Michael Green: The Stock Market Is Now A Giant Ponzi Scheme

Thanks to the "giant mindless robot" of relentless passive capital inflows

There is a mechanical force that pushes asset prices higher as capital flows passively into the market every month.

As more money flows in, it must be used to purchase assets, at whatever current price they're trading at.

That valuation-insensitive buying results in higher and higher prices.

Today's guest refers to this current system as the "giant mindless robot".

And, in his view, it has deformed our financial markets into a gargantuan ponzi scheme of unprecedented scale. One that someday must go bust, as all ponzis do.

For all the details on this, I sat down with Michael Green, portfolio manager & chief strategist at Simplify Asset Management.

To listen to the full interview, click here or on the video below:

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Adam’s Notes: Michael Green (recorded 7.16.24)

EXECUTIVE SUMMARY

• The U.S. economy is either in the late stages of expansion or already in a recession, marked by rising unemployment claims and declining builder confidence. He points out a disconnect between the stock market and economic indicators, attributing it to the influence of passive investment flows. The gig economy and low unemployment benefits have also distorted traditional labor market signals.

• Michael emphasizes that passive investments, which automatically allocate funds into benchmark indices, can create artificial market support. He is particularly worried about the potential for these flows to reverse, which could lead to significant market corrections. He provides evidence that net 401(k) flows are currently negative, although the ongoing contributions and institutional adjustments are temporarily sustaining the system.

• Michael highlights that investors have shifted from broad market funds, such as the Vanguard Total Market Index, to more specialized tech and growth funds. This rotation has contributed to market narrowness and significant outperformance of certain sectors. Despite earlier concerns about outflows, passive investments have not yet reached a withdrawal stage, indicating continued support for current market levels.

• Michael warns that the current trend of passive investment inflows is unsustainable. The mechanical bid from passive investments inflates stock prices artificially, and a reversal could cause a significant market downturn. He urges investors to be cautious and prepare for potential disruptions, emphasizing the need for a diversified and well-balanced portfolio to navigate the uncertain future.

• As for what assets to invest in given these current market conditions, Michael advises investors hold assets with defined, predictable returns to mitigate risks from economic uncertainties. Specifically, he recommends