Mike Green: Why A 1987-Style Crash Is Now Almost Inevitable — Here's the Math

Added: 2026-05-08

[00:00:00]And our conclusion is somewhere between 65% and about 80% the market enters into a stochcastic regime in which the possibility of explosive volatility and a 1987 style crash becomes not a probability but almost a certainty. So we're unfortunately very close. We're gaining about 4% a year in passive share right now. So at that 65% lower level, we're you know 2 and 1/2 years out.

[00:00:27]Hey everyone, welcome back to another special in studio episode of the Julia Larose show where we are joined once again by Michael Green. He is the chief strategist and portfolio manager at Simplify Asset Management, author of the Yes, I Give a Fig Substack. Great to see you again, Mike.

[00:00:43]>> It's great to be here, Julio. Thank you for having me.

[00:00:45]>> Really appreciate you coming in. We had so much fun having you back in December.

[00:00:48]What a great episode. And I'm excited to kick this conversation off with you because Mike, you've been making the argument for a while now around the markets being broken. Um, we've seen >> for a while is defined as a decade.

[00:01:02]Yeah.

[00:01:03]>> While we've seen recent all-time highs, I take that does not surprise you. But are you seeing further evidence of broken markets today?

[00:01:13]>> Oh, 100%. I mean, what what we are seeing is what I call reduced elasticity. It basically means that for changes in supply and demand, the price changes significantly. Um, this is showing up whether it's in mega caps rallying by amounts that their previous market caps weren't even approaching uh in very short order to the speed of the recovery off of the recent lows. These are all evidence that the market is struggling to um absorb flows that are coming into it. And that makes unfortunately perfect sense in the context of a market that's now around 55% passive. that level of you know passivity um for lack of a better phrase is basically treat creating conditions as if the whole market is trading as a lowflat instrument and that unfortunately is one of the direct predictions that I actually made a decade ago that we were going to experience that's now been validated by academic research that we are seeing this decrease in in elasticity in the market that it has less capacity to absorb capital than it had before and that it's leading to an increase in the volatility and rate change in prices.

[00:02:20]>> Mhm. All right. Um, before we go even further there, Broken Markets that you've been talking about for a decade now, I feel like the more I'm doing this show and hosting the show, the more guests I have on, they're starting to recognize this, too. And they're actually referencing your work as well, which is always nice to see. They're like, >> when you talk about something for a decade, you tend to become a resource.

[00:02:40]Yeah.

[00:02:40]>> Right. But I'm definitely noticing a change where I'm hearing more people, and it's not just because I think they're friends with you. Do you feel like people are starting to catch up with this? You did mention some academic research validating this, but what's your sense of the recognition of broken markets?

[00:02:55]>> It it absolutely is increasing and um it's increasing for the right reasons.

[00:03:01]So when I started my research in 2016 was the first time that people started refer to what they called the castanza market. And this refers to the Seinfeld episode where George Castanza, the perennial loser, recognizes that he's made every choice in his life wrong. And so if he simply does the opposite of what he is, what he thinks he should do, that it should work out. And it turns into such fantastic success that he ultimately can't handle it. Right? So that description of the market where the market began to behave in what was perceived as an irrational framework that really began to emerge in 2016 was the impetus for forcing me to take some time off and evaluate how the market was changing what the response function was and what was occurring. I was incredibly fortunate that a partner at AQR Lassi Peterson wrote a paper in 2016 called sharpening the arithmetic of active management and that refers to a paper written in 1991 by Bill Sharp Nobel Prize winner for the among other things the sharp ratio the CAPM formulations etc. >> Um he sharp's articulation was a really useful thought piece for the promotion of passive investing. He is the source of all the language that basically says active and passive in the end of the day own the same things in the market. They have to almost by definition. That turns out not to be entirely true but as a working you know model it was reasonable. Um Lassi challenged the assumptions that Sharp made. In particular, he noted that in periods of index reconstitution, by Sharp's own definition of passive, which is an entity that always holds, never transacts, that they were forced to actually transact to rebalance their portfolios to meet the new index reconstitution.

[00:04:48]And that created conditions under which they would cease being passive investors and they would instead by Sharp's own definition be active investors and therefore have to influence the market and potentially be exposed to the same risks of trading disruptions or distortions that traditional active managers are exposed to. Um, I basically looked at that paper and said, "Wait a second, Lassi has missed another form of rebalancing that occurs on a far more frequent basis, which is simply the contribution of cash to those portfolios. So, when you have a withholding from your paycheck into your 401k program, you aren't sending the S&P 500 to Vanguard. You're sending them cash. they have to transact in response to that cash to meet their desired um portfolio allocation. That means that they are trading. They are active managers. And since they receive inflows every single day, they are always trading and therefore they're not passive ever. There is no such thing as a passive investor. That was really the critical insight. Instead, what I recognize is that they are systematic algorithmic investors that simply say, "Did you give me cash? If so, then buy.

[00:06:04]Did you ask for cash? If so, then sell."

[00:06:07]And that changed the ability to analyze what their influence on the market would be. I built a list of projections of things that would happen. I wrote this in 2017, and literally every single one of them still sits at the front of my presentations, totally unchanged.

[00:06:21]>> Wow. Um, one of those you mentioned was the 55% of passive today.

[00:06:28]>> Yeah.

[00:06:29]>> Where were we when we first started when you first be when you first started this research?

[00:06:33]>> Well, in the late 19th century um no um in 1992 when I started uh when I graduated from college and began my experience in markets, passive was about 2% of the market.

[00:06:46]>> Oh.

[00:06:46]>> And so it's it's been an astonishing change. And to think that a magnitude of that change in the composition of investors would not have altered market structure in a material fashion requires a degree of suspension of you know of rationality that makes no sense whatsoever.

[00:07:05]>> So it might feel good on the way up for folks.

[00:07:09]>> Well, yeah, that that unfortunately is the conclusion which is if you have a systematic algorithm that simply says did you give me cash? If so then buy.

[00:07:20]There is no valuation filter in the market.

[00:07:22]>> And so what really happened with that castanza market in 2015 2016 where people began to observe that the market appeared to be behaving irrationally is it actually was behaving irrationally under the rules with which active managers had traditionally managed money. A passive vehicle will buy more with the next dollar that comes in of something that has gone up in price.

[00:07:45]It's a momentum type strategy. It's a byproduct of market cap waiting. You simply are recognizing that this is now a bigger piece of the pie. So the next dollar in has to allocate more capital to things that have gone up.

[00:07:57]>> That's the inverse of how active managers tend to react.

[00:08:00]>> If there has been no change in the fundamentals and the price has risen, the articulation from traditional management would be the forward expected returns for that security are lower and therefore I want to allocate less capital to it. H >> when you change to that magnitude from um participants that discount and effectively think that there is a fair value that ultimately there will be a pull towards and therefore an increase in price lowers your expected return to an overwhelming force of inflows that simply says if the price went up put more money into it contributes to the phenomenon that we saw. And in 2015 2016, it turns out what really happened was that we actually began to experience outflows in the active manager community. And that was a byproduct of regulatory changes that were introduced in 2006 that strongly biased the system towards putting money into passive vehicles. Most people think that this was purely organic. It wasn't. It is actually truly a byproduct of regulatory change. The 2006 Pension Protection Act changed our 401k system from one in which you chose to participate into one in which you had to choose not to participate. That radically increased participation. And if you're going to force somebody to participate, if you're going to nudge them, to use the phrase that was used at the time, you have to then designate something that they are going to invest in. The Pension Protection Act introduced what's called the Qualified Default Investment Alternative, QDIA.

[00:09:27]that established a liability protected framework for sponsors of 401ks to automatically default their employees into a particular type of investment.

[00:09:38]And just as you might expect, the vast majority of people when defaulted into that investment never change it. Hey everyone, I hope you are enjoying this interview. if you can take a quick moment and hit that subscribe button. We are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. So that's to your point that a lot of people point to Vanguard and they point to Jack Bogle when they talk about the rise of passive, but that's not where this really lies. It's no >> this legislation.

[00:10:13]>> Yeah.

[00:10:13]>> Huh. So interesting. Okay. Um, you're writing a book.

[00:10:18]>> Yes.

[00:10:18]>> The greatest Oh, you're writing. Yes.

[00:10:20]Um, you're writing the Am I allowed to say the title? Yes, you are. Okay. The greatest story ever sold. Love the title.

[00:10:26]>> Thank you.

[00:10:27]>> And I read your Substack. Um, yes, I give a fig. So tired.

[00:10:32]>> You mentioned you're rewriting the book.

[00:10:34]You have to rewrite some chapters because of some academic research that's come out.

[00:10:39]>> Yeah. So um literally in February a new academic paper came out that evaluates one of the topics that I touch on in the book. I actually spent a fair amount of time on it which is the decision to construct our retirement system as we have has very um identifiable and predictable consequences for the way that we save for retirement. Retirement is a very tricky thing, right? It's very difficult to know what is going to happen in your individual experience. I have no idea how long you're going to live. I certainly don't know how long I'm going to live. But if we look at a population of a thousand people or 10,000 people or a million people, we can actually begin extracting what are you know effectively what an insurance company does an actuarial forecast for what fraction of that population is going to live for how long, right? What is our expected outcome becomes the dominant feature as compared to our individual outcome. When you move from a pension system that's a defined benefit that play pays income to the participants in the retirement system over a period of time that can be managed in that actuarial basis.

[00:11:49]Interestingly enough, part of the reason that the defined benefit systems experienced so much trouble in the late 1960s and early 1970s was because life expectancy was far greater than people had anticipated. The change in life expectancy particularly tied to the introduction of antibiotics during World War II radically changed the frequency with which people basically dropped dead of you know getting cutting themselves shaving then getting infected infected with strepscus bacteria. Um penicellin took away a lot of those deaths. The cure for tuberculosis took away a lot of midlife deaths. Um also antibiotics by the way. Um and so that actually led to a burden on the pension plans that had assumed that people were going to die at a certain age with a certain frequency causing many of their participants to have much longer retirement periods than they had anticipated and unfortunately creating conditions under which many companies went bankrupt around this.

[00:12:44]People sought an alternative. From a corporate perspective, it's much easier to say we will make a defined contribution. we will put $500 a month into your retirement account for you. We have no idea what that's going to deliver to you into retirement, right?

[00:12:59]And it's not our responsibility. It's your responsibility.

[00:13:02]>> We took it from the, you know, investment committees and pension planners at corporations who ostensibly have access to all the tools and the finest managers and we can debate whether that's a good thing or a bad thing. And we suddenly put it upon secretaries and janitors and everybody else to manage their own retirement. Um, in those conditions, again, every individual has to basically assume the worst case phenomenon. And so, they have to save much more money than they would if we had a collective system in which people are ultimately being uh governed against these actuarial assumptions.

[00:13:34]That means we've moved to a system in which we're hoarding assets. And that's what this paper is actually about. It identifies the mechanical change that has actually occurred. And it looks not just at the implications of the traditional saver who actually is very distinctly benefited by the system because they have an incentive to save.

[00:13:52]They effectively identify that there are different types of people in the population. There's as they describe it type A and type B. Type A people look at their paycheck and say, "Okay, I'm going to set aside 15% of this and it's a total gift from the government that I get to do that on a pre-tax basis."

[00:14:07]There's another group of people who look at their paycheck and are like, "Oh, this is fantastic. I can get another snow cone." Right. Yeah. And you know what we did in 2006 with the pension protection act was identify that and say wait a second those people who want a snow cone we're going to take that money away from them before they can buy the snow cone >> automatically just do it for them.

[00:14:24]That's the pushing the button versus the rise of passive as you point out.

[00:14:28]>> Um and that's because that okay because of that prices don't move because of new information.

[00:14:35]>> They move because of the flow of funds and they've always done that. This is actually really critical to understand.

[00:14:39]Prices have always changed because of transactions. They don't change because of an earnings report. They change because somebody trades in response to that earnings report. And so when you change the incentive structure or the rationale for why people transact, you're going to change market behavior.

[00:14:56]>> So when you were saying um what was it 1992 it was 2% of the market was passive. Today it's 55. Is there a number where it's like uhoh where we've reached the threshold of >> So this is actually an active subject of debate. Um I just released a paper uh in concert with two other authors um that evaluates exactly this takes a shortcut approach. It basically goes back to a more traditional stockbased model. It says is there a level of passive regardless of flows at which the market becomes unstable. And our conclusion is somewhere between 65% and about 80% the market enters into a stochcastic regime in which the possibility of explosive volatility and a 1987 style crash becomes not a probability but almost a certainty.

[00:15:45]And so we're unfortunately very close.

[00:15:48]We're gaining about 4% a year in passive share right now. So at that 65% lower level, we're you know two and a half years out.

[00:15:56]>> Wait. Okay. So 65 to 80% is >> and then it's wait explain a bit more on the prob and then what that translates to the probability of a 1987 style crash.

[00:16:07]>> Yeah, I mean it's it's worse than 1987 to be totally candid and you know you may remember that when I did my first work on this in 2016. I began searching for markets in which passive or more accurately systematic algorithmic strategies had already reached extraordinarily high levels. Was that portfolio insurance back then?

[00:16:26]>> Well, in ' 87, it was the portfolio insurance. So, that was an attempt to effectively um replicate what's called the riskneutral arbitrage properties of of Blackshaw's. Um portfolio insurance was really just a way of effectively creating synthetic puts in a portfolio by selling futures against an underlying position. Um the assumptions around black trolls, this is always, by the way, what happens, right? We make models. models by definition have to have simplifying assumptions. Otherwise, we cannot we cannot calculate them. They become what's called intractable. The world itself is far too complex to calculate. When you get a map that shows, you know, the highway goes this way. It's not actually measuring every single tiny deviation in the highway.

[00:17:09]It's not looking at, you know, the rocks on the side of the road that could potentially cause you problems. It's a simplifying assumption that is good enough to allow you to navigate from point A to point B. We make those same assumptions within finance. In 1987, we assumed that markets were continuous and that allows you to have the properties of riskneutral arbitrage be totally unimpeded in a portfolio insurance model. Unfortunately, we discovered in 1987 is once a particular strategy becomes a dominant feature within that market, conditions can arise in which markets become discontinuous. And that was really what happened in 1987 was you entered into a regime in which Lor Leland O'Brien Rubenstein Mark Rubenstein's firm who introduced portfolio insurance became a large enough fraction of the futures market that the required quantity that they were going to have to transact would exceed the market's capacity to absorb it. That was the analysis that Paul Tudtor Jones did in 1987 that allowed him to predict and profit from the 87 crash. My work led me to the VIX complex, the volatility complex, the UX futures market had become dominated by a product called XIV and a lookalike called SVXY.

[00:18:24]Um, where they were exceeding 70% of the daily volume of the UX futures on any given day. Um, and that was under normal low volatility conditions. The systematic rebalancing of their portfolios had become the dominant flow in that market.

[00:18:41]um that allowed me to extend the analysis and say is there a point at which we can have a discontinuous move here and my conclusion was that it was roughly a 95% probability from that point I was managing Peter Thiel's capital at the time we took about a quarter billion dollar position in put op or put options on a product called SVXY was a lookalike for the XIV and predicted that this event was going to happen um it ended up happening about 6 months later in the event called fall magdon Um, and candidly, in many ways, that spoiled me, right? It's the gamblers's curse. If you win on your first time out, you somewhat become lazy. It's a little bit akin to sitting down at a slot machine and winning, then deciding that slot machine is the hot slot machine. Um, it turns out that the difference between the VIX or the XIV and the S&P 500 is the composition of the index. So, with the XIV, there was a single underlier, the UX futures. M >> and so it became very easy to predict that with the S&P 500 or a total market index there's 500 to 3500 underlying securities and so it actually turns out and this has been some of the work that I've done in the last six months it's been one of the most fruitful periods of my career is identifying the impact that this has the order flow coming into the indices has on every individual security and so we now actually have models that are somewhat predictive around the impact of a dollar into a Vanguard fund that allows us to articulate how that affects every individual security with reasonably high precision.

[00:20:10]>> This is so interesting. Okay, so based on your model, we're only we're like just under three years away from the >> we're three years away from the window that basically says this becomes an inevitability. You can't predict exactly when it's going to happen, but the market at that point becomes inelastic enough that on any significant change in volume um or demand flows, you could see an extraordinary uh effectively a waterfall type event, which is what a crash really is. It's a discontinuous event.

[00:20:41]>> Does this make it harder for actual investors? Like we're talking about the active managers.

[00:20:46]We've seen short sellers who step back over the years. Is it harder today to be an investor? It >> it is because if you think about that concept of inelasticity, right, what it's really describing is a convex response, a nonlinear response. And so, you know, if you think about the process of um tracking an individual, if I know that they are walking at exactly 3 miles an hour in a northeasternly direction, I can tell you in exactly an hour, they'll be three miles northeast. But if they are randomly running or accelerating or slowing for a coffee, etc., it makes it much harder to predict. And so from a a short seller perspective, and this is really where the pain has occurred, and I I sometimes joke that I've spent much of the last decade functioning as a uh Robin Williams equivalent from the movie Goodwill Hunting, in which I say to short, it's not your fault, son, right?

[00:21:34]It's not your fault, right? Um you know, you have conditions that have emerged where the securities that they are short on the flip side of that have an inelastic buyer. the Vanguard passive complex that doesn't care about any of their findings. It does not care if it's a fraud, right? And so the largest buyers of firms like Nicola, the, you know, battery powered truck rolling down the hill were firms like Vanguard.

[00:22:01]>> Yeah, I remember that Nicola truck. Oh my goodness. um where markets are not well you could say today or more recently at these all-time highs does it often feel like there's a disconnect between the markets and the economy is there one right now or >> there there is one and people will point to earnings and say you know well this justifies what the market is doing we're seeing an extraordinary increase in earnings I would point to the quality of those earnings so if you think about a company like Nvidia for example >> the source of its extraordinary earnings growth is primarily really been through its expansion in margins. Right? There's been huge revenue increases, but the vast majority of the profit increase has actually been their profit margins expanding from about 40% to today they're running around 75% gross margins. Those are extraordinary levels.

[00:22:46]Um that has actually been facilitated by the rise of Nvidia stock because it allows them to basically use their appreciated capital position to engage in vendor financing. if I'm going to lend you the money to buy my semiconductors, you're not going to spend much time negotiating for price.

[00:23:03]And so they've been able to pass through these dramatic price increases or failure to price through price decreases that would traditionally play through an on market by largely engaging in the type of vendor financing that also facilitated Cisco's profitability in 1999 with network sales. One of the primary tools that was used by venture-funded or startup companies in the late 1990s was to have to sell shares to Vanguard or not to Vanguard, I'm sorry, to Cisco and Cisco would in turn sell them the uh network equipment that was required to start up their dot um in exchange for ownership of the company. That shows up as profits as they go public. That shows up as profits to Cisco, etc. Nvidia has benefited from this. Nvidia has benefited from the inability of their customers to negotiate on price because they're receiving financing from Nvidia or others. That means that there's a natural tightness to the supply in the market that facilitates those much higher prices that in turn support those earnings. And so it is become a circular phenomenon where the strength of the stock market is actually contributing to the profitability of many of these companies.

[00:24:07]>> Is there a level where you think we should be or >> in terms of the market or in terms of the profits?

[00:24:14]Um, if I do a traditional discounted cash flow analysis, this is interesting because Goldman Sachs actually just did this analysis and and basically the answer is right now about 75% of the market value is in that quote unquote terminal value which assumes that somebody else is going to buy this from us at somewhat similar multiples off into the future. It can't be explained by the cash flows. And so just on a purely mechanical basis when I among other things consider the already inflated cash flows that crazily enough suggests that the market is overvalued by more than 75%.

[00:24:47]>> Wow.

[00:24:47]>> Which would translate to an S&P somewhere below 20 you know somewhere below 200.

[00:24:52]>> Wow. Yeah. Um, do you as an investor, do you have to just like recognize this is the force at play and just play into the trend while the music's still going or >> Well, you know, I I I fall unfortunately into the category of somebody who recognizes it, understands it, um, utilizes it, hates it, >> right? And, um, as a result, I, you know, I find myself constantly simultaneously offering soothing words of this is not going to stop until it stops and we need to understand this.

[00:25:22]and at the same time doing everything I can to raise awareness of these issues because candidly the system is unstable.

[00:25:30]>> You've pushed back. I've seen you push back on the we've never been better off narrative.

[00:25:34]>> Oh yeah.

[00:25:35]>> Push back on it.

[00:25:36]>> Yeah. Um look, I mean the the the simple reality is that many of the metrics that we use for measuring how well off we are are still trapped in an aggregate framework, right? So we talk about GDP per capita. We don't talk about your individual GDP or your individual wealth. We talk about them in aggregates. And as I sometimes joke, you know, the law of averages can be brutal.

[00:26:00]If you know, Bill Gates and I walk into the average bar, the bartender says, "Oh, look, a couple of billionaires, right?" Well, Bill Gates is a billionaire. I'm not a billionaire. I would hope he's buying drinks. Um, but the simple reality is is that I don't have the same outcomes that he does. And so, when we quote things like GDP per capita, we're basically looking at an average. And our society is increasingly not characterized by an average. The median is far below the mean. The lowest quintile um of our population is really struggling. Where we're actually seeing the biggest breakdown is actually basically between that 20% who would class, you know, would we would traditionally think of as truly poor and those that are about the 90th percentile who we would traditionally think of as really well off. that 20th to 90th percentile is just an increasingly stressed population in which the cost of participating in today's society um is making them feel, you know, precarious is the the line that I think is the word that I think best describes how most people feel. And we're seeing that in the data. Gallup just came out with a poll that says 55% of American households are concerned that their financial status will be worse off in a year. This is the highest level we've ever seen in history. It's completely in congruous with the metrics that we have a 4.3% unemployment rate and a stock market at all-time highs.

[00:27:21]>> And presumably that that's the valley of death, if you will. They probably have certain jobs that are buying in or they're investing in the stock market.

[00:27:31]>> Well, they they are almost by definition being pushed into it. So, you know, often times people will point to growing wealth in 401ks.

[00:27:38]That unfortunately, again, as this paper we were just discussing highlights, is you know, a largely a function of demographics. As a society, we've gotten dramatically older and we have a higher fraction of people who are at their peak wealth levels because they are planning for this retirement of uncertain duration. And so, we see a very high level of household wealth. But if we actually look at that for example for the millennial generation and we flip it around and we say you know what is their share of corporate earnings or of corporate cash flow versus prior generations because of the much higher valuations that they're buying these securities at. They're actually getting fantastically low participation in the economy on a fundamental basis versus prior generations. Yes, their wealth is high, but that's because we're paying 30 times for mature companies like Apple as compared to where I would estimate Apple is worth, which is probably a single digit PE.

[00:28:36]>> So, demographics, >> demographics play a really critical role and again, they become an increasingly important role when you change your retirement system from one that offers income >> to one that relies on your ability to sell assets to fund your retirement.

[00:28:50]>> And boomers are moving into the retirement age. they're going to start to draw down.

[00:28:55]>> Yeah. So, boomers have already started to move into that. Now, you know, Jerome Powell at the Fed has been very helpful to the boomers by raising interest rates to a level that we haven't seen for really 15 plus years. Um, that reduced their need to sell assets and has contributed to the phenomenon that many of us are experiencing the economy where the older people seem to be doing really well and they look at the younger people struggling and they just don't understand. And this is actually one of the critical insights that I want to make sure that people particularly because you have a younger generation in your audience that they understand.

[00:29:30]>> Part of what's happening is that older generation is terrified as well because they don't know how long they're going to live. They don't know what the expenses are going to be associated with their retirement. They don't know if Medicare and Social Security are going to be there to allow them to fund the medical care that they've grown that they need in their aging um during their aging experience.

[00:29:49]um they're scared their assets aren't going to last long enough and so they're under spending relative to what their asset levels are. We hear this from entities like Barry Ritoltz has explicitly highlighted this that the traditional model is something like a 4% withdrawal from a 401k. They're seeing their clients withdraw 2%. Mhm.

[00:30:11]>> And really that's just the income on if you think about a 60/40 portfolio paying 5% that 40% is going to generate somewhere in the neighborhood of 2 and a.5% interest income on that portfolio.

[00:30:22]They're basically just spending a fraction of that interest. It's because they're so scared to let go of those assets because they don't know what's going to happen. And so, you know, when you talk to your parents, understand that one, they're under spending directly translates to reduced income for the younger generation. It's just a tautology in an economy. spending from one person becomes another person's income. So the lack of spending that's happening at the older generation is actually impacting the incomes for the younger generation. And when we raise our voices and we say this isn't fair, this isn't right. We should tax their wealth. All you're doing is make them tighten up even more, >> right? They're scared and understandably so.

[00:30:58]>> I can tell Mike that you really care about this. You've been working and writing and researching about this for over a decade now.

[00:31:07]What is it that worries you the most?

[00:31:10]Like what is that scenario that it that maybe scares you?

[00:31:14]>> Well, it's unfortunately exactly this phenomenon, right? You have one segment of the population, the younger generation that is really being impacted by this asset hoarding. If you think about most of the complaints that you're hearing from young people, it's I can't buy houses. Well, the great irony is is that you have a generation dur you know that is headed towards mortality that is living in their houses far longer than we expected that is holding on to their houses among other things because they financed them at 3% interest rates and so they can't possibly replace that house with a lower payment. They may have paid off their house and as a result they're looking at it and saying, "Well, I don't really have housing costs. If I sell this house and I go buy something else, I'm going to reduce my security." And that is creating the condition for the younger generation where they can't buy the houses of the boomers because the boomers aren't selling them. Now, that's starting to change. I mean, this is some of something that I think people really need to understand and probably the best model for this is what happened in Japan, what's currently happening in China. Um the data has actually just recently come out that Chinese home prices have now fallen to the level that they were 20 years ago. Right? So this is a country that has become far wealthier that has become very successful on the global stage in part because of the size of the population and our outsourcing of our manufacturing there which also by the way plays a role in in the phenomenon that we're experiencing and we tariffs become an interesting discussion. We should probably come back to that. But you know those markets in real estate have been disasters for 20 plus 30 years now. We haven't experienced anything like that in the US because we're still ascending that up slope as I sometimes call it going uphill with no brakes, right?

[00:32:49]Doesn't matter. Once you start going downhill, it becomes a problem. I'll tell you on a personal basis, I actually just bought a property off of a boomer who unexpectedly had to go into assisted living and I bought it for 40% below the list.

[00:33:02]>> Wow. So like >> as an investment >> uh yeah it's basically a piano tear.

[00:33:07]Yeah.

[00:33:07]>> But you know that type of condition is going to begin emerging >> and it will improve some of these scenarios that people have. But it also, you know, creates social friction. Home prices falling is not a good thing because those are levered assets that people have. You put 20% down. If that home price starts to fall, you're increasingly stressed. the equity that you've made by paying down that mortgage. And that almost all happens in the last 10 years of that mortgage on a 30-year mortgage. You make very little progress in building equity other than price appreciation in the first 20 years of a advertising mortgage. Um, you know that you lose in that scenario too.

[00:33:49]>> And so the younger generation is understandably very stressed about how they acquire the assets that are necessary to live a modern life. How do I get a home? How do I have it at home in a good school district so I can have children and avoid the additional expense of private school or force my wife to stay home or my husband to stay home and and homeschool the kids? These are all the challenges that your generation are facing. And in my opinion, it is largely tied my opinion and my analysis leads me to conclude that it is largely a byproduct of the way we've structured retirement around not replacing income and instead encouraging people to hoard assets.

[00:34:21]>> Wow. Mike, before we go here, you write about these issues and I think a lot of times they're like almost like societ they're just societal problems, too. Um, what does all this say about like the social fabric, the direction that we're headed?

[00:34:39]Um, if you could sum it up.

[00:34:42]>> Um, well, part of what I part of the reason I write about it is because diagnosing what is actually the problem is the first step in curing the problem.

[00:34:51]And the the thing that makes me saddest and also the most hopeful is that it's remarkably easy to change, right?

[00:34:58]Changes to the tax structure and rationalization of the tax code. Uh to you know there's a UK um writer and podcaster Gary Johnson um who wrote a book called Trader um T r a der not trader as in trader to his country although >> I know who you're talking about. Yeah.

[00:35:18]So he he he has a motto right tax wealth not work >> and it's actually a very insightful observation and it very much is the tax code that we had in the 1950s that contributed to the most equal society and most productive society that we have ever seen. What's unfortunately increasingly happening is that the younger generation is starved of capital. They're starved of the assets that allow them to be productive members of society. They're so worried about what comes next. what's the next bill that's going to hit? What's the next barrier that I'm going to face? That they aren't able to actually free their minds and focus on how do I make my life better? How do I make other people's lives better? That's what capitalism really is. Capitalism is a tool for harnessing self-interest in the collective interest. Right? I create the rules that facilitate competitive exchange where my contributions to society are going to be valued based on how much other people value them. Right?

[00:36:12]And that's a really powerful force. And we've muted that by basically biasing the system towards capital accumulation and taxing work. Labor in the United States is actually taxed at an extraordinarily high level relative to capital. That naturally biases the system against workers and creates the conditions under which the younger generation where all they have to offer is their time in labor. They feel like the system is stacked against them and they're right.

[00:36:41]>> Do you think the wealth taxes make sense? Like the billionaire's tax? I don't and that's actually one of the other frustrations is that the shortcut approaches to it are actually quite costic. Um so if you introduce a perennial wealth tax if we tax wealth on a continuous basis that creates or we even you know proclaim to ourselves this is a one-time tax. We're not going to do it again but we've set in place this the facilities that allow us to do it again.

[00:37:04]We will do it again. Mhm.

[00:37:06]>> That actually raises the cost of capital quite dramatically and it creates conditions under which far less investment and far less capital is actually deployed in the real economy.

[00:37:16]More and more of it is actually deployed in financialization which is really just various permutations of how do I build something to avoid taxes in many situations. Um that's unproductive investment. And so you know very you know what what would candidly feel like major changes but would really just require thoughtful policym could take us an extraordinary distance in ameliating these conditions and establishing a much more rational and fair society in which people contribute through either their contribution of capital or through their contribution of time in the form of labor. And those benefits are much more equalized. Not meaning everybody has the same outcomes. I'm not preaching equality. I want to be very clear clear.

[00:37:58]Inequality is a motivator. It is a powerful force. Again, capitalism harnesses self-interest in the benefit of the collective. It is the most moral system that we have. What we're experiencing right now is not capitalism.

[00:38:11]>> Michael Green, chief strategist at Simplify Asset Management, author of Yes, I give a fig substack profum 999 on X. Really appreciate you taking the time. Thank you for being so generous with all of your ideas, your knowledge, your wisdom, helping all of us learn and get better. Really appreciate you.