Mindless Buying: The Driving Force Behind Modern Market Dynamics with Michael Green
Oct 17, 2023
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Mike Green, Chief strategist and portfolio manager of Simplify Asset Management, joins the podcast to discuss the impact of passive investing on market dynamics. He highlights how mindless buying is driving the stock market, despite limited growth prospects for big companies like Apple and PepsiCo. Additionally, he details the influence of interest rates on the markets and explains the unique opportunity in the bond market.
Passive investing relies on mindless buying and can lead to irrational valuations in the stock market.
Bonds offer an attractive investment opportunity with high interest rates, especially as the Federal Reserve intentionally raises rates.
Investors should consider allocating their portfolios towards treasury bonds, specifically inflation-protected securities, to secure guaranteed real returns.
Deep dives
The Rise of Passive Investing
The podcast episode discusses the concept of passive investing and its impact on the market. Passive investing refers to the strategy of investing in index funds or ETFs that track a broad market index, such as the S&P 500. The rise of passive investing has led to a significant increase in market share, with more than 40% of investors now adopting this approach. However, the guest on the podcast highlights the flaws and potential risks associated with passive investing. They argue that passive investing is not truly passive, as it relies on continuous inflows of cash, which are mindlessly used to buy stocks. This has the potential to create a market dynamic where stocks become increasingly inelastic, making it harder for the market to go down. The guest suggests that interest rates, particularly the current high levels, could disrupt the passive investing trend. They point out that interest rates on risk-free assets are intentionally set too high by the Federal Reserve to combat inflation, presenting a unique opportunity for investors to consider buying bonds. They conclude by urging listeners to pay attention to the potential impact of passive investing and take advantage of the attractive interest rates offered by bonds.
The Death of Bonds and Opportunities for Investors
In the podcast episode, the guest explores the perception that bonds are a poor investment choice due to their low interest rates. They highlight the irony of this belief, given that the Federal Reserve is intentionally raising interest rates to levels that are considered unsustainable. They argue that the high interest rates on bonds present an extraordinary investment opportunity for those who recognize its value. They emphasize that bonds offer a safe and secure return, particularly in comparison to highly valued stocks. The guest suggests that the perception of bonds as a poor investment is fueled by a lack of understanding and a focus on past price performance rather than the current attractive interest rates. They stress the importance of recognizing the opportunity presented by bonds and urge listeners to consider incorporating them into their investment portfolios.
Taking Action: Investing in Treasuries
As a response to the attractive interest rates offered by bonds, the guest provides their advice on what investors can do. They specifically highlight the appeal of investing in treasury bonds, particularly inflation-protected securities such as 10-year and 30-year TIPS. These bonds guarantee a real return in the range of 2.5% and offer a way to lock in sustainable returns for an extended period. The guest encourages investors to allocate their portfolios away from equities and towards treasury bonds, emphasizing the potential benefits of securing a guaranteed real return. They conclude by stating their own confidence in rotating their portfolios towards bonds and recommend that listeners consider this approach as well.
Passive investing and the subversion of markets
The podcast episode discusses how passive investing has changed market behavior and subverted the role of markets in establishing the cost of capital for corporations. It highlights the use of passive investing as a utility for retirement goals, leading to a lack of active decision-making in investment strategies. The episode raises concerns about the impact of large-scale selling when retirees eventually need to liquidate their assets, and how this can have greater consequences than anticipated. The speaker also points out the demographic aspect, with the retirement of baby boomers affecting market dynamics. The episode suggests that the current rules and regulations around retirement funds, such as the delay of required minimum distributions, favor wealthy individuals over the average American.
The risks and implications of passive investing
The podcast delves into the risks and potential consequences of relying on passive investing in the current market environment. It argues that the conditions created by passive investing can lead to irrational valuations and defy logic in market evaluations. The episode explores the potential challenge of future selling and the disruptive effects it could have on the market. It highlights the growing influence of passive investing lobby groups, such as Vanguard and BlackRock, and their role in shaping regulations to encourage continued passive investing. The podcast concludes by suggesting the need to reevaluate the role of markets in retirement vehicles and the importance of focusing on the well-being and opportunities for younger generations.
On this week's Stansberry Investor Hour, Dan and Corey are joined by Michael "Mike" Green. Mike is the chief strategist and portfolio manager of Simplify Asset Management – an investment advisory firm. He has spent nearly 30 years studying markets and market structures, and he brings his decades of insight to today's show.
But first, Dan and Corey discuss the evolving landscape of the bond market, the opportunity in Treasury bills, and the potential impact of high bond yields on the broader investment world. Corey warns...
Take advantage of it now, because if the economy goes in the crapper in the future, the [bond] rates are going to go down when the Fed cuts [interest] rates.
Mike then joins the conversation to delve into the world of passive investing, which involves never transacting and only ever holding assets. This leads to a strategy of mindless buying:
[The stock market is] marching upwards, being led by a very few number of extremely large-cap stocks that have relatively limited growth prospects... In real terms, PepsiCo's sales are down over the last decade. This is true for companies like Apple where their sales growth, since the introduction of the iPhone 5, [is] stagnant... certainly not justifying the types of valuations that we see.
Finally, Mike details how the Federal Reserve can influence the markets with interest rates, and in turn how interest rates can affect passive investing. Moreover, he highlights the unique opportunity in the bond market and explains why bonds are an attractive option for investors.
