Markets Aren’t Driven by Fundamentals – Flows Decide Everything | Michael Green
Summary
Flows Over Fundamentals: The guest reiterates that passive investing and capital flows dominate price action, citing the inelastic market hypothesis and massive multipliers from incremental inflows.
Index Dominance: With most net inflows going to index replication, mega-cap weights rise and active management continues to shrink, driving persistent underperformance of equal-weight and small-cap indices.
Buybacks and Retirement Flows: A combination of share buybacks, muted net issuance, and flat retirement contributions still generated outsized market cap gains due to flow multipliers.
US Equities: Despite talk of de-dollarization, the U.S. continues to attract record inflows into Treasuries and equities, reinforcing a positive feedback loop favoring U.S. markets.
Tariffs: The guest views trade tariffs as effectively reshaping global trade, pressuring China’s excess production and prompting Europe to reassess exposure, potentially benefiting U.S. strategic interests.
AI: Rapid rollout of AI/LLMs is boosting productivity and investment across mega-cap platforms, creating a positive social bubble with broad benefits and some displacement risks.
Risks: A deterioration in employment could reverse flows and valuations; until then, passive-driven momentum likely keeps mega caps leading.
Transcript
Last time my guest was on, he said fundamentals don't control markets. Flows do. That was in at the end of March. Now we're sitting here in early January. And I'm really curious what what has changed? Do flows still dictate where the market is headed? Keep in mind the S&P 500 is about 2,000 points higher since our last conversation at the end of March. And now, are we seeing a trend change? Are we seeing a crack perhaps in the flow of capital and the flow of funds here? Really curious. And of course, we have many other topics to discuss. the impact of QE, the tariffs, a tariff dividend, and also perhaps geopolitics to to a lesser degree, like how are they impacting markets these days. I've invited a brilliant guest back onto the program. His name is Michael Green. He's the portfolio manager and chief strategist over at Simplify Asset Management. They have over 12 billion in assets under management. And Michael is a frequent guest on Mainstream TV as well to explain some of his points in more detail, one of which we're going to cover hopefully in this conversation as well. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously and we much appreciate the support. Now, Michael, it is great to welcome you back on Soore Financially. Happy New Year. >> Happy New Year to you, too, Kai. >> Yeah, it's great to have you back, Michael. It's It's been a while since we last chatted. We last spoke. Uh March 21st is when we published the interview about two weeks after Liberation Day or before Liberation Day as well. Market has moved tremendously. S&P 500 up about 2,000 points. gold up $1,800. Um, let let's come back to your main thesis of our conversation last time. Fundamentals don't control the markets. Flows do. Like how much have money has moved into the markets to push us that much higher and what is it looking like right now? >> Well, so this is one of the key components that has really been in kind of a theoretical or an academic breakthrough over the last 5 years is understanding how much flows impact the market. uh in 2020 there was a paper written by two academics uh Zavier Gabay at Harvard and Ralph Koen at University of Chicago in which they floated a hypothesis they called the inelastic market hypothesis which was the idea that markets are extremely sensitive to inflows and outflows rather than the traditional economic assumption that they are highly in highly elastic. In other words, they had the belief historically was that you had the capacity to put nearly unlimited amounts of money into the market with very little impact. The idea being there for every buyer there's a seller. We now know that's not true. And so the impact of flows has a multiplier to it. Uh theoretical foundations like the efficient market hypothesis assume that a dollar into the market creates about a penny of market capitalization. basically the difference between the bid ask spread on any single security or index. It turns out that that multiplier is closer to $8 for the index in aggregate. In other words, a misspecification of about 800 to1 which you know even the German government couldn't be that bad. Um the the the that is even worse for the largest stocks. So, we're now seeing multipliers on companies like Nvidia or Apple or Microsoft with trillion dollar market capitalizations and large shares of index flows that are in the range of $50 to $100 that is created from a single dollar flowing into the market. So the the that's a very long- winded way of saying far less than you actually think flew into the market, but it was capable of creating somewhere in the neighborhood of 10 to$15 trillion of market capitalization last year on a global basis. Um the estimates that we have are somewhere in the neighborhood of about 600 to700 billion net came into the market. That's a combination of share buybacks, new issuance uh being a a negative uh flow and then the last component being flows in and out of investment accounts. Um in the United States, those are actually pretty flat right now once we factor in the mutual fund complex and uh the net contributions to things like ETFs. So the long and short of it is less than you think, but the impact is much larger than most people think. Uh it's interesting like because you were talking about like investment flows by retail investors or so have subsided or stayed fairly flat. Let's break that down like where is that money actually coming from that has flown into the market that's really pushed us to the current levels. >> Well there's three or four primary sources. So there's contributions that are coming from institutional investors. Those would be in the those would be things like insurance companies which have a float that they have to continually reinvest. they have premiums that they have to continually reinvest, endowments um that are receiving donations um or generating profits from operating businesses. And then of course there's the large flow coming in through the 401k and IRA retirement complexes both in the United States and their equivalent on an international basis. Um, the total estimates right now for 401k and IRA contributions, basically the broad category of retirement flows in the United States is only about a net $200 billion. That's a combination of contributions into IRA and 401ks from people who are currently working. and the increasing withdrawals from people who are retired and are living off of that income with interest rates starting to fall again. We're seeing a slight uptick in the amount of selling that is actually occurring in those accounts. The fourth quarter of last year had pretty good evidence that there was some selling in what's called required minimum distributions in 401ks. Um there's also about a billion dollar a trillion dollars worth of share buybacks on a global basis. That number is only modestly higher. Most of that's happening in the United States and about 2/3 of that is concentrated in the S&P 500. Um the other sources of liquidity would be things like private equity firms, buying companies, etc. That has actually been relatively muted in the past year. And so on a net basis, we're talking a couple hundred billion dollars that flew into that flowed into the market last year, probably closer to a trillion once we factor in the stock buyback and the net issuance coming from employee stock grants. Um but you know that was enough to basically drive a 10 trillion dollar increase in the market. And the really critical thing I want to make sure that people understand is is that this is not anything new right? Flows have always been the determinant of market prices. It's just a question of what's driving those flows. Is it being driven by institutional investors such as myself that historically would have paid attention to earnings reports or to cash flow statements or is it being driven by index inclusion and index investing? And unfortunately today about 80% of the the uh net flow that's coming in is coming in purely through index replication strategies. Uh what does it look like historically if you compare it to previous periods like the last few years like have the flows increased, decreased? Are we within the norm? Um what does the what do the percentage increases look like in in that regard? Um we've actually seen the flows modestly slow um in 21 and 20 in 2021 we had huge flows that was a combination of significant excess liquidity that was created by the 2020 uh COVID stimulus and the um unnecess you the lack of spending associated with things like commuting to work, paying for lunch at the office, child care, etc. that was changed during the COVID period. Um the flows themselves continue to grow. It's a function of national income and the share of that that is flowing in and participation in the stock market continues to grow in the United States as more and more people are defaulted into 401ks as they gain employment. Um but it is not really changing that radically. It's not the most important thing that's happening in terms of the flows because we have a growing retirement class. We are seeing more selling coming from there that seems to be offsetting most of the increase that we're experiencing. If we think about the flows though, I'll just share a couple of slides here. >> Uhhuh. to highlight this you know this from a presentation that I give on the topic and it's really what it's really highlighting this is only through 23 but it's showing the growing flow of funds into passive vehicles and around 2015 we actually started seeing net outflows from active vehicles things like mutual funds that would have been managed by a portfolio manager selecting individual securities. It's really the relationship between these two that is driving much of the behavior that we see in the market. If you just think about what happens in an active manager portfolio, it is extraordinarily rare that they would be able to do something like run a portfolio that is 7% Apple, 7% Nvidia, and 7% Microsoft, roughly equivalent to the S&P allocations. And so if you fire that fund and replace it with an S&P index fund, that's a net purchase of the large cap companies. Smaller cap companies are going to be over represented in those active portfolios where you're generally seeing investors try to add value by understanding the fundamentals in a differential way. And as a result, less money actually negative money in some situations is flowing into those types of uh products. The net impact of that is is that we've seen this bifurcation in the market. The equal weighted S&P 500 or the Russell 2000 equal weighted has dramatically underperformed their cap weighted equivalents. That's largely a function of the impact of these flows. If you notice the chart on the right, this is showing the collapse in fundamental trading as a percent of US equity turnover. That's really the byproduct of what I'm identifying here. If I go back to 1995, a couple years after I entered the industry, about 80% of trading was being done by active management. Today, that number is below 10%. Speculative retail traders with the decreases in commission and the introduction of free option trading have actually become roughly twice the size of the entire active manager community. So, this is one of the reasons why you see components that appear to be what we in the United States sometimes describe as the Costanza market, referring to the Seinfeld episode, where George Castanza, the perennial bumbler, decides he's just going to do the exact opposite of what he thinks he should do, and his life starts going fantastically well. That's really the behavior that we're seeing. And you can understand it if you think about how passive indices are weighted. They're weighted on the basis of market capitalization. So what that means is when they go up in price, the next dollar coming into the index is going to buy more of that security. Now that's a traditional strategy referred to as momentum. Doesn't necessarily have to have momentum components to it, but it plays a very similar game that has contributed to stocks that are rising continuing to attract a larger and larger share of flows while stocks that are falling are experiencing a declining share of flows. And that's exacerbated when active managers try to step in, buy those securities, create a position in it, they can temporarily drive it higher. But because the entire active manager space and mutual funds last year had nearly $600 billion in outflows um creating a condition that I refer to as the death of active management. That means that they're actually selling the stuff that other people like them have identified as particularly attractive securities, forcing those prices lower, creating the valuation discrepancy that many people are highlighting, suggesting that value strategies or small caps or international stocks are particularly cheap relative to the S&P 500 or the NASDAQ. But until we change the character of flows and the reason why the flows occur, it's not going to change. >> Are you seeing any cracks in that in in the flows at all? Like you didn't see any back in March. So I'm curious, Michael, if you're seeing any cracks appear now. Um the Fed seems to be very worried about the jobs market. Is that a cause for concern? >> It's a cause for concern, but it is it's relatively marginal. Ultimately the only thing that will drive uh the turn here is either a significant increase in unemployment and a reduction in employment in total. Um, but even more importantly is that there is actually a a terminal point here. Once you get passive enough, I actually have an academic paper that I'm writing along with uh two other authors uh that walks through the mechanics of this. But once you hit a certain level of passive investing, uh you effectively approach a limit in which the volatility characteristics of the market change radically and at that point it effectively becomes a fat comp plea. Um, by my math, we're 4 to 6 years out from where that change will be enforced. Whether exogenous events emerge that cause that to happen earlier, very tough to know. >> And it sort of t exogenous events ties sort of into my next topic that I want to discuss with you, Michael, and that's just capital controls. You you briefly touched on it as well. Do do you see capital controls coming? And um I mentioned to you before in the report, but I'm personally thinking of an unwinding of the yen carrier trade that could cause disruption in in the flow of capital into the US, for example. So I'm curious um if you're seeing any cause for concern for capital controls, is that more imminent now? I >> there certainly are elements, but I think we're actually addressing the core issue with capital controls through tariffs. We talked about this last time. the, you know, the really critical observation with tariffs is they're effectively a way of making sure that you maintain global taxation for access to US consumers. Um, the yen carry trade largely emerged because Japan ran a significant trade surplus with the United States. That trade surplus had to be reinvested somewhere. Ultimately, they could either buy American products and services or they could buy American financial products. And that's really what the yen carry trade is all about is Japan reinvesting its traditional trade surplus and the reserves that of dollars that accumulated because of it. The only other thing they could have done is sell dollar assets by Japanese assets. That would have caused the yen to appreciate and that would have been deletterious to the uh trade relationship with the United States. would have worked out great from the United States standpoint, but from Japan's standpoint with a largely managed currency and economy, it was less than desirable. They needed to maintain an external source of demand, not dissimilar to what China is going through right now, where they also are managing their currency to prevent it from appreciating against the United States on purely trade related terms. >> Are tariffs working in in your mind? Are we seeing a positive impact from the US standpoint? I think from the US standpoint it's kind of in the too early to tell framework but I do think that we've laid bare that a lot of the analysis that was done on tariffs that oh my gosh this is smoo holly all over again etc was a very fundamental misunderstanding in fact what we've actually done is force a smooley type condition onto China by raising the cost of selling to the United States and restricting the ability to sell to the United States we force China's excess production into Europe and other regions around the world and they're suddenly waking up and saying, "Hey, wait a second." You know, the relationship that Germany had with China where we ship you capital goods and cars um many of or at least manufacture cars in China through joint ventures with the profits somewhat repatriated to Germany are now giving way to a flood of Chinese imports that are threatening the the German industry. Um, the rest of the world is waking up to this and I think one of the most successful components of the tariffs was effectively slapping the rest of the world across the face and saying, "Hey, this is a real problem." The rest of the world is suddenly saying, "Yeah, you may be right. >> The world is being reshaped economically, geopolitically, but on the economic front, coming back to capital controls, what what does it look like right now? Is money still flowing out of the US? Is it flowing into the US? What what are you seeing right now on a global scale here? >> Well, one of the big things that people had talked a lot about in March when we were talking last time was the end of American exceptionalism that we're going to see a reorientation of flows, etc. That's just categorically failed to materialize. We've seen record high inflows in terms of US Treasury demand relative to our trade surplus which has begun our trade deficit which has begun to contract. um we are you know also see continuing to see significant inflows from the rest of the world into US equities and that's really again just a byproduct of how people choose to invest. If I go to the Norwegian sovereign wealth fund, they're going to be allocating effectively on an index basis to the United States. And they're going to be allocating outside of Norway on a global cap weighted basis, which favors the United States as kind of the first leader in the passive revolution that's causing valuations to rise. Once again, that creates a magnification or a positive feedback loop that drives more and more capital into the United States. And we've really seen very little evidence that that's changing. Yeah, we also talked about like politics, meaning President Trump is a very polarizing character obviously and in Europe people just hate his guts. Literally hate his guts in Europe. Um there's a lot of TDS over here. Um how do you sort of factor take that out of the equation? Like how how do you take that personality out out of the markets as well? Because a lot of is like we we when we talked about I remember our conversation vividly like there was a Danish I think it was a pension fund manager who who said like well we're done done investing in the US but a lot was tied to President Trump's policies and how we acted right without having looking at fundamentals or anything. So how do you take that out of the equation? >> You just take it out of the equation. I mean, you know, dislike for an individual or dislike for a political figure is a very poor reason to invest. If you actually believe and have a fundamental basis to argue that the policies that are being pursued are counterproductive to the interests of that country, that's entirely different. But part of what is so offensive to the rest of the world about Donald Trump is is that he isn't unapologetically America first. Some may debate that and say America second, Trump first. But, you know, he is an unapologetically American first politician, which candidly I'm I'm surprised has taken so long to emerge. The simple reality is in a democratic system, you elect leaders who are supposed to represent your interests, not the interests of foreigners. And in many ways, the Democratic Party in the United States and some elements of the Republican party had effectively become consumed with a globalist agenda with the idea being that in one form or another there was far more commonality between French elite and German elites and Dutch elites and the United States elites who they ostensibly represent um than there are with people living in flyover country. And that has changed in the United States. Now whether it's presented in the most politic form in a manner that is helpful to discussions, negotiations, partnerships, etc. That's certainly subject to debate, right? Trump is a polarizing figure in a variety of ways. But the reality is is that the United States is doing what it should have done long ago, which is reassert on the global stage and say, "Yeah, look, you're our allies, but at the end of the day, there are no allies. There are only interests." you know a a famous phrase and to the extent those interests are shared we are really happy to work with you and by the way Europe you've really been kind of riding on our cotales and engaging in a whole bunch of shod and freud and enjoying the fact that China was emerging and pointing to the fall of the American republic and the you know ignoring the threat of Russia before it showed up on your doorstep and the simple reality is is that that is starting to change and I think it's changing in a manner that is beneficial both to US and European an interests. Europe will eventually be dragged kicking and screaming into a real politic world in which they start representing the interests of the European people instead of trying to behave as a globalist agenda, which I don't think is a bad thing. By the way, I just want to be very clear when I use the term globalist. I'm not using it in a porative frame. I'm simply saying that you are appointed and elected to represent the interests of the individuals in your um uh population. You're not put in place to determine how much carbon should be in the atmosphere or whether the sources of energy should be coming from mice running on treadmills versus nuclear power. The simple reality is is that you should be doing everything possible to protect and enhance the interests of your constituents and Europe has done a terrible job of that. >> Yeah, I'd second that. Absolutely. Uh Canada as well, a lot of viewers from Canada as well. If you look at GDP growth or not the personal wealth growth I think in measured in GDP Germany Canada are dead last globally or not >> and they should be and by the way it's 10 times worse in Canada because Canada has had such significant immigration and GDP per capita has actually been in significant decline and so the standard of living for most Canadians that have been there for an extended period of time has deteriorated notably that is actually driving behavior that is very similar to what we're seeing in the United States where you know increasingly I'm finding Canadians on Twitter and elsewhere saying our only hope is integration with the United States. We should secede from Canada and join the United States and become, you know, the 51st through 50 through 64th states. That's remarkable. I mean, it's remarkable to think that that has changed so that people are openly having these conversations. In Canada, we talk about countries like Taiwan potentially being taken over in a fifth column attack where Taiwan effectively folds internally to join China. man, you got places like Canada that's leaning towards that. >> Yeah. Well, politics in Canada are very different topic and very annoying topic as well. Quite honestly, I used to live there for three and a half years. It was disaster. So, um but but Michael, we titled our last video not China, the US is its own worst enemy. And it's 2026. We have midterm elections coming up here in November. Um from that point of view and from that angle approaching it, like how how are you looking at the US right now? Um, how do you see it being maybe more divided than ever? >> Well, unfortunately, I think the United States continues to be its own worst enemy when we talk about things like Trump derangement syndrome. And again, I want to be very, very clear. It's not that I'm supporting the individual or his behaviors. I'm simply identifying that the policies that he has taken in America first policy is one that is ultimately in the interests of most Americans. Um, we are starting to see some progress, right? And I would actually argue that if you can remove the blinders of Trump derangement syndrome and look at the actual policies that are being enacted, things like tariffs, things like the reindustrialization of the United States, things like securing strategic supplies through the military complex, you know, it's not well commented on in the media, but we've largely actually solved the problem associated with rare earth materials in the United States with the uh coming online of of MP P materials which allows recycling of consumer goods into militaryra magnets for uh navigation and electronic purposes. So the United States is a far more secure place than it was simp you know even 24 months ago. Um and we have followed down this path even under the Biden administration. We maintained the tariffs against the rest of the world and China in particular. We've continued to push forward on those policies. The manner in which it's conducted I think could be done significantly better. Unfortunately, it's unnecessarily confrontational and is setting the stage for a potential change of control in the United States which would likely set back some of these initiatives for a period of time. Uh but much more importantly in the United States we continue to struggle with tremendous inequality. The United States has a genie coefficient that basically puts it in third world country status. And while that is something that is resisted by those who are at the upper income level, the extreme upper income level, the reality is it means that more and more Americans are suffering through periods of procarity and want that restrict their ability to be fully productive members of our society. So we have a large population. We are underutilizing that population in my analysis. If we were to actually make significant improvements in the progressivity of our tax code and ironing out many of the loopholes that large corporations and wealthy individuals take advantage of, we would have more resources to focus on education and infrastructure. And I think we're starting to see signs that that's occurring. It's just unfortunately an area that I think Trump in particular is um you know he he is opposed to it in principle, right? We don't want to raise taxes. That would be a bad thing. Well, the question is, what taxes are we raising? What taxes are we cutting? You know, you obviously are familiar with some of the recent analysis I did around poverty in the United States. more accurately, the uh what I refer to as the valley of death or the benefits cliff that basically create a trap between about 40,000 and roughly $100,000 worth of income in which many Americans that should be thriving are ultimately finding themselves saddled with policies that create effectively 100% marginal tax rates during periods of transition over that valley of death. If we were to solve those problems, I actually genuinely believe that the United States would return and accelerate its growth, particularly with new innovations like artificial intelligence or LLM, raising productivity in the services sector, which it unquestionably is doing, by the way. >> Yeah. You you suggested maybe raising the poverty line from 32,000 to $140,000. What would that change? >> Well, what I actually proposed is is that we should change the pattern in which we withdraw benefits. So in the United States, $32,000 is roughly the poverty line for a family of four with two income earners and two dependent children. That level is so laughably below the level of base existence in the United States that it means that policy forces this navigation of these benefit cliffs. At 32,000, you're receiving tremendous support from the US government. The value of the benefits that you receive from the US government on a market basis is somewhere in the neighborhood of $50,000 a year. So your effective income is roughly $82,000. This is what's referred to as the supplemental poverty measure in the United States. And it's one of the tools that critics of my analysis use to say, "Well, poverty is not nearly as bad as you think." And unfortunately, they're actually not understanding the problem because as you navigate from $30,000 worth of income to that roughly h 100,000, that 52,000 gets drawn away. It disappears entirely around $90,000. And at every step in that process, you have to replace those goods and services that are provided by those benefits. At roughly 40,000, you lose food support. At roughly 50,000, you lose housing support. At roughly 60,000, you use lose child care support. and you also start to lose health care insurance etc. These are all factors that become increasingly relevant for families as they are navigating that process. Solving that would be a huge boon to the United States. It would create incentives for additional work. It would create incentives for additional labor force participation. And candidly, it would create conditions under which children in the United States would be raised much more effectively. The manner in which I propose to address that is not actually by increasing the benefit quantities but actually by reducing the pace at which they are removed and also reducing the institutional framework that is built up around it in which the government dictates here's how you should spend your money instead expanding what's called the earned income tax credit in the United States effectively returning cash to those who are participating in the United States economy working and earning not freeloaders people who are working and earning and giving them effectively a larger share of the national income than they would otherwise earn simply through their labor, effectively a negative tax rate. Um, if we were to do that and fund it by raising taxes on corporations, raising taxes on high-income individuals like myself, raising taxes on foreigners selling to the United States in the form of tariffs, those would ultimately contribute to a rising standard of living for those who are at the lower end of the US spectrum. they would have more money to spend which would drive more goods and services to servicing that community and raising the standard of living across that community in a manner that we currently don't experience. >> No, those are really good ideas because it comes back down to what Kav said. I think you retweeted that is like how do you get out of this is through hard work, capitalism and uh I think the rest will take care of itself. I think I forgot one point in there but that sort of underlines it, right? I think that's right. And I think unfortunately, you know, Mille is a hero of the right for removing many of the forms of benefits and removing many of the restrictions. But what he actually is doing is creating the incentive for hard work. In the United States, our benefit system actually creates disincentives for work. As you withdraw those benefits, people have to do the calculus that says, "Look, I don't have a continuous income stream. Having children doesn't suddenly make me more money. What it does is give me more expenses. And so if that's actually the condition, you're going to see more and more people ultimately saying,"I can't afford to have children. I can't afford to get married. I can't afford to take that job in a place that is really attractive from employment prospects because I can't afford to move there." Right? When those conditions are in place, you create disincentives towards productive work that effectively behave the same as the socialist endeavors in Argentina. >> No abs. Absolutely. Now, I can't wait to catch up with you in about 6 months time, Michael, and see where we're at and if some of those policies are being implemented, if if we're seeing some actual change and of course, are we seeing a change to the flow of funds in into the market as well? Are we seeing bigger cracks appear? And maybe you talked about tariffs and tariff dividends. Are they going to change the flow flows into the marketplace as well? Cuz maybe to summarize, Michael, where do you see markets headed 6 years from now? Oh, it's not six years, 6 months from now. Um, where are we going to be let's say June 30th next year or this year? I'm sorry, it's already 2026. >> Well, I think last time we talked, I predicted that the S&P would be roughly 2,000 points higher, that the Treasuries would be I'm joking. Um, you know, this the simple reality is is it depends. And so if we continue to see the US economy develop along the path that it has been developing where it is slowing but not yet firmly in recession um and we manage to avoid that recession which there's some indications that we might although the failure to uh address the healthc care subsidies in the United States is going to become a significant burden for many households and could further penalize those at the lower end of the income spectrum forcing them to consume consume less of other things. Um it, you know, this is really what it's going to depend on. And so if the flows deteriorate because employment deteriorates, then I'm going to argue prices will be significantly lower and markets will be deletteriously affected. If we manage to continue to grow employment in the United States, if we continue to grow participation, and if we are able to create conditions under which we're able to maintain an orderly withdrawal of the boomers into retirement, then you know, we'll just continue to move upwards in the pattern that we have where mega caps continue to dominate. Unfortunately, that has its own terminal point. And I think we've seen indications of this. This is what's referred to as the agency costs of overvalued equities. You have companies like Google and Microsoft and in particular Facebook that have market caps measured in the trillions that are spending money like mad because they think that they are actually worth that. They see a return on capital from those investments in the market that suggests they're making all the right choices. This is the same phenomenon that played out during the dot cycle. It creates a positive social bubble. We will all benefit from the rapid roll out and development of LLMs and AI in many respects. There will be individuals who are negatively affected. Hopefully, we're able to do it in a manner that allows those individuals resources to be redirected into more productive areas with new technology, but that remains to be seen. So, you know, at some point we will have a recession. At some point the unemployment will begin to rise. At some point the flows will begin to reverse. And when that occurs, the same methodology that is leading me to say, you know, this is going to continue until it stops will stop. >> I don't see that. >> Really good point. So, sorry to jump in, Michael. I thought you were done. Apologies. >> Really interesting because we'll maybe in 6 months time we'll we'll talk about also the impact of Kiwi. It might be a little too early to talk about that at this point. It just started about a month ago, $40 billion. So, we we'll see if more money flows back or keeps flowing into the market. So, Michael, tremendously appreciate your time. Um, where can our audience follow more of your work, Michael? >> Oh god, they really would want to do that. Um, you can find me on Twitter at profplum999. You can find our website for Simplify at www.simplify. us. I encourage you to check out some of the offerings, some of which are available in Europe and Canada. Um, and uh then if you're really really bored and you want to waste your time and energy, you can check out my Substack at yesigafig.com. Uh there you'll find my longer form writings and uh some of it is free content. Um most of it is behind the payw wall. If you are interested in subscribing and simply can't afford it, um feel free to reach out over substack. I'm very generous in granting free memberships. >> Well, that's very nice of you. Thank you so much because we all give a sick. That's why I think our audience is watching. Michael sub tremendously appreciate your time. As I said before, happy new year. Have a great one. Can't wait to catch up with you soon again. And uh in the meantime, take care. All the best for 2026. Michael and uh everybody else, thanks so much for tuning in to Sore financially. Happy New Year to you as well. Should have said it at the beginning of the interview, but we really try to have a good intro hook there, but hope all is well. I hope you have a successful 2026. Much appreciate you watching. If you enjoyed this conversation, hit that like and subscribe button. It helps us out tremendously, and we much much appreciate the support. Our goal is to hit 100,000 subscribers here in Q1. Let's uh let's achieve it together. Much appreciate that. And uh good luck out there. Health and wealth in 2026. And take care out there. Bye-bye.
Markets Aren’t Driven by Fundamentals – Flows Decide Everything | Michael Green
Summary
Transcript
Last time my guest was on, he said fundamentals don't control markets. Flows do. That was in at the end of March. Now we're sitting here in early January. And I'm really curious what what has changed? Do flows still dictate where the market is headed? Keep in mind the S&P 500 is about 2,000 points higher since our last conversation at the end of March. And now, are we seeing a trend change? Are we seeing a crack perhaps in the flow of capital and the flow of funds here? Really curious. And of course, we have many other topics to discuss. the impact of QE, the tariffs, a tariff dividend, and also perhaps geopolitics to to a lesser degree, like how are they impacting markets these days. I've invited a brilliant guest back onto the program. His name is Michael Green. He's the portfolio manager and chief strategist over at Simplify Asset Management. They have over 12 billion in assets under management. And Michael is a frequent guest on Mainstream TV as well to explain some of his points in more detail, one of which we're going to cover hopefully in this conversation as well. But before I switch over to my guest, hit that like and subscribe button. Helps us out tremendously and we much appreciate the support. Now, Michael, it is great to welcome you back on Soore Financially. Happy New Year. >> Happy New Year to you, too, Kai. >> Yeah, it's great to have you back, Michael. It's It's been a while since we last chatted. We last spoke. Uh March 21st is when we published the interview about two weeks after Liberation Day or before Liberation Day as well. Market has moved tremendously. S&P 500 up about 2,000 points. gold up $1,800. Um, let let's come back to your main thesis of our conversation last time. Fundamentals don't control the markets. Flows do. Like how much have money has moved into the markets to push us that much higher and what is it looking like right now? >> Well, so this is one of the key components that has really been in kind of a theoretical or an academic breakthrough over the last 5 years is understanding how much flows impact the market. uh in 2020 there was a paper written by two academics uh Zavier Gabay at Harvard and Ralph Koen at University of Chicago in which they floated a hypothesis they called the inelastic market hypothesis which was the idea that markets are extremely sensitive to inflows and outflows rather than the traditional economic assumption that they are highly in highly elastic. In other words, they had the belief historically was that you had the capacity to put nearly unlimited amounts of money into the market with very little impact. The idea being there for every buyer there's a seller. We now know that's not true. And so the impact of flows has a multiplier to it. Uh theoretical foundations like the efficient market hypothesis assume that a dollar into the market creates about a penny of market capitalization. basically the difference between the bid ask spread on any single security or index. It turns out that that multiplier is closer to $8 for the index in aggregate. In other words, a misspecification of about 800 to1 which you know even the German government couldn't be that bad. Um the the the that is even worse for the largest stocks. So, we're now seeing multipliers on companies like Nvidia or Apple or Microsoft with trillion dollar market capitalizations and large shares of index flows that are in the range of $50 to $100 that is created from a single dollar flowing into the market. So the the that's a very long- winded way of saying far less than you actually think flew into the market, but it was capable of creating somewhere in the neighborhood of 10 to$15 trillion of market capitalization last year on a global basis. Um the estimates that we have are somewhere in the neighborhood of about 600 to700 billion net came into the market. That's a combination of share buybacks, new issuance uh being a a negative uh flow and then the last component being flows in and out of investment accounts. Um in the United States, those are actually pretty flat right now once we factor in the mutual fund complex and uh the net contributions to things like ETFs. So the long and short of it is less than you think, but the impact is much larger than most people think. Uh it's interesting like because you were talking about like investment flows by retail investors or so have subsided or stayed fairly flat. Let's break that down like where is that money actually coming from that has flown into the market that's really pushed us to the current levels. >> Well there's three or four primary sources. So there's contributions that are coming from institutional investors. Those would be in the those would be things like insurance companies which have a float that they have to continually reinvest. they have premiums that they have to continually reinvest, endowments um that are receiving donations um or generating profits from operating businesses. And then of course there's the large flow coming in through the 401k and IRA retirement complexes both in the United States and their equivalent on an international basis. Um, the total estimates right now for 401k and IRA contributions, basically the broad category of retirement flows in the United States is only about a net $200 billion. That's a combination of contributions into IRA and 401ks from people who are currently working. and the increasing withdrawals from people who are retired and are living off of that income with interest rates starting to fall again. We're seeing a slight uptick in the amount of selling that is actually occurring in those accounts. The fourth quarter of last year had pretty good evidence that there was some selling in what's called required minimum distributions in 401ks. Um there's also about a billion dollar a trillion dollars worth of share buybacks on a global basis. That number is only modestly higher. Most of that's happening in the United States and about 2/3 of that is concentrated in the S&P 500. Um the other sources of liquidity would be things like private equity firms, buying companies, etc. That has actually been relatively muted in the past year. And so on a net basis, we're talking a couple hundred billion dollars that flew into that flowed into the market last year, probably closer to a trillion once we factor in the stock buyback and the net issuance coming from employee stock grants. Um but you know that was enough to basically drive a 10 trillion dollar increase in the market. And the really critical thing I want to make sure that people understand is is that this is not anything new right? Flows have always been the determinant of market prices. It's just a question of what's driving those flows. Is it being driven by institutional investors such as myself that historically would have paid attention to earnings reports or to cash flow statements or is it being driven by index inclusion and index investing? And unfortunately today about 80% of the the uh net flow that's coming in is coming in purely through index replication strategies. Uh what does it look like historically if you compare it to previous periods like the last few years like have the flows increased, decreased? Are we within the norm? Um what does the what do the percentage increases look like in in that regard? Um we've actually seen the flows modestly slow um in 21 and 20 in 2021 we had huge flows that was a combination of significant excess liquidity that was created by the 2020 uh COVID stimulus and the um unnecess you the lack of spending associated with things like commuting to work, paying for lunch at the office, child care, etc. that was changed during the COVID period. Um the flows themselves continue to grow. It's a function of national income and the share of that that is flowing in and participation in the stock market continues to grow in the United States as more and more people are defaulted into 401ks as they gain employment. Um but it is not really changing that radically. It's not the most important thing that's happening in terms of the flows because we have a growing retirement class. We are seeing more selling coming from there that seems to be offsetting most of the increase that we're experiencing. If we think about the flows though, I'll just share a couple of slides here. >> Uhhuh. to highlight this you know this from a presentation that I give on the topic and it's really what it's really highlighting this is only through 23 but it's showing the growing flow of funds into passive vehicles and around 2015 we actually started seeing net outflows from active vehicles things like mutual funds that would have been managed by a portfolio manager selecting individual securities. It's really the relationship between these two that is driving much of the behavior that we see in the market. If you just think about what happens in an active manager portfolio, it is extraordinarily rare that they would be able to do something like run a portfolio that is 7% Apple, 7% Nvidia, and 7% Microsoft, roughly equivalent to the S&P allocations. And so if you fire that fund and replace it with an S&P index fund, that's a net purchase of the large cap companies. Smaller cap companies are going to be over represented in those active portfolios where you're generally seeing investors try to add value by understanding the fundamentals in a differential way. And as a result, less money actually negative money in some situations is flowing into those types of uh products. The net impact of that is is that we've seen this bifurcation in the market. The equal weighted S&P 500 or the Russell 2000 equal weighted has dramatically underperformed their cap weighted equivalents. That's largely a function of the impact of these flows. If you notice the chart on the right, this is showing the collapse in fundamental trading as a percent of US equity turnover. That's really the byproduct of what I'm identifying here. If I go back to 1995, a couple years after I entered the industry, about 80% of trading was being done by active management. Today, that number is below 10%. Speculative retail traders with the decreases in commission and the introduction of free option trading have actually become roughly twice the size of the entire active manager community. So, this is one of the reasons why you see components that appear to be what we in the United States sometimes describe as the Costanza market, referring to the Seinfeld episode, where George Castanza, the perennial bumbler, decides he's just going to do the exact opposite of what he thinks he should do, and his life starts going fantastically well. That's really the behavior that we're seeing. And you can understand it if you think about how passive indices are weighted. They're weighted on the basis of market capitalization. So what that means is when they go up in price, the next dollar coming into the index is going to buy more of that security. Now that's a traditional strategy referred to as momentum. Doesn't necessarily have to have momentum components to it, but it plays a very similar game that has contributed to stocks that are rising continuing to attract a larger and larger share of flows while stocks that are falling are experiencing a declining share of flows. And that's exacerbated when active managers try to step in, buy those securities, create a position in it, they can temporarily drive it higher. But because the entire active manager space and mutual funds last year had nearly $600 billion in outflows um creating a condition that I refer to as the death of active management. That means that they're actually selling the stuff that other people like them have identified as particularly attractive securities, forcing those prices lower, creating the valuation discrepancy that many people are highlighting, suggesting that value strategies or small caps or international stocks are particularly cheap relative to the S&P 500 or the NASDAQ. But until we change the character of flows and the reason why the flows occur, it's not going to change. >> Are you seeing any cracks in that in in the flows at all? Like you didn't see any back in March. So I'm curious, Michael, if you're seeing any cracks appear now. Um the Fed seems to be very worried about the jobs market. Is that a cause for concern? >> It's a cause for concern, but it is it's relatively marginal. Ultimately the only thing that will drive uh the turn here is either a significant increase in unemployment and a reduction in employment in total. Um, but even more importantly is that there is actually a a terminal point here. Once you get passive enough, I actually have an academic paper that I'm writing along with uh two other authors uh that walks through the mechanics of this. But once you hit a certain level of passive investing, uh you effectively approach a limit in which the volatility characteristics of the market change radically and at that point it effectively becomes a fat comp plea. Um, by my math, we're 4 to 6 years out from where that change will be enforced. Whether exogenous events emerge that cause that to happen earlier, very tough to know. >> And it sort of t exogenous events ties sort of into my next topic that I want to discuss with you, Michael, and that's just capital controls. You you briefly touched on it as well. Do do you see capital controls coming? And um I mentioned to you before in the report, but I'm personally thinking of an unwinding of the yen carrier trade that could cause disruption in in the flow of capital into the US, for example. So I'm curious um if you're seeing any cause for concern for capital controls, is that more imminent now? I >> there certainly are elements, but I think we're actually addressing the core issue with capital controls through tariffs. We talked about this last time. the, you know, the really critical observation with tariffs is they're effectively a way of making sure that you maintain global taxation for access to US consumers. Um, the yen carry trade largely emerged because Japan ran a significant trade surplus with the United States. That trade surplus had to be reinvested somewhere. Ultimately, they could either buy American products and services or they could buy American financial products. And that's really what the yen carry trade is all about is Japan reinvesting its traditional trade surplus and the reserves that of dollars that accumulated because of it. The only other thing they could have done is sell dollar assets by Japanese assets. That would have caused the yen to appreciate and that would have been deletterious to the uh trade relationship with the United States. would have worked out great from the United States standpoint, but from Japan's standpoint with a largely managed currency and economy, it was less than desirable. They needed to maintain an external source of demand, not dissimilar to what China is going through right now, where they also are managing their currency to prevent it from appreciating against the United States on purely trade related terms. >> Are tariffs working in in your mind? Are we seeing a positive impact from the US standpoint? I think from the US standpoint it's kind of in the too early to tell framework but I do think that we've laid bare that a lot of the analysis that was done on tariffs that oh my gosh this is smoo holly all over again etc was a very fundamental misunderstanding in fact what we've actually done is force a smooley type condition onto China by raising the cost of selling to the United States and restricting the ability to sell to the United States we force China's excess production into Europe and other regions around the world and they're suddenly waking up and saying, "Hey, wait a second." You know, the relationship that Germany had with China where we ship you capital goods and cars um many of or at least manufacture cars in China through joint ventures with the profits somewhat repatriated to Germany are now giving way to a flood of Chinese imports that are threatening the the German industry. Um, the rest of the world is waking up to this and I think one of the most successful components of the tariffs was effectively slapping the rest of the world across the face and saying, "Hey, this is a real problem." The rest of the world is suddenly saying, "Yeah, you may be right. >> The world is being reshaped economically, geopolitically, but on the economic front, coming back to capital controls, what what does it look like right now? Is money still flowing out of the US? Is it flowing into the US? What what are you seeing right now on a global scale here? >> Well, one of the big things that people had talked a lot about in March when we were talking last time was the end of American exceptionalism that we're going to see a reorientation of flows, etc. That's just categorically failed to materialize. We've seen record high inflows in terms of US Treasury demand relative to our trade surplus which has begun our trade deficit which has begun to contract. um we are you know also see continuing to see significant inflows from the rest of the world into US equities and that's really again just a byproduct of how people choose to invest. If I go to the Norwegian sovereign wealth fund, they're going to be allocating effectively on an index basis to the United States. And they're going to be allocating outside of Norway on a global cap weighted basis, which favors the United States as kind of the first leader in the passive revolution that's causing valuations to rise. Once again, that creates a magnification or a positive feedback loop that drives more and more capital into the United States. And we've really seen very little evidence that that's changing. Yeah, we also talked about like politics, meaning President Trump is a very polarizing character obviously and in Europe people just hate his guts. Literally hate his guts in Europe. Um there's a lot of TDS over here. Um how do you sort of factor take that out of the equation? Like how how do you take that personality out out of the markets as well? Because a lot of is like we we when we talked about I remember our conversation vividly like there was a Danish I think it was a pension fund manager who who said like well we're done done investing in the US but a lot was tied to President Trump's policies and how we acted right without having looking at fundamentals or anything. So how do you take that out of the equation? >> You just take it out of the equation. I mean, you know, dislike for an individual or dislike for a political figure is a very poor reason to invest. If you actually believe and have a fundamental basis to argue that the policies that are being pursued are counterproductive to the interests of that country, that's entirely different. But part of what is so offensive to the rest of the world about Donald Trump is is that he isn't unapologetically America first. Some may debate that and say America second, Trump first. But, you know, he is an unapologetically American first politician, which candidly I'm I'm surprised has taken so long to emerge. The simple reality is in a democratic system, you elect leaders who are supposed to represent your interests, not the interests of foreigners. And in many ways, the Democratic Party in the United States and some elements of the Republican party had effectively become consumed with a globalist agenda with the idea being that in one form or another there was far more commonality between French elite and German elites and Dutch elites and the United States elites who they ostensibly represent um than there are with people living in flyover country. And that has changed in the United States. Now whether it's presented in the most politic form in a manner that is helpful to discussions, negotiations, partnerships, etc. That's certainly subject to debate, right? Trump is a polarizing figure in a variety of ways. But the reality is is that the United States is doing what it should have done long ago, which is reassert on the global stage and say, "Yeah, look, you're our allies, but at the end of the day, there are no allies. There are only interests." you know a a famous phrase and to the extent those interests are shared we are really happy to work with you and by the way Europe you've really been kind of riding on our cotales and engaging in a whole bunch of shod and freud and enjoying the fact that China was emerging and pointing to the fall of the American republic and the you know ignoring the threat of Russia before it showed up on your doorstep and the simple reality is is that that is starting to change and I think it's changing in a manner that is beneficial both to US and European an interests. Europe will eventually be dragged kicking and screaming into a real politic world in which they start representing the interests of the European people instead of trying to behave as a globalist agenda, which I don't think is a bad thing. By the way, I just want to be very clear when I use the term globalist. I'm not using it in a porative frame. I'm simply saying that you are appointed and elected to represent the interests of the individuals in your um uh population. You're not put in place to determine how much carbon should be in the atmosphere or whether the sources of energy should be coming from mice running on treadmills versus nuclear power. The simple reality is is that you should be doing everything possible to protect and enhance the interests of your constituents and Europe has done a terrible job of that. >> Yeah, I'd second that. Absolutely. Uh Canada as well, a lot of viewers from Canada as well. If you look at GDP growth or not the personal wealth growth I think in measured in GDP Germany Canada are dead last globally or not >> and they should be and by the way it's 10 times worse in Canada because Canada has had such significant immigration and GDP per capita has actually been in significant decline and so the standard of living for most Canadians that have been there for an extended period of time has deteriorated notably that is actually driving behavior that is very similar to what we're seeing in the United States where you know increasingly I'm finding Canadians on Twitter and elsewhere saying our only hope is integration with the United States. We should secede from Canada and join the United States and become, you know, the 51st through 50 through 64th states. That's remarkable. I mean, it's remarkable to think that that has changed so that people are openly having these conversations. In Canada, we talk about countries like Taiwan potentially being taken over in a fifth column attack where Taiwan effectively folds internally to join China. man, you got places like Canada that's leaning towards that. >> Yeah. Well, politics in Canada are very different topic and very annoying topic as well. Quite honestly, I used to live there for three and a half years. It was disaster. So, um but but Michael, we titled our last video not China, the US is its own worst enemy. And it's 2026. We have midterm elections coming up here in November. Um from that point of view and from that angle approaching it, like how how are you looking at the US right now? Um, how do you see it being maybe more divided than ever? >> Well, unfortunately, I think the United States continues to be its own worst enemy when we talk about things like Trump derangement syndrome. And again, I want to be very, very clear. It's not that I'm supporting the individual or his behaviors. I'm simply identifying that the policies that he has taken in America first policy is one that is ultimately in the interests of most Americans. Um, we are starting to see some progress, right? And I would actually argue that if you can remove the blinders of Trump derangement syndrome and look at the actual policies that are being enacted, things like tariffs, things like the reindustrialization of the United States, things like securing strategic supplies through the military complex, you know, it's not well commented on in the media, but we've largely actually solved the problem associated with rare earth materials in the United States with the uh coming online of of MP P materials which allows recycling of consumer goods into militaryra magnets for uh navigation and electronic purposes. So the United States is a far more secure place than it was simp you know even 24 months ago. Um and we have followed down this path even under the Biden administration. We maintained the tariffs against the rest of the world and China in particular. We've continued to push forward on those policies. The manner in which it's conducted I think could be done significantly better. Unfortunately, it's unnecessarily confrontational and is setting the stage for a potential change of control in the United States which would likely set back some of these initiatives for a period of time. Uh but much more importantly in the United States we continue to struggle with tremendous inequality. The United States has a genie coefficient that basically puts it in third world country status. And while that is something that is resisted by those who are at the upper income level, the extreme upper income level, the reality is it means that more and more Americans are suffering through periods of procarity and want that restrict their ability to be fully productive members of our society. So we have a large population. We are underutilizing that population in my analysis. If we were to actually make significant improvements in the progressivity of our tax code and ironing out many of the loopholes that large corporations and wealthy individuals take advantage of, we would have more resources to focus on education and infrastructure. And I think we're starting to see signs that that's occurring. It's just unfortunately an area that I think Trump in particular is um you know he he is opposed to it in principle, right? We don't want to raise taxes. That would be a bad thing. Well, the question is, what taxes are we raising? What taxes are we cutting? You know, you obviously are familiar with some of the recent analysis I did around poverty in the United States. more accurately, the uh what I refer to as the valley of death or the benefits cliff that basically create a trap between about 40,000 and roughly $100,000 worth of income in which many Americans that should be thriving are ultimately finding themselves saddled with policies that create effectively 100% marginal tax rates during periods of transition over that valley of death. If we were to solve those problems, I actually genuinely believe that the United States would return and accelerate its growth, particularly with new innovations like artificial intelligence or LLM, raising productivity in the services sector, which it unquestionably is doing, by the way. >> Yeah. You you suggested maybe raising the poverty line from 32,000 to $140,000. What would that change? >> Well, what I actually proposed is is that we should change the pattern in which we withdraw benefits. So in the United States, $32,000 is roughly the poverty line for a family of four with two income earners and two dependent children. That level is so laughably below the level of base existence in the United States that it means that policy forces this navigation of these benefit cliffs. At 32,000, you're receiving tremendous support from the US government. The value of the benefits that you receive from the US government on a market basis is somewhere in the neighborhood of $50,000 a year. So your effective income is roughly $82,000. This is what's referred to as the supplemental poverty measure in the United States. And it's one of the tools that critics of my analysis use to say, "Well, poverty is not nearly as bad as you think." And unfortunately, they're actually not understanding the problem because as you navigate from $30,000 worth of income to that roughly h 100,000, that 52,000 gets drawn away. It disappears entirely around $90,000. And at every step in that process, you have to replace those goods and services that are provided by those benefits. At roughly 40,000, you lose food support. At roughly 50,000, you lose housing support. At roughly 60,000, you use lose child care support. and you also start to lose health care insurance etc. These are all factors that become increasingly relevant for families as they are navigating that process. Solving that would be a huge boon to the United States. It would create incentives for additional work. It would create incentives for additional labor force participation. And candidly, it would create conditions under which children in the United States would be raised much more effectively. The manner in which I propose to address that is not actually by increasing the benefit quantities but actually by reducing the pace at which they are removed and also reducing the institutional framework that is built up around it in which the government dictates here's how you should spend your money instead expanding what's called the earned income tax credit in the United States effectively returning cash to those who are participating in the United States economy working and earning not freeloaders people who are working and earning and giving them effectively a larger share of the national income than they would otherwise earn simply through their labor, effectively a negative tax rate. Um, if we were to do that and fund it by raising taxes on corporations, raising taxes on high-income individuals like myself, raising taxes on foreigners selling to the United States in the form of tariffs, those would ultimately contribute to a rising standard of living for those who are at the lower end of the US spectrum. they would have more money to spend which would drive more goods and services to servicing that community and raising the standard of living across that community in a manner that we currently don't experience. >> No, those are really good ideas because it comes back down to what Kav said. I think you retweeted that is like how do you get out of this is through hard work, capitalism and uh I think the rest will take care of itself. I think I forgot one point in there but that sort of underlines it, right? I think that's right. And I think unfortunately, you know, Mille is a hero of the right for removing many of the forms of benefits and removing many of the restrictions. But what he actually is doing is creating the incentive for hard work. In the United States, our benefit system actually creates disincentives for work. As you withdraw those benefits, people have to do the calculus that says, "Look, I don't have a continuous income stream. Having children doesn't suddenly make me more money. What it does is give me more expenses. And so if that's actually the condition, you're going to see more and more people ultimately saying,"I can't afford to have children. I can't afford to get married. I can't afford to take that job in a place that is really attractive from employment prospects because I can't afford to move there." Right? When those conditions are in place, you create disincentives towards productive work that effectively behave the same as the socialist endeavors in Argentina. >> No abs. Absolutely. Now, I can't wait to catch up with you in about 6 months time, Michael, and see where we're at and if some of those policies are being implemented, if if we're seeing some actual change and of course, are we seeing a change to the flow of funds in into the market as well? Are we seeing bigger cracks appear? And maybe you talked about tariffs and tariff dividends. Are they going to change the flow flows into the marketplace as well? Cuz maybe to summarize, Michael, where do you see markets headed 6 years from now? Oh, it's not six years, 6 months from now. Um, where are we going to be let's say June 30th next year or this year? I'm sorry, it's already 2026. >> Well, I think last time we talked, I predicted that the S&P would be roughly 2,000 points higher, that the Treasuries would be I'm joking. Um, you know, this the simple reality is is it depends. And so if we continue to see the US economy develop along the path that it has been developing where it is slowing but not yet firmly in recession um and we manage to avoid that recession which there's some indications that we might although the failure to uh address the healthc care subsidies in the United States is going to become a significant burden for many households and could further penalize those at the lower end of the income spectrum forcing them to consume consume less of other things. Um it, you know, this is really what it's going to depend on. And so if the flows deteriorate because employment deteriorates, then I'm going to argue prices will be significantly lower and markets will be deletteriously affected. If we manage to continue to grow employment in the United States, if we continue to grow participation, and if we are able to create conditions under which we're able to maintain an orderly withdrawal of the boomers into retirement, then you know, we'll just continue to move upwards in the pattern that we have where mega caps continue to dominate. Unfortunately, that has its own terminal point. And I think we've seen indications of this. This is what's referred to as the agency costs of overvalued equities. You have companies like Google and Microsoft and in particular Facebook that have market caps measured in the trillions that are spending money like mad because they think that they are actually worth that. They see a return on capital from those investments in the market that suggests they're making all the right choices. This is the same phenomenon that played out during the dot cycle. It creates a positive social bubble. We will all benefit from the rapid roll out and development of LLMs and AI in many respects. There will be individuals who are negatively affected. Hopefully, we're able to do it in a manner that allows those individuals resources to be redirected into more productive areas with new technology, but that remains to be seen. So, you know, at some point we will have a recession. At some point the unemployment will begin to rise. At some point the flows will begin to reverse. And when that occurs, the same methodology that is leading me to say, you know, this is going to continue until it stops will stop. >> I don't see that. >> Really good point. So, sorry to jump in, Michael. I thought you were done. Apologies. >> Really interesting because we'll maybe in 6 months time we'll we'll talk about also the impact of Kiwi. It might be a little too early to talk about that at this point. It just started about a month ago, $40 billion. So, we we'll see if more money flows back or keeps flowing into the market. So, Michael, tremendously appreciate your time. Um, where can our audience follow more of your work, Michael? >> Oh god, they really would want to do that. Um, you can find me on Twitter at profplum999. You can find our website for Simplify at www.simplify. us. I encourage you to check out some of the offerings, some of which are available in Europe and Canada. Um, and uh then if you're really really bored and you want to waste your time and energy, you can check out my Substack at yesigafig.com. Uh there you'll find my longer form writings and uh some of it is free content. Um most of it is behind the payw wall. If you are interested in subscribing and simply can't afford it, um feel free to reach out over substack. I'm very generous in granting free memberships. >> Well, that's very nice of you. Thank you so much because we all give a sick. That's why I think our audience is watching. Michael sub tremendously appreciate your time. As I said before, happy new year. Have a great one. Can't wait to catch up with you soon again. And uh in the meantime, take care. All the best for 2026. Michael and uh everybody else, thanks so much for tuning in to Sore financially. Happy New Year to you as well. Should have said it at the beginning of the interview, but we really try to have a good intro hook there, but hope all is well. I hope you have a successful 2026. Much appreciate you watching. If you enjoyed this conversation, hit that like and subscribe button. It helps us out tremendously, and we much much appreciate the support. Our goal is to hit 100,000 subscribers here in Q1. Let's uh let's achieve it together. Much appreciate that. And uh good luck out there. Health and wealth in 2026. And take care out there. Bye-bye.