GM06: The hidden danger of Passive Investing ft. Michael Green

In today’s episode, we are joined by Michael Green, of Logica Capital advisors. Michael has over 20 years as a portfolio manager, mainly in the global macro space. Recently he has become well known because of his work on the shift to passive investing, and inevitably this was one of the topics we wanted to ask Mike about. Our conversation wasn’t limited to that however, and we also discussed comparisons between the present day and previous historical crisis (going back to the Roman Empire!), as well as many other interesting subjects.

Topics Discussed in this Episode

Passive investing

ETFs and target date funds

Intergenerational inequality

“(The) growth of passive is now basically built into the system. From a regulatory framework, all the new money that comes into the U.S Savings and Investment accounts (primarily in the form of 401Ks and IRAs), are coming in passive vehicles.”

Real interest rates over history

Mean reversion and momentum

Negative interest rates

“I think negative interest rates are absurd and that they're a view that I articulated back in 2015 and is now, I think, increasingly accepted that they're ultimately harmful to the banking system. They create a tax on the banking system.”

Leverage: recourse vs no recourse (limited liability)

“I think another component that people generally under-appreciate is that while we all complain about leverage and we complain about the high levels of debt, the flavor-de-jour of how we solve this is something like risk parity which says, "OK, let's lever our portfolio 10X in the fixed income space, and let's add..."

MMT

“MMT is right but it offers almost no prescriptions for how that money should be spent. So, by handing it over to the politicians, we're at least in a situation where you could see outcomes of how that money gets spent that we have never predicted.”

Yield enhancement strategies

Links

Catch up with Michael and learn more about his work:

Logica

Follow Niels, Moritz, Rob on Twitter:

Niels Kaastrup-Larsen

Moritz Seibert

Rob Carver

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Full Transcript

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Michael

If I’m running a discretionary program and that’s going into some form of a structured product (and this doesn’t happen for precisely this reason), if I choose to do something that is different than I would have done historically, then the results of that product could be very different than I have advertised them for and I’d become liable. So, I’m forced into a quantitative system. That's actually part of the reason why I partnered with Wayne is that I realized that until the rules change there is, actually, no substitute to a documented quantitative process.