Apr 25, 2024

Episode 302 – Michael Green: Market Efficiency Is Not The Question

With a wealth of experience as a market theoretician and a prolific contributor to financial discourse, today’s guest is uniquely positioned to guide us through the complexities of index fund dynamics. Joining us to discuss the problems that passive investing may be causing in financial markets (and what people should do about it) is Michael Green, Chief Strategist and Portfolio Manager for Simplify Asset Management. Tuning in, you’ll learn about the ramifications of the surging popularity of indexing and the sobering reality of mounting market inelasticity, backed by compelling evidence that underscores the challenges facing today’s financial landscape. The insights in this episode extend beyond mere observation, with Mike offering policy recommendations and strategies to address the structural issues affecting our markets. While this conversation is certainly challenging, philosophical, and even alarming, it isn’t purely theoretical. It’s a call to action to safeguard the integrity of our financial systems. So, be sure to join us as we navigate the nuances of indexing and passive investing at large, guided by the expertise and foresight of one of finance’s most respected voices!

https://youtu.be/ON6U6IMn8GI

Key Points From This Episode:

(0:05:48) The negative effect that the growth of indexing is having on financial markets.

(0:07:37) Insight into the XIV trade that strengthened Mike’s belief in this view.

(0:13:49) Defining the problem that indexing is causing (which might seem like a good thing).

(0:15:57) How market cap-weighted index funds differ from closet index funds.

(0:16:57) Indications that markets are becoming increasingly inelastic over time.

(0:19:21) Why flows into cap-weighted index funds differ from the overall aggregate of active.

(0:24:21) Active versus passive investing in public versus non-public markets.

(0:25:57) The catastrophic event that could be caused by index funds (and how to avoid it).

(0:30:51) Why we need to rethink the definition of passive investing and the value of diversity.

(0:36:10) Market inelasticity versus inefficiency and the impact of active manager performance.

(0:41:38) How investors should shift their strategy to respond to the current market structure.

(0:53:01) Regulatory recommendations: who actually needs to step up and do something.

(0:54:30) Mike’s outlook on US expected returns, market volatility, and 401(k)s.

(1:01:50) Why Bitcoin isn’t the solution to all of our monetary and fiscal policy problems.

(1:05:22) The definition of success in Mike’s life (and why it’s completely non-financial).


Participate in our Community Discussion about this Episode:

https://community.rationalreminder.ca/t/episode-302-michael-green-market-efficiency-is-not-the-question-discussion-thread/29382 

Books From Today’s Episode:

The Black Swan — https://www.amazon.com/dp/081297381X

Adaptive Markets — https://www.amazon.com/dp/0691135142

Papers From Today’s Episode:

‘How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3821263

‘How Competitive is the Stock Market?’ Slides — https://drive.google.com/file/d/1QTxuFI7eK_RJwaV3ncAjX41pEb1anLeM/view

‘Do Active Funds Do Better in What They Trade?’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4624934

‘The Passive-Ownership Share Is Double What You Think It Is’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4188052

‘The Arithmetic of Active Management’ — https://www.jstor.org/stable/4479386

‘Sharpening the Arithmetic of Active Management’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849071

‘Long Volatility, Asymmetric Alpha, Negatively Correlated Alpha, Convex Crisis Alpha’ Slides — https://www.macrovoices.com/guest-content/list-guest-publications/3860-logica-capital-active-to-passive-for-macrovoices/file

‘The Greatest Story Ever Sold: The Impact of Passive Investment on Markets’ Slides — https://utahfpa.org/images/downloads/Library_Documents/market_policy_presentation.pdf

‘The Inelastic Markets Hypothesis’ — https://www.nber.org/papers/w28967

Links From Today’s Episode:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582

Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://twitter.com/RationalRemind

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.ca

Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/ 

Benjamin on X — https://twitter.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/

Cameron on X — https://twitter.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

‘Yes, I give a fig… Thoughts on markets from Michael Green’ — https://www.yesigiveafig.com/

Michael Green on Substack — https://substack.com/@michaelwgreen

Michael Green on LinkedIn — https://www.linkedin.com/in/michael-green-9a15142/

Michael Green on X — https://twitter.com/profplum99

About The Author
Cameron Passmore
Cameron Passmore

Cameron Passmore has been a leading advocate for evidence-based, systemic investing for over 20 years in the Ottawa area. Today, Cameron and his team serve a broad range of affluent clients across Canada.

Benjamin Felix
Benjamin Felix

Benjamin is co-host of the Rational Reminder Podcast and the host of a popular YouTube series.

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