Michael Green (@ProfPlum99): Providing Clues to Solve These Markets
Summary
Market Structure: Passive flows from 401(k)s and buybacks dominate price action, making equities inelastic and prone to sharp but brief corrections.
Regulatory Risk: NASDAQ’s proposed fast-entry and 5x free-float multiplier could create forced buying, liquidity imbalances, and fertile ground for abuse akin to SPAC-era distortions.
Gold: Central bank accumulation (notably China) and renewed U.S. investor demand, alongside rising GLD shares outstanding, are powerful flow drivers pushing gold higher.
Bitcoin: Price is largely explained by ETF flows; its undefined purpose makes it a speculative, narrative-driven asset that could erode investor trust.
AI: A genuine productivity revolution lowering knowledge-work costs, yet near-term hiring frictions and wage pressure for new grads persist before longer-term gains accrue.
Sector Rotation: Materials, industrials, energy, and gold are small weights in cap-weighted indices; sustained reallocations could have outsized price impacts, though flows, not stock-picking, remain the primary driver.
Macro Outlook: Slowing growth, rising bankruptcies, and weakening labor data increase fragility; a more dovish Fed under new leadership could cut rates, altering income effects and market dynamics.
Concentration Risk: The price-weight spiral in passive indices reinforces mega-cap dominance (e.g., AAPL), amplifying momentum and valuation dislocations.
Transcript
In this episode of On the Tape, I am thrilled to welcome Michael Green back to the pod. Mike was last on in April of last year. We discussed many topics including market structure in the role of passive versus active investing as well as Mike's career path which included the infamous Volmageddon trade while working in the Peter Teal family office. Mike [music] currently serves as portfolio manager and chief strategist at Simplify Asset Management and is the author of Yes, I give a big on Substack. But before we get to Mike, I wanted to reiterate how it's [music] more important than ever to be mindful of where and what you invest in these days. I have talked before about the pros and cons of deregulation in the financial markets, but I fear we are moving too quickly and what might be to the detriment of the retail investor. Barren posted an article earlier this week and highlighted the fact that the CFTC's Chicago office has gone from 20 trial enforcement lawyers to one. This is the capital of futures trading. To put this in perspective, enforcement actions brought in over $17 billion through 58 enforcement actions in 2024 and only $9.2 million through 13 enforcement actions in 2025. According to the article, five of the six attorneys at the agency that received a reduction in force notices last summer and one that retired early had a combined 103 years experience at the agency. As of last Friday, there is now one trial attorney working with three remaining investigators and one parillegal in the Chicago office. This was the office that handled the case against Binance and FTX. If the Senate passes the Digital Asset Market Clarity Act already passed by the House, the CFTC would be given jurisdiction over the crypto industry that currently sits with the SEC and that's in addition to regulating the explosive growth in the prediction markets. One of the CFTC trial attorneys that was let go said, quote, "If I was a different person, I would launch a crypto scam right now because there are no cops on the beat." This Baron's article follows a Wall Street Journal story at the end of last year that was entitled, "Trump administration upends prosecution of white collar crime." It describes notable changes in the enforcement of the Foreign Corrupt Practices Act, which fell off of a cliff in 2025 that also included a six-month freeze on new cases. The Justice Department and the Securities Exchange Commission, which share authority to investigate violations, brought about 33 cases a year against companies or individuals between 2015 and 2024. This year, the Justice Department brought six new FCPA cases, and the SEC brought none. So, as white collar crime might go unpunished and or in some cases get reversed through pardons and drop cases, it's more important than ever to protect yourself. My guest on the pod today will certainly arm you with knowledge that might help. Mike, welcome back to the pod. You were on the pod in late April 2025 and at the time we were decoding the on again offagain tariff policies and the impact it was having on the macro and the markets. It's almost 10 months later and while there's like a bit more clarity on some things, there's obviously still a lot to decode out there. So let's start with that. Give me your thoughts on kind of the big picture and you know the macro and we can dive in from there if that's okay. Yeah, I mean, you know, it's funny. I think we talked about this at the time. Um, you know, there were a lot of calls, particularly in in light of the S&P having sold off around the tariff tantrum, that somehow or another tariffs were going to set off a wave of inflation, that, you know, we're going to see um extraordinary price increases, that it was a terrible policy that was somehow or another going to reinstate the components of the Great Depression. And of course, all of that was somewhat validated by the rapid sell-off that we saw in equities. Um, you know, at the time I said, and I continue to say that really the only thing that actually matters to the behavior of equity markets is flows. We knew mechanically what had happened um was largely tied to Europeans and Asians effectively voting with their feet and taking their money home. We saw a very little of it, a very little amount of US retirees selling. And the point that I just continually emphasize is, you know, yes, you'll go through periods of this sort of friction and uncertainty and it can cause people to change their positioning. And that happening in a market that is, as you know, I believe, heavily influenced by passive to become much more inelastic will cause large swings in prices. But the minute it's over, the minute people kind of have gotten their positioning where they think they want it, then the dominant force just becomes the flow of money into 401ks and passive and stock buybacks, etc. And it and it's really not telling us that much about the economy in terms of its behavior. And so, unfortunately, I think we're right back into the same place, right, where the markets are telling us one thing. And yet, we are seeing very clearly a slowing in the economy broadly. jobs are being um downgraded. Tomorrow we should get, you know, really terrible numbers in terms of the revisions on the QCW um the quarterly uh census unemployment and wages. Um, you know what we know is is that the approach that has been taken by many government agencies is to quote unquote massage the data not by virtue of trying to conspire to present false data but simply because they have a different approach to doing it. In the case of the BLS, they estimate the number of new businesses that are being created and that number is just wrong, right? Their their methodology is wrong. We know exactly why it's wrong. They will eventually change it. Um, but they'll, as they always do, they'll probably change it at the worst possible moment. So, you know, where we sit today, we're seeing rising financial distress. We're seeing more bankruptcies. We're seeing rising unemployment broadly. Wages are getting hit. Um, and it does eventually set up the conditions that cause a meaningful correction, but I just don't think we're quite there yet. >> Wait. So we've had five or six kind of mini corrections if you want to go in the last year where VA has spiked and to your point lasted sometimes a day, sometimes two, sometimes three and it always seems to reverse course to your point because the flows are unrelenting in terms of passive. >> So is it the horse or the cart here? Meaning people actually end up having less money to put in the markets or will the market sell off and cause them to have less money? So where does that kind of meet there? I would say >> yeah I mean I I think the point that I would emphasize is you know the uh the Twitter meme of why not both. Um you know the simple reality is is that wealth creates collateral collateral creates borrowing and spending capacity and so if prices fall there is less of that. Um on the you know the other component as we were talking about is that flows require people to have jobs to contribute to their 401ks. Um, and it's not just that component as well. With Federal Reserve having hiked interest rates to relatively high levels, in an environment in which there's a lot of cash outstanding, that's created a huge slug of income. That basically means boomers don't have to sell their portfolios in order to meet their lifestyle objectives. They can live off of the interest income that's coming from their fixed income portion of their portfolio. This sets up conditions where you know like my honest model at this point is is that the most likely catalyst that will ultimately undermine the system is that we will begin to see deteriorating economic conditions as we flow through this year. We will have a new Federal Reserve chairman. Um the market tends to not be very uh kind to new Fed chairs. And for all of the the thoughts around managing the balance sheet or raising or lowering interest rates to fight perceived inflation, um my hunch is is that, you know, Wars will cut interest rates relatively aggressively when confronted with with weak economic activity. At least in my model of the world, that actually reduces government fiscal transfers to the wealthy individuals that own the stock market and potentially creates the catalyst for a more meaningful selloff. But as I as I always emphasize like this is a stochastic phenomenon. We we know it will eventually occur by trying to offer the exact mechanism by which it's going to occur. I simply devalue the overall forecast. Right? This is a fragile market that has unique exposures to extraordinary overvaluation and securities that are increasingly disassociated from the underlying fundamentals. Um those conditions rarely end well. So when you combine obviously this kind of buy the dip mentality with the Fed has your back and I think you just described a situation that they're going to have your back near term in a midterm election year. So if you think worsh is going to be more doubbish than people think which I totally agree with you that the that this white house and or the government will do whatever it takes to you know for 2026 midterms doesn't feel like there's going to be a huge catalyst barring something we're not thinking about at least in the next quarter or two that would occur to kind of reverse that psyche and the moral hazard that kind of exists. And you're right debt's not going away. We're going to go over 40 trillion I'm sure at some point this summer. We're not fixing any of those structural issues, but it's, you know, is this a timing issue then in your point or what is it really tips the scales then if you're describing kind of a dovish um buy the dip mentality that's still kind of out there? >> Well, again, the vast majority of the buy the dip actually is mechanically built into markets. So, when you think about a 401k system, I'm contributing a fixed amount tied to my income every single twoe pay period. That doesn't, by the way, flow in the day you contribute it. it's actually contributed into a pool. Those pools are then smooth. So there is some evidence of like Fridays having slightly higher flows than you know Wednesdays. But the the reality is is that that is a somewhat smooth flow. And if you just mechanically think about it, constant stream of dollars coming in, prices go down, you buy more shares. Um until we get to a point in which the withdrawals or the need for income associated need for cash effectively associated with um lifestyle safety whatever exceeds those contributions you know that the the market is an up and to the right phenomenon. >> It's fair and I think within the structural aspect of the market and the passive we're going to get into other things here I promise. um we're so concentrated you know by definition of how these passive indices are constructed into 10 names controlling X but within that I think one thing that's not talked about enough is the wealth effect and the point you're making if you were to get a sustained selloff in the market it would then trickle through the economy the same way I think the economy is being held up by people that own the market have experienced growth and I will throw crypto into that as well since I think it's so retailheavy give me your thoughts on that and and what impact that could have kind an unwind of the wealth effect. >> Well, you know, crypto, Bitcoin in particular, has actually been a wonderful test case of my theories around flows. And I, you know, um I'll fire back up my computer and show you a couple of charts, but you know, the simple reality is is that the flows in and out of Bitcoin ETFs now, at this point, explain north of 75% of the price action in Bitcoin. That's an extraordinarily high R squared just to, you know, to emphasize that point. Um but you know, yes, it's a collateral asset that unfortunately is heavily owned by younger people in particular. Um and that's the group that's under the greatest pressure in today's world, right? It's not so much the boomers who again are benefiting from relatively high interest rates, certainly higher than they anticipated when they began accumulating financial assets um or at least, you know, really accelerated over the past couple of years. We talk a lot about the wealth effect. We often ignore the income effect. And so, you know, just to parameize that very quickly, the estimates of incremental spending tied to an increase in in $1 in wealth is about two cents. This actually matches up with a lot of the data we see on withdrawals, etc. Um, so you know, a dollar lost out of the market adds, you know, subtracts two cents from spending. A dollar added to the market adds two cents of spending. You can clearly see how that's stimulative on the way up, but it also in magnitude is nowhere near as large as the income effect of an interest rate increase. When you have um interest income, people treat that as stable and much more tied to a life cycle phenomenon. The marginal propensity to spend out of interest income is around 70 cents on the dollar. And so the give or take $1 trillion dollars of incremental interest expense that the US government has taken on with Jerome Powell's interest rate hikes has actually proven to be incredibly stimulative in my view of the world. Um and my big fear is is that they don't understand this. I've seen no indication that they fully appreciate the role that they themselves have in in creating loose financial conditions. One thing that's out there now that there's more ETFs than stocks is that it actually has become a great stock pickers market. At first it wasn't. When passive came on the scene and was growing because portfolio managers were forced to just kind of follow the trend they needed to outperform certain sectors, overweight, underweight, buy the biggest names within them. But it feels like we've now reached the point where if you're doing bottom up work in the market and just step away from the macro for a second, there's some huge opportunities. It might require patience. But it is amazing how we're getting these huge moves sometimes higher just by names that have been either underfollowed or underowned that are all of a sudden getting attention again. What are your thoughts on that? And is that lost art of kind of active management feels like it's coming back here? >> Yeah, almost nothing I see suggests that it's really about the active management or the selection of the securities. is much more about the flows into those spaces. So, you know, gold would be a really good example. I wrote about this last year. The evidence was pretty clear that the traditional flows that had gone into gold had been diluted by Bitcoin. And that was actually blinding people to the opportunity of the gold price to push significantly higher if something were to change around that. And unfortunately, that's exactly what we've seen. shares outstanding in the GLD alongside the buying that's coming out of China, which has very similar characteristics to it. You know, those flows really do help explain what is going on with the price. It's always this simple. If a lot of money tries to go from one allocation, let's say a $70 trillion allocation to the S&P 500, if you take 1% out of that and try to buy the Russell 2000, you're literally talking about 25% of the market capitalization of the Russell 2000, right? You try to buy 25% of the shares of anything and it's going to go vertical. And that is what we've seen in small caps as people tried to rotate. It's exactly what we've seen as people tried to rotate into gold or into commodities. These are very small markets relative to the market that people are drawing capital from. Um and so I like while I agree with the overall observation that many people have been rewarded by um sticking to investments in areas like materials or areas that would be traditionally more associated with negative outlooks as compared to particularly positive outlooks. Um I I unfortunately think it really is the same underlying phenomenon, a deeply inelastic market where more money is trying to go in than the space is capable of of uh uh accommodating. >> Well, let's stick on that topic for a minute. So you talk about flows into the S&P 500. There's only one gold miner in it, pneumont. That's it. So when you think about, you know, a Boston fund manager and how they have to make decisions and so forth, you brought up materials, which is, you know, two to three% waiting in the S&P 500. It can be ignored, but one of the things I'm getting at is that flows have self-fulfilled how uneven these sectors have gotten. And so I guess you're answering it, but I guess what I'm saying is if a portfolio manager wants to make the decision to start underweighting technology and allocate more into materials, industrials, energy, and gold, which falls under, you know, materials, that's a powerful secular move. To your point, the math might be difficult, but if it were to occur on a sustained basis, there's huge opportunity. That's the point I'm trying to make is that within the sectors that are underw weight, you know, within some of these names, there's opportunities. That's all I'm getting at. I I know it it we've gotten to a point where it's almost impossible to fit the elephant through the mouse hole, but that's kind of where I'm going with that. >> Yeah, I I I think that's right. And that is one of the things that it, you know, we have to be very very cognizant that the momentum that we think about historically that was correctly identified by Cliff Aznes back in the 1980s um turns out to be effectively a subset of the overall class of momentum. Um uh for those of you who know my relationship with Cliff, that would allow me to define Cliff as a small problem. Um you know, the underlying characteristic of uh momentum is the idea of information diffusion, right? Danny figures something out. He buys a security that causes the security to rise modestly in price. Mike sees the security rising in price, starts to dig into the fundamentals, discovers what Danny has discovered, buys an addition that causes the price to rise. Other people follow along in that process, right? That information diffusion is is a special case of momentum. There's a second form of momentum that is actually created um by what I call the price weight spiral within passive which is that as money goes into the index it differentially affects the largest stocks in the index. Um they are less liquid relative to their market capitalizations. becomes particularly extreme at the largest companies. And so that money coming in to buy Apple, for example, causes Apple's price to rise faster than the rest of the S&P. That means that the next dollar into the S&P will buy more of Apple than it will of the other stocks. That reinforces momentum through simply a price waiting mechanism. Um the problem with that is that it's very hard to change that, right? It's very very hard to change that. And so this is part of what has led to me, you know, seeming to be really arrogant and dealing with people on like international stocks or small stocks, etc. Until we change our our mechanisms for allocation, until we return more capital to those active managers, those discretionary managers that you're highlighting, unfortunately, I don't think it's a secular trend. I think it's really just a rebalancing or a short-term cyclical trend. and and so far it looks like that's playing out again. >> Yeah, I guess you would need a large market selloff um sustained market selloff in order for that to kind of change. So on your and then we'll close out the passive theme here, but uh on your I give a fig on Substack, you just wrote a really interesting piece which addresses this which it's not just about the trends, it's actually the rules themselves. And you wrote something regarding um specifically and you can explain this the 5x free float multiplier which is part of a proposal and the fast entry uh which is part of a proposal and basically self-fulfilling that even a large company market cap wise that has a small float uh at the detriment of people that will be buying it and the benefit of insiders etc. explain that because that's just a rule and if it goes forward you're pointing out it's just unfair and and not a not a great structure. >> Well, it what it does I describe it as the spackification of the of the QQQs, right? Um spaxs were the mechanism that allowed many lowquality companies to come public in the 2020 to 2022 time period. That was simply a function function of index arbitrage. um this fasttrack IPO status effectively what NASDAQ is proposing to reinstate with some particular wrinkles around it that candidly I think are absolutely crazy is very similar to what would transpire with spaxs. So spaxs as you know have been around forever. They're basically a mechanism for hedge funds to buy a little bit of volatility and hide the amount of cash that they have in their portfolio because it's a cash instrument with the option to acquire something. um they were not eligible for index inclusion and the total market indices broadly the tool that's used within most target date funds um you know because they were cash instruments and not operating companies. If they made an operating acquisition they would be subject to the same inclusion rules as a traditional IPO. Um, and this proven to be a disaster because the traditional rules of an IPO, a traditional S1 perspectus and road show requires a healthy and vibrant active manager community willing to deviate from their benchmark and take a risk on a new untested name. Spack shortcircuited that with a modification called the FastTrack IPO. The fasttrack IPO is almost identical to what is being discussed by NASDAQ, which is the idea that if the company is big enough, it exceeds a certain threshold that it should have been eligible for inclusion in the index in as few as five days upon making the that operating acquisition. In 2020, that cutoff was about a billion half dollars. Now, nobody had ever seen a billion half dollar spax. So nobody thought to do this but the minute they began to emerge we actually saw unfortunately the same dynamics which is that the only liquidity available in spaxs is insider selling insiders are restricted from selling typically for 20 days in a spa more particularly it's typically 20 days above a 20% threshold and if the largest buyers in the market the index funds are required to buy in as few as five days per the terms of a fasttrack IPO you can figure out the immediate imbalance right? There's a lot of buyers and not many sellers. NASDAQ has proposed with this rule change that is, you know, that is open in the comment period. I encourage people to check out my work at Yes, I give a FIG and take a look at that piece. Um, I'm always willing to extend subscriptions to people who request it. So, just hit me on Substack if you'd like to read the piece. And I helpfully made it very easy for people to comment to the NASDAQ on this. What NASDAQ has proposed here is is that they would allow rapid inclusion of companies that were large enough to enter the NASDAQ 100. And if that wasn't actually enough, again, a mismatch between the insiders and the index buying, they then proposed to magnify the float by effectively 5x, which would allow a company to issue very few shares, making very few shares actually available for the public to settle trades while requiring index providers to buy literally five times as much as is actually available. like this would become the happiest hunting ground for financial fraud I can imagine. Um and it really is disappointing to me that at this stage in the game that the index providers don't appear to fully understand the impact or if they do understand it are treating it very cynically. Um you know this is just bad. It's like it is not not not just unfair is bad. It is literally designed to extract money from the retirement system of the average American to hand it to Elon Musk. >> So, it's safe to say if NASDAQ is trying to court Elon Musk or Sam Alman to come on their exchange when they go public, this would be the best way to potentially do it. To your point, >> it would be an extraordinary tool to attract large listings to um the NASDAQ, which you know, to be fair to them. Ostensibly, the index is distinct from the listing business. Um, this looks awfully suspicious. >> Fair enough. All right, so let's talk a little bit. We touched on it briefly. I want to talk about the kind of the AI impact on the markets and the economy. I know we mentioned how topheavy some of these indices are because of AI related stocks and we mentioned before the white collar jobs kind of what are your real thoughts there and what inning are we in kind of on on this? Are we just at the beginning potentially of seeing these impacts? And do you expect the job impact to be as big as it as it might be? >> Look, I I fall into the camp very similar to my good friend Josh Wolf that ultimately technology creates more opportunities for employment. It gives us more possible combinatorial answers that allow us to increase, you know, the opportunity to solve problems for people, which is really what employment is all about. Um, with that said, the idea that that happens smoothly and it happens equally to all people is absolutely untrue. Right? When we see waves of technology, when we see waves of innovation, it unfortunately impacts local individuals far differently than it does the aggregate population. So there will be a surge in population or in jobs in India created by telecommunication for example that can be done at much lower cost than it can be done in the United States. AI is an incredible technology that as a content creator I use on a continuous basis. In many ways I describe it as I suddenly am you know I have 400 first year analysts. I would actually argue that the advances in AI have probably pushed them to second year or even first year associates at this point. All of which are incredibly motivated to solve the problems that I put in front of them. I just know need to know how to ask the question the right way. And I also need to have the domain specific knowledge that allows me to look at their answers and say no that's not right. Go back and try it again. Um most of the hallucinations are are solved by that component. Right? If I don't have any knowledge of the the topic, it's very easy for me to post fake information. If I know the topic really well, like that, you know, you've been through this process. You've had analysts. The simple reality is they are really smart. They're extraordinarily well read. They're very motivated. And you can't trust them as far as you can throw them. Right? So, this is the same underlying phenomenon. It's just it's radically cheaper. My AI bill is somewhere in the neighborhood of $1,000 a month right now as a professional user. if I was running an equivalent amount of brain power in terms of analysts, I'd be running a $12 million a month um sort of expense. So, this is a true innovation. It is really powerful. I have no question that it's going to lead to some extraordinary breakthroughs. Certainly led me to accelerate my work in areas. But the net impact for many people is the uncertainty is creating a lack of hiring particularly for young workers who are coming out of college who may not have been exposed to AI in a way that makes them immediately productive members and enhancing the capabilities of a firm. And the firms are increasingly looking at and say I'm really uncertain about the economy. I'm really uncertain about the impact of this new technology on my business. Why would I hire somebody only to have to fire them if it turns out that X, Y, or Z turns out to be true? That slow rate of hiring is really isolating itself in the younger population. And today we just got the, you know, the information that we're now down 8% um another year. This is the fourth consecutive year that first year college grads are seeing their wages fall. So this is, you know, this is a rough time period and it's particularly rough for young people, which is made all the worse by the fact that we have relatively high interest rates that are creating conditions under which the older population is like, hey, things are pretty good. I got money to spend. Um, and you know, simple terms, yes, I think AI is going to be an incredible revolution. Yes, I do think it's going to create localized job loss and it's going to create frictions for new entrance into the labor force. Um but it will eventually resolve itself and the answer is not to engage in sabotage and you know throw wooden shoes into uh data centers. >> All right. So with that Mike kind of um morph that into kind of the K-shaped economy and kind of what we're seeing and we're going to go off the rails to the top of the K all the way up and on the bottom and what what's the next letter that that would look like? But uh it's something cursive I'm sure. But uh >> yeah yeah I'm trying like maybe a capital Q or something. Um, >> uh, you know, it's interesting. So, I got pulled into this debate around affordability, etc. through a piece I wrote called My Life is a Lie, the $140,000 poverty line. Um, you know, that really was just kind of a voyage of self-discovery as I dug into some of these topics. Um what's really interesting about it is that it actually turns out that there are emergent properties of economies that are bifurcated between capital holders and those who primarily use their labor. Um it largely turns out that that most of the conditions that we actually experience are a function of volatility. And what we're really describing when we're talking about somebody who is poor or who is less well off is they lack the buffers in life that allow you to avoid a hard reset. Right? You and I are fortunate enough to never really have to worry about a medical condition creating a system a condition of bankruptcy um or a car breaking down causing us to lose our job or anything else. Right? Those buffers allow us to basically continue to play the game and continue to compound in both our income and wealth. For people who are at the lower level, there's something I refer to as the valley of death, which is this idea that between about 40,000 and about $100,000. As you make more income, you lose more benefits and you're effectively having the safety net withdrawn even as you're working harder. That's what I think is really driving this K-shaped economy that there's effectively about 40% of the US population who is now underresourced enough that a minor event can cause them to basically have to start all over again. And that's what our K-shaped economy is about. And we need to recognize that while we may not agree with how everybody chooses to participate and behave in society, we're doing ourselves a tremendous disservice with the current narrative that, you know, that 40% of the population is less intelligent, therefore less valuable, is you know, naturally poor, they'll always be poor, etc. Um my work really suggests that that's not what is really going on. That it really is this function of volatility buffers that you and I have been able to accumulate by virtue of being, you know, born into relatively stable families, being given excellent educations, being given the opportunity to participate in highincome uh careers that allowed us to establish that that difference. I you know, look, I'm not a dumb guy. I know that. But the simple reality is is that, you know, none of this would have mattered if I was living in Paleolithic times. I'm not a particularly fast guy. I would have made a delicious meal for a saber-tooth tiger. And, you know, the world wouldn't have been treated to my Substack or my contributions as a portfolio manager. Um, yeah, I was a really pudgy kid, man. Um, I would have made good eating. Um, so you know, the simple reality is is that that's a lot of what technology is about is building those buffers that allow people to take that next step in a somewhat unimpeded fashion. And a lot of my work is just suggesting that we've gone too far in this in the pursuit of efficiency by saying, you know, we're only going to hire the brightest. We're only going to hire the smartest. we're only going to allow the participation from those who achieve a certain impremature by being a you know Harvard graduate or a pen grad or a Stanford grad. Um this the simple reality is is that that undervalues a sizable fraction of our population and candidly I don't agree with people who think that those at the lower end of the of society aren't active and measurable contributors to our overall well-being. One last thing, Mike, just back to the macro for a minute. We touched on Bitcoin. We talked about gold, but we really didn't talk about those two asset classes in terms of your thoughts on them here and the signals that they're sending. I know you're not a you're not an anti- Bitcoin guy. You're not I think you're like me, you're not a pro Bitcoin guy. Thoughts there. And then what is gold telling us? And the second part of that is what is the US dollar telling us and where do you see that going and where should we be concerned? >> Yeah. So well first of all actually um I am uh what is perceived as anti- bitcoin. Um I think unfortunately that there is a deep misunderstanding in our society of what money is and therefore we've allowed a narrative to persist somehow or another. Bitcoin is a solution. I would suggest it's a speculative asset in search of a narrative. Um and anything that creates a narrative that causes money to flow into it should be clear from my discussion of other assets that can cause the price to go up regardless of value. Uh, I did an experiment on Twitter the other day where I repeated the the very famous Francis Golton experiment of how much does an ox weigh and asking people somewhat, you know, randomly. And as you might expect, the wisdom of the crowds came back and told us, you know, that an ox weighs somewhere between 1500 and 2,000 pounds, which is almost spot-on with the actual weight of an adult ox. I asked the same question, how much does an adult higandorfus weigh? And the answer was actually a radically different distribution. And it was heavily weighted to the tales, right? Meaning people thought that the vast majority of people thought that Higandorfus weighed very little or weighed an infinite amount. Bitcoin's the same thing. What the hell is it? Is it a store of value? Is it a peer-to-p peer payment system? Is it the next digital gold? Is it a um uh you know um uh distributed ledger that allows us to quickly and easily audit? Um, is it a mechanism for transferring wealth across state lines that we otherwise call moneyaundering? Um, you know, we we actually don't know what it is. It's a higorphus. And so, how much is it worth? Well, either zero or a lot. And it just depends on where it is in that process that helps to define it. This is actually what a lot of my recent work on passive and the strategies behind it highlight that we effectively have become a society that doesn't really know what we are investing in or buying. And so there is no meaningful difference between Bitcoin as you know Ben Hunt calls it you know with the TM after the trademark after it or a Higendorfus or an Nvidia separated from its fundamentals. We don't know what the right answer is and so we're willing to project a wide range of outcomes on it. Um, it makes me sad in Bitcoin more than anything else because I think it has largely been sold under fraudulent terms and I think many individuals are going to find themselves with a distinct lack of trust in a system that allows it to fail because they will view it as an assault on them personally having bought into the idea. This is one of the saddest stories associated with the original Ponzi scheme. Right? Most of the victims of Charles Ponzi actually believe that the US government took their money, that they shut him down, that it wasn't his fault, he wasn't the bad guy, etc. I'm sure somewhere out there in the audience some screaming, "That's true. It wasn't his fault. He was a good guy, you know, etc." Um, you know, but I think unfortunately we're going to find that Bitcoin ends up being the same thing. Um and you know the last thing our society needs is a further undercurrent of trust um being cut out from under it. Um gold is you know I I do fall into the Keynesian framework. I think that it is ultimately a barbarous relic. With that said it is a barbarous relic that does have a unique feature that Bitcoin doesn't have. If the gold mining network stops, gold remains gold, right? It doesn't actually require everybody to continue to participate and mine and maintain the sanctity of the blockchain in order for it to preserve its character. What really kicked off with gold was when Russia invaded Ukraine and the US confiscated Russian reserves or more accurately eliminated Russia's ability to utilize those. Our you know the world's largest exporter China looked at that and said okay this is this is bad. We can no longer hold treasuries. And so they started buying gold. Um, interestingly enough, they were buying gold at the same time that Americans were selling it because they were off buying Bitcoin. And as a result, you had kind of two offsetting components that meant the gold didn't move very fast. Uh, sometime around 2024, Americans woke up and they're like, "Oh, you know, we should maybe buy some of this gold stuff." Look at central banks accumulating it around the world, right? You know, the narrative of the dollar is collapsing is always a fun and relevant one. Um, and the combination of those two is effectively, you know, the elephant through the mouse hole, right? We're trying to squeeze more money in there. And you can see this in the disassociation between fundamental values and the prices in particular in places like China. Um, less impact in the United States where we have more smoothly functioning financial markets. Um, it is also, by the way, one of the reasons why the Chinese stock markets played a key role in my analysis of an understanding of what passive was actually doing. Um, but I think that's really what's happening is is that we we, you know, we basically have a little bit of a mania of people saying, "Wow, things are so bad. I just want to get out of this. I don't want to actually invest. I want to put my money to the side. I want to move away from something that has a counterparty exposure." Or even if I didn't pay attention to Mike Green and his arguments against Bitcoin, you know, that thing's going down. I might as well buy the thing that's going up. Um, and so I really unfortunately think that's what's going on. I think it is telling you that trust has been damaged and eroded in the system. Whether that is foreign countries believing that the US will protect their access to their assets or whether it is Americans believing that the government has taxing capacity and is effective at what it's trying to do. There's just an awful lot of people who are trying to get out of the system right now. I think fiat currencies, to your point, the role of the dollar is that gets devalued, debased, whatever you want to call it, people will flock to a hard currency. And for a while, Bitcoin was stealing gold's thunder up until up until a few years ago. Now, a 5% move in in gold is the entire market cap of of Bitcoin here. So, it's, you know, it's certainly changed. So, I take back my comment that you're neutral on Bitcoin. Although, I think from the standpoint is I don't think you're going out and shorting it because it's an unknown thing. to your point you just made the argument against yourself would be it could go to 200,000 because it can just easily go to 10,000 is 200,000 so there's no point so if that was my takeaway I think that's the correct one >> yeah no I think that's fair the only trade I've done in Bitcoin in the past couple of years was a bet between myself and Peter McCormack was a noted Bitcoiner um in which he forecasted that you know Bitcoin would definitely hit 100,000 and was willing to offer five to one odds against it um but the funny part is is that you know so I had to put up 20,000 and that it wasn't going to hit 100,000 and he was going to pay me a h 100,000 if it didn't hit 100,000. Right? That allowed me to go out and buy that same option in the market at one the price he was offering it to me. And so it actually ended up being an extraordinarily profitable trade for me which you know Bitcoiners of course didn't understand. Peter when I tried to renew the bet with him on a million dollars was like dude how much money did you make off this bet? and he was extremely disappointed that I didn't lose money. I made money on the bet. Um, that took the joy out of it for him. But that's like Danny, you know this, that's what Wall Street is, right? Our objective is to make money no matter what. And if you give us the terms and you express a strong enough belief in anything, we will fleece you. Well, my that's a great way to end, I think. I don't know if it's a great way to end or not, but uh you can follow you on X at Professor Plum or Prof Plum99, right? >> Yep. >> What's that story by the way? The 99. Are you gonna give that up? What What is that? >> The 99 literally was um it's pretty funny, actually. So, uh yeah, I graduated from the University of Pennsylvania in 1992. had started the PhD program there, dropped out to go to work in uh the private sector um when I realized that finance was nowhere near far along enough for for me to really do the stuff that I wanted to do in a deeply theoretical way. Um but you know in the early Unix systems you had to decide on an email handle, right? And you know I it would be presumptuous to be Professor Green. Mr. Green was a character in uh Clue and that also was kind of boring and probably taken I can't remember exactly and so I I jokingly put it as Professor Plum. That was my original email handle in Unix. Um when we shifted to internet um uh email systems, somebody had already taken Professor Plum and so I just shortened it to Profl Plum99 in 1999. And that's where the Prof Plum 999 comes from. Uh the character that you'll see there is you know an even more balding uh Vini from the Princess Bride and you the rationale behind that is just really simple. Um you know look again I'm a smart guy. I know I'm a smart guy but I am not the smartest guy in the world and I certainly don't understand the rules of every game that I'm playing. The character of Vini is interesting because he is really really smart but he didn't understand the game that he was playing when the most important terms were on the line. It never occurred to him that there was ioine powder in both gauntlets. And so, you know, the one thing that kills you when you're really smart is overconfidence. And, you know, I I keep that avatar to remind myself that you can't be overconfident. You may not actually know the rules of the game you're playing. >> Fair enough. And just remind people on Substack, it's a great read. Yes, I give a fig. You can you can follow Mike there and subscribe as he says, reach out. He'll send you some uh some of his notes as well. So, Mike, I can't thank you enough for coming on. It's a crazy world and market we're living and look forward to having you back on in the future. >> Thank you for having me on, Danny. >> And make sure to check out another episode of the Danny Moses Show this Friday at 7 PM on Scripps News where my guest will be Peter Bookfar, chief investment officer at one point and author of the book report. And while there are no more football picks this season, I hope you caught my picks last week, which included the Seahawks, Kenneth Walker the third as MVP, and the mention of the word wind during the broadcast. And there is now golf and horse season upon us. So, be sure to tune in. Thanks for listening to the On the Tape podcast with Danny Moses. If you like what you heard, please subscribe on either Apple or Spotify to the weekly podcast and please leave a rating and review, positive only. You can also watch on the On the Tape channel on YouTube and give us a thumbs up there as well.
Michael Green (@ProfPlum99): Providing Clues to Solve These Markets
Summary
Transcript
In this episode of On the Tape, I am thrilled to welcome Michael Green back to the pod. Mike was last on in April of last year. We discussed many topics including market structure in the role of passive versus active investing as well as Mike's career path which included the infamous Volmageddon trade while working in the Peter Teal family office. Mike [music] currently serves as portfolio manager and chief strategist at Simplify Asset Management and is the author of Yes, I give a big on Substack. But before we get to Mike, I wanted to reiterate how it's [music] more important than ever to be mindful of where and what you invest in these days. I have talked before about the pros and cons of deregulation in the financial markets, but I fear we are moving too quickly and what might be to the detriment of the retail investor. Barren posted an article earlier this week and highlighted the fact that the CFTC's Chicago office has gone from 20 trial enforcement lawyers to one. This is the capital of futures trading. To put this in perspective, enforcement actions brought in over $17 billion through 58 enforcement actions in 2024 and only $9.2 million through 13 enforcement actions in 2025. According to the article, five of the six attorneys at the agency that received a reduction in force notices last summer and one that retired early had a combined 103 years experience at the agency. As of last Friday, there is now one trial attorney working with three remaining investigators and one parillegal in the Chicago office. This was the office that handled the case against Binance and FTX. If the Senate passes the Digital Asset Market Clarity Act already passed by the House, the CFTC would be given jurisdiction over the crypto industry that currently sits with the SEC and that's in addition to regulating the explosive growth in the prediction markets. One of the CFTC trial attorneys that was let go said, quote, "If I was a different person, I would launch a crypto scam right now because there are no cops on the beat." This Baron's article follows a Wall Street Journal story at the end of last year that was entitled, "Trump administration upends prosecution of white collar crime." It describes notable changes in the enforcement of the Foreign Corrupt Practices Act, which fell off of a cliff in 2025 that also included a six-month freeze on new cases. The Justice Department and the Securities Exchange Commission, which share authority to investigate violations, brought about 33 cases a year against companies or individuals between 2015 and 2024. This year, the Justice Department brought six new FCPA cases, and the SEC brought none. So, as white collar crime might go unpunished and or in some cases get reversed through pardons and drop cases, it's more important than ever to protect yourself. My guest on the pod today will certainly arm you with knowledge that might help. Mike, welcome back to the pod. You were on the pod in late April 2025 and at the time we were decoding the on again offagain tariff policies and the impact it was having on the macro and the markets. It's almost 10 months later and while there's like a bit more clarity on some things, there's obviously still a lot to decode out there. So let's start with that. Give me your thoughts on kind of the big picture and you know the macro and we can dive in from there if that's okay. Yeah, I mean, you know, it's funny. I think we talked about this at the time. Um, you know, there were a lot of calls, particularly in in light of the S&P having sold off around the tariff tantrum, that somehow or another tariffs were going to set off a wave of inflation, that, you know, we're going to see um extraordinary price increases, that it was a terrible policy that was somehow or another going to reinstate the components of the Great Depression. And of course, all of that was somewhat validated by the rapid sell-off that we saw in equities. Um, you know, at the time I said, and I continue to say that really the only thing that actually matters to the behavior of equity markets is flows. We knew mechanically what had happened um was largely tied to Europeans and Asians effectively voting with their feet and taking their money home. We saw a very little of it, a very little amount of US retirees selling. And the point that I just continually emphasize is, you know, yes, you'll go through periods of this sort of friction and uncertainty and it can cause people to change their positioning. And that happening in a market that is, as you know, I believe, heavily influenced by passive to become much more inelastic will cause large swings in prices. But the minute it's over, the minute people kind of have gotten their positioning where they think they want it, then the dominant force just becomes the flow of money into 401ks and passive and stock buybacks, etc. And it and it's really not telling us that much about the economy in terms of its behavior. And so, unfortunately, I think we're right back into the same place, right, where the markets are telling us one thing. And yet, we are seeing very clearly a slowing in the economy broadly. jobs are being um downgraded. Tomorrow we should get, you know, really terrible numbers in terms of the revisions on the QCW um the quarterly uh census unemployment and wages. Um, you know what we know is is that the approach that has been taken by many government agencies is to quote unquote massage the data not by virtue of trying to conspire to present false data but simply because they have a different approach to doing it. In the case of the BLS, they estimate the number of new businesses that are being created and that number is just wrong, right? Their their methodology is wrong. We know exactly why it's wrong. They will eventually change it. Um, but they'll, as they always do, they'll probably change it at the worst possible moment. So, you know, where we sit today, we're seeing rising financial distress. We're seeing more bankruptcies. We're seeing rising unemployment broadly. Wages are getting hit. Um, and it does eventually set up the conditions that cause a meaningful correction, but I just don't think we're quite there yet. >> Wait. So we've had five or six kind of mini corrections if you want to go in the last year where VA has spiked and to your point lasted sometimes a day, sometimes two, sometimes three and it always seems to reverse course to your point because the flows are unrelenting in terms of passive. >> So is it the horse or the cart here? Meaning people actually end up having less money to put in the markets or will the market sell off and cause them to have less money? So where does that kind of meet there? I would say >> yeah I mean I I think the point that I would emphasize is you know the uh the Twitter meme of why not both. Um you know the simple reality is is that wealth creates collateral collateral creates borrowing and spending capacity and so if prices fall there is less of that. Um on the you know the other component as we were talking about is that flows require people to have jobs to contribute to their 401ks. Um, and it's not just that component as well. With Federal Reserve having hiked interest rates to relatively high levels, in an environment in which there's a lot of cash outstanding, that's created a huge slug of income. That basically means boomers don't have to sell their portfolios in order to meet their lifestyle objectives. They can live off of the interest income that's coming from their fixed income portion of their portfolio. This sets up conditions where you know like my honest model at this point is is that the most likely catalyst that will ultimately undermine the system is that we will begin to see deteriorating economic conditions as we flow through this year. We will have a new Federal Reserve chairman. Um the market tends to not be very uh kind to new Fed chairs. And for all of the the thoughts around managing the balance sheet or raising or lowering interest rates to fight perceived inflation, um my hunch is is that, you know, Wars will cut interest rates relatively aggressively when confronted with with weak economic activity. At least in my model of the world, that actually reduces government fiscal transfers to the wealthy individuals that own the stock market and potentially creates the catalyst for a more meaningful selloff. But as I as I always emphasize like this is a stochastic phenomenon. We we know it will eventually occur by trying to offer the exact mechanism by which it's going to occur. I simply devalue the overall forecast. Right? This is a fragile market that has unique exposures to extraordinary overvaluation and securities that are increasingly disassociated from the underlying fundamentals. Um those conditions rarely end well. So when you combine obviously this kind of buy the dip mentality with the Fed has your back and I think you just described a situation that they're going to have your back near term in a midterm election year. So if you think worsh is going to be more doubbish than people think which I totally agree with you that the that this white house and or the government will do whatever it takes to you know for 2026 midterms doesn't feel like there's going to be a huge catalyst barring something we're not thinking about at least in the next quarter or two that would occur to kind of reverse that psyche and the moral hazard that kind of exists. And you're right debt's not going away. We're going to go over 40 trillion I'm sure at some point this summer. We're not fixing any of those structural issues, but it's, you know, is this a timing issue then in your point or what is it really tips the scales then if you're describing kind of a dovish um buy the dip mentality that's still kind of out there? >> Well, again, the vast majority of the buy the dip actually is mechanically built into markets. So, when you think about a 401k system, I'm contributing a fixed amount tied to my income every single twoe pay period. That doesn't, by the way, flow in the day you contribute it. it's actually contributed into a pool. Those pools are then smooth. So there is some evidence of like Fridays having slightly higher flows than you know Wednesdays. But the the reality is is that that is a somewhat smooth flow. And if you just mechanically think about it, constant stream of dollars coming in, prices go down, you buy more shares. Um until we get to a point in which the withdrawals or the need for income associated need for cash effectively associated with um lifestyle safety whatever exceeds those contributions you know that the the market is an up and to the right phenomenon. >> It's fair and I think within the structural aspect of the market and the passive we're going to get into other things here I promise. um we're so concentrated you know by definition of how these passive indices are constructed into 10 names controlling X but within that I think one thing that's not talked about enough is the wealth effect and the point you're making if you were to get a sustained selloff in the market it would then trickle through the economy the same way I think the economy is being held up by people that own the market have experienced growth and I will throw crypto into that as well since I think it's so retailheavy give me your thoughts on that and and what impact that could have kind an unwind of the wealth effect. >> Well, you know, crypto, Bitcoin in particular, has actually been a wonderful test case of my theories around flows. And I, you know, um I'll fire back up my computer and show you a couple of charts, but you know, the simple reality is is that the flows in and out of Bitcoin ETFs now, at this point, explain north of 75% of the price action in Bitcoin. That's an extraordinarily high R squared just to, you know, to emphasize that point. Um but you know, yes, it's a collateral asset that unfortunately is heavily owned by younger people in particular. Um and that's the group that's under the greatest pressure in today's world, right? It's not so much the boomers who again are benefiting from relatively high interest rates, certainly higher than they anticipated when they began accumulating financial assets um or at least, you know, really accelerated over the past couple of years. We talk a lot about the wealth effect. We often ignore the income effect. And so, you know, just to parameize that very quickly, the estimates of incremental spending tied to an increase in in $1 in wealth is about two cents. This actually matches up with a lot of the data we see on withdrawals, etc. Um, so you know, a dollar lost out of the market adds, you know, subtracts two cents from spending. A dollar added to the market adds two cents of spending. You can clearly see how that's stimulative on the way up, but it also in magnitude is nowhere near as large as the income effect of an interest rate increase. When you have um interest income, people treat that as stable and much more tied to a life cycle phenomenon. The marginal propensity to spend out of interest income is around 70 cents on the dollar. And so the give or take $1 trillion dollars of incremental interest expense that the US government has taken on with Jerome Powell's interest rate hikes has actually proven to be incredibly stimulative in my view of the world. Um and my big fear is is that they don't understand this. I've seen no indication that they fully appreciate the role that they themselves have in in creating loose financial conditions. One thing that's out there now that there's more ETFs than stocks is that it actually has become a great stock pickers market. At first it wasn't. When passive came on the scene and was growing because portfolio managers were forced to just kind of follow the trend they needed to outperform certain sectors, overweight, underweight, buy the biggest names within them. But it feels like we've now reached the point where if you're doing bottom up work in the market and just step away from the macro for a second, there's some huge opportunities. It might require patience. But it is amazing how we're getting these huge moves sometimes higher just by names that have been either underfollowed or underowned that are all of a sudden getting attention again. What are your thoughts on that? And is that lost art of kind of active management feels like it's coming back here? >> Yeah, almost nothing I see suggests that it's really about the active management or the selection of the securities. is much more about the flows into those spaces. So, you know, gold would be a really good example. I wrote about this last year. The evidence was pretty clear that the traditional flows that had gone into gold had been diluted by Bitcoin. And that was actually blinding people to the opportunity of the gold price to push significantly higher if something were to change around that. And unfortunately, that's exactly what we've seen. shares outstanding in the GLD alongside the buying that's coming out of China, which has very similar characteristics to it. You know, those flows really do help explain what is going on with the price. It's always this simple. If a lot of money tries to go from one allocation, let's say a $70 trillion allocation to the S&P 500, if you take 1% out of that and try to buy the Russell 2000, you're literally talking about 25% of the market capitalization of the Russell 2000, right? You try to buy 25% of the shares of anything and it's going to go vertical. And that is what we've seen in small caps as people tried to rotate. It's exactly what we've seen as people tried to rotate into gold or into commodities. These are very small markets relative to the market that people are drawing capital from. Um and so I like while I agree with the overall observation that many people have been rewarded by um sticking to investments in areas like materials or areas that would be traditionally more associated with negative outlooks as compared to particularly positive outlooks. Um I I unfortunately think it really is the same underlying phenomenon, a deeply inelastic market where more money is trying to go in than the space is capable of of uh uh accommodating. >> Well, let's stick on that topic for a minute. So you talk about flows into the S&P 500. There's only one gold miner in it, pneumont. That's it. So when you think about, you know, a Boston fund manager and how they have to make decisions and so forth, you brought up materials, which is, you know, two to three% waiting in the S&P 500. It can be ignored, but one of the things I'm getting at is that flows have self-fulfilled how uneven these sectors have gotten. And so I guess you're answering it, but I guess what I'm saying is if a portfolio manager wants to make the decision to start underweighting technology and allocate more into materials, industrials, energy, and gold, which falls under, you know, materials, that's a powerful secular move. To your point, the math might be difficult, but if it were to occur on a sustained basis, there's huge opportunity. That's the point I'm trying to make is that within the sectors that are underw weight, you know, within some of these names, there's opportunities. That's all I'm getting at. I I know it it we've gotten to a point where it's almost impossible to fit the elephant through the mouse hole, but that's kind of where I'm going with that. >> Yeah, I I I think that's right. And that is one of the things that it, you know, we have to be very very cognizant that the momentum that we think about historically that was correctly identified by Cliff Aznes back in the 1980s um turns out to be effectively a subset of the overall class of momentum. Um uh for those of you who know my relationship with Cliff, that would allow me to define Cliff as a small problem. Um you know, the underlying characteristic of uh momentum is the idea of information diffusion, right? Danny figures something out. He buys a security that causes the security to rise modestly in price. Mike sees the security rising in price, starts to dig into the fundamentals, discovers what Danny has discovered, buys an addition that causes the price to rise. Other people follow along in that process, right? That information diffusion is is a special case of momentum. There's a second form of momentum that is actually created um by what I call the price weight spiral within passive which is that as money goes into the index it differentially affects the largest stocks in the index. Um they are less liquid relative to their market capitalizations. becomes particularly extreme at the largest companies. And so that money coming in to buy Apple, for example, causes Apple's price to rise faster than the rest of the S&P. That means that the next dollar into the S&P will buy more of Apple than it will of the other stocks. That reinforces momentum through simply a price waiting mechanism. Um the problem with that is that it's very hard to change that, right? It's very very hard to change that. And so this is part of what has led to me, you know, seeming to be really arrogant and dealing with people on like international stocks or small stocks, etc. Until we change our our mechanisms for allocation, until we return more capital to those active managers, those discretionary managers that you're highlighting, unfortunately, I don't think it's a secular trend. I think it's really just a rebalancing or a short-term cyclical trend. and and so far it looks like that's playing out again. >> Yeah, I guess you would need a large market selloff um sustained market selloff in order for that to kind of change. So on your and then we'll close out the passive theme here, but uh on your I give a fig on Substack, you just wrote a really interesting piece which addresses this which it's not just about the trends, it's actually the rules themselves. And you wrote something regarding um specifically and you can explain this the 5x free float multiplier which is part of a proposal and the fast entry uh which is part of a proposal and basically self-fulfilling that even a large company market cap wise that has a small float uh at the detriment of people that will be buying it and the benefit of insiders etc. explain that because that's just a rule and if it goes forward you're pointing out it's just unfair and and not a not a great structure. >> Well, it what it does I describe it as the spackification of the of the QQQs, right? Um spaxs were the mechanism that allowed many lowquality companies to come public in the 2020 to 2022 time period. That was simply a function function of index arbitrage. um this fasttrack IPO status effectively what NASDAQ is proposing to reinstate with some particular wrinkles around it that candidly I think are absolutely crazy is very similar to what would transpire with spaxs. So spaxs as you know have been around forever. They're basically a mechanism for hedge funds to buy a little bit of volatility and hide the amount of cash that they have in their portfolio because it's a cash instrument with the option to acquire something. um they were not eligible for index inclusion and the total market indices broadly the tool that's used within most target date funds um you know because they were cash instruments and not operating companies. If they made an operating acquisition they would be subject to the same inclusion rules as a traditional IPO. Um, and this proven to be a disaster because the traditional rules of an IPO, a traditional S1 perspectus and road show requires a healthy and vibrant active manager community willing to deviate from their benchmark and take a risk on a new untested name. Spack shortcircuited that with a modification called the FastTrack IPO. The fasttrack IPO is almost identical to what is being discussed by NASDAQ, which is the idea that if the company is big enough, it exceeds a certain threshold that it should have been eligible for inclusion in the index in as few as five days upon making the that operating acquisition. In 2020, that cutoff was about a billion half dollars. Now, nobody had ever seen a billion half dollar spax. So nobody thought to do this but the minute they began to emerge we actually saw unfortunately the same dynamics which is that the only liquidity available in spaxs is insider selling insiders are restricted from selling typically for 20 days in a spa more particularly it's typically 20 days above a 20% threshold and if the largest buyers in the market the index funds are required to buy in as few as five days per the terms of a fasttrack IPO you can figure out the immediate imbalance right? There's a lot of buyers and not many sellers. NASDAQ has proposed with this rule change that is, you know, that is open in the comment period. I encourage people to check out my work at Yes, I give a FIG and take a look at that piece. Um, I'm always willing to extend subscriptions to people who request it. So, just hit me on Substack if you'd like to read the piece. And I helpfully made it very easy for people to comment to the NASDAQ on this. What NASDAQ has proposed here is is that they would allow rapid inclusion of companies that were large enough to enter the NASDAQ 100. And if that wasn't actually enough, again, a mismatch between the insiders and the index buying, they then proposed to magnify the float by effectively 5x, which would allow a company to issue very few shares, making very few shares actually available for the public to settle trades while requiring index providers to buy literally five times as much as is actually available. like this would become the happiest hunting ground for financial fraud I can imagine. Um and it really is disappointing to me that at this stage in the game that the index providers don't appear to fully understand the impact or if they do understand it are treating it very cynically. Um you know this is just bad. It's like it is not not not just unfair is bad. It is literally designed to extract money from the retirement system of the average American to hand it to Elon Musk. >> So, it's safe to say if NASDAQ is trying to court Elon Musk or Sam Alman to come on their exchange when they go public, this would be the best way to potentially do it. To your point, >> it would be an extraordinary tool to attract large listings to um the NASDAQ, which you know, to be fair to them. Ostensibly, the index is distinct from the listing business. Um, this looks awfully suspicious. >> Fair enough. All right, so let's talk a little bit. We touched on it briefly. I want to talk about the kind of the AI impact on the markets and the economy. I know we mentioned how topheavy some of these indices are because of AI related stocks and we mentioned before the white collar jobs kind of what are your real thoughts there and what inning are we in kind of on on this? Are we just at the beginning potentially of seeing these impacts? And do you expect the job impact to be as big as it as it might be? >> Look, I I fall into the camp very similar to my good friend Josh Wolf that ultimately technology creates more opportunities for employment. It gives us more possible combinatorial answers that allow us to increase, you know, the opportunity to solve problems for people, which is really what employment is all about. Um, with that said, the idea that that happens smoothly and it happens equally to all people is absolutely untrue. Right? When we see waves of technology, when we see waves of innovation, it unfortunately impacts local individuals far differently than it does the aggregate population. So there will be a surge in population or in jobs in India created by telecommunication for example that can be done at much lower cost than it can be done in the United States. AI is an incredible technology that as a content creator I use on a continuous basis. In many ways I describe it as I suddenly am you know I have 400 first year analysts. I would actually argue that the advances in AI have probably pushed them to second year or even first year associates at this point. All of which are incredibly motivated to solve the problems that I put in front of them. I just know need to know how to ask the question the right way. And I also need to have the domain specific knowledge that allows me to look at their answers and say no that's not right. Go back and try it again. Um most of the hallucinations are are solved by that component. Right? If I don't have any knowledge of the the topic, it's very easy for me to post fake information. If I know the topic really well, like that, you know, you've been through this process. You've had analysts. The simple reality is they are really smart. They're extraordinarily well read. They're very motivated. And you can't trust them as far as you can throw them. Right? So, this is the same underlying phenomenon. It's just it's radically cheaper. My AI bill is somewhere in the neighborhood of $1,000 a month right now as a professional user. if I was running an equivalent amount of brain power in terms of analysts, I'd be running a $12 million a month um sort of expense. So, this is a true innovation. It is really powerful. I have no question that it's going to lead to some extraordinary breakthroughs. Certainly led me to accelerate my work in areas. But the net impact for many people is the uncertainty is creating a lack of hiring particularly for young workers who are coming out of college who may not have been exposed to AI in a way that makes them immediately productive members and enhancing the capabilities of a firm. And the firms are increasingly looking at and say I'm really uncertain about the economy. I'm really uncertain about the impact of this new technology on my business. Why would I hire somebody only to have to fire them if it turns out that X, Y, or Z turns out to be true? That slow rate of hiring is really isolating itself in the younger population. And today we just got the, you know, the information that we're now down 8% um another year. This is the fourth consecutive year that first year college grads are seeing their wages fall. So this is, you know, this is a rough time period and it's particularly rough for young people, which is made all the worse by the fact that we have relatively high interest rates that are creating conditions under which the older population is like, hey, things are pretty good. I got money to spend. Um, and you know, simple terms, yes, I think AI is going to be an incredible revolution. Yes, I do think it's going to create localized job loss and it's going to create frictions for new entrance into the labor force. Um but it will eventually resolve itself and the answer is not to engage in sabotage and you know throw wooden shoes into uh data centers. >> All right. So with that Mike kind of um morph that into kind of the K-shaped economy and kind of what we're seeing and we're going to go off the rails to the top of the K all the way up and on the bottom and what what's the next letter that that would look like? But uh it's something cursive I'm sure. But uh >> yeah yeah I'm trying like maybe a capital Q or something. Um, >> uh, you know, it's interesting. So, I got pulled into this debate around affordability, etc. through a piece I wrote called My Life is a Lie, the $140,000 poverty line. Um, you know, that really was just kind of a voyage of self-discovery as I dug into some of these topics. Um what's really interesting about it is that it actually turns out that there are emergent properties of economies that are bifurcated between capital holders and those who primarily use their labor. Um it largely turns out that that most of the conditions that we actually experience are a function of volatility. And what we're really describing when we're talking about somebody who is poor or who is less well off is they lack the buffers in life that allow you to avoid a hard reset. Right? You and I are fortunate enough to never really have to worry about a medical condition creating a system a condition of bankruptcy um or a car breaking down causing us to lose our job or anything else. Right? Those buffers allow us to basically continue to play the game and continue to compound in both our income and wealth. For people who are at the lower level, there's something I refer to as the valley of death, which is this idea that between about 40,000 and about $100,000. As you make more income, you lose more benefits and you're effectively having the safety net withdrawn even as you're working harder. That's what I think is really driving this K-shaped economy that there's effectively about 40% of the US population who is now underresourced enough that a minor event can cause them to basically have to start all over again. And that's what our K-shaped economy is about. And we need to recognize that while we may not agree with how everybody chooses to participate and behave in society, we're doing ourselves a tremendous disservice with the current narrative that, you know, that 40% of the population is less intelligent, therefore less valuable, is you know, naturally poor, they'll always be poor, etc. Um my work really suggests that that's not what is really going on. That it really is this function of volatility buffers that you and I have been able to accumulate by virtue of being, you know, born into relatively stable families, being given excellent educations, being given the opportunity to participate in highincome uh careers that allowed us to establish that that difference. I you know, look, I'm not a dumb guy. I know that. But the simple reality is is that, you know, none of this would have mattered if I was living in Paleolithic times. I'm not a particularly fast guy. I would have made a delicious meal for a saber-tooth tiger. And, you know, the world wouldn't have been treated to my Substack or my contributions as a portfolio manager. Um, yeah, I was a really pudgy kid, man. Um, I would have made good eating. Um, so you know, the simple reality is is that that's a lot of what technology is about is building those buffers that allow people to take that next step in a somewhat unimpeded fashion. And a lot of my work is just suggesting that we've gone too far in this in the pursuit of efficiency by saying, you know, we're only going to hire the brightest. We're only going to hire the smartest. we're only going to allow the participation from those who achieve a certain impremature by being a you know Harvard graduate or a pen grad or a Stanford grad. Um this the simple reality is is that that undervalues a sizable fraction of our population and candidly I don't agree with people who think that those at the lower end of the of society aren't active and measurable contributors to our overall well-being. One last thing, Mike, just back to the macro for a minute. We touched on Bitcoin. We talked about gold, but we really didn't talk about those two asset classes in terms of your thoughts on them here and the signals that they're sending. I know you're not a you're not an anti- Bitcoin guy. You're not I think you're like me, you're not a pro Bitcoin guy. Thoughts there. And then what is gold telling us? And the second part of that is what is the US dollar telling us and where do you see that going and where should we be concerned? >> Yeah. So well first of all actually um I am uh what is perceived as anti- bitcoin. Um I think unfortunately that there is a deep misunderstanding in our society of what money is and therefore we've allowed a narrative to persist somehow or another. Bitcoin is a solution. I would suggest it's a speculative asset in search of a narrative. Um and anything that creates a narrative that causes money to flow into it should be clear from my discussion of other assets that can cause the price to go up regardless of value. Uh, I did an experiment on Twitter the other day where I repeated the the very famous Francis Golton experiment of how much does an ox weigh and asking people somewhat, you know, randomly. And as you might expect, the wisdom of the crowds came back and told us, you know, that an ox weighs somewhere between 1500 and 2,000 pounds, which is almost spot-on with the actual weight of an adult ox. I asked the same question, how much does an adult higandorfus weigh? And the answer was actually a radically different distribution. And it was heavily weighted to the tales, right? Meaning people thought that the vast majority of people thought that Higandorfus weighed very little or weighed an infinite amount. Bitcoin's the same thing. What the hell is it? Is it a store of value? Is it a peer-to-p peer payment system? Is it the next digital gold? Is it a um uh you know um uh distributed ledger that allows us to quickly and easily audit? Um, is it a mechanism for transferring wealth across state lines that we otherwise call moneyaundering? Um, you know, we we actually don't know what it is. It's a higorphus. And so, how much is it worth? Well, either zero or a lot. And it just depends on where it is in that process that helps to define it. This is actually what a lot of my recent work on passive and the strategies behind it highlight that we effectively have become a society that doesn't really know what we are investing in or buying. And so there is no meaningful difference between Bitcoin as you know Ben Hunt calls it you know with the TM after the trademark after it or a Higendorfus or an Nvidia separated from its fundamentals. We don't know what the right answer is and so we're willing to project a wide range of outcomes on it. Um, it makes me sad in Bitcoin more than anything else because I think it has largely been sold under fraudulent terms and I think many individuals are going to find themselves with a distinct lack of trust in a system that allows it to fail because they will view it as an assault on them personally having bought into the idea. This is one of the saddest stories associated with the original Ponzi scheme. Right? Most of the victims of Charles Ponzi actually believe that the US government took their money, that they shut him down, that it wasn't his fault, he wasn't the bad guy, etc. I'm sure somewhere out there in the audience some screaming, "That's true. It wasn't his fault. He was a good guy, you know, etc." Um, you know, but I think unfortunately we're going to find that Bitcoin ends up being the same thing. Um and you know the last thing our society needs is a further undercurrent of trust um being cut out from under it. Um gold is you know I I do fall into the Keynesian framework. I think that it is ultimately a barbarous relic. With that said it is a barbarous relic that does have a unique feature that Bitcoin doesn't have. If the gold mining network stops, gold remains gold, right? It doesn't actually require everybody to continue to participate and mine and maintain the sanctity of the blockchain in order for it to preserve its character. What really kicked off with gold was when Russia invaded Ukraine and the US confiscated Russian reserves or more accurately eliminated Russia's ability to utilize those. Our you know the world's largest exporter China looked at that and said okay this is this is bad. We can no longer hold treasuries. And so they started buying gold. Um, interestingly enough, they were buying gold at the same time that Americans were selling it because they were off buying Bitcoin. And as a result, you had kind of two offsetting components that meant the gold didn't move very fast. Uh, sometime around 2024, Americans woke up and they're like, "Oh, you know, we should maybe buy some of this gold stuff." Look at central banks accumulating it around the world, right? You know, the narrative of the dollar is collapsing is always a fun and relevant one. Um, and the combination of those two is effectively, you know, the elephant through the mouse hole, right? We're trying to squeeze more money in there. And you can see this in the disassociation between fundamental values and the prices in particular in places like China. Um, less impact in the United States where we have more smoothly functioning financial markets. Um, it is also, by the way, one of the reasons why the Chinese stock markets played a key role in my analysis of an understanding of what passive was actually doing. Um, but I think that's really what's happening is is that we we, you know, we basically have a little bit of a mania of people saying, "Wow, things are so bad. I just want to get out of this. I don't want to actually invest. I want to put my money to the side. I want to move away from something that has a counterparty exposure." Or even if I didn't pay attention to Mike Green and his arguments against Bitcoin, you know, that thing's going down. I might as well buy the thing that's going up. Um, and so I really unfortunately think that's what's going on. I think it is telling you that trust has been damaged and eroded in the system. Whether that is foreign countries believing that the US will protect their access to their assets or whether it is Americans believing that the government has taxing capacity and is effective at what it's trying to do. There's just an awful lot of people who are trying to get out of the system right now. I think fiat currencies, to your point, the role of the dollar is that gets devalued, debased, whatever you want to call it, people will flock to a hard currency. And for a while, Bitcoin was stealing gold's thunder up until up until a few years ago. Now, a 5% move in in gold is the entire market cap of of Bitcoin here. So, it's, you know, it's certainly changed. So, I take back my comment that you're neutral on Bitcoin. Although, I think from the standpoint is I don't think you're going out and shorting it because it's an unknown thing. to your point you just made the argument against yourself would be it could go to 200,000 because it can just easily go to 10,000 is 200,000 so there's no point so if that was my takeaway I think that's the correct one >> yeah no I think that's fair the only trade I've done in Bitcoin in the past couple of years was a bet between myself and Peter McCormack was a noted Bitcoiner um in which he forecasted that you know Bitcoin would definitely hit 100,000 and was willing to offer five to one odds against it um but the funny part is is that you know so I had to put up 20,000 and that it wasn't going to hit 100,000 and he was going to pay me a h 100,000 if it didn't hit 100,000. Right? That allowed me to go out and buy that same option in the market at one the price he was offering it to me. And so it actually ended up being an extraordinarily profitable trade for me which you know Bitcoiners of course didn't understand. Peter when I tried to renew the bet with him on a million dollars was like dude how much money did you make off this bet? and he was extremely disappointed that I didn't lose money. I made money on the bet. Um, that took the joy out of it for him. But that's like Danny, you know this, that's what Wall Street is, right? Our objective is to make money no matter what. And if you give us the terms and you express a strong enough belief in anything, we will fleece you. Well, my that's a great way to end, I think. I don't know if it's a great way to end or not, but uh you can follow you on X at Professor Plum or Prof Plum99, right? >> Yep. >> What's that story by the way? The 99. Are you gonna give that up? What What is that? >> The 99 literally was um it's pretty funny, actually. So, uh yeah, I graduated from the University of Pennsylvania in 1992. had started the PhD program there, dropped out to go to work in uh the private sector um when I realized that finance was nowhere near far along enough for for me to really do the stuff that I wanted to do in a deeply theoretical way. Um but you know in the early Unix systems you had to decide on an email handle, right? And you know I it would be presumptuous to be Professor Green. Mr. Green was a character in uh Clue and that also was kind of boring and probably taken I can't remember exactly and so I I jokingly put it as Professor Plum. That was my original email handle in Unix. Um when we shifted to internet um uh email systems, somebody had already taken Professor Plum and so I just shortened it to Profl Plum99 in 1999. And that's where the Prof Plum 999 comes from. Uh the character that you'll see there is you know an even more balding uh Vini from the Princess Bride and you the rationale behind that is just really simple. Um you know look again I'm a smart guy. I know I'm a smart guy but I am not the smartest guy in the world and I certainly don't understand the rules of every game that I'm playing. The character of Vini is interesting because he is really really smart but he didn't understand the game that he was playing when the most important terms were on the line. It never occurred to him that there was ioine powder in both gauntlets. And so, you know, the one thing that kills you when you're really smart is overconfidence. And, you know, I I keep that avatar to remind myself that you can't be overconfident. You may not actually know the rules of the game you're playing. >> Fair enough. And just remind people on Substack, it's a great read. Yes, I give a fig. You can you can follow Mike there and subscribe as he says, reach out. He'll send you some uh some of his notes as well. So, Mike, I can't thank you enough for coming on. It's a crazy world and market we're living and look forward to having you back on in the future. >> Thank you for having me on, Danny. >> And make sure to check out another episode of the Danny Moses Show this Friday at 7 PM on Scripps News where my guest will be Peter Bookfar, chief investment officer at one point and author of the book report. And while there are no more football picks this season, I hope you caught my picks last week, which included the Seahawks, Kenneth Walker the third as MVP, and the mention of the word wind during the broadcast. And there is now golf and horse season upon us. So, be sure to tune in. Thanks for listening to the On the Tape podcast with Danny Moses. If you like what you heard, please subscribe on either Apple or Spotify to the weekly podcast and please leave a rating and review, positive only. You can also watch on the On the Tape channel on YouTube and give us a thumbs up there as well.