Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today, Dan interviews Michael Greene, chief strategist of Simplify Asset Management.

Dan Ferris: And today, Corey and I will talk about getting rich and living off the interest.

Corey McLaughlin: And remember, you want to ask us a question, or tell us what's on your mind, e-mail us at [email protected].

Dan Ferris: That and more right now on the Stansberry Investor Hour. There are some things more exciting than bonds. Just a few.

Corey McLaughlin: Quite a bit. Maybe everything.

Dan Ferris: Yeah.

Corey McLaughlin: [Laughter] In normal life. Yeah.

Dan Ferris: Yes. In her in normal life. Boring movies are more exciting than bonds. [Laughter]

Corey McLaughlin: Typically, yes.

Dan Ferris: Yeah, typically, right? Typically. But when you're in a three-year bond bear market, well, all of the sudden, everybody wants to talk about bonds. At least all the headlines do. I don't know if investors do. They seem to hate them. [Laughter] I saw a really good, a guy named Dan McMurtrie, who calls himself @SuperMugatu on Twitter – at least he used to... I haven't seen him there in a while. He had a thing where he gave a presentation, I think it was it. This might even have been a recent presentation at the Grant Conference, which I haven't been to in years.

Anyway, the headline was, "No, Mr. Bond, I expect you to die." Which if you're old enough, you recognize that as a line from the film Goldfinger with, you know, Sean Connery as James Bond, and Gert Fröbe, as the villain Goldfinger. And he's got bonds strapped to a table, and he's got this laser beam just inching its way towards Bond. And then Goldfinger is walking away, and Bond turns his head and says, "Do you expect me to talk?" And he says, "No, Mr. Bond, I expect you to die." It's like one of the best lines in a Bond film. And that's like investors toward bonds today. You know, they're not happy with them, after a three-year bond bear market.

Corey McLaughlin: Right. And after three years, and what's hitting me is, you know, we're talking about in the headlines, and usually when things get to this point, you're like, all right, is that story over? Is it at max pessimism right now?

Dan Ferris: Right.

Corey McLaughlin: We'll see. There's a lot of talk about bonds, which is an indicator of itself, I would say.

Dan Ferris: Right. So it makes you, it makes us, most people don't want to buy them, but it makes you and I think, hmm, maybe it's time to start thinking about buying bonds. And I certainly, you know, I pounded the table on T-Bills, I recommend that a T-Bill fund, ticker symbol BIL in the latest issue of The Ferris Report. And we made it free for the whole world because I thought it was that important.

Corey McLaughlin: Yeah, that was great, by the way. I'm glad you did that.

Dan Ferris: Yeah, thanks. I'm pleased with it. We got one whole subscription out of it, in fact.

Corey McLaughlin: Oh, wow.

Dan Ferris: [Laughter] Yeah, I think we sent it to millions of millions of people. One guy subscribed.

Corey McLaughlin: Oh, wow.

Dan Ferris: And he wrote us a little note. It said, "Thanks, Dan."

Corey McLaughlin: I thought it would have been more. Oh, well.

Dan Ferris: [Laughter] Yeah, well, you know, maybe it's not as great as I think it is. [Laughter] So, you know, I made this argument that T-Bills are attractive, and you know, they're doing 5%. And you put them in this fund, and it just pays a monthly dividend at an annualized rate of 5%. These days, 5.1%, I think right now, and you've got this nice hurdle rate, and this secure, safe return. You know you're going to get your principal back, and you know, that you're going to get your interest payments.

And then you can sort of measure that in a very rational way against whatever else, the stock bond, real estate, whatever markets are coughing up in any given moment. And you haven't had that in a long time. You know, it's just been, woo, 0% interest. Anything goes, you know, let's, you know, do 1,000 SPACs in a few, you know, over the course of a few years, and buy whatever garbage we can, you know.

Corey McLaughlin: Right.

Dan Ferris: So, yeah, bonds. Interesting. I find them very interesting right now.

Corey McLaughlin: Yeah, I mean, like you said, I think it's hard to kind of peg any, like, capital appreciation to bonds, if you're going to go that way. But the interest style, like you're saying, especially in the short term with, with, you know, 5% yields. Like it's, what's, what is wrong with that? I don't think there's anything wrong with that.

Dan Ferris: No.

Corey McLaughlin: I mean, it's it beats having your cash sitting in a container in the backyard, I would say.

Dan Ferris: It does.

Corey McLaughlin: It's not, to me, it's a no-brainer, especially if you're just sitting on some cash, and you're at the point where you've accumulated a lot already. Take advantage of it now, because if the economy goes in the crapper in the future, the rates are going to go down a little bit when the Fed cuts rates. Which they're not anytime soon, but that will presumably eventually happen a little bit. Yeah, so that's a good time.

Dan Ferris: It is a good time. I remember when I was, a kid a long time ago, in the late '60s and early '70s, you'd hear folks talk about someone who's living off the interest.

Corey McLaughlin: Right. [Laughter]

Dan Ferris: You know, they just made a bunch of money, and now they're living off the interest. When interest rates are zero, and even when they're just, you know, declining rapidly, as they were leading up to zero, you can't live off the interest unless you've got billions, you know.

Corey McLaughlin: Right. It reminds me, I thought about that recently, right, in terms of the word capitalism, right? When there's an actual real interest rate, capitalism works for the people who have capital, in simple terms. Like, when rates are at zero, things can work for everybody, even if they don't have, you know, generous amounts of capital. So it's...

Dan Ferris: Well, when there's zero, though, and the reason why this is so great that we have interest rates again, when they're zero, everybody's a speculator, because, you know, you're just running around looking for the fastest capital gains you can get. And people view all kinds of other things, like selling options, as reasonable income streams, which, you know, there are people who – we know, people, you know, mainly Doc Eifrig, who can show you how to make a great living selling options. I'm not saying it isn't, it isn't doable. What I am saying is you better know how to do something like that when you can't make income any other way in the market.

So, you know, reliable, safe income, where your principal is safe and steady. You know, these things are realistic expectations. We haven't been able to act on them for a long time, but it's a realistic expectation, at least it has been for most of my life, you know, that there's a safe way to get a decent income out of your money. And here we are again. Yay.

Corey McLaughlin: Right. I'm wondering also how much, you know, this alternative, right to stocks, too. Like, this presents an alternative to owning stocks. And I'm wondering how much –

Dan Ferris: Exactly.

Corey McLaughlin: – how much of this is influence – influencing the market, you know, this year, the stock market this year. Because I'm looking at the, like, an equal-weighted S&P 500 fund right now, and it's pretty much flat since the start of the year. And, you know, we've talked about those, and a lot of people have talked about those "Magnificent Seven," the tech stocks, carrying most of the market higher. You know, you just wonder, like, OK, are people, you know, going back to those tech stocks, but then also able to, you know, just get income in a way that they haven't been able to do in 15 years. So there's got to be some of that, the fact that the most of the market's flat this year.

Dan Ferris: Yeah. And we had, you know, we had a guest on fairly recently, we had Joel Litman on fairly recently. And he's saying, you know, relative to interest rates, relative to bonds, stocks are just, like, more expensive than ever, than ever. And I found that very interesting with rates up, you know, that's stocks are more expensive than ever. So, you know, he's like, I've never, I can't remember hearing him so bearish, or even really, very bearish at all. But he said, you know, for the next year or two, stocks are, woo, are really rough. And, of course, you know, you've had me saying that for two years, or whatever it's been. And we've had various other folks on here, who have expressed similar sentiments, you know, for and for similar reasons, you know.

I don't think like, you know, I cite all these metrics that have a really decent track record, the CAPE ratio, price to sales, all this stuff John Hussman does. He does various – he's found five measures of basically price to some kind of revenue or earnings stream that, you know, hit their highest level ever in this mega bubble era in 2021 and early 2022. So, I mean, you know, I agree. You know, we start talking about bonds, and then looking at stocks, you're like, hmm, that hurdle rate of 5% in my safe Treasurys is looking really good compared to, oh, I don't know everything, right? [Laughter]

Corey McLaughlin: Right. [Laughter]

Dan Ferris: Everything.

Corey McLaughlin: And you know, yes, but of course, it depends on your analysis. This depends on your timeline, and what you want to do, too. But yes, in general, like 5% risk free, unless the U.S. government, you know, totally implodes, which in that case, then we're all in trouble.

Dan Ferris: Yeah.

Corey McLaughlin: Not bad.

Dan Ferris: That's right. Not bad. Lots of talk about, you know, the death of the dollar and, you know, the government or whatever. And I think, you know, we're not in the greatest time in the history of our great republic. But you know, I don't know if Attila the Hun and his hordes are like right outside, ready to come in and sweep through, and take over. I forget, or wasn't it so? Who was it? It was the person who sacked Rome – oh, anyway, I don't want to get into the history of [crosstalk] –

Corey McLaughlin: You're testing me now. Yeah.

Dan Ferris: Yeah, I know, I'm testing me and I'm failing. [Laughter] But Alaric, was it Alaric who sacked Rome? I can't remember. I'm going to – and I'm not going to look it up here because we'll get down a rabbit hole with that. But I don't think we're there, right? We're just at the point where I think we just hit this inflection point in COVID, where the government ran a successful test of how much it can do to us without us revolting again, you know. So you know, it's going to do, it's going to do more of that stuff. But, overall, though, I'm optimistic. Because I think our civil liberties did take a hit as a result of COVID. I don't think that's a controversial statement at all. [Laughter]

Corey McLaughlin: No, I would think most people would agree with that at this point.

Dan Ferris: Yeah. But if you sort of run down the list, like you, you know, you get past the first Amendment, then you get to the Second Amendment. And you're like, whoa, OK, that one's not doing so bad. That one's doing pretty well, I think, you know, compared to recent history, of course. And freedom of speech is a little rough, especially if you're on a college campus. But if you, if you are anywhere, but in the United States, I can still see wanting to come here. And you know, according to Fox News, everybody is coming here, you know. [Laughter]

Corey McLaughlin: Yeah, there's definitely, yeah, I mean, this last week is has shown, you know, there's a lot of problems around the world interconnectedness. But at the end of the day, you know, you're still thankful to be in the U.S. of A, I would say, overall.

Dan Ferris: That's right.

Corey McLaughlin: And you know, 5% T-bills, here we go.

Dan Ferris: Yeah, I mean, you know, that's, that's the way it is in the U.S., though. And I'm very critical of U.S. government. I'm critical of some aspects of U.S. culture sometimes, but I love it. And a lot of people around the world love it, too. You know, I've heard people say, "Oh, everybody hates the U.S." I don't think that's true at all. When I travel around the world, either people are great actors, and they're trying to get more money out of me, or they really do love the U.S. They love U.S., you know, sports and culture, and everything. They just don't like the U.S. government coming in, and, you know, kind of whacking hornet's nests in their neighborhood, or anywhere else, you know. And I think that's a reasonable thing to object to.

Corey McLaughlin: Yeah, yeah, me too. It's like, again, the governments and the people, they're supposed to represent are too often, two different things, way, way far apart. You know, in terms of interests and actions from the leadership, so, yes. But I don't know what else to say other than bonds are in again, and maybe some people can live off interest once more.

Dan Ferris: That's right. I think that's an excellent point, actually. It's profound. It's a "sea change," as Howard Marks said in his recent couple of memos. And I think our guest is actually kind of on board with this idea. More than kind of. He's one of the smartest voices in the financial firmament of the last few years. And I invited him on to talk about an idea that he's – it may be his most popular idea. His greatest hit, I call it. And his name is Michael Green. He's the chief strategist for Simplify Asset Management. And I don't know what else to say here, Corey. He's like one of the smartest guys I've ever heard speak about financial matters, period. So with that, let's talk with him. Let's do it right now. Let's talk with Michael Green. Let's do it right now.

Folks, stocks are near all-time highs. AI has added trillions to just a handful of stocks. And everyone's convinced the market can just shrug off the biggest and fastest interest-rate hikes in history. It's textbook bubble behavior. And it's why my colleague Joel Litman, is stepping forward with the biggest warning of his career. Now, Joel warned of the coming disaster in 2008. He nailed the market bottom in 2020, and the top in 2022, both nearly to the day. Now, he says he's more worried about stocks than he's been in the last 16 years.

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Mike, welcome to the show.

Michael Green: Thanks for being here. Dan. Thank you. I appreciate the invite.

Dan Ferris: All right. So I'm guessing that most of our listeners actually aren't familiar with your work. So I'm hoping that you wouldn't mind talking about like one of your kind of greatest hit ideas, which, of course, is your view on passive investing. And this is a practical thing, too, because I'm pretty sure that most of the people listening to this have 401(k)s, and they're doing it, they're doing it every two weeks.

Michael Green: Right.

Dan Ferris: And I want them to know – now I have discussed this a little bit, I mean, about this much compared to what you have. And I've just pointed out that of all the algorithms in the market, the biggest one is receive a dollar of capital, buy a dollar of equity, regardless of any kind of fundamental inputs whatsoever. And that, you know, I've asked the question, as some have, as I know, you have, what happens if it goes into reverse? [Laughter] You know, on the way up, it looks great. It looks like it's putting a floor under the market for us. But can it really, truly go into reverse? And you know, what does that look like? And reverse or not, what are the implications of it? It seems like it implies other things, not just that it's going to reverse one day. So if you hear a question in there, [laughter] I don't think there's a question. But you know what to do.

Michael Green: No. So there's definitely a question there. And I agree with you. And I think this is I mean, we talked about it being, you know, among my greatest hits, I think it's more like, you know, the record player that is stuck, and repeating over and over again, right. Because it receives a lot of airtime doesn't make it great. So the really simple thing that it helps, that is helpful for people to understand is what passive investing actually means in a theoretical framework.

And from that perspective, you have to go back, and I don't want any of your listeners to do this, although they're more than welcome to, it's actually really easy, you need to go back and read a document from Bill Sharpe, S-H-A-R-P-E, called the arithmetic of active management. And anytime you've heard somebody say, well, all pass it all active managers in aggregate are identical to the passive entities, and therefore the performance in aggregate is going to be the same. And as long as you have lower fees in passive, you're going to outperform. If you've ever heard that language, that actually originates with Bill Sharpe, and that paper called "The Arithmetic of Active Management."

Now, buried in that analysis, and this is true for almost any form of academic model or thought process, there are assumptions. And helpfully, Bill lays out one of the key assumptions, which is what is his definition of passive. His definition of passive is an investor, who never transacts. They only hold, right? Now, if you adopt that as your model, you then have to ask a really simple question. Well, how did they get into the market? And how do they get out of the market? And the answer is, it's magic, right?

And so you either believe that there's magic happening every time you decide to buy a passive vehicle, or you're actually participating in a phenomenon that's not passive at all. It is exactly as you described, Dan, the world's simplest algorithm. If you give me cash, then buy. If you ask for cash, then sell. And the minute you recognize that that's not passive investing, not even under a, you know, super simple framework, and you recognize that entities like Vanguard and BlackRock are continually receiving flows that they have to put to work in the market, right, then you change your entire perspective around what's happening, and you actually have to ask yourself, what is the impact if I allow the market share of the world simplest algorithm.

Did you give me cash? If so, then buy, right? If I allow the market share of that algorithm to go from roughly 0% in 1975, to today's level where it appears to be north of 40%, how would you expect that to change the behavior in markets? And the most obvious conclusion that comes from it is as they gain market share, that means that they're adding capital, that they're getting new resources in reserves. That means that they are just buying, right? Mindlessly buying.

And if I introduce the theoretical framework of an entity that mindlessly buys, it wouldn't be an unreasonable conclusion to say, well, if I have an entity that mindlessly buys, it becomes really hard to short. It becomes really hard to bet against the market. It becomes really hard for the market to go down. And I just want to emphasize for people, nowhere in this entire description, did I introduce the Federal Reserve, right? So most people operate under a model of markets where they say, hey, wait a second, it's all about the Fed, right? Interest rates were kept artificially low, therefore, stocks are more valuable. Therefore, people bought stocks.

Well, guess what? Interest rates are now high, right? They may not be as extremely high as they were in the late 1970s, early 1980s, but they're dramatically higher than they were 18 months ago. And guess what? The exact same thing is happening in the equity markets, right? they're marching upwards, being led by a very few number of extremely large cap stocks that have relatively limited growth prospects. I mean, I made a point actually, in one of my comments yesterday, that I write on the market, you know, highlighting that in real terms, PepsiCo's sales are down over the last decade, right?

This is true for companies like Apple, where their sales growth, since the introduction of the iPhone 5, which was the big breakout product, are effectively stagnant, right? Very low rates of growth in aggregate, certainly not justifying the types of valuations that we see. And so nowhere in this discussion have I introduced the idea of the Federal Reserve. Instead, what I've talked about is the mechanical aspect of introducing this mindless, robotic systematic strategy that simply says, If you give me cash, then buy.

What do I buy? I buy the entire publicly traded market, as defined by a particular index. In this case, the Vanguard Total Market Index. How is that index constructed? That index is constructed on a market cap weighted basis, for more accurately, a float adjusted market cap basis. Are there ways that I can influence that index? Of course, right? I can do things like buyback my shares, creating an additional source of flow and buying power that then isn't captured by the system until it looks at a quarterly number of shares outstanding. And then theoretically, it's supposed to adjust supply, except for the fact that the market cap is already what it is, right? And so it doesn't particularly have a very meaningful impact, and the company can step in and buy shares.

Now, everything I'm talking about is actually a change in models around how to think about markets, and has, by and large, been mirrored by the growth of an academic understanding of how markets work, that, candidly, we just didn't have the calculations capability. We didn't have the computer processing power, nor did we actually have the data that would have allowed us to build these types of models and this type of understanding of the importance of flows to market price determination, versus the academic models of the 1950s.

And the crazy part is, is that everything we're talking about, the growth of passive, the growth of modern portfolio theory, the growth of the idea that, you know, passive is equal to active, and that there is no real impact is a byproduct of those 1950s, 1960s models like CAPM, like the efficient market hypothesis, etc., that we all know are not true, right? We actually know empirically now that the market exhibits, at best, weak form efficiency, and how we define all that really matters, right? I mean, if you define efficiency as a market as efficient, if most of the price change occurs when fundamental news is released, right, like Facebook reports disappointing earnings, and a $2 trillion market cap company falls by $300 billion in market cap, right, effectively a giant entity, until very recently.

Or in the case of Nvidia, and extremely well telegraphed growth of artificial intelligence chips and GPUs causes an earnings beat, that causes the stock to appreciate two levels of valuation that most people would look at me like, "That's just absurd." Right? Like nobody actually thinks that makes any sense. Except for the fact that if you look at that type of model, where there's this giant entity out there whose model is simply a buy and hold, that creates the dynamics that are very similar to having high levels of insider ownership. And in other words, stocks begin to react in an increasingly inelastic manner, meaning there's not a lot of adjustment for supply and demand when price changes, right?

We talk about that with oil, right, or gasoline. We talked about that with gasoline, but we presume that there's somebody out there, you know, like, we know that if we have to get to work today, we pull it into the gasoline station, we have to pay, basically, whatever price there is. We can shop, you know, comparison shop across the four quarters of the intersection, and find the one that's five cents cheaper in the grade of gasoline we need, or if we want to use credit, right? But the reality is we need gas, and we're going to pay that price.

That same underlying phenomenon is now increasingly happening in the stock market, and in the bond market as well, by the way, when you have these passive players that have to buy. They have a fiduciary obligation, regardless of the ridiculous valuation, to show up and buy. And it's even more perverse than that. Because the higher something goes in price, the higher its market cap, the more marginal capital, I actually applied to that name, right? And so this explains so much of the behavior we're seeing in markets, and it's a byproduct of our attempt to say, you know, hey, let's just all be really thoughtful and simple, and not try to figure things out. And we're going to let the professionals do that.

And we're just going to invest, as Warren Buffett says, in, you know, the safety of a diversified index called the S&P 500, or the Total Market Index. And unfortunately, the evidence is actually really clear that we've changed behaviors in markets, and largely subverted the role of markets, which is to try to establish the marginal cost of capital for corporations, right? Publicly traded corporations. That's the role of markets by treating it as if it's a utility to serve retirement objectives, right, and saying we don't actually have to do any real work around this. We just have to dollar cost average into it under this super simple algorithm.

My fear is, is that we've created conditions that when, as you correctly point out, we eventually do have to sell. And we can walk through the math on why that inevitably will occur, that the impact of that selling is extraordinarily greater than we thought it would be.

Dan Ferris: And I assume that, you know, that math around the selling is about demographics and the inevitable sort of retirement of all these people, who are feeding this for that purpose. [Crosstalk]

Michael Green: So some components of it are tied to the demographics, and I think that's really an important component. And again, anything that I'm saying can be easily demonstrated or replicated by your listeners, right? And so one of the things I encourage people to do is just Google 401(k) outflows, right? So retirement fund outflows, and one of the things you'll find is, is that the articles that show up in your search will be the fourth quarter of 2018. We hit that demographic window in the fourth quarter of 2018. And my analysis is actually that a lot of the fourth-quarter sell-off in 2018, was directly tied to the dynamics of retirement and baby boomers starting to reduce their positioning in equities.

Now, the great irony, of course, is that that can't be allowed to happen. And so what did we do in 2018, 2019? We changed the rules. And so many of your listeners may be familiar that required minimum distributions, which used to be at 69 and a half, move to 72. Then they move to 74. Now, they've actually structurally moved to basically never, right? So the actual current rules that are in place are you do not have to liquidate them until 10 years after your death. That's just a giveaway to extraordinarily wealthy individuals who don't actually have to live off those resources.

And it's kind of the ultimate middle finger from the baby boomers, which, you know, no offense to anyone in that generation, you know, the simple reality is that they don't individually make these choices. And it's a somewhat natural collective choice to make that, you know, we're going to look out for our best interests. But the reality is, is that that's not actually what's happening. What's really happening is effectively we're creating conditions under which the baby boomers get to die. And then their heirs are left with, you know, thinking that they've got this fantastic pool of capital, but it ultimately still needs to be sold.

And this is where the logic becomes somewhat inescapable. Because the dynamics that we're talking about raise the price of equities, raise their valuations. Contributions will always be a function of incomes. Withdrawals are a function of the asset level. And as the asset level rises relative to incomes, it becomes harder and harder for that system to sustain itself. At some point, you hit the tipping characteristics, where somebody has to take out. That number turns into a net negative number. And then you actually encounter, you know, the really unfortunate logic, that when an entity says, you know, if you give me cash, then buy.

If that's replaced by its analog. If you ask for cash, then sell. At what price? Whatever price I can get. It doesn't matter, right? It doesn't matter what the price is, because there's no fundamental information. I'm not evaluating is this a cheap stock. Is the index cheap? I have to take that money out, right? And under those conditions, if you run these scenarios through what's called "agent-based models," where you endow the individual agents with these types of rules, as the market gets more and more passive in its construction, the risks of extreme down events begin to rise.

Dan Ferris: You know, Mike, I don't remember Fidelity sending me a note saying, "You really can't ever sell." [Laughter] I didn't get that one in my e-mail. But you know, when you say that the rules have changed, so that you can never sell, I mean, are you just talking about the market structure, or are you talking about an actual rule that has pushed distributions out, you know, to an age that is absurd?

Michael Green: Yeah. So the actual age has been pushed out, too. I like your use of words to something absurd, right? So, no, the actual shift is now that, in many situations, you do not ever have to take required minimum distributions, or at least the final accelerated distributions.

Dan Ferris: I see. OK. So in other words, like the moment of selling is now, it's not something that could be sort of guaranteed in time. But we, we don't live forever is the only guarantee, right, that eventually selling will take place? [Laughter] Right? Unless our lifespan dramatically increases.

Michael Green: Yeah, absolutely. And the really critical thing to understand is, who are the lobbyists behind this? Right? I mean, I'm an asset manager, so I definitely benefit from the idea that nobody can ever sell, right, or nobody ever has to sell. That unquestionably benefits me. But the irony is, is that all that legislation, all that regulatory change is being pursued by the lobbying activities from Vanguard and BlackRock. Now, the wonderful part is, is that they're able to cloak themselves in the veil of John Bogle, and say this is all for the best interests of the American public.

But what you're actually doing is kicking that can down the road, concentrating it, and perversely creating a benefit for those who never actually have to touch these retirement accounts for the purposes that they were designed for, right, to pay for your retirement. And, you know, it basically turns into a condition under which those who have, you know, huge 401(k)s, obviously. You know, we've had examples of Mitt Romney and Peter Thiel, at various points in time, where people have become aware of extraordinary 401(k)s. That was just a pure handout to those individuals in a lot of ways, or those who are approaching that, who have millions of dollars in their retirement accounts. They don't have to touch them.

Whereas the average American, the median American, who has somewhere in the neighborhood of $250,000 to $300,000 in a 401(k) as they approach retirement, they don't have the luxury of that, right? They don't get that benefit. So the tax deferral that has been created there, the ability to hold these assets is really truly another handout to the very wealthy.

Dan Ferris: OK, Mike, I want to go back to something though. I want to go back to your – as you explain, you know, a little bit about the history from the Sharpe paper forward, and just the mechanics of, you know, the implications of passive, I just wanted to stop you and say, it sounds like you're just giving me a reason to be eternally bullish. Why are we even talking about this, when people eventually sell? Is it only because, you know, we're not going to live forever, and therefore, at some point, somebody's going to start selling. And, you know, not every generation, necessarily, will be as large as the baby boomers, let's just say. You know, that would make sense over time, I guess. But isn't it, at least for some period of time, isn't it just a reason to be bullish?

Michael Green: So unfortunately, like, this is one of the points that I've emphasized for people, right, is it creates conditions under which valuations can become so crazy that it defies logic, right? And I mean, I've gotten into, so you know, those who are listening, and do know who I am will know that I'm on Twitter as ProfPlumb99, right? And I had any number of arguments with people who are, you know, value proponents, for example, who will make arguments around, well, value has become so cheap relative to the really expensive stuff that, you know, you have to buy value. You should be short Microsoft, the Magnificent Seven, etc.

Dan Ferris: And that can be true, by the way. I just want to emphasize that it does not have to be the wrong choice. But part of the point that I would emphasize is that as long as the mechanics of the system that I'm describing create positive net flows, and remember that the lobbying activity is designed to encourage that to continue, right? If death is not a long enough time period, for you to be able to defer taking gains, maybe they'll turn it into death plus, right?

Michael Green: [Laughter]

Dan Ferris: Who knows? Like at this point, it doesn't feel like we've hit a somewhat logical conclusion. But the actual rules as they're constructed right now as death plus 10 years, right? Maybe we turn it into death plus 50 years. Why not? Sounds good to me, right? We're kind of past the point where the product are doing anything close to what they were originally supposed to do, which is provide a middle class benefit, to encourage savings for retirement in a tax-advantaged way. And to invest that money, alongside other investors, that have thoughtfully deployed it in the objectives of markets, which is to set the marginal cost of capital.

They've just grown far beyond that, to the point that we've actually created a utility that we call "the markets" that are being used largely to fund the retirement of baby boomers and others, right? It's a broad phenomenon. We're all trying to participate in it. But that's not what markets are designed to do, right? And when you start talking about markets as being the mechanisms for retirement vehicles, then you suddenly are trapped in a situation, where you have to say, is the government willing to stand by and let the retirement system fail? Man, that's a terrible bet, right? It's just a terrible bet.

In every democracy in history, where the retirement system has imploded, the democracy has come to an end. And so, you know, you want to stop fed interventionism, we have to actually recognize that what we're trying to do in using markets to create a retirement mechanism is wrong. It's not the right mechanism.

Dan Ferris: All right. I thought of you this morning. I was glancing through a paper, one of these sorts of reports by a guy named Christopher Cole from Artemis Capital. I like them. They're very, they're kind of almost poetic. And one of them points out that this period from, you know, the peak of interest rates, really, 1980, I think he dated it 2020, was kind of unusual, historically speaking. And he said, it was absolutely basically tailor-made for passive investing. And that we forget that passive would not have worked in most of the past, I think it was 90 years, he was talking about.

And the reason this concerns me is that I think – we had a guest Vitaliy Katsenelson on the show a couple years ago, actually, or a year or so ago. And he says just take the last 20, 30 years, and invert it. And that's what the next 20, 30 are going to look like. And that would suggest to me that this Goldilocks anomaly period is over. And that your concerns about passive are going to go from becoming a theoretical thing within the next few to maybe several years, for real investing. People are actually going to have to figure out, OK, Mike is right. And if Dan is right, and this may be about to happen, because there's this sea change that we're living through. What the hell do I do about it? Anything? I mean, you know, what do I do? I've got these assets in this 401(k).

Michael Green: So, you know, I've been fortunate to be in financial markets for a long time. And so I've encountered a lot of really smart people, who often provide very pithy observations, right? I mean, this is, the primary skill as you get older is basically becoming more and more like Mark Twain in terms of your ability to string a phrase together, because you've just said so many [inaudible] words in the process of getting older, right?

Dan Ferris: Yep. [Laughter]

Michael Green: But one of the best languages, one of the best terms that I ever heard came from a guy by the name of Scott Bessent. He used to run Soros' internal capital, and now runs a firm called Key Square. And his comment was, "If you're going to panic, panic first," right? And that's actually not a terrible piece of advice as it relates to financial markets. Because if you sell early, you're effectively just saying, I'm going to give up some of the upside gains, right? And that has been very hard for people to do because the gains have been magnificent and wonderful.

At the same time, we are being given a really interesting time period or opportunity to do so. Because right now, the government is raising interest rates to levels, the interest rate on risk-free assets, to levels that are intentionally too high, right? Now, just stop and think about that as a listener for a second. The Federal Reserve has raised interest rates on U.S. government debt to levels that are intentionally too high. Why? Because they're trying to stop inflation. So what that's telling you is, is you are currently being given an opportunity in fixed income, that is, by their own calculations, too much money for you to be making on a sustainable basis, right?

That's a pretty nice way of framing the cheap price for bonds or high levels of interest rates that we have right now. And I would point out to almost all listeners, the level of valuation that we have in equities relative to the real rates of returns that can be earned and things like 30-year tips, right? And by the way, I just want to emphasize this doesn't mean it can't get worse, right? It doesn't mean that equities can't get more expensive. As you point out Dan, like, a lot of my calculations suggest this is the perpetual motion machine, that effectively gets crazier and crazier and crazier.

So almost inevitably, you're going to be too early in this process of selling, right? But you are being given this gift in bonds right now, that I just think people have to be paying attention to. And again, part of the great irony is, if you're listening to this program, and you're listening to me say this, and you're like, wow, that's not the dumbest thing I've ever heard, which would be remarkable of coming from my mouth. But if you say this is not the dumbest thing I've ever heard, you're being given that opportunity.

And at the same time, people who are not listening to this, who are in things like target date funds, right, or in systematic allocation strategies, that presume the historical returns for assets are what you're going to receive going forward, right? They can't pay attention to this, they have no mechanism to do this. I like to say that the scariest language I heard coming out of the pandemic, and I heard a lot of scary things, was from Vanguard in a self-congratulatory fashion saying to itself, or saying in a public release, less than 1% of their clients tried to sell at all.

Dan Ferris: [Laughter]

Michael Green: Now, from a dollar cost average and a time in the market standpoint, that's remarkable, right? Like, oh, my gosh, that's fantastic. At the same time, like, you know, imagine when you talk about that as it relates to, like, trains going over cliffs, right? You know, guess what, less than 1% of the passengers tried to disembark, right?

Dan Ferris: Yeah. [Laughter]

Michael Green: That's not an advertisement for you know, safety and pride. That's just an advertisement that you got to idiots for passengers.

Dan Ferris: Right. So in other words, 34% in one month, and only 1%.

Michael Green: And only 1% tried to sell.

Dan Ferris: Yeah. [Laughter]

Michael Green: So what's it going to take? When do we wake up? And I like to say about that event, holy crap, if that's what 1% selling looked like, can you imagine what it would look like if 2% tried to sell?

Dan Ferris: Right. That was my first thought was only 1%. And it was minus 34% a month? I mean, wow, what is 2%? Yeah, what does 2% look like? Or three? I mean, it's just yeah.

Michael Green: Right.

Dan Ferris: Wow.

Michael Green: And that is important. And then the other thing to remember is, is that passive itself – so when you talked about the demographics, I do actually just want to highlight something. So when I say passive is now north of 40% market share, I just want to emphasize that that's not what's called homogenously distributed, right? It's not like Dan is 40% passive, and I'm 40% passive, and my dogs are 40% passive, and my wife is 40% passive, right?

You have individuals who are 0% passive, and you have individuals who are 100% passive. And the really critical thing to understand is that a lot of this growth has been a byproduct of regulatory changes that has pushed the younger generation in. And so to actually put numbers behind that of that 40%. It's split about 20% to 25% market share for those over the age of 65. And about 95% market share for those under the age of 40, right?

And so this is one of the reasons why, like you hear – and by the way, like I hope your audience is literally sitting there looking at the screen going, one, that dude's old, and two, like this is the world's smallest violin playing for an active manager who can't beat the S&P 500, right?

Dan Ferris: Right.

Michael Green: I totally understand that, by the way. And you're certainly welcome to both points of view, because they both are true, right, certainly over periods of time. And the old is inevitable and getting worse. But the really simple reality is that, you know, if you actually think about this, who else is supposed to raise the alarm? Who else is supposed to say, look, this is what the math of this system leads you to? Because it's not, Dan, it's not your job to try to figure this out. It's not, it's really not even my job, right? I looked at what was happening in markets and said, hey, wait a second, this doesn't fit the fact pattern that everybody wants to use, which is it's all about the Fed.

Dan Ferris: Right. So, you know, I completely believed, like, that interest-rate movements and Federal Reserve monetary policy is not like the only. You know, people seem to think that that's the only thing that makes stocks go up and down, the way some people talk. But I am sympathetic to the idea – I mean, Howard Marks just came out with a piece about how, you know, the movement in interest rates over the last, you know, 40 years, he calls it the most important thing financially. And I have to say, I think I'm in agreement with you. I feel like investing has – is possible, again, with 5% Treasurys.

Because without that benchmark, you know, you can create a mental hurdle and say, well, I'm going to pretend that there's a 5% Treasury available, and that's going to be my hurdle rate. So I'm going to behave that way. But it doesn't matter, right? It matters, though, when you have it sitting in your account, and you say, you know, you're from Missouri, and you say, show me. OK, show me. I got this 5% risk free. Show me a good deal. And you're not buying Nvidia. So I'm encouraged by this. And I also tend to think it might, the situation might be around longer, maybe then a lot of folks think.

And I wonder, can this disrupt, you know, possibly disrupt this passive tidal wave, tsunami, this endless passive tsunami? Can we finally get to a place where more people want to be a little more active by saying, I'm going to buy bonds now. I'm going to buy Treasurys, rather than buying, you know, Nvidia, Microsoft, Apple, S&P 500, etc. [Laughter] Is there any hope that interest rates can help me out here?

Michael Green: Yeah. So, one, I think you're actually right, right? I just want to actually emphasize this, if this is – this is one of the very few things that could derail this process. Now, we're not seeing significant indications that that's true. And this is actually the point of my sub stack this past weekend, right, is effectively this argument about the death of bonds, right? And so, you know, Dan, you're active on Twitter, as am I, and you'll notice that almost all of the language today is some variant of like, well, what idiot would ever want to own U.S. government bonds? It's very clear that you know, they're going to zero. And oh, by the way, like the S&P 500 is so much safer than bonds, right?

And there is a remarkable amount of belief around that. If nothing else that actually should tell you something. I did a podcast earlier, late last week, with Demetri Kofinas and another gentleman named Andy Constan, who also is – has been in the market for a long time, actually longer than I have. And Demetri asked us the question like, well, you know, bonds are hard. Bonds have math. Like, how can I feel comfortable that a 10-year bond is going to behave the way you're telling me as opposed to when I can just buy Apple?

And I'm sitting there like, oh, my gosh, I actually can't believe that we're having a conversation in which you're telling me that the price behavior of Apple is more predictable than the price behavior of a, quote, unquote, risk-free fixed rate, fixed income security, right? And but I do think that people actually really believe that in a lot of situations today. And so while bonds are giving us this extraordinary opportunity, which again, the Federal Reserve has declared their objective here. We're going to rise raise interest rates, to the point that they are unsustainable for the economy, and therefore mechanically slow the economy.

If you believe what they're saying to you, then today's interest rates have to represent an unusual and somewhat extraordinary investment opportunity. And yet, nobody wants to take advantage of it, because they're looking at the past price performance, in the same way that they would have looked at the S&P 500 in March of 2002, 2003, and said, I'm not touching that thing. That thing's down 60%, right? Like that could fall another 50% easily, right? We're seeing exactly that language as it relates to bonds, which is a really amazing phenomenon. And by the way, again, I just want to emphasize that when markets are governed by these flow dynamics, it actually opens up an entirely different kettle of fish, versus the information component, right?

Because I just gave you somewhat unassailable logic why these interest rates are particularly attractive. They are mechanically designed to be too high, right? Like, if somebody comes to you and says, "I'm going to give you a special opportunity to sell me the car at a price that is far too high, because I'm trying to do something that is non-economic in its nature," your reaction to that should be like, "Take the keys." Right? "Take my car." Right? But our natural reaction is like, oh, what's your angle on it, right? And your immediate angle is, oh, the U.S. government's trying to sell me something, right? They're trying to sell me these bonds.

No, what they're really trying to do is lock up your cash. You know, try to try to prevent you from using it as long as possible so that they can slow inflation down. So we have all the information that we need in front of us, and yet, the models that are in place, things like target date funds, there's literally nowhere for them to even incorporate that information. There is no mechanism for a target date fund to change its allocation on the basis of current yield and fixed income.

Dan Ferris: All right. So, you know, part of the answer to my question [crosstalk] – no. No. No. So but I was asking, you know, what do you actually do? And, and part of the answer what to do is we're saying, we're agreeing that Treasurys are an unusually attractive situation right now. And that's a great –

Michael Green: Yeah, I mean, the answer, first of all, like, well, I just want to emphasize, like, recognize this is my advice, right? It's worth exactly what your viewer has paid for it. But you are being told by the Federal Reserve, we've hiked interest rates to an unsustainable level. You have the opportunity to lock in those interest rates for an extended period of time. In particular, I would highlight things like 10-plus-year tips, inflation protected securities, that offer a guaranteed real return in the neighborhood of 2.5% today, 30 years the same.

By the way, where you could just remove, like, remove any of the discussions around uncertainty about what's going to happen to inflation, right? 2.5% real is a phenomenal return. It's just an unreal return versus any period in history. You know, I'm sure you've heard the analysis, people are, like, you know, if somebody just made 1% a year from the history of the Roman Empire, they'd be the richest man in the world. Well, that's because nobody gets to invest for 1,000 years, and nobody gets to invest in a 1% real rate, you inevitably encounter all sorts of troubles. But you're being given that opportunity right now.

And so, like, on a personal basis, and on a professional basis, I'm rapidly rotating my portfolios, to being out of equities, being in bonds. And I am 100% certain that not only have I been early to that process, but I'm probably still early because we're at a point in which most investors can't yet wake up and see that opportunity. They just physically can't because of the structures that they're investing in.

Dan Ferris: I admit to being selfishly happy to hear that, because I've begun, just begun to pound the table on this idea in my newsletter, so. [Laughter] So that's a good thing. And of course, two men had to mention the Roman Empire, right? Like, we had to get it in there. [Crosstalk]

Michael Green: When the Roman Empire thing made its way around Twitter, you know, in terms of how often do you think about it, like my wife's joke was, OK, you actually so radically overrepresent this population that is probably more like every hour. But it's – because I do. I think, what I want to emphasize for people is, it's actually not that, you know, what I think we're going through, by the way, is not the end of the Roman Empire, I think we're going through or we're leaning towards the end of the Roman Republic.

That period in time in which the efficiency of the public sector has become so corrupt, and so dysfunctional, that we are increasingly looking for a strong man to say, "This is how we're going to fix the problem." Right? And we're willing to tolerate all sorts of terrible behavior around it, simply to get somebody who steps forward and says, "Here's what we're going to do." And that's what an autocratic system is. That's what the rise of a dictator, that's why the Romans actually had the role of dictator, right? It was to interject that single individual who can make the hard choices.

I just think, you know, we haven't even come close to getting to that point yet in American history. I think it's totally premature to dismiss all the advantages that the United States has, from a geographical perspective to a population perspective, to a relatively young society versus the rest of the world. We have such an extraordinary competitive advantage, that it's basically like just super exciting to imagine the end of it, but far, far higher probability is that we sacrifice our individual freedoms to preserve the luxuries to which we've become accustomed.

Dan Ferris: Yeah, I'm sure that, I'm sure our listeners are probably saying, "You're damn right," [laughter] to that at this point. It feels that way a lot lately, I think, you know, especially since COVID. But, Mike, it is actually time for the final question. The final question is something I asked every guest. OK? It's the identical question, even if sometimes I have a guest that's a nonfinancial guest. It's always the exact same identical final question. And it is very simply that if you could leave our listener with a single thought today, what would it be?

Michael Green: Well, I can say something, like, eat your vegetables, or brush your teeth twice a day. Those are our, you know, I would argue really, really important points. But since we, since we're speaking in such a sweeping forum, right, you know, remember that the government is us, right? And it's going to do what we want it to do. And so if we actually tell the government, that the thing we care most about is the security of our old people, right, which by and large has been our voting pattern for the past 100 years, we're going to get young people vote, to become old, with as few resources individually as they possibly can have. They want to rely on that government for them.

That means that we see things that we're seeing in our society, falling fertility rates, children staying at home longer, and not more actively participating. Educational periods expanding, and people taking on significant amounts of debt, in order to avoid starting their lives, right? This is all actually by choice. And as a society, I would argue that we need to recommit ourselves to youth. And so you know, if there's one thing that I would encourage people, and I know the demographic of this – of the listener base is inevitably skewed older.

Anytime you introduce the idea of financial matters, each of us individually, and I'm certainly there as well, but each of us individually really needs to stop and think, what did I do to make the world a better place for children today? And if you just do that every single day, if we actually incorporate that into our voting patterns, if we actually incorporate that into our behaviors, I'm willing to bet that 90% of society's problems disappear.

Dan Ferris: Oh, that's a great one. That is a fantastic answer. I've never heard anything quite like it. You know, it's usually like something just sort of financial, and, you know. We've had a lot of good financial answers, but I like that one a lot. And thank you for it. And thanks for being here, Mike. I really appreciate you spending time with us.

Michael Green: Dan, it was a real pleasure. Thank you for having me.

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I'm glad we finally got Mike Green to come on the show. I've admired his work for some time. And I follow him on Twitter, and he's very active on there. So there's plenty of comments. And he writes a sub stack, and there's plenty of stuff to take in. And you know, at his website, Simplify.us from his asset management company, where he's chief strategist, there's a blog there as well. So I'm really excited that I finally got Mike Green to spell out his ideas about passive investing for you because it's really important. We're all doing it. We're all doing it in our 401(k)s.

And like I said during the interview, I'm afraid that this time that we live in now is quite a bit different from what has prevailed in the markets over the past few decades. And my fear is that all the work that Mike has done on passive investing, and he's been talking about this for a few years now, please understand. So, you know, it's this theoretical thing, as he said, but I wonder with all the, you know, higher interest rates, and the market action in the past couple of years, if we are not finally into a period where this will start becoming a concern.

And one of the things I forgot to ask him was if he thought the trend in small caps was maybe a harbinger of things to come, because small caps have miserably underperformed. The Russell 2000 has miserably underperformed, you know, the FAANG or just even the big indexes were, the Magnificent Seven, or the FAANG, or whatever you want to call them have really pushed the returns this year in S&P 500 and Nasdaq. So who knows, maybe the small caps are trying to tell us off that. Maybe there's a, OK, it's over. The selling is going to begin soon. Because maybe there's a recession coming, which, you know, the small caps have had somewhat of a decent track record of predicting recession in the past.

I just looked at some data just before getting on to record this that was indicating that. So who knows? Maybe the issue that I wanted Mike to spell out for you, which he did in great detail. He obviously does a lot of deep work. And I wanted you to hear that. I wanted to hear his thinking aloud on this. And just, you know, aside from the particular topic, just the way he digs in and goes after a subject. He takes a historical view and a very deep view of available data, and some original thinking, and comes up with his own unique view of things. That's really valuable. It's valuable just to have all these folks on the show, so you can hear how they think, you know, let alone exactly, you know, what it is they're talking about at any given moment.

And Mike Green is a great example of somebody who kind of teaches you how to think as he spells out his thesis. So I really, really hope you enjoyed that as much as I did, as much as I always hear – enjoy hearing Mike Green talk. And who knows, I'll certainly invite him back on in six or 12 months. And you know, I hope he's able to do it again. But that's another, wow, really great interview in my humble opinion, and that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.

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