Michael Green: The Consequences of Passive Investing (ft. Michael Taylor) - Fordham Investments Club

Okay. Well, so first I appreciate that introduction very much. I will tell you anytime anyone uses superlatives to describe somebody, it means they are destined for a fall. So I appreciate being framed.

It was nice knowing me. Okay. So the topic of my presentation is called the greatest story ever sold with an emphasis on the idea that this is largely a marketing story. The passive impact on markets is incredibly profound. The labeling of passive is incorrect. And as we'll talk about as we go through this, there is no such thing as a passive investor. And so what's unfortunately happened is that we have marketed and sold our way ourselves into a systemic risk that exists for us on a societal framework. Now, it's really quite terrifying and I'm not quite sure what to do with it other than to try to make people aware. Very first thing to understand is the scale of what has transpired in terms of the growth of passive investing. When I started in the industry in the early 1990s, passive as an asset class was about 2% of the market. Today, using estimates that I've derived independently, that academics like Valentine Hadad or Marco Salmon have derived or Bloomberg's analysts, we estimate that passive is about 53% by market capitalization of the US equity markets. Right? So the entire story of my career has actually occurred with passive growing in the background. Most people didn't understand this. The typical way of calculating how much of the market was passive was simply adding up the mutual fund shares from Vanguard, BlackRock, etc. That's very much an iceberg phenomenon. What you see at the top is give or take two sevenths of the totality.

Also included in passive would include things like CITs, which are unregistered mutual funds that represent the majority of 401k and many IRA type investments. Any type of employee sponsored program is typically done through a CIT. Futures themselves, total return swaps, etc. And actually on the institutional side of the business, it's even more penetrated than it is on the retail side. That's where it started. That's where Wells Fargo first introduced it. It has grown more rapidly in the institutional space. In 2022, a professor I'm associated with, Marco Sammon, wrote a paper called Double What You Think, which explored this idea. The reason he stumbled across it is I was the adjudicant on a paper he had written in 2021 in which he scaled the problem by that 15%. I said that's wrong and explained why. He actually developed a methodology for looking at what fraction of shares are trading hands when an index reconstitutes itself. They came to the conclusion that only five funds, five indices represented about 38% of all the market exposure, right? S&P 500, etc. What they excluded from that 38% number included things like the single largest index fund, the Vanguard total market indices which are tied to the CRSP indices, right? And so those are difficult because they own theoretically every public stock and so it doesn't really matter. You can't track the turnover in that same way. If you add that component to it, you get somewhere around 50 plus percent of the market that is now managed in passive frameworks.

John Bogle himself acknowledged that if everybody indexed, the only word you could use is chaos, catastrophe, the markets would fail. This is predicated on kind of the traditional Grossman-Stiglitz thought experiment. What if everybody's passive, right? John came to the conclusion, which he made up by the way, and he would actually have admitted this, that it was around 85%. But what that failed to calculate or capture was the process of moving from a market that was 2% market share passive to a market that's 85% passive share market. In that process around 2015, something really important happened. Active vehicles began to experience net outflows, passive continued, and so we're actually more than 100% of the flows that are coming into the market today on a marginal basis. In other words, the marginal price setter is now exclusively passive.

JP Morgan echoed this a long time ago and I've got some more research that'll show this, but fundamental trading, the stuff that theoretically is the Grossman-Stiglitz thought process on fundamental information flows now represents less than 10% of trading activity. And in fact, if we go back to 1995, about 80% of the trading was active management with a very small fraction tied to noise traders and an immaterial fraction tied to passive investing. Today, the single largest category is actually the process of facilitating the investment in passive investing, things like market making in ETFs or mutual funds, right? But equally important has been this shift in the speculative trading. The advent of no cost, no commission trading, the emergence of options with no commissions, etc. has actually expanded the world of speculative trading and retail participation. Today, what we classically think of as uninformed noise traders are roughly twice the size of the entire active management space by themselves. That's before we consider the impact of investors like passive funds that simply have a very simple algorithm. Did you give me cash? If so, then buy. Did you ask for cash? If so, then sell.

Right? When passive strategies become too large, right, they're not actually passive. They are systematic algorithms. Again, when you give me cash, I buy, right? When I stumbled across this in 2016, I began exploring opportunities to identify markets in which passive had penetrated to the point or systematic strategies had penetrated to the point that they were exploitable. And I stumbled across the inverse VIX ETF, XIV. This was a very very popular trade from 2016 until 2018 when it rose roughly 600%. As you can see, there were articles being written in the Wall Street Journal about former Target store managers who were launching funds because it was just so easy to make money trading this thing, etc. I stumbled across this and in May of 2017, presented at the EQD derivatives conference in Las Vegas, which is the largest equity derivatives conference, and presented the idea that this product could go to zero on a single day.

The founder of the product happened to be in the audience and we had one of those Big Short moments in which a discussion, I think is the appropriate term, ensued. I asked him if he thought it would survive in 1987. He told me I didn't understand the product. It's fine. It's probably true. Asked him if he thought it would survive a 1987 style event. He thought it would. I thought it would go to zero on a 4% decline, single day decline in the S&P 500. It went to zero on February 5th, 2018 on a 3.9% decline in the S&P 500. The takeaway from that is I'm very conservative. My employer at the time, I was managing Peter Thiel's personal capital, we had basically a quarter billion dollar bet that ended up working out quite well. I will also give you, since you're mostly students, advice. If you're going to trade on Wall Street and you're going to, I think the technical term is, own an entire complex, make sure that your counterparties don't hold the risk. Right? And so like part of my communication process to this was to explain to the people who were on the other side of my trade in terms of market making activities, get out of this risk. I know you want to hold it. I know you think I'm insane. Get out of this. On February 5th, I got a lot of phone calls saying, "Thank you." And that's actually how it became publicly available.

Um, so the critical insight on the trade was that there is actually, so most options are priced off of a lognormal distribution. That's how they were pricing the options on XIV. It was really on a competing product called SVXY. Anytime you have an inverse product, it actually behaves very very differently. As the price of the underlying gets higher and higher and higher, right? Or I'm sorry, as the price of the inverse gets higher and higher, the actual underlying is getting lower and lower. So a smaller and smaller volatility shock was required to take it to zero. Effectively a doubling on any inverse product if its underlying is going to cause it to go to zero. The VIX got down into the single digit range in 2017. That persisted by and large until 2018. That created conditions under which a relatively small shock would occur. We simply applied the probability of that shock occurring to the pricing of options. We discovered that there was a fantastic mismatch. Right? So bimodal distribution is very difficult to price in options. Is that...

Oh, all right. So I put...

So the nice part...

Well, this was actually, so this was the critical insight, right? When an options market exists. You guys have all seen the movie The Big Short, right? What did Michael Burry do? Figure out an option that he could actually execute the trade on. You don't want to take the inverse of it. There were a lot of people who shorted the XIV. They also went out of business. The opportunity set that emerged is there were LEAPS trading on the SVXY equivalent. That meant that I could put a limited amount of capital out, know my loss, have it defined, and be able to sit. I actually bought two-year options. That was where I did the calculation. There was roughly a 95% probability over the course of two years. It happened in seven months. And so I actually dramatically underperformed versus what I could have done. As I said, I'm conservative.

Okay, so here's the most important thing in this presentation and it's not even my insights. It's actually Lasse Pedersen at AQR. What is passive investing? This is literally taken from Bill Sharpe's The Arithmetic of Active Management. A passive investor is one who always holds every security from the market. And an active investor is one who is not passive. So the critical question is how do the passive investors get into the market and how do they get out? Now, Sharpe in footnote number four to that paper said, "Well, of course we know this isn't actually true. We're just going to assume that they trade in the final hours in which the markets are not open, right?" That doesn't work, right? So, really it boils down to magic. What is actually happening is every single day flows are, or money is flowing into passive vehicles and as a result they are always trading, they are always buying and they are always selling. They're not passive. They're systematic algorithms. And systematic algorithmic strategies can get crowded. And that is unfortunately exactly what's happened in the market.

Okay. So, if we accept that passive investing can impact the market, how should it impact the market? These are, this is actually a slide that I first produced in 2017 as I was explaining this to Peter Thiel. The first six points on here have not changed since 2016. The last component, portfolio effects dominating cash flow and discounting effects, has been added since. I'll explain exactly why that was. But you should expect to see an increase in correlation between securities with some interesting limitations. I don't have the perfect slide for it, but I'll explain what's going on. An increase in valuation of securities regardless of fundamentals as the passive share grows. In part, this is because there is a demand for more stock. They hold less cash, but more importantly, there's momentum feedback, right? As something goes up, traditionally, an active manager would actually sell that because unless there's been an increase in the fundamentals, that lowers the future expected return in a discounted cash flow type analysis, right? Passive investing doesn't work that way. It assumes that the price is correct. So, when something goes up, the next flow in buys more of it. All right? And this is a really critical change. Reduced market elasticity raises the risk of extraordinary price movements. Elasticity is here defined in a somewhat of a perversion of the economics term. Right? Changes in price relative to supply and demand. We have actually assumed historically that markets were highly elastic. In other words, large flows would be required to cause a meaningful change in price. We've discovered in the last few years that that's not true. And part of that change has been the growth of passive strategies. Ultimately, passive strategies are very much like insider holdings. They aren't going to transact on fundamentals, right? Insiders don't do it because they don't want to go to jail. Michael Saylor has a slightly different view of that interpretation. But the vast majority of insiders are not going to trade. And this actually has some really perverse effects. We'll talk through these things. An increase in market concentration as that momentum bias leads to the largest companies becoming larger. This is actually where most of my very recent research is on. It's what I call the price weight spiral. It actually turns out that passive investing crosses a threshold and starts to create its own momentum. It's really quite extraordinary.

Or you can listen to races. Shame, shame, Mike. All right. Reduced ability for new companies to come public. This is actually a surprising component. I'll talk through it in some detail, but the really critical insight is that to get a company public, you actually have to find somebody who's willing to deviate from their benchmark. That requires active managers. If active managers are facing redemptions, that means there really is no possibility of getting people to take exceptional risks, right? And so it becomes increasingly hard for companies to come public. Unfortunately, this is very much playing out. And then the last one is portfolio effects dominate cash flow and discounting effects. It's a little confusing, but in the simplest terms, nobody does a DCF anymore. If I'm running a portfolio that has to be automatically rebalanced to 60/40 bonds and equities, what I actually care about is did bond prices go up or did equity prices go up? And I'll change my weights between those two. Now, that looks like discounting, right? Bond prices go up or, I'm sorry, interest rates go up, bond prices go down, and I have to sell equities and buy bonds, right? Looks like I did a DCF, but I'm just rebalancing my portfolio.

Okay. Period of record correlations. This is a chart you're not going to see anywhere else, largely because I made it up. But this is actually looking at the S&P all the way back to 1927. And it's tracking not exactly correlation. Correlation is a really devilishly tricky concept, right? It requires a, to do the S&P requires a 500 by 500 covariance matrix with instantaneous weights, etc. You're not going to find that data going back over a long period of time. Or you can cheat and take advantage of a mathematical property called Kendall's tau or binomial correlation, which is the same phenomenon that you get when you watch the Rockettes at Rockefeller Center at Christmas, right? They're not all exactly the same size. They don't all have the exact same length legs, but if they move their legs together, it looks extraordinarily correlated. Binomial correlation dispenses with all the weighting information, etc., and simply says, did two stocks move in the same direction on the same day? And what we're finding is that more and more stocks are moving in the same direction on any given day. There's a couple of really critical dates that I've put in here. The first is the Investment Company Act of 1940. I need to shift the arrows because they're slightly off center here, but this arrow actually should be right about there. That actually had a really critical role on Wall Street. That's the introduction of the modern mutual fund. But importantly, in the aftermath of the Great Depression, it did something really, really important. It stripped firms of the ability to use undisclosed leverage. Right? Has anyone here traded crypto? Okay. What happens in a liquidity event? Everybody has to sell. It's a waterfall liquidation event, right? That is what used to happen to equities in the 1930s. We got rid of that with the 40 Act. Mutual funds by and large were unlevered until 1994, again slightly off center. You can see I've updated the data but not the labels. In 1994, Vanguard began to experience a challenge for index funds. They began to experience tracking error because they'd grown to be about one and a half percent of the market. Their trading activity was actually causing the stocks that they were trying to buy on an individual basis to move in price. That meant that their performance didn't match the benchmark exactly. Tracking error is a very bad thing for index funds. They went to Wall Street and they said, "Hey, what could we do about this? We're these hicks from Malvern, PA, you guys are all sophisticated." And the street kind of looked at them like, "Wait, why are you guys actually buying every single stock? Why don't you just buy futures?" They said, "Oh, there's this thing called the 40 Act, right? And the 40 Act prevents us from using futures which require margin accounts." The advice from the street was, "Well, that's silly. You guys are not trying to speculate. You're not trying to like do, you know, bad stuff. It's not like the 1920s all over again. You should just go to the SEC, lobby the SEC, and get what's called a no action letter that allows you to use futures and then we'd be happy to help trade this." They did that. The SEC in 1994 passed a series of rules that facilitated the inclusion of derivatives on Wall Street, more broadly, the accounting for them, and specifically gave a no action letter to index funds that allowed them to use futures. Crazily enough, this is what caused the dot-com cycle. Right? Now, it sounds totally insane until you recognize that the indices at the time were market cap weighted. Most people think they're still market cap weighted. They're not. They're float adjusted weights. Right? In the 1990s, there was a unique confluence of relatively high market cap, low float companies heavily owned by insiders, firms like Microsoft and Cisco and Dell. Right? So, when the street actually went to try to replicate it through the futures, they were trying to buy twice as many shares as actually were available to trade. If you try to buy twice as much of something as actually exists to trade, what's going to happen to its relative price? It's going to go up, right? We didn't used to have factor funds. We didn't have insider ownership funds, etc. But we constructed wonderful academic narratives. Any of the academics in the room can tell you about all the brilliant papers that were written in the mid-1990s about the importance of insider ownership because management was aligned with you, etc. It was all bunk, right? Nobody cares about insider ownership anymore. Nobody cares about insider selling. Nobody cares about the information content of it, etc. Because it didn't actually matter. What was really driving the outperformance was the fact that those stocks got more buying from the futures index replication. As we progressed through that, people naturally start to figure this out, right? They construct stories. We're going to buy these things, etc. Or you can simply do a Venn diagram of the overlap between relatively high market cap companies with relatively high levels of insider ownership. What do we call those? IPOs. Right. So the late 1990s was the exact same phenomenon we saw in 2006 in The Big Short. The street began manufacturing what we needed: new technology IPOs. Right. Now, when that crashed in 2000, they quietly changed the index construction in 2003 from market cap weighted to float weighted. This was among the most disingenuous and candidly dishonest presentations I've ever seen because what they did was they said, "Oh, it didn't really have much impact." They simply showed the index as if it had been reweighted. Therefore, slightly lowering it would have underperformed slightly in the 1990s. It would have outperformed in the period since. But what that ignored was actually the factor itself, right? The impact of that excess buying component, right? That went away in 2003. It bought us capacity to increase the size of passive without having distortion at the same levels. And then on February 5th, 2018, which is the day that the XIV went to zero, something happened that had never happened before in the history of the S&P, including the crash of '87, every single stock moved in the exact same direction. It then happened three times in the fourth quarter of 2018. It then happened five times in March of 2020. It's happened a couple times since, but by and large, we've been relatively restrained. There's not been as much activity. I haven't fully diagnosed exactly why that's happening, although I have some insights on it. But the key point is that we're seeing this sort of crazy behavior. Now, one of my favorite experiences in having shared this was actually sitting on a panel. So, the last time I sat on a panel with the chief strategist for Blackstone, BlackRock, I'm sorry, I don't want to cast aspersions on the wrong firm. And he highlighted, well, you know, you've obviously got to be wrong here because the correlation was roughly the same in the 1930s. There was no passive investing. Does anyone else know what was happening in 1931-32 that would cause the correlation to be really high?

So, like to compare these two when markets that are at all-time highs just feels completely disingenuous to me. Okay, before you start talking about how markets change, you actually have to weirdly figure out how they used to work. And one of the things I was most surprised by as I began doing this work was that there wasn't actually a holistic theory of how managers reacted to valuations. And so I decided to do some fundamental research. Probably the last good work I ever did. In which I went out and I surveyed managers and I asked them a question. Surveyed roughly 450 individuals. I asked them a question. You're a portfolio manager. You have 5% cash in your portfolio. So cash is not a meaningful constraint in either direction. Right? You receive an inflow or an outflow. How do you react to that inflow or outflow given valuations? And totally unsurprisingly, the propensity to sell rises with valuation. Your propensity to buy falls with valuation. Totally unsurprising. Your marginal propensity to buy falls as valuations get higher. Your marginal propensity to sell falls as valuations get cheaper. What was really surprising is this. The intersection at almost exactly 50/50. Remember this is just a survey of 450 random people, right? At almost 50/50 at exactly the market's historical valuation average. Notice I didn't ask anything about interest rates. I didn't ask anything about where we were in the economic cycle, right? This is just a baseline reaction. And if you feed these responses from these managers into an agentic model, so I built a 10,000 agent model that was fed with the various responses scaled up slightly by about 20 for each factor and then I randomly gave them cash and I took cash away to see what the impact was. And the result is a mean reverting market. In other words, this is why the Shiller PE worked because the participants themselves discounted, right? Valuations went higher, they were more willing to sell. Valuations went lower, they were less willing to sell, more willing to buy. Right? So this is why the Shiller PE worked. Now the problem is if you introduce a systematic algorithm whose algorithm is did you give me cash if so then buy? Did you ask for cash? If so, then sell. Who can tell me what their marginal propensity to transact on flows is? Come on. It's not a math class. 100%. Right? And so as you shift the composition of the market towards passive investors, what you're actually doing is shifting this off of the mean reversion to a mean expansionary framework. And if you run that same simulation with growing share of passive investors, here's your mean reversion that you had before. This is your new pattern that emerges. Mean expansionary valuations. Unfortunately, this almost perfectly matches what we're experiencing. All right, so here's the theory on the left. Here's the reality on the right. It most affects the cap weighted components because the largest stocks actually receive an additional impulse. But a lot of the narratives in the market are well, it's just a really narrow market and there's these AI companies that are super rich and everything else is relatively cheap. Yes, it is. It is indeed relatively cheap, right? That's a very big gap. But notice something. It's risen in valuation. The median stock is up about two and a half x versus a starting point. So we actually, I actually think the most overvalued segments of the market are some of the lower quality components where companies have borrowed significantly against an inflated equity value. I think many of these are actually zeros. That's not the only way that it impacts it. It actually turns out that the construction of the portfolio plays a very material role. Your typical active manager historically would carry between five and 10% cash. You would do that in part because the cash creates optionality in your portfolio. Cash represents a tool. I think of optionality all the time. But cash represents an option to buy without having to sell. It represents an option to meet a redemption without having to sell. And those redemptions tend to come at the most inopportune times. And so it's actually super, super valuable to carry cash in your portfolio. When you switch to investors like passive vehicles that don't really carry any cash, it has a very surprising effect. So let's just run through a theoretical model here. I apologize for the small print. I'll talk through all the words. Let's imagine there's only $1,000 total assets that are available to be invested and they're all given to active managers in the market. Then by definition, they're going to own 950 of equities and 50 of cash. If I as a participant in the system decide I want to take $10 and move it from active to passive because we're talking about the total market there can't be any actual transactions. They have to pay me out of cash. This leaves the active investors with 950 of equity and 40 of cash. They are underweight cash. I have that $10 of cash was 100% of my assets. I then give it to a passive fund that has $10 of cash and no equities. And now we actually enter into transactions. The active managers want to sell to raise cash. The passive managers want to buy to get equity exposure, right? So active sells $950. Passive buys $9.99 to get to their target 10 basis points of cash. And it's all good, right? Does anybody know what the problem with that is? That's not a transaction. Buyers and sellers have to meet. I can't sell 950 of equities and have somebody else buy $9.99. So, we actually enter into an iterative process to establish the clearing price. And unfortunately, that clearing price is that 1% move from active to passive lowers the percent of the market that is in cash and raises valuations by more than 1%. That's just a 1% move. Now, consider the compounding effect of this. This is the cash in the market and the valuations turn exponential, right? We are roughly right here. Again, I got to update this. That doesn't seem like much, but again, that's about two to two and a half times richer valuations in order to accommodate this reduced desire to hold cash.

In the past couple years, so I started presenting this in 2017. In the past couple of years, there's been an explosion of financial academic research that unfortunately validates almost everything that I've said. Those parts that don't validate it, we won't talk about. In 2021, Xavier Gabaix and Ralph Koijen wrote an incredibly important paper called In Search of the Origins of Financial Fluctuations: The Inelastic Market Hypothesis. Under the EMH, it's presumed that markets are highly elastic, that they can effectively accommodate trading of almost any size with very immaterial impacts. Basically, the bid-ask spread because every buyer has a seller, right? The actual specification of the EMH is a dollar into the market creates about one penny of incremental market capitalization. Gabaix and Koijen's research suggested that number was closer to $8. Right? My work actually suggests that if you bifurcate active managers and passive managers, it's about $2 of market value that is created when the money flows to an active manager because among other things, they have the option of holding cash. They don't have to transact. That money flowing into passive actually changes the multiplier based on how large the share of passive is. Again, it's more and more like trading heavily owned insider stocks. And it actually turns out that right now that estimate appears to be about $20 of market capitalization is created for every dollar that is contributed to a passive fund. And this of course was Gabaix's equation: the price elasticity of the aggregate stock market is small and flows in and out of the stock market have large impacts on prices. So, I like to point out to people that like we complain about the government sector all the time, but the entire investment community has misspecified the EMH by anywhere from 800 to 1 to 2,000 to 1. We're not very good at this either. Okay. How does a market transitioning from active to passive behave? Well, the world's largest active fund is the Fidelity Contra Fund. It's about $150 billion in assets, carries about $4.5 billion in cash, pretty much in line with what I would have expected. That cash balance has lowered as funds find themselves competing more and more with passive firms that are fully invested. But look at the world's largest passive fund. This is actually just one share class of it. So the total size of the Vanguard Total Stock Market Index is about $1.8 trillion. As of April, they were carrying negative $900 million in cash. How is that possible? Well, in the sell-offs in April, they couldn't find a buyer for the other side. So, they tapped lines of credit. You guys are not active market participants, so you don't see this stuff, but Vanguard was literally sending out emails to its investors in early April saying, "Don't sell. Good time to buy." Right? And I was just telling this to Paul Johnson. The single scariest comment that I heard coming out of COVID was not you have COVID. It was a self-congratulatory letter that Vanguard released in April of 2020 saying less than 1% of our clients tried to sell. And my reaction to that is holy... Imagine if it'd been two. Volatility on fundamental events like earnings announcements is rising as passive holders do not react to these events. There's nobody from Vanguard on the Apple earnings call. And so effectively, we're right back into that late 1990s phase in which more and more trading amongst active managers is happening in a reduced liquidity environment. They're basically forced to trade amongst themselves, right? So an analyst at Millennium thinks Apple's going to beat and an analyst at Baillie thinks that Millennium is going to miss. The analyst at Baillie is correct, but he gets fired because the market goes up. I'm joking on that part, but the simple reality is that they're trading on a reduced liquidity set. This is looking at the average earnings day move relative to average volatility. Now, this is one of these really perverse components, right? So, clearly this is rising on a trend basis. I love this chart from Goldman Sachs because it has an average here. This is as of late 2024. This is the same chart, literally the same construction of the chart as I showed you on the correlation before. Right. And what's actually happening here is this reduced liquidity component to it. But if you think about this from an academic standpoint, isn't more movement on fundamental information release a more efficient market? Right? So unfortunately our definitions are actually telling us this is increased efficiency. Even as any rational market participant could say wait this is insane, right? I mean, Facebook was down 20%. Right? Like that didn't used to happen with the large cap stocks in part because the information on any one earnings release really never changes by anywhere near enough to affect that type of volatility. But in an academic world, it's great. This is actually an incredibly, incredibly important chart. This is from Valentin Haddad, another academic who has a paper. I think Gabaix and Koijen will ultimately win the Nobel Prize for their paper. Haddad's paper is really fantastic though. He identifies that the large increase in passive investing in the last 20 years has led to substantially more inelastic aggregate demand curves for individual stocks. This is where all my recent risk stuff is on as well. When demand is more inelastic, small changes in market structure can have a large effect on prices because investors are unwilling to change their position. Right? Now this chart is showing you market capitalization against elasticity. Right? And remember elasticity measures how much does price have to change to accommodate changes in supply and demand. The smallest companies are going to be more elastic than the largest companies. We actually know this to be true in a fundamental or theoretical framework. That's actually what this red line is. This is a fixed elasticity per stock. And what we actually know is that liquidity does not scale with market capitalization. Apple is $4 trillion in market cap. Delta Airlines is roughly $30 billion in market cap, give or take a hundredfold difference between the two. Apple only trades about 10 times more than Delta Airlines, right? And there's a variety of reasons why that is. The biggest one is that market makers are ultimately capital constrained. They have to choose where they're going to deploy capital, right? And part of that calculus is that the profitability of market making operations is a function of how wide is the bid-ask spread. It tends to be very low on the largest stocks and the trading volume. And so they're going to allocate more capital to making markets in smaller stocks than they are to larger stocks on a market cap proportional basis. That's what that framework is. The actual empirical data is a much steeper curve. And my hypothesis for this is twofold, but the most important one is that this is largely reflecting two factors. One is lack of substitutability. If I'm running an index fund, do I have any choice about whether or not to buy Apple or Nvidia? No. Do I need to buy Delta Airlines? No. You know what? It's 0.02% of the index. It's not going to have any meaningful impact on my performance whatsoever. So, I can buy that at my leisure. And by the way, I can also substitute United Airlines for it if I'm statistically sampling, right? So I have no real factor exposure to it at all. So there's a lack of substitutability here. The other component though that is ultimately really, really important here is the largest stocks are being bought because of that outflow that's coming from active managers. So active managers tend to skew towards smaller stocks. It's not true that active management in total owns the same as passive in part because there is no passive. But when you have redemptions coming from the active managers, they tend to be actually providing liquidity to the exit on the smallest stocks. And so I think this is a temporal shift. I don't think it's a permanent shift, but it's really critical in terms of understanding what's ultimately happening right now. So perversely, the largest stocks are the ones that are most affected and therefore it has a giant impact on the market. Chen at Michigan State has a paper called The Rise of the Mega Cap Firm that actually identifies this. I believe he improperly specifies it as tied to idiosyncratic volatility, but it ultimately says the same thing, right? That in turn is driving concentration. The passive model allocates more money to the largest stocks because there's this liquidity mismatch. They see the largest increases in price which makes them even larger in the index, etc. That is somewhat known at this point. What isn't known is that the SEC is still helping. So in September of 2019, many types of passive indices, in particular, things like the S&P 500 Growth, actually crossed a concentration threshold in which they became classified as non-diversified funds, right? A non-diversified fund can't be marketed in the same way as a diversified fund, which was terribly unfair to Vanguard. And so they again lobbied the SEC and the SEC said, "Oh yeah, that's cool." Right? This is one of the really sad parts of this is that regulators are on board for almost every part of this. I would argue largely because they don't understand. But they are facilitating everything we see. Okay. Bonds wouldn't be enough as this was stocks. It actually turns out that the bond story is equally bad if not worse in some ways. Who was buying all the negative yielding bonds? The argument that we heard on the street was that this was asset liability matching. It was largely European insurers who needed long duration assets that were buying things like the Austrian Century Bond. That's absolute bunk. Again, it turns out that the largest holders were firms like Vanguard, BlackRock, and Capital Group, the largest providers of target date funds because by and large they construct bond indices that are built on the basis of the market value of the bonds. Now, the great irony is even Vanguard will acknowledge that market cap weighting for bond indices is stupid. Equities we can at least argue, right? We can say, hey, it's at a higher price because people have higher expectations for it and therefore we...

should allocate more money to it because this is the market's collective wisdom. A bond that's trading at 150 to par, I know exactly where that's going. If it's a high quality bond, it's going back to par, right? So bonds don't have the same open-ended characteristics to them as equities. Their distribution of returns looks much more like an American football, right? Slightly in flight, right? We're going to get a positive return associated with it, but if it's very high price relative to its par, it's going to fall in value as it comes to maturity. The reverse is true at the lower end.

When you market cap-weight bond indices and the Federal Reserve cuts interest rates — this will probably be the only time I mention the Fed, the second-to-only time in this presentation I mention the Fed because there's nothing really nefarious that's going on. But when the Fed cuts interest rates, what happens to the price of long duration low coupon bonds? They rise. They become a higher weight in the index, right? Just mechanically, imagine there's only two bonds in an index, a two-year bond and a 30-year bond, right? They're equal weight at the start. The Fed hikes interest rate. What happens to the two-year bond price? It goes down a little, but not very much. What happens to the 30-year bond? Goes down a lot. I've now changed the weightings in the indices. So the next dollar in buys less duration, right?

This is actually what's been happening in the US equity markets where it appears — or US bond markets, I'm sorry — where it appears we've lost control of the long end. Right? This is the narrative: inflation is running wild. The simple reality is it's largely a byproduct of passive investing which has now become the dominant flow in the bond markets as well. It has actually just crossed the threshold that equity markets crossed in 2016 where net flows into passively managed funds are now positive. There's some debate as to whether or not the active manager community is seeing negative outflows yet, but it is clearly passed as the marginal player.

You can actually see this by the way. This is the shape of the US bond curve right now in terms of its exposure within the total bond market index, the Vanguard preferred vehicle. Because the Fed cut interest rates, the short end is priced at a premium relative to the long end. As a result, the next dollar that comes in buys a lot of short end, not so much tens, not so much 30s.

You'll also notice a distinct difference here. New issues, they can participate in auctions. Those are issued at par. They come through at a normal weight. But a bond that's priced to 65 cents, like the 30-year zero coupon, is trading somewhere around 68 cents, right? It receives less inflows. This has actually given rise to yet another hedge fund trade that is the same as the index arbitrage that we see in the S&P 500. It's what you may have read in the newspaper referred to as the basis trade, right?

The basis trade literally looks exactly like — in terms of its representation, literally looks exactly like the Fed funds chart. That raises interest rates, drives duration off, makes off-the-run very attractive relative to the new issue. There's an arbitrage that can be executed in the bond market because these are ultimately cash instruments. As long as you can obtain financing, you can actually pull this trade off. So this is actually unfortunately increasingly driving our bond market as well. The Treasury Secretary is aware of this. I believe this is why they've started aggressively repurchasing many of these off-the-run issues.

Okay. We did the — okay. Reduced ability for new companies to become public. When I first started sharing this chart, SPACs were in full bloom. And so this chart actually — I'm sorry, when I first started talking about this, SPACs hadn't yet emerged. And you saw this pattern of reduced IPOs despite the fact that markets were hitting all-time highs. And then all of a sudden in 2020, these things called SPACs showed up. Right now, SPACs have actually been in the market since the 1970s. They're actually a little bit of a game that hedge funds play.

Among other things, they're a really attractive asset. If I want to hold cash in my portfolio but not reveal to my investors I'm holding cash, I can put some money in a SPAC, a pre-acquisition. I get some volatility components to it, but I ultimately have a cash instrument. All right, so it shouldn't experience that much price volatility. I get some optionality around it. Sounds good. Kind of a cool thing to play with. I'll pretend to let the guys make the operating acquisition. And then they went absolutely bananas around COVID.

All right. And the reason why actually turns out that it was in the fine print of the total market index. It's run by Van — this is what Vanguard uses. This is from August 2020. And I apologize, there's nothing I can do about this. SPACs are not eligible for index inclusion. Well, what the hell are you talking about, Mike? Turns out that SPACs are not eligible for index inclusion until they make an operating acquisition and then they are evaluated based on the size of the acquisition.

If the acquisition was of sufficient size to clear the 85th percentile threshold for the Vanguard total market index, the CRSP total market index, then it became eligible for what's called fast-track IPO status in which the index providers had to buy their allotment in as few as five days. Does anyone know what the rules of SPACs are in terms of when insiders who are the sole source of liquidity in SPACs can sell?

It's typical IPO, which is one of the reasons they struggle. But with SPACs, it's typically 20 days above a threshold level. If the world's largest asset managers have to buy 5% of your company in five days and there is no liquidity, what's going to happen to the price? It's going to go bananas, right? And so I actually fortunately saw this in advance. Got a lot of my friends in private equity and venture capital to dump SPACs to you guys. I appreciate you buying it for us. But this is why you have things like Nikola, right? Remember the truck being rolled down the hill? The largest buyer was Vanguard.

Right behind them was Norges Bank, which is actually the Norwegian pension plan that basically is another index fund. BlackRock brought up the rear. All the rest of these are insiders. I like to use movie references. You guys have seen Animal House? Okay. Needham dead. Private equity dead. Why? Because in September of 2023, they changed the rules and they actually moved SPACs from the ability to be included in the index on fast-track IPO status. This cut off the pipeline. From this point, private equity payouts have collapsed.

Despite the fact, by the way, that private equity tells you that their assets are up about 40% over that time period. Another movie reference: Cool Hand Luke, what we have here is a failure to communicate. I like to do this chart every single year so I can just keep updating it. Every year the forecast is for tons of IPOs. Every year it goes flat.

Okay, this is where it gets really, really fun because I get to be a loser here. One of the core assumptions in finance is modern portfolio theory, which holds that asset returns can be modeled as somewhat normally distributed around an expected return, right? Expected return to stocks is eight and a half — well, maybe it's nine, probably 11 actually — over time with cyclical variations around that, right? Here's the problem. What I just showed you is that we now have a mean expansionary framework that's tied to time, the passive share, right?

We have a leaky bucket for active managers where their clients are largely old. They're not getting hired anymore because they're no longer eligible for participation in 401ks. In 2006, we introduced the Pension Protection Act, which changed 401ks from an opt-in framework — you had to choose to participate and select what investments you were going to — to an opt-out framework. I don't know how many of you have had jobs or had a 401k recently, but typically now you get a 401k package, you are automatically defaulted into it with the additional benefit of employer matching and you are default selected into a target date fund which is a passive construction.

Right? That actually drives inflation which has a really perverse impact on what alpha actually means because it turns out that really what we're trying to do is apply a linear equation to what has become a convex surface. Right? If passive is providing an inflationary component — this is not coming through clearly but there's, you can see that faint curve, right? Alpha is simply the intercept on a y equals mx plus b equation. The return of my portfolio is equal to its beta times the market plus some idiosyncratic factor we're going to call skill.

If I use a linear equation to solve a curved surface, my results change over time. At time zero, I get the historic, very little deviation from it. At time one, my alphas start to fall. By the time we get to time two and we start seeing the real inflation of passive, my alphas are structurally negative. This is the actual data. The model is on the left, the actual data is on the right.

In other words, we're firing active managers because we're hiring passive managers because the government told us so. Right? In the process, we're destroying price discovery. We're destroying our ability to allocate capital. That's what markets are. Markets are meant to price the marginal cost of capital to facilitate the allocation of capital, not to meet the retirement objectives of the US public.

The retirement investment options themselves are increasingly on autopilot. At this point roughly 80% of all 401ks have a single asset in it, a target date fund. It doesn't leave a lot of room for active managers to compete for those assets or to obtain the assets that would be required to arbitrage away the deviations that are occurring versus fundamental management. Also means your employment prospects suck. But sorry, that was unfair.

Okay, so like this all sounds wonderful. Stocks constantly go up, right? Remember that last point I introduced, the portfolio rebalance channel. This is where it gets really kind of crazy because if you think about a portfolio that is built like a target date fund where I have a systematic balance of let's say 60/40 or let's make my life simple, 50/50 bonds and equities. Federal Reserve hikes interest rates. What happens to my bond portfolio? It falls in price. I'm now overweight equities, underweight bonds.

What do I have to do? Sell equities, buy bonds. Did I do a discounted cash flow analysis? Did I do any fundamental research? Did I calculate the weighted average cost of capital to the third decimal point using a levered beta versus an unlevered beta? You guys all know this stuff, right? No, I did none of that. It's just an algorithm, right? And so what actually happened was when the Fed started hiking interest rates, that passive flow stopped, right?

Equity funds basically went sideways during the period of interest rate increases because they were constantly selling their equity position to buy more bonds as bond prices fell. Right? And this has unfortunately now been documented as well. In April of 2023, Zhu, who's now a professor — she was a PhD candidate at Stanford at the time, she's now a professor at Washington — wrote a paper called 'Monetary Transmission and Portfolio Rebalancing: A Cross-Sectional Approach.'

We proposed that institutional investors' portfolio rebalancing across asset classes contributes to the stock market's puzzlingly large response to monetary shocks. That unfortunately is exactly what we saw in 2022. Bond prices rose, bonds were sold, equity prices got sold to rebalance portfolios. Bond yields were raised, bond prices fell. We had to sell more equities, etc., etc., until the Fed was done.

And when the Fed was done — again, you guys aren't mostly active market participants, a few of you are — the narrative is like, 'Oh, thank God. Now we've got real interest rates. Now we can discount. Now there is an alternative to equities.' And by the way, Cliff Asness was super excited because value was finally going to outperform, right? We've gotten to the point where the most richly valued companies, the speculative nonsense, those values represent cash flows off into the future with real interest rates. We're going to see that fall in value relative to value companies which have their discounted cash flow valuation largely close.

Anyone know how that call turned out? Not very well, right? Value has dramatically underperformed. Small cap value even worse. Okay. So, what can we do about this? First of all, there is no passive investing. We've been sold a lie. And I emphasize 'sold.' I often give this presentation like the CFA, etc. But I emphasize that from a fiduciary standpoint, there's a duty to understand and be informed.

Realize that all of our back tests of historical data now are horribly skewed by the influence of the growth of passive. It'll eventually be unwound. Unfortunately, it looks very much like the XIV when I run simulations on it. The difference is that was a $2.5 billion fund. This is now a $72 trillion asset that represents the entirety of your parents' savings.

Education, that's why I'm here. The CFA, clients, policy makers. I will tell you when I started giving this presentation, I did not give it publicly. I gave it to regulators. And the single most frightening response that I got back was from the Bank for International Settlements. The Fed wrote a nice paper. It's basically a he said, she said because who's the next group that you're going to call when Mike Green comes into your office to tell you that passive is the worst thing ever?

Your next call will be to Vanguard, right? And like, 'that guy's crazy,' which they could be right about. But and so they wrote a he said, she said. The Bank for International Settlements was even more discombobulating. They said, 'But we actually agree with your numbers.' They've written a paper on this since. And I said, 'Oh my god, that's fantastic. All right, what can we do about it?' They said, 'There's nothing we can do about it.' Like, 'What? What do you mean?'

I said, 'Well, what you don't understand is that Vanguard and BlackRock control the regulatory apparatus at this point. And so we could raise the alarm, but unless this happens tomorrow, we're just going to lose our jobs. So, we're not doing anything.' And that unfortunately is where we are, right? More and more people are aware of this. We all know something's wrong, right? It's just a question of can we articulate what it is and are we going to make any changes?

And unfortunately, like where I'm really sad at this point is I don't think we will. It just feels too good. We're driving a car uphill with no brakes, right? Doesn't matter. No, we can just take our foot off the accelerator, right? What happens when you crest the hill? And that is coming because at the end of the day, contributions are always going to be a function of income levels and withdrawals are always going to be a function of asset levels, right?

This is why Warren Buffett's indicator of market capitalization to GDP has historically worked. It's just another way of framing that equation: asset values relative to incomes. Right? Now, what we've done is we've added a loading factor to it. We've introduced a new style of investing that causes those valuations to inflate. But ultimately, that raises the assets to the point that those who hold them are going to start to sell them to fund their increasingly extravagant lifestyles while the rest of us can't do that, right?

And at that point, the system breaks and it turns into an XIV. And so, I'd like to end with a quote from Voltaire: 'Those who can make you believe absurdities can make you commit atrocities.' We, I believe, are in the process of destroying the financial markets in order to facilitate the retirement at low cost of the American public. That's where I'll stop.

Yeah, I would. I got a mic up.

Which one? No, no, no.

Yeah. I mean, that unfortunately is the same story that the BIS shared, right? Which is we can clean up after a crisis, we can't necessarily prevent it because the participants have vested interests.

Both can be true.

Oh, we're better than fine.

Yes. And we're going to make this available to individuals because we've been denying them this asset class. We do it.

Well, I mean, this is actually the greatest news that ever happened because the direction that they're trying to go is actually to move the 60/40 portfolio to the 80/20 where private equity and private credit and venture are treated as alternative assets. And so it's a net equity increase, right?

That is where it is increasingly headed. No, from an academic or a theoretical framework, this is completely absurd, right? Private equity is just levered equity. It basically runs at a 1.6 beta to the S&P, slightly higher than the Russell — by actually quite a bit higher than the Russell, which has a slightly lower than one beta to the S&P right now. And they are levered companies which if we draw a direct analog to their private — to their public equivalents, we can weight it on an industry basis, we can weight it on an exposure basis, etc.

Like, the public equivalents are down 6% over the last five years while private equity claims to be up 115%. Meanwhile, the distributions from private equity, as I pointed out, are down about 65%. So there's one of two possible solutions to that: either they are so good at their jobs that they're able to deliver 1,700 basis points of alpha — slightly more than that actually — and yet still aren't able to make distributions because they're just so good at their job, we should keep investing with them, right? We want to let that compound, that beautiful, beautiful excess return. Or they're just lying, and I kind of lean in the direction of this second.

They know they're lying.

They know that's the worst. They know that there's no way to have — it doesn't matter if they know. It matters if Washington knows, right? They're willfully lying. Private equity is willfully lying, which is the worst kind of lying. If you lie because you don't know, then it's fine.

Yeah. I mean, I just want to be very, very clear. I think the flows into passive — because active is now negative, right? So it's about 120%.

Yeah, it's a — if I look at the total flows that are coming into passive, they're about 120. And that flow doesn't care about valuation, doesn't care about information. It actually has a negative loading for it because it buys stocks that have gone up. It spends more incremental capital on stocks that have gone up as compared to stocks that have gone down.

Oh, I think it's absolutely worse than I said. And again, this is some of my most recent stuff is looking at the inside the index components to it. Does anyone know what the largest stock in the Russell 2000, the small cap value index is right now?

Oh, who said that? Nicely done. What does Oklahoma do? They haven't built an SMR yet. They haven't built an SMR yet, but they will. Does that sound like a value stock?

This is unfortunately what happens, right? Is the idiosyncratic volatility associated with that name combined with the market capitalization means that the incremental flows that come in when people try to buy small cap assets and in particular small cap value biases more and more and more of those flows towards OKA. Anyone else — anyone know what the largest stock in the Russell 2000 value was in 2021? Come on. No Roaring Kitty fans in the audience. GameStop.

All right. Until the rebalance. That was a value stock. Phenomenal value.

Yes. If you can call what he does active. But no, it's actually very, very, very challenging to — and this is why you see active managers, they always say, oh, they always or almost always many of them underperform the benchmark and this is a monstrous component as to why.

Everything that — every time that you pick something that is off the beaten path, not mega path, you better be right immediately because if you are not, over time there's like theta of that chunk, chunk, chunk of the larger caps that will kill your performance.

Again, this is some of the most recent stuff that I was doing. I shared it with some of the people we were speaking with earlier, but you know, there is a competitive response that degrades this, but the pure — the pure passive factor at this stage is adding about 40 percentage points a year to Apple.

Right now, Apple's not up 40% a year. Apple's actually down. Right? Why? Because nobody with a shred of fundamental information is going to buy Apple, right? It's a company that has abused its customers. Nobody feels as strongly about their iPhone as they used to. We're all desperately waiting to replace it. We can just get rid of those little green messages that come — or blue, whatever it is for Android. I don't pay attention. But the simple reality is they haven't introduced a decent product in who knows how long, right? The old products are increasingly derivative. They've lost the Chinese market. Why is this thing trading at 35 times earnings? It's insane, right? And they've degraded the quality of their balance sheet.

Absolutely. In fact, we started this around —

So yeah, it started in about around 2011 and it was just an observation on how the larger cap names in my space were trading and I couldn't understand what — and I did the math and you do that whole matrix and look at this and you're like, why does this group keep outperforming independent of the fundamentals? And I was a super fundamental guy. I knew these companies like the back of my hand, like lived them. And I'm looking around, I'm like, who is it that's doing this? You know, a Millennium — who? Because we are, you know, 120 managers are running this fundamental thing and if it's happening it has to be us because we are the market.

And then I started to realize maybe we're not the market, maybe it's something else. I don't exactly understand what's going on, but I need to change my book to start to account for this and account for it. Huh? It starts moving like this. Like for instance, when you'd have a large cap that would have a positive surprise, the movement started to become much more exaggerated than a small cap. And it didn't make any sense to me because everything you learned — that shouldn't happen. And I had been expressing that. Of course, nobody understood what I meant. Nobody understood what I was saying because nobody saw it.

And then I met Mike Green at a dinner. And then we were best friends ever since because he had the same problem from a different approach. He was looking at the math. I was looking at the reality in a book.

And just to put that in context, he's a pain in the ass to be a good friend with. So yeah. Yeah. I'm half deaf. The fact that we're still friends is —

Yeah. No, that's exactly correct.

What's the equivalent of the LEAP puts on the XIV? Look, we're not yet inside a window in which this can be traded with any sort of precision. Like my math suggests there's roughly a 30% probability of the event over the next two years. In another year, they'll rise. And so it's not yet at the point that I want to express it in that way. I'm still trapped in the — you've got to play the game, right?

And so all of my work at this point is actually focused on trying to figure out which stocks are most positively and extremely focused on this and effectively repricing option curves on the individual stocks as well as building portfolios around this. But just to give you some idea, like you know some of this stuff is very, very recent, but I actually just upgraded some of the tools that I use in some of my portfolios and it looks like we're creating anywhere from 400 basis points to an additional 1,600 basis points of alpha by focusing on these individual securities. So I like — I don't think active managers are out yet, but it's getting pretty close.

I tell you — and that's a great question. So, what's really important, and by the way, you got — once Mike's book comes out, you're not going to be able to get in a room with him.

I'm really curious how that's going to play out because they will not want to talk about this. We do have a wonderful example though of the flows going the wrong way in Japan. We saw this happen already where the age of the population got to such a point that the flows turned negative because the population was too — they're redeeming rather than adding. And a funny thing happened and we were able to predict this too: their central bank would not just be printing money and buying bonds, they would start buying stocks to hold up the market. And that's exactly what they did. And guess what they can't do? Stop. They can't stop printing money and buying stocks or it all goes the wrong way.

They have an inflation problem right now. And I don't understand how it ends and neither do they. And they still can't stop printing money. That's — I believe that's where it ultimately goes for the US and you'll see it in Europe first and you're going to see it in Europe soon because the demographics are such that this exact same thing is going to happen very shortly and they will start printing money and they cannot stop even if they have inflation in order to keep the asset prices up.

Yeah, I think that's true about Europe in its totality. I think there's something far more frightening that's actually happening. Is anyone from a small town — like an actual small town, like a Nebraska farm town sort of thing, right? Like what's happened? What's happened in these regions, right? Capital has flowed out. The local grocery store is replaced by a Walmart. That means the profits no longer go to support the local schools, the local baseball team, etc. They increasingly flow to Bentonville, Arkansas to pay for the climate change objectives of the Walton family.

Yeah, that was not true.

And that hollowing out is actually happening to our country and it's happening internationally. In our country because the government has now defined that your retirement investments will flow into large multinationals that have nothing better to do with the funds than buy back their own shares to enrich their executives. And by the way, I am completely opposed to the idea that buybacks are the same as dividends. And I can just give you a really, really simple example of that.

Imagine Apple pays a dividend. How much of that gets reinvested by Vanguard into Apple stock? 7%. Right? Roughly its weight within the S&P 500. Apple does a buyback. How much of that gets reinvested in Apple's stock?

100 plus percent. Yeah. Right. The net impact is very, very different if markets are not.

I don't know. If I knew the answer, I'd probably be retired.

Yeah. 6% a year.

Yeah, of course.

I'm not entirely sure I agree with Mike. I'm not yet at the level of cynicism that I think that everybody is in on the nefarious information. There are players who are definitely in on the nefarious information. But I think it's quite possible that Mike Taylor's right in that people are maximizing their own slice and collectively you're getting this to all scale up because I agree with you that everybody is motivated by what they believe is in their own personal best interest.

We can see through it what the end consequence is if you play it out. It's just that nobody plays it out. And unfortunately our media, their biggest advertiser is Apple, Walmart, Microsoft, others. And so they're really not allowed to inform us on that.

They are not helping me write it, which is really the problem.

We actually are making real progress at this time. Honestly, Mike, the title. I'm still thinking — the bestselling financial book.

Well, it's so — just very quickly, Mike is being incredibly humble. His fund has outperformed by about 400 basis points a year since inception. It's incredible.

The rest of us hate him. He's a genuine talent. The rest of us pretend. And I will tell a very quick Mike Taylor story. So Mike, you would not believe this, but actually has been incredibly sick. The reason he left Millennium and Citadel to retire to his bed is because he had an autoimmune disorder in —

I didn't know that. Wow. Cool. So now he's back, which is a real pain in the ass because I'd kind of written him off. But um...

No more sharing rooms.

Yeah. Um, so again, this like the quick answer is yes. The long answer is um I'm fairly confident I've isolated the passive factor. I'm also fairly confident I'm not giving it away. So,

Yeah. So, actually earlier today I met with um uh some individual anchor investor. And so I'm actually going to go in addition to my ETF and my writing and my various ridiculous stuff that I do with my life, I'm going to actually relaunch a hedge fund to try to take advantage of this. So we'll we'll see what happens.

Yeah. So, so let's split the two, right? It doesn't matter whether it's AI or whether it's active managers, whatever. If somebody figures out a better mousetrap, could we ultimately be passive at the game?

Had to go there.

Had to go there to change.

Well, they haven't perceived safer assets.

Only because of the rebalancing component.

Well your point is is that because wait I just want to be clear so what you're saying is what is predictable the inflation tied to passive investing or the crash tied to a demographic rebalancing? Oh,