Forget everything you've been told by others before. Get ready for the real deal, the full story. Real talk about money, markets, life. Now it's the Real Investment Show with Lance Roberts, presented by RIIA Advisors.
And welcome to the Real Investment Show. I'm your host, Lance Roberts, and today our very special guest, and I'm really excited about this, is Michael Green. Simplify was founded in 2020 to make institutional-grade alternative strategies available to all investors through low-cost, transparent ETF vehicles. Michael's been a student of the markets for almost as long as me, about 30 years. He's younger than I am, so that's a good thing. His proprietary research on the shift from actively managed portfolios and investment funds to systemic passive investment strategies has been presented to the Federal Reserve, the BIS, the IMF, and numerous other industry groups. So, Michael, welcome to the show today. It's so good to have you here.
It's fantastic to be here. Thanks for having me on, Lance.
Absolutely. Well, you know, we've got a lot of things that we can talk about, and the one reason I like having guys like you on the show that have actually managed money, have been in the markets, understand what it means to have capital at risk, I think is very important to our listeners. You know, there's a lot of people running around making claims, you know, the market's going to crash or this is going to happen or whatever it is, and they don't manage any money. If they're wrong, it doesn't impede them at all. They're just out there for clicks and views. So I think it's very important to have people that actually understand what risk really means and talk about how markets actually work in real time. And so, kind of from that point, I thought we'd just have a little bit of a wide-ranging conversation. We talk about markets. I do want to touch on, before we finish up our episode today, your recent article. You've gotten a lot of publicity over your recent articles on the poverty line. I've read both of the commentaries. I've read yours and I've read all the rebuttals back to you. So that's quite an interesting discussion. We'll certainly get into that. But Michael, let's start off just a little bit talking about markets here for a moment as we kind of kick off a brand new year. It's 2026, and we've had three years of near 20% returns. It's been very easy to make money in the markets over the last three years. And there's this kind of burgeoning idea now that after we've had this very strong economic growth surge that we had back in '21, '22, '23 because of all the stimulus, the economy kind of slowed down a little bit. You know, we're running around 2.2, 2.3% GDP growth. Now all of a sudden, in this year in 2026, we're going to have this resurgence of economic activity. Goldman Sachs just recently surveyed 400 different investment analysts, and by far and large, about 70% of them said, oh yeah, we're expecting 3% growth this year in the economy, probably between 10 and 18% in terms of returns this year in the markets. Very optimistic, very bullish. Just kind of wanted to get your thoughts on that. This is all based on the premise that the OBBBA, the One Big Beautiful Bill Act, is going to provide a lot of tax reform and deregulation. The Fed's going to continue to cut rates. Oh, and by the way, I forgot, we're going to have this 3% growth with no increase in inflation. So that really kind of makes the whole case here. Do you think that's a realistic issue, or what are you thinking this year?
I mean, I think the acceleration hypothesis is going to definitely be true in areas of the economy that have been in an extended recession. So areas like housing, for example, we're now seeing new homes slowly start to become more competitive. The cuts in interest rates are actually flowing through to lower mortgage rates. That is opening up some avenues of reinvestment in those areas. The real question, of course, becomes: is that actually the important metric or the important area for either the stock market or elsewhere? And the answer behind that is simply we don't know yet, right? We are very much being driven in terms of GDP growth by originally equity-sourced financing for the buildout of data centers that's now increasingly moving to debt-based financing for data centers. And that's where I think it gets a little bit diceier, right? The need to generate a return on capital for these companies will eventually have to play out. You know, this could be a replay of the dot-com cycle. The flip side of that that I would just emphasize is, man, everybody keeps talking about this acceleration, and I'll share one quick chart. I just want people to actually see this. With the exception of kind of a crazy move around COVID, you know, this is GDP on a year-over-year basis, right? From 2011 through 2020, the average is the dashed line. The red line is the average that we've had basically since 2022. And they just look exactly the same to me. I don't see any meaningful difference in what has supposedly transpired that's leading to this confidence we're going to see a surge in productivity, other than, of course, the need to have something along the lines of a narrative that matches an accelerating or a rising stock market. Earnings reports have been overall strong, and we've seen some recovery in the S&P 500 earnings, but the quality of those earnings have degraded sharply. We're seeing a much larger than normal spread effectively between GAAP accounting earnings and reported earnings. The Russell 2000 earnings have actually turned negative, which is a pretty shocking development supposedly in an accelerating economy. And so I kind of just think people are trying to explain why the stock market is up and why they think the stock market will be up again without actually ceding to what I think is really driving it, which is simply the flows from passive investing.
Well, and I do want to get to passive investing with you because I think this is one of the key stories that has been driving the markets and probably will continue to drive markets going forward. But it's interesting what you just said about small-cap and mid-cap stocks because I've been saying this for a while now, that those stocks are the most economically sensitive, and as you showed, the economy is not doing anything exceptional from what it was doing pre-COVID. But yet during that spike, back on your chart, you had that big spike in GDP growth from all the stimulus and interventions that were put into the markets, and during that period those small-cap, mid-cap companies actually had negative earnings growth. But this year in 2026, Goldman Sachs, as an example, is expecting almost a 60% increase in earnings for those companies. And that all of a sudden the bottom 493 are about to grow earnings at a massive pace of almost 11% annualized when they've grown at roughly about 3% over the last three years. So that's why I'm having a little bit of trouble with this narrative, is that there's a lot of hope built into this. And as Bob Farrell once said, he says, 'When all experts agree, something else tends to happen.' And I think that seems to be kind of the case that we're setting up here.
Yeah. I think one thing I would just emphasize is that when you talk about small caps, one, you need to be very cognizant that what composes the small-cap index today, if you're doing a bottoms-up calculation in terms of the earnings, could very well actually not be the small-cap index going forward. One of the characteristics that's bizarrely played out is that we've seen so much volatility and so much price change over the past few years that you get all sorts of really confusing scenarios, right? You know, nuclear startups with no profits end up in the value index. These are just weird byproducts of how we calculate indices. And so I want to be very careful because I've not done a bottoms-up analysis of the Russell 2000 to dispute that. But it is very contingent on that acceleration of growth that people are articulating and anticipating. It does require cyclicals to recover significantly. And it's going to be hard, is the simple math.
Well, and again, if you take a look at the Russell 2000, 40% of them are nonprofitable. So, kind of to your point, right? I mean, take a good example like Oklo, which is the company that's going to build nuclear power plants. They have no revenue, no sales whatsoever, and the stock's up a tremendous amount on expectations that someday they'll actually build a nuclear power plant and they'll actually generate revenues. But that company is sitting there in that index, and that's part of that 40% that don't have any profitability. So there's certainly an issue in regards of kind of investing in the index. And this is why it's important to really understand what you own versus just kind of buying blindly in the markets.
Yeah. I mean, let's actually take Oklo for a second here. This is a perfect illustration of the sort of stuff that I talk about. Let me share my screen again here. We're going to turn this one interactive. Everybody's going to have a lot of fun looking at this.
Okay. So, I mean, Oklo would be a perfect example of this. This is looking at the actual holders of Oklo stock disclosed on 13Fs, and the largest holder by far is Vanguard, then some insiders, then BlackRock. I don't know the background behind Maria Asset Financial Group, but I'm going to guess that this is actually an institutional passive strategy because it's similar exposure to Geode, which is the passive arm of Franklin. VANC is going to be ETFs. UBS, I have no idea. Could be private wealth. It also could just be index tracking. State Street is index tracking. Like, I can go through this list, you know, down to basically the 18th holder before I find somebody who has actually put some real thought into whether they want to own this or not. And so we're just kind of trapped in this weird world where because things are designated as part of an index, they receive significant inflows. Those significant inflows ultimately have to find sellers, and the sellers are typically at higher prices, particularly when it's a company like Oklo that is all story, right? There's, you know, what are you going to say? Oh, well, the announcement from the CEO that they're going to be building nuclear power plants broke my thesis that they're going to be building nuclear power plants. Like, it just, you know, there's nothing you can do about it. It is an option, it is a call option, and it is treated as an investment because of its representation within the indices, but it doesn't give us any information in its behavior.
Yeah. But see, that's the real interesting part about all this, right, Michael? Because we, you know, normally used to pre-2000, right? You know, back in the day when we actually managed money for a living, you had to buy a stock based on what you thought the thesis was, and you made your bet kind of accordingly. But now this is going to get into your whole kind of giant mindless robot passive investing problem, which is now you have so many of these ETFs that are out there. We had, what, a thousand new ETFs issued just last year in 2025. 50% of them were leveraged ETFs, single-stock ETFs, those type of things. You know, everybody's trying to get an ETF out there that now just captures some part of the momentum of the markets. But you have all these ETFs. You have like a value ETF that owns Oklo, which is not a value stock, but in order to get performance so people will put money into the value index, they have to own these stocks that are not value stocks or not growth, you know, not safety stocks, etc. And so you get this kind of replication of holdings across the board. And you made a statement I want to make sure that our listeners understand what you said, is that as these individuals, these ETFs, these mutual funds, whatever it is, as they buy these stocks, it is dragging the sellers higher. And this is the, you know, we always come up with these rationalizations, Michael, for the markets, right? Oh, the market's going to go up this year because of A, B, or C reason, or this is happening because of A, B, or C reason. But the reality is that price only moves because you have an imbalance of buyers and sellers. And we have a lot of buyers in there wanting to buy a stock, whatever it is. Then the sellers go, 'Yeah, I'll sell it to you, but I'm going to sell it to you at a higher price.' And that math works until at some point the seller goes, 'I want this for my shares. If you want to buy it from me, this is what it's going to pay.' And the buyer says, 'No, I'm good.' And then that's when the reversal starts. But all these ETFs now are driving that buy side of the equation, and sellers are basically able to name their price right now.
Yeah, I think that's correct, right? And part of that is, of course, the discretionary component to it. When you think about the traditional framework of an active manager who might be looking at Oklo, they would have some form of a discounted cash flow analysis that would be heavily predicated on future cash flows. Those would be discounted at a relatively high weighted average cost of capital because of the uncertainty of the timing and the magnitude of those cash flows because it's a speculative stock. And the price going up would lower my future expected return because I have a fixed price target. It is worth X in my mind, right? So it gets closer to X, that lowers my future return. If it gets further away from X to the downside, that raises my future return. That encourages me to buy stocks that have gone down and to sell stocks that have gone up. Passive investing works the exact opposite manner, right? It is predicated on the theory that all of the available information, including my thought process, is embedded in current prices, and therefore why bother doing any research? If the price goes higher, that's an indication that other people have done their analysis and have suggested that the value should be higher, and as a result I want to buy more of it, not less of it. That's a momentum strategy, and there's a valid intellectual and theoretical reason for momentum, which is there is a slow diffusion of information and the prices signal that somebody out there has made a thoughtful decision. The problem is when the passive flows become the dominant flows, their decision to buy in proportion to market capitalization actually becomes the increasingly determinative marginal flow. And so that actually drives the price higher with the only information content not being tied to Oklo, but instead being tied to the end state of the client, which is they're employed. And so it actually changes markets from being forward-looking vehicles to actually largely backwards-looking vehicles, right? Because employment is a lagging indicator.
When we talk about that change again, I'll bring up another slide here for you. So if we go back to the 1990s and we look at that structure of the market, you'd reference this prior-to-2000 type framework. Active managers making those sort of discretionary activities were about 80% of the trading activity. As of 2022, that had fallen to about 10%, right? The speculative retail trading, what we classically would have referred to as noise traders who may have information, may not have information, may be chasing sentiment, etc., they've actually expanded as commissions have fallen. And today, if I do my latest estimates, my estimate is the active management space is down to six to seven percent of transaction volume. Speculative activity has climbed to about 20% of the activity, and all the rest of this, if you look up here, this is all just passive market making, right, and option trading. And so you really have a situation, unfortunately, in which the tail is increasingly wagging the dog. I go to buy the index thinking I'm buying the best insights and available information, and what I'm actually doing is increasingly determining the behavior of that. The problem is how do you really correct an overvalued stock, right? I can correct an undervalued stock by going activist on management, by buying the shares, etc. My only prospect for correcting an overvalued stock is to short it. And if I do that, my risk of loss is unlimited. In a rising market, that becomes really painful. In a rising market being driven by a thoughtless, mindless robot like passive, it becomes devastating. So we've seen short interest collapse. We've seen shorts and bears in general as an asset category basically become non-existent. And this unfortunately appears to be the driver. It also then engenders all sorts of crazy behavior from management teams like Oklo, who in turn suddenly say, hey, the market thinks we're worth $15 billion. That allows us to go out and make acquisitions. That allows us to go out and make commitments. That allows us to buy Bitcoin for our treasury. I don't know if they did that. I don't care. But they are entitled to do all sorts of stuff by virtue of the market having arrived at a decision that says, 'Hey, the CEO is a genius. We should let this guy do whatever he wants.' And we have no real mechanism for correcting that in an overvalued stock market.
So this brings up an interesting question, Michael, and I've been wrestling with this for the last six, seven years in particular, really since the COVID pandemic and subsequent run of the market since then, is that, and I agree with you by the way, the problem with passive indexing is that it's just this continuous stream of flows into the markets on this kind of, as you state, a mindless basis. And so as a portfolio manager myself, I have two jobs, right? I'm trying to make the best investment decisions for my clients based on fundamentals and valuations and all these type of things. But at the same time, I realize that if I don't create performance, my clients are going to leave and go somewhere else and they're going to go chase whoever, whatever index or whatever market guy did last year. So I have to create this performance. So by the very nature and makeup of the market, I am forced to own stocks that I don't really want to own because those are the ones that are receiving the most money from the passive inflow. You look at the top 10 stocks, they make up about 40% of the index. So 40 cents of every dollar that goes into an S&P index fund goes into 10 stocks. So I'm almost forced by nature just to own those 10 stocks and maybe a little bit of something else. But that really kind of undermines the markets. And the bigger risk that I've talked about, and it hasn't happened yet by the way, is what happens when whatever event it is causes people to start selling their indexed ETFs. You know, you've got to have some catalyst will come along and they'll say, 'Okay, I need to get out of the market for whatever reason.' And I think what a lot of people miss is that the same driver that's been fueling this market to the upside is potentially a very big risk if, and again I don't know what the reason or catalyst would be, but if people start to sell ETFs, that seems to be the real problem.
Yeah. Unfortunately I think that's right, and there's a couple of things that you captured in here that are embedded in the presentation that I've been sharing with your audience that I often give people. One of the really critical catalysts are things like the differential impact on the largest stocks versus the smallest stocks. You gave a really good example when you said, 'Look, as a portfolio manager who's investing for my clients who ultimately will fire me if I don't at least come close to matching the performance of the S&P 500 because it's just too easy to fire me with that direct comparison. I can tell them for a year or two, hey, I think valuations are crazy, I think the world is terrible, blah blah blah. The bearish case always sounds more intelligent' is actually a very valid observation, right? But they're going to run out of patience, and if you don't actually invest somewhat like the market, they are ultimately going to leave your business and go to a competitor who is going to brag about their performance that was so much better than the market by taking a more levered position. Then they haven't participated during your time period and they're exposed in a more levered fashion afterwards. So they just lose, right? Like it's a bad setup. Part of what that is actually creating is another one of my charts here. So this is actually from Valentin Haddad. It's an academic paper. So this chart actually, if you're looking at this on the x-axis here, this is market capitalization expressed in log terms. So 12.5 is about $3 trillion in market capitalization. On the y-axis we're measuring elasticity, and this is the economic concept of how much does price change in response to a change in supply and demand, right? A highly inelastic good is one in which the price can swing wildly. A highly elastic good is one in which demand will effectively evaporate if the price moves at all. So a one is a stock that is perfectly elastic, basically it has perfect substitutes available. And a zero would be a stock that is perfectly inelastic. It effectively could rise a nearly infinite amount in response to a modest change in supply and demand. You'll notice that perversely the red line is the theoretical line. This is what would happen. We know this would happen even if every stock had the same elasticity. And the reason why is because market capitalization and liquidity don't actually scale. Apple at $4 trillion in market cap trades about 10 times as much as Delta Airlines despite the fact that it's about 150 times the market capitalization. So a 1 to 15 mismatch there. That makes a trade of index-level size into Apple more impactful than a trade of index representation size into Delta Airlines. So we know there would be a bias there anyway. But what you've actually captured with your articulation of it is the green line, which is the empirical line, which reflects the fact that if I'm buying a client portfolio, I almost have to have Nvidia in there. I almost have to have Apple in there. I almost have to have Microsoft in there because their representation in the stock market is so high that I can't actually fathom competing with the stock market without some representation of those in my portfolio. As a result, they become nearly perfectly inelastic. This translates to multipliers, right? So that's really what it's doing. A stock that has a perfect elasticity, a multiplier of one, is going to effectively have almost no impact on price from changes in supply and demand. A stock that has a zero elasticity, is perfectly inelastic, could theoretically have an infinite change. And this is unfortunately what we see. So when you see a dollar go into Nvidia at this point, my estimate of the multiplier is approaching 100x. In other words, $1 buying Nvidia causes the market cap to rise $100, right?
When we think about things like the efficient market hypothesis, and there'll be some debate around those numbers, etc. Those are my calculations. They're not everybody's calculations, etc. But we know that those multipliers are much higher than we had historically expected. And this is how you see a stock have a $250 billion increase in market capitalization under an efficient market hypothesis framework that would require $250 billion worth of inflows. That's a total annual inflows basically into the stock market. So clearly that's not what's really happening. Those hundred-time multipliers, when you see a $250 billion move, means you saw $2.5 billion flow through, and that's roughly what we end up seeing. Right? So this is part of the problem is we've got a theoretical framework justifying why we're all investing this way in passive vehicles that has no resemblance to reality. Right? It'd be like trying to drive ourselves using a map that's marked in kilometers and converting it to miles. Right? We would never make the right turn. We'd never end up at the right destination. We'd never do any of the things that we take for granted. Even though we're using a map, right? We're using a map. We've just got things marked and specified wrong.
Right. So here's the interesting question from this, and a lot of people have been running around on various YouTube channels or whatever, market's going to crash, this is going to happen, that's going to happen, and that's fine. I have no problem with those views. My statement is always this. As an investor and as somebody who manages money and as somebody who invests money, for any forecast to be useful at all, it needs to have, okay, some time frame. Okay, the market's going to crash. Okay, it's going to crash within six months. How much is it going to crash? And what do I do once it crashes? And those are the three things I need to know so that if a prediction is going to be any type of use. And people have been running around forever saying market's going to crash since 2008, and it just hasn't done it yet. But this is the problem here. A lot of people saying, hey, market's going to crash, etc. But you have these passive flows that are just continuing to fuel the market on an exacerbated basis, just as you just stated, which almost suggests that the market can't crash.
Well, so that is unfortunately what, you know, there are two ways you can interpret it, right? And for those of you that know my background here, I originally developed these theories in 2016. Identified a market where this was most apparent, traded around it. The success of that trade ultimately gave me some credibility, which is why my work was presented to the Federal Reserve, the BIS, the IMF, etc. The reality was the BIS's response was probably the most illuminative, which was, 'We agree with you. We think you're right. Your math checks out.' And my reaction to that in 2018 was, 'Oh my gosh, all right. How can I help? What can we do about it?' And their reaction was, 'Yeah, there's nothing we can do.' And I was, 'Wait, what do you mean? You're the Bank of International Settlement. Part of your job is to highlight and flag these risks.' Like, 'Yeah, but what you don't understand is that Vanguard and BlackRock control the regulatory apparatus.' And so a projection like this, while we can agree with it, unless it happens tomorrow, if we were to raise the alarm, it would cause us to lose our jobs, right? And that is unfortunately, by the way, what happens to the market commentators. And so part of what has happened in my work is that it has gone from the institutional space into the retail space. If you listen to any presentation I give, I just say very, very clearly, as long as this continues, markets will continue to go higher.
When it reverses, then markets will probably crash. And I've got a white paper that I'm about to release with Hari Krishnan that addresses kind of a closed-form solution to this that suggests within four to five years we'll hit levels in which it is inevitable that the idiosyncratic or the endogenous volatility in the market will have risen so much that the markets will inevitably crash, right? And be very difficult to recover from. But that, exactly as you said, four to five years, it will inevitably happen. And okay, I might as well tell you that sometime in your next life, you'll come back as a ladybug, so don't smush them, right? You don't know who that might have been, your neighbor, right? That might have been your neighbor. Who knows, right? But that's really the crux of the issue. And so what I'm actually trying to do more than anything else is raise awareness and help people understand why the narrative that they're told on why markets are doing what they're doing is not correct. That in turn helps people, both in terms of maintaining the faith of value investing and why they should continue to maintain the skill sets, because there is a point at which those will become available.
The other thing is, candidly, I watched it happen in 2008 where the banks largely directed their own bailout. The last thing I want to see is Vanguard and BlackRock brought in to solve a problem that is of their creation.
Right. Well, we saw that though during the pandemic shutdown. The Federal Reserve went to BlackRock to manage the high-yield bond buys. So, I mean, yeah, those are the first people they go to, kind of the foxes in the hen house, I guess.
And the only thing I can do is basically beg for a place on the Pecora Commission, the 1934 investigation of Wall Street, 1933 I guess it was actually, that gave rise to the SEC and a reformation of the system that served us extraordinarily well for an extended period of time. That's really the only thing that we can ultimately do about this is we now have to wait for the event, and when the event occurs, if I'm correct, it will turn out to be a very devastating impact. I hope I'm wrong. I genuinely, genuinely hope I'm wrong. I would be ecstatic if our generation is the one that discovered the magic money machine that never stops paying out. But I'm very skeptical.
Well, look, there's just some systemic issues about what's happening in the markets. The capture of money flow, the capture of a certain number of stocks capturing a majority of those inflows, I don't think it takes a large leap of intelligence or forethought to go, that's not going to end well, right? At some point something is going to break, and when that runs in reverse, that same huge advance you had from the benefit of that is going to run in reverse, and the crash is going to be much larger than people would expect. Here's my question to you though about that, is of course after the fact the SEC will come in and we will reorganize whatever it is that eventually blew up. You know, this is how we always do it. The financial crisis, then the SEC shows up, says, okay, now we need to change the rules. Dot-com crash, we did Dodd-Frank, right? So we always, after the fact, something blows up, we'll come in and we'll make new regulations, new reforms, etc. But let's just say for the moment I can put you in charge of the markets in general. Is there anything you could do today to slow that systemic issue from building? Should we think about reforms to the ETF market? Is it the number of issuers? Is it requiring individuals, if you're going to issue a value-based ETF, you can only own value stocks? You can't have a Meta in it, you know, whatever. Are there reforms that you could do today that would potentially slow at least the process of that problem?
I mean, the quick answer is no. We're too late, unfortunately. If we had taken steps before, my work suggests that we could have avoided some components of this. We're now well past 50% of the aggregate market cap is being invested in this framework. The vast majority of even designated active managers have embedded passive exposure. This is work again of Valentin Haddad and his colleagues, I think Paul Hubner. We've seen a stunning collapse in the elasticity of individual institutions as they increasingly shadow index or closet index to match that performance, maintain relevance, and try to continue their business models in the hope that sometime it eventually reemerges. But we've lost an unbelievable amount of skill in valuing securities, analyzing companies, talking about companies, evaluating critically business plans, offering constructive feedback, etc. That's just been, the steamroller has come for those who are picking up the nickels. And the industry is in full-scale retreat. Last year, the active manager space lost $600 billion in assets to flows. It was somewhat offset by valuation and price increases, but not really. And so increasingly, unfortunately, we're seeing the death of security analysis, which unfortunately is a byproduct and predictable and empirically observable byproduct of the growth of passive strategies. And so we're going to be in for some pain as we correct this. Little things we could do, right? Like again, I'll share a screen here just so people can actually see a good illustration of this right now. If I look at the world's largest mutual fund, it is the Vanguard Total Market Index. Yeah, give or take a trillion and a half in just this share class. I think the total size now is about $2 trillion. So this is about a $1.5 trillion fund in this share class. I believe total exposure across different strategies is somewhere in the two to three trillion dollar range of capital that is managed in this manner. One thing I want to highlight is notice that all the position changes are red, which actually tells you something that's going on in the mutual fund space is distinct from the ETF space. Mutual funds are largely the vehicles through which 401ks are invested. This is actually telling you that many of the mutual fund strategies, including passive strategies, have now hit a demographic point in which they're starting to be liquidated. This has been one of the things I've been watching for very carefully. But at a trillion and a half dollars in market capitalization, if you think about the classic kind of exposures that portfolio managers would have had, you'd be required to carry between two and five percent cash in order to meet these liquidity demands. These are liquidity demands when you're forced to sell. Look how much cash this portfolio has. $174 million against $1.5 trillion in market capitalization.
In other words, it's completely dependent upon the market to provide exit liquidity since it has in large part become the market. It is now totally self-referential. And that would be radically different if I were to pull up the largest active fund, which is the Fidelity Contra Fund. You know, that's about $170 billion in assets. It carries three and a half billion dollars in cash, right? So, one-tenth the size, 30 times as much cash.
Yeah, I mean, this continues to be the problem, right? So like things that could be done, you could mandate a required level of cash for large index funds that in turn would likely drive the fragmentation of the index funds, moving away from giant pools of capital like Vanguard. And this is really a critical component that I think people have to fully understand. There is a difference between 500 funds at a billion dollars each and one half-trillion dollar fund, and that's because of the manner in which markets are made in mutual funds. Mutual funds trade on NAV at the end of the day. So it's effectively a transfer between parties. If you have a $1 billion mutual fund and I'm a buyer, you're a seller, that crosses and effectively has no market impact. They're able to cancel that out. If there are 500 funds like that and they cancel out, it has very little impact. If you have one half-trillion dollar fund and it has an imbalance on any given day, the size of that imbalance is going to be enough that it's going to impact the market, right? So if it has 1% or a half percent imbalance, that's a $2.5 billion...
dollar order that's going to go through as compared to a fraction of that if it was split across multiple mutual funds, some of which would be buying, some of which would be selling. Those are things we could do, but I'll be honest with you, we're not going to do it.
Right. Well, and again, you know, my worry is this, Michael, is that we have a whole lot of young people that are now coming up and getting invested into the markets. You know, we look at Gen Z's now. They're getting invested younger than any other kind of demographic age group before this. Um, millennials as well. And what we're looking at is seeing so much risk taking within that group in terms of, you know, buying speculative options, cryptocurrencies, you know, individual stocks, you know, buying more aggressive these individual stocks, meme stocks, etc. But they've been taught that there is no risk in the markets. The market just always goes up. So there's nothing to risk. You know, buy every dip. Dips always get recovered. Somebody always steps in, bails something out. You know that, you know, they run the biggest risk. And you know, for you and I who have been around through the dot-com crisis, we've seen the financial crisis, you know, the crash of '87. You know, we know what happens to investors after those things occur, not just financially but also psychologically.
That, you know, this is my big fear for the younger generation coming up is, you know, it's easy now to invest but at some point this reality is going to wake up and markets are going to reverse and it's going to financially devastate a lot of these youngers, you know, and again this kind of is going to feed into your recent article about, you know, the poverty they're in.
And you know, there's a lot of young people today that are very upset, you know, like homes are unaffordable, I can't afford them. Well, the reason you can't afford them is because we did adjustable rate mortgages and then we did zero interest rates and no money down loans and we created a massive amount of demand and supply couldn't keep up. So, prices had nowhere to go but up. So, you know, we've done all these things to this generation and I can't blame them for being angry in a lot of cases, but they're also walking themselves into a very difficult trap. And you know, when I try to talk to them it's like, oh, you're just a boomer, you don't understand, right? Things are different this time. You know, what's your message to them?
Well, first I'm very sympathetic, right? So, part of the reason I wrote the piece on the poverty line, which is available on my Substack, no charge, was because I was trying to understand what people were actually experiencing, right? There's two ways of approaching the world from an expertise standpoint. You can approach it from the standpoint of saying, well, I have all the data, I have all the insight and these people are dumb. The temptation to do that is very high, right? You do this for 30 plus years, you've seen most things, your immediate reaction to an absurd claim is, well, that's just absurd. When you hear those claims over and over and over again and you see behavior that suggests people actually believe it in some way, and I'm really referring to basically that nihilistic behavior that you're describing where people are gambling with lottery tickets. The reason you do that is because you do not see hope in a continuous effort path, right? If I save 6% a year and my employer matches it 6% and I invest that and I earn eight to nine percent historically and I do this over the course of 50 years eventually I'll have a very comfortable retirement. Right? That's the boomer story in large part although they didn't have the matching initially. They didn't have many of the other things that have driven outsized performance in the past couple of decades.
Um, you know, so I understand why the young generation is playing for those lottery tickets because their perception is they need a giant nest egg before they can really start making any plans.
And they're simply not seeing that come through their income. They're underemployed relative to what they were told they were going to be earning. They are struggling to start life and the solution is basically, well, if I just had a million dollars then I could really start living my life, right? And so everything becomes focused around getting that million dollars rather than, you know, or, you know, 10 bitcoin or whatever it is, right?
Um, you know, becomes focused on that rather than a thoughtful decision on how to live your life. And for those of us who are older and have largely lived our lives and are increasingly going to end up as footnotes in history, you know, that's very frustrating. We look at them, we say, oh, they're making all these stupid mistakes, right? Well, you know, that is their life. And the reality is that if you are operating underwater, it's not irrational to basically make small bets with the hope of extraordinary payouts to give you an advance. This is actually a byproduct of various schools of economics.
Um, so like I just don't think it's a terrible component. But I do think the much bigger issue is that, you know, mainstream economics and in particular the economics of the right have increasingly turned to these kids and told them you're just stupid and entitled and we're not going to pay any attention to you instead of realistically evaluating the claims and observations that they're making. And that's what I did with my life as a lie. And I discovered that, you know what, these guys really are screwed. Like we really did make terrible choices that basically created barriers to the formation of households and families that the vast majority of Americans had no real idea that were there. And I think that's why my piece, which was never intended to go viral. I didn't promote it. I didn't do anything else with it. You know, it's why my piece went viral because it actually spoke to people and they were able to send it to their parents and they were able to send it to their, sit down with their grandparents. Like I've told this story and I've gotten over the emotional aspects of it, but I released it right around Thanksgiving. I think it was November 21st.
And all of a sudden my inbox filled up with people saying, oh my gosh, I'm printing this out, 10 copies for everyone to discuss at the Thanksgiving table. [laughter] You know,
I'm glad I wasn't at that Thanksgiving.
Yeah, exactly. No, but I mean it was amazing. Like I would literally get these reactions from people who are like, this is the first time I have a chance of explaining to my family, you know, to my parents what life is actually like.
And the vast majority of boomers reacted to the costs embedded in the poverty line. They're like, there's no way child care can be 25 to $30,000 a year, right?
Followed by the response from their children be like, uh, yeah, it's more like 35. [laughter] Yeah. Right.
But real quick though, but real quick, Michael, though, going back to what you said earlier, that was a function of choices, right, that we made politically. And again, I've been, I'm hugely against, you know, government bailouts and government subsidies. But if the government's going to step in and provide tax credits or direct payments for child care, child care is going up, right? The providers of the child care are going to go, oh, wait. You've got more money to spend. I'm going to charge you more for it.
So, you know, we, and this is what I was saying earlier about housing. We make all these decisions and look, President Trump just did this just recently, had a great idea. Says, you know what we're going to do is we're going to come out and we're going to get major corporations out of owning homes. Awesome. Great idea. Because you've got an artificial buyer in there buying up the supply of homes, keeping cost elevated. And then he turns around and shoots himself in the foot and says, and I'm going to have mortgage companies buy $30 billion worth of bonds so we can get interest rates down, which adds to the demand. So you just completely negated the whole part you were trying to do by trying to create home affordability. It's not a function of rates, it's supply versus demand. And you know this, but we've done all these things, zero interest rates, bailouts, you know, all these type of things that have created this problem for the young people today. And you know, I had this conversation with, I've got four kids, right? And they're all at the same age around 2022 and we were having the same conversation about your article over the holidays and they were like, yeah, you know, he's right. It just, you know, I'm going to have to make $200,000 a year to just live, you know, live my life. I'm like, well, yes and no. And because you also have to make choices in your life. Yeah. You know, when I was growing up, we didn't have cell phones and internet and all this other stuff we got to pay for that, you know, we have today. So, a lot of young people's like, oh, I need to have the latest iPhone or I've got to have the latest, you know, I've got every service available on the internet, whatever it is. And, you know, those are financial choices they make. But that's also driven by, and look, I blame a lot of social media. You know, when they're on social media, they see all these people on social media living these fantastic lives, huge houses, fast cars, you know, private jets in the driveway, that type of thing. And they think that's normal, and they think that's what life is supposed to be like, but that's not reality. And so you kind of got this dichotomy of we screwed them financially, but we've also created this world that's not real either.
Yeah. So there's parts of that that, you know, again, I think we have to be very careful in determining what are choices, right? So, you gave the example of a cell phone, right? Um, what's your bank balance?
You don't have to actually reveal it, but how would you find out?
Oh, I'd look, I would go on, I would go into the computer and look.
Yeah. Would you look at the computer? You'd look at your smartphone.
I never look at, I never put any banking on my smartphone. I'm not an idiot.
