Why Passive Investing Could Trigger The Next Major Crash | Mike Green

本站添加: 2026-05-23

[00:00:00]You watch the passive flows closely because a you want to make money while this trend is continuing to work in the direction it is, but you're not in love with the reason why these passive flows exist and why they're so influential and you do worry about an inflection point where things start to flip into reverse on a more secular basis.

[00:00:17]>> So this is actually the subject of a paper that I just released. We basically created a an analysis in which we used a closed form mathematical solution to show that if you exceed about 65% passive share and just to parameize that we're about 53 54 right now gaining about 4% a year. Above 65% there is not enough discretionary capital left that is really capable to respond to the volatility signatures that begin to emerge past that level. And it becomes like the XIV trade that you've heard me talk about before. It basically becomes a guarantee that a volatility event will occur that can't be offset by discretionary flows. And so that was what I was looking for in the XIV. About 70% of the daily trading volume was tied to the inverse VIX ETF complex. That allowed us to get to the point that we were able to articulate fairly cleanly that this event was a not just a possibility but a probability, a high probability event. My analysis was it was roughly 95% certainty that within a 2-year period from when I began to analyze the XIV that an event would occur that would drive the product to zero in a single day. It happened 6 months later. That same phenomenon exists now, not for a $2.5 billion ETF, but for a $73 trillion market. That is a source of genuine fear.

[00:01:41]>> When you say currently at a 53% passive share, does that just mean of the trading activity in the markets in a given day, 53% of it is made up of the giant mindless robot?

[00:01:52]>> No. I want to be clear on that. So we estimate that somewhere in the neighborhood of about 60% of all trading activity is tied up in the passive complex whether that's the creation redemption process for ETFs or mutual fund rebalancing or that type of process now is approaching rapidly those levels but discretionary trading is still significant both on the retail side and on the asset manager side. So passive is gaining about 4% a year. So the math would suggest we're about 2 and 1/2 years out. Once it gets inside kind of that 2-year window, there's tools that are available to start playing it. And while I hate to say I look forward to that opportunity, I think that there will be trades to be done around that.

[00:02:35]>> So let's say we get there when this thing gets into the danger zone. These ever rising markets where buying the dip was always the best strategy and we've all just had this nice wonderful rocket ride because of the positive capital flows. that era is going to end and it's going to be a much less enjoyable market for the vast majority of people.

[00:02:52]>> Yeah, I think unfortunately that's the case.

[00:02:53]>> Get access to my notes with the key takeaways from this interview with Mike Green by visiting my Substack. Link is below.