Mike Greene on Why Passive Investing Is Hurting Market Structure | Masters in Business

[Music] Bloomberg audio Studios podcasts radio [Music] news this is Masters in Business with Barry rolz on Bloomberg Radio hey this week on the podcast I have an extra special guest Mike Green and I have been chopping it up on Twitter arguing over passive versus active uh and I thought well why are we wasting this on Twitter as it circles the drain why don't we just have a conversation in the studio about um his beef with passive why he thinks it's a structural threat to the market and the advice that he gave to David Einhorn about

it that helped lead Einhorn to start really kicking uh the benchmarks but again uh for the past couple of years I found this conversation to be both interesting and surprising um some of the things Mike said about investing like what would you tell your friends and family to put your money into he says it's hard to argue against the low cost and the performance of indexing but that doesn't mean Regulators should overlook the Potential Threat I I'm kind of unconvinced by the argument there have been a series of arguments over the years against passive what

makes the discussion with green so interesting is he's the guy that I identified the the structural problem leading to the destabilization of the vix if you recall back in 2018 Vol mageddon he was on the right side of that trade made hundreds of millions of dollars for his firm in identifying a structural problem that was about to blow up now I don't believe the market structure is subject to the same risks as a single inverse trading instrument but he makes a really compelling case for this is important we have to pay attention to this and

we have to understand why this is potentially a risky asset with no further Ado my discussion with simplifies Mike Green Barry thank you for having me so let's start out a little bit with your background before we get into your really interesting career Wharton at the University of Pennsylvania you're also a CFA holder what was the initial career plan well the initial career plan actually so I grew up on a farm in Northern California my initial career plan was that I was going to go into science I actually studied physics uh as a young man

and then recognized that I was not actually nearly talented enough in physics to do anything of of uh note and so transition like many people did in my generation into Finance similar similar story I'm always fascinated when I hear people who were great in in high school at mathematics or physics and then go to university and say oh I'm only pretty good at that I'm in the same camp Camp as you um you've had a fairly entrepreneurial background not just in finance over the past decade or two but you founded or co-founded value ad software

in the 1990s tell us a little bit about that experience sure so that was actually an outgrowth from my experience coming out of whorton and you mentioned the the you know the transition of people who tended to be skilled at math or physics into Finance we forget that there weren't personal computers on everybody's desk back then we forget that most people didn't have the skill set around Excel Etc we didn't Excel didn't even exist when I started it was vizal and Lotus right and so in the 1990s I developed the the late 1980s early 1990s

I developed a skill set around valuation in particular discounted cash flow or residual income type models um along with a couple of peers out of the Consulting industry we built a company that was focused on valuation initially actually targeting corporate strategic planning departments so working with companies like PepsiCo or others that were looking to either divest business units or to make Acquisitions they needed have some mechanism to think about the valuation of these that's what value ad software was originally it also was the path for me into the asset management space because coincidentally Mitch julus

of Canyon Partners was researching on the internet in the early days of the internet for valuation engines and insights stumbled across our stuff and reached out and said hey could you link this to the public Equity databases like computat so we could use it for valuing stocks that actually is exactly what we ended up doing we were one of the last to get What's called the value added light license to the computat database and so that then led to the sale of that business in the late 1990s to credit Swiss and then you end up

actually at Canyon Capital previously I had Dominic M uh as a guest uh but you stood up they're an LA outfit you stood up the New York office and ran about $5 billion for them tell us what it was like doing that a couple of years before the financial crisis blew up well it was very tight to the financial crisis and so I'll tell you candidly that I thought there was a very reasonable chance that I was going to be out on my ass the technical term in the in the financial crisis um you mentioned

Dominique Mill is one of the fantastically talented people at Canyon Partners she was based out in Los Angeles and from kind of that 1996 introduction to Mitch and Josh they repeatedly tried to get me to go to work for them in Los Angeles and finally I think it was 2003 or 4 I ran into Mitch on the street on actually on 57th just around the corner from where we are right now and he you know said hey you we're thinking about opening a New York office is it us or is it Los Angeles and the

answer was it was Los Angeles I didn't want to be in Los Angeles my wife doesn't like to drive I actually came like within inches of accepting a canyon partner's offer back in 1998 and then I'm going from dinner at M jus' house to the airport it's 11:00 at night on a Friday bumper bumper to- bumper traffic and all I could think is if I do this I'm done my wife is going to leave me in about 2 and a half minutes um and so we just made a a a a a meeting of the

Minds when they decided to Branch out to to New York City it provided the perfect opportunity to transition to Canyon Partners initially I joined to help them manage their Equity portfolio my background in the asset management space was originally going to small cap value um and Canyon Partners really gave me the platform that allowed me to branch that out into multiple different areas H how do you morph from small cap value into things like derivatives and FX so my actual background was originally in derivatives my first job on Wall Street when I was still at

the University of Pennsylania was trading crude oil Futures to offset option positions for spear leads and Kellogg um so I I had a background in derivatives um the opportunities to trade derivatives and be involved in the hedge fund space was something that really had not emerged at least for me in New York until Canyon Partners provided that opportunity but if you look at when I sold my software company in the late 1990s we had this huge disconnect where I'm a value investor I'm somebody who's focus on valuation and small caps and small cap value in

particular we trading at this incredible discount and so I actually went into small cap looking at it from the same standpoint that a macro investor might and say this is an area that has real resources and opportunity and the valuations are totally mispriced relative to what we're seeing in the broader Market I get just got lucky candidly that the dot bubble broke about six months after I made that transition if it had gone for another two years I might not be sitting here to talk to you today right Hey listen smart is good luck is

better luck is better definitely absolutely true so after a successful run at Canyon you stand up your own fund ice Farm Capital you're seated by Soros fund management so I met him once briefly I think it was on his at his apartment at Park Avenue for some event but tell us what it was like working with the people at Soros well so again the Soros guys um in particular Scott bessent had actually rejoined Soros as the CIO at that point he was the lead analyst for Stan dren Miller and so he was returning to Soros

he basically tried to build a stable of outside managers that he thought were interesting and and presented interesting ideas initially same thing as Canyon Partners basically try me non-correlated multi strategy let spread it across a lot of different ideas disciplines approaches and hopefully some of them are working most of the time 100% that's exactly the idea and so um Scott actually approached me about joining Soros and um I turned him down with the observation I've already got a great job he immediately picked up on that that the word job probably came across uh tapping into

my entrepreneurial background and he said uh well if you don't want to change jobs would you be interested in running your own firm we'll see you that's what led to ice Farm Capital um the the name actually funnily enough comes from a vacation property that I used to own we sold it when we moved to California to to following the rest of the career but I owned a 19th century ice harvesting operation which sounds insane until you actually stop and think about all the characteristics of what the world would have looked like in 1900 ice

was very much a business like cable television back then you actually didn't own your ice box you leased your ice box from the Ice Company the icean cometh right the Iceman was somebody who would deliver the ice on a regular basis alongside cheese and various other components and believe it or not that was the seventh largest business in the United States in 1900 and by 1935 with the invention of air conditioning and modern refrigeration techniques primarily by carrier the entire industry is gone and everything files for bankruptcy and so we actually picked up a vacation

property that's just outside of exciting vacation destination just outside of Scranton Pennsylvania um that was in the Pocono Foothills it was effectively a property that is between 2 3,000 foot mountains and so in the Northeast it constantly stays cool it was fed by five artisian Springs and so this is the Fantastic most perfect place to grow ice the ice farm and we had like railroad tracks that went to New York and Philadelphia Etc they were all aband long since abandoned but that was the Genesis of the name you're always looking for a name to run

to launch a firm no that's great there and there's if you look at every Greek mythological creature or God like all the names have been taken it's all it's pretty it's pretty hilarious um so let's talk about the next gig you have teal macro you're managing the person person capital of Peter teal which I found fascinating because people have a tendency to read into the politics of of the investors the New York Post famously does this all the time but you know the politics is capital is capital whether it's coming from Soros management or teal

tell us a little bit about what it was like working um with Peter teal well so th those are pretty much the two extremes right one is certainly perceived as you know um rightwing in one way and the other perceived is very much left-wing I don't care about the politics component I I care a lot about politics per se but I very strongly believe that we're able to have our own opinions there is a degree of discussion around those types of components in any setting right and so it is important that at least you're able

to entertain that Peter is unbelievably brilliant right he is one of these people who I think has a very intuitive grasp of order in the universe and tries to take positions that exploit those underlying Dynamics his you know familiarity with Renee Gerard and the dynamic of mimickry and and people's desire to imitate what other people have or to try to obtain what other people value I think it's kind of his underpinning philosophy and has proved to be really really powerful in terms of identifying where the puck is going you know Peter Built a phenomenal pool

of capital that it was a real privilege to have the opportunity to work with him on and he was an early investor people sometimes forget he was early in Facebook he was early in I think was Uber I mean he was in the right place at the right time more often than we were talking about lucky at a certain point it's like hey you know once or twice is a coincidence but at a certain point there's a certain set of insights and skills there yeah I I I don't think luck plays nearly as much of

a role as people would like to think because it relates to Peter I do think that that um a lot of the Dynamics that we saw coming out of Silicon Valley Peter was one of the first people to say hey wait let's try to treat this like a business as compared to purely a scientific experiment mhm and so he was part of that early crop of venture capitalist in that late 1990s time period that I think started to think about it less on the pure technology front and more on exactly as I was referring to

with reneer r the aspirational Dynamics like what do people really want right very few people want to quote unquote get onto a Smartphone they want to be able to connect with their friends they want to be able to do math they want to be able to get their email they want to be able to do their work away from the office Etc that awareness that that world was transitioning to the online space I think is really what Peter's key observation was and now it's interesting to watch him as he recognizes I think in a lot

of ways that people want other things in life not necessarily just technology there there's a whole longer conversation about the uh the evils of how we use Tech but before I leave the teal macro I got to ask you about the famous volmageddon trade in 2018 you had identified in advance that there were some structural problems with XIV yeah and on beh of that fund you made a bet that hey this thing is going to blow up tell us a little bit about that trade sure so XIV which has been reintroduced in various forms was

just an inverse of the VIX Index meaning when when Market volatility went down that should go it should go up the the irony of course is is that like most of these trades that's out there it's not quite what people thought it was right so the actual source of profitability in that trade is not the level of the vix but the shape of the VA surface right describe Define what you mean by that so the the structure of the VA surface is generally upward sloping meaning that people are more uncertain and price greater uncertainty about

events far off into the future as compared to events that are relatively nearby right now when that inverts when the Vic spikes on a riskof event that actually means that you're suddenly if you're inverse right so you're shorting this Dynamic you're shorting stuff that is low priced is rolling up to high price right that's really bad on the flip side of that equation in a normal what's called a contango construction in the vix if you are shorting six-month volatility or two-month volatility and buying it back as one month volatility you're typically selling it around 15

and buying it back around 12 that's a crazy return when you think about it that that's happening every single month you're basically generating 25% close to 25% right in that trade on a monthly basis when you run that full strength it gives the Dynamics of something like the XIV which rose 600% in 2017 right right now my observation was twofold one was that because of the growth of this strategy it had actually gotten so large that it was consuming all of the liquidity in the ux Futures the vix Futures on normal trading days it was

about 70% of the daily volume was simply the rebalancing of these things wow that's huge so the passive component of that which we'll feed into a discussion we'll have later on had just become so large that it relied on liquidity that was not necessarily going to be there right there very similar to the financial crisis where people had long-term debts but it was so much cheaper to to to finance that with short-term paper hey we'll just roll it over every 30 days 100% that's exactly the same underlying Dynamic and by the way the model for

the trade that I built was actually going back and reading Paul tutor Jones analysis leading into the crash in 1987 portolio portfolio insurance components right it was the exact same trade so like down to the point the portfolio insurance was consuming somewhere around 30 to 40% of the the volume on the S&P 500 on a normal basis Paul's observation Paul tutor Jones observation was that in an event that actually exacerbated volatility the trading quantity that they would need was far greater than the market could Supply I had the exact same Insight exact same view and

simply pointed out that like look there's a misunderstanding of an inverse product you think like a normal stock it's getting safer and safer and safer as it goes higher in price but it's the exact oppos it's the exact opposite and so what you were actually building was a bodal distribution meaning two humps to the distribution where there was a smaller and smaller probability that everything was okay and a bigger and bigger probability that all I think technical term is all hell was about to break loose right we basically came to the conclusion there was roughly

a 95% chance it was going to go to zero over a two-year period we ended up buying this is one of the wonderful things about financial markets and degrees of completeness there were options available with a two-year time Horizon that allowed us to exess amazing leverage so how much how much were you putting at risk at that that moment that hey this this analysis is correct and the timing this should happen within two years so we were actually ultimately limited by the liquidity in the space but it was large enough that we were able to

put a sizable amount of Premium am and and make a meaningful amount you made this trade on behalf of teal macro put any of your own Capital into it also well that's one of the funny things everybody discovers as you go through this industry is is that when your compensation is tied to the outcome of the trade you can absolutely Express components of it but the reality is is that we're all massively underinvested in things like equities Etc because so much of your income is the you know I've had that exact conversation hey why don't

you own more Common Stocks you talk about passive investing this and that I don't know about 95% % of my net worth is tied up in Market related Investments you're in the same place 100% And it it it's hard for people to understand that so it's great to have the opportunity to actually share that I mean our industry tends to be among the most conservative investors out there precisely because we look at it and we're like wait a second if this risk goes wrong not only do I lose my assets but I lose my job

right it's it's double concentrated risk there were lots of rumors about that trade at the time some people said it was 50 million 100 million million I don't know what you're allowed to talk about but it's safe to say this was a big eight or nine figure trans profit right this was a giant win yeah the the notional amount of the trade was about a quarter billion dollars and um we we did well I'm going to guess you don't you don't have to sit you don't have to admit or deny the following but if the

if that was your notational 100 isn't a ridiculous profit margin that's Barry saying it that's not Mike so any compliance people listening just spitballing here a couple of months ago I had David Einhorn on and and he made some news basically saying passive has broken the markets and kind of snuck by after he dropped that bomb was he credited you with helping him understand how passive has changed Market structures and forcing him to become as a value investor a more of a let's call it a deep value investor and his performance has since rebounded so

given that Einhorn has credited you with this Insight tell us how you came about to this belief sure so the the XIV trade was actually part of a broader research uh into the Dynamics of passive and if I'm going to run through that language and and help explain it um the single biggest contributor to that research was actually a 2016 paper by L Peterson at aqr a brilliant individual he wrote a paper called sharpening the arithmetic of active management right that paper refers back to the foundational literature of Bill Sharp who wrote the famous paper

in 1991 the arithmetic of active management which is the source of any statement that you hear which is active simply owns the same stocks as passive because it charges less therefore passive will outperform over time right the argument is very straightforward as an assumption of completeness in markets what lass pointed out in his paper was that passive had to transact during periods in which there was index rebalancing and so in that period they ceased to be passive investors they became active investors and that became an opportunity for outperformance now the reason that that became interesting

to me was I recognized one additional feature that lass had not highlighted which is that passive investors are always transacting because of the Dynamics of flow so you get your paycheck you put 6% aside that flows into various Vanguard funds they're transacting on a daily basis and just to put it in perspective over the past couple years Vanguard has averaged somewhere in the neighborhood of $300 billion worth of inflows every single year that's the equivalent of a large hedge fund every single day having to deploy its capital into the market and so when you think

about this Dynamic of is passive actually passive it's really important to understand that the definition of passive as it's stated and this is true for the XIV it's true for the S&P 500 in any form of index fund the definition of passive is somebody who never transacts if they transact every single day then they're actually a different animal so let let me push back on that definition a little bit because I don't want us cuz you and I are going to disagree about some things but I want us to have some fundamental agreements my definition

of passive is rather than trying to time the market or pick specific stocks or have a concentrated portfolio meaning a high active share so you don't look like the index you're just going to default to a broad index whether it's the S&P 500 or the Vanguard Total Market which I think is 800 and then there's an even larger one that's a few thousand and I'm going to own the whole market and what that will allow me to do is have minimal trading costs minimal tax costs and avoid all the behavioral problems that comes with active

management and so I'm going to own this in a 401k it'll be a mutual funds in a tax taxable account it'll be an ETF and I'll let that run so I don't think you're that disagreeing with that definition or how far off is my definition from yours well the only difference in our definitions is actually the process of how you get to hold it MH right so the the natural conclusion that you're making is actually consistent with Sharp's paper right which is the idea that passive investors hold every security the problem is how do you

get in to hold those Securities and how do you get out when the time comes to sell them so you and I are not disagreeing at all you you set up your 401k or you set up your investment plan and whether you're making a purchase and putting it away or dollar cost averaging in your 401k or in any other my partner Josh calls this the Relentless bid the constant flow of money into 401k or Iris H have operated as a um a little bit of a floor on the market you know the dot financial crisis

and pandemic crashes notwithstanding most of the time there you can count on positive inflows to equities well yes right I think that's correct and I do think you used a term that I think is really interesting the Relentless bid yeah absolutely and so when you start thinking about each of those individual components that you're talking about first of all just it's really important to understand that all the literature that exists around active versus passive and the idea that passive doesn't meaningfully change markets actually presumes that it's simply a hold that there is no transaction activity

it goes other than I mean obviously it's not like okay everybody in 1999 buy stocks and then no one buys stocks for the next 30 Years there's a continual the economy continues to grow people earn wages whether it's a retirement account or a tax deferred account or just an investment account the average mom and pop investor throws money into the market on a regular basis and takes money out of the market when it's needed for other purposes so the fascinating thing about that is first I completely agree right and I think that's actually part of

the language that gets confused and lost on this and so again anytime you're transacting you're not passive when you decide to buy with your weekly contributions you're not passive what you're actually doing is you're transacting in a systematic fashion so you are a systematic algorithmic investor that has a very simple rule what do I buy I buy everything what price should I buy it at whatever price the market is offering me that's presumed to be the right price right now any time you buy you've traded portfolios that are several hundred million to billion dollars in

size anytime you attempt a transaction like that you're going to influence the prices right and that's really what distinguishes the difference that's what David is highlighting as more and more investors transition to this systematic algorithmic investment that simply says did you give me cash if so so then buy did you ask for cash if so then sell that starts to change the market behavior in a measurable and meaningful fashion it actually causes two things to happen one is it creates a momentum bid because what do I choose to buy I choose to buy whatever the

market is pricing it at so things that went up since I my last purchase I buy more of as a proportion of my assets I buy less of things that went down right the second thing that It ultimately does is it creates conditions under which there's a transition from cashr portfolios that are ultimately option likee in their characteristic so I as a discretionary portfolio manager if you hand me cash I can look at the market and say you know what thank you for the cash I'm going to hold it in my portfolio I'm going to

use this as an opportunity for me to reduce my exposure to the market or I could choose to use it to buy something without having to sell something given that what are the risks to the US economy and to the markets from too much passive Investments flowing in to equities so the key risk ultimately lies in that very simple language right did you give me cash if so then buy did you ask for cash if so then sell and I just want to pause for a second and go through a little bit of financial history

here because I think it's really important for people to understand this things that we think of as having always been there things like 401ks and IRAs are actually very recent inventions and there have been dramatic changes around their implementation within your investment career and my investment career which are roughly similar in duration it actually predates us but had not become popular like it had existed for about 20 years before people started to figure out wait I could put this money away and have it grow tax-free it really took a few decades before the market kind

of came to grips with that yeah I mean so just very quickly IAS were actually created in 1972 to facilitate a key risk that nobody had ever imagined before which is if you were a union employee who was fired in the 1971 recession and you received a lumpsum settlement of your pension you suddenly that was treated as earned income in that year you were subject to the 75% marginal tax rate it was absolutely insane and devastating to many individuals and so the IRA was created to facilitate the rollover of those on a tax deferred basis

so you could maintain those assets even if you lost your job right the second tool that was introduced was the 401K which refers to a specific provision of the tax code that created the defined contribution right if you launch yourself all the way back to 1981 and the start of the bull market 1982 the start of the bull market in US equities following the election of Reagan the total assets in those two were about hundred billion dollar in each right today IRAs I believe are around 17 trillion and 401ks are somewhere in the neighborhood of

8 to 9 trillion right these are the single largest pools of assets on the planet is the American retirement system um the there was a subsequent change in 2006 called the pension protection act that one tried to push more and more people into 401ks right by making it what's called an opt out framework as compared to an opt-in right you can blame dick Thor and nudge for that 100% the nudge Dynamics and trying to create the ownership economy and those have been on net quite positive components to them but they have meaningfully changed the structure

of how flows enter the market because of the qfs right so qdas what they I'm sorry um so the qualified default investment alternative if you're going to default somebody into participating you no longer leave it up to them to say hey what do you want to buy you actually have to select something that you're going to put them into and so the pension protection act also introduced this idea of qualified default investment alternatives provided a liability protected mechanism for HR managers or CFOs to declare this is where we're going to default people into initially those

were balanced funds so this is part of the key growth of Pimco which had skill set in both in both equities and fixed income so the growth of balanced funds was a re really key characteristic of that 2006 to 2012 market and then in 2012 they changed the qdia to what's called a Target date fund which is what about 85% of Americans now fault into in their retirement assets right what the way it used to be is you would start out a company even if they had a a match you had to go out and

do the paperwork you had to go out and choose the fund even if they said as uh joining a company you automatically get a 401k cash would just pile up in there if you didn't give some form of default so so essentially what was designed to say hey you got to get off your button do something we're going to make it we're going to make sure you're investing in something it's up to you to go in and change it to what you want it's kind of shocking and and in some ways um just reminding us

of the strength of Behavioral finance that people are so lazy just like would you put me in okay great and they don't even think twice about it 100% And that actually is exactly what we see so it's also a very bifurcated experience where those who were older and who already defaulted into 401 plans and made the choice to go into those 401K plans they typically would choose from a universe of active managers right that's the world that largely existed prior to 2006 the passive share at that point was still quite low when I entered the

industry when I first started you know cutting my teeth on this stuff it's hard for people to remember but passive was still roughly 1% market share in 1992 Vanguard formed in 1974 they didn't get to a trillion dollars till pretty much after the financial crisis I have have a thesis that have said you know from the '90s implosion and then just a raft of scandals the accounting Scandal the anal Scandal the IPO spinning Scandal the just go down the whole list and then Bernie ma off and then the financial crisis my general sense has been

lots of mom and popop investors have said we just don't want to get involved in that mess just let me buy the market and forget about it and and for those folks it's worked out and those folks are very often my clients so let me pose this question to you um if you're having a discussion with a fiduciary who runs a few billion dollars in client assets convince me to shift those accounts away from either broad indexes or passive generally to something more active why should I move their accounts elsewhere quick answer is you shouldn't

and that's actually part of the problem is that the individual ual Choice should be to buy passive MH right the problem is is when all of the individuals buy passive we actually change the structure of the market and so it no longer represents what it historically did and by the way let me interrupt you and just say we obviously have huge swats of fixed income and Muni bonds as part of the that portfolio and we also own a variety of non-passive um Holdings some with a value tilt some with a momentum tilt some International so

it's not like all right we're going to charge you a fee and just load up on the S&P 500 it's obviously a lot more significant than that but given what you're saying that fiduciaries should be looking for lowcost at least in a coron satellite setup how do you go about reducing the risks to what you see as as Market structure problems caused by a simple default to passive so this is actually the core of the issue and it's part of the reason why I spend so much time talking about and it's part of what I

made David aware of in that conversation to go back to it is there's very little the individual or the individual raia can do to change this this is a regulatory framework and it is controlled by the vanguards and black rocks who are spending far more on lobbying than the rest of the industry combined right so part of what's really happening is the political choice to push you into these vehicles the political choice to make it the only acceptable alternative under the rubric of offering safe lowcost investment to people is totally understandable we all want that

desire certainly that's your desire as well I mean is it an overwhelming amount of academic literature that says you know some active managers manage to outperform but by the time you get to 10 years and Tak in taxes and costs and and fees you would have been better off in passive the more people who find their way into passive Vehicles doesn't that create more opportunities for people like David n horn isn't the greater the percentage of passive ownership the more inefficiencies there are and therefore shouldn't we see active sort of reassert itself perhaps at a

lower fee than in the past but aren't there more and more opportunities for people who have a skill set to identify um inefficiencies wherever they pop up so I'm really glad you asked me that question because this is the traditional model and the way that people think about it and it's exactly what I focused on with David right the immediate reaction to the idea of the growth of this nonth thoughtful entity passive right makes it seem like those who are thoughtful should have an advantage the problem is is in the theories that lead you to

that articulation so what you're referring to is broadly called the Grossman stiglets Paradox the dynamic that the more people choose not to put in effort into the market and divining prices the greater the incentive and the opportunity set is for those who are choosing to put that into the market it's what they call the impossibility of perfectly efficient markets the problem again goes into the details of the Assumption of the model so really what Grossman stiglets is all about is the wisdom of crowds you're familiar with the Michael mobison examples of these or the articulation

that we're all familiar with you go to the county fair there's a giant jar of jelly beans and you're supposed to guess how many Jelly Beans there are in there right any individual has a very low probability of success but when we agre at all the guesses and we take the mean of that it tends to be pretty darn close to that answer and that's composed of absolute nerds like me who are like what's the diameter and how big is a jelly bean and all that sort of stuff right and people who are making just

total wild guesses right the problem is that model the wisdom of crowds actually requires everybody to have what's called equal endowment or the same number of votes and that's actually what Grossman stiglet relies on as well is the idea that the wisdom of crowds is caused by the dynamic of each individual making those choices and the market in its totality being able to guide towards that and so that incentive where prices get pushed off if I'm the same size and I have the same number of votes as everybody else I can guide the market back

to that that's the opportunity set what why wouldn't that work in uh Equity markets where people with more votes more dollars have a greater incentive to get the number of jelly beans correct so that's actually exactly what isn't the case so what's actually happening is we're giving more and more of a vote to somebody who doesn't care right as a result Vanguard and black rock because of their daily transactions the size of those transactions has gotten to the point even though they're not actively trading on a day-to-day basis that Relentless bid that your partner refers

to is actually changing the structure of the market it's changing that price Behavior it's the same thing as if we went to the county fair and they said everybody guesses and then the mayor gets to guess 10,000 times H whose vote's going to count so I did a lot of prep work for this you and I have had disagreements on Twitter about passive versus active I I think our disagreements are less than I previously realized um I think we both understand the advantages of lowcost indexing but but let's talk about some of the recent data

that's come out I know you're a big fan uh of a lot of research that's out there there last week Eric balunis who's the ETF wizard at Bloomberg intelligence uh put out a report passive investing worries appear overblown as active as in control and his key take takeaway was when you looked at the S&P 500 stocks and you broke them into quintiles with the most or the least passive uh ownership the least owned quintile beat all the rest over one three and five years so if that's the case doesn't that prove the active managers are

still doing okay and the stru market structure is behaving as it should so it' be nice if that was the case unfortunately the analysis was deeply flawed I pointed this out in responses to Eric what you discover if you actually dig into that analysis is is that the least passively owned stocks are the apples Microsoft Nvidia Etc of the world the largest companies meaning the active managers are buying those big Magnificent Seven stocks except they're not and so the reason why that disconnect comes is because hold on I have to I have to stop you

there sure every concentrated portfolio I've looked at every active manager you have to really go down the list to get to people who don't have some combination of Nvidia Microsoft Netflix go you know go down the list of the top 10 they all seem to own United Health now if they're not Clos indexers if they don't own 300 stocks maybe they stop after 10 or 20 but those big big cap dare I call them nifty50 stocks they seem to be the favorites of the active managers make the other case so it actually turns out that

the active managers and this is almost exactly why we see some of the Dynamics that we talk about active managers skew towards smaller stocks simply by definition right the Russell 2000 has 2,000 out of the roughly 3500 stocks ail publicly traded it's about 4% of the total market cap so somebody has to actually go out and own that we know it's not Vanguard we know it's not Black Rock they're not owning it in any different proportion or any meaningfully different proportion to what they're owning everything else through a total Market type index there are some

wrinkles around that but in rough terms that's the case you are absolutely correct that there is representation of apple or Microsoft but that actually hits on a slightly different component which is if you are going to compete with the S&P 500 paradoxically you do have to own those names you don't have to own Delta Airlines nobody cares right but you do have to have exposure to the apples microsofts Etc of the world but almost no active manager can carry them in the size that a passive vehicle can because of concentration limits why how how much

is Tesla in the S&P 500 or Netflix or Nvidia none of them are more than 10% did didn't the S&P and the NASDAQ 100 change those rules like 10 15 years ago so 10 to 15 years ago they changed to market cap from market cap weighted to float adjusted weights I think that's what you were referring to right but actually interestingly enough this is part of the dynamic in where regulation plays a role entities like the S&P 500 growth fund are far more concentrated than is legally allowed by the 40 act by which they're governed

they are too concentrated relative to that they've been given dispensation by Regulators because they're index investors and this is where the analysis that Eric was highlighting is flawed because what's actually happening when you see the high levels of index ownership for an individual name what's happening is is that you're picking up a sector fund for example this is very notorious in REITs it's also very clear in things like a technology index the xlk for example or The XLE in the energy space XLE is I believe 40% xon mobile 40% Chevron right nobody can actually run

an active portfolio that looks anything remotely like are they that big that's that's crazy yeah that that that that's absolutely ridiculous um so that's so just very quickly that is actually what Eric is picking up and I would argue that those are not actually what we're talking about when we talk about passive precisely the definition you and I were talking about if you're passive or systematic index investor you're not saying well I'm going to overweight energy I'm going to allocate to an individual indust industry and so to turn around and then say that those stocks

that are most passively owned don't exhibit this type of behavior is to confuse those two Dynamics so also within Eric's uh research piece was something that said hey we went back and looked at draw Downs of 10% or more of the components in the S&P 500 the stocks with the highest passive ownership didn't weren't subject to Greater volatility or larger draw Downs than any of the rest of the ownership which is a big part of the argument that hey the structure is damaged and when it finally breaks these passively owned vehicles are going to be

a dis disaster so there's two separate components to it one is that again the issue is how you're defining the passively held so if by definition I've already gravitated to saying the least passively held are the Microsoft apples Etc of the world I'm going to come to that conclusion but the the unfortunate answer right well what about the most passively held those actually ironically are the most passively held and the reason that they're actually the most passively held is precisely this issue of concentration risk most active managers can't hold those names in the size that's

required if I'm a small cap manager or I'm a diversified fund manager I typically have to run with 100 names in my portfolio 100 names in my portfolio to be equal weight to Apple for example in the index it'd have to far out away everything else in my portfolio I offer as an active manager typically very little value added to the insights on something like apple and so the institutional space or most uh uh asset selectors asset allocators are going to look for managers that are trying to add value otherwise why not just buy passive

why not go with a lowcost solution so so that kind of raises the the question about what is the solution to this um I brought up Al chunis but I recall oh maybe it's 10 years ago he he wrote a column that he eventually turned into a book called the Vanguard effect and he figured out that over the course of the previous 20 30 years Vanguard has taken about a trillion dollars in fees out of the market now it didn't all go to Vanguard they got took about hundred billion doll in fees but it forced

everybody else to compress their fees to lower their fees in order to be competitive and ultimately saved um ultimately saved investors a trillion dollars so the question is how do we not go back to the bad old days of expensive under performing active managers given the the alternative that we've created and keep in mind uh Vanguard and black rock didn't you know they weren't born whole cloth into a vacuum they came about following a lot of academic research and a lot of pricing underperforming active managers in the 70s 80s 90s so how do we not

go back to those days and yet still have an opportunity to fix the market structure yeah no so there there's a a whole bunch of different components to what you hit on the first is this idea of cost savings associated with Vanguard first of all I absolutely agree with Eric's analysis that the lowcost introduction the introduction of the mutual structure was absolutely part of the success of Vanguard and the push towards lower fees has been absolutely critical but remember the vast majority of the time that Vanguard was actually running 50 basis points would have been

considered really cheap fees right that's right right and initially introduced believe the fees on the Vanguard funds were about 75 basis points 0.75% as compared to most active managers who are between one and a half and 2% right so that pulling down was absolutely critical today you're at a point where the three basis point candid it just doesn't mean anything it's free free it's effectively free and one of the reasons that it's able to be effectively free is because there are hidden subsidies within the industry which ironically are affecting things like the CPI numbers that

we see where securi lending is actually what's paying for Vanguard right mean people want to short stocks they borrow it they Bor from you go to thear you go you go to Black Rock and Vanguard absolutely those are the two that you go to those but that's that's you know it's real money when you're running trillions of dollars but when you're three or four basis points or five basis points and don't forget Vanguard is about 30% active funds black rock is a little more 40 something per active funds so so they haven't abandoned that space

and when you look outside of their core you know S&P 500 or for Vanguard it's vti or vo or you have a run of total markets or total Global markets us or Global there are some higher fee products um 10 20 30 basis points but it's the scale trillions and trillions of dollars that have allowed them to take a fund like that down to three basis points or four basis points so that's actually exactly the point that I would emphasize which is is that we have allowed the industry to change so dramatically from that thought

experiment of Grossman stiglet in which everybody was roughly the same size Merl was bigger but it was a whole bunch of individual brokers who were able to do whatever they individually wanted to right now what you've effectively done is you've created an industry that like so many other Industries has become remarkably concentrated and so one of the ironies is is when Eric is talking about passive share the way that that calculation is done is simply by adding up Vanguard Black Rock Etc right now that actually was the focus of a research piece that I actually

inspired I challenged two Harvard professors actually a Harvard professor and a PhD candidate Alex uh Chinko was the PHD candidate Marco salmon was the Harvard Professor I was the adjudant on a paper that they'd written where they did an analysis on the impact of passive I very much agreed with the work that they had done public record but they had done their scaling of the impact by looking at it and saying the shareff passive is 15% roughly what Eric was working off of right in other words when you look at ETFs and mutual funds passive

is about 50% of mutual funds now it's over 50% but the nonf funds the direct ownership is primarily active you're you're saying that is somewhat overstated it is very much overstated so it actually turns out the the statistics that people are using for that is very quickly the mutual fund or 40 act industry is about 35% of the equity Market in total a little bit more than half that as you're pointing out is passive in its structure and so we can multiply call 20% right that's the quick answer in terms of how much is passive

but remember passive actually got started even before Bogle it got started in the institutional space it was Wells Fargo that was the first in the passive space and so it actually turns out that away from the retail space passive is even larger in the institutional space and that's the area under the iceberg that you're missing right so Marco sammon and Cho's work focused on exactly that they went and they did a they did an actual experiment where they tracked what fraction of shares had to trade in response to an index rebalancing and the answer is

around 40% right now I've seen some push back to that that says there's a lot of end today trading there's a lot of people who are either front running or piggybacking those trades and you can't credit all of that 40% rebalance number to to passive um and so that's how they end up with Fidelity had a study I want to say it was 27 or 28% um somebody else had another study that 23% but let's give you 30% um so if it's 30% going to 40% going to 50% when 50% of the market is purely

passive doesn't that mean that folks like David Einhorn are just going to clean up doesn't it create isn't it homeostatic and going back and forth so if it were a stable situation absolutely the case the problem is is that when you talk about going from 30% to 35% to 40% what you actually have is the scenario that we have in markets today where more than 100% of the flows which is actually what determines the majority of transaction activity is passive in its construction right again the active space is losing assets it's seeing net redemptions the

passive space is actually receiving more than 100% of the inflows and if you go back back and you think about the Dynamics of Andrew low stating 90% or John Bogle himself highlighting that between 80 and 90% markets begin to break down it's important to recognize that 90% of the trading activity no longer has a fundamental component to it that's actually research that was done by JP Morgan as of 2017 and all the components that you're talking about the Arbitrage the normalization ETC all of those are done in the facilitation of that endof day uh Market

on closing balance is tied to the mutual fund ETF orders Etc so what do you what do you think about not traditional passive but some of the concentrated portfolios I I had Andrew slemmons of Morgan stallion not too long ago he runs a 20 or a 30 name um portfolio that has done pretty well we continue to see people like Bill Miller slag the active side of the industry calling them mostly closet indexers and said if you if you want to beat the market you have to look different from the market um you have all

sorts of things like smart beta and thematic investing and I know simplify has an India based ETF there's a lot of choices for people who want to run let's call it a core and satellite type of portfolio where hey our core is going to be look very similar to the market but we're going to put our own stink on it because we want to have exposure to Japan exposure to India exposure to momentum blah blah blah blah Isn't that the sort of the direction things seem to be heading in not at all so yeah so

there's a lot of highlight around the growth of active ETS for example they're about 25% they become huge right and capturing some flow they are capturing some flow but they haven't become huge let's actually be really they become bigger so I'm I'm overstating it they're much bigger today than they were five years ago with the offset being that the mutual fund and hedge fund spaces are much smaller fair right so what you've actually had is a net decrease in the quantity of active but it's instructive that everybody points that like oh look how robust the

space is and how wonderful it is right the simple reality is is that nobody can actually afford to acknowledge many of the concerns that I'm highlighting it's really very straightforward there is no such thing as passive investing everybody is an active investor well they're an active Trader when they're deploying the capital they also an but they're not actively selecting stocks they're relying on an index which actually is a decision process an Al of course right right I did a column a couple years ago how passive how active is your passive where hey even the S&P

500 someone decided it's going to be market cap weighted someone decided what the rules are and there's regularly additions and deletions that seem to be you remember when Tesla was added that seemed to be an editorial decision not a um systematic algorithm deciding well it actually technically was a very systematic decision right and so we actually Tesla was a fascinating example on this because we actually had received a lot of speculation around it the rules for inclusion in the S&P 500 are pretty straightforward you need to be of sufficient size and you need to have

at least five consecutive quarters of profitability right so once Tesla began actually reporting profits and then moving towards that Fifth Quarter it became very clear that on a pure size basis they were going to be the next player to be included and the size that they were going to be included in was going to require an insane amount of passive buying there was a ton of front running also ton of active running exact same thing just happened with smci for example well they're they're a lot smaller doesn't really matter though actually so I'm glad you

brought up Tesla um we're recording this on the first day of May uh two months ago Tesla originally part of the Magnificent 7 down 65% from its recent highs doesn't seem like active flows or passive flows were helping Tesla and then over the the last month you know they cut a deal in China they they kind of explained away some issues with the self-driving problems um they cut prices and suddenly they're back to only down 50% which is a big move when you're down 65% doesn't that Bell the whole argument that passive is destroying uh

price Discovery obviously a bunch of active managers figured out Tesla was way too richly priced back in 21 and after got whacked by 2/3 someone else turned around and said all right this has gone too far this this is not a worthless company heading to bankruptcy we want to own it isn't there plenty of of price Discovery going on so unfortunately I think the answer to that is no right there's always going to be a subjective component to that I would highlight when you look at something like Tesla there's a couple of things that are

really interesting one is who was the largest seller of Tesla besides Elon no that's exactly the point oh okay so why did Tesla go down over that time period in which he was requiring Twitter cuz he had to sell a ton of Tesla shares there are a lot of other reasons like I I will make a fundamental case for you the yeah Elon sold some he didn't sell enough to whack it 2/3 their cars are kind of long in the tooth they they haven't really introduced uh an upgraded even the X and Y look very

much like the model S um and and uh I'm sorry the model 3 and the model y look like the S and the X um in China has become an ongoing problem 5 years ago they were a decade ahead of everybody in the software now they're I don't know three four five years ahead of everybody and there's a boat ton of competition it's not just for GM BMW Mercedes Audi Volkswagen Volvo Renault go down the list you could buy an Eevee Rolls-Royce or Maserati if you want everybody is piled into the space so fundamentally you

can make a case yeah Elon sold a bunch of stock but suddenly it's a more challenging environment and the stock had become overpriced that's the argument I would make that um that that Tesla had become overvalued and it seems like the market picked up on a lot of it especially what did it Peak at at 1.2 1.3 trillion that kind of suggested we're going to own the EV space for the next decade it wasn't even just own the EV space so first of all I actually agree with you and I think most fundamental managers would

agree with you that Tesla was overvalued but the simple reality is overvaluation doesn't actually affect anything right what affects things is people actually executing trades right the only thing so how much did Elon sell I mean it he it didn't seem like he sold what what did he overpay for twitter4 right and he didn't pay for that was an all Tesla stock it was I think he had to pay 10 or 20% of it let's call it 10 billion out of 1.2 trillion shouldn't have crushed the stock so let's use Bitcoin as an example for

a second right how much money has flowed into the Bitcoin ETFs I don't know $60 billion over the past uh decade well not over the over the past decade but in particular since the introduction in January oh God you look at the Black Rock ETF it was at $5 billion in a month and it's probably close to 10 billion dollar now right so there's been about $40 billion worth of inflows against a Bitcoin valuation or a market cap of Bitcoin going into it of about $400 billion and it costus a 65% appreciation so $40 billion

it's nonlinear totally same thing's true on Tesla right everything happens at the margin by the way why why did Amazon sell off so so firmly over the past couple of years as well because Bezos departed and the company is a shell of the delightful retailer it once was wouldn't that be awesome if it was true except it really boils down to McKenzie Scott selling her shares this there's a lot of that so let me let me shift gears on you since we're talking about structure I I want to change things up and throw one more

thing at you about structure because I I I'm enjoying this conversation so a couple of years ago we started working with the folks that are shown us the asset management who rolled out a product called canvas which was a direct indexing product direct indexing has been around for decades it to me it's never been particularly impressive and oy had a couple things going for them that nobody else did they they over their course of 20 30 years created their own incredibly clean database that they had built out that was you know you have to look

at crisp um maybe as the or compus that in the old days is the only thing that's close but it was really very specific to them and second you know the team at at oan and I've had all these folks on um between Patrick ooni and Jim who famously wrote the book what works on Wall Street a really a first Quant book for the public they created a form of direct indexing that as someone who's been a skeptic Dave and I have disagreed about this for years when we first saw this in I want to

say 2019 it's like oh I get it you can do so much more now and of the you know 4 point whatever billion dollars we run over a billion is on the canvas platform now owned by Franklin Templeton and what we have discovered is if you have any sort of um this is a long way to go but I'll get there if you have any sort of potential capital gains you've inherited uh a portfolio you've sold a business you have a bunch of founders stock you have a bunch of IPO stock and you want to

diverse ify out of that core portfolio but the capital gains are going to be fairly uh weighty you could use direct indexing to tax loss Harvest and order of magnitude better results than if you own a half a dozen ETFs or mutual funds um just and and first quarter of um 2020 anytime you have a 30 plus% decrease that fits nicely in in the range of the calendar quarter you know instead of being 7580 basis points it's 300 oanes has um case studies 400 500 basis points Giant game changer long asked question short uh conclusion

is do things like direct indexing which have always been a small part of the market but seem to be catching a bid now might this interfere with that Relentless bid of passive cons something like this change the game for what you see as a structural problem in passive so it is a very long question with a lot of different components to it um First Direct indexing is almost by definition always going to be relatively small it's a tax arbitrage strategy it requires people to start with a lot and then try to maintain most of it

right and so the return differentials that you're quoting there are obviously a tax advantage return differential it's not the absolute levels of performance that's right understand let me let me clarify I'm referring to the tax Alpha returns yep over and above what you get from the market and it's not aimed at market performance in its own way it is a form of um I don't want to call it passive because it's not but it Apes passive Investments or whatever funds you want to put in what it's doing is it's seeking diversification right so it really

doesn't what you're doing is you're taking heavily appreciated individual positions and you're then diversifying it into a market exposure right the ability to to Arbitrage your individual tax positions Falls Way outside the Dynamics of market efficiency right every individual is going to have their own components we could get into tons of conversations around exactly that issue and that actually almost perfectly fits with what the critical point that I would make is it's not so much that passive itself is a terrible thing it's actually the the idea of a systematically algorithmic investment in which the simple

determining algorithm is did you give me cash if so then buy did you ask for cash if so then sell that actually can diversify a market it creates a different mechanism and it can actually lower volatility and candidly I think we saw that up to a certain point of market share around 25% market share it actually turns out perversely the passive is beneficial to the market it's once you go past that point that it starts contributing to higher volatility much higher correlations and the risk of severe left tail events which brings this full circle back

to the XIV type dynamic so so then let me ask you one final question before we jump to our favorite questions who has the burden for dealing with the the challenges of passive attracting so much in assets shouldn't it be on the active managers to reduce their costs put up better performance numbers over longer periods of time and take advantage of all of these inefficiencies passive creates isn't this a system that should heal itself if active managers start to perform lower their fees and attract more Capital so the the answer is very quickly no and

unfortunately this brings us back to the question you had asked of doesn't it get easier and ironically what ends up happening mathematically what occurs that constant bid that you're describing perversely changes the return profile of the market and it actually turns it into a this is difficult for people to see over radio but I'm drawing a convex upward sloping curve right it pushes valuations higher over time now perversely what we call Alpha in the industry which is typically how we evaluate individual managers it turns out is actually over time just the The Intercept on a

y equals MX plus p and linear equation right so I know this is hard for people just like mentally imagine you're back in in high school it's your freshman year and you're doing a y equals MX plus b graph in algebra right what happens that's the same thing as saying the portfolio return equals the market return x times a beta plus Alpha the residual in that The Intercept in that if I curve that surface and I try to use a linear equation to solve it it actually mechanically pushes the Alpha's negative the intercepts get pushed

negative right you can run this experiment with yourself just draw a positively curved line and then draw a series of straight lines that BCT or intersect it right understand how hard this is over over no by the way I I see the curve I see the intersect where I would just push back on the algebra is simply and he seated one of your early accounts soros's concept of reflexivity should say that the bigger passive gets it creates more opportunities for active and therefore so it does in exactly the way that the XIV did that's why

I chose the XIV for that trade because it had already gotten to the levels of passive that I could very clearly see it happening almost immediately so last question before I we do a speedrun of my favorite five questions what's the trade that will capitalize on the damage that passive is doing to Market structure so the quick answer is unfortunately if I'm right you'll have an XIV type event for the S&P 500 I realize how ridiculous and ter Buy out of the money puts on the SPX going out as far as the leaps will let

somebody will eventually win on that but it is very stochastic in its framework meaning you don't know if this is next year five years from now it you look at it as an eventuality I look at it as a a tail risk that the market itself hopefully corrects and I would absolutely agree with you if that if it could correct it the problem is and I I'll I'll share this with your audience right I presented this type of work to the FED I've presented to the um imf's Financial stability group every single time going in

and saying please tell me why I'm wrong and unfortunately the answer is you're right right they actually acknowledge that and my reaction to that was fantastic how can I help what can we do and their answer is there's nothing we can do because Vanguard and black rock control the regulatory apparatus if we raise an alarm prior to the event happening all that happens is we get fired huh so so let me ask you one or two other questions then related to those entities so so you said um some of the models that BLS and NBR

use are flawed um I'm a big fan of George Box's statement all models are wrong but some are useful um NBR should declare a recession in first quarter 2023 I'm kind of paraphrasing something you said tell us why you think last year should have been declared a recession or or NBR might declare a recession uh I think in hindsight we might ultimately declare because we did see a combination of an increase in unemployment we saw a decrease in industrial production and we saw a broad deterioration in terms of the economy things like leading economic indicators

Etc are all consistent with historical recessions now whether we choose to acknowledge that really boils down to the depth at which it occurred and so the NBR looks at three separate components they talk about how broad it is how long it's occurring and how deep the draw down is and so the debate can be around How Deep The draw down was at that point I think the bigger issue that most people are struggling with is actually around things like the employment numbers where there's been a very substantive change in how we calculate that data What's

called the birth death adjustment model which was designed to reduce the um need for periodic reassessments of what the levels of employment were in the economy tied to new business formation there was an attempt to do that in a statistical framework and unfortunately that statistical framework is now broken down in the now I remember in the 2000s um BLS was showing some quarters where 100% of the job creation for the month was due to birth death adjustments and a lot of people called them out on it and they subsequently made adjustments to their model um

I've seen in certain um reports and certain commentary hey you look at the past 12 months it's all been uh adjustment I'm not seeing that in the data I'm seeing a lot of new job creation yeah if you look at the household survey it's it's slipped and there's a lot of uh new part-time jobs but the new work from home remote hybrid model lets a lot of people work part-time and still do child care whatever tell them tell me what's wrong with the BLS model well so the biggest issue with the BLS model is actually

the conversion of those new businesses to jobs right so in particular if you take take a job in let's just say food service right or you create a job for yourself in food service by forming an independent company so that you can deduct some of your expenses for tax purposes for your job as a door Dash driver right ironically that falls into a category food service that's treated as high propensity to create additional jobs and so there's a statistical model that then turns around and says well you started this door Dash business called Mike LLC

what's the prospect that that's going to create new jobs because of its SIC code it's actually treated as a high propensity job formation and it's assigned additional jobs in the The Establishment payroll what what about all the Uber drivers and lift drivers out there so I actually think this is actually a fascinating dynamic because what we us you said we used to call those people unemployed we did actually used to call those people unemployed and so again these are revisions that have happened within the data sets and it's all very similar to this type of

of discussion that we're having where it's in the details that ultimately matter in 2008 we didn't have Uber right it's important to recognize that so if you wanted to go drive uh New York City Taxi that was an entirely different job you didn't even have Uber in 2010 what you really had was the Uber X introduced in competition with Lyft in 2012 right this so we're way out of the recession at this point that changes the Dynamics but you used to be able to be unemployed and go get a cash paying job I could go

bartend at your bar for example you be like hey I'm going to help you out I'll I'll pay you under the table right okay you you pocket some of your receipts you sell some beer for cash you pay me with it nobody knows anything from the government standpoint those rules actually began to change quite significantly in 2012 we introduced What's called the 1099 I think it's uh K that changed the reporting requirements around that type of business it made it much easier and much more electronic and then in 2021 we actually substantively changed the rules

we went from being able to treat up to $20,000 in income as independent and not requiring filing taxes to $600 well when you go from 20,000 to 600 you catch a whole bunch of new businesses and that's really what's showing up in the employment numbers huh re really fascinating stuff thank you Mike for being so generous with your time we have been speaking with Mike Green he is the chief strategist at simplify Asset Management helping to oversee 28 funds with over $4 billion in assets if you enjoy this conversation check out any of the 500

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