What exactly does a chief strategist do? Besides picking fights with Bitcoin HODLers on Twitter… And how exactly does one of the most prominent voices on the dangers of too much passive money trying to fit into a single asset classes on/off ramps, end up at….wait for it….an ETF shop?
We aim to find out in this episode with Simplify’s Chief Strategist and Portfolio Manager – the one and only Mike Green @profplum99 – he of Clue character handles, Princess Bride Avatars, and insightful RealVision interviews and macro focused writing pieces.
In this fun chat, Mike shares his particular brand of monotone macro mastery with us, but we also dive into his famous anti-XIV trade, role at Simplify, why the ETF structure keeps getting more and more appealing, big boy markets, exchanges and the LME, the inflationary pressures of the ’70s vs. today, why ‘team transitory’ gets a bad rap and quick thoughts on Crypto and NTFs. You’re not going to want to miss this jammed-packed episode!
About Mike Green
Michael has been a student of markets and market structure, for nearly 30 years. His proprietary research into the shift from actively managed portfolios and investment funds to systematic passive investment strategies has been presented to the Federal Reserve, the BIS, the IMF and numerous other industry groups and associations.
Michael joined Simplify in April 2021 after serving as Chief Strategist and Portfolio Manager for Logica Capital Advisers, LLC. Prior to Logica, Michael managed macro strategies at Thiel Macro, LLC, an investment firm that manages the personal capital of Peter Thiel. Prior to Thiel, Michael founded Ice Farm Capital, a discretionary global macro hedge fund seeded by Soros Fund Management. From 2006-2014, Michael founded and managed the New York office of Canyon Capital Advisors, a $23B multi-strategy hedge fund based in Los Angeles, CA, where he established their global macro strategies, managing in excess of $5B of exposure across equity, credit, FX, commodity and derivative markets.
In addition to his work as a market theorist and portfolio manager, Michael has been noted for his work as a public speaker and financial media participant. He is a graduate of the Wharton School at the University of Pennsylvania and a CFA holder.
From the Episode:
Learn more about Mike’s background in our previous recorded episode here.
Check out the complete Transcript from this weeks podcast below:
Hedge Funds vs ETFs, Passive vs Active,70s Inflation vs Now, & Commodities vs CTAs with Simplify’s Mike Green
Jeff Malec 00:07
Welcome to the Derivative by our RCM alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy Spring everyone. It’s April in Chicago and we’re finally warming up in the pods warming up to with performance coach Denise shell on next week, followed by the guys behind the new vix ETFs followed by quant Archer set. So subscribe today on your favorite pod program be the first to get these episodes as they drop. We’ve got a great one for you today with the one and only Mike Green chief strategist and portfolio manager at simplify to share his particular brand of monotone macro mastery with us. This was a fun chat talking through kids leaving for college. Why he went into the passive Vipers den so to speak, joining an ETF shop and coming up with a few new things for morning startup. It’s fun research flow beta and leveraged beta. Send it This episode is brought to you by RCM’s managed futures group and their newest white paper going through all the ins and outs of trend following we talked with Mike in this episode about simplifies new trend following ETF and our Sam’s professional team of advisors can help you really dig into what products like that are doing under the hood. Check out everything our Sam email@example.com Now back to show. Okay, we’ve got them the one and only Professor Plum slash Barzini. Mike Green of simplify. I always want to say Spotify. Yeah, you too. It’s not Spotify, it’s simplify, right?
Mike Green 01:41
It is not Spotify, it is Simplify.
Jeff Malec 01:45
So we’re gonna skip over the background a little bit, we did our first property back in 2020. Go check it out, we’ll put it in the show notes. Especially the part where Mike structured a very nice trade buying puts on the inverse fix Etn before it went bust down to zero. So let’s start with your tweet. Last night, your son’s going to Navy.
Mike Green 02:06
Yeah, he finally made the made the call, he had a number of choices, and candidly took the path less traveled, you know, turning down some really amazing schools that are more traditional academic choices. But he really loves the discipline, he really loves the coach at Navy. He’s a big swimmer, I think you know that. And, you know, this is really an opportunity for him to try to do something that, you know, when I asked him, you know, what, what are you afraid of in the traditional Ivy League sort of choices, or the UC choices? You know, his reaction was nothing right? What is there to be scared of? Same thing I’ve been doing, you know, my entire life, basically. And when I asked them about Navy it was you know, well, I’m worried you know, could I Hackett right, is it more than more than I’m prepared to handle. And from my standpoint, that’s exactly the reason why you end up doing something, right? You challenge yourself particularly early on in your life, to try things that you’re not entirely sure you can pull off. And if you succeed at it, then you don’t have that to worry about anymore. And if you fail, well, he learned something new about yourself.
Jeff Malec 03:22
And what how does that work? So you go there and then you have to serve at least two years or what’s the
Mike Green 03:28
it is four years, so I’m sorry, five years actually. So he will have four years of US Naval Academy undergraduate and then five years in the service. He also considered doing things like ROTC which are similar in terms of their dynamics. But he really, you know, just wanted to be involved with the the Navy and the discipline and brotherhood associated with the service academies.
Jeff Malec 03:55
Good for him. I was feel a little unspectacular. My grandfather was in the Navy World War Two, my dad was in the Navy in Vietnam, and here I am doing hedge fund stuff that doesn’t equate. So hats off to him on
Mike Green 04:09
your near enough to the pits. It’s like wading into battle once.
Jeff Malec 04:13
Yeah. That’s awesome. And how’d you find the whole college application? I’ve been hearing horror stories of people with straight A’s and they can’t get into schools because basically COVID condensed three years of applicants in one year.
Mike Green 04:26
Yeah, so that affected him more than most. So he’s our third, our last actually. And so this is very bittersweet in that, you know, he is not only going off to college, but leaving early because he has to go for club summer. So he’s, he’s going to be taking off basically June 30. And that’s the last time he’ll live at home for a very long period of time because then during the summer is they have the equivalent of internships where they go and experience different opportunities and different different areas of the service. So Now you’re going to get me emotional because I’m, I’m in the process of losing my last son. He’s a very serious athlete. He just missed the Olympic trials cuts for swimming this past summer, which is great for a high school kid. Yeah. And, you know, he was recruited athlete, but the dynamics of being a recruited athlete were heavily screwed up by COVID. His sister who was playing volleyball at the University of Pennsylvania, just missed or, you know, managed to get recruited just before the cut offs began. He was in the middle of his recruiting season as as COVID kicked in. And one of the weirder dynamics that that happened is that all NCAA athletes had their eligibility extended by an additional year. And so the implications of that were that the recruiting classes were cut, in many situations less so for sports, like football, but certainly for sports like swimming. Instead of eight kids to recruit, typically, there’d be five kids because you had kids sticking around for a longer period of time. So that really played havoc with his expectations around the process. But it all ended up working out great in the end, that he’s with the coach he wanted to be with. And I look forward to getting to travel cross country to go see him swim now.
Jeff Malec 06:19
Yeah, you’re gonna be on those red eyes nonstop.
Mike Green 06:22
Yeah, exactly. If anyone if anyone else out there is a swim parent, you know exactly what I’m talking about. Gavin is a sprinter. And so I will travel, you know, for a three day swim meet to watch him swim a grand total of about two and a half minutes across his various events. So it’s, you know, on a, it’s like watching your kid ride the bench continually, even if they’re pretty good at it, so.
Jeff Malec 06:44
And so does he still have a shot at Olympic trials next time around four years?
Mike Green 06:48
He’ll make the Olympic trials next cycle? Almost certainly. Usually, they drop a couple of seconds during college. And with that, like he’ll, he’ll definitely, it’s my expectation that hope qualify? Well, we’ll see. Never say no, you know, you can’t take things like that for granted.
Jeff Malec 07:07
Right? Where did all these athletic jeans come from? Is that from you? Did you play a sport?
Mike Green 07:12
I did play sports, but I never played them particularly well, my wife was the same. And I will tell you that our kids are a testament to the fact that two parents with very limited athletic talent can produce kids that that seem to pull it off if they have the discipline to do it themselves.
Jeff Malec 07:30
Hello. And last personal before we get into the good stuff, the has the Keto going, I know I was big on that four years ago and kind of fallen off the wagon. So I see your tweets and you’re given me hope to get back in there.
Mike Green 07:44
It’s going really really well. So I’m down about 75 pounds 75 While 75 pounds, and I’m roughly the weight I am when I got married. And if I if I’m honest with myself, I’ve got another 20 pounds to lose and those 20 are probably going to be the hardest because I feel pretty good. And I can feel a little bit of the Keto exhaustion kicking in but I’m doing better than I have been done a long time and you know, giving myself the grace to say okay, let’s have a little bit of celebration and then let’s let’s get back to it. The biggest challenge at this juncture is just finding the time to work out as I had been doing because now at simplify we’re launching multiple we’ve launched multiple new products that I’m very directly involved in. And as you’ve you know, obviously observed and others are catching on the markets have become quite a bit more tricky than they were in kind of the one way trade following March 2020. Right So figuring out the right way to structure products helping people understand how products should respond thinking up better ways to hedge in the environment where hedging costs are much more expensive is mentally quite a bit more taxing so you know now I’ve got multiple loads competing on my brain right now. Here you
Jeff Malec 09:12
simplify what exactly does a chief strategist do? What’s your normal day look like? To me? It’s you wake up fight with some bitcoin holders on Twitter for a little while, and then come up with some cool product. Exactly.
Mike Green 09:25
Yeah, you nailed it. No. Um, so I have two titles chief strategist and portfolio manager as chief strategist. I’m responsible for thinking about things like how market structure will contribute to our products behavior, understanding the general macro environment, not quite putting us into the quadrant type framework, but be thinking much more about how should we be hedging in this particular environment and contributing you know, far too much experience to that process. On the portfolio manager side, it’s much more traditional, right? It’s, you know, should we actually execute a hedging trade? What is the budget that we’re going to use over this quarter? What are the discretionary trades that we can deploy, because we do do discretionary trading, particularly in small size at the front end to try to defray some of the costs of carrying the hedges. You know, so being actively involved in that process is pretty typical. You do see me being very active on Twitter, that is part of my job is is promoting the simplify brand, sharing the insights that we have across markets, contributing a little bit of my personality to it to the extent that somebody with a monotone voice and a face made for radio can contribute to those sorts of things.
Jeff Malec 10:50
But 75 pounds down your face alone probably dropped 10 pounds, right. So I get for video head is significantly
Mike Green 10:57
less swollen now, shall we say? But yeah. Now it’s it’s so so the day to day existence, like is, you know, I’m usually up around 430 In the morning, because I’m on the on the West Coast. And, you know, we’ll start the day off with some reading. And part of that reading is, of course, going through Twitter, which has become one of the better news services for capturing information, quickly and efficiently, much greater degrees of flexibility with the analysts and thought leaders on Twitter, then you have in the sell side investment banks. And so there’s it’s actually quite a bit less filtered and in many ways more efficient to gather information off of Twitter, if you know what you’re looking for.
Jeff Malec 11:40
Yeah, kind of counter to some people’s like, there’s too much noise. But yeah, if you have the right visitors, and notably, you want to know,
Mike Green 11:47
there’s an incredible amount of noise, but there’s also an incredible amount of quality as well, right? I mean, there’s just some really, really smart, thoughtful people out there.
Jeff Malec 11:56
Yeah. And sometimes you find with, like, 300 followers, like this guy really knows his stuff.
Mike Green 12:01
Yeah, you do find that. And one of the nice things about being relatively well followed on Twitter is the opportunity to amplify some of those individuals right there. You know, they’re both very talented and very smart, and often incredibly appreciative of somebody paying attention to them, right, which can be quite helpful in terms of understanding stuff. So I’ve developed networks on Twitter that include US government officials, that include regulatory advisors, there’s a number of very talented analysts that work for the Fed, or the bureau of labor statistics that are on Twitter. And they really provide excellent, excellent analysis.
Jeff Malec 12:48
And something you said in the back there of discretion inside the ETF. So I feel like the original ETF creators would be rolling over in their grave right now, right? It’s just a passive stock index following model. So how to simplify an overall as kind of a more active trade active ETFs, right? And then how do you be able to trade inside the ETF structure?
Mike Green 13:10
So we fall into a class that’s referred to as active ETFs. And anytime you’re using derivatives, and this is actually you mentioned earlier, the trade around x IV, for example, part of the reason why that trade was made possible is because they weren’t actually, you know, X IV and velocityshares did not have any discretion, I knew exactly what they were going to do. And so it was relatively easy to disaggregate the impact that they were having on the market, and what was the likely impact if if they were to encounter a particular type of event? Within an ETF, for example, our flagship product SPD? You know, we have to be very cognizant that those same dynamics are in place, right. So if the price of long dated deep out of the money insurance rises significantly, which it has in the aftermath of the of the pandemic, and has not retreated, right, so even as the VIX moves back down to the sub, you know, into the teens, we’re not seeing a retreat from longer dated volatility that is consistent with that sort of move, right? So you’re seeing a one year variance or a two year variance contract printing in the mid to high 20s. That changes the character of how you should be seeking insurance.
Jeff Malec 14:31
The right and I feel like the regulators were a little too naive at first, right of like, Oh, if it’s rules based, it’s systematic. It’s better for the investor protects them. When in fact, as you’re pointing out, well, sometimes that can hurt them because someone can gain the other side of those rules. Yeah,
Mike Green 14:48
it does. And the regulatory environment is still not changed enough from that standpoint. Right. You know, I just is having a meeting, speaking with a large wirehouse. And one of the things that was made very clear is that if you have a purely systematic strategy, it is actually much easier to get on to platforms, it is much easier for people to allocate capital to you, then even if you have a small slog of discretionary for the very simple reason that it’s not predictable. Right, you know, they can’t know exactly what you’re going to do.
Jeff Malec 15:30
That’s from the market maker side or just from the the warehouse trying to sell it. Both. Yeah, yeah, the way I’ve gone down that path before myself, if I if the market maker can’t make a market, fine, you have an ETF, but the spread is $3, wide, nobody’s going to train it or want to want to buy it if the spreads do what?
Mike Green 15:47
Right. And so So you run into those issues. One of the advantages of of being somewhat of a first mover into these types of products, this is that we’ve managed to get to scale so that market makers allow us to do things that others might not have been allowed to do or might not have been viewed as favorably. You know, among those would be products like introducing the first ETF CTA commodity trade, you know, trend advisor,
Jeff Malec 16:16
or take that one in a minute, we’re gonna deep dive that,
Mike Green 16:20
you know, those sorts of products or things that we’re bringing to market that I don’t think are easily accomplished. I know it looks like everything is easy on the ETF side. But that’s because there’s a ton of work that’s going on behind the scenes. And we can talk about some of those dynamics, but one of the most important and powerful dynamics is the ETF structure has an extraordinary amount of tax efficiency associated with it. And that’s particularly important when you start talking about derivative strategies. And so there are things that I can do that are tax efficient within ETFs that really were not appropriate within the traditional hedge fund space, except for tax deferred or tax advantaged institutions. Right? So so some a lot
Jeff Malec 17:09
of that just buy and hold stuff, you’re saying,
Mike Green 17:11
well, buy and hold is always tax efficient, right? But what is not tax efficient, for example, is any strategy that involves options, right? Because the best case scenario is you’re using index options in that scenario, you can elect for partial, you know, split treatment between long term and short term capital gains. But for the most part, derivatives are always treated as short term capital gains. And so anytime you’re running a strategy, you know, mild strategies that logica or the strategies for Ben eifert, for example, a QBR, etc. These are strategies when you involve options that tend to be uniquely well suited for institutions as compared to individuals either on the retail side or on the high net worth side. And so one of the key attractions was recognizing that the ETF structure could be used to improve the tax efficiency of options strategies quite significantly.
Jeff Malec 18:10
Do you see there was a little bit of talk of that ETF tax efficiency could be regulated away any fears of that? Also, think of like, if you move to that, hey, we’re gonna mark to market income tax on all your holdings. Does maybe the ETF get carved out of that and become an even bigger play?
Mike Green 18:31
The quick answer is we can’t possibly know this is one of the fun things when policy begins to move front and center is is that it is inherently unknowable and stochastic, and it’s in its framework, right? We just can’t actually know in advance so they’re going to suspend the tax advantages of ETFs. Are they going to expand the tax advantages of ETFs? One of the nice things in our industry is, you know, while I complain about it in a lot of other ways, the power of Blackrock, the power of Vanguard from a marketing standpoint, in terms of lobbying is pretty unmatched. And they’re pretty, you know, they’re pretty locked in at this stage.
Jeff Malec 19:09
Yeah, those what are they trillions, we just had a Robin Wigglesworth have wrote the book trillions talking about the whole ETF space. So it’s was Blackrock 5 trillion, I can’t remember the number, there’s
Mike Green 19:24
9 trillion and Vanguard is about 7 trillion
Jeff Malec 19:27
lodwar. And so how did you weigh coming from the hedge fund world to the ETF world? It seems like a little bit like made a deal with the devil to go into the passive space, but you’re saying they’re active, but they’re still passive inside of there.
Mike Green 19:41
Yep. So this is one of the things that hopefully was very clear from my narrative, you know, starting several years ago, the dynamics of the growth of passive creates conditions under which it is almost impossible to beat them, right for the very simple reason you’ve heard me use analogy. It’s like that that horse racing game or the the inflate the balloon water game at the carnival right
Jeff Malec 20:06
now loosen fans really good at it.
Mike Green 20:08
What’s your son’s really good at it? Okay? Well do you can make your son even better if both of you shoot at the same target, right you’re increasing the water pressure, you’re increasing the potential for the balloon to fill faster or the horse to run faster. That’s effectively what’s happening in the passive space is all the money is flowing into passive strategies that’s causing the underlying securities that mimic the the passive component or make up the passive component to outperform right, and there’s not a lot of ways that you can improve that without taking significant tracking error risks. One of the ways you can improve it is taking advantage of the fact that option theory does not even provide for the possibility that the market is being influenced in that manner. So the whole thought process behind footfall parody and risk neutral arbitrage is functionally dependent on the efficient market hypothesis, the idea that there is no forward drift that is not compensated ie knowledge based, for example. You know that that’s one of the most foundational components in option theory, and it creates the opportunity to earn excess returns in options if something’s going on. That’s creating conditions of drift.
Jeff Malec 21:25
It’s almost like the Yolo meme stock traders figured that out by accident, right? Of like, hey, if we go into these call options, and everyone’s flowing into them, we’re gonna get this huge outsized payoff.
Mike Green 21:37
That’s what I mean. That’s one of the great ironies. Right is that is I think I said it this way, on the the Grant Williams podcast a long time ago, there’s genius in the naivete, right. Yeah. Sometimes it’s as simple as saying, Hey, we can do this not should we do this is this the right thing to do? Is this a long term trade, etc. Just do it right to quote Nike, and beat the vast majority of people are going to lose under those conditions. But every once in a while, you’ll get a Gamestop, you’ll get an AMC. And that’s particularly true if there’s an environment in which the marginal purchaser of those underlying securities is either somebody who’s forced to hedge or an index player, right, and GameStop, for example, and I believe AMC as well, at one point became the largest stocks within their respective indices, right created a tremendous amount of buying pressure as money flowed into Vanguard, for example. You know, they were following on and buying AMC and GameStop for the very simple reason that the assumptions under passive investing presume that there must be really good stuff going on to justify that type of price increase.
Jeff Malec 22:47
And then is arc A good example of your theory on the on the downside, right? I’m like, hey, when this money comes out, yeah, in both directions.
Mike Green 22:57
So if you disaggregate arcs performance into it, you know, the traditional way to do it would be that you run the performance of Ark against the s&p or the NASDAQ, right. And if you do that, you discover that that has a rut that ark has a relatively unstable beta, that their beta to the NASDAQ, which is probably the best benchmark for them has been growing. But it doesn’t do a very good job of explaining behavior. If you introduce a second variable which is flows into arc, what you discover is that second variable has its own beta that ultimately began to subsume first on the top side and then on the downside much of the beta exposure associated with the NASDAQ itself. And so the beta for ark to the NASDAQ, if I incorporate flows has remained relatively constant and you can think of, you know Cathy wood as the well there had to be somebody who was willing to go with a 1.5 beta to the to the NASDAQ. Once flow started to come in, it caused her portfolio to begin to outperform even the NASDAQ as the flows in created positive behavior. And then once that flipped, he began to see them all underperform right I think she I think it’s a fascinating insight in terms of this dynamic of a flows dominant marketplace.
Jeff Malec 24:24
We need that should be a new Morningstar stat or something, the flows beta, is there a fancy Greek for that or anything? There is
Mike Green 24:31
no fancy Greek, although that’s its it actually probably should be designated in some form or another. The challenges is that it’s been really hard to disaggregate this type of stuff, to academics at Chicago, gubbay and cogen, who you’ve heard me talk about before, have done some very fancy math that allows you to do that. One of the beautiful things about Cathy Woods Ark is that we have daily liquid daily flows. associated with art because it is an ETF. And so it’s relatively easy to disaggregate that type of performance. I don’t need to do the very fancy higher level mathematics that Gevey equation are doing. But you know, it, there’s definitely something there. And the data is becoming more and more clear that this idea that markets are nearly perfectly elastic, and that all the information, or all the source of price change in a market as a function of information flows. It’s just becoming painfully clear that that’s not what’s actually happening.
Jeff Malec 25:38
I bet. That’s an interesting point on all that available data, we’re gonna see academic papers probably for the next decade, right of dissecting arc. And what happened exactly,
Mike Green 25:46
we’ve already started to see an extraordinary explosion. This is, you know, in the same way that that fama and French kicked off kind of a, you know, a Cambrian or Precambrian explosion in terms of the diversity of factor research, etc. Yeah, I would argue that the first paper by Laci Peterson sharpening the arithmetic of active management, which I consider to be foundational in my thinking around indices, and really was the first to highlight look, you know, they can’t actually be described as passive because they occasionally have to transact that paper in 2016, in my view, started the process of kicking off a new revolution in thinking. And we’re witnessing an extraordinary explosion in very good academic research that is challenging the very core precepts of the efficient market hypothesis. And unfortunately, the the the great irony is that that is happening at exactly the same time that we’re seeing more and more and more of the market managed under the assumption that the efficient market hypothesis is true.
Jeff Malec 27:00
And where do you sort of tangential to that? Where do you land on the whole option, market maker gamma hedging, really driving the market at times, we’ve had some on this podcast are basically saying that’s the whole game. Some are saying that’s way overblown. It’s like just a drop in the bucket, it doesn’t really matter if you’re trying to grab a few ticks here and there, maybe it matters. But on the grand scheme, it’s not pushing things around.
Mike Green 27:26
I think it depends on what you’re trying to accomplish. You know, the first of all, I would never say any one factor is all the the there is right? It’s always a single dynamic, right. So gamma is really important. In terms of the indices, it is less important in terms of individual stocks. The we are we are seeing an extraordinary amount of influence from stock option positioning on some of these meme stocks, for example, Ben eifert, for did a wonderful analysis on how that could translate to an extraordinary amount of notional purchasing of the underlying, you know, that is absolutely important and really critical. I tend to think of gamma hedging, or gamma signals from a regime standpoint, am I looking at a rising vol or a falling vol environment, if the market has shifted into positive gamma, then all else being equal, there’s involved dampening influence on the market. And if we’re in a gamma, negative environment, and all else equal, we’re in involved expansionary environment. Many of the traditional metrics still remain true and important, right? It is really hard. You know, we just went through this and and you know, those who follow me on Twitter or elsewhere know that I was out there cautioning people and saying, don’t get too buried up. I understand what you’re all seeing. from a fundamental standpoint. Yes. nuclear apocalypse seems like that would be really bad for stocks. But everybody had positioned themselves on the discretionary side super bearish already, right. And so understanding that sort of stuff is absolutely going to influence it maintaining a vix or an implied volatility in equity options. In the absence of true fundamental uncertainty around the economic environment is just really tough, right? I mean, the 35 vix translates to every single day in the market, you have to move more than 2% On average, right, that’s really hard to pull off. Yeah. It’s just really hard to pull off.
Jeff Malec 29:40
It just seems like that’s the next step from the right. We went from like, it has a beta just based on information to Hey, flows are important. And now the third leg is like, hey, guess what leverage and this implied leverage of all these options, activities, almost just as important.
Mike Green 29:54
Yeah, I think that’s right. And, you know, I think we should have known that early on when We saw that babies themselves did a terrible job of predicting returns, right?
Jeff Malec 30:04
Yeah, it’s almost like all this stuff is just in plain sight. Now we’re just starting to talk about it more, but those who knew knew,
Mike Green 30:12
yeah, I mean, shame on me probably for taking as long as I did to figure it out, although I think I’ve done a pretty good job of extending the research in areas that people may not have. But there’s nothing particularly insightful that says, a market should be influenced by the behavior of its of the buyers and sellers in the market, right. It’s only in some weird academic world that we can say, Well, none of them actually influences it, it’s just the market is anticipating all the available information through the application of infinitesimally small, you know, pressures that are occurring. I mean, people forget that the initial conditions that are assumed in something like a Grossman Stiglitz paradox, or an efficient market hypothesis, is that each player right, each agent in the market is presumed to have the same endowment, in other words, the same capital base, right? Like, we just know, that world doesn’t exist, the
Jeff Malec 31:10
same desires and incentives, right? There might be non economic reasons for
Mike Green 31:14
they’re always non economic. Right? There are all you know, there’s all sorts of stuff that’s going on. And when you have dynamics, like the baby boomer retirement, or you have the new product introductions, entirely new product introductions, like passive, for example, when you have a regulatory change that favors the growth of a particular style of investing, you have to believe that that’s going to influence the market significantly. But for some weird reason that that was not the focus,
Jeff Malec 31:43
right? Poker, poker? 101, right? You’ve got to play the guys at the table, not necessarily the
Mike Green 31:48
guys at the table. And that is ultimately so you had asked me earlier, like, you know, going into the you know, the enemy’s camp on on the passive side. The objective for me, it was never to say you shouldn’t do passive, it’s that passive is changing the structure of the market. My objective for my clients is to both make them money and give them effectively the seatbelt and airbag that allows them to survive the inevitable accident, if my theories are correct,
Jeff Malec 32:15
yeah, and further simplify a hell of a lot of sense, right? Hey, let’s get this guy who’s who’s talking about this stuff to make sure we’re not falling into the same trap, or we’re doing all we can to protect ourselves. Right.
Mike Green 32:25
And that’s, that’s really the opportunity set. And to do that in a tax efficient manner, at least, you know, for now is, you know, what I would describe as a gift
Jeff Malec 32:41
changing topic, so you mentioned the new CTA product, great job getting that ticker. Thank you for ticker, the. So you’re waiting into my world of managed futures. Just talk to us how you’ve felt how you’ve interacted with managed futures over the years, per my understanding? Well, there’s been a little bit more discretionary macro type versus purely systematic. So what’s your experience bandwidth managed futures over there? And how are you looking at them now?
Mike Green 33:09
Yeah, so first, you’re 100% Correct, that I have always been on the discretionary side. And part of that is simply a function of I don’t believe that you can fully program a system, you know, to do everything that a human being should be aware of, or is capable of doing if they take a step back and try to approach the market from the standpoint of what are people being forced to do as compared to what do we think they kind of want to do? Right. The dynamics of CTA, we’ve wanted to have the capacity to build out many of the product strategies that you’ve heard others talk about. So for example, Chris Paul’s permanent portfolio, or you’ve had, you know, you’re close to the guys at mutiny, and you’re aware of the importance of things like trend following strategies and in forms of diversification. We’ve wanted to have the capacity to offer people access to these tools in a way that wasn’t historically available. I have no unique talent on the systematic side, but what I do have is a Rolodex of friends that are willing to work with us at very reasonable prices that are extraordinarily good at this stuff. So whether it’s Mike Taylor working with us on the healthcare fun Mike grand millenniums largest health care pod and is a legend in the in the healthcare investing space, he’s running our pink product. In this case, we went out and we found a firm that was owned by a friend of mine, Charlie Maghera, who used to run Goldman Sachs is commodity desk and is now actively involved in the crypto space among other things, but his partnership with a firm called Alterus, who had been a long term Provider In the CTA space, created the opportunity for us to co brand and launch this product together. And so this is a product that was built by the guys at at autists. It is designed to work well with other products within the simplify universe. And so many CTAs, for example, have survived by including a heavy portion of equity exposure in their underlying strategies, we’ve chosen to a shoe that tried so we’re not using equity exposure, because we’re trying to actually create a product that does a very good job of diversifying a core model portfolio that we might offer on a simplified type platform.
Jeff Malec 35:41
So shifted to long bias and with the longtime listeners know all about this, we’re like, hey, in order to survive those lean times, they went long equities long, biased.
Mike Green 35:52
Yeah, no. And this was, I mean, part of that is just being smart. Right? Let’s, let’s just lay it out there. Right. I
Jeff Malec 36:01
just want to go out of business and change your mother. Yeah. Yeah. I
Mike Green 36:04
mean, you know, when the world is different now that the issue that I have with that is, was it done? Because that’s what happened empirically? Or was it done because there’s a thoughtful theoretical application? Right? I always struggled with the, well, this worked over the last 10 years, therefore, it’s most likely to work going forward, I want to have a very fundamental reason why that’s the case. Right? And so that can range from thinking about things like the Value Factor radically differently. You know, you read the paper that I wrote about a year and a half ago, you know, called talking your book about value that highlighted and hypothesized the role of portfolio formation in delivering the value premium, right? I would argue the CTAs are similar, right trend following query have seen does a really good job of articulating this as do others resembles a call option or a put option in terms of the delta hedging characteristics, right. So instead of going explicitly long volatility, they’re behaving as if they’re long volatility through what is the equivalent of a delta hedging routine, right? That’s our travel
Jeff Malec 37:12
profile. Right? Right,
Mike Green 37:14
exactly. A straddle Profile option smokes. So that characteristic actually has unique value in a in a portfolio that already has long value characteristics to it. Right, because it doesn’t, in technical terms, they have the Delta exposure that you want to have from a long vol fund, but they don’t have the explicit Vega exposure. And so when you enter into an environment, like you have today, where Vega is relatively elevated, this becomes a much more attractive way to approach a long volatility position.
Jeff Malec 37:46
And my favorite part might be strong, but one of my favorite parts of it allows you to, without much cost of carry access things like silver and lumber in these markets that have you tried to access those directly and wait for some outlier move. Right? You’ve run out of money way before the outlier move happen? Yeah,
Mike Green 38:04
I mean, the real benefit to the CTA space is is the ability to trade futures markets across lots of different areas. You know, there are always issues around the relative liquidity, there’s always issues, I would argue this is particularly true in 2005. In the immediate aftermath of 2005, when Gary Gordon his facts and fantasies about of commodity futures, came out and opened up that whole institutional space, you may remember that was the time, you know, that was the time period in which uso was introduced in GLD, was introduced. And basically, people on the institutional space began to actively go back into commodities, which had basically been a backwater. And the institution, he hadn’t invested in it for a very long period of time. You know, that that period from 2005, to give or take 2012 was all about something very similar to what I would argue is happened in Bitcoin in the past couple of years, which is just increased access through institutional investing.
Jeff Malec 39:04
And they were just carving off, which I think was the wrong approach proved to be the wrong approach, but just hey, we’re gonna put 5% in long and buy and hold commodities cost of carry be damn, right. There’s just a lot of ill conceived methods to do that.
Mike Green 39:17
Well, there were a lot of products that did a poor job. And the extreme version of this again, was uso right, which we discovered was uniquely exposed to the, you know, the potential failure for liquidity to emerge or the ability to take delivery of physical in May of 2020. I guess it’s actually April 2020 of the May 2020 contract. You know, you’re starting to see those products do a better job, right, but they inevitably have to go through that fire. And the irony, of course, is that what you’re describing the the Gary Gordon paper, the majority 80 of the returns actually came through carry. Yeah. But as is always the case, when you’re assuming something along the lines of the efficient market hypothesis, it’s presumed that the asset class has a stable but cyclical return. And again, this just goes back to my arguments around passive that, why would you possibly assume that equities have an 8%? You know, return, simply because that’s what they delivered over the last 100 years, right? You know, there’s so many conditional components around the very short data sets that we have, even when we use the longest data sets, like a Schiller type database. You know, having information on the behavior of stocks from the 1870s is just not particularly useful, unless you think that the world is largely an invariant place. And I don’t believe that at all.
Jeff Malec 40:50
The great example is the first I believe managed futures ETF was wisdom trees product, and they base it on trader vix index, which didn’t go short oil. So we had a blog post, we’ll put in the show notes that showed the index, of course was straight up and to the right. Yep, they launched the ETF. 2014 happens, right? Oil crashed, all the CTAs made a ton of money because they were short oil. And this thing didn’t do well, because it had picked the wrong index, essentially, right. gotten to
Mike Green 41:21
the flip side of that, right is what happened to risk parity in the fourth quarter of 2018. Right. So, you know, I understand that 2014 2015 into early 2016 dynamics around oil, which most people had associated with a Chinese slowdown, I agree with you, by the way that that the behavior of institutional investors exiting that asset class was a primary component. But the most extreme version of that, I would argue, is the fourth quarter of 2018, when you had two separate factors in play, you had a tremendous amount of hedging activity that had occurred on the oil and gas producers side right, where they had effectively sold topside participation to buy downside participation that allowed them to access the debt markets, right that stood against the flip side of the equation, which is I believe it was AQR had chosen because of the positive carry to introduce the term that you had the fact that oil was the only commodity that offered positive carry, they chose to concentrate their risk parity commodity allocation into the oil markets. And if I remember correctly, the largest commercial owner of oil in the fourth quarter of 2018 was AQR right. unwinding that position proved to be painful, I think is the technical term for it.
Jeff Malec 42:50
And that just goes to show back to that kind of discretionary vers systematic, like even systematic models, risk parodies, right? Give it a have some discretionary when you put the portfolio together when you made decisions on sizing and whatnot. So how do you think about I don’t know if you’ve done any research on this, but right back when CTA was underperforming, which was basically, you know, oh, wait, did Greg crisis period performer then vol just got sucked out, not just in equities, but across the whole commodity space. And trend followers. Basically, I joke that my son’s been in drawdown his whole life he was born in 2009. Right, so from basically 2009 Until that oil sell off in 14, it was pretty brutal there. Yeah. And then a lot of things came out of like, it’s central bank intervention, the space is too big. So coming back to your passive thesis, like do you have worries that the space could get too big again, right, and I kind of summarize your passive thesis, there’s too many, too much money going through too small of a pipe. Yeah. And kind of NCTA space that gets magnified even more. I don’t know.
Mike Green 44:00
I think there’s a whole bunch of things that are working together to create the conditions that you’re observing, right? The single most important thing that I would the single most important thing that I would highlight is that we now have massive players where we used to have widely diversified small individual players. And so if you if you think back again, to the fundamental thesis, you know, where everybody starts with the same endowment, everybody has the same share like that actually was not a terrible model of the markets 50 years ago, where even the largest holders the JP Morgan’s Morgan Stanley’s, etc, the world did not behave all in the same way because you had, you know, individual brokers that were helping to manage accounts. And the share was very small, right? Nobody ever imagined a financial services industry consolidating to the extent that it has, you know, both in terms of the asset allocators, the Blackrock Vanguards to a certain extent fidelity state Street’s etc, the world have now become large enough that, you know, we know that they are going to be the largest holders of basically everything. The second, you know, dynamic that I would argue that we never really considered was more on the market maker side, you know, where you used to have the components of the specialist system where each individual specialist behaved largely together, there were rare ins or individually, I’m sorry, there were rare instances like 1987, where they all had their, you know, lines of capital pulled at the same time that created and facilitated the conditions that emerge there. But today, you’ve got basically two or three options, market makers that matter, right? You’ve got two or three market makers that really matter, that represent the vast majority of trading activity, James Street, Citadel, Susquehanna a few others, right? Those players are in this business to make money. And you know, they have a very nasty habit of behaving with their own self interest. And I’m using sarcasm, as I said,
Jeff Malec 46:10
when they have unlimited capital, which seems hard to believe set it out as limited capital. But
Mike Green 46:15
but but everybody has limited capital. That’s almost a definition, right? And so we think about behaviors in markets, if markets become more risky Citadel wants to risk less capital, right? Same thing we want to do, right, same thing other people want to do in the market. So it’s completely rational that they do it. But when they are the sole providers, or you know, they happen to be a dominant provider, that’s going to influence the market and the liquidity and make all the behaviors more extreme. Right. The other thing that I would highlight on the CTA space, and this tends to be under appreciated is prior to the global financial crisis and the Volcker rule, it was much easier for the macro CTA traders like Paul Tudor, Jones, etc, to negotiate terms of service that effectively gave him option like exposure. Right? So he would be able to negotiate with his prime. If I place an order, you guarantee you will execute it within a tick. And if you don’t do it within that tick, then you take the loss, not me. Right? Well, that’s functionally just turning a buy order into a call option and a short order into a put option, the guarantees that the most you can lose is x. Right? Right. When those went away, the space began to struggle more. And I think that has a lot more to do with it actually, ultimately than the Fed does.
Jeff Malec 47:37
Interesting, which I just thought of, of like there’s position limits in commodity markets. Right. So you can’t have a BlackRock and a those players can emerge having all their right if there’s not going to be a $50 billion CTA ETF, because they won’t be allowed to put on the positions they need.
Mike Green 47:56
Yes, there are limitations around that. Although,
Jeff Malec 48:00
yeah, you came up with the yellow ops and some Well, yeah,
Mike Green 48:03
we just saw the elemi. You know, there is discretion about enforcing those margin limits, right member margin limits. And that’s, that’s one of the big complaints, right is is that a whale got outsized on the elemi. And it was uncomfortable.
Jeff Malec 48:20
What What are your thoughts on that seems to tie in to the passive thesis somehow that I don’t quite know how but write a for profit exchange had different economic incentives than to let the market function properly.
Mike Green 48:34
So I know a lot of people have have highlighted this. And I think that that many are highlighting the right part of it, which is just that, look, if the elemi can’t be trusted to behave in a manner that is consistent with its stated bylaws and objectives of you know, behaving in a certain way, then the answer is you stop trading with the elemi or you reduce your trading with the elemi. The elemi is owned by the Hong Kong exchange, right? So part of the natural suspicion is did China play a role in influencing these outcomes that JP Morgan play a role in influencing these outcomes? We’ll never know. Right? And there’s a part of me that
Jeff Malec 49:18
no, I play a fastness. Thanks, though answer in Spain.
Mike Green 49:21
Yeah. Well, we know what Cliff Asness things but but part of it also is just like, look, this is definitely not the first time that that effectively force majeure clauses have been used by exchanges. You know, it tends to be very preferable that the exchange has a set, you know, a Set Rulebook that says if these limits are breached, this is how we behave right? That’s why you document it and you build it out in advance. But they’re these are big boy markets. Right? And, you know, the ability to bend those rules has always been there. It’s been exploited. You know, guys like Mark beholdest, for example, will highlight that you know how badly They got screwed by Goldman Sachs and the global financial crisis. It’s just a continuation of the same behavior as a legitimate complaint. Right. It shouldn’t be there. But it has been an enduring feature.
Jeff Malec 50:13
Right. And I think we can complain, but do we want the exchanges to be government owned and run? I don’t know if that’s a better answer, right. Like, their utilities, their utilities, and they’re gonna,
Mike Green 50:24
right, but But do we actually want the government to own the utility? Or do we want the government to regulate the utility? Yeah, right. And or do we want neither? And, you know, I think unfortunately, what we’re seeing with the LM E is, is that there, there tends to be a pretty good reason to have a degree of of regulatory authority and rulemaking decision set at the CFTC type level as compared to determined on a discretionary basis by the exchange.
Jeff Malec 50:55
Right? And I think, to me, the big piece, there’s right hey, suspend trading all you want. But you canceling wind trades, right? That’s a whole nother ball of wax, right? So it should be like, Hey, if you have to cancel trades, you need to meet these 10 requirements by the regulators or whatnot.
Mike Green 51:12
And I would suggest that ultimately, we end up heading in that direction. But the far more important message to me is, is how fragile everything is, right? We’re experiencing these types of behaviors and brakes, with the s&p three to 5% off of all time highs, right? I mean, what does this look like down? 30? Right, what does this look like when credit markets are actually stressed? Right. One of the unheralded aspects of the elemi dynamic was the blowing out of credit spreads and Goldman Sachs and others, right. That should have been a lot more concerning to people I think, then then it kind of got the airtime for right.
Jeff Malec 51:55
And that that is the kind of thing that could snowball. So maybe we should applaud the elemi. Right? Like, hey, you kept this from causing the next financial crash, right? It’s like, okay, JP Morgan just got hit for 8 billion, which causes Goldman to get it for x and down the chain?
Mike Green 52:10
Well, this is one of the real challenges with the exception of crude oil. Right. There are very few commodities that are quote unquote, large enough on a price basis to cause that sort of crisis, right. I mean, the the largest commodity markets by dollar value, in terms of permanent storage are things like gold, which is somewhere in the neighborhood of $10 trillion, right? Financial markets are somewhere in the neighborhood of $400 trillion in aggregate $10 trillion, I’m not going to say, you know, is subprime contained sort of framework, but it is hard with commodities to create a financial crisis, what you can create is a legitimate shortage crisis. And that can be far uglier for many of the players that are directly involved. But part of the reason why, you know, you, you’ve seen the elemi and the nickel markets develop in this way is because in all seriousness, like who really cares, other than stainless steel producers, you know,
Jeff Malec 53:15
and a bunch of weird futures traders like neighbors right?
Mike Green 53:18
You know, we’re shocked and outraged that there’s you know, nefarious activity and behavior going on and in the mafia run Pacino’s right, you know, I don’t I don’t know why anyone’s all that surprise.
Jeff Malec 53:37
So, a lot of this interest, I saw you did a twitter poll. Basically, what would you invest in? Right? And Bitcoin, of course, was number one, and gold, I think, are commodities. Number two, your more interesting thing is like, Hey, this is really about inflation, not about these, these two pieces. So let’s talk a little bit about inflation. I read your post on Medium as well. And talking about how this was the 70s was unique, a lot of people are saying this was just like 1973 When the curve inverted, yada, yada, yada, like take us through a little bit how the 70s were unique in that regard.
Mike Green 54:14
Well, so the unique feature of the 1970s was just extraordinary population growth. Right. And that was true in the developed markets where in the US the labor force was growing somewhere around three and a half percent every year the population was growing slightly faster than that. Because of the you know, the the extension of life expectancy to get older and older. And around the developed world, even in regions of the world that now have negative population growth pressures, places like Germany, etc. You had significantly positive pressures coming out of the aftermath of World War Two. In the developed in the developing world, you saw extraordinary population growth that was similar in a lot of ways to what had transpired at the end of the 19th century and much the development world where you suddenly began to introduce modern concepts of sanitation, antibiotics, improve food techniques, etc, right. And so this led to a dramatic expansion of population, things like commodities are very much what I would describe as pantry items, right? You need a certain amount of toilet paper per capita, right? You need a certain amount of steel per capita, you need a certain amount of coal or oil or natural gas per capita, tied to your level of economic development. And so the 1970s were this incredible time period where every single year you knew that the demand the aggregate demand function, was going to shift outwards significantly. Right. And that was creating conditions under which you needed to find replacements that allowed you to significantly scale and grow your your oil, for example, right, or your wheat or your your beef. This time around, we don’t have that at all right? US labor force growth is effectively zero developed market labor force growth is pretty close to zero, if not negative. developing markets around the world are effectively shut off from any of their largest sources of capital, in terms of tourism, etc. And we’re facing conditions under which there has been a very rough and inefficient restart to a global system that was shut down in a somewhat unprecedented fashion similar to what you would have with the war, right. But on the flip side of that, we don’t have we don’t have that continual growth in aggregate demand. So if I’m looking at demand for oil three or four or five years out, I don’t see it as being 20%. Higher. Right, I just I don’t see that. I think we have a problem of supply right now. I think we have a problem of supply chains. I think it’s, you know, I would just highlight that another Evergrande ship just ran aground in the Baltimore Harbor, right. It’s almost like the, you know, the, you’ve got a distressed institution that is under paying its workers and and isn’t properly you know, managing its role in the global logistics system. Or you kind of have to believe that the Chinese are doing everything they can to screw up supply chains and continue to put pressure on the west, right. But, you know, this is a snafu driven dynamic as compared to an outward shift in the aggregate demand function. And the most extreme version of that can be seen in things like unemployment, which is doing the exact opposite of what it did in the 1970s. Right. So the 1970s, you had huge labor growth, the 1970s was actually the decade that had the highest rate of job formation of any decade in US history. And unemployment rates rose dramatically over the course of that decade. For the very simple reason that we had so many people coming into the labor market, we couldn’t possibly figure out what to do with them. Right? Well, this time around, I
Jeff Malec 58:07
mean, some getting pushed out.
Mike Green 58:09
Yeah, right, exactly. But this time, I waited the exact opposite scenario, right, we can’t find the workers, we have, you know, nearly unlimited job openings, and an unemployment rate that looks much more like the 1950s in the 1970s.
Jeff Malec 58:23
And just two interesting pieces of that paper, the one was 70s was introduced introduction of the credit card, which I hadn’t seen tied to that inflationary pressures before but makes sense. And then secondly, that I can’t remember the number 25%, or something of manufacturing was oil based, essentially. So creating way more oil demand than we have now as well.
Mike Green 58:46
Well, you so you had two separate components associated with that. One is what credit cards did was introduced unsecured lending, right. So young people were suddenly able to tap into credit in a manner that they might not have historically been able to, that led to a an inelastic outward shift in the aggregate demand curve that was even greater than you would have had otherwise, you also had women entering the labor force, and suddenly and being able to run independent households in a manner that they had not historically, the introduction of the war on poverty, which is really basically let’s give money to old people facilitated the maintenance of independent households, whereas historically would have seen parents move in with their children and collapse that household. Starting with the expansion in the war on poverty, you saw that change and elder headed households became a very important component. The extreme dynamic of this can be seen in the demographics of the United States for the median use, you’ve seen all the data that says like, what happened to median workers or median household income, right? Why did it move off in a totally different direction in the 1970s? That’s because in the 1970s, we changed the definition of household quite significantly. So the marginal incremental household was suddenly instead of a, you know, married couple with 2.2 children, it became a single mother or it became an elderly headed household, right. And their incomes are going to be structurally much lower. So there was a large portion of that slow down that was actually just driven by the changing description of what the median household actually was. We just don’t have any of that going on this time around. Like, I just don’t see it. I do see the snafu. I do see that we made our systems far too optimized and far too fragile. Right, we decided that we can rely on stuff being shipped 3500 miles across an ocean, you know, to be there tomorrow. order to to optimize supply chains and supply, you know, to to us go more pilots, surprise, surprise, right? When you shut that system down and try and restart it experiences pain, right? It has frictions.
Jeff Malec 1:01:03
So. So you’re on the transitory, Team transitory.
Mike Green 1:01:09
So I am on Team transitory but I want to emphasize why I think team transitory has gotten a bad rap versus one the quantity of time, right? So the idea that we were going to immediately reverse this is somewhat silly, right? The second is, is when you talk about team transitory it’s important to understand we’re talking about an inflation rate, rather than a price level. So I don’t know anyone who is forecasting that oh, hey, oil prices are going to go back to minus $37 a barrel? That’s what we mean by transitory right, what they mean? Or at least you know, what I would argue, I mean, when I say transitory is the rate of inflation, the rate of price increases, is going to slow down significantly, in part, because those high prices destroy demand. And in part because those high prices facilitate the growth of supply.
Jeff Malec 1:02:03
It’s almost by definition of rate can’t just keep printing the same.
Mike Green 1:02:07
Correct. And so this is part of the frustrating dynamics people like, well, that’s not what we see in the grocery store. And, and yes, absolutely, you see higher prices in the grocery store. By the way, you should have seen higher prices in March 2020, or April 2020, when we were all experiencing shortages of bottled water, and toilet paper. It’s just they weren’t allowed to price gouge in that way. Right. So there was no ability to respond. We’re now two years into it. And people are able to say, You know what, it cost me more, I’m not able to source stuff, I’m going to effectively price gouge and that’s really what we’re seeing is an increase in prices rather than a dramatic shift in the inflationary conditions. And we’re seeing exactly what you would expect under that dynamic. real incomes are beginning to decline, real purchasing power is beginning to decline. You’re seeing increased credit card usage, particularly amongst those in the lowest quintile, they’re beginning to already experiencing increased credit card delinquencies, like the whole system is grinding to a halt. And, of course, the Fed this goes back to a paper that I wrote, in almost the time of our first interview, which is, you know, policy in a world of pandemics. The Fed reacts to the markets, the markets, in turn are trying to predict what the Fed is going to do. And so you have all sorts of confusing stuff that’s going on right now, I would argue that the markets for interest rates are seeing a combination of derivative positions being unwound and an incredible amount of volatility that is causing the front end to push much higher than even the Fed is, you know, articulated, right, if I look at December 2022 Eurodollar, futures, they’re pricing in nine hikes. You know, whereas the Feds dots are, you know, proposing something like six right, we’re hearing discussion around 50 basis point hikes. To me this is just narrative that’s being used to describe what’s happening in the market. And of course, the Fed is then being forced to respond to that and saying, oh my gosh, we’re really behind the curve in terms of hiking, even as the yield curve inverts telling us that the Fed is going to be cutting going forward, right? It’s like the market is pricing in a Fed mistake.
Jeff Malec 1:04:30
Which I think is from years and years right like the Feds out of bullets defense. They don’t know what they’re doing like the Fed put his gun like where do you stand on all that they still have plenty of ammo, right?
Mike Green 1:04:42
Well, plenty of ammo. I think it’s a dangerous phrase, but But yes, they still have a lot of ammo left. My expectation is is that one of the forms of ammo that they will use is pausing sooner than people think in terms of the hiking activity or quantity weird,
Jeff Malec 1:05:01
they haven’t really even started yet. We’re already talking about pausing, right?
Mike Green 1:05:06
Correct. The market is very clearly telling us that that something is going to break. And, you know, I would broadly just say that we already know a lot of things have broken. Because the quantity of zombie corporations, the quantity of households that can’t handle higher interest rates, is high enough that the mere thought of lifting interest rates moving off of that lower bound, I would argue is starting to tell you that things are breaking.
Jeff Malec 1:05:38
And what how do you view from your chief strategist, head of like, okay, how do we approach inflation? How do we write what are the tools in the toolbox that you consider right? Gold tips, that kind of thing? Like, okay, whether or not it’s happening right now, but how do I, how do I, as an investor protect against my real wages, my real income, my declining, which is another problem that on that very lowest quintile they can’t even write they don’t even really have the tools or the means to do it? Right. So that’s a separate conversation.
Mike Green 1:06:09
Right, exactly. But that so one, that’s an important general observation, which is there is no one way to protect your purchasing power, right. Beside classic advice is to go out and buy things like real assets, right. CTA can help in that, right, it does give a bias to to physical assets. Gold has traditionally functioned as a hedge in that type of environment. A lot of people have been worried that interest rates are going to rise significantly as the Fed loses control of the situation. I don’t see a lot of evidence to suggest that and you know, and this has been part of the reason why I’ve been focused on the transitory dynamic, right? Like your individual purchasing behavior, your individual purchasing basket is not something I can replicate. I can’t know if you really like lime flavored jello, or you really like chocolate pudding. Right? So your individual purchasing basket is your individual purchasing basket. Bloomberg took an incredible amount of flack for a reporter putting out an article saying, here’s how you can deal with it by lentils instead of Yeah, terrible perspective. But true, unfortunately, which is that we’re all going to be forced to do certain things that we may not necessarily want to do, whether that’s learning how to use a pressure cooker to deal with cheaper cuts of beef, or whether that’s substituting lentils for beef or whether that is, you know, using big box stores, freezing products, etc, and a freezer like all those things are various coping mechanisms. from an investment standpoint, I care about two things in particular. One is, is there actually conditions being created under which assets are going to flow into an asset class because of these fears? So CTA would be a direct example of that. We have a product P fix that is designed to deal with much higher interest rates, which is another significant issue that people would face. And by the way, just be very clear, like, I don’t know the answer on that, right. So the answers to something like P fix is, is that we’re using an option based structure as compared to a delta one forecast, right? So define loss defined characteristics to it, treat it as a hedge, not as the core of a portfolio. But those are the things that I ultimately care about. The other thing that I’ve highlighted for people is just this broader issue of like, what we’ve traditionally thought of as the role of inflation is that, well, higher inflation causes asset prices to collapse, right? Because we have exactly an n of one in our observations with the 1970s. And therefore, by definition, we know what’s going to happen to equities, right? Because we’ve seen this once before. Well, obviously, that’s not working. Right? Nothing like the 1970s seems to be playing out in the market behavior. And so understanding why that is, I think, is actually really important.
Jeff Malec 1:09:09
And it’s almost like stocks are our number one export, right? That’s our number one commodity in the US. So it’s like, if there’s inflation of asset prices, why shouldn’t that inflate as well? Like we’re talking nominal terms, in real terms, it could decline. So we could spend the whole pot on it, let’s just get 45 seconds to two minutes on your thoughts on crypto after all this time kind of wading into those waters. Since you’ve been in there? There’s been NF T’s web 3.0 D fi, all the above? What are your What are your quick thoughts on where we are and where we’re going?
Mike Green 1:09:49
So my quick thoughts are that one I am a very particular critic of Bitcoin, as distinct from crypto and the language that is used around Bitcoin in my opinion is unfortunate and increasingly untrue. I’m would describe this idea of a digital gold, you know, you know money good collateral sort of framework that that Bitcoin has tried to carve out for itself as a misrepresentation of the realities of that system. It cannot be a money good commodity, it cannot be a store of value if it requires the network to continue to operate right. So, gold does not require Swiss banks for it to be gold, it will always be gold, right? Whether it maintains value is ultimately up to an individual but not on somebody else maintaining a network. In the case of Bitcoin, it is a permanently negative cash flow network that exists in terms of paying the miners to run the accounting systems that allow the network to have any value whatsoever, there is no equivalent to just pulling out, you know, the scales and weighing and measuring something. There’s a secondary issue associated with Bitcoin, which is the dynamics of perfect scarcity is not actually a feature, it’s a bug, because it does not allow for innovation. So under the gold standard, which again, did not derive its value, because gold had an inherent value, it derived its value because of the exchangeability. The willingness of the government to buy gold at a fixed price, right created those characteristics. But if the price of gold rose relative to other goods, there was the prospect of increasing gold production through human ingenuity, right, inventing the cyanide process, for example, dramatically expanded the production of gold discovering new gold deposits, or an asteroid that has gold on it has the potential to use human ingenuity to create expansionary capabilities in the monetary system. It just doesn’t exist within Bitcoin. And as a result, it is inherently flawed because it presumes that human ingenuity is a negative, not a positive. As it relates to crypto, to me, there is absolutely no question that we are headed down the path of digitally native securities. And a lot of what’s going on in the defy space in the crypto space is basically play acting to get us to that point, right, not dissimilar to the construction of the Internet backbone under the flawed assumptions of global crossing or level three, right? I think a lot of mistakes are being made, a lot of money is being wasted. But the capability to develop a parallel financial system that has, at its core, a potentially more robust framework that doesn’t rely on centralized clearing, counterparties, etc. It is emerging, right. And so I think that’s really, really positive. But we’re a long way away from it being the solution. And you know, I’m starting to do more work around it being the solution, but we’re a long way away from it being defined.
Jeff Malec 1:13:19
Great, quick thoughts on NF Ts.
Mike Green 1:13:23
You know again, NF T’s or, you know, NF T’s are a symptom of a market that needs to be developed the market for scarce digital assets. That doesn’t really have product to sell. Right? So what it really wants to sell is stock certificates or stock tokenization. Right, things that are truly non fungible, that actually have the capability of being uniquely valuable and not subject to the whims of do I happen to like my apes with you know, you know, yeah, Greenshot eyes, or do I want them clear and focused on on the opportunity ahead? You know, so to me, it’s it like, is it unfortunate that the language is being built up around it, and the speculation is being done by many who can’t afford to do it, and there’s a high degree of misrepresentation of you know, well, Justin Bieber, you know, went and spent a million dollars on this NFT therefore, it’s a good deal without fully disclosing that he actually was gifted that million dollar, like, I don’t know the answer. I genuinely
Jeff Malec 1:14:25
don’t know the or that that’s like $20 to the rest of us. Yeah. Or that’s
Mike Green 1:14:29
$20. That’s right, like, I don’t know, but I would just describe it broadly as it’s the same type of artwork that used to happen on stock certificates when people would individually receive their stock certificates, right? It’s, you know, if I can turn it into collectors are people are less willing to sell it, therefore, it gains some form of effectively, senior age in its in its behavior, right. So I just think that’s what’s going on. Can I know that? No, because that requires knowledge of the future. And I don’t have that
Jeff Malec 1:15:05
two truths and a lie Give me three things about you personally or professionally. And I’ll suss out which one is not so true
Mike Green 1:15:15
um, I got my start in my first job as a commodities trader let’s see my lowest grade at Wharton was an option theory. And let’s see I currently own Bitcoin.
Jeff Malec 1:15:46
So tough. I’m going lowest grade option theory. I think it’s true. That’s a tough subject. No, True. True. And I’ll go that you were a commodities you started out as a commodities trader. True.
Mike Green 1:16:05
True on multiple fronts. So my very first job was actually selling eggs and then I was a crude oil trader for sphere leads and Kellogg.
Jeff Malec 1:16:13
I didn’t know your crude. selling eggs like physically selling eggs, physically selling I grew up on a farm. Nice. Um, so obviously, owning Bitcoin, not so much.
Mike Green 1:16:26
I do not own Bitcoin. Correct.
Jeff Malec 1:16:29
I might spend fun, go catch your plane, and
Mike Green 1:16:33
All right. Take care. Bye bye.