Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, I tweeted something recently and Uh, it provoked a large response on social media. It's weird how that happens, Right, you tweeted something that provoked a response. I find it very hard to believe. I know it's outrageous. Um, but I was talking about. Have you heard of the fire movement? Uh? Yes, vaguely, like I am familiar with it. It has to do with people retiring early, right, Yeah, So it's fire as an f I R E. And it stands for financial independence retire early. And the basic idea is you can save a lot of money, and if you invest it wisely, you can retire at an early age, like in your thirties. And supposedly it's it can work out for for even normal people or people on normal salaries. We're not talking about really wealthy people. And the thing that I always find really interesting about it is when you go and read about how people are actually investing that money so that they can retire early, they're almost all talking about doing it a themselves and be through passive investments like e t s right, exactly right. So people think, okay, they live frugally, they work for several years, they live frugally, but then they sort of have this confidence that historical returns that we've seen in stock and bond markets throughout the world will just always be there for them in the future, and so they just put a bunch of money in passive e t F or you know, passive ish e t f s, and then they count on that existing for the rest of their lives. And then they do something I don't know, they go read it or tweet for the next from thirty five until that's right. And the reason I find this, you know, it doesn't sound bad to me, to be honest, I would be fine. I would do that if I if I had confidence. You can see the allure for sure. But the reason I find it so interesting from a market perspective is to me, it hits upon like a number of very very important themes, But really it hits upon this question of whether or not the fire movement can exist without the bull market that we've seen for the last ten years. Right, Like, it's very easy to say dump all your money in something like um, you know a vanguard total stock market e t F and just watch it sore when that's the thing that's been happening for years and years and years. Well, I'll say two things. So one is it certainly raises the question about whether this subculture can continue to exist, But it also raises another question about people who aren't in that subculture but in a way of effect brought into it. Because this mantra that we've gotten from uh sort of the media and the fund management industry is okay, most people aren't saying you should try to retire at thirty five or forty, but this idea, never try at a time the market, never pick individual stocks, just have a broad, diversified basket of e t F that you may be rebalanced every once in a while has become so intense and extreme and everyone's being pushed to invest like that. So even if you are one of the fire people on Reddit, it still raises the question of how much is everyone else who is not planning on per se retiring early essentially blotted to a less extreme version of the same story. Absolutely, and you'll see a lot of the investment advice that the fire people talk about is actually very very similar to advice given to people generally when it comes to their for oh one case and stuff like that. Passive is supposed to be cheaper, it's supposed to be much better. But what if there's a downside to pass of investing. We've spoken about, you know, active versus passive on the podcast before, but we haven't done that much on how passive investing might actually be changing the way the market functions. No, absolutely, and it's such an important question given as we've been talking about, how many people have portfolios in which the only action they do is just add to the same basket of three or four ETFs every single month for their working lives. It's been fantastic since the crisis with the incredible rally in stocks and bonds simultaneously. But you know, as they say, past performance no guarantee of future returns, this is true. All right. Well, I'm happy to say that we have the perfect person to talk about this today. Our guest is Mike Green. He's the chief strategist and portfolio manager over at Logica Capital Investors. Mike, thanks for being on, Thank you for having me. So I guess my first question is how did you get interested in this particular area examining the impact of passive investing on the broader market. Is it something that you're observing in your sort of day job. Well, the way I think of my day job is to really try to understand the market structure. I'm not a trader in the traditional sense, wasn't trained on a prop desk or anything else. And so you know, I've always managed to make money by trying to figure out actually what people are being forced to do. What is the incentive structure that's causing people to do what I think is fundamentally irrational. Rather than just saying, hey, they're crazy and stupid and this will eventually stop, the opportunity to dig in and understand actually the incentive structures that have been created the restraint or the requirements for people to engage in certain transactions, whether it's from a regulatory framework, whether it's from a institutional framework basically built into their prospectuves. Ultimately, that can create the opportunity to identify trades that you think are irrational and have the potential to break as that behavior is brought to its logical extreme. So that's how I stumbled onto this stuff. So what are in your view, the big structural trends or the big structural impositions on individual investors or pension funds or any other entity that has a lot of money that are all causing people to sort of invest in the same way. Right now, one of the big the key ideas here. So there's a couple of key things. The first is is that the growth of passive investing has has been well documented, right, and the narrative behind the out performance is fundamentally built around the work of Bill Sharp, who is the father of of the Sharp ratio um, the cap M formula, etcetera. Um his paper in called the Arithmetic of Active Management is this analysis that we've all heard that says fundamentally passive investors by definition are only matching the active investors in terms of their overall allocation, and so the difference is just going to be fees, which means that the active managers underperformed. Everyone accepts this today because we've seen the evidence of the outperformance of passive but very few will take the time to go back and actually look at the construction of the problem, the assumptions that existed under that the assumptions are just absurd, right, So in in the definition of what a passive investor is, according to Bill Sharp, is that passive investors hold all the securities in the market. How do they get in? That's magic. How do they get out? That's also magic. They never transact. Right the minute they transact, they cease to be passive investors. And as we know, passive vehicles are dealing with billions and billions of dollars of inflows on a daily and weekly basis. They're in the market transacting. They are the single largest transactors by far, and there's a result. They have to be influencing the market. They cannot be passive. So the fundamental premise on which this whole idea is built is flawed. Right. The second thing that has happened, though, is because passive investing has grown so large and so powerful, the resources to engage in lobbying efforts to institutionalize within the framework has expanded dramatically. Most people have a cursory familiarity with things like four oh one K plans and I RAS. Vast majority of Americans have some exposure through their employer to these plans. Those rules have changed over the years to the lobbying efforts of passive players like Van Garden Blackrock to inculcate passive strategies into these vehicles under the premise that this is the best possible vehicle for the vast majority of Americans to invest in. It's had the effect of creating this crowding that has further accelerated the performance of the benchmarks that these are ultimately tied to. Oh man, sorry, there's so much just in that first couple of minutes, um, that I find really really fascinating. Oh why don't we go back to the first point, which is this idea that when we're evaluating the performance of passive versus active, we're not actually taking into account the way that passive can influence the market. So how are you seeing passive investing actually impact the market? Now? We're seeing it in a couple of different ways, right, Um. One is is that we're seeing a distinct performance advantage that is being created for those securities that are in indices that are being invested into by passive investors. This is a fairly well studied phenomenon in terms of the dynamic of what's called index inclusion. So we have one off events in which we can look at securities that have been put into an index or have been ejected from a widely traded index, and we see that there is a distinct and permanent shift in the valuation the price levels associated with those securities. This is a well documented academic literature. But the literature has not studied is the dynamic of the continued inclusion the continued flow of capital. And that becomes a harder problem because suddenly they're on par with all of the other constituents in the index, and they're all experiencing it. Right. So I gave a speech several years ago in which I compared it to the David Foster Wallace, this is water right. The media him in which we're actually participating is being skewed by the behavior of these passive flows. The best analogy to think about this, most people have had exposure to the carnival game where you're shooting water at horses that are racing across. Right. The best strategy to play that game is to wait until the table is relatively full so it gets a large prize, and then you and a friend simultaneously go to the table and you both shoot at the same horse, abandoning one of your horses, but the objective is to win, right, and by simultaneously exerting pressure on the water sensor, you're giving the perception that you are more accurate, causing that horse to outperform. All right, That's what we're seeing with the benchmarks, as more and more people are shooting water at the stocks that are explicitly in these benchmarks, and in particular the larger stocks. Right because of the momentum bias associated with this and some of the techniques under which many industries are constructive it's called sampling techniques, where they're trying to with a minimum number of transactions, replicate the behavior of the index. These securities are in turn those horses that are receiving additional uh participants or water flow at the at them, leading to the perception that their performance is better because those are the benchmarks. That then leads you to conclude that all of the active managers are actually underperforming, when the problem is just how we're measuring it. So there's this uh yeah, I guess some people will call it a virtuous cycle. Some people might call it a vicious cycle. But what you're describing essentially is, Okay, we look at all these fund managers, maybe they're underperforming the SMP five hundred over some period of time, but it's essentially because all the money is going into the SPI as a whole, and then that accelerates because the fund managers appear to be unperforming. That appears to vindicate the idea that oh, yeah, of course, just go passive active doesn't work, and the problem or the disparity grows larger. So if this is true, it means that something like quite big and fundamental has actually happened or changed in the market, which is that there used to be a point where things would get too expensive, and that's when investors would stop buying them and eventually the price would sort of self regulate itself and drop back a little bit. But now what you're saying is basically, because we have so much money hitting the same target over and over and we basically have flows chasing flows, that markets are no longer self limiting, so to speak. Unfortunately, I think that's correct. I mean, there will ultimately be limits, but they're far beyond anything that we have currently experienced. So any reference to historical dynamics becomes an inherently flawed because we did not have these participants in the past. So it's a good thesis or it's a provocative thesis. And obviously you can point to the data that shows lots of fund managers under performing the benchmarks that have been set by them, and maybe that's uh, maybe those benchmarks are arbitrary. But how do we know that's true? What are some other indicators, like, how do we know it's not just fees that are causing them to underperform, or how do we know it's not just that they're bad at their jobs and they're bad at picking stocks that are causing them to underperform. What other evidence is there that people that they're actually still I guess doing a good job in spite of their underperformance. So the easiest way to actually tease something like this out is to look at the performance of benchmarks that UM are designed to model many of the strategies of active managers the generation of alpha and have historically worked quite well and doing so UM but charge no fees. So a simple example of that would be the by right index from the cbo E, which is you own the S ANDP, so you are actually tied explicitly to the benchmark and you sell an out of the money option on a continuous basis, capturing the premium associated with that option. Right, that has always historically delivered quote unquote alpha. Right. What you're actually doing is you're selling some of your top side exposure. You have full down side exposure in exchange for that sale of the top side, you are actually receiving a premium. Right. That premium delivers return regardless of the underlying return of the s and P five hundred the underlying and so that shows up as a alpha producing strategy. Right. We have seen this alpha decline in a nearly linear form over the past twenty five years. Right, it's not tied to interest rates, it's not tied to the implied versus realized which is the traditional component that people have focused on. We've seen these strategies that should offer a consistent return deliver now negative alpha, which is highlighting part of the problem. We're using tools that presume the efficient market hypothesis is true right to measure performance. So the calculation of alpha is literally just the intercept in a y equals m x plus b equation, a linear equation. If you try to solve a linear equation, if you try to use a linear equation to solve what has become a curved or distorted surface. Right mechanically, that alpha shifts increasingly negative in the same fashion that we're seeing this happen across these types of strategies. So one of the guests that we had on the podcast, I think it was maybe like three or four years ago now, we talked to Michael Morison, and he has a sort of separate model or theory about how this is all going on, and he basically kind of likened it to the online poker boom in the early two thousands, in which a bunch of bad players started playing poker and that was a really good time for professional pokers. A shark poker players the sharks could eat the fish, and then when the fish realized that they suck at it, they stopped playing. And then it's just sharks versus sharks, and the only thing is they are all good, but there the house gets a rank and they all start to underperform, and that the only real phenomenon with the passive emergence is just that people who never should have been trying to invest in the stocks in the first place aren't anymore, and that the alpha that the fun the professionals generated was just a result of there being a lot of bad players in the market, and now they're gone because they all they're all buying spy or whatever, and it's not their fault, but they just there's no bad there are fewer and fewer bad players. That sounds like a plausible way, a plausible story that is a little more benign than your vision. Yeah. So I know Michael personally, I kind of as a friend. Um, he's wrong. Um, in really simple terms, he's framing the problem incorrectly. So we all like to think of Wall Street is gambling, and so it's easy to draw an analogy to something like poker. The difference is poker is what's called innergotic system. The distribution of cards, the frequency in which you can pull the cards out at this particular suits. Uh. The hands that can be constructed are the finite in their underlying construction. Statistically, that's not going to change over any period of time. Any sample that I draw, as long as I'm drawing from a deck, is going to have the same distribution and probability. All right. That's what in our godic system is. It's what the tools that we use when you talk about Monte Carlo type simulations. They presume the exact opposite of what you said. Past performance is not a guarantee of future success, because we know that a blackjack table, or a poker table, or a um game of craps roulette is going to have the exact same probability distribution at any point in time. Alright, That's not how markets work. Markets have an infinite and infinite number of combinations, and they also have a singular direction in terms of the era of time. We have no certainty as to what the forward distribution is. The Michael's premise is fundamentally wrong. I want to ask you about another potential impact that you're if you're correct your thesis around the impact of passive investing on the market, another potential impact that could be playing out, and that's in the arena of volatility. So presumably if you have close chasing clothes, then the market becomes much quieter, I suppose. I don't think that's true, actually, so I just want to be very clear on that, right, certain types of behaviors of volatility become very different. Right, So when you have a market that is I would describe it as more accurately continually providing liquidity because you've removed the restrictions you you mentioned earlier. The idea that valuation or a focus on valuation creates self regulatory or self limiting behavior. People eventually will stop buying and hold cash as an alternative to holding securities because they find them unattractively valued and guaranteeing or virtually guaranteeing a negative return in forward expected space. Right, when you remove that restriction and instead you place the investments with the world's simplest algorithm, right, which passive is right. Passive is literally an algorithm that says, if you give me cash, then buy, if you ask for cash, then sell. Right. You remove those limits right and simultaneously, as long as the money coming in is positive, right, the flows are positive, you're providing liquidity to the market, which dampens volatility to a certain extent. Now, there's a host of extenuating factors that have been created through what are called yield enhancement strategies, basically strategies that are built around selling volatility that further influenced this dynamic. What we're actually seeing is daily volatility in terms of the point change is significantly less than weakly volatility, which is significantly less than monthly volatility, which is significantly less than annualized volatility. And that's the sort of behavior that you would expect to see if you're seeing this dampening on a localized basis, but the ability to inflate valuations over time. So I want to get to soon how this could all go bad and belly up and all the grim stuff that I'm I'm sure people are waiting for. But before we do that, I want to talk a little bit about what you identified up front is the sort of second key dynamic, which are these sort of other factors just sort of driving this trend overall, And you mentioned, uh, lobbying efforts and regulation. It also feels like, I don't want to say propaganda, but there's also been just a lot of media coverage about how nobody should ever time the market, nobody should ever pick stocks, nobody should ever just just keep investing, writing it out kind of the fire belief. Talk a little bit more about how this emerge, This sort of consensus around just if you have cash, put it in stocks, if you need cash, cell stocks, Well, I mean, we've heard this repeatedly before, and it's part of what I think gives rise to a little bit of sanctimony from the active manager space of this is all craziness, this is a cycle, it will end. I think it's a deep under appreciation for how we've structurally changed the system in terms of those dynamics, and the regulatory framework is a great one. You know. We tend to take for granted the underlying structure of a market, the underlying dynamic, but vehicles like four oh one case and iras, which represent the vast majority of individual American savings and actually are can be thought of colloquially as the world's largest sovereign wealth fund. Roughly sixteen trillion dollars in assets across the American public in four oh one case and I ras, people tend to think of stock ownership is heavily concentrated amongst the extremely wealthy. The reality is that four one case and iras are actually mechanisms by which the vast majority of Americans are capable of saving relatively small sums. The median investor, once they hit retirement, has somewhere in the neighborhood of two or fifty thousand dollars in their four oh one K and those funds need to be spent right so to fund retirement. So this is not a story of concentration of wealth. What it is the story is the mechanisms that are available for people to invest in their four oh one case have increasingly been directed to passive assets. There's a passing familiarity with something that's called the Department of Labor fiduciary role right, which came into being in April of two thousand sixteen. This actually changed the structure of for a one case quite significantly. Any corporation that offered a four oh one K had to offer passive strategies, had to offer low cost passive index alternatives to their employees, or they became liable to their employees for the excess fees that they were charged they were being charged to them and therefore oh one K and even more crazily potentially becoming liable for the under performance of the investments that they were offering right now. So corporations aren't in the business of guaranteeing a return relative to the SMP five or the Vanguard Total Market Index. They are in the business of trying to quickly and easily to spend benefits to their employees to keep them happy, right, And so this created a very accelerated shift into passive vehicles that began in two thousand and sixteen became formalized in early seventeen. And if we had not stopped the Phase two implementation of the d O L fiduciary role in t eighteen, this would have actually gotten far crazier. The second thing that's changed is the mechanism that people invest. All right, So four oh one case, again, we're a product of the nineteen seventies. They're created in nineteen seventy eight started the bull market. In nineteen eight one, there was only about seventy five hundred billion dollars invested in four oh one case. Today that numbers around seven trillion UM. In two thousand three, we introduced products called target date funds. I believe it was somewhere around two thousand five that we began to change what's called the quality the qualified default investment alternative for people who go into four oh one case. One of the traditional problems that people had in going into four oh one case is that their employees felt uncomfortable making an allocation choice, and so they would default to the cash that was being put in there and there was no actual investment of these proceeds. In two thousand five, that changed with the designation of a q d I A that was not cash. Effectively, the HR Department decided on any base allocation, so if you went in, you didn't change anything. Typically you would go into something like an SMP five underd or a total market index, or potentially into an actively managed product. There's active lobbying for designation is appropriate for q d A, and the recent passage of the Secure Act further enforces this. Starting around two thousand twelve, a default a qdi A default became a target date fund right, which means that your money is being put into a set proportion of equities and bonds based on your age um. That is, in turn investing almost exclusively through passive vehicles. There are a few exceptions to that, but the vast majority of of target date funds are investing through passive vehicles and so directing incremental flows into the market into those assets um and this has now become the dominant investment vehicle in the United States for money flowing into four own k the the number is close to Incremental dollars are now going into target date funds. I know Joe wants to get to the bad stuff happening, but just before we do. I mean, you mentioned active managers there, and often one of the complaints we see from active managers is the reason they're under performing is because the market is so distorted by the Federal Reserve or other central banks and massive amounts of liquidity that they can't possibly compete with, you know, the irrationality of everything. Is there any space in your particular view of the markets for central bank liquidity uh distorting some of the flows? So there is, but not in the manner that many active managers complain about, right, and um, it takes two forms. One is the low level of interest rates that we've arrived at through central bank actions. And those interest rates are certainly in terms of risk free rates, those are a policy choice. The central bank chooses the level to set the front of the curve, and everything else in the risk free space has to be set as some function of that number, right, so it will always be the anchor point. And there there's there's true complaints about that those low levels of interest rates relative to what they were even fifteen twenty years ago, has created a condition in which there is a desperate search for yield because people have a shortage of financial assets that would allow them to meet their retirement or return objectives. UM. That has given rise to a cottage industry that we call yield enhancement strategies and Asia. These are often referred to as what are called autocollables in the United States that could take the form of things like put writing or call writing strategies, overlay strategies UM. Very publicly a firm called Harvest was a very active seller of yield enhancement strategies. UBS was sued about the under performance of these strategies and going to twenty nineteen UM and so I would argue that central banks are primarily responsible for the rise of those yield enhancement strategies, and those in particular are creating a lot of the vol dampening that you're referring to, Joe right and UH listeners, remember a couple of weeks ago we talked to Ben Effort about exactly that factor, the Asian retail buyers going back and UH buying all these sort of selling volatility to generate yield in this environment that you're describing, in which UH there's this wall of money that comes in every paycheck or every month or whatever it is. Is there a reason for anyone two to sort of like you know, security selection, stock selection? What people the old star mutual fund managers or is trying that or trying to find a good uh stock selector just kind of a loser way to play it at this point, Well, it depends on what your objective is. Right. If your objective is to allocate capital, right, that's a very important role. Right. The role of financial markets is actually to set the marginal price of capital so that companies and access that either in the form of debt markets or in the form of equity markets. We focused on the equity markets. I would actually argue the impact of passive on the debt and the rate and credit markets is increasingly pernicious um because the models that are totally flawed. That is actually a very important role. Taking money from bad companies and giving it to good companies is a critical role in a capitalist system, effectively allowing those who are efficient and intelligent allocators of capital to give money to management teams that have good prospects in terms of generating future wealth. What we've created now is a distortion. That's a fun house mirror effect right where we've presumed that everybody else is doing this for us. Therefore it is a fool's game to do it ourselves, right, and the rewards very clearly are accruing to those who are engaged in various ways of leveraging this phenomenon. You asked, you know, how can people beat the market? While we saw in two thousand seventeen a product x I v UM that was basically a hyper leveraged and leveraged, increasingly levered exposure of the SMP become the stock market Darling, Right. And the downside to leverage is what we saw in February fifen, which is in a single event that stock basically went to zero, right, um. And so this is the conundrum, right. You can approach this from the standpoint of I want increasingly levered exposure to this and that will allow me to outperform over a short period of time. And I presume that I have the skill to break away from the market when the greater fuel theory is about to be exhausted. But if you're holding that recourse leverage, you could lose everything in the process. Let's talk about those yield enhancers or the overlay strategies, because I suspect this is probably where things start to wobble a little bit. But how pervasive is the use of this kind of strategy to enhance yields and who is most actively deploying it, So it's very hard to track. Um. There are lots and lots of institutional strategies that are not disclosed to the market that involve various forms of yield enhancement. I know that most forms of private wealth management offer products that they call yield enhancement, which are various forms of you know, selling puts on an investment grade bond index to modestly enhance the yield, effectively saying I will take double downside exposure and exchange for slightly less or slightly higher coupon in in current form um, these are not well tracked. Chris Cole and Ben Effort, among others, have made estimates. Um it is very clearly in the trillions of dollars that is involved in this type of behavior. But again it's a natural byproduct of an environment in which yields have fallen dramatically UH in response to fears about securities, prices and that is the second area, and I didn't talk about this, where the central bank influence is quite significant. You know, you effectively have expanded the demand for financial assets dramatically because central banks target asset price stability in their behavior. Right. So the way that they can do that is by cutting interest rates, which raises the price of a bond. Right, When I cut interest rates, it raises the price of the bond. The benefit is not actually that this stimulates borrowing, an investment in the economy, which is what the FED is presuming. Is the channel that is occurring, right, The idea of being by cutting interest rates, I make more economic that marginal factory that could be built, or that marginal home that could be built. Instead, what you're actually doing is in levered portfolios, you're expanding collateral. You're increasing the borrowing capacity to buy other financial assets. Right, and so again it's a liquidity enhancement that is driving prices higher, driving interest rates lower, and increasing the need for these types of yield enhancement strategies, which in turn are fundamentally providing insurance to the market from individuals who don't know that they're providing insurance. So obviously, uh, we've seen this passive trend. It's exploded as you laid out, starting in the early nineties, there's been a series of regulatory changes that also just sort of encouraged individuals and institutions to invest this way. What are the limits, like, where does it and and in your view of the distortions that are being caused by it, how how far? How far could it go? So I think it's very hard to define that, right, Um, there are limits in terms of of the underlying behavior of what gets contributed. Um. And so if you think about the dynamics of buying behavior, ultimately that faces limits in terms of the nominal quantity of dollars that are available to be incrementally deployed. Right So Americans savings into therefore one case will only change in proportion the quantity that can be invested by every individual, the amount that goes up every year, and the number of Americans that participate in four O one case and are employed with super low levels of unemployment and you know, very low levels of labor force growth and relatively high levels of participation, although things like the Secure Act have tried to expand participation even further. UM, I would argue we're beginning to approach the limits in terms of the quantity that can be contributed. Um. There are similar limitations in terms of corporate share buybacks, which are ultimately bound by the earnings capability of corporations. They've taken an increasing fraction of their earnings in cash flow more than because of the ability to borrow money, which ultimately still has to be serviced and so faces its own limits. UM. But there are limits in terms of how much can be deployed in these types of strategies. Right on the other side of the equation, most endowments, most Americans, through their four oh one case, need to take actually a percentage of their underlying portfolio, and so that is actually bound only by the price level of the financial assets themselves, right, And so there is a point at which the outflows begin to outweigh the inflows, and this should reverse. Where that happens is anyone's guess what does that reversal actually look like. I mean, you mentioned the VIX exchange traded notes earlier, and uh, some of our listeners will remember the v apocalypse of I guess it was early now and the products ended up sort of impacting the volatility market itself. Is that something that you would expect to happen as these clothes start to reverse? Unfortunately? Yes, right, because the way that markets work is the prices are set by transactions. Right. They're a little bit like Schrodinger's cat. They're neither alive nor dead until an actual transaction occurs. The presumption of continuity of those prices that you know Apple will trade at and then to nine is simply an assumption. In the presence of massive flows in either direction, these prices can become discontinuous. We've seen it to the top side of the past four months. Basically, the downside could be created when you have outflows similar to what we saw in December of eighteen, which had the largest equity outflows in the history of the market. So what do you do in the meantime? If if one is an investor, you look at this situation, it seems unto sustainable. The assumptions seem ridiculous. If you don't want to play along with this idea of just writing the market or sort of thinking you'll be smart enough to get out a day before everyone else. Uh, what are other ways to make money in the meantime that are satisfactory too. For if you're fund you have investors that want to see their quarterly returns. What makes sense here? Ultimately, everyone's bound by their own capability, UM and their own interest in doing that. Right. UM, you may not want to participate this, but you need you need to be aware that your neighbor maybe getting rich while you're not. UM. Certainly, my wife would highlight, uh, you know that that underlying dynamic. When I see these types of structures, it can be very different. Right, when you have an exposure like the x I V there were unique opportunities to purchase vehicles that allowed you to profit from that without significant uh, day to day involvement. I don't think that's I don't think that exists in this framework. Right. What we're doing at Logica as we are seeking ways to capitalize from obtaining non recourse leverage in both directions, right, using the tools of finance to purchase products that need to be managed on a continuous basis, but give us exposure to that top side leverage as well as the exposure to the downside leverage in a February eighteen type event. So it's you know, this is a UM, it's a buyer, beware market. Um, if everybody decided to take you know, my concerns to heart, then that would result in the flows turning very negative and the markets would crash. Um. Hopefully nobody's paying attention and they continue to go up. Is it plausible that it deflates quietly, that the rather than there being some sort of you know, Tracy used the word of apocalypse earlier in the end, like the x I V blow up, it was kind of minor and it didn't really have any sort of big spillover ramifications. Is it possible that, rather than and a volatility blow up, that it ends up being more just like you know, a helium balloon ten days after a birthday party that sort of starts sagging down And isn't it doesn't pop? Or do you think it will pop? Well? What I think has no bearing on what actually occurs, right, But you're here, so what I'm here? So I get to pontificate. You know, my belief is that it will pop. When that happens, I don't know. Um. And as a result, you know, you're forced to engage strategies that allow you to both participate and protect yourself. I think those tools that are available. Ironically, Um, people misunderstand many of the tools that they are using, and so those are being provided to me at the lowest cost they have ever been provided in history. So I'm actually quite excited about that and speaking against my own interest here. Now, what do you say, uh, I mean going back to connecting some of the dots here, are you talking when you say tools that are available to you to protect yourself at the lowest price in history? Are these more or less the sort of deep out of the money put that Korean retail investors are selling to generate yield, depressing the cost of a you know, a black tail risk insurance. Is that sort of conceptually what you're saying there? Uh? No, okay, okay. I have a really simple question which sort of goes back to the intro uh, the introductory discussion that Joe and I were having. Should someone looking to retire relatively early invest their money in something like the Banguard Total Stock Fund. So it's funny when you mentioned the fire concept, right because you both are relatively young, um and far better looking than I am. But the um, you know, fire pre global financial crisis actually stood for finance, insurance and real estate and was, it was an indicator. It was indicative of a bubble that was happening within a sector of the economy. Right, I would argue the idea of a fire movement in which people seek to remove their human capital from the labor force at an early age, is indicative of a is a clear indication of a bubble. Right, that's a that's an absurd use of a human being to retire at thirty five to pursue their own objectives. You happen to have struck it phenomenally rich and and or you happen to be born into dilettant wealth, more power to you. It's a fantastic mechanism for redistributing that wealth. Let's take the most valuable thing that any human being has, which is their capacity to contribute to an economy, and turn into a life of leisure at that young age. Like, it's just it's it's stupid idea. Yeah, I whenever I read those message boards, that is seemed to be a huge issue is boredom, and so people retire and then they just like then they're all asking each other what they should do with their lives. I was sometimes I fantasize about retirement. My wife says I would get bored just tweeting all the time, and I think I would enjoy it. But maybe she's right. Having taken a couple of sabbaticles over the course of my career, that can be periods of intense creativity. But you absolutely need to use that in the prospect of, you know, leveraging that human capital and those insights that you've developed a return to an economy. I just think the entire premise is wrong. Well, Mike Green from Logical Capital Advisors, that was an absolutely fantastic conversation. Thank you so much for coming on all thoughts my pleasure. Thanks Mike, that was awesome. Thank you. Joe. Can I just say the notion of you retiring early so that you could tweet even more is very, very worrying to me for for many reasons. Obviously I would miss you on all thoughts, but also it would be so painful. Don't worry, Trazy I have. I have no prospect of doing that any attempt soon. I have two kids under four, so there's no there's no path towards me retiring early to a life just tweeting more. So well, we'll continue the podcast for a while. All right, the world, thanks you. But I have to say I found that conversation so so interesting because, as we alluded to in the intro, it sort of touches on a couple of big thing themes. So one is the bowl market and how high can valuations actually go, And the other one, of course, is the debate between active and passive management. And of course we've had all these other episodes with people like Chris Cole, with people like Ben I for Sultan Posar, who's done some work on volatility overlay strategies, and to see all of that come together in one conversation is really unexpected and very pleasing. Yeah. Absolutely, and I really do think that, and I'm struck by I hadn't well, I would say two things I had not realized prior to this conversation with Mike. The full degree of sort of regulatory changes that we've seen since arguably the start of this bowl market in the early nineteen eighties, essentially designed to just make sure de facto that there is this fresh cash being put to work every single month or every single pay period. And also, you know, I have to admit, like, as a member of the financial media, this idea that uh, passive is better, that you're sort of a fool if you ever try to time the market, that you're a fool if you try to engage in your own security. Uh selection. Like that message, that sort of ideological message. I mean, I largely have bought it, and I'm not saying I agree or disagree with it, but it's certainly one that I think many people in the financial media practice of really internalized, especially like if you remember the sort of irresponsibility of the late nineties and the way like media is just so like hyped up on individual text docs that people got burned on. There's been this major course correction since then. It feels like to not move away from that style of talking about the market. Yeah, but you mentioned the regulation that is shaping some of this and the lobbying, and I find that really interesting. I find Mike's emphasis on incentives very very interesting, And again it goes back to some of the discussions we've had about economic models that don't actually take into account the way the real world works. So you know, if you're buying that e t F, as soon as you put money in, the e t F is deploying that money that's just like what it does, that's what it's created and incentivized to do. And the idea that that wouldn't that behavior wouldn't have an impact on the market like it seems quaint. After that discussion, two things I think we should schedule for future episodes is one we should do really examine the fiduciary role rule, because that is one of these things that, again I think a lot of people in the media had just sort of taken as yeah, that makes sense that UH advisors should have a fiduciary responsibility to investors to look out for their best interest. But really sort of examine UH that story more fully. And we should also have Michael Mobison back on and sort of repress him. It's been a while since we've talked to him on some of these questions about passive versus active, So new territories to explore for us. Excellent. I agree with both those ideas. Alright. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Alloway and I'm Joe wisn't Thal. You can follow me on Twitter at the Stalwart And you should definitely Follow our guest Today on Twitter, Michael Green. He's at prof plum Very high value follow, and be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy at Francesca Today, and check out the whole family of Bloomberg podcasts under the handle at podcasts. Thanks for listening.