Follow on:

Michael Green reveals the hidden economic dangers and the risks of passive investing in today’s market. In this episode, Andrew Brill welcomes back Michael Green, Portfolio Manager and Chief Strategist at Simplify Asset Management, for an insightful discussion on the current state of the economy. Discover why market indexes continue to hit new highs despite underlying economic weaknesses, and learn about the potential risks of passive investing.


Michael Green 0:00
So the first is when you think about passive investing, the theoretical definition of passive investing what’s actually underpinning it is a combination what’s called the efficient market hypothesis that the market ultimately will reflect all of the best ideas and information in its current incarnation at all points in time. If you believe that, then simply mirroring the market is effectively doing the best job possible, right. The second component is that you have to believe that the markets are capable of taking in new funds. And those funds come in or go out with very little impact on the market. And so just to specify this, the Efficient Market Hypothesis presumes that $1 into the market or $1 out of the market, changes the aggregate value of the market by about one penny.

Andrew Brill 0:50
Hello, and welcome to Wealthion and I’m your host, Andrew brill. Some of the market indexes continued to hit new highs, we’ll discuss why, again, into the overall economy next.

I’d like to welcome back Michael Green to Wealthion. He’s a portfolio manager and chief strategist at simplify Asset Management. Mike, welcome back. It’s always a pleasure to have you. It’s a pleasure to be here, Andrew, thank you for having me. So in this crazy world in these crazy times, tell me what are your thoughts on the economy at this particular point in time? Oh, I thought I was gonna get to comment on the craziness. I’ll ask you that next.

So look, I

Michael Green 1:34
think that the we have a very interesting situation in which we are simultaneously seeing the economy decelerate, we actually today just today got the quarterly census on employment and wages, which is the revision data that will flow into the non farm payrolls. That suggest that were about 750, ending of 735,000 jobs less than the payrolls number, reported last year, that means the household was much closer means those who are skeptical about the idea that the economy had accelerated rapidly, we’re correct. And unfortunately, all that information is coming out at a point where it doesn’t really matter anymore. So what we’re actually looking at is an economy that was weaker last year than we had anticipated, it’s almost certainly weaker this year than the headline data would suggest. And we’re struggling in large part in a lot of the commentary, you’re going to hear to explain why the equity markets are near all time highs, if not at all time highs. And I think that’s one of the real challenges as we’ve moved from a world in which it’s presumed that the equity markets reflect underlying economic data to increasingly being the tool that we use for saying, is the economy doing well? Or is the economy not doing well? Right. That I think it’s going to be one of the things that’s that we find is challenged over the next couple of years as we continue to confront the dynamics of the growth of things like passive strategies, etc, that really don’t have a link to fundamentals other than the employment component. And that I think, is again, you know, going to be kind of the really interesting question, how do we see people start changing their portfolios, as they recognize that the tools that they’ve used that simply assume that equities deliver a certain return? Do they begin to wake up to the opportunity that at least I see within the fixed income space, where real yields are much higher than they’ve been in over a decade and the opportunity to take advantage of what the Fed itself will acknowledge or unsustainably high rates for a period of time? Does that begin to dominate portfolios? And in turn, how does that begin to change the financial market landscape? That’s, this becomes the key question. I don’t think we actually know the answer yet. What we do know is that the data is telling us the economy was weaker than the headlines would have suggested. My expectations are we’re going to continue to move in that direction. And

Andrew Brill 3:52
we got housing numbers, also the housing sales were down. But I want to touch on something you mentioned, which was passive investing. And that you said that that artificially inflates the market, you explain to us what exactly passive investing is, and why it has that effect?

Michael Green 4:09
Sure. So the language that refers to passive investing, people will often confuse it with ETFs, or with mutual funds, etc. It’s actually a very specific type of investing. It’s a type of investing, that attempts to gain access to all securities in the market. A total market indices are kind of the best version of this. So something like a Vanguard Total market, or Blackrock total market, where you’ve taken stock selection or sector selection or security selection out of the mix, and you’re simply trying to match the overall market position. That’s the theoretical framework for passive investing. And the idea is very straightforward. The average investor, the median investor, the vast majority of investors, for that matter, simply don’t have the time and resources to allocate to selecting securities and trying to beat the market. So you’re better served By simply participating, that sounds great, and it makes perfect sense in an environment in which transactions are largely frictionless. Unfortunately, that’s not how markets actually work. So the behavior from people buying those indices and buying those funds that are that are replicating these indices means that they’re actually influencing prices in markets. And as more and more people end up doing exactly that, and you’ll notice in that discussion, there’s no attempt at security selection, there’s no attempt at asset allocation, there’s simply an assertion, I want to buy it. All right. When you do that, you actually are changing the price behavior in the market, you are reinforcing price trends. So stocks that go up, suddenly get an incremental allocation of capital, and you Next put money to work that pushes them higher. This helps to explain the divergence that we’ve seen in the stock market where the largest stocks are getting larger and larger and more richly valued. Even as fundamental principles, like the law of large numbers suggests it becomes harder and harder for them to grow in the manner that they did historically. So

Andrew Brill 6:06
if we’re talking about someone when we have employment or full employment as we’ve had for a period of time, and employers offer 401, K’s or IRA plans, and people say, okay, yeah, I want to participate. And they get they put in their money, they get their match from their employer, and just go someplace where they don’t. They just say, okay, yeah, put it in here. And that goes to a fund. That’s how that all happens. They’re actually not monitoring what they’re investing in. They’re just saying, okay, yeah, put it in this Vanguard fund, if you will, it’s up 567 percent a year, and the Vanguard fund just automatically pumps money into those stocks. Absolutely.

Michael Green 6:45
And that’s it. I mean, that is the vast majority of investing, if you actually look at quote, unquote, investing really, it’s what people are trying to do is they’re trying and I’ve heard others refer to it this way. And I think it’s fascinating. They think of the money that’s being put into a 401k savings, right, almost like you’re putting it into a savings account. You don’t put any thought process really into the money that you put into a savings account, but you’re supposed to be you’re supposed to be thoughtful about the money that you put into an investment account. Again, the theory behind passive investing is that you are free riding on the efforts of others. And free riding in and of itself can actually be a very good thing that you have to ask, what are the services that you’re providing on the other side of that? Why do you get away with that? The simple answer is by putting money to work in that fashion, you are actually providing a service to the market by increasing the liquidity. It makes it easier for me to sell if somebody shows up and says, Well, I have a job, I have savings, I’m just going to put it in, therefore I’m going to buy, you want to sell you may have some fundamental reason you want to sell I don’t care, I’m simply going to try to buy, right, that actually is an interesting service that you can provide to the market. But once you once those strategies become too large, they actually start to overwhelm the fundamental signals. And that’s really where we are in this process. So

Andrew Brill 8:07
a lot of money be pumped being pumped in because we have or have had full employment. But as you said, at the top, unemployment is starting to move in the other direction. So what happens when those people lose those jobs, and that money isn’t being poured into those 401 k’s and the IRAs? Well,

Michael Green 8:24
it also takes multiple forms, right? So remember that things like 401 K investing really didn’t exist prior to the 1970s. It was a program that was created in 1978. It was expanded in 1981. It was expanded again in a large scale fashion in 2006, with what was called the Pension Protection Act that changed 401 K’s from entities that you had to choose to participate in, you received a job, the HR manager would say, hey, we offer a 401 K plan that allows tax deferred investing, would you like to have some of your money withheld from your paycheck in order to participate in 2006, that changed, so the vast majority of participants no longer are offered that option? They’re actually turned into what’s called an opt out framework as compared to an opt in framework. Instead of being asked Do you want to participate, you have to specify without being asked, I don’t want to participate. Alright, as a result, participation rose dramatically more funds were directed to the market. And we’ve continued to add to that dynamic buy in by creating incentives for employers to match funds that you contribute, etcetera. All these are good things in and of themselves. But they’ve dramatically increased the quantity of money that flows from things like 401, Ks and IRAs into the stock market. And then we went a step further, once you switch a system from being an opt in framework where I have to make a voluntary choice and I have to select my own investments to one that is an opt out framework where I’m defaulted into investment Do you have to provide the employer with a legal shield that prevents them from you from suing them? When they make that selection? Right? Did they behave appropriately with your money? The government solved that by creating what’s called a qualified default investment alternative. Those are all passive strategies. Now, it is required that they be the lowest cost index type products, the passive type products, in particular, people tend to be pushed into what are called target date funds. And this is very fundamentally and structurally changed the behavior in the market.

Andrew Brill 10:36
So is it possible that since we’re at a point where this has become a problem, or could potentially be a problem, because if people are not working, and they’re not pumping that money in all of a sudden the signal goes, Okay, you know, what, I need some cash. And, you know, all of a sudden the market drops like a tank.

Michael Green 10:58
Well, so that’s the key risk, right? And I just want to be very clear to people that my objective is not to turn around and try to scare people and say, Oh, my gosh, the markets gonna crash. Right? Right. But it is important for people to understand that there are a couple of features that play into the scenario that you talked about. So the first is when you think about passive investing, the theoretical definition of passive investing what’s actually underpinning it is a combination with called the efficient market hypothesis that the market ultimately will reflect all of the best ideas and information in its current incarnation at all points in time. If you believe that, then simply mirroring the market is effectively doing the best job possible, right. The second component is that you have to believe that the markets are capable of taking in new funds. And those funds come in or go out with very little impact on the market. And so just to specify this, the efficient market hypothesis, presumes that $1 into the market or $1, out of the market, changes the aggregate value of the market by about one penny. And you can understand why that happens, right? Because for every buyer, there’s a seller, theoretically, we meet relatively closely, right? It turns out, and this is where the academic literature is really beginning to explode. People forget, we didn’t really have the computational power, same way AI is beginning to emerge, we now actually have the ability to do research on transaction behavior, that allows us to test that theory in ways that we couldn’t have tested it before. When those were tested and put to the challenge in 2020. By two academics Viega Bay at Harvard University and Ralph co agent at the University of Chicago, they found out that the answer to $1 going into the market or coming out of the market was not a one penny increase. It was a five to $8 increase. Wow. Right. So 500 to 800 times Miss specified in the theoretical model that we’ve been operating under. Now, the reason that becomes an issue is exactly what you’re referring to. That means that the participation in the growing participation has had a much larger impact than we would have theoretically imagine this helps to explain why market valuations have risen so much as people have been pushed into these strategies. The second thing that then obviously raises your awareness of is the outsized impact when they start to withdraw. And there’s two reasons why they withdraw one you hit on job loss that requires you to tap into capital. The second reason, though, is simply retirement, and death and job loss come for all of us. That’s kind of the easiest way to put it, right. So we are going to see this impact, we are seeing this maturing system, the slows beginning of the flows beginning to slow the job growth has now effectively stopped the rate of job growth that we saw in the US economy last year, as I pointed out was much lower than we thought it was a year to date basis, my expectation, my belief is that we’re actually quite close to zero net job growth. And if we go into a recession, we’ll see the job growth turn negative and people will lose their jobs. And that’ll happen at the exact same time that the baby boomers are beginning to accelerate into retirement and start to take distributions. So those are the things that I’m watching for and I’m very cognizant of, and to me, they represent risks that are obviously outsize because of my belief around how the system is working. But was

Andrew Brill 14:17
there a, you know, obviously, you know, one person isn’t going to make a difference, but is there a way for? First of all, I guess my one of my questions is, can we change this? They obviously change it so that there’s, you know, you can put your money in put say, Okay, I want to buy this fund, and, you know, just forget about it, because the historical increase in that fund is pretty good. How do we combat that? Because it seems like when things are good, the economy’s good people are working. Market just goes up because there’s that cash because of employment that’s being put in, but as soon as people lose their jobs, and as like you said the baby boomers retire and start withdrawing on that there would be In a market downturn, how do we fix that? So

Michael Green 15:03
I think the unfortunate answer is there’s not much we can do, you’re certainly correct on an individual basis, the only thing that I can hope to accomplish is to educate people to make them aware, to encourage them to increase the quantity of savings that they’re allocating, both that they have, right, because those historical return profiles that we use for our savings patterns, overstate the returns that we’re likely to generate in the future. And so the forward return profile looks less attractive than the historical return profile. Even as ironically, if the flows continue, the market can go up faster and faster, right. So this is very much the chuck Prince line from 2007. You know, when the music’s playing, you got to keep dancing sort of thing, right. But people can be aware of that. And then the second thing that they can do is they can actually recognize the fact that the market is going to new all time highs is not an economic signal that tells you that growth is incredibly robust or that inflation isn’t a runaway construction. It simply tells you that this is how the allocation systems are built things like target date funds, do not care about the relative valuation of equities and bonds, they simply reference the age of the participants, and slowly start rotating them into bonds and fixed income as they get older. But there is no mechanism for them to accelerate that or to change their allocations, we’ve been through an extraordinary time period, in which we’ve seen interest rates go from zero to about five and a half percent at the front end. And we’re somewhere in the mid fours at the longer end. Real yields are positive all the way across the curve with forward inflation expectations kind of solidly in the mid twos. So those yields are actually delivering positive real yields in the fixed income space. That’s something that didn’t exist five years ago. And yet, people are not receiving that signal. And recognizing that they should probably start changing their allocations to reflect the opportunity set that has been put in front of them. I actually listened to a podcast the other day where somebody was saying, bonds have the worst possible configuration is the worst time to buy bonds in history, right. And I can’t help but laugh at that when I look at what transpired in 2022, for example, coming off of 0% interest rates and climbing to that 5% had a huge impact on bond pricing and forward looking bond returns. And yet nobody’s really changing their allocations yet, pensions and institutions are slow to do. So candidly, individuals just don’t receive the signal if they’re participating in things like target date funds. Is

Andrew Brill 17:42
it possible with the system that we have for someone to take control of their own IRA or 401 K and say, Look, you know what, I want my money to go into my 401k, where my investment advisor controls that, and he’s going to put it into the stocks that he thinks are going to be good instead of investing in these funds that are traditionally IRA or 401 K funds where there’s okay, you know, this gets a 7% return every year. But this does a 10% return every year. And these are the allocated stocks. And maybe you don’t want all those allocated stocks, is it possible for someone to take control of their own IRA?

Michael Green 18:19
I think it is possible, but it’s a lot of work, right. And you’re almost guaranteed to underperform until the forces that I’m highlighting start moving the market in the opposite direction. And so this is very much tied to the research that I’ve done in these areas that actually highlights one of the challenges that we’re seeing in the active manager community is a byproduct of the distortions that we’re seeing. So I thought I’d share us a stock chart or a graph with you. But it probably would not be very clear and easily explained to people. So I’ll try to explain it in a slightly different fashion. The characteristics of what causes a stock price to move are obviously changes in supply and demand, right? The supply of any individual stock tends to remain relatively fixed, right, that aren’t issuing shares, really on a continuous basis, they may be buying back some shares, actually, in fact, but that tends to the supply tends to be relatively fixed. And so then it’s up to a question of changes in demand. When you think about the largest stocks, the assumption would be that flows and money going into them has less impact than the smallest stocks. But it actually turns out that the way that markets work are effectively the largest stocks, particularly when you have a passive dominated market. Everybody has to own those names. If I’m going to create something that looks like the s&p 500, and I want to benchmark myself to the s&p 500. I can ignore the smallest stocks in the s&p 500 index. They don’t have a statistically meaningful impact on the performance of the index. But I can’t ignore Apple Microsoft in video which is you know, as of today, reporting earnings Tonight, right, one of the most anticipated numbers out there. And as a result, since you can’t ignore those, it actually turns out that those are less elastic than the smaller stocks. In other words, changes in supply and demand have a larger impact on those largest stocks. That in turn means that as long as everybody is flowing into these passive entities, the larger stocks are bias to outperformance. And if you’re trying to take control of your own portfolio, you’re probably more focused on things that you know and companies that you think you can add value to. And as a result, like many active managers, you’re almost certain to underperform the s&p 500 as long as these conditions remain in place.

Andrew Brill 20:43
Like Are we entering a danger zone? You mentioned in Vidya? We were at the Magnificent Seven, I think we’re probably down to, you know, five or four of those magnificent stocks. Is this a danger area where we’re just like you say, we you know, you have to be allocated into those stocks, whereas the market is going to go the way those four or five stocks go, I like you said in video reports earnings on the 22nd, which is today. And if they’re forward looking guidance, it doesn’t matter what they do today, because they’re actually reporting on what’s happened. But if their forward guidance is positive, and that stocks gonna pop to 1000 1100 pretty quickly. But if the forward looking guidance isn’t great, the market is going to take a pretty big downturn, in my opinion, because there’s so much money allocated to that stock. Is this a danger zone where there’s just so few stocks that are being touted and watched and really money being poured into them?

Michael Green 21:36
Well, I mean, it’s funny, I actually ran the numbers this morning, just to fully appreciate this. Within the s&p 500 semiconductors, which is dominated by NVIDIA makes up only about nine and a half percent of the market cap inclusive of semiconductor capital equipment, it makes up about 10 and a half percent of the total market cap of the s&p 500. And yet, that sector, right, that combined sector of those two accounts for 45% of all the earnings growth for the entire s&p 500 on a forward looking basis over the next two years. Right. So to to emphasize your point, we are really looking at a market that is extraordinarily narrow, both from a fundamental expectation standpoint. And from a market capitalization representation standpoint, that to me, creates significant risks.

Andrew Brill 22:32
And couple that with some geopolitical issues, we’ve just upped the tariffs on China, and they control a decent amount of the semiconductor. stuff in in the world, I think that they they are a big, big semiconductor player. And that’s just going to drive prices higher and make things more difficult. Well,

Michael Green 22:54
I mean, the interesting thing is when you say that it drives price higher, right? Remember, that tends to actually benefit the semiconductor manufacturers. So the fact that that competition could potentially be withheld, or as we effectively create trading barriers to both the import and export of types of semiconductors, these companies actually are effectively getting preferential treatment. Right now they’ve lost some end markets. And I think that’s important to consider. But ultimately, that what you just described is, in some ways supportive of the semiconductor sector. Now, the much bigger question emerges, do limitations on availability of semiconductors, or do higher prices for semiconductors, in turn, lower the aggregate potential growth rate for the US economy and lead to exacerbated job loss to bring us back full circle to the discussion we were having earlier. And I think that’s probably the bigger concern, the simple reality is, is that the United States and China have found themselves in the uncomfortable situation where the capitalists have sold the rope to the Communists who want to hang them. To quote Lenin, and at this point, you know, the capitalists in the United States, to the extent we still behave in a capitalistic fashion, are increasingly saying, we need to figure out ways to remove the risk that they’re going to hang us. And I’m hopeful that we’re moving in that direction. I actually think that we’re not too late. And I actually think the American economy is ultimately quite robust in a way that most other economies around the world are not. We have high capability to feed, clothe, take care of ourselves. We have a large population, we have a favorable geographic climate. We have an extraordinary resource in that we only have two direct neighbors. So the actual need for defense spending as compared to defense spending designed to keep global trade open for the rest of the world is relatively minor, right? We don’t have to spend that much defending our Canadian border. Our Mexican border is a little bit more problematic, but certainly not anything that looks like the border between Ukraine and Russia, for example. And so, you know, or Taiwan and China for that matter, right. So, you know, we’re looking at a very different situation in the United States. And I remain hopeful about it. But there are some hard times potentially what

Andrew Brill 25:24
you’d say we’re, you know, we have a robust economy, and we were able to feed and clothe most of our people, but it seems like in in the economy that we’re in now, and now that it’s starting to slow a little bit, the lower end of the economic food chain, if you will, or the distribution, as compared to the higher end of the income distribution is getting wider, it seems that the lower end of the income distribution is starting to really suffer. And the people who have money are not suffering nearly as much, if at all.

Michael Green 26:01
Yeah, I think that’s right. And I think, you know, I think it’s, this is one of these very frustrating situations, I think, where people are, most people who are in the bottom half, or really, even in the bottom 90% of the income distribution, are now facing difficulty that is more pronounced than they face it almost any other time in their lives, right, we’ve seen that top 10% And even within the top 10%. It’s really the 1%. And even within that 1%, it’s really 0.1% that have done extraordinarily well, in this society in this economy. Things like inflation, affect the money that you spend, right, and that money that you spend, if you’re spending 100% of your income or near 100% of your income, a inflationary pulse, like we saw from 2020 until 2023, it has started to dissipate. I know it doesn’t feel like that I just want to make sure that people understand that inflation measures the rate of change of prices. From the current level, we’ve seen a dramatic, almost 25% Jump in the aggregate the general price level, that is still affecting people. And if you had spent 100% of your income, prior to the pandemic, your income no longer is capable of covering that because it has not risen 25% While your expenses have risen 25%. As a result, people are depleting their savings. They’re increasingly facing economic stress. And that’s exactly what you’re referring to the other end of the spectrum, somebody who’s very wealthy and has a high income level, they typically could save 35, even 50 or 75% of their income, right? Bill Gates saves far more than 75% of his income, he has no capacity to spend it other than charitable donation, right. And so inflation doesn’t mean anything to somebody in that income category. Right? Really, even if you’re looking at an income level of three or $400,000, the odds are that you’ve got a cushion, that means you’re never going to possibly spend nearly as much unless you decide to do silly things like taking private planes, etc. You know, then, so that’s what people are seeing those that are below that kind of $100,000 threshold, are increasingly feeling stressed. This is a, this has nothing to do with individual choices that they made. It’s not like they made bad choices, etc. But now they’re being forced to make sacrifices that those in the upper echelons who actually had the the potential to impact policy really aren’t suffering from. And I think that’s driving a lot of societal friction, right? It’s creating a degree of resentment and anger, that is ultimately not helpful for us at all.

Andrew Brill 28:44
So like now that we’ve, you know, the COVID stimulus obviously pumped a lot of money into the economy, probably more than then they expect it to pump into the economy. It, I want to say padded people’s pockets, but it gave people money to spend, they created a lot of the inflation that we see today. But that money is spent that money is gone. And now personal debt is growing, and it’s becoming a big problem. I mean, look, our national debt, and we’ll get into that is growing as well. But personal debt, you know, car loans, Home Loans, stuff like that is really becoming a problem. And, you know, at some point, the government has to say, Okay, we need to bring these interest rates down to help these people.

Michael Green 29:30
Well, you know, the irony is, and I think a lot of people have this correct with the exception of mortgages, bringing interest rates down doesn’t really help many people at all right, but you’re using credit card debt. And you’re paying I think, the current average interest rate on credit card debt for those who pay interest, right. So, again, I’m very fortunate. I’m one of those individuals who uses credit cards for convenience purposes and pays off my balance every month, right? As long as I continue to do that. I’m not going to pay any interest on it, thank you very much for the convenience and service that this provides. But if I fall behind, and I’m suddenly paying that 27% interest rate that I believe is roughly the average for those who do pay interest on those balances, the Fed cutting interest rates by 2%, two percentage points, it’s not going to have any difference. There is no difference between 25 and 27. Right? Nor does the credit card company need to pass that through to me now that they have me by I think what are technically referred to as the Shorthairs, right. So you know, when you look at that type of situation, it’s really not going to provide significant relief, except to potentially mortgages. And even within mortgages, because we came through the COVID environment, the vast majority of mortgages are currently struck below three and a half percent, the current mortgage rate is somewhere in the mid sevens about 7374. I think, as a result, another, you know, let’s say we cut interest rates by 2%. Again, that’s not going to allow me to refinance my mortgage, it’s not going to allow me to obtain any additional liquidity.

Andrew Brill 31:04
And so this is a very challenging situation in which again, those who are at the lower end of the economic strata, did absolutely nothing wrong, and yet are proving to be the most vulnerable to bad policy choices that were made over the past several years. So understanding that, you know, yes, I under my first mortgage was in that seven, seven something percent range. And it seems that it hasn’t really stopped mid home sales have slowed, but now I see that in more inventories coming onto the market. But let’s talk about the national debt for a moment. And it seems it’s gone up about a trillion and a half dollars, since the last time you were on Wealthion and that’s just a short while ago.

And with bond prices, where they are and the debt that the country has to service, we’re just in a really bad place. We

Michael Green 31:57
are. And unfortunately, I think you referred earlier to the dynamics of benefiting one group over another right, raising interest rates actually perversely can help those at the highest end of the spectrum by raising the return that they receive on the cash that they hold. Right. So, you know, again, those who are fortunate, I’ll share with people a dirty little secret, if you have $5 million dollars at JP Morgan, they will pay you 5% on your savings account. Right? Congratulations, that’s a quarter million dollars of interest that you will make every single year for doing absolutely nothing. That didn’t exist two years ago. Right? Right. So that’s a quarter million dollars that is automatically flowing into their income statements, I’m sure most of your listeners would be very happy to receive that they can just write into wealthy on you’ll give them the $5 million, then go put it into the positive JP Morgan. You know, if you have $500 or $5,000 in your bank account, you really don’t care that much about the interest that you’re earning on it. Right, you’re going from zero to Congratulations $250 I hope you and your family really enjoy the dinner at the Cheesecake Factory, right. So you know, there’s this tremendous inequities that are being created in this environment, the cause of those who are best positioned in our society to look at the challenges that those the lower end are experiencing. And both not understand them and not appreciate them. You know, when you think about it from the national debt standpoint, it then becomes a question of does hiking interest rates actually helped with what we thought we were trying to do, which is limited inflation. And it does a little bit, right, that hiking of interest rates means that it becomes harder for people to get that marginal credit, it makes it harder for them to buy that that desired item. Right. But those again, at the upper end of the spectrum, now perversely have more resources, that quarter million dollars, I can go use that to buy a nice sports car, right? I don’t need it. But now I have found money that the Federal Reserve has gifted me so I can go buy a nice car, right? That type of dynamic means that it’s not particularly effective at fighting inflation. And what it’s actually doing is slowly bringing the economy to the point where people again at the lower end are facing more and more distress. This becomes particularly egregious when we consider that we’ve actually cut many of the support payments, that were a cause of the inflationary dynamics that you’re referring to, but largely benefited those in the lower and middle classes that have a high propensity to spend that next dollar that comes in. Alright, so the answer, unfortunately, is not to give more money away. Either the high end or the low end, the answer is actually let’s start to try to recognize that we need to take money away from the high end. And we need to be cognizant that we can’t just hand it out to the low end. And gosh, you know what, that also does We call those taxes and we actually raise them on rich people. And when we do so we reduce inflationary pressures, we reduce the capacity for the economy to purchase goods and services that slows the economy down lowers prices, at the same time deals with that really troubling debt. Right that we’re talking about. Now, nobody wants to hear this. Nobody wants to accept this or deal with this. And I find it incredibly ironic that entities like the Club for Growth, have now come out and said, What we need is to cut tax rates even more, right? The debt is a problem, we need to cut tax rates even more, and we need to cut spending, there’s no mechanism to cut spending. Right, the money that is being spent right now half of it is basically half of the increase is tied simply to the interest expense, you can’t stop paying that. And you can’t stop paying Social Security, and you can’t stop paying Medicare. So what exactly do these people think you’re gonna cut?

Andrew Brill 35:50
Hey, you gotta protect yourself? Absolutely. Now, is is when the Fed increases interest rates, they’re obviously looking to slow the economy. They’re, they’re looking to, you know, have businesses borrow less, they’re trying to get some money out of the economy or, you know, to flow slower, and stuff like that. Is the American people collateral damage for that? Because it’s look, it’s the big businesses that are throwing this money around it? Yes, we have the companies like Nvidia and Facebook, there’s oh, we’re spending billions and billions of dollars on AI. So they have the cash, they don’t have to. And at this point in time, money’s a little too expensive. So they’re gonna use their cash, wait for interest rates to come down, then they’ll replenish their cash when they need to. But is the American people the collateral damage when they raise interest rates? Before

Michael Green 36:43
I answer that question, the answer to which of course, yes. I’m going to share with your viewers an incredible event that’s underway right now. So Google, is being sued under antitrust provisions by the US government. For similar to Apple having a closed Play Store, in the closed app store, right? You have the same thing under Google Android, Google has been found in violation of antitrust by keeping that closed and not allowing competition to emerge within the space. They’re currently in court in San Jose. And when faced with the prospect of losing this, the answer for Google was, here’s a check. Right? They literally wrote a, they provided to the court a cashier’s check saying this is the maximum amount that you could actually claim as damages, you’ve already declared, This is the maximum amount, here’s the cash just go away. Right now, what they’re trying to avoid our civil penalties associated, they could potentially break up Google, for example, right, but the arrogance of showing up in court and simply saying, Here’s a check, by the way, written out of our petty cash effectively, right now just go away nice little US government is a message that the US public should be well aware of.

Andrew Brill 38:05
But yet, they don’t pay a lot in taxes. And a lot of these big corporations don’t hence, hence part of our problem, if if they paid the taxes that they make, if they pay the taxes that are equivalent to the money they make, we’d be in a much different situation with a lot of these huge corporations.

Michael Green 38:20
That’s really the sad part is that, you know, none of us like taxes, right? And all of us want to become rich. And so we understandably sympathize when people who are wealthy or corporations that are extraordinarily wealthy say, we should minimize taxes, and we shouldn’t penalize people become rich, right? Because that’s what we want when we want to be part of that club. But the simple reality is, is that the process of protecting those benefits either through lobbying, which is extensive corporate capture, regulatory capture, etc, it’s exploitation of tax shields and tax benefits on a global basis. All of these are being used to effectively pull the ladder up behind these entities and individuals, making it harder for the next generation of Americans to achieve.

Andrew Brill 39:06
Basically, we are still I heard the comment we’re stealing from our grandkids at this point. Absolutely

Michael Green 39:10
correct. That really is the right way to think about it. And we’ve known elements of this, unfortunately, we kind of are the grandkids in this process, right? There’s a reason why the boomers are so widely reviled. And I apologize to those in your audience who are watching this, because almost by definition, if you’re watching this, you’re a part of a group that both cares, and are concerned, right. And so like you are not the problem, although we all need to wake up and recognize that the behaviors that we’re describing are facilitated by us basically putting our heads in the sand and saying, well, as long as I’m protected, right, we all need to kind of wake up at this point.

Andrew Brill 39:47
It’s like what what do we do? How do we protect ourselves? Where are where are we putting our money these days to make sure that a look you know what, I need my money to at least work for me? What are we doing these days?

Michael Green 39:57
Well, again, as I said, like we are in an interesting in a position where the riskiest investments offer some of the highest returns that they’ve offered in over 20 years, right, you can make in something like a, you know, 1020 year tip, you can make two and a half to 3% on an after tax basis, and you’ll be an after inflation basis, and you’ll be compensated for the risk of inflation. That’s a really attractive return profile, I just want to remind people that throughout history, to earn a 1%, real rate of return would mean that you’re a quadrillion error if you started investing in, you know, one BCE, or in one ad, right. So like, those numbers accumulate over time and become very meaningful. It’s important in an environment like this, to think about protecting what you have, and to think about protecting your family and maximizing the resources that are available to you. Candidly, the opportunity to do so in a manner that guarantees what you’re going to get out in a real fashion is something that I think is under appreciated in today’s market.

Andrew Brill 40:57
So start young, and let it accumulate, yes, start in

Michael Green 41:00
one ad and let it accumulate, you’ll be fine. No, I mean, look, the reality is, is that if we, if we are thoughtful, and we manage our economy, well, we can all be extraordinarily successful relative to those who came before us. Because cumulative technology makes lives better for everybody involved, productivity continues to rise, we are better at doing things and our grandparents were right, probably not at some things, but certainly at most things. And as a result, like we have the potential to create tremendous wealth as a society, we need to do a better job of returning that wealth in the form of human capital for the next generation.

Andrew Brill 41:40
Is that is AI a good thing? I think AI is a good thing.

Michael Green 41:43
And the reason I think AI is a good thing is because ultimately productivity enhancing capabilities, raise everybody as well. Again, it becomes a question of how do we choose to share that, right? How do we choose to distribute the benefits associated with that, if we enter a future in which there is a single dominant AI, and that single dominant AI funnels the profits, from all applications of that AI to a small group of individuals will simply become a monarchy, those individuals will eventually take over, we’ll lose our democracy and all the discussions we’re having around this will be removed, right? I don’t think that’s the direction that we’re going. But I do think like, if I take all of that and separate it from the actual productivity enhancing characteristics of artificial intelligence, artificial intelligence is not meaningfully different than artificial horses. We call those cars, steam engines, electric engines, etc, right.

Andrew Brill 42:40
And so those are good things, those can enhance our standard of living. Thank you so much. This was awesome. I really appreciate it. I appreciate you coming on again. And where can we find you? Other than at simplify? Well, you can find me at simplifies website You can also find me on Twitter as at Prof. Plumb 99. And finally, if you are curious about listening to my writing in longer form, then you’ll find in you know, 240 character tweets, you can look up my substack at Yes, I give a And I hope people do. Excellent. Thank you so much. And we’ll have you again soon. I appreciate it. Thank you very much, Andrew. That’s a wrap on another discussion here on Wealthion. We hope you enjoyed it. Thank you for joining us. If you need help being financially resilient, please head over to and sign up for a free no obligation portfolio review with one of our registered investment advisors. And remember to follow us on social media for the latest news and information to help you invest wisely. And if you could like and subscribe to the channel, we’d greatly appreciate it. Don’t forget to hit the notification bells so you can find out when we post new videos to the channel. Thanks again for watching. And until next time, stay informed, be empowered, and may your investments flourish. And if you liked this content, please check out this video next


The information, opinions, and insights expressed by our guests do not necessarily reflect the views of Wealthion. They are intended to provide a diverse perspective on the economy, investing, and other relevant topics to enrich your understanding of these complex fields.

While we value and appreciate the insights shared by our esteemed guests, they are to be viewed as personal opinions and not as official investment advice or recommendations from Wealthion. These opinions should not replace your own due diligence or the advice of a professional financial advisor.

We strongly encourage all of our audience members to seek out the guidance of a financial advisor who can provide advice based on your individual circumstances and financial goals. Wealthion has a distinguished network of advisors who are available to guide you on your financial journey. However, should you choose to seek guidance elsewhere, we respect and support your decision to do so.

The world of finance and investment is intricate and diverse. It’s our mission at Wealthion to provide you with a variety of insights and perspectives to help you navigate it more effectively. We thank you for your understanding and your trust.

Put these insights into action.

This is why we created Wealthion. To bring you the insights of some of the world’s experienced wealth advisors and then connect you with like-minded, independent financial professionals who will create and manage an investment plan custom-tailored to you. We only recommend products or services that we believe will add value to our audience.  Some links on our website are affiliate links. This means that if you click on them and use the affiliate’s services, we may receive a payment from the vendor at no additional cost to you. 

Schedule a free portfolio evaluation now.