you should try to retire at 52 00:03:11,600 --> 00:03:15,400 Speaker 1: thirty five or forty, but this idea, never try at 53 00:03:15,320 --> 00:03:18,840 Speaker 1: a time the market, never pick individual stocks, just have 54 00:03:19,080 --> 00:03:22,360 Speaker 1: a broad, diversified basket of e t F that you 55 00:03:22,400 --> 00:03:25,080 Speaker 1: may be rebalanced every once in a while has become 56 00:03:25,200 --> 00:03:28,280 Speaker 1: so intense and extreme and everyone's being pushed to invest 57 00:03:28,360 --> 00:03:30,280 Speaker 1: like that. So even if you are one of the 58 00:03:30,280 --> 00:03:34,000 Speaker 1: fire people on Reddit, it still raises the question of 59 00:03:34,160 --> 00:03:36,440 Speaker 1: how much is everyone else who is not planning on 60 00:03:36,520 --> 00:03:40,760 Speaker 1: per se retiring early essentially blotted to a less extreme 61 00:03:40,880 --> 00:03:43,600 Speaker 1: version of the same story. Absolutely, and you'll see a 62 00:03:43,640 --> 00:03:46,280 Speaker 1: lot of the investment advice that the fire people talk 63 00:03:46,320 --> 00:03:49,320 Speaker 1: about is actually very very similar to advice given to 64 00:03:49,600 --> 00:03:51,600 Speaker 1: people generally when it comes to their for oh one 65 00:03:51,600 --> 00:03:54,760 Speaker 1: case and stuff like that. Passive is supposed to be cheaper, 66 00:03:54,800 --> 00:03:58,240 Speaker 1: it's supposed to be much better. But what if there's 67 00:03:58,240 --> 00:04:02,120 Speaker 1: a downside to pass of investing. We've spoken about, you know, 68 00:04:02,360 --> 00:04:06,240 Speaker 1: active versus passive on the podcast before, but we haven't 69 00:04:06,280 --> 00:04:09,200 Speaker 1: done that much on how passive investing might actually be 70 00:04:09,280 --> 00:04:13,840 Speaker 1: changing the way the market functions. No, absolutely, and it's 71 00:04:13,880 --> 00:04:17,480 Speaker 1: such an important question given as we've been talking about, 72 00:04:17,520 --> 00:04:20,640 Speaker 1: how many people have portfolios in which the only action 73 00:04:20,680 --> 00:04:23,760 Speaker 1: they do is just add to the same basket of 74 00:04:23,839 --> 00:04:27,680 Speaker 1: three or four ETFs every single month for their working lives. 75 00:04:27,880 --> 00:04:31,479 Speaker 1: It's been fantastic since the crisis with the incredible rally 76 00:04:31,520 --> 00:04:35,600 Speaker 1: in stocks and bonds simultaneously. But you know, as they say, 77 00:04:35,880 --> 00:04:39,400 Speaker 1: past performance no guarantee of future returns, this is true. 78 00:04:39,880 --> 00:04:41,839 Speaker 1: All right. Well, I'm happy to say that we have 79 00:04:41,920 --> 00:04:45,200 Speaker 1: the perfect person to talk about this today. Our guest 80 00:04:45,360 --> 00:04:49,000 Speaker 1: is Mike Green. He's the chief strategist and portfolio manager 81 00:04:49,160 --> 00:04:53,280 Speaker 1: over at Logica Capital Investors. Mike, thanks for being on, 82 00:04:53,760 --> 00:04:56,960 Speaker 1: Thank you for having me. So I guess my first 83 00:04:57,040 --> 00:05:01,440 Speaker 1: question is how did you get interested in this particular 84 00:05:01,600 --> 00:05:06,880 Speaker 1: area examining the impact of passive investing on the broader market. 85 00:05:06,920 --> 00:05:09,240 Speaker 1: Is it something that you're observing in your sort of 86 00:05:09,440 --> 00:05:11,520 Speaker 1: day job. Well, the way I think of my day 87 00:05:11,600 --> 00:05:14,920 Speaker 1: job is to really try to understand the market structure. 88 00:05:14,920 --> 00:05:17,360 Speaker 1: I'm not a trader in the traditional sense, wasn't trained 89 00:05:17,400 --> 00:05:20,280 Speaker 1: on a prop desk or anything else. And so you know, 90 00:05:20,320 --> 00:05:22,479 Speaker 1: I've always managed to make money by trying to figure 91 00:05:22,480 --> 00:05:24,560 Speaker 1: out actually what people are being forced to do. What 92 00:05:24,680 --> 00:05:26,719 Speaker 1: is the incentive structure that's causing people to do what 93 00:05:26,839 --> 00:05:29,720 Speaker 1: I think is fundamentally irrational. Rather than just saying, hey, 94 00:05:29,720 --> 00:05:33,200 Speaker 1: they're crazy and stupid and this will eventually stop, the 95 00:05:33,279 --> 00:05:37,719 Speaker 1: opportunity to dig in and understand actually the incentive structures 96 00:05:37,720 --> 00:05:40,719 Speaker 1: that have been created the restraint or the requirements for 97 00:05:40,760 --> 00:05:43,000 Speaker 1: people to engage in certain transactions, whether it's from a 98 00:05:43,000 --> 00:05:48,080 Speaker 1: regulatory framework, whether it's from a institutional framework basically built 99 00:05:48,120 --> 00:05:53,800 Speaker 1: into their prospectuves. Ultimately, that can create the opportunity to 100 00:05:53,839 --> 00:05:56,840 Speaker 1: identify trades that you think are irrational and have the 101 00:05:56,839 --> 00:05:59,160 Speaker 1: potential to break as that behavior is brought to its 102 00:05:59,160 --> 00:06:01,960 Speaker 1: logical extreme. So that's how I stumbled onto this stuff. 103 00:06:02,200 --> 00:06:06,120 Speaker 1: So what are in your view, the big structural trends 104 00:06:06,240 --> 00:06:10,080 Speaker 1: or the big structural impositions on individual investors or pension 105 00:06:10,080 --> 00:06:12,720 Speaker 1: funds or any other entity that has a lot of 106 00:06:12,760 --> 00:06:16,279 Speaker 1: money that are all causing people to sort of invest 107 00:06:16,320 --> 00:06:18,040 Speaker 1: in the same way. Right now, one of the big 108 00:06:18,160 --> 00:06:20,560 Speaker 1: the key ideas here. So there's a couple of key things. 109 00:06:20,640 --> 00:06:22,960 Speaker 1: The first is is that the growth of passive investing 110 00:06:22,960 --> 00:06:25,880 Speaker 1: has has been well documented, right, and the narrative behind 111 00:06:26,000 --> 00:06:30,040 Speaker 1: the out performance is fundamentally built around the work of 112 00:06:30,080 --> 00:06:32,559 Speaker 1: Bill Sharp, who is the father of of the Sharp 113 00:06:32,680 --> 00:06:37,599 Speaker 1: ratio um, the cap M formula, etcetera. Um his paper 114 00:06:37,640 --> 00:06:41,440 Speaker 1: in called the Arithmetic of Active Management is this analysis 115 00:06:41,480 --> 00:06:44,880 Speaker 1: that we've all heard that says fundamentally passive investors by 116 00:06:44,920 --> 00:06:47,680 Speaker 1: definition are only matching the active investors in terms of 117 00:06:47,680 --> 00:06:49,960 Speaker 1: their overall allocation, and so the difference is just going 118 00:06:50,040 --> 00:06:52,640 Speaker 1: to be fees, which means that the active managers underperformed. 119 00:06:54,080 --> 00:06:57,719 Speaker 1: Everyone accepts this today because we've seen the evidence of 120 00:06:57,720 --> 00:07:00,440 Speaker 1: the outperformance of passive but very few will take the 121 00:07:00,440 --> 00:07:02,600 Speaker 1: time to go back and actually look at the construction 122 00:07:02,640 --> 00:07:05,839 Speaker 1: of the problem, the assumptions that existed under that the 123 00:07:05,880 --> 00:07:10,840 Speaker 1: assumptions are just absurd, right, So in in the definition 124 00:07:10,920 --> 00:07:13,760 Speaker 1: of what a passive investor is, according to Bill Sharp, 125 00:07:14,360 --> 00:07:18,160 Speaker 1: is that passive investors hold all the securities in the market. 126 00:07:18,760 --> 00:07:21,800 Speaker 1: How do they get in? That's magic. How do they 127 00:07:21,840 --> 00:07:26,280 Speaker 1: get out? That's also magic. They never transact. Right the 128 00:07:26,320 --> 00:07:30,000 Speaker 1: minute they transact, they cease to be passive investors. And 129 00:07:30,040 --> 00:07:33,400 Speaker 1: as we know, passive vehicles are dealing with billions and 130 00:07:33,400 --> 00:07:36,320 Speaker 1: billions of dollars of inflows on a daily and weekly basis. 131 00:07:36,800 --> 00:07:39,640 Speaker 1: They're in the market transacting. They are the single largest 132 00:07:39,640 --> 00:07:42,280 Speaker 1: transactors by far, and there's a result. They have to 133 00:07:42,320 --> 00:07:45,200 Speaker 1: be influencing the market. They cannot be passive. So the 134 00:07:45,200 --> 00:07:49,600 Speaker 1: fundamental premise on which this whole idea is built is flawed. Right. 135 00:07:50,160 --> 00:07:53,160 Speaker 1: The second thing that has happened, though, is because passive 136 00:07:53,160 --> 00:07:56,440 Speaker 1: investing has grown so large and so powerful, the resources 137 00:07:56,480 --> 00:08:01,040 Speaker 1: to engage in lobbying efforts to institutionalize within the framework 138 00:08:01,080 --> 00:08:05,640 Speaker 1: has expanded dramatically. Most people have a cursory familiarity with 139 00:08:05,720 --> 00:08:07,880 Speaker 1: things like four oh one K plans and I RAS. 140 00:08:08,280 --> 00:08:11,160 Speaker 1: Vast majority of Americans have some exposure through their employer 141 00:08:11,200 --> 00:08:15,040 Speaker 1: to these plans. Those rules have changed over the years 142 00:08:15,040 --> 00:08:17,760 Speaker 1: to the lobbying efforts of passive players like Van Garden 143 00:08:17,800 --> 00:08:22,120 Speaker 1: Blackrock to inculcate passive strategies into these vehicles under the 144 00:08:22,120 --> 00:08:25,800 Speaker 1: premise that this is the best possible vehicle for the 145 00:08:25,880 --> 00:08:28,920 Speaker 1: vast majority of Americans to invest in. It's had the 146 00:08:28,920 --> 00:08:32,120 Speaker 1: effect of creating this crowding that has further accelerated the 147 00:08:32,120 --> 00:08:34,840 Speaker 1: performance of the benchmarks that these are ultimately tied to. 148 00:08:36,080 --> 00:08:39,880 Speaker 1: Oh man, sorry, there's so much just in that first 149 00:08:40,000 --> 00:08:43,640 Speaker 1: couple of minutes, um, that I find really really fascinating. 150 00:08:43,640 --> 00:08:46,480 Speaker 1: Oh why don't we go back to the first point, 151 00:08:46,679 --> 00:08:50,239 Speaker 1: which is this idea that when we're evaluating the performance 152 00:08:50,400 --> 00:08:54,560 Speaker 1: of passive versus active, we're not actually taking into account 153 00:08:54,600 --> 00:08:57,959 Speaker 1: the way that passive can influence the market. So how 154 00:08:58,000 --> 00:09:02,839 Speaker 1: are you seeing passive investing actually impact the market? Now? 155 00:09:03,880 --> 00:09:06,280 Speaker 1: We're seeing it in a couple of different ways, right, Um. 156 00:09:06,400 --> 00:09:09,720 Speaker 1: One is is that we're seeing a distinct performance advantage 157 00:09:09,760 --> 00:09:12,480 Speaker 1: that is being created for those securities that are in 158 00:09:12,480 --> 00:09:16,920 Speaker 1: indices that are being invested into by passive investors. This 159 00:09:17,000 --> 00:09:19,520 Speaker 1: is a fairly well studied phenomenon in terms of the 160 00:09:19,600 --> 00:09:22,440 Speaker 1: dynamic of what's called index inclusion. So we have one 161 00:09:22,480 --> 00:09:24,800 Speaker 1: off events in which we can look at securities that 162 00:09:24,800 --> 00:09:27,240 Speaker 1: have been put into an index or have been ejected 163 00:09:27,280 --> 00:09:30,439 Speaker 1: from a widely traded index, and we see that there 164 00:09:30,520 --> 00:09:34,280 Speaker 1: is a distinct and permanent shift in the valuation the 165 00:09:34,320 --> 00:09:37,360 Speaker 1: price levels associated with those securities. This is a well 166 00:09:37,440 --> 00:09:42,040 Speaker 1: documented academic literature. But the literature has not studied is 167 00:09:42,040 --> 00:09:45,760 Speaker 1: the dynamic of the continued inclusion the continued flow of capital. 168 00:09:45,760 --> 00:09:48,440 Speaker 1: And that becomes a harder problem because suddenly they're on 169 00:09:48,559 --> 00:09:51,000 Speaker 1: par with all of the other constituents in the index, 170 00:09:51,480 --> 00:09:54,440 Speaker 1: and they're all experiencing it. Right. So I gave a 171 00:09:54,440 --> 00:09:56,439 Speaker 1: speech several years ago in which I compared it to 172 00:09:56,520 --> 00:09:59,920 Speaker 1: the David Foster Wallace, this is water right. The media 173 00:10:00,080 --> 00:10:03,600 Speaker 1: him in which we're actually participating is being skewed by 174 00:10:03,640 --> 00:10:07,320 Speaker 1: the behavior of these passive flows. The best analogy to 175 00:10:07,320 --> 00:10:09,559 Speaker 1: think about this, most people have had exposure to the 176 00:10:09,600 --> 00:10:13,280 Speaker 1: carnival game where you're shooting water at horses that are 177 00:10:13,360 --> 00:10:17,280 Speaker 1: racing across. Right. The best strategy to play that game 178 00:10:17,320 --> 00:10:19,520 Speaker 1: is to wait until the table is relatively full so 179 00:10:19,559 --> 00:10:21,400 Speaker 1: it gets a large prize, and then you and a 180 00:10:21,440 --> 00:10:24,800 Speaker 1: friend simultaneously go to the table and you both shoot 181 00:10:24,800 --> 00:10:27,160 Speaker 1: at the same horse, abandoning one of your horses, but 182 00:10:27,200 --> 00:10:31,360 Speaker 1: the objective is to win, right, and by simultaneously exerting 183 00:10:31,559 --> 00:10:35,800 Speaker 1: pressure on the water sensor, you're giving the perception that 184 00:10:35,880 --> 00:10:39,640 Speaker 1: you are more accurate, causing that horse to outperform. All right, 185 00:10:40,160 --> 00:10:42,160 Speaker 1: That's what we're seeing with the benchmarks, as more and 186 00:10:42,200 --> 00:10:44,600 Speaker 1: more people are shooting water at the stocks that are 187 00:10:44,640 --> 00:10:48,880 Speaker 1: explicitly in these benchmarks, and in particular the larger stocks. 188 00:10:49,080 --> 00:10:52,000 Speaker 1: Right because of the momentum bias associated with this and 189 00:10:52,320 --> 00:10:54,680 Speaker 1: some of the techniques under which many industries are constructive 190 00:10:54,679 --> 00:10:57,240 Speaker 1: it's called sampling techniques, where they're trying to with a 191 00:10:57,320 --> 00:11:00,760 Speaker 1: minimum number of transactions, replicate the behavior of the index. 192 00:11:01,400 --> 00:11:04,360 Speaker 1: These securities are in turn those horses that are receiving 193 00:11:04,360 --> 00:11:08,800 Speaker 1: additional uh participants or water flow at the at them, 194 00:11:08,880 --> 00:11:12,520 Speaker 1: leading to the perception that their performance is better because 195 00:11:12,559 --> 00:11:15,440 Speaker 1: those are the benchmarks. That then leads you to conclude 196 00:11:15,440 --> 00:11:18,319 Speaker 1: that all of the active managers are actually underperforming, when 197 00:11:18,320 --> 00:11:22,439 Speaker 1: the problem is just how we're measuring it. So there's 198 00:11:22,480 --> 00:11:25,079 Speaker 1: this uh yeah, I guess some people will call it 199 00:11:25,080 --> 00:11:27,720 Speaker 1: a virtuous cycle. Some people might call it a vicious cycle. 200 00:11:28,240 --> 00:11:31,320 Speaker 1: But what you're describing essentially is, Okay, we look at 201 00:11:31,320 --> 00:11:35,680 Speaker 1: all these fund managers, maybe they're underperforming the SMP five 202 00:11:35,760 --> 00:11:40,960 Speaker 1: hundred over some period of time, but it's essentially because 203 00:11:41,720 --> 00:11:45,199 Speaker 1: all the money is going into the SPI as a whole, 204 00:11:45,559 --> 00:11:48,959 Speaker 1: and then that accelerates because the fund managers appear to 205 00:11:48,960 --> 00:11:53,120 Speaker 1: be unperforming. That appears to vindicate the idea that oh, yeah, 206 00:11:53,160 --> 00:11:57,120 Speaker 1: of course, just go passive active doesn't work, and the 207 00:11:57,200 --> 00:12:02,640 Speaker 1: problem or the disparity grows larger. So if this is true, 208 00:12:02,960 --> 00:12:07,559 Speaker 1: it means that something like quite big and fundamental has 209 00:12:07,600 --> 00:12:10,360 Speaker 1: actually happened or changed in the market, which is that 210 00:12:11,240 --> 00:12:14,880 Speaker 1: there used to be a point where things would get 211 00:12:14,920 --> 00:12:19,760 Speaker 1: too expensive, and that's when investors would stop buying them 212 00:12:19,800 --> 00:12:23,319 Speaker 1: and eventually the price would sort of self regulate itself 213 00:12:23,360 --> 00:12:26,760 Speaker 1: and drop back a little bit. But now what you're 214 00:12:26,760 --> 00:12:29,360 Speaker 1: saying is basically, because we have so much money hitting 215 00:12:29,400 --> 00:12:32,040 Speaker 1: the same target over and over and we basically have 216 00:12:32,160 --> 00:12:37,120 Speaker 1: flows chasing flows, that markets are no longer self limiting, 217 00:12:37,240 --> 00:12:40,679 Speaker 1: so to speak. Unfortunately, I think that's correct. I mean, 218 00:12:40,679 --> 00:12:43,440 Speaker 1: there will ultimately be limits, but they're far beyond anything 219 00:12:43,480 --> 00:12:46,640 Speaker 1: that we have currently experienced. So any reference to historical 220 00:12:47,120 --> 00:12:51,280 Speaker 1: dynamics becomes an inherently flawed because we did not have 221 00:12:51,360 --> 00:12:54,800 Speaker 1: these participants in the past. So it's a good thesis 222 00:12:54,880 --> 00:12:58,480 Speaker 1: or it's a provocative thesis. And obviously you can point 223 00:12:58,559 --> 00:13:01,800 Speaker 1: to the data that shows lots of fund managers under 224 00:13:01,800 --> 00:13:05,559 Speaker 1: performing the benchmarks that have been set by them, and 225 00:13:05,720 --> 00:13:09,000 Speaker 1: maybe that's uh, maybe those benchmarks are arbitrary. But how 226 00:13:09,000 --> 00:13:12,839 Speaker 1: do we know that's true? What are some other indicators, like, 227 00:13:12,880 --> 00:13:15,160 Speaker 1: how do we know it's not just fees that are 228 00:13:15,160 --> 00:13:17,199 Speaker 1: causing them to underperform, or how do we know it's 229 00:13:17,280 --> 00:13:19,800 Speaker 1: not just that they're bad at their jobs and they're 230 00:13:19,800 --> 00:13:22,559 Speaker 1: bad at picking stocks that are causing them to underperform. 231 00:13:22,920 --> 00:13:27,080 Speaker 1: What other evidence is there that people that they're actually 232 00:13:27,120 --> 00:13:29,760 Speaker 1: still I guess doing a good job in spite of 233 00:13:29,760 --> 00:13:32,600 Speaker 1: their underperformance. So the easiest way to actually tease something 234 00:13:32,640 --> 00:13:34,440 Speaker 1: like this out is to look at the performance of 235 00:13:34,960 --> 00:13:37,839 Speaker 1: benchmarks that UM are designed to model many of the 236 00:13:37,880 --> 00:13:41,400 Speaker 1: strategies of active managers the generation of alpha and have 237 00:13:41,559 --> 00:13:44,880 Speaker 1: historically worked quite well and doing so UM but charge 238 00:13:44,920 --> 00:13:47,000 Speaker 1: no fees. So a simple example of that would be 239 00:13:47,000 --> 00:13:49,080 Speaker 1: the by right index from the cbo E, which is 240 00:13:49,520 --> 00:13:52,080 Speaker 1: you own the S ANDP, so you are actually tied 241 00:13:52,120 --> 00:13:54,960 Speaker 1: explicitly to the benchmark and you sell an out of 242 00:13:54,960 --> 00:13:57,840 Speaker 1: the money option on a continuous basis, capturing the premium 243 00:13:57,880 --> 00:14:03,240 Speaker 1: associated with that option. Right, that has always historically delivered 244 00:14:03,320 --> 00:14:06,240 Speaker 1: quote unquote alpha. Right. What you're actually doing is you're 245 00:14:06,240 --> 00:14:08,720 Speaker 1: selling some of your top side exposure. You have full 246 00:14:08,840 --> 00:14:12,640 Speaker 1: down side exposure in exchange for that sale of the 247 00:14:12,679 --> 00:14:15,960 Speaker 1: top side, you are actually receiving a premium. Right. That 248 00:14:16,040 --> 00:14:19,920 Speaker 1: premium delivers return regardless of the underlying return of the 249 00:14:20,040 --> 00:14:22,600 Speaker 1: s and P five hundred the underlying and so that 250 00:14:22,640 --> 00:14:26,480 Speaker 1: shows up as a alpha producing strategy. Right. We have 251 00:14:26,600 --> 00:14:29,840 Speaker 1: seen this alpha decline in a nearly linear form over 252 00:14:29,840 --> 00:14:32,840 Speaker 1: the past twenty five years. Right, it's not tied to 253 00:14:32,840 --> 00:14:35,560 Speaker 1: interest rates, it's not tied to the implied versus realized 254 00:14:35,600 --> 00:14:37,840 Speaker 1: which is the traditional component that people have focused on. 255 00:14:38,360 --> 00:14:43,000 Speaker 1: We've seen these strategies that should offer a consistent return 256 00:14:43,680 --> 00:14:47,120 Speaker 1: deliver now negative alpha, which is highlighting part of the problem. 257 00:14:47,600 --> 00:14:51,720 Speaker 1: We're using tools that presume the efficient market hypothesis is 258 00:14:51,720 --> 00:14:57,600 Speaker 1: true right to measure performance. So the calculation of alpha 259 00:14:57,800 --> 00:15:00,120 Speaker 1: is literally just the intercept in a y equals m 260 00:15:00,160 --> 00:15:03,040 Speaker 1: x plus b equation, a linear equation. If you try 261 00:15:03,040 --> 00:15:04,640 Speaker 1: to solve a linear equation, if you try to use 262 00:15:04,640 --> 00:15:06,960 Speaker 1: a linear equation to solve what has become a curved 263 00:15:07,080 --> 00:15:12,560 Speaker 1: or distorted surface. Right mechanically, that alpha shifts increasingly negative 264 00:15:12,600 --> 00:15:15,040 Speaker 1: in the same fashion that we're seeing this happen across 265 00:15:15,120 --> 00:15:17,880 Speaker 1: these types of strategies. So one of the guests that 266 00:15:17,920 --> 00:15:20,960 Speaker 1: we had on the podcast, I think it was maybe 267 00:15:20,960 --> 00:15:23,480 Speaker 1: like three or four years ago now, we talked to 268 00:15:23,640 --> 00:15:27,560 Speaker 1: Michael Morison, and he has a sort of separate model 269 00:15:27,760 --> 00:15:29,760 Speaker 1: or theory about how this is all going on, and 270 00:15:29,800 --> 00:15:33,720 Speaker 1: he basically kind of likened it to the online poker 271 00:15:33,760 --> 00:15:36,720 Speaker 1: boom in the early two thousands, in which a bunch 272 00:15:36,760 --> 00:15:39,200 Speaker 1: of bad players started playing poker and that was a 273 00:15:39,200 --> 00:15:43,440 Speaker 1: really good time for professional pokers. A shark poker players 274 00:15:43,520 --> 00:15:45,720 Speaker 1: the sharks could eat the fish, and then when the 275 00:15:45,760 --> 00:15:48,520 Speaker 1: fish realized that they suck at it, they stopped playing. 276 00:15:48,840 --> 00:15:51,000 Speaker 1: And then it's just sharks versus sharks, and the only 277 00:15:51,040 --> 00:15:53,920 Speaker 1: thing is they are all good, but there the house 278 00:15:53,960 --> 00:15:56,640 Speaker 1: gets a rank and they all start to underperform, and 279 00:15:56,680 --> 00:15:59,600 Speaker 1: that the only real phenomenon with the passive emergence is 280 00:15:59,640 --> 00:16:02,120 Speaker 1: just that people who never should have been trying to 281 00:16:02,160 --> 00:16:04,760 Speaker 1: invest in the stocks in the first place aren't anymore, 282 00:16:05,120 --> 00:16:08,359 Speaker 1: and that the alpha that the fun the professionals generated 283 00:16:08,640 --> 00:16:10,480 Speaker 1: was just a result of there being a lot of 284 00:16:10,480 --> 00:16:13,720 Speaker 1: bad players in the market, and now they're gone because 285 00:16:13,720 --> 00:16:17,040 Speaker 1: they all they're all buying spy or whatever, and it's 286 00:16:17,040 --> 00:16:19,320 Speaker 1: not their fault, but they just there's no bad there 287 00:16:19,360 --> 00:16:23,040 Speaker 1: are fewer and fewer bad players. That sounds like a 288 00:16:23,160 --> 00:16:26,880 Speaker 1: plausible way, a plausible story that is a little more 289 00:16:26,920 --> 00:16:30,280 Speaker 1: benign than your vision. Yeah. So I know Michael personally, 290 00:16:30,320 --> 00:16:33,400 Speaker 1: I kind of as a friend. Um, he's wrong. Um, 291 00:16:33,480 --> 00:16:35,920 Speaker 1: in really simple terms, he's framing the problem incorrectly. So 292 00:16:35,960 --> 00:16:37,560 Speaker 1: we all like to think of Wall Street is gambling, 293 00:16:37,560 --> 00:16:39,400 Speaker 1: and so it's easy to draw an analogy to something 294 00:16:39,400 --> 00:16:42,680 Speaker 1: like poker. The difference is poker is what's called innergotic system. 295 00:16:42,840 --> 00:16:45,320 Speaker 1: The distribution of cards, the frequency in which you can 296 00:16:45,320 --> 00:16:48,480 Speaker 1: pull the cards out at this particular suits. Uh. The 297 00:16:48,520 --> 00:16:50,560 Speaker 1: hands that can be constructed are the finite in their 298 00:16:50,600 --> 00:16:53,800 Speaker 1: underlying construction. Statistically, that's not going to change over any 299 00:16:53,800 --> 00:16:56,720 Speaker 1: period of time. Any sample that I draw, as long 300 00:16:56,760 --> 00:16:58,240 Speaker 1: as I'm drawing from a deck, is going to have 301 00:16:58,280 --> 00:17:01,240 Speaker 1: the same distribution and probability. All right. That's what in 302 00:17:01,320 --> 00:17:04,399 Speaker 1: our godic system is. It's what the tools that we 303 00:17:04,480 --> 00:17:08,000 Speaker 1: use when you talk about Monte Carlo type simulations. They 304 00:17:08,000 --> 00:17:10,640 Speaker 1: presume the exact opposite of what you said. Past performance 305 00:17:10,680 --> 00:17:12,760 Speaker 1: is not a guarantee of future success, because we know 306 00:17:13,359 --> 00:17:16,639 Speaker 1: that a blackjack table, or a poker table, or a 307 00:17:17,320 --> 00:17:19,840 Speaker 1: um game of craps roulette is going to have the 308 00:17:19,840 --> 00:17:23,760 Speaker 1: exact same probability distribution at any point in time. Alright, 309 00:17:23,800 --> 00:17:26,280 Speaker 1: That's not how markets work. Markets have an infinite and 310 00:17:26,800 --> 00:17:29,720 Speaker 1: infinite number of combinations, and they also have a singular 311 00:17:29,720 --> 00:17:31,399 Speaker 1: direction in terms of the era of time. We have 312 00:17:31,520 --> 00:17:34,720 Speaker 1: no certainty as to what the forward distribution is. The 313 00:17:34,800 --> 00:17:55,680 Speaker 1: Michael's premise is fundamentally wrong. I want to ask you 314 00:17:55,760 --> 00:18:00,440 Speaker 1: about another potential impact that you're if you're correct your 315 00:18:00,520 --> 00:18:03,679 Speaker 1: thesis around the impact of passive investing on the market, 316 00:18:03,720 --> 00:18:07,000 Speaker 1: another potential impact that could be playing out, and that's 317 00:18:07,119 --> 00:18:11,439 Speaker 1: in the arena of volatility. So presumably if you have 318 00:18:11,560 --> 00:18:17,440 Speaker 1: close chasing clothes, then the market becomes much quieter, I suppose. 319 00:18:18,080 --> 00:18:20,000 Speaker 1: I don't think that's true, actually, so I just want 320 00:18:20,000 --> 00:18:23,240 Speaker 1: to be very clear on that, right, certain types of 321 00:18:23,640 --> 00:18:27,840 Speaker 1: behaviors of volatility become very different. Right, So when you 322 00:18:27,880 --> 00:18:30,040 Speaker 1: have a market that is I would describe it as 323 00:18:30,040 --> 00:18:34,720 Speaker 1: more accurately continually providing liquidity because you've removed the restrictions 324 00:18:34,800 --> 00:18:37,480 Speaker 1: you you mentioned earlier. The idea that valuation or a 325 00:18:37,560 --> 00:18:41,280 Speaker 1: focus on valuation creates self regulatory or self limiting behavior. 326 00:18:41,320 --> 00:18:43,919 Speaker 1: People eventually will stop buying and hold cash as an 327 00:18:43,920 --> 00:18:47,440 Speaker 1: alternative to holding securities because they find them unattractively valued 328 00:18:48,040 --> 00:18:52,200 Speaker 1: and guaranteeing or virtually guaranteeing a negative return in forward 329 00:18:52,359 --> 00:18:57,120 Speaker 1: expected space. Right, when you remove that restriction and instead 330 00:18:57,200 --> 00:19:00,560 Speaker 1: you place the investments with the world's simplest algorithm, right, 331 00:19:00,600 --> 00:19:04,040 Speaker 1: which passive is right. Passive is literally an algorithm that says, 332 00:19:04,080 --> 00:19:06,880 Speaker 1: if you give me cash, then buy, if you ask 333 00:19:06,960 --> 00:19:11,080 Speaker 1: for cash, then sell. Right. You remove those limits right 334 00:19:11,320 --> 00:19:15,359 Speaker 1: and simultaneously, as long as the money coming in is positive, right, 335 00:19:15,400 --> 00:19:18,840 Speaker 1: the flows are positive, you're providing liquidity to the market, 336 00:19:18,920 --> 00:19:21,679 Speaker 1: which dampens volatility to a certain extent. Now, there's a 337 00:19:21,720 --> 00:19:25,080 Speaker 1: host of extenuating factors that have been created through what 338 00:19:25,119 --> 00:19:27,880 Speaker 1: are called yield enhancement strategies, basically strategies that are built 339 00:19:27,880 --> 00:19:32,120 Speaker 1: around selling volatility that further influenced this dynamic. What we're 340 00:19:32,119 --> 00:19:36,439 Speaker 1: actually seeing is daily volatility in terms of the point 341 00:19:36,520 --> 00:19:40,399 Speaker 1: change is significantly less than weakly volatility, which is significantly 342 00:19:40,480 --> 00:19:44,840 Speaker 1: less than monthly volatility, which is significantly less than annualized volatility. 343 00:19:44,960 --> 00:19:46,760 Speaker 1: And that's the sort of behavior that you would expect 344 00:19:46,760 --> 00:19:49,360 Speaker 1: to see if you're seeing this dampening on a localized basis, 345 00:19:49,760 --> 00:19:53,760 Speaker 1: but the ability to inflate valuations over time. So I 346 00:19:53,800 --> 00:19:56,159 Speaker 1: want to get to soon how this could all go 347 00:19:56,240 --> 00:19:58,920 Speaker 1: bad and belly up and all the grim stuff that 348 00:19:58,960 --> 00:20:02,200 Speaker 1: I'm I'm sure people are waiting for. But before we 349 00:20:02,320 --> 00:20:04,200 Speaker 1: do that, I want to talk a little bit about 350 00:20:04,280 --> 00:20:06,400 Speaker 1: what you identified up front is the sort of second 351 00:20:07,160 --> 00:20:10,240 Speaker 1: key dynamic, which are these sort of other factors just 352 00:20:10,280 --> 00:20:14,640 Speaker 1: sort of driving this trend overall, And you mentioned, uh, 353 00:20:14,840 --> 00:20:18,760 Speaker 1: lobbying efforts and regulation. It also feels like, I don't 354 00:20:18,760 --> 00:20:20,959 Speaker 1: want to say propaganda, but there's also been just a 355 00:20:21,000 --> 00:20:23,880 Speaker 1: lot of media coverage about how nobody should ever time 356 00:20:23,960 --> 00:20:27,480 Speaker 1: the market, nobody should ever pick stocks, nobody should ever 357 00:20:27,880 --> 00:20:30,119 Speaker 1: just just keep investing, writing it out kind of the 358 00:20:30,640 --> 00:20:35,200 Speaker 1: fire belief. Talk a little bit more about how this emerge, 359 00:20:35,280 --> 00:20:38,720 Speaker 1: This sort of consensus around just if you have cash, 360 00:20:38,760 --> 00:20:42,160 Speaker 1: put it in stocks, if you need cash, cell stocks, Well, 361 00:20:42,320 --> 00:20:45,160 Speaker 1: I mean, we've heard this repeatedly before, and it's part 362 00:20:45,160 --> 00:20:47,320 Speaker 1: of what I think gives rise to a little bit 363 00:20:47,320 --> 00:20:50,199 Speaker 1: of sanctimony from the active manager space of this is 364 00:20:50,200 --> 00:20:53,159 Speaker 1: all craziness, this is a cycle, it will end. I 365 00:20:53,160 --> 00:20:56,080 Speaker 1: think it's a deep under appreciation for how we've structurally 366 00:20:56,160 --> 00:20:58,359 Speaker 1: changed the system in terms of those dynamics, and the 367 00:20:58,400 --> 00:21:01,640 Speaker 1: regulatory framework is a great one. You know. We tend 368 00:21:01,720 --> 00:21:04,240 Speaker 1: to take for granted the underlying structure of a market, 369 00:21:04,280 --> 00:21:07,280 Speaker 1: the underlying dynamic, but vehicles like four oh one case 370 00:21:07,320 --> 00:21:11,800 Speaker 1: and iras, which represent the vast majority of individual American 371 00:21:11,880 --> 00:21:14,520 Speaker 1: savings and actually are can be thought of colloquially as 372 00:21:14,680 --> 00:21:17,600 Speaker 1: the world's largest sovereign wealth fund. Roughly sixteen trillion dollars 373 00:21:17,600 --> 00:21:20,800 Speaker 1: in assets across the American public in four oh one 374 00:21:20,840 --> 00:21:23,920 Speaker 1: case and I ras, people tend to think of stock 375 00:21:23,960 --> 00:21:27,760 Speaker 1: ownership is heavily concentrated amongst the extremely wealthy. The reality 376 00:21:28,320 --> 00:21:31,200 Speaker 1: is that four one case and iras are actually mechanisms 377 00:21:31,240 --> 00:21:33,679 Speaker 1: by which the vast majority of Americans are capable of 378 00:21:33,720 --> 00:21:37,879 Speaker 1: saving relatively small sums. The median investor, once they hit retirement, 379 00:21:37,920 --> 00:21:39,760 Speaker 1: has somewhere in the neighborhood of two or fifty thousand 380 00:21:39,760 --> 00:21:41,399 Speaker 1: dollars in their four oh one K and those funds 381 00:21:41,400 --> 00:21:44,199 Speaker 1: need to be spent right so to fund retirement. So 382 00:21:44,560 --> 00:21:47,320 Speaker 1: this is not a story of concentration of wealth. What 383 00:21:47,440 --> 00:21:50,680 Speaker 1: it is the story is the mechanisms that are available 384 00:21:50,720 --> 00:21:52,560 Speaker 1: for people to invest in their four oh one case 385 00:21:53,000 --> 00:21:57,880 Speaker 1: have increasingly been directed to passive assets. There's a passing 386 00:21:57,920 --> 00:22:01,000 Speaker 1: familiarity with something that's called the Department of Labor fiduciary 387 00:22:01,080 --> 00:22:03,680 Speaker 1: role right, which came into being in April of two 388 00:22:03,680 --> 00:22:07,280 Speaker 1: thousand sixteen. This actually changed the structure of for a 389 00:22:07,400 --> 00:22:10,800 Speaker 1: one case quite significantly. Any corporation that offered a four 390 00:22:10,840 --> 00:22:14,960 Speaker 1: oh one K had to offer passive strategies, had to 391 00:22:15,119 --> 00:22:19,520 Speaker 1: offer low cost passive index alternatives to their employees, or 392 00:22:19,600 --> 00:22:23,359 Speaker 1: they became liable to their employees for the excess fees 393 00:22:23,680 --> 00:22:25,399 Speaker 1: that they were charged they were being charged to them 394 00:22:25,440 --> 00:22:29,320 Speaker 1: and therefore oh one K and even more crazily potentially 395 00:22:29,359 --> 00:22:32,159 Speaker 1: becoming liable for the under performance of the investments that 396 00:22:32,200 --> 00:22:34,760 Speaker 1: they were offering right now. So corporations aren't in the 397 00:22:34,800 --> 00:22:37,800 Speaker 1: business of guaranteeing a return relative to the SMP five 398 00:22:38,400 --> 00:22:41,600 Speaker 1: or the Vanguard Total Market Index. They are in the 399 00:22:41,640 --> 00:22:44,720 Speaker 1: business of trying to quickly and easily to spend benefits 400 00:22:44,720 --> 00:22:47,439 Speaker 1: to their employees to keep them happy, right, And so 401 00:22:47,520 --> 00:22:51,920 Speaker 1: this created a very accelerated shift into passive vehicles that 402 00:22:52,040 --> 00:22:55,840 Speaker 1: began in two thousand and sixteen became formalized in early seventeen. 403 00:22:55,920 --> 00:22:58,679 Speaker 1: And if we had not stopped the Phase two implementation 404 00:22:58,720 --> 00:23:01,560 Speaker 1: of the d O L fiduciary role in t eighteen, 405 00:23:01,720 --> 00:23:04,960 Speaker 1: this would have actually gotten far crazier. The second thing 406 00:23:04,960 --> 00:23:07,920 Speaker 1: that's changed is the mechanism that people invest. All right, 407 00:23:07,960 --> 00:23:10,240 Speaker 1: So four oh one case, again, we're a product of 408 00:23:10,240 --> 00:23:13,639 Speaker 1: the nineteen seventies. They're created in nineteen seventy eight started 409 00:23:13,640 --> 00:23:15,359 Speaker 1: the bull market. In nineteen eight one, there was only 410 00:23:15,359 --> 00:23:18,000 Speaker 1: about seventy five hundred billion dollars invested in four oh 411 00:23:18,000 --> 00:23:21,240 Speaker 1: one case. Today that numbers around seven trillion UM. In 412 00:23:21,320 --> 00:23:24,480 Speaker 1: two thousand three, we introduced products called target date funds. 413 00:23:24,880 --> 00:23:27,159 Speaker 1: I believe it was somewhere around two thousand five that 414 00:23:27,240 --> 00:23:29,680 Speaker 1: we began to change what's called the quality the qualified 415 00:23:29,680 --> 00:23:32,239 Speaker 1: default investment alternative for people who go into four oh 416 00:23:32,240 --> 00:23:35,040 Speaker 1: one case. One of the traditional problems that people had 417 00:23:35,080 --> 00:23:37,440 Speaker 1: in going into four oh one case is that their 418 00:23:37,440 --> 00:23:40,760 Speaker 1: employees felt uncomfortable making an allocation choice, and so they 419 00:23:40,800 --> 00:23:43,920 Speaker 1: would default to the cash that was being put in 420 00:23:43,960 --> 00:23:46,639 Speaker 1: there and there was no actual investment of these proceeds. 421 00:23:47,280 --> 00:23:50,520 Speaker 1: In two thousand five, that changed with the designation of 422 00:23:50,560 --> 00:23:53,679 Speaker 1: a q d I A that was not cash. Effectively, 423 00:23:53,720 --> 00:23:56,520 Speaker 1: the HR Department decided on any base allocation, so if 424 00:23:56,520 --> 00:23:58,560 Speaker 1: you went in, you didn't change anything. Typically you would 425 00:23:58,560 --> 00:24:00,960 Speaker 1: go into something like an SMP five underd or a 426 00:24:01,000 --> 00:24:04,240 Speaker 1: total market index, or potentially into an actively managed product. 427 00:24:04,680 --> 00:24:08,520 Speaker 1: There's active lobbying for designation is appropriate for q d A, 428 00:24:08,640 --> 00:24:11,320 Speaker 1: and the recent passage of the Secure Act further enforces this. 429 00:24:12,200 --> 00:24:15,399 Speaker 1: Starting around two thousand twelve, a default a qdi A 430 00:24:15,440 --> 00:24:18,199 Speaker 1: default became a target date fund right, which means that 431 00:24:18,240 --> 00:24:22,000 Speaker 1: your money is being put into a set proportion of 432 00:24:22,680 --> 00:24:25,960 Speaker 1: equities and bonds based on your age um. That is, 433 00:24:26,359 --> 00:24:29,679 Speaker 1: in turn investing almost exclusively through passive vehicles. There are 434 00:24:29,680 --> 00:24:32,280 Speaker 1: a few exceptions to that, but the vast majority of 435 00:24:32,280 --> 00:24:35,879 Speaker 1: of target date funds are investing through passive vehicles and 436 00:24:35,920 --> 00:24:39,639 Speaker 1: so directing incremental flows into the market into those assets 437 00:24:40,320 --> 00:24:43,000 Speaker 1: um and this has now become the dominant investment vehicle 438 00:24:43,359 --> 00:24:46,720 Speaker 1: in the United States for money flowing into four own 439 00:24:46,800 --> 00:24:50,119 Speaker 1: k the the number is close to Incremental dollars are 440 00:24:50,119 --> 00:24:53,119 Speaker 1: now going into target date funds. I know Joe wants 441 00:24:53,160 --> 00:24:56,399 Speaker 1: to get to the bad stuff happening, but just before 442 00:24:56,400 --> 00:24:59,399 Speaker 1: we do. I mean, you mentioned active managers there, and 443 00:24:59,480 --> 00:25:02,919 Speaker 1: often one of the complaints we see from active managers 444 00:25:03,240 --> 00:25:06,560 Speaker 1: is the reason they're under performing is because the market 445 00:25:06,680 --> 00:25:09,959 Speaker 1: is so distorted by the Federal Reserve or other central 446 00:25:10,000 --> 00:25:14,200 Speaker 1: banks and massive amounts of liquidity that they can't possibly 447 00:25:14,560 --> 00:25:19,520 Speaker 1: compete with, you know, the irrationality of everything. Is there 448 00:25:19,560 --> 00:25:24,439 Speaker 1: any space in your particular view of the markets for 449 00:25:24,800 --> 00:25:28,600 Speaker 1: central bank liquidity uh distorting some of the flows? So 450 00:25:28,640 --> 00:25:31,080 Speaker 1: there is, but not in the manner that many active 451 00:25:31,080 --> 00:25:34,760 Speaker 1: managers complain about, right, and um, it takes two forms. 452 00:25:36,000 --> 00:25:38,480 Speaker 1: One is the low level of interest rates that we've 453 00:25:38,560 --> 00:25:42,200 Speaker 1: arrived at through central bank actions. And those interest rates 454 00:25:42,240 --> 00:25:45,280 Speaker 1: are certainly in terms of risk free rates, those are 455 00:25:45,320 --> 00:25:48,600 Speaker 1: a policy choice. The central bank chooses the level to 456 00:25:48,640 --> 00:25:50,760 Speaker 1: set the front of the curve, and everything else in 457 00:25:50,760 --> 00:25:53,720 Speaker 1: the risk free space has to be set as some 458 00:25:53,840 --> 00:25:57,480 Speaker 1: function of that number, right, so it will always be 459 00:25:57,560 --> 00:26:00,159 Speaker 1: the anchor point. And there there's there's true complaints about 460 00:26:00,160 --> 00:26:03,439 Speaker 1: that those low levels of interest rates relative to what 461 00:26:03,480 --> 00:26:06,040 Speaker 1: they were even fifteen twenty years ago, has created a 462 00:26:06,040 --> 00:26:08,359 Speaker 1: condition in which there is a desperate search for yield 463 00:26:08,359 --> 00:26:11,480 Speaker 1: because people have a shortage of financial assets that would 464 00:26:11,520 --> 00:26:15,480 Speaker 1: allow them to meet their retirement or return objectives. UM. 465 00:26:15,520 --> 00:26:18,600 Speaker 1: That has given rise to a cottage industry that we 466 00:26:18,640 --> 00:26:21,919 Speaker 1: call yield enhancement strategies and Asia. These are often referred 467 00:26:21,920 --> 00:26:24,800 Speaker 1: to as what are called autocollables in the United States 468 00:26:24,800 --> 00:26:26,440 Speaker 1: that could take the form of things like put writing 469 00:26:26,480 --> 00:26:30,480 Speaker 1: or call writing strategies, overlay strategies UM. Very publicly a 470 00:26:30,560 --> 00:26:33,960 Speaker 1: firm called Harvest was a very active seller of yield 471 00:26:34,040 --> 00:26:37,280 Speaker 1: enhancement strategies. UBS was sued about the under performance of 472 00:26:37,320 --> 00:26:41,360 Speaker 1: these strategies and going to twenty nineteen UM and so 473 00:26:41,440 --> 00:26:44,320 Speaker 1: I would argue that central banks are primarily responsible for 474 00:26:44,359 --> 00:26:46,760 Speaker 1: the rise of those yield enhancement strategies, and those in 475 00:26:46,800 --> 00:26:49,399 Speaker 1: particular are creating a lot of the vol dampening that 476 00:26:49,480 --> 00:26:52,840 Speaker 1: you're referring to, Joe right and UH listeners, remember a 477 00:26:52,880 --> 00:26:55,320 Speaker 1: couple of weeks ago we talked to Ben Effort about 478 00:26:55,400 --> 00:26:59,840 Speaker 1: exactly that factor, the Asian retail buyers going back and 479 00:27:00,080 --> 00:27:04,320 Speaker 1: UH buying all these sort of selling volatility to generate 480 00:27:04,400 --> 00:27:10,280 Speaker 1: yield in this environment that you're describing, in which UH 481 00:27:10,320 --> 00:27:12,960 Speaker 1: there's this wall of money that comes in every paycheck 482 00:27:13,040 --> 00:27:16,000 Speaker 1: or every month or whatever it is. Is there a 483 00:27:16,080 --> 00:27:20,800 Speaker 1: reason for anyone two to sort of like you know, 484 00:27:21,200 --> 00:27:27,439 Speaker 1: security selection, stock selection? What people the old star mutual 485 00:27:27,440 --> 00:27:31,120 Speaker 1: fund managers or is trying that or trying to find 486 00:27:31,240 --> 00:27:34,919 Speaker 1: a good uh stock selector just kind of a loser 487 00:27:34,920 --> 00:27:37,240 Speaker 1: way to play it at this point, Well, it depends 488 00:27:37,240 --> 00:27:39,439 Speaker 1: on what your objective is. Right. If your objective is 489 00:27:39,520 --> 00:27:43,280 Speaker 1: to allocate capital, right, that's a very important role. Right. 490 00:27:43,440 --> 00:27:46,560 Speaker 1: The role of financial markets is actually to set the 491 00:27:46,600 --> 00:27:50,560 Speaker 1: marginal price of capital so that companies and access that 492 00:27:50,640 --> 00:27:52,320 Speaker 1: either in the form of debt markets or in the 493 00:27:52,320 --> 00:27:54,359 Speaker 1: form of equity markets. We focused on the equity markets. 494 00:27:54,359 --> 00:27:57,760 Speaker 1: I would actually argue the impact of passive on the 495 00:27:57,800 --> 00:28:01,439 Speaker 1: debt and the rate and credit markets is increasingly pernicious 496 00:28:02,160 --> 00:28:05,480 Speaker 1: um because the models that are totally flawed. That is 497 00:28:05,480 --> 00:28:09,560 Speaker 1: actually a very important role. Taking money from bad companies 498 00:28:09,600 --> 00:28:12,440 Speaker 1: and giving it to good companies is a critical role 499 00:28:12,600 --> 00:28:15,840 Speaker 1: in a capitalist system, effectively allowing those who are efficient 500 00:28:15,880 --> 00:28:20,080 Speaker 1: and intelligent allocators of capital to give money to management 501 00:28:20,080 --> 00:28:23,000 Speaker 1: teams that have good prospects in terms of generating future wealth. 502 00:28:23,680 --> 00:28:25,800 Speaker 1: What we've created now is a distortion. That's a fun 503 00:28:25,840 --> 00:28:28,920 Speaker 1: house mirror effect right where we've presumed that everybody else 504 00:28:29,000 --> 00:28:30,719 Speaker 1: is doing this for us. Therefore it is a fool's 505 00:28:30,760 --> 00:28:33,720 Speaker 1: game to do it ourselves, right, and the rewards very 506 00:28:33,760 --> 00:28:36,479 Speaker 1: clearly are accruing to those who are engaged in various 507 00:28:36,480 --> 00:28:39,840 Speaker 1: ways of leveraging this phenomenon. You asked, you know, how 508 00:28:39,880 --> 00:28:42,240 Speaker 1: can people beat the market? While we saw in two 509 00:28:42,240 --> 00:28:45,960 Speaker 1: thousand seventeen a product x I v UM that was 510 00:28:46,040 --> 00:28:50,000 Speaker 1: basically a hyper leveraged and leveraged, increasingly levered exposure of 511 00:28:50,040 --> 00:28:53,959 Speaker 1: the SMP become the stock market Darling, Right. And the 512 00:28:54,000 --> 00:28:57,040 Speaker 1: downside to leverage is what we saw in February fifen, 513 00:28:57,400 --> 00:28:59,760 Speaker 1: which is in a single event that stock basically went 514 00:28:59,800 --> 00:29:03,600 Speaker 1: to zero, right, um. And so this is the conundrum, right. 515 00:29:03,640 --> 00:29:05,800 Speaker 1: You can approach this from the standpoint of I want 516 00:29:05,840 --> 00:29:08,960 Speaker 1: increasingly levered exposure to this and that will allow me 517 00:29:09,000 --> 00:29:11,560 Speaker 1: to outperform over a short period of time. And I 518 00:29:11,600 --> 00:29:14,200 Speaker 1: presume that I have the skill to break away from 519 00:29:14,240 --> 00:29:16,800 Speaker 1: the market when the greater fuel theory is about to 520 00:29:16,800 --> 00:29:20,240 Speaker 1: be exhausted. But if you're holding that recourse leverage, you 521 00:29:20,280 --> 00:29:23,560 Speaker 1: could lose everything in the process. Let's talk about those 522 00:29:23,640 --> 00:29:28,200 Speaker 1: yield enhancers or the overlay strategies, because I suspect this 523 00:29:28,280 --> 00:29:32,560 Speaker 1: is probably where things start to wobble a little bit. 524 00:29:32,600 --> 00:29:36,720 Speaker 1: But how pervasive is the use of this kind of 525 00:29:36,720 --> 00:29:42,320 Speaker 1: strategy to enhance yields and who is most actively deploying it, 526 00:29:43,080 --> 00:29:47,240 Speaker 1: So it's very hard to track. Um. There are lots 527 00:29:47,240 --> 00:29:50,000 Speaker 1: and lots of institutional strategies that are not disclosed to 528 00:29:50,000 --> 00:29:53,520 Speaker 1: the market that involve various forms of yield enhancement. I 529 00:29:53,600 --> 00:29:57,880 Speaker 1: know that most forms of private wealth management offer products 530 00:29:57,880 --> 00:30:00,520 Speaker 1: that they call yield enhancement, which are various forms of 531 00:30:01,120 --> 00:30:03,479 Speaker 1: you know, selling puts on an investment grade bond index 532 00:30:03,520 --> 00:30:06,080 Speaker 1: to modestly enhance the yield, effectively saying I will take 533 00:30:06,120 --> 00:30:10,000 Speaker 1: double downside exposure and exchange for slightly less or slightly 534 00:30:10,040 --> 00:30:13,720 Speaker 1: higher coupon in in current form um, these are not 535 00:30:13,800 --> 00:30:17,680 Speaker 1: well tracked. Chris Cole and Ben Effort, among others, have 536 00:30:17,840 --> 00:30:21,240 Speaker 1: made estimates. Um it is very clearly in the trillions 537 00:30:21,280 --> 00:30:24,240 Speaker 1: of dollars that is involved in this type of behavior. 538 00:30:24,400 --> 00:30:27,760 Speaker 1: But again it's a natural byproduct of an environment in 539 00:30:27,800 --> 00:30:32,479 Speaker 1: which yields have fallen dramatically UH in response to fears 540 00:30:32,480 --> 00:30:35,400 Speaker 1: about securities, prices and that is the second area, and 541 00:30:35,440 --> 00:30:38,600 Speaker 1: I didn't talk about this, where the central bank influence 542 00:30:38,680 --> 00:30:42,360 Speaker 1: is quite significant. You know, you effectively have expanded the 543 00:30:42,400 --> 00:30:46,880 Speaker 1: demand for financial assets dramatically because central banks target asset 544 00:30:46,920 --> 00:30:50,480 Speaker 1: price stability in their behavior. Right. So the way that 545 00:30:50,560 --> 00:30:53,360 Speaker 1: they can do that is by cutting interest rates, which 546 00:30:53,440 --> 00:30:56,800 Speaker 1: raises the price of a bond. Right, When I cut 547 00:30:56,800 --> 00:30:59,360 Speaker 1: interest rates, it raises the price of the bond. The 548 00:30:59,400 --> 00:31:02,760 Speaker 1: benefit is not actually that this stimulates borrowing, an investment 549 00:31:02,800 --> 00:31:05,200 Speaker 1: in the economy, which is what the FED is presuming. 550 00:31:05,280 --> 00:31:07,760 Speaker 1: Is the channel that is occurring, right, The idea of 551 00:31:07,760 --> 00:31:10,560 Speaker 1: being by cutting interest rates, I make more economic that 552 00:31:10,600 --> 00:31:13,040 Speaker 1: marginal factory that could be built, or that marginal home 553 00:31:13,160 --> 00:31:15,840 Speaker 1: that could be built. Instead, what you're actually doing is 554 00:31:15,880 --> 00:31:20,400 Speaker 1: in levered portfolios, you're expanding collateral. You're increasing the borrowing 555 00:31:20,400 --> 00:31:24,760 Speaker 1: capacity to buy other financial assets. Right, and so again 556 00:31:24,800 --> 00:31:28,479 Speaker 1: it's a liquidity enhancement that is driving prices higher, driving 557 00:31:28,560 --> 00:31:31,840 Speaker 1: interest rates lower, and increasing the need for these types 558 00:31:31,880 --> 00:31:35,040 Speaker 1: of yield enhancement strategies, which in turn are fundamentally providing 559 00:31:35,080 --> 00:31:37,440 Speaker 1: insurance to the market from individuals who don't know that 560 00:31:37,480 --> 00:31:45,800 Speaker 1: they're providing insurance. So obviously, uh, we've seen this passive trend. 561 00:31:46,080 --> 00:31:50,560 Speaker 1: It's exploded as you laid out, starting in the early nineties, 562 00:31:51,400 --> 00:31:54,160 Speaker 1: there's been a series of regulatory changes that also just 563 00:31:54,200 --> 00:31:58,680 Speaker 1: sort of encouraged individuals and institutions to invest this way. 564 00:31:58,720 --> 00:32:02,160 Speaker 1: What are the limits, like, where does it and and 565 00:32:02,200 --> 00:32:04,479 Speaker 1: in your view of the distortions that are being caused 566 00:32:04,480 --> 00:32:06,600 Speaker 1: by it, how how far? How far could it go? 567 00:32:07,160 --> 00:32:09,520 Speaker 1: So I think it's very hard to define that, right, Um, 568 00:32:09,600 --> 00:32:13,200 Speaker 1: there are limits in terms of of the underlying behavior 569 00:32:13,400 --> 00:32:16,840 Speaker 1: of what gets contributed. Um. And so if you think 570 00:32:16,880 --> 00:32:21,200 Speaker 1: about the dynamics of buying behavior, ultimately that faces limits 571 00:32:21,240 --> 00:32:23,880 Speaker 1: in terms of the nominal quantity of dollars that are 572 00:32:23,880 --> 00:32:28,280 Speaker 1: available to be incrementally deployed. Right So Americans savings into 573 00:32:28,280 --> 00:32:32,040 Speaker 1: therefore one case will only change in proportion the quantity 574 00:32:32,080 --> 00:32:35,080 Speaker 1: that can be invested by every individual, the amount that 575 00:32:35,080 --> 00:32:37,160 Speaker 1: goes up every year, and the number of Americans that 576 00:32:37,200 --> 00:32:40,560 Speaker 1: participate in four O one case and are employed with 577 00:32:40,640 --> 00:32:43,640 Speaker 1: super low levels of unemployment and you know, very low 578 00:32:43,760 --> 00:32:48,040 Speaker 1: levels of labor force growth and relatively high levels of participation, 579 00:32:48,320 --> 00:32:50,960 Speaker 1: although things like the Secure Act have tried to expand 580 00:32:51,040 --> 00:32:54,840 Speaker 1: participation even further. UM, I would argue we're beginning to 581 00:32:54,880 --> 00:32:57,960 Speaker 1: approach the limits in terms of the quantity that can 582 00:32:58,000 --> 00:33:02,640 Speaker 1: be contributed. Um. There are similar limitations in terms of 583 00:33:02,680 --> 00:33:06,480 Speaker 1: corporate share buybacks, which are ultimately bound by the earnings 584 00:33:06,520 --> 00:33:10,800 Speaker 1: capability of corporations. They've taken an increasing fraction of their 585 00:33:10,800 --> 00:33:14,920 Speaker 1: earnings in cash flow more than because of the ability 586 00:33:15,000 --> 00:33:17,959 Speaker 1: to borrow money, which ultimately still has to be serviced 587 00:33:17,960 --> 00:33:21,320 Speaker 1: and so faces its own limits. UM. But there are 588 00:33:21,360 --> 00:33:23,320 Speaker 1: limits in terms of how much can be deployed in 589 00:33:23,360 --> 00:33:26,720 Speaker 1: these types of strategies. Right on the other side of 590 00:33:26,760 --> 00:33:30,160 Speaker 1: the equation, most endowments, most Americans, through their four oh 591 00:33:30,240 --> 00:33:34,400 Speaker 1: one case, need to take actually a percentage of their 592 00:33:34,440 --> 00:33:37,520 Speaker 1: underlying portfolio, and so that is actually bound only by 593 00:33:37,560 --> 00:33:41,520 Speaker 1: the price level of the financial assets themselves, right, And 594 00:33:41,600 --> 00:33:44,040 Speaker 1: so there is a point at which the outflows begin 595 00:33:44,160 --> 00:33:49,200 Speaker 1: to outweigh the inflows, and this should reverse. Where that 596 00:33:49,280 --> 00:33:53,960 Speaker 1: happens is anyone's guess what does that reversal actually look like. 597 00:33:54,040 --> 00:33:58,320 Speaker 1: I mean, you mentioned the VIX exchange traded notes earlier, 598 00:33:58,360 --> 00:34:01,320 Speaker 1: and uh, some of our listeners will remember the v 599 00:34:01,400 --> 00:34:06,840 Speaker 1: apocalypse of I guess it was early now and the 600 00:34:06,880 --> 00:34:11,759 Speaker 1: products ended up sort of impacting the volatility market itself. 601 00:34:12,000 --> 00:34:14,480 Speaker 1: Is that something that you would expect to happen as 602 00:34:14,880 --> 00:34:19,120 Speaker 1: these clothes start to reverse? Unfortunately? Yes, right, because the 603 00:34:19,160 --> 00:34:22,600 Speaker 1: way that markets work is the prices are set by transactions. Right. 604 00:34:22,640 --> 00:34:24,960 Speaker 1: They're a little bit like Schrodinger's cat. They're neither alive 605 00:34:25,000 --> 00:34:28,600 Speaker 1: nor dead until an actual transaction occurs. The presumption of 606 00:34:28,680 --> 00:34:31,440 Speaker 1: continuity of those prices that you know Apple will trade 607 00:34:31,480 --> 00:34:36,759 Speaker 1: at and then to nine is simply an assumption. In 608 00:34:36,840 --> 00:34:40,080 Speaker 1: the presence of massive flows in either direction, these prices 609 00:34:40,120 --> 00:34:43,280 Speaker 1: can become discontinuous. We've seen it to the top side 610 00:34:43,280 --> 00:34:46,799 Speaker 1: of the past four months. Basically, the downside could be 611 00:34:46,840 --> 00:34:48,879 Speaker 1: created when you have outflows similar to what we saw 612 00:34:48,880 --> 00:34:51,960 Speaker 1: in December of eighteen, which had the largest equity outflows 613 00:34:51,960 --> 00:34:55,160 Speaker 1: in the history of the market. So what do you 614 00:34:55,200 --> 00:34:57,680 Speaker 1: do in the meantime? If if one is an investor, 615 00:34:57,880 --> 00:35:00,680 Speaker 1: you look at this situation, it seems unto sustainable. The 616 00:35:00,719 --> 00:35:05,040 Speaker 1: assumptions seem ridiculous. If you don't want to play along 617 00:35:05,080 --> 00:35:07,919 Speaker 1: with this idea of just writing the market or sort 618 00:35:07,920 --> 00:35:10,080 Speaker 1: of thinking you'll be smart enough to get out a 619 00:35:10,200 --> 00:35:14,880 Speaker 1: day before everyone else. Uh, what are other ways to 620 00:35:14,920 --> 00:35:18,960 Speaker 1: make money in the meantime that are satisfactory too. For 621 00:35:19,080 --> 00:35:21,839 Speaker 1: if you're fund you have investors that want to see 622 00:35:21,880 --> 00:35:26,239 Speaker 1: their quarterly returns. What makes sense here? Ultimately, everyone's bound 623 00:35:26,239 --> 00:35:29,200 Speaker 1: by their own capability, UM and their own interest in 624 00:35:29,280 --> 00:35:32,279 Speaker 1: doing that. Right. UM, you may not want to participate this, 625 00:35:32,320 --> 00:35:34,239 Speaker 1: but you need you need to be aware that your 626 00:35:34,280 --> 00:35:37,560 Speaker 1: neighbor maybe getting rich while you're not. UM. Certainly, my 627 00:35:37,600 --> 00:35:40,960 Speaker 1: wife would highlight, uh, you know that that underlying dynamic. 628 00:35:41,520 --> 00:35:44,400 Speaker 1: When I see these types of structures, it can be 629 00:35:44,520 --> 00:35:47,239 Speaker 1: very different. Right, when you have an exposure like the 630 00:35:47,400 --> 00:35:52,120 Speaker 1: x I V there were unique opportunities to purchase vehicles 631 00:35:52,160 --> 00:35:55,880 Speaker 1: that allowed you to profit from that without significant uh, 632 00:35:56,080 --> 00:35:59,160 Speaker 1: day to day involvement. I don't think that's I don't 633 00:35:59,160 --> 00:36:03,160 Speaker 1: think that exists in this framework. Right. What we're doing 634 00:36:03,160 --> 00:36:06,920 Speaker 1: at Logica as we are seeking ways to capitalize from 635 00:36:06,920 --> 00:36:10,600 Speaker 1: obtaining non recourse leverage in both directions, right, using the 636 00:36:10,640 --> 00:36:14,480 Speaker 1: tools of finance to purchase products that need to be 637 00:36:14,520 --> 00:36:17,799 Speaker 1: managed on a continuous basis, but give us exposure to 638 00:36:17,880 --> 00:36:20,360 Speaker 1: that top side leverage as well as the exposure to 639 00:36:20,400 --> 00:36:24,319 Speaker 1: the downside leverage in a February eighteen type event. So 640 00:36:24,360 --> 00:36:27,800 Speaker 1: it's you know, this is a UM, it's a buyer, 641 00:36:27,840 --> 00:36:31,040 Speaker 1: beware market. Um, if everybody decided to take you know, 642 00:36:31,080 --> 00:36:34,080 Speaker 1: my concerns to heart, then that would result in the 643 00:36:34,080 --> 00:36:37,120 Speaker 1: flows turning very negative and the markets would crash. Um. 644 00:36:37,239 --> 00:36:40,400 Speaker 1: Hopefully nobody's paying attention and they continue to go up. 645 00:36:41,800 --> 00:36:46,319 Speaker 1: Is it plausible that it deflates quietly, that the rather 646 00:36:46,440 --> 00:36:48,879 Speaker 1: than there being some sort of you know, Tracy used 647 00:36:48,880 --> 00:36:51,560 Speaker 1: the word of apocalypse earlier in the end, like the 648 00:36:51,719 --> 00:36:53,720 Speaker 1: x I V blow up, it was kind of minor 649 00:36:53,760 --> 00:36:57,720 Speaker 1: and it didn't really have any sort of big spillover ramifications. 650 00:36:58,280 --> 00:37:01,480 Speaker 1: Is it possible that, rather than and a volatility blow up, 651 00:37:01,760 --> 00:37:04,000 Speaker 1: that it ends up being more just like you know, 652 00:37:04,040 --> 00:37:06,880 Speaker 1: a helium balloon ten days after a birthday party that 653 00:37:07,000 --> 00:37:10,280 Speaker 1: sort of starts sagging down And isn't it doesn't pop? 654 00:37:10,400 --> 00:37:12,799 Speaker 1: Or do you think it will pop? Well? What I 655 00:37:12,840 --> 00:37:15,560 Speaker 1: think has no bearing on what actually occurs, right, But 656 00:37:15,760 --> 00:37:18,080 Speaker 1: you're here, so what I'm here? So I get to pontificate. 657 00:37:18,400 --> 00:37:21,919 Speaker 1: You know, my belief is that it will pop. When 658 00:37:21,960 --> 00:37:25,360 Speaker 1: that happens, I don't know. Um. And as a result, 659 00:37:25,520 --> 00:37:28,040 Speaker 1: you know, you're forced to engage strategies that allow you 660 00:37:28,080 --> 00:37:31,680 Speaker 1: to both participate and protect yourself. I think those tools 661 00:37:31,800 --> 00:37:36,840 Speaker 1: that are available. Ironically, Um, people misunderstand many of the 662 00:37:36,840 --> 00:37:40,000 Speaker 1: tools that they are using, and so those are being 663 00:37:40,040 --> 00:37:42,239 Speaker 1: provided to me at the lowest cost they have ever 664 00:37:42,280 --> 00:37:45,520 Speaker 1: been provided in history. So I'm actually quite excited about 665 00:37:45,560 --> 00:37:48,600 Speaker 1: that and speaking against my own interest here. Now, what 666 00:37:48,680 --> 00:37:51,719 Speaker 1: do you say, uh, I mean going back to connecting 667 00:37:51,760 --> 00:37:54,840 Speaker 1: some of the dots here, are you talking when you 668 00:37:54,880 --> 00:37:57,920 Speaker 1: say tools that are available to you to protect yourself 669 00:37:57,920 --> 00:38:01,800 Speaker 1: at the lowest price in history? Are these more or 670 00:38:01,920 --> 00:38:05,040 Speaker 1: less the sort of deep out of the money put 671 00:38:05,200 --> 00:38:09,360 Speaker 1: that Korean retail investors are selling to generate yield, depressing 672 00:38:09,880 --> 00:38:12,640 Speaker 1: the cost of a you know, a black tail risk insurance. 673 00:38:12,680 --> 00:38:18,440 Speaker 1: Is that sort of conceptually what you're saying there? Uh? No, okay, okay. 674 00:38:18,680 --> 00:38:22,560 Speaker 1: I have a really simple question which sort of goes 675 00:38:22,600 --> 00:38:26,560 Speaker 1: back to the intro uh, the introductory discussion that Joe 676 00:38:26,600 --> 00:38:31,520 Speaker 1: and I were having. Should someone looking to retire relatively 677 00:38:31,560 --> 00:38:36,600 Speaker 1: early invest their money in something like the Banguard Total 678 00:38:36,640 --> 00:38:40,520 Speaker 1: Stock Fund. So it's funny when you mentioned the fire concept, 679 00:38:40,680 --> 00:38:43,680 Speaker 1: right because you both are relatively young, um and far 680 00:38:43,719 --> 00:38:47,640 Speaker 1: better looking than I am. But the um, you know, 681 00:38:47,719 --> 00:38:52,240 Speaker 1: fire pre global financial crisis actually stood for finance, insurance 682 00:38:52,239 --> 00:38:55,080 Speaker 1: and real estate and was, it was an indicator. It 683 00:38:55,120 --> 00:38:57,360 Speaker 1: was indicative of a bubble that was happening within a 684 00:38:57,440 --> 00:39:01,560 Speaker 1: sector of the economy. Right, I would argue the idea 685 00:39:01,800 --> 00:39:04,560 Speaker 1: of a fire movement in which people seek to remove 686 00:39:04,640 --> 00:39:07,800 Speaker 1: their human capital from the labor force at an early age, 687 00:39:08,280 --> 00:39:11,960 Speaker 1: is indicative of a is a clear indication of a bubble. Right, 688 00:39:12,000 --> 00:39:13,960 Speaker 1: that's a that's an absurd use of a human being 689 00:39:13,960 --> 00:39:16,560 Speaker 1: to retire at thirty five to pursue their own objectives. 690 00:39:17,040 --> 00:39:19,799 Speaker 1: You happen to have struck it phenomenally rich and and 691 00:39:19,960 --> 00:39:22,719 Speaker 1: or you happen to be born into dilettant wealth, more 692 00:39:22,719 --> 00:39:26,040 Speaker 1: power to you. It's a fantastic mechanism for redistributing that wealth. 693 00:39:26,560 --> 00:39:29,040 Speaker 1: Let's take the most valuable thing that any human being has, 694 00:39:29,080 --> 00:39:31,960 Speaker 1: which is their capacity to contribute to an economy, and 695 00:39:32,080 --> 00:39:34,520 Speaker 1: turn into a life of leisure at that young age. Like, 696 00:39:34,560 --> 00:39:37,600 Speaker 1: it's just it's it's stupid idea. Yeah, I whenever I 697 00:39:37,640 --> 00:39:40,600 Speaker 1: read those message boards, that is seemed to be a 698 00:39:40,680 --> 00:39:44,560 Speaker 1: huge issue is boredom, and so people retire and then 699 00:39:44,600 --> 00:39:46,719 Speaker 1: they just like then they're all asking each other what 700 00:39:46,760 --> 00:39:48,799 Speaker 1: they should do with their lives. I was sometimes I 701 00:39:48,840 --> 00:39:51,280 Speaker 1: fantasize about retirement. My wife says I would get bored 702 00:39:51,600 --> 00:39:53,959 Speaker 1: just tweeting all the time, and I think I would 703 00:39:54,040 --> 00:39:56,480 Speaker 1: enjoy it. But maybe she's right. Having taken a couple 704 00:39:56,520 --> 00:39:58,279 Speaker 1: of sabbaticles over the course of my career, that can 705 00:39:58,320 --> 00:40:02,239 Speaker 1: be periods of intense creativity. But you absolutely need to 706 00:40:02,320 --> 00:40:04,960 Speaker 1: use that in the prospect of, you know, leveraging that 707 00:40:05,040 --> 00:40:07,480 Speaker 1: human capital and those insights that you've developed a return 708 00:40:07,560 --> 00:40:11,879 Speaker 1: to an economy. I just think the entire premise is wrong. Well, 709 00:40:12,320 --> 00:40:16,640 Speaker 1: Mike Green from Logical Capital Advisors, that was an absolutely 710 00:40:16,640 --> 00:40:19,960 Speaker 1: fantastic conversation. Thank you so much for coming on all 711 00:40:20,040 --> 00:40:35,959 Speaker 1: thoughts my pleasure. Thanks Mike, that was awesome. Thank you. Joe. 712 00:40:36,080 --> 00:40:38,400 Speaker 1: Can I just say the notion of you retiring early 713 00:40:38,640 --> 00:40:41,959 Speaker 1: so that you could tweet even more is very, very 714 00:40:42,000 --> 00:40:45,280 Speaker 1: worrying to me for for many reasons. Obviously I would 715 00:40:45,280 --> 00:40:47,759 Speaker 1: miss you on all thoughts, but also it would be 716 00:40:47,800 --> 00:40:50,759 Speaker 1: so painful. Don't worry, Trazy I have. I have no 717 00:40:50,920 --> 00:40:53,279 Speaker 1: prospect of doing that any attempt soon. I have two 718 00:40:53,320 --> 00:40:57,320 Speaker 1: kids under four, so there's no there's no path towards 719 00:40:57,440 --> 00:41:01,080 Speaker 1: me retiring early to a life just tweeting more. So well, 720 00:41:00,960 --> 00:41:03,360 Speaker 1: we'll continue the podcast for a while. All right, the world, 721 00:41:03,480 --> 00:41:06,319 Speaker 1: thanks you. But I have to say I found that 722 00:41:06,400 --> 00:41:10,640 Speaker 1: conversation so so interesting because, as we alluded to in 723 00:41:10,680 --> 00:41:12,920 Speaker 1: the intro, it sort of touches on a couple of 724 00:41:12,960 --> 00:41:16,520 Speaker 1: big thing themes. So one is the bowl market and 725 00:41:16,560 --> 00:41:19,120 Speaker 1: how high can valuations actually go, And the other one, 726 00:41:19,120 --> 00:41:23,239 Speaker 1: of course, is the debate between active and passive management. 727 00:41:23,719 --> 00:41:26,120 Speaker 1: And of course we've had all these other episodes with 728 00:41:26,239 --> 00:41:28,920 Speaker 1: people like Chris Cole, with people like Ben I for 729 00:41:29,440 --> 00:41:34,080 Speaker 1: Sultan Posar, who's done some work on volatility overlay strategies, 730 00:41:34,440 --> 00:41:37,319 Speaker 1: and to see all of that come together in one 731 00:41:37,400 --> 00:41:44,040 Speaker 1: conversation is really unexpected and very pleasing. Yeah. Absolutely, and 732 00:41:44,080 --> 00:41:47,839 Speaker 1: I really do think that, and I'm struck by I 733 00:41:47,840 --> 00:41:50,080 Speaker 1: hadn't well, I would say two things I had not 734 00:41:50,239 --> 00:41:55,280 Speaker 1: realized prior to this conversation with Mike. The full degree 735 00:41:55,520 --> 00:41:58,960 Speaker 1: of sort of regulatory changes that we've seen since arguably 736 00:41:59,000 --> 00:42:03,040 Speaker 1: the start of this bowl market in the early nineteen eighties, 737 00:42:03,360 --> 00:42:08,480 Speaker 1: essentially designed to just make sure de facto that there 738 00:42:08,640 --> 00:42:12,520 Speaker 1: is this fresh cash being put to work every single 739 00:42:12,600 --> 00:42:16,400 Speaker 1: month or every single pay period. And also, you know, 740 00:42:16,440 --> 00:42:18,480 Speaker 1: I have to admit, like, as a member of the 741 00:42:18,520 --> 00:42:24,080 Speaker 1: financial media, this idea that uh, passive is better, that 742 00:42:24,160 --> 00:42:25,880 Speaker 1: you're sort of a fool if you ever try to 743 00:42:25,960 --> 00:42:27,879 Speaker 1: time the market, that you're a fool if you try 744 00:42:28,000 --> 00:42:32,440 Speaker 1: to engage in your own security. Uh selection. Like that message, 745 00:42:32,719 --> 00:42:36,040 Speaker 1: that sort of ideological message. I mean, I largely have 746 00:42:36,160 --> 00:42:38,160 Speaker 1: bought it, and I'm not saying I agree or disagree 747 00:42:38,160 --> 00:42:40,920 Speaker 1: with it, but it's certainly one that I think many 748 00:42:41,040 --> 00:42:45,720 Speaker 1: people in the financial media practice of really internalized, especially 749 00:42:45,719 --> 00:42:48,880 Speaker 1: like if you remember the sort of irresponsibility of the 750 00:42:48,960 --> 00:42:51,640 Speaker 1: late nineties and the way like media is just so 751 00:42:51,760 --> 00:42:55,040 Speaker 1: like hyped up on individual text docs that people got 752 00:42:55,080 --> 00:42:58,160 Speaker 1: burned on. There's been this major course correction since then. 753 00:42:58,160 --> 00:43:02,400 Speaker 1: It feels like to not move away from that style 754 00:43:02,640 --> 00:43:06,319 Speaker 1: of talking about the market. Yeah, but you mentioned the 755 00:43:06,400 --> 00:43:10,160 Speaker 1: regulation that is shaping some of this and the lobbying, 756 00:43:10,200 --> 00:43:13,320 Speaker 1: and I find that really interesting. I find Mike's emphasis 757 00:43:13,400 --> 00:43:17,239 Speaker 1: on incentives very very interesting, And again it goes back 758 00:43:17,280 --> 00:43:20,000 Speaker 1: to some of the discussions we've had about economic models 759 00:43:20,239 --> 00:43:23,120 Speaker 1: that don't actually take into account the way the real 760 00:43:23,160 --> 00:43:26,440 Speaker 1: world works. So you know, if you're buying that e 761 00:43:26,600 --> 00:43:29,160 Speaker 1: t F, as soon as you put money in, the 762 00:43:29,160 --> 00:43:31,960 Speaker 1: e t F is deploying that money that's just like 763 00:43:32,120 --> 00:43:35,640 Speaker 1: what it does, that's what it's created and incentivized to do. 764 00:43:36,239 --> 00:43:39,960 Speaker 1: And the idea that that wouldn't that behavior wouldn't have 765 00:43:40,000 --> 00:43:43,360 Speaker 1: an impact on the market like it seems quaint. After 766 00:43:43,719 --> 00:43:47,759 Speaker 1: that discussion, two things I think we should schedule for 767 00:43:47,800 --> 00:43:51,759 Speaker 1: future episodes is one we should do really examine the 768 00:43:51,800 --> 00:43:55,040 Speaker 1: fiduciary role rule, because that is one of these things that, 769 00:43:55,360 --> 00:43:57,200 Speaker 1: again I think a lot of people in the media 770 00:43:57,400 --> 00:43:59,959 Speaker 1: had just sort of taken as yeah, that makes sense 771 00:44:00,320 --> 00:44:05,880 Speaker 1: that UH advisors should have a fiduciary responsibility to investors 772 00:44:06,120 --> 00:44:08,399 Speaker 1: to look out for their best interest. But really sort 773 00:44:08,440 --> 00:44:11,919 Speaker 1: of examine UH that story more fully. And we should 774 00:44:11,920 --> 00:44:16,480 Speaker 1: also have Michael Mobison back on and sort of repress him. 775 00:44:16,800 --> 00:44:18,480 Speaker 1: It's been a while since we've talked to him on 776 00:44:18,960 --> 00:44:22,879 Speaker 1: some of these questions about passive versus active, So new 777 00:44:22,960 --> 00:44:26,399 Speaker 1: territories to explore for us. Excellent. I agree with both 778 00:44:26,400 --> 00:44:30,480 Speaker 1: those ideas. Alright. This has been another episode of the 779 00:44:30,520 --> 00:44:33,719 Speaker 1: All Thoughts podcast. I'm Tracy Allaway. You can follow me 780 00:44:33,880 --> 00:44:38,000 Speaker 1: on Twitter at Tracy Alloway and I'm Joe wisn't Thal. 781 00:44:38,239 --> 00:44:41,520 Speaker 1: You can follow me on Twitter at the Stalwart And 782 00:44:41,560 --> 00:44:44,960 Speaker 1: you should definitely Follow our guest Today on Twitter, Michael Green. 783 00:44:45,080 --> 00:44:50,480 Speaker 1: He's at prof plum Very high value follow, and be 784 00:44:50,520 --> 00:44:53,640 Speaker 1: sure to follow our producer on Twitter, Laura Carlson. She's 785 00:44:53,680 --> 00:44:57,000 Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast, 786 00:44:57,080 --> 00:45:00,719 Speaker 1: Francesca Levy at Francesca Today, and check out the whole 787 00:45:00,760 --> 00:45:05,319 Speaker 1: family of Bloomberg podcasts under the handle at podcasts. Thanks 788 00:45:05,360 --> 00:45:05,840 Speaker 1: for listening.