Thinking We’ll Avoid Recession Is Delusional | Michael Green

Michael Green 0:00
There is no scenario on earth in which a surge in revolving credit debt for people buying, you know, consumables, groceries and everything that’s not good in an economy. That’s like anyone who thinks that is good is insane

Adam Taggart 0:20
Welcome to Wealthion. I’m Wealthion founder Adam Taggart. As we enter the second half of 2023 Will the stronger than expected recovery in the markets continue? Or will forces such as the lag effect of the Feds hawkish ly aggressive policies over the past year, ruin the current party? For insight it helps to talk to those tasked with Captain and client capital through the season ahead. Today, we’re fortunate to hear from Michael Green Portfolio Manager and chief strategist at simplify Asset Management. Mike, thanks so much for joining us today.

Michael Green 0:55
Adam, it’s a real pleasure.

Adam Taggart 0:57
Hey, it’s always pleasure to have you on the program here was before we started the cameras here, you were telling me about your cross country travails? I’m glad they’re over. Glad you’re in one piece, looking forward to this discussion with you. Lots of questions for you. But let’s just kick it off with the regular general one I’d like to start these discussions with what’s your current assessment of the global economy and financial markets?

Michael Green 1:20
Well, so I think it’s been very clear that the global economy is slowing. I think at the end of 2022, there was a lot of discussion around the idea that perhaps the reopening of the Chinese economy would provide the stimulus that would keep the rest of the world going, effectively the reverse of the decoupling hypothesis or a repeat of the decoupling hypothesis from 2008. Unfortunately, at this point, I think that’s been largely acknowledged to be a bust, the Chinese economy has not proven to be nearly as robust as people had anticipated, and the rest of the world has slowed down significantly more. On the flip side of that you’ve seen obviously, equity markets in particular have been extraordinarily strong, and across multiple geographies, whether it ranges from Japan, to the United States, particularly in the technology sector, to Europe, you’ve seen the impact of, you know, the end of the 2022, quote, unquote, bear market continuing into 2023. And I think that’s led to an awful lot of confusion about you know, what’s really going on, it doesn’t feel like it’s possible that the economy is slowing down to the magnitude that we seem to be indicating, particularly in Europe, which already appears to be deeply into recession. And squaring that with the behavior of financial markets, I think, you know, one of the things that’s so fascinating is how much our ex expectations are shaped by the behavior of financial markets themselves, right. And the performance of the NASDAQ in particular, for 2023, I think, has a lot of people scratching their heads. For me, it’s a little easier because I look at financial markets and say, they themselves are derivatives of flows and behaviors. And until you see those flows and behaviors change. And you’ve heard me talk about this often. I don’t see any reason why we should expect them to meaningfully reflect economic fundamentals.

Adam Taggart 3:09
All right, so let’s, let’s actually talk about the key flows that are going on here, a theme on this program, a lot of late has been liquidity, where I think folks really expected liquidity coming out of the system pretty substantially at this point, because we had turned off the Fed’s monetary stimulus and tightened interest rates and doing quantitative tightening. And now we’re refilling the TGA. You know, after the debt ceiling has been raised, there just seems to in financial stimulus, we’re not passing any more financial stimulus right now. So there was a, there was a sense of getting to a stimulus Cliff this year, and a lot of the things I mentioned have been happening. Now that said, there have been other things going on that have been continuing to add liquidity in here and net net, you know, people have different ways they measure this, which is what makes it somewhat complicated. But but net net, you know, there are some that say, it’s actually we’ve had net liquidity entering the system, and if so, that does explain in some ways, the robustness of the financial markets. I guess I’d love to hear any thoughts you have on the Quiddity maybe get a sense for how you like to track it, and what other flows right now do you think are, are instrumental in explaining, you know, the equity markets performance so far?

Michael Green 4:34
Yeah, I mean, the great thing about liquidity is is that there’s so many different definitions of what it actually means, right? And so part of the definition of liquidity can include things like the wealth effect associated with stock prices, so stock prices going up, enhances liquidity, right and increases the collateral that’s available, etc. I think you know, when most people talk about liquidity these days, they’re very focused on the central Dynamic dynamic. And so, you know, we look at the continued tightening of balance sheets on central banks, in particular the quantitative tightening that’s coming from the Federal Reserve. They a lot of people have been confused by that. Obviously, you mentioned the TGA, your audience is going to be familiar with the offsetting effect of the of the Fed tightening its balance sheet, at the same time that the Treasury was spending down its checking account that creates a unified government balance sheet that on jet in general has actually been a net provider of liquidity on it on a year to date basis, right. I think that helps to explain the behavior of financial markets. I don’t think it’s fully responsible for it, though. And I just want to emphasize that one of the key things that we’re seeing in markets has been this extraordinary divergence between kind of, you know, the fabulous seven in the form of the leading stocks in the NASDAQ, and much broader markets. The Russell 2000, I believe, is actually now down again for the year. If I look within the Russell and they do an equal weighted Russell, it underperformed. So the majority of stocks themselves are actually flat to down on the year, even as financial markets, particularly again, in the form of something like the NASDAQ 100, the Q’s that’s appreciated very sharply on a year to day basis, right. So we’re seeing, you know, what I would describe it as a combination of liquidity. And the term that I use for the economic term is in elasticity. Where changes in supply and demand can cause very significant changes in price, we often hear the idea of, you know, oil demand is inelastic. Well, another example of inelastic demand is Microsoft buying back its shares or Apple buying back at shares or in video buying back at shares where it’s doing through doing so, through an accelerated share repurchase program, where they don’t care what the price is, right, they’re not trying to time a bottom or anything else. And so they become a continuous force, increasing the demand for the underlying shares. That in turn can cause the stock price to rise significantly unless there’s very willing sellers. And that, to me feels like the much bigger story that we’ve seen so far in 2023, which is just generally an absence of people who are willing to bite the bullet and execute a semi distressed sale. Right? This is absolutely what we’re seeing within the housing markets, for example, where the unique feature is actually not the number of new homes, for example, that are being built or bought, it’s actually on the existing home sales, or in the commercial real estate space, where everyone is doing everything they possibly can to avoid selling, right, they’re holding on to their mortgage effectively as compared to their house. Because they recognize that if they go to sell their house, in the United States, for example, you have to get rid of your mortgage just secured by the property. And a new mortgage that you enter into is going to cost you dramatically more, right. So most people are doing everything they can to avoid stepping out of that situations that for me, it was, you know, one of the more interesting experiences you mentioned, my cross country trip, I actually just sold a home in California, I am not buying another home, I’m doing everything I can to avoid entering into that transaction, precisely because I look at the value of the house that I just sold. And I’m like, This is crazy, this house shouldn’t be worth anywhere near this amount. In these conditions, the carrying cost for the new owner of that home is roughly three times what mine was. Right? That’s an extraordinary change when you stop and think about it. In terms of the implications of much higher home prices over the last five years against dramatically higher interest rates. We haven’t even begun to see that filter through the system yet. And that, to me is what’s going to be really interesting. We’re starting to see it internationally. You’re seeing the UK government being forced to respond to the dramatic increases in interest rates and the costs of mortgages as those mortgages reset and the UK, Canada is facing similar challenges. Those tend to create their own catalysts where suddenly the explosive, the explosion in carrying costs, changes that calculus and forces people to bite the bullet. But across corporate debt, across commercial real estate across residential real estate, we across equities for that matter, we really have not yet begun to see those implications that distressed selling, or that recognition of a much higher cap rate to us, economic you know, the real estate economic term. It just hasn’t yet penetrated into the system.

Adam Taggart 9:45
Alright, so in my inner introduction to this discussion, I mentioned the lag effect is one potential variable here that could come into play later this year. It sounds like from what you’re saying you expect there to be some sort of reckoning from this higher carrying cost that the economy is being forced to take on right now. Right. But But right now, players are trying to resist it right, you give an example of homeowners right now transactions have dried up, basically, because nobody wants to sell, they don’t want to give up their affordable mortgage yet at this point in time. Do you see that as more or less, you know, a relatively predictable development here that we’re going to start seeing more and more parts of the economy crack under this higher cost of capital?

Michael Green 10:40
Unfortunately, I think that’s I think the answer to that, of course, has to be yes. And I think the problem is, is that those lag effects are what contributes to the Hemingway observation, right? How did you go bankrupt slowly, and then all at once, right. Once the first distressed sales start, then the prices start to reset lower suddenly, people are facing the reality of, well, now maybe I can’t sell because I can’t actually afford to pay off the mortgage that I now have. If that continues to carry through and then leads to a decline in various other economic activity, which causes people to be unable to take jobs in new locations, be unable to relocate, unable to prosecute their retirement as they originally planned their objectives, then all of a sudden behaviors really started to change meaningfully. And that whole system can start to move at a much faster pace. The other component, of course, is is that when you start thinking about things like commercial, real estate, secondary, private, you know, the private markets and credit the private markets and equity, as public markets, or as transactions begin to validate in much lower pricing environment, you start to see pressures emerge in all sorts of ways for people to recognize the losses, either from a tax standpoint where it can be advantageous, or from a need to refinance, which is really what I’m looking for in the corporate sector. You know, the number of companies that are in the levered space that can actually afford to refinance at today’s interest rates is remarkably low, I can send you a chart on this, and I posted some some charts online on this, and most recently, my substack. But if I look at the high yield universe, and I split it into what companies are currently paying in terms of the coupon, so remember, they’ve issued the paper, while it can be trading at a distressed level in the secondary markets reflecting a much higher interest rates, the company itself doesn’t have to pay that interest rate, right? The company is paying its prior interest rate, it’s very much like a home a homeowner who has you know, taken out a mortgage at a fixed rate, they pay the current costs. That coupon in the high yield space and across the levered universe on average is about five and a half percent, if I use the secondary market pricing, which is the price that we’re really seeing transactions occur in the secondary market. And again, because of that resistance to accept much lower prices, the transactions that we’re seeing in the secondary markets are largely in higher quality credits, not the distressed credits, that number is somewhere around eight and a half percent. If I look at the new issue market, where either private equity sponsors are transacting in the private credit markets, or where paper is being printed, for you know, index, similar sort of transactions, the pricing is suggesting more like 12%. And if I just kind of run across those metrics, the profitability in the corporate sector, particularly for companies with leverage just completely collapses in this environment, right? I mean, you can almost think about it in a really perverse way. If you were a corporation that took out five and a half percent debt, you know, three years ago, you’re currently paying five and a half on your debt, your cash balances are now actually earning five and a half percent versus zero you were getting before, you have no incentive to put money to work, you have no incentive to make investments, etc. You’d almost rather just make the risk free five and a half while you wait for hopefully, the Fed is going to pivot and cut your costs. So you’re not going to get hammered with this. Because candidly, you lose your equity value in almost all of these companies, you go from about 85% of the index being profitable on an operating profit basis. With the current level of interest rates, the current coupons they’re paying to get only about 7% of the universe is actually cashflow positive at the secondary market levels of interest rate. I mean, it’s just an extraordinary deterioration in corporate profits that we’re going to see tied to the much higher levels of interest rates.

Adam Taggart 14:47
Oh my gosh, let me just repeat that to make sure I heard you say it correctly, at the current interest rates that they’re paying on the existing that they hold, but 85% of the companies in the index For profitable, but if they rewrite to what you’re seeing, as what new issuances are charging, it drops to 7%. That would be profitable. Yes. Wow. In sir, which index? Were you looking at there?

Michael Green 15:15
So this is this is effectively the high yield universe. Okay.

Adam Taggart 15:19
That high yield universe. Okay, that is frightening. I mean, some some would call that kind of apocalyptic. And I know you’re not saying they’re all going to reset at the same time, right. But but that is that, really,

Michael Green 15:31
but it is. I mean, this is the reflexivity dynamic that George Soros highlights within markets, right? I mean, so once companies start to have to reprice on that framework, or companies begin to enter into distress, and we’re seeing an extraordinary increase in corporate bankruptcies, it just gets worse, right? Because suddenly, the collateral is worth significantly less. I mean, I was I was laughing about, I think I actually posted this and I put out a P, I put out some work under tier one alphas of is a data service that I’m involved with, tied to the options market, and we were highlighting the disc connect between the valuation of enterprise software companies in the public equity markets, right. So SAP is trading at 100 times PE. And if I flip that around, and I look at the private credit markets, and I look at the current level of interest rate for this competitor, variant, I think it’s variant Veritas, I’m sorry, Veritas, you know, their their debt is pricing at 17 and a half percent. Let me just stop and think about that. 100 times earnings, in other words, implying a 1%, cost of equity. Right, roughly, I’m being very simplistic in that analysis, versus 17 and a half percent price for first lien debt. That’s insane. I mean, it literally makes no sense whatsoever. And I understand that they’re different companies, I understand that they’re there there are intricacies around them that make that direct comparison. Not entirely perfect. But, you know, this is like the breadbox type of analogy, right? Yes, it’s definitely bigger than a breadbox.

Adam Taggart 17:11
All right. So gotta head this whole progression, where I was just gonna walk this conversation through, but you’re kind of getting into a really interesting meat of it. So why don’t we just dive right in with both hands? So it sounds like yes, you do believe that? Sort of the cruel math will catch up with the economy here. What do you see as being maybe some of the biggest triggers or catalysts for maybe the fracture Alliance, we’re starting to see, to actually, you know, really begin to break up in here? Is it going to take something like an earnings recession, or something like, you know, unemployment really start rising, and people started losing their jobs, and that impacts consumer spending? You know, what do you see as sort of the most likely triggers that could could turn these first little, you know, snowballs into a full fledged avalanche?

Michael Green 18:07
Well, so the fun part about credit markets, and, you know, again, I’d use air quotes around the fun part, right is, is that they embed their own catalysts. It’s called maturity and coupon payments. As I mentioned, the coupon payments as they currently exist are not really the issue, right. Most companies are able to service their debt, just like most households are able to service their mortgages with very few problems. It’s when that refinancing occurs and that refinancing is always just tied to maturity, right? So we have a maturity wall in high yield that hits around 2024 2025. Heading into those sorts of events around 2024 2025, you need to start to recognize that you don’t want to be in your last year trying to refinance, because then it’s the equivalent of showing up and saying, you know, I’m desperate to borrow money, what will you lend it to me?

Adam Taggart 19:00
Right, right.

Michael Green 19:02
So you tend to like they should be out there refinancing this paper today? They can’t, because the secondary, you know, the primary issuance markets are so much wider than their current coupons than if they were to actually go into the markets today. They’re suddenly in a position where they have to explain away why the deterioration profitability, shouldn’t worry, the debt investors, right. So everybody is in this kind of frozen standstill, when you ask about the catalysts. It almost always comes out of the debt markets, because the debt markets have this catalysts, you know, embedded in the maturity transformation in the maturity wall associated with it. So that’s where I’m really looking at it. The second one that you mentioned, and I think it’s a super valid one is unemployment. Right. And so when people have jobs, particularly those who own homes, who tend to be white collar workers, at the higher end of the income spectrum, as SR reality in terms of homeownership, you know, when they start losing their jobs, then they’re suddenly forced to confront the realities of do I need to change my location? Do I need to liquefy some of my assets so that I can cover these costs? By and large that feels to me as a second catalyst that’s underway and already well underway. Where this and I, I’ve written about this in particular, but you know, this is a very different recession than we’ve seen in the past. Historically, the oversupply has been at the low end of the labor, labor spectrum, right, it has been the services work, the low end services worker has been the manufacturing worker, it’s been the construction worker who has lost their job. This time around construction is a great example of this. I mean, this is the first cycle in US history, in which we have actually built fewer homes than were occupied in the last decade. And that seems crazy when you said until you recognize that homes are a depreciating asset, you need to replace some fraction of the existing stock every year, in order to accommodate future growth. This time around, we actually haven’t done that this is the first time ever. So starting in q4 2018, was the first time in US history where you could look back and say more homes were occupied than built in the last decade, that’s continued over the last several years, it’s contributed to the tightness in the in the construction sector, that is protecting that lower end worker, we all experienced this, when we try to hire a plumber, or an electrician or anything else. The dynamic that’s happened at the higher end is we’ve seen an extraordinary increase in the number of Americans. And this is a global phenomenon that have tertiary education, college degrees. And they’re competing for these jobs that are suddenly actually facing automation pressures in the form of things like chat, GBT, right, where suddenly the productivity of high end white collar workers, whether it’s tied to transportation, you and I are doing this over an electronic transportation network as compared to having to travel and do it in person. Right, the initial dynamics of that creates tons of additional demand for broadcast content, you and I have both benefited from those dynamics. But on the flip side of it, we just don’t get on planes as much as we used to, right. So that transportation sector doesn’t need the same number of workers as it might have historically, likewise, the the, you know, air traffic controllers have not expanded at cetera, et cetera, et cetera, we’re seeing higher productivity push through those. And the one area where we’re really starting to see a push through is in things like the Googles, you know, the high end marketing, administrative support, the programming capabilities, etc, we’re starting to see layoffs in those areas that we’ve just never seen before. Right? That is going to be an interesting dynamic, because we just don’t have good government data, the data that we track in the economy is not at all designed to track rising unemployment amongst college graduates. So we actually have the data. I mean, the percentage of college graduates that are now unemployed, is above 2%. Historically, that number was in the kind of 1% range, right? It’s, it’s up almost 100% versus its historic averages. During expansionary periods, we’re starting to see that data come through, where things like the total wage, so if I’m using things like personal income metrics, that track all wages together, we’re seeing those wages fall, even as we’re being told that, you know, the labor market is super strong, and wages are rising. Right? Yeah.

Adam Taggart 23:44
Sorry, I’ll let you conclude there. No, I

Michael Green 23:46
was just gonna say so you know, the data systems that we have that we track through the BLS, etc, unemployment metrics are inevitably skewed towards the traditionally cyclical aspects of the economy. But we’re seeing extraordinary weakness start to come at the high end. And so it’s not well tracked, and not well understood.

Adam Taggart 24:04
And that’s, that’s interesting. We’ve had a lot of discussion on this program of late of how much can we really trust the data that’s coming out from the BLS. And you’re getting a piece of the puzzle here, which is, well, one of the reasons why it might not be tracking reality, as well, this time around is because we just have a different dynamic going on here where it’s it’s set up to track a different type of deterioration of the workforce that we’re experiencing right now.

Michael Green 24:29
Yeah. So I don’t have a lot of sympathy for people who spend a lot of time worrying about, you know, conspiracy at the BLS, right. You know, the idea that they’re goosing the numbers to make Biden look good or to make, you know, Trump look good, depending on who’s in office, et cetera. I just don’t have a lot of sympathy for that. Because candidly, you know, containing conspiracies is really hard. But these are genuinely hard working talented, smart economists who are trying to do what they have done in the past, right? They’re not looking at this and saying, you know, like, you’re just not compensated as a $75,000 a year or $100,000, a year BLS employee to sit there and pretend to be like, well, what if this was happening in a totally different way than it’s ever happened before? Right, that’s just so outside of your scale of activities and scope, that it’s unrealistic to expect it. And I think unfortunately, I’m I’m hugely critical of Jerome Powell, in part because I think he himself should actually be showing that imagination. He should be saying, How can we think about this? How can we explain the extraordinary divergence between consumer sentiment and what we’re actually seeing in terms of the employment market? You know, the quick answer is, is there that he’s just not right, the Fed is basically fighting a war that we lost 50 years ago under Volcker to prosecute, you know, inflation using interest rates, it just doesn’t work. We’re pursuing a terrible policy path that I think, you know, to go back to your earlier question, do I think the lagged effects are going to hit I think they’re going to hit and I think they’re going to hit really hard, and proved to be really ineffectual in their primary objective of containing inflation.

Adam Taggart 26:10
Well, and one of the additional dangers about that is if the BLS numbers aren’t super reflective of reality, and yet the Fed is using them as a benchmark for saying, Hey, should I continue tightening here? Because, you know, Powell has essentially said, you have got these two mandates, but I’m going to prioritize taming inflation now. And so therefore, I want to see some steam come out of the job market, right, I’m trying to reduce demand a little bit. And if he’s not seeing that steam come out, because the numbers are still really low, it gives him more leeway to to be even more aggressive. And to your point, if the lag effects catch up for us, we may be over tightening right now and not be aware of it yet.

Michael Green 26:52
Yeah, I mean, from my standpoint, I think there’s no question about that. And unfortunately, again, the metrics that we use for things like measuring inflation, and I just think it’s really important for people to understand that inflation, right, you know, capital I in X, you know, the exclamation after it is a concept that we’re in economics means very, very different things, right, there is inflation, meaning debasement of the currency, there is inflation, meaning a change in the price level, as measured by the CPI, which is a fixed basket, and so very subject to the emergence of supply disruptions in particular areas that are measured, right, so CPI, 40% of it is in housing, it would be foolish to think that the impact of a shortage of construction over the last decade would not show up and manifest itself in spikes in the cost of rent, for example, right. And particularly in an environment which you hike, interest rates make it harder for people to form households in which they purchase homes, therefore, they’re forced to go Hatton and to corporate owners, and the rental space, which has also experienced a dramatic change, moving from Mom and Pop renters to an increasingly corporate market that is capable of managing its inventory and a much more efficient use, you know, the word efficient there with intentional irony, you know, manner that preserves their pricing power versus the mom and pop, who traditionally be like, Oh, my gosh, I’ve got two units. If one of them’s vacant, my cashflow collapses, therefore, I’m willing to see it on price. If you’re Blackstone or somebody else, you can manage that inventory much more efficiently, because you’ve got 1000s and 1000s of properties, right? 10s of 1000s of properties. So all of these are showing up in the measured unit that we call inflation, and influencing the behavior of the central banks and policymakers. Again, it’s it’s really asking a lot to expect a government bureaucrat to dig into the data and say, Well, no, if I, you know, particularly manage it in this way, and I look at it slightly differently, you know, then I get totally different results. That’s just not their job. Right. It’s supposed to be the job of the people at the top, but I don’t think they’re up for up to the task.

Adam Taggart 29:07
Yeah, yeah, it sounds like you don’t have a ton of confidence in the pilot in general, but you’re worried that the data on his dashboard there isn’t entirely trustworthy either. I want to just based on something you just said, I want to bring up a tweet that I saw that you put up relatively recently, from your cross country trip, standing there next to a statue of President Truman, where you say that regular readers of your work know that you’re you admire Truman, especially for his State of the Union addresses. And you say inflation, you know, he defeated inflation with growth, not interest rate policy, and then you make this statement. The role of government needs to be redefined, not eliminated, or we will indeed lose our democracy. So, talk to me a little bit more about that and how if you were put in charge here, you you would prefer that we were going against this and how we would be fighting inflation differently than the current crew.

Michael Green 30:07
Yeah. So I mean, just again, to help people understand and orient themselves remember that in 1946, as, as the troops are coming back home, one of the primary fears, you know, we’ve dealt with the debasement of the currency and the extraordinary increase in demand for non productive activities, like putting soldiers in the field munitions, it, you know, both on the ground and in the air, you know, we’ve destroyed a bunch of stuff, moving us backwards. And so the supply disruptions that are not at all dissimilar to what we experienced around COVID, where we shut the world down. And then as we turn it back on, we experienced all sorts of disruptions, this is happening at that time period. But there’s the additional wrinkle of, well, we have to actually address the shortages that are emerging in real time in the US economy, as the soldiers come back, because if they come back, and their quality of life has deteriorated radically, and they go back to the Great Depression, we could very well end up facing homegrown threats in the form of communism, just like they experienced in in, you know, Eastern Europe, etc, right under behind the Iron Curtain. And so in response to that, the US government made a very clear statement of we’re going to mobilize the same resources and the same capabilities towards growth. Some of those were focused around the housing market. So we had an extraordinary growth of the housing market, people will remember things like Levittown, etc, we also dramatically increased our transportation capability, admittedly, it was largely under Eisenhower and for national security reasons that we introduced the highway system in the United States, but the amount of roadbuilding, etc, that occurred under the Truman Administration, the expansion of capabilities. And all of this was occurring against the backdrop in which we’re offering the GI Bill to dramatically increase the activities and skill level in the US economy. Right, that’s happening. And in that context, we managed to defeat inflation the right way we expanded supply. Alright, we’ve made it cheaper and easier and better for people to acquire what they wanted in life, whether that was an education for their children, their own little plot, you know, a quarter acre plot of land or eight acre, lot of land, whatever apartment in Peter Cooper village, Stuyvesant Town in New York City, right, we did all of those activities, with the objective of actually improving the standard of life. This time around, I mean, it was said most eloquently. And, again, I tend to be sarcastic in my use of words, but, you know, said very eloquently by Hugh pill, so that, you know, we just have to accept we’re poor. I think it’s, it’s a terrible statement. It’s completely absurd. We’re not poor, we’re choosing to be poor.

Adam Taggart 32:54
So I’m just curious, some people might point to something like the inflation Reduction Act, right, which has a lot of infrastructure spending, and hey, we’re gonna, you know, electrify the transportation grid and all that. And they might say, Okay, those are sort of big public works projects that are putting people back to work and investing in the future of this country. You don’t necessarily have to opine about that particular program. But I’m just curious, is it is it programs like that, that you’d like to see? Or is there any? I’m just curious, you know, what do you think would be some important pieces of the puzzle of the solution here that you’d like to see implemented?

Michael Green 33:26
So I actually think that’s a great example, unfortunately, now, I may disagree with many aspects of the inflation Reduction Act. But I actually do think that the importance of the inflation Reduction Act, or that it claimed to be inflation reduction, and many people would point to it as a further expansion of the deficit and in, you know, a competition for resources with the private sector, all of that has occurred against the backdrop of inflation decelerating rapidly. Right. So now, while I disagree with the idea that we can move to a green economy, and that the objective function of the economy should be replaced fossil fuels, with what I consider to be largely inferior sources of energy, right, but that dynamic is mobilizing resources and putting them to work. And candidly, it’s not driving inflation higher, right? This is exactly the Truman Doctrine in that context. We can actually direct resources, we can make industrial policy, we can accomplish objectives, right, while at the same time lowering inflation, if we spend it in reasonable ways are at least not driving inflation higher. What I would like to see is I’d like to see much of the red tape removed around all sorts of activities to encourage the private sector to step in and do this. I have some involvement actually was on a call today with the guys at truth lation.com, which is a website I encourage people to check out because it’s actually got a pretty good metric of real time inflation. You know, we’re now down firmly into the twos. The problem is that it’s likely So we’re likely to see many aspects of inflation return. Because we haven’t addressed things like housing. We haven’t addressed many of the issues around those types of dynamics by saying, you know, what, let’s dramatically increase the quantity of housing is available, let’s facilitate creating an expansion of opportunities for young people to obtain education in a way that is not dissimilar to the GI Bill. And that doesn’t mean dumping people into colleges, it means training programs that allow people to actually compete for the the opportunities that exist within plumbing and earn a trade like this, instead of right, we able to trade programming that we’ve devalued because we somehow assign value to a college degree, instead of what a college degree is supposed to be about, which is obtaining skills for employment. Right? I mean, I like this all the time, we talk about using market based measures. And then we use something as absurd as our current educational policy to strip all the signals from the educational system, right, it’s completely it should be viewed as clinically insane that you pay the same interest rate to attend college to get a degree in civil or electrical engineering where your job prospects are fantastic, as you do to obtain a degree in French medieval literature, where your job prospects are non existent. Right, like, that’s what the market is actually there. For private sector, lenders should say, you know, what, I’m more than happy to lend to people who want to go to MIT and get a degree in engineering. Right? Those people are great credits, you know, who’s not a great credit, the kid who goes to Bunker Hill College and wants to become a psychologist, right? It’s just not a good investment. I’m sorry, it’s not. Right. But that sort of thing is facilitated by the private market. It’s facilitated by actual market economies. What we have today is is a pale imitation of that. Okay,

Adam Taggart 37:01
got a couple of things. First off, I just want to note for users here, one of the people who I’ve been reaching out to for couple of years to come on this program so far, with no success, but as Mike Rowe, and like I imagined, you would probably find a lot of his thoughts on the education system and the importance of the trades and whatnot, very similar to yours. Okay, and it sounds like you know, what you’re saying is, is you’d like to see the government kind of instigate some of these these big works, but really instigate them and then create the opportunity for private capital to come in and really create a market driven solution behind these these major movements.

Michael Green 37:46
Yeah, I mean, that that, unfortunately, is the great irony of where we are today. It’s part of the reason why I highlight if you read my work, I tend to highlight the cyclical aspect of it. I talked about a changing relationship with government or changing role for government. You know, we react violently or angrily when the government, you know, when people hear the government say, Well, we have to regulate Google or Twitter, right, as if somehow or another we they were not regulated to begin with, right, the Internet was very clearly regulated. They were protecting, protected, given a walled off garden under Section 230, for example, that allowed them to develop many of the capabilities that they have today, we’re seeing all sorts of behavior that would have traditionally been classified as antitrust behavior, right? Price, monopolistic type behavior, that’s a classroom environment, and we’re scared to death to regulate that. But at the same time, we’re super excited about the idea of stepping in and destroying the market signals for human capital development, as I just articulated, right. So the role of government has is perversely captured in this, like, we’re terrified to do what we should be doing. And we’re engaged in all sorts of band aid applications that are preventing the actual signals that are coming through. So it’s, you know, I, it sounds strange, sometimes when you hear a chief strategist and an investment company or a portfolio manager talking about these dynamics, but I genuinely believe we’re in a world that is much worse than it could be, if we were to properly evaluate the implications of breaking up or restricting from a competitive standpoint, the behaviors of many of the larger institutions in our society, and subsidizing and encouraging the development of competition and human capital.

Adam Taggart 39:34
All right, well, look, if you if this was all a prelude to the Mike Green 2024 platform, you got my vote.

Michael Green 39:42
Well, I appreciate that very much. But I very much fall into the category of if nominated, I’m incapable of running or serving, so I appreciate it very much, but there are better people out there that hopefully I can offer some advice to

Adam Taggart 39:58
Okay, actually, I Do you hope you get a chance to do that? And I know that your your move is taking you a little bit closer to the halls of power. And maybe maybe hopefully some of those folks start listening a little bit more. All right, look, I got a bunch of topics here. Still, I’m going to start jettisoning some of them to be able to get to your market outlook. But before we get their high, you were talking about the maturity wall that the credit markets face in 2024 2025, which is coming it’s it’s a ways out that’s around the corner. Yeah. Feels but yeah. But but in terms of like, in terms of like a recession, and I’m not talking about whatever the current definition du jour is of a recession. But like in terms of the lived experience of the majority of the viewers of this channel, if you do think a notable recession is is in the cards? What’s your current expectation of that timing? is potentially a year or two.

Michael Green 41:07
More. Yeah, so So again, I think part of the challenge is the data measurement, so on some metrics, so by looking at gross domestic income as different from gross domestic product, we’re already in a recession, we are seeing the increase in unemployment and unemployment claims that are beginning to indicate that, I’ll give another really simple example of why that can be really misleading, right. So in the state of California, the maximum benefit for filing for unemployment in any given experience is about $13,000.26 weeks at about $500 maximum per week, if you’re a Google engineer being fired, laid off from your median job of north of $200,000, in compensation, and you’re then receiving six months of severance, you’re not going to file for unemployment, even though you’re technically eligible for it, in order to like that $500 a week, right, you’re going to continue to live off of your severance. And the odds are pretty good that you’re gonna get another job going from Google, at least in the initial waves, because many companies have struggled to find those employees. But you’re also highly unlikely to step in and find a job that pays you in the same way that you were at Google. Right. So I’m very clearly seeing this, I had a discussion with a young person who works at Amazon, right, and is making an extraordinary amount of money for a 27 year old at Amazon is looking at, you know, moving out of Amazon into competing firms, and discovering that none of them pay anywhere close to what he has been making. Right. And mostly it is it’s unlike the housing market. Right. Right. Exactly. Right. And so you know, like, they’re trapped by the proverbial golden handcuffs into the Amazon employment. The Amazon compensation has been largely tied to stock price appreciation. And so it’s not really cash income, Amazon has benefited from under paying its workers, once you properly adjust for those types of factors, you know, and so you kind of end and end up in this weird place where you know, the job that you took, if you happen to go for go to work for Amazon in retail, as compared to going to work for you know, JW, Nordstrom and retail, your experience is radically different, even if you’re a standard line employee, right, not something that should really meaningfully determine the outcomes in your compensation, but it does, and it has and that is characterized our economy. As those opportunities begin to disappear as people are forced to confront those realities. I think you’re looking at a a further deterioration or a sense that the system is breaking in a way that has felt camouflaged for some people in the past couple of years.

Adam Taggart 43:57
Okay, so so just to re ask that question, again, for the lived experience, where people can look around and say, okay, yeah, my life’s getting worse now. Right? Either like my employers laying off or my homes just dropped 30% and its value or my stock portfolio just crashed or whatever. It is that later this year, do you think or does it not really kick off until this maturity wall or some other event, you know, makes it happen in Oh, four or even oh, five?

Michael Green 44:28
Well, I think the maturity wall is kind of the hard end of that, right? So it can happen before then for any number of reasons. Anytime someone asks you for a catalyst and somebody offers in definitive Well, this is the reason why they’re going to fall prey to, you know, over specifying the reason why it occurs. What I would just emphasize is the conditions are in place for that to occur on any number of catalysts, whether it’s the maturity while in the leverage space, whether it’s the deterioration of funding of unprofitable calm Bananas, which by definition, spend more on their employees than they make in terms of their income. Right. So the loss of those is a net loss for employees. Right? All of those are starting to go away. And whether that catalysts emerges next week, or whether that catalyst emerges in a cumulative basis over the next two or three quarters, it feels very definitively that it is here.

Adam Taggart 45:26
Got it? Okay. And if I understand you correctly, you know, there are, there are failure points that could happen to really get the snowballing before the maturity wall hits. But if it hasn’t hit by, then that maturity wall is going to be a pretty big domino to fall. That could, you know, really, then make it happen. But But exactly when it happens, we don’t know we’ll be watching and tracking, you’re welcome to come back in the program, Michael, anytime you see something that you want to wave a flag of ever it

Michael Green 45:53
happens, I assure you all show up and say, See, I told you it was going to happen right then.

Adam Taggart 45:57
Okay, good. And I’ll give you credit, do or not no, but you’ve been very good about this. But But I just want to underscore, but it also here you’re saying is that this is sort of an exponential decay that you’re looking at, or what we’ll call a negative feedback loop, which is that once you start dropping, that will increase the odds that additional shooters will start dropping, right?

Michael Green 46:17
Absolutely correct. Right. This is that, you know, you can think about it. And I actually posted on Twitter, when we can pull it up a chart in response, I forget who was directly in response to where they were saying, you know, the rates of hourly wages in real terms of starting to turn positive as inflation drops, right. And I posted I’m like, that’s a little bit more complicated than that on my math, but I look at things like total personal income, those have been sharply negative when I look at on a per worker basis, we’ll put the chart in so people can actually see this. But if you take something like personal income wages, and total compensation, and you look at it on a per worker basis, inflation adjusted, it’s historically been one of the most stable series in history, right. And the reason why just mechanically is because most times when you talk about a recession, it’s not that people are losing their it’s not that people are seeing their wages fall, it’s that people end up losing their jobs. And so the wage number in aggregate falls to reflect the employment statistics. The unique thing that happened during the COVID dynamic was we saw income and wages explode on a per capita basis, because the number the amount of money people were receiving for not working rose dramatically. Right. So you saw this series rise, and it’s been falling ever since. Right? It’s basically been a continuous decline. I think that has contributed to the general sense of malaise that by and large, everyone feels kind of terrible right now. It’s just nobody really wants to put their hand up and say, oh, you know, my life is terrible, except for Bitcoiners. And, you know, those who are basically disassociated from the system, we all kind of they’re like, Well, you know, things aren’t that bad, but they’re worse than they were last year. Right? I’m really unhappy versus where I was last year. You see that very clearly in this type of data series? And

Adam Taggart 48:21
can I ask you a question on that? Just just to have you include this in your continued answer. So you just took a cross country trip? I just had to fly across country. week or so. Choice? Yes. And, you know, I mean, this is anecdotal. But I hear other people say the same thing, anecdotally, which is, like, I’m looking at all this sort of pretty grim macro data. But like, the airports are still full, the restaurants are still full, we are seeing that people are financing a lot of their their lifestyle increasingly on revolving credit, right. So maybe they’re just shifting to, you know, put it on plastic until they can’t anymore. But I am curious, because I agree with you about the data. But if I look around anecdotally, yet, to your point, I don’t see too many people visibly, at least sort of in my circles, and I’m obviously not representative of the whole country and seeing the type of behavior change that you expect if people are feeling terrible.

Michael Green 49:22
No, I think that’s actually almost a perfect explanation of exactly what I just articulated. Which is if I’m personally facing a reduction in my circumstances, but I look around and everything that I see tells me you know, there’s jobs wanted, you know, people are saying things are supposed to be really good. The restaurants are full, my friends are going out to eat. Well, I’m going to try to smooth my income shortfall by borrowing. I’m going to use credit cards I’m gonna put money onto revolving credit if that’s the only credit that’s available to me to maintain my lifestyle so that I get to behave like my friends behave. Right? I’m not defending this B behavior. I’m saying that this is normal social behavior. The flip side of that is when the animal spirits go in the opposite direction, people are suddenly forced to read, you know, to reevaluate and say, Wait a second, I just put on all this 30% interest rate revolving debt, so that I could get pizza delivered by Domino’s, right? What was the thinking? Right now I have to spend all my time and money trying to pay back that 30% There was a and that’s the hopeful interpretation of it, right? The more frightening interpretation of it again, I’ll give you a link to a tweet that I posted the other day, where some probably 24 year old kid is, you know, speaking on the Instagram and highlighting, I think it was Instagram or it knows tick tock

Adam Taggart 50:46
tick tock just so you know, I put this clip up in my weekly market recap that aired on Saturday, but but continue talking about it.

Michael Green 50:52
So you have this kid who’s like talking about the fact that he founded 10 businesses that he quote, unquote, doesn’t care about, you know, took out credit cards and went and bought $100,000 Watch that he’s going to sell for $80,000 and use that $80,000 to finance his lifestyle as he defaults on the credit card debt to the businesses because business credit card debt doesn’t have recourse to the individual. Right now. That’s just idiocy. Right? It’s it, you know, you’re engaging in fraud, and you’re publicizing it. Right? But the really frightening thing, Adam is is that I think that we have actually gotten to a point of degraded financial knowledge that a lot of people in the younger generation actually want to believe that. Right. And by the way, I want to be very clear, like, I’m not picking on Millennials or Zoomers or anyone else in that construct. I’m actually picking on my generation and the generations that became because we did a terrible job of educating our children.

Adam Taggart 51:48
I was gonna say you’re putting on the education system here. Yeah. Which does a terrible job of teaching financial literacy. Yeah.

Michael Green 51:55
So, you know, but when you see things like that, as I said at the time, like, Please, God tell me, this is not the source of the surge in business formations that we’re seeing in the data. But a part of it is, right. I mean, we’re actually empirically seeing this the the business formation data that directly feeds into the employment data forecasts that are used under what’s called the birth date of the birth death model by the BLS for its forecast of employment behavior, or non farm payrolls to be more precise, attempts to estimate new business formations from Ein applications, employee identification, or applications, which is what this kid did when he went out and started a business, they then took credit cards out, right? We’re seeing things like a surge in business applications, because of ridiculous things like the government change in 1099 requirements, where you used to be able to make up to $20,000 a year without having to file a 1099 for independent business earned income, that threshold fell to 600. Many people individually will remember that as their kids calling and saying, by the way, if you’re transferring money to be over Venmo, you know, you can’t do $10,000, like you used to now, you have to only give me a maximum of $600 or becomes reportable. Or maybe you said that to your kids, because you were aware of it. That’s what’s actually happening. But that’s led to a surge of business formations as Uber drivers and only fans, creators, and DoorDash delivery individuals are suddenly forced to form businesses that don’t have employees, but paradoxically, show up in areas like you know, catering services or food services, not elsewhere classified that according to the BLS, our high propensity to create jobs, businesses, right, so like all of this is feeding back into a situation in which like, we just don’t really have transparency in terms of what’s happening. But there is no scenario on earth in which a surge in revolving credit debt for people buying, you know, consumables groceries, and I think that’s not good in an economy. That’s like, anyone who thinks that is good is insane.

Adam Taggart 54:12
So I totally agree. And I wish I had more time to delve into this specifically with you. Because I think it’s such a it’s such a key topic right now. And I love the fact that you’re just really putting your finger on it and saying, like, look, there’s no way to spin this positively. Right? Is this is like burning eating your seed corn burning your furniture in the wintertime to stay warm, right? It just does not have a good ending. And to a certain extent, this is another it’s like a sister to the credit maturity wall that you were talking about earlier, which is consumers can only do this for a period of time. And then once they can’t, right where they either just can’t take on any more debt because they won’t be able to service their existing debts or their creditors cut them off their behavior, right. They’re trying to maintain a lifestyle, their behavior then ain’t just very abruptly once they hit that wall, right? So it’s another one of these sorts of just approaching milestones that we can mathematically project out there. All right, love to keep talking to you on the macro side here. But since we’re running short on time, now, I do just want to get to the markets side of things. So you are the capital manager, I mean, you you have very well researched perspectives here that you’ve been sharing with us, Michael, but you don’t have the luxury of just having an opinion, you actually have to guide capital based upon, you know, how you see the future here. So given this market, given this macro outlook, which is not very rosy, how are you allocating capital right now?

Michael Green 55:41
Well, I mean, unfortunately, the simple reality is, is that the Fed by doing what I think is an error, or has actually given us a gift, right, so they have told us that risk free for the next two years, you can earn four plus percent, I don’t see any reason not to take advantage of that. As I look beyond that, I get a little bit more nervous, because I also think the bad choices that are being made, are going to lead to political solutions that may reinforce dynamics around inflation, etc. And so I get less excited the further out the the bond duration curve, I go. Within our firm simplify, we focused on building tools that allow people to maximize those expressions, for example. So my largest allocation within my fund, on a, you know, on a risk weighted basis is actually to the two year, there’s a lot of people who talk about the two year and who highlight that it embeds. You know, if I look at the forward curve, and embeds the idea that interest rates are 5% this year, and then they’re going to be cut to give or take three and a half percent next year. I think that’s actually wrong, I think the right way to think about what is currently built into the rate curve is much more like the, the interest rate is gonna be 5%. This year, and next year, the Fed is forced to recognize and acknowledge its mistakes, and it’s going to cut interest rates to 1%, for example, as the economy deteriorated sharply, that’s not yet priced into the curve, right. But it’s a much more accurate reading that the market is pricing in some probability of dramatic fed cuts, as compared to this idea that like the base case, is they’re going to cut two or three times over the next year.

Adam Taggart 57:25
Okay. So if that’s the case, I’m just curious, when would that not be an argument to be allocating some of the portfolio out on the long duration side of the curve to to ride the appreciate the price appreciation of the longer duration bonds.

Michael Green 57:42
So you would pick up price appreciation on some of those bonds. The flip side of that, though, is in the response, are we going to see an expectation of higher inflation further out, that means that the entire interest rate curve has reset higher. So if you kind of mechanically think about what that looks like, and I referenced this directly, like, the easiest way to think about my forecast would be something like the one year rate is currently five and change, the two year rate should be, you know, the the one year forward two year rate should be something like 1%. And then the four year forward two year rate should be something like five and a half. Right, that’s going to be harder to price in the the longer duration aspects, we’ll see a curve steepening which which from this level of inversion in twos 10s, around 90 basis points, biases me towards being at the front of the curve, if I can do so in a vehicle that gives me more duration exposure, in other words, a levered two’s expression.

Adam Taggart 58:48
Okay. All right. So, aside from the levered short end of the Treasury curve, is there anything else right now that your, your listing? is too scary?

Michael Green 59:00
Yeah, no? Well, look, I think that there, there’s been a lot of interesting commentary that has been written by individuals highlighting that the value universe has effectively bifurcated into really cheap, and kind of deep, or actually historically kind of expensive. I think there’s some deep value stuff that’s kind of interesting, where the cash flow characteristics are high enough that you’re really not actually paying for much. I’m concerned about the terminal value on a lot of stuff. In particular, around the commodity space. I think that people tend to under appreciate these large sec, structural and secular changes that are happening on the demand side that are actually going to likely depress demand for commodities. In particular, I would point to the slowdown in the growth of Asia, particularly on a population basis. It’s just hard to see a scenario in which the world experiences the decline in population pressures that it’s likely to experience over the next 20 to 30 years. And that that sets the stage for an extraordinary increase in demand for commodities unless, of course, you’re talking about, you know, a significant expansion of, of, you know, the wars in Ukraine and to a lesser extent, other areas around the world. If that if that enters in, then you’ve got a whole different set of issues, one of them being do you actually own anything and resources that are in in far distant places. Consistent with my arguments around credit, when you start talking about things that are really interesting to me, that whole levered universe, which tends to fall into the value space, you don’t often see a lot of leverage, at least in the traditional sense associated with small unprofitable growth companies. That space I think, is fantastically overvalued. Because I think it has this nonlinear characteristic, moving from largely profitable to deeply unprofitable in the current environment. That means things like high yield CDs or IG CDs, if you can trade those become really attractive potential investment vehicles purely for price speculation. And remember that most of these carry negatively. There are ways that can be modified through equity, long, short exposures, and we have those in some of our funds that simplify as well. But those would be areas that I would in general be biasing people towards quality, I would in general be biasing people towards finding companies that have strong balance sheets and reasonably defensible business conditions, business models that are likely to sustain in the next cycle. The obvious caveat to that is the potential for regulatory interference at the very top end the Googles, Microsoft’s etcetera, the world I think are going to come under a lot of pressure. And if you know, my other work, is it all hopeful that black rocks and Vanguards, etc, will come under that pressure as well, JP Morgan, you know, we need to think about ways to reduce the influence of monopolies and near monopolies on on our economic system.

Adam Taggart 1:02:01
Yeah, we didn’t even get into really the cartel structure of much of our economy at this point in time. We’re gonna have to leave that for for the future. But I would love to actually do a deeper dive with you. I know, Michael, and you’ve got some great thinking there. And this may be a little bit of a self serving question, because on the way out of here, I’m going to remind folks of Wealthion kind of perennial recommendation to be trying to navigate these markets with the help of a good professional financial advisor who understands all the macro issues that we’ve been talking about here. But I’m kind of what I took from your your parting comments there on what you’re looking for is, you know, it’s less Oh, he these are the sectors that are going to do well, or poorly. And it’s more it’s being back to much more of an active stock pickers game, than it may be perhaps, has been for much of the past decade plus, right, well, you could just kind of buy the sector ETF and just let it ride and feel pretty good about it and rising tides rose most boats. Is that an accurate factor? Now? Well, you’re really going to have to do a lot more homework to pick out the pearls from the chaff here. If I can mix my metaphors.

Michael Green 1:03:17
I hope that’s correct. As you know, a lot of my work is focused around the dynamics of passive investing and how that has actually changed the experience that we all have in the investing world. And so I am hesitant to get too far in that direction. I often. You know, I often remind people that the simple reality is passive investing continues to gain share that puts positive pressure on companies and securities that are influenced by investments in that I would encourage people to check out my substack, which is Michael W. Yes, I give a fig@substack.com or Michael W. Green. Yes, I give a fig, go to my Twitter handle Prof. Prof. Plum 99, and it’s listed there. But you know that I’ve written a number of things that highlight the impact of investments going into sector ETFs, or into passive indices, and that can have a disproportionate impact on securities. I gave a really simple example that I walked through in detail, where you look at a company like in video, which is now you know, a trillion dollar market cap company. With a trillion dollar market cap company, your expectation would be well, let’s say I put in a $10 million order. If I told you that that changed the price of invidia by 0.08%, which is roughly my metric of how much that would impact the stock price of Nvidia. If you put it in an order of that size. Your reaction to that would probably like Well, that seems kind of reasonable, right 0.08% We’re not talking all that much. And then you suddenly recognize well, with with a $10 million order, that means I’m actually adding almost a billion dollars of market cap to Nvidia, right. So when you when you enter into those types of distortions that occur in markets, I just want to be very cautious in saying like, you know, active management nirvana is around the corner, because I don’t actually think that’s the case. But I do think that it gets harder going forward. And I really strongly encourage people to follow your advice and seek out professional management. And most importantly, on the wealth management side, an advisor who can work with them to accurately identify what their needs objectives and wants are out of their portfolio in their investments. So it’s, you know, I agree with part of the statement, I think it’s going to be hard going forward for people to achieve many of the objectives that they want. All right.

Adam Taggart 1:05:59
Thank you for both such a great answer, as well as kind of making my plug for me. But I’m glad you also brought it up to you because that was one question I did want to ask you before we signed off on here, which is the effects of the the dynamics of increased passive investing in passive capital flows in today’s market are most felt in those top fantastic seven or however you refer to those stocks, right, that they’re basically so widely owned, across the market right now across so many funds that I mean, what is it like almost 3738 cents of any every dollar goes into that goes into the market is going into just those stocks alone, I think it’s over 50% of any any dollar that goes into the NASDAQ is going into those stocks. So they they are now kind of the tail that’s wagging the dog, although I shouldn’t even call them the tail because they’re they represent so much of the market cap of the indices right now. Do you expect that to moderate or get contained or change anytime in the near future? Do you see any reason for that? Or do you just see it as something continuing to metastasize in size here, so it,

Michael Green 1:07:16
it’s unfortunately, actually worse than what you’re describing. So when you when you start talking about that degree of market concentration, recognize first that active managers almost by definition, are prevented by the rules from investing in them in proportion to their market capitalization, right? So if I’m going to run a diversified Fund, which allows me to market it to non accredited investors, I am restricted by the 1940 Investment Company Act in terms of the degree of diversification that I have. Passive vehicles have been granted exceptions to that if you look at the XL K ETF, for example, you know, 50% of the assets are into stocks Fiat in Nvidia to those two stocks, I get 70%, nearly of the index is now tied to three stocks, right. So the active management space just can’t even begin to compete. The second component is because of the change in regulations, when you talk about the money flowing in remember that more than 100 cents of every retirement dollar is now going into passive vehicles, because active managers are being net redeemed. And so when you start talking about these numbers, you discover that, like crazy amounts of money are flowing into those vehicle those securities, whereas the vast majority of companies are actually experiencing outflows from the retirement space, as part of the reason why the Russell 2000 and more accurately the equal weighted Russell 2000, which is probably the best proxy for active management is actually struggling while the NASDAQ soars, right. It’s really hard to change those without changing the rules around it. And so you know, the world’s smallest violin is playing for asset managers like myself who have lived by any standard and extraordinary life. But the simple reality is, you know, we’ve taken a firm like simplify, which launched in September of 2020. And over the last two and a half years, we’ve busted our butts, to grow it into one of the top issuers of ETFs in the investment world. We’re extraordinarily thrilled and pleased with the success that we’ve had. But as I like to note to our investors, you know, and by investors, I mean, both our clients and our actual capital. You know, we’ve worked for two and a half years to grow by basically one day of Vanguards inflows, right. The system has to change, or we’re going to lose the system. It’s the same thing I said about the government. If we don’t reform our relationship with the government, we will lose our democracy. If we don’t reform our relationship with the public equity markets and public debt markets, we will lose our capital formation capability. So it’s a super sobering message. I wish I didn’t have to deliver it, but it’s just not as simple As dollar cost averaging into index funds, that’s not the way the market actually works.

Adam Taggart 1:10:04
And in terms of any progress we’re making towards those kinds of reforms I’m going to take from your tone and your body language, that we’re not very far into a reform process at this point. No,

Michael Green 1:10:23
you know, I, so I started speaking on these topics, and in 2017, saw a sizable breakthrough in 2018, we’ve largely been unable to capitalize on that. And, you know, when I presented my work to the Bank of International Settlements, the IMF, the Federal Reserve, etc, all of them broadly agree with the work, the academic world is increasingly aligning itself behind the analysis that I’ve done on this stuff, and they have their own approaches to it, that independently confirmed my work. And unfortunately, the feedback that you get is, well, this is all great. But until a crisis actually occurs, there’s nothing we can do about it. Because the Vanguard’s and black rocks of the world control the regulatory apparatus, they control the political environment in Washington, DC, I understand why that is, it’s tremendous narrative, right, let’s charge as little as possible for asset management fees, let’s let everyone participate, etcetera. But the models themselves are wrong, and the theories behind them are wrong. And as a result, we’re effectively you know, following a map of the earth that says, you know, it’s shaped in this way. And it turns out, we’re about to go over the edge. You know, again, I hate I physically hate delivering these messages, you can actually see it in my body language, you know, we well enough to know that I really, truly believe this. But, you know, we’re setting up for a very bad outcome. And all I’m trying to do is raise awareness so that when it occurs, we actually are able to reasonably sit down and say, How can we reform the system? All right, well, we can keep it until that occurs.

Adam Taggart 1:12:06
Yeah. Well, one thing I want to give you strong kudos for is I think it was Winston Churchill, who said, you know, when a crisis arrives, the solution set that’s considered are the things that are already on the table. And you’re working hard to get some of these solutions on the table so that by the time the next crisis arises, somebody can say, okay, look, well, let’s try this thing, right. All right. Well, look, we’ll have to leave it there. But thank you so much for just telling it to a straight. And like I said, Michael, open invitation and come back on his channel anytime. But certainly, when you see, you know, a material step in any of the elements that we talked about on the macro side of things that, you know, influence your sense of timing or magnitude of you know, how things are unfolding from here, you’re welcome to come back in the program anytime to let our users know about that. When we edit this, I normally conclude by asking Where should folks go to learn more about you and your work, you already shared your substack and your Twitter accounts. And when we edit this, I will put up the links to those on the screen so folks know exactly where to go. Folks will also have hyperlinks in the description description below this video too. So you can go to them directly. Michael, any other places besides those to direct folks?

Michael Green 1:13:19
I mean, the great place to go is obviously to the simplify website, we’ve got an extraordinary amount of resources for investors to help them understand some of these dynamics as well as to understand the products that we offer. And I encourage people to check that out.

Adam Taggart 1:13:32
Okay, great. I’ll link to that as well put that up on the screen, Michael, that’s simplified.us. Right. For the folks that are listening on the podcast.

Michael Green 1:13:40
Yes, that’s correct. simplify.us.

Adam Taggart 1:13:43
Okay, great. All right. Well, look, folks, Michael made the case for me. So it’d be super brief here. But for the reasons that I always say, and he said his time round, I highly recommend that you navigate this increasingly complex and potentially risky environment that that we’ve been talking about for the past hour plus, following the guidance and the input of a professional financial advisor who takes all of these macro issues that we talked about into consideration. And then building a personalized portfolio plan for you based upon your needs, risks, goals, you know, risk tolerance, etc, right? If you’ve and then executes it for you, so that you can focus on your busy life, but keeps you well informed along the way. If you’ve got when he’s doing that for you, great stick with them. They’re pretty rare. If you don’t tell you’d like a second opinion from when you’re does consider scheduling a free consultation with one of the financial advisors that Wealthion endorses to do that. Just fill out the short form@wealthion.com These consultations are totally free, they don’t cost you anything. There’s no commitment to work with these guys. It’s just a public service that they offer to help as many people as possible position prudently today in advance of perhaps some of those shoes that Michael was warning about maybe dropping here in the future. And if you’d like to see Michael come back on this program again soon please cast your vote in support of that by hitting the like button and clicking on the red subscribe button below. What was that little bell icon right next to it? Michael, I just want to say it’s always a pleasure talking to you always a fascinating conversation. You’re clearly out there trying to do good both for your clients, but for the larger world in general, thank you for those efforts. And like I said, door’s always open for you to come back here on the program.

Michael Green 1:15:22
Thank you very much. I appreciate it. All right. Thanks

Adam Taggart 1:15:25
so much, and everybody else thanks so much for watching.