In this episode of Excess Returns, Mike Green returns to dissect the structural transformation underway in public markets due to the rise of passive investing. He explains why “there’s no such thing as a passive investor,” how inelastic flows distort prices, and what it means for valuation, volatility, and the long-term sustainability of equity markets. From the math behind market multipliers to the policy distortions driving mega-cap dominance, Mike walks through the macro, micro, and behavioral implications of passive flows — and what investors and policymakers need to do about it.
🔍 Topics Covered:
Why passive investing isn’t truly passive
The origins and impact of the inelastic market hypothesis
How passive flows distort price discovery
The shift from mean reversion to mean expansion in markets
Multipliers and the mechanics of how flows drive prices
Why market efficiency is breaking down at scale
The hidden risks of passive-dominant market structure
Target date funds and their unintended consequences
The fragility of valuations under passive dominance
The problem with IPO scarcity and capital misallocation
Options strategies for convex tails and market drift
Why the Fed and regulators may act — and what could trigger it
Bitcoin and private markets as new flow-driven regimes
How policy and tax advantages have reshaped capitalism
⏱️ Timestamps:
00:00 – "There’s no such thing as a passive investor"
01:05 – The origins of Mike’s work on passive flows
03:00 – Bill Sharpe vs. Lasse Pedersen on passive flaws
06:00 – Index rebalancing and the illusion of passivity
07:00 – The rise of flow-based (demand-side) asset pricing
10:00 – Why EMH broke down under scale
12:00 – The human layer markets forgot
14:30 – The math behind price multipliers (5x to 25x)
17:00 – Market efficiency vs. market distortion
20:00 – Meta, index drift, and fake efficiency
23:00 – What individual investors should do
25:00 – The Mag 7 and extreme multiplier effects
27:00 – Options and convex tail risk management
29:00 – Mike’s 2016 survey on marginal buying behavior
31:00 – The shift from mean reversion to mean expansion
33:30 – When the music stops: wealth-to-income dynamics
35:00 – Theoretical crash under net withdrawals
36:00 – Why the boomer selloff thesis is flawed
39:00 – The overlooked risk: wealthy investors exiting actives
41:00 – Public vs. private equity concentration
43:00 – Why policy response is likely (and how it may look)
46:00 – Political power vs. market dominance
49:00 – Bitcoin, passive ETFs, and flow-driven pricing
52:00 – Private equity in 401(k)s — implications and risks
57:00 – The unintended outcomes of inflated valuations
59:00 – The hollowing out of the public equity bid
1:01:00 – How Vanguard’s 2015 rebalancing moved the market
1:04:00 – Valuation opacity and future withdrawals
1:07:00 – What Mike is working on now and next steps
