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You're listening to Teip. Hey, everyone, welcome to the Investors podcast. On today's show, we have Michael Green. Michael is a professional investor that has multiple decades managing tens of billions of dollars. Michael is the former portfolio manager for billionaire Peter TEALS, macro investment firm, and he's now the partner in chief strategist at Logica Funds. As you'll see throughout this discussion, Mike has some fascinating insight surrounding passive investing and the systematic risk it potentially poses to the overall market, along with numerous other ideas.


So without further delay, we bring you our discussion with Mike Green.


You are listening to the investor's podcast. While we study the financial markets and read the books that influenced self-made billionaires the most, we keep you informed and prepared for the unexpected. Hey, everyone, welcome to the Investors podcast, I'm your host, Preston Pearson is always I'm accompanied by my co-host, Stig Protozoan. And like we said in the intro, we got the one and only Mike Green here with us. Mike, thanks for making time for us and coming on the Investor's podcast.


Pleasure to be here, Preston. Hey, so Mike, the thing that I kind of chuckled at when I sent out that I was going to be talking with you on Twitter, got a ton of responses, a monster amount of responses. But one of the responses, somebody said, you know, I feel like I understand Mike's positions on where he stands in the markets. I want to know more about Mike, the person. One of the things that I like to dig into is deep learning, machine learning, how the brain works.


And one of the things that almost always comes up is that when you're younger, like under the age of 10, there's things that shape you and the kind of polarized how your neural net starts to process information. And then there's this reflexive it leads to who the person becomes someday. Some kind of curious at a young age, your parents, mother or father, somebody who was really influential in your life. What would you say is something that kind of gave you that initial push in the direction that you ended up going?


I grew up in northern California on a small farm outside of San Francisco, and so literally starting at the age of three, was like collecting eggs and selling them to our neighbors sort of stuff. And my mom in particular was always just very focused on how wonderful and precious I was and giving me every possible sacrifice she could give me, every opportunity that was possible. And so despite coming from a firmly middle class background, she made the sacrifices to give you the best possible education that she could and really inculcated a love of learning for me that I remember from the very earliest ages.


My house was always filled with books. I remember my father reading to me. My mom did day care to help defray the costs of living where we did.


And I remember reading to the small children when I was younger, etc. And so it's just all those sorts of things I think contribute to who you become when you're brought up in an environment in which people are telling you, you know, this is the path, this is what matters. Right. And that set off a period of just intense reading is, I guess, the easiest way to put it. So by the time I started reading is probably five years old or so, I just constantly had books in front of me.


Things that you don't realize are crazy until afterwards is like my mom bought the World Book Encyclopedia and she buys the World Book Encyclopedia. And of course I'm like, OK, I'll read the World Book Encyclopedia. And so if I were to cover I read the World Book Encyclopedia and I was like 10 years old. And you don't really think about it because that's just how you grew up. Right. And that's the environment that you were. And so if there's one thing that I would point to, it was just incredibly voracious love of reading that translated to building a body of knowledge that allowed me to start making some comparisons at a very young age of kind of what's true, what's not.


People heard you on other shows are probably saying now it all makes sense what I'm thinking whenever I'm thinking my green is also critical thinker. You are a person who does not take things at face value. You dig deep and then you dig deeper. You constantly trying to piece things together. So I have to ask you, what makes a person a great critical thinker?


Well, so now we can turn a little bit dark on this, actually, and it's funny because this is I know other people who have similar backgrounds, Josh Wolf, a good friend of mine, has a similar background. I'll make it actually really easy. There are two components that led to really critical thinking. The first was I was brought up in a household with comparative religion. So my father is Jewish. My mother was Methodist. I was raised Jewish until I was six years old.


Then my grandparents, my father's parents passed away and I suddenly switched to Episcopalianism, not to Methodism, but to Episcopal pianism, because my mother thought that that was a better religion. And so I'd been exposed at that point to Judaism and then Episcopalianism. Then I went to a Jesuit high school. And all along the way, the people are telling you their stories that are true. Right. This is the truth. You are supposed to have faith in this, and yet they're completely different stories.


And so one of the things that you discover is that that's just part of life, is just that people present things with certainty and they have no idea what somebody else is saying that can be at odds with that. And so collecting that and using that information is important. The second thing that happened in all candor was, is that I had a somewhat disastrous relationship with my father, who was a pathological liar. When you're again exposed to somebody who is supposed to be telling you the truth and is constantly trying to control the narrative to make themselves look better, that changes you.


It puts you into a situation where you never really take anything for face value. There's a number of people in my life that I know who have had similar experiences, and it's not a positive until you make it one. That's just fascinating, it, when I hear you tell the stories, is just a kind of smile a little bit because it really just demonstrates why you are such a deep thinker, because I'm serious. I think I speak for everybody out there.


You're a super deep thinker and it's just really enjoyable to kind of follow your feed. So when we talk to the markets, when you look at these big market cycles, when we look at for the last 40 years the boom and the bust cycle, so much of this just comes down to the liquidity that the central banks are allowing to be into the system. As to the big moves up and the talking collectively, it appears like the policy at the Fed particularly has shifted from not allowing things to contract or not promoting things to contract, and that it's just they're just trying to pump as much liquidity into this.


What has caused that change? And I'm kind of just curious to hear your thoughts in general on the liquidity comment.


Well, I think that there's a couple of things that are going on and the John Maynard Keynes quote everyone, rational men who think they're exempt from any form of influence are slaves to some defunct economist. Right. A lot of what you're seeing happen with the Fed and the behavior is them attempting to use the expectations channel to inform their actions. And so, you know, if you truly believe that the stock market, the S&P, five hundred or credit spreads or any other measure reflect the best collective information gathering of private market participants with an incentive to collect that information because of a profit motive.


And that, therefore represents the best possible knowledge of expectations of what could occur, what is likely to occur in the future. Why wouldn't you use that information to try to fine tune the system? And unfortunately, the feedback loop that that creates, you create a feedback loop in which the markets in turn are expecting the Fed to bail them out and therefore they cease to function as an expectations channel. Now, I have my own challenges associated with some of the narrative because I do think that there's a mixture of factors, right?


There's never one single sweeping dynamic. Right. And so we'll lay the story at the feet of the Fed or we'll talk about crazy retail investors ET. All right. I tend to find that what's actually happening is, is a function of market structure. Right. You build systems and in a certain way, it's almost a variant of a political science analysis in which you're saying the structures, the reaction function of society determines how the structures are built. Right.


So I think that in large form, a lot of what we've seen over the last 50 years, I do think that there were components of it that were tied to the central bank and tied to decisions to provide liquidity. But I would argue that the vast majority of what we're seeing is actually an outgrowth of the idea that markets are forward looking, that the expectations channel controls and contains information, and that we can centrally plan and fine tune a system with the benefit of the input from the expectations channel.


I really believe that they are not trying to do something bad. I think they're trying to do something good. But just like a parent who constantly gives into their child and constantly gives them what they say they want, you're ultimately going to end up with quite adverse consequences. How do you think through the velocity of money when you look at it over the past 40 years, it's been a downtrend, even though more and more liquidity is put into the system.


When Fed Chair Jay Powell is looking at the levers you can pull if you're looking for this to revert and why he needs to add more liquidity into the system and not allow for it to contract.


I don't think that Powell has a principled understanding of the system, and candidly, I think that he, much more so than prior Fed chairs, is really captive to the staff as he just doesn't have the academic chops or the theoretical chops to stand up against them. And he was very quickly cowed by the reaction of the market and market behavior under his administration into doing pretty much whatever was necessary. But with that said, the entire theory of interest rates, of the theory of the quantity of money or the theory of the velocity of money tied back to the idea of MVE equals P.


Q When we think about what money actually is, and I know this is something that is very important to you. I just have a different theory of how I think about money. So I think about money and debt as functionally the equity in a country is it behaves exactly as you would expect corporate debt or corporate equity issuance to behave. If I constantly met the shortfall associated with my business by issuing new shares to receive cash. What happens to my dividend yield?


Gets crushed, it gets crushed because of the looting, the dividends per share, even faster than the price of the shares are falling due to the dilution. Right. And so I think that's what we're actually doing. I think when we respond by issuing debt to match the shortfall or to offset the shortfall associated with productivity and growth of the labor force and everything else. I think when we do that, we're creating conditions. And Lacy Hunt talks eloquently about these types of dynamics.


We're creating an overhang. We just can't possibly service it. And the declining velocity of money is just in my book, another way of saying falling interest rates. And interestingly enough, that was actually John Maynard Keynes initial theory in terms of how he thought about interest rates and money was that it was much more tied to effectively a time shift dynamic. What is the interest rate that is required to get you to hold money to reduce the velocity of that money effectively against people who are demanding it?


I think the general theory actually probably took a step back. Back whenever he was writing these things, the world had never been collectively on a Fiat standard. Right, collectively, all nations. So is there something that's different about what we're seeing today? Because, you know, we had Bretton Woods, we pegged the dollar to gold. The rest of the world pegged their money to ours, which basically was a global peg on gold. And then we collectively on a global scale came off of that standard.


And so it almost seems like now that we're off that standard collectively and we're going through this delusion that you're talking about, there's no backstop for anybody to be fiscally responsible. If anything, there's an incentive structure to be further irresponsible. Right. Again, I think that's largely the dialogue that you hear, right? I mean, this is Paul Krugman draglines like you need to be credibly irresponsible. You're going to if you want to actually get inflation to appear, if you want to get interest rates to be forced upwards through the Yardeni bond vigilantes are the only way you can do that is by being completely irrational.


Now, the irony, of course, is that we've moved from the idea that that's completely irrational to the idea that, well, of course, that makes perfect sense. We need to have something like universal basic income. And so in the space of 10 years, we've completely changed the dialogue. Now, my pushback that we're going to move as quickly as people think to a lot of this stuff, though, is just that. You see this this is what we wrote.


Our policy in the world of pandemics. Right in March was saying the market is ultimately dictating policy. And so when prices fall rapidly, the policymakers look at it and say, oh, my gosh, the expectations channel is telling us that at the end of the world is not right and therefore we have to immediately act. And so they they immediately roll out extraordinary measures and then prices move to all time highs. And what do we see? Very predictably, they're saying, you know, are we going to do at one point six trillion dollar package or two point four trillion dollar package?


Well, since we can't agree on how we're going to spend your money versus our money, let's not do anything because there's no urgency. If you look at the markets, the markets are telling me everything's fine. And it's the few major companies that are doing fine. Whenever you drive into the small towns, you know, their businesses, they're just obliterated. The case shaped economy that Peter Atwater, I believe, is the one who originated that term has been spreading it.


I think it's very accurate and in a lot of ways, the companies that were positioned first in line to get those handouts or to benefit from those handouts as people transitioned very quickly to a work from home environment that's a Microsoft or an Apple or an Amazon, et cetera, you've seen them benefit. Now, I'm always cautious because I think that we're constructing a narrative around that component. And there is a feedback loop, I think, that's influenced or enhanced by the underlying dynamic of passive investing.


At the end of the day, if you have a large sum of money that is coming in and saying whatever price the last price was, that's the right price, that becomes a reinforcing mechanism for it. To me, nothing that has happened is all that surprising. What's frustrating about it is that we have so blithely adopted a narrative like, well, it must be fine, right? We're going to see a giant restocking cycle. Americans are rushing out to buy new homes and therefore the housing sector is going to drive the economy and just wait till we have a vaccine.


Then everything's coming back. Right? I would just push back. I do think that we're going have a restocking cycle to a certain extent.


But I also think that people forget that much of the spending that we've seen has been a function of a collapse in services spending. So people get fewer haircuts, they go out to restaurants less times. They have fewer people clean their house for them. They take their clothes to the dry cleaners, far less. They're getting far fewer cups of coffee from Starbucks, et cetera. Right. And when they look at the free money that they have or the leftover money that they have, what have they done?


They've turned around and they've purchased capital goods, particularly leisure oriented capital goods that enhance the quality of life that they're experiencing at home. And so that's hot tubs and ARV's and backyard projects and all these sorts of things have exploded. But those will come back next year.


We don't see an enhancement of that next year that we've pulled forward years and years and years of delayed projects. And I think part of the challenges is if you have any form of economic uncertainty going forward, you could very well see that fall and a far more aggressive fashion as we look at twenty, twenty one. And I think anyone is thinking about. So recently, I saw a clip where Nassim Taleb was asked about what's the big risk that you think very few people are accounting for in the market?


He paused and he kind of looked off in the distance and then he said, I just don't think that it's a guarantee that the dollar's going to continue to be the global reserve asset is something to that effect. I'm kind of curious if you would agree with him on that. Well, I think it depends on your time horizon, it's important to distinguish what you mean by reserve currency, right? So there's reserve currency as measured by the IMF, as a reserve currency, as measured by central banks in terms of what are the actual assets that they hold right on that front.


There are competitors to the dollar, largely because it's dictated right to the SDR. Components within the IMF include the RMV. They include the Japanese yen, they include the British pound, they include the euro. But if I look at it on the basis of international trade or global trade and more importantly, on a like for like basis. Right. So remember that euro trade figures include transactions that occur between Germany and France. We don't include in global trade transactions between California and Nevada, but they are functionally identical.


They may not like each other as much, although Californians and Novartis don't really Nevadans don't really get along either. But the simple reality is that they are both municipals, not states. Germany doesn't have its own currency. It doesn't have its own fiat dynamics. Right. And so it's subsumed itself, although they want to accept that or not. They're part of Europe as compared to a true fiat currency or a sovereign nation that gave that up. They may choose to take it back, but if that happens and the euro collapses as a reserve currency, right.


And certainly as a measure of global trade, it falls even further. And so I would just highlight that when you look at it on that basis, the dollar is actually gaining strength, picking up a larger and larger share of global trade. People have started to hear some views on the political economy, dynamic and geopolitics. And I would just say very simply that we've come to the end of Francis Fukuyama. At the end of history. There is a somewhat legitimate threat to the US hegemony in the form of China.


And there's a couple of players out there that are playing it really, really well and quite aggressively, effectively saying, do I switch allegiances from the bully on the playground to another bully on the playground in the hopes to improve my position? And so when I look at Europe, Europe is overwhelmed with the type of schadenfreude where they're like, oh, wouldn't it be great if the Chinese dethroned the Americans? Wouldn't that be fantastic if the Americans got their comeuppance?


Right. And as a result, I think that and there's a lot of countries that honestly feel that way. And unfortunately, the US in a weird way, has is almost never had more resources available to it relative to everybody else. And the single most important of those is human capital. And people tend to underappreciated that were brought up in an economic environment where we're taught the work of John Maynard Keynes. And almost no one in the audience who hasn't formally studied graduate level economics knows who Arthur Lewis is.


You may know the solo swan model, which has similarities to the Arthur Lewis growth economic model of an emerging economy, but you don't know it and how that sits at a primary role and that's really the story of the United States, is that the United States has had the world's greatest business model. You will send us products cheaply and you're going to send us your top human capital from all over the world, those who are actually interested in breaking out of a historical pattern.


And that doesn't show up anywhere in the trade accounts and the fact that China has a negative brain drain to the United States or for that matter, almost anywhere in the world, with the possible exception, I think, of Australia has a negative brain drain to the United States that doesn't show up in our accounting, in our national accounting systems at all. How can you possibly account for that? Think about a system where India devotes its scarce resources educating engineers and then they get on a plane and travel to the United States to see the dollar fail.


You have to see that break. And I think we're a ways away from that. We may be doing our best to expedite those events, but it's really hard to think that the dollar is going to collapse as long as those conditions remain in place. As our listeners would know, we follow closely here on the show and we talked multiple times about his model of the big death cycle and our listeners, if you're not completely familiar with that, I would highly encourage you to go to episode two hundred twenty four when we outlined that in detail.


But, Mike, do you buy into Riddler's model of the beat that cycle or how do you see the economy? I mean, the long and short of it is, is that, yes, there are cycles, but the idea that those cycles are going to repeat themselves in any predictable way, I mean, the nonsense of saying, you know, there's been hundreds or thousands of these cycles, millions of times this has played out like this, just a totally false statement.


People often hear me refer to what happened to Rome in terms of the transition from the Roman Republic to the Roman Empire. And I do think that that's actually very interesting. But to point to the dynamics of a debt deflation in Egypt at a time period when people, the vast majority of individuals were so close to the subsistence line that basically a failed harvest was the difference between starvation and survival. That's just not the world we inhabit today. And that's one of the reasons people hear me.


You've heard me use the idea that we live in the age of uncertainty, right. It's just a ridiculous concept. If anything, we are more certain about almost everything in our life. And if you look at the dynamics around covid, we're all completely appalled and up in arms because our day to day lives have been disrupted. And for the vast majority of us, unfortunately not the vast, but for the majority of us, even those lives haven't changed all that much.


And I work from home before this. You work from home before this. The only thing that's changed is you have to put a piece of cloth over your face when you go out. And so that's not a meaningful change relative to jokingly say things like the Golden Horde invading your village and killing every male taller than a wagon wheel like Attila the Hun. But the that just doesn't happen in our lives. I don't know where you're based, but what would you happen if an invading horde of barbarians came in and and literally started lopping off the heads of every male taller than a wagon wheel?


That's real uncertainty we're going through now is nothing. Yeah, when you put it in a historical perspective, I'm with you. Let's take a quick break and hear from today's sponsor.


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Talk to us a little bit about your comments on the Roman Empire. I want to hear this. So one of the things that I try to highlight for people is I think the critical risk and this is something that I always try to carry through in my communications with regulators, members of the US government. We are in a situation where the biggest risk that we have is actually to ourselves that in the process of trying to address the risks associated with the rise of China, associated with the inequality that has emerged in our system, associated with the two high levels of debt that have emerged as the Fed has participated in bailing people out and encouraging them to take on additional leverage.


We run the risk that we follow the same path that the Romans did under the Roman Republic, where effectively the equivalent of the congressional body, the Senate, becomes dysfunctional and unuseful and so divided by partisan factions that it's incapable of making any decisions. The Romans had a formalized process for how to handle that. That's what a dictator was. And so they began a process. Historically, a dictator was used during periods of military conflict where the state needed to quickly marshal the resources and didn't need to be distracted by various debates that began to increasingly turn into a de facto norm.


And I would argue something very similar has happened in the United States over the past 60, 70 years. You can start looking back at the march of the growth of power of the executive branch, particularly expanded under FDR, and then continued expansion through additional executive order authority, particularly under Obama and on into Trump. Right. We're looking at a situation where when we talk about the government, we're no longer talking about bicameral legislative system and we're no longer talking about in any real measure, the judicial system.


Functioning is a series of checks and balances. But we're really talking about is Joe Biden's going to solve the problem? Donald Trump is going to solve the problem. Right? We're personalizing it. We're putting a single person at the head and you're effectively normalizing the conditions under which people are going to say, hey, we just need to have one guy in charge. I drove my daughter and her volleyball team to a meet a tournament probably two years ago now feels like it was forever.


And my daughter and I were talking about the dynamics of politics, the dynamics of total war, etc., which again gives you some idea of how much fun it is to hang out in our house. But her friends are sitting in the back seat like sitting there going, I have no idea what you guys are talking about. I'm like, your parents never know. Like, OK, let me ask you just a really simple question. Would you prefer to vote into a system in which you know that the person you're voting for can't solve the problem, but at least more represent your choices than the alternative?


Or would you rather have just a person who can make the decisions and really fix it? And literally every single kid except for my daughter said, oh, absolutely, that guy. I want that guy and that sort of change. I don't think people understand what we have. I don't think they understand why a system of checks and balances were brought in. And this is ultimately when you start talking about the dollar, the risk that you have to the dollar is it ultimately it is abused ability to be used for force around the world.


There's only so many times Europe will be threatened with access to the financial system before they develop an alternative financial system. China is very actively working to develop an alternative financial system so that they can quit. And this is the other thing that I think people tend to forget. Like we talk about the dollar is the global reserve currency and that it's been that way for a couple of hundred years or one hundred years, whatever. It really has only been the case since nineteen ninety one.


With the fall of the Soviet Union, you ended the ruble block. But when we had Bretton Woods, the Soviets participated in Bretton Woods but didn't embrace the dollar is the reserve currency. They chose to use a ruble and offer an alternative. And we just totally forget that because we don't have any real history of interaction with half the world over the Cold War period. Right. So is it entirely possible that we move to a multi currency regime with trading blocs that don't interact?


I think that feels very plausible. We're in a very clear process of globalization, and I think there's a variety of reasons why that's happening. The most obvious one being nobody wants to stand in the way of China is they try to deal with the collapse of aggregate demand that's going to be tied to their demographics. So a lot of people in the comments, whenever they knew you were coming on the show, we got a lot of questions. You obviously know I'm a fan of Bitcoin.


This question came from a person with the handle, bold call instead, a bold call. He was bold call and he was bald in the picture. And he asks, ask him his views on Bitcoin and why he's so disinterested in it. So I'm kind of curious to hear your thoughts. So I'm not at all disinterested in decentralized finance, cryptocurrency is more importantly smart contracts, etc. I am disinterested in Bitcoin. I could certainly be wrong in Bitcoin and there have been many times in the past where I've told people, as I was uncertain as to the path that Bitcoin was going to follow, that they should get themselves to neutral.


Right, effectively own enough Bitcoin so that if it became the story, then they were successful and if it didn't work, they weren't killing themselves. It's hard for people to do effectively that they do it all the time. And trading is what I call go to neutral. And it basically means I take a position, but it's a position that doesn't matter. And so I'm not spending my time panicking. Am I going to miss out? I going to lose a crazy amount of money buying into this stupid idea, et cetera.


I've become much more comfortable with the idea that I don't think Bitcoin is going to work. And I think the entire focus of Bitcoin was on let's create an alternative in the aftermath of 2008 to the US dollar or to fiat currencies. And the presumption in 2008, I think, was very straightforward that governments were going to become weaker, the governments were going to lose control. And I think the data suggests the exact opposite. The governments are becoming stronger.


And if governments are becoming stronger, yes, you'll see some defector's you'll see a Swiss canton decide, hey, we're going to take Bitcoin, right? Well, they don't tell you. They also take rubles. Right? So they don't actually care. This is the equivalent. Remember where they are geographically and what they represent. They're just as fine. As long as we can convert it back into Swiss franc, we're perfectly happy to take it. I don't consider that a victory.


I actually consider that a mark of weakness when people like, hey, look at the Swiss canton. Right. So it's just really simple terms. Do I think we're going to move to digital assets? Do I think we'll move away from paper money? Do I think that that will facilitate the continued strength and growth of governments as a force in our lives? Absolutely. And do I think that there's possibly a role for something like Bitcoin effectively? Is the fraud phone cards of the late nineties if you're in Mexico or Venezuela?


Sure, it functions as a money laundering tool in Venezuela.


You can use subsidized electricity to try to effectively mine for gold in an artisanal fashion. You see the same thing in Zimbabwe where farmers were unable to produce stuff on their farms. Go and try and find grains of gold in the Zambezi River. But it's the same thing. It's not a meaningful component of the economic system. You mentioned decentralised finance. Mike, what are your thoughts on that?


So for me, it ultimately plays back down to part of what I'm concerned about with the dynamics of passive. Right. So you're relatively young, but you don't remember a world in which preferred equity was an investable instrument or convertible debt. Those things don't exist for you. And you've got to ask yourself why. And the answer is very simple, because they don't exist in Vanguard's world. So they don't have funds that have any real way to invest in those.


And they receive more than one hundred percent of the marginal capital that's being invested in the markets. And as a result, anything that veers from that normal is going to actually face a penalty. You're going to have a higher cost of capital associated with it because there isn't a defined source of that capital. Ultimately, the complete wasteland that our equity and credit markets are becoming because of the influence of passive will create the conditions under which they break. And when they break, I fully expect that it will be effectively a punctuated equilibrium type moment.


You'll see a massive, diverse emergence of diversity in terms of the financing tools that people use. And ultimately, that's what I'm really interested in, because the dynamics of something like a smart contract on an Assyrian base and I could care less about the Ethereum itself, other than the dynamics associated with the smart contract components to it. And there are other people who are far more in the weeds on this, in part because I think we're at least five years out from any of this really matter.


But if you stop and think about what you're doing with a smart contract, you're taking a simplified CUSA that would say something is equity or something is debt, and you're suddenly converting it into something that can be any of those things and all of those things. So a debt covenant, a covenant and a debt contract is just a real world option. Gives me, as the debt holders, the ability to enforce action on the part of management that I otherwise don't have the ability to enforce.


If I put that into a smart contract and I can compare that across thousands of securities and I think about it in terms of its payout feature, I can start to value that as an option. And that's my job. That's what I do right, is figuring out how to value those options. And so the idea of smart contracts and their ability to diversify and create thousands upon thousands effectively unlimited types of securities, that's incredibly exciting to me. What's crazy right now in that space is you effectively have a CDO type event from the twenty twenty seven time frame that was playing out and a lot of the real estate, I suspect you have the exact same thing happening in the DFI space right now where you got all these unknown entities that are creating these tokens.


They're then dropping them into these decentralized exchanges. And because they can't capture any type of liquidity, because they're not listed on an exchange, they're pulling them together in order to narrow the volatility, then the more expensive coins are stepping in. Call it the Ethereum. The Bitcoins are stepping in and people are receiving high yield, quote unquote, high yield on these on them supplying the liquidity. And then that liquidity is nesting itself down into these polls just like a CDO 12 years ago.


It's playing out in that space right now. But I'm with you on the technology of it in five years from now or 10 years or whatever it might be, because that might be the relief valve to what we're seeing in the passive side where so much is just I mean, it's mind numbing where all the passive is going these days. So back in I think it was 20, 15, Carl Icahn basically rang the bell on his opinions on passive and it kind of being this ticking time bomb from a systematic standpoint.


And lo and behold, it wasn't more than a couple of weeks later you had Larry Fink from BlackRock step in and challenge him to a debate. I don't remember the specifics on what Larry was effectively coming back to Carl with, but what was basically his response? So Carlos focus was on the credit securities, right, so the credit ETFs highlighting was the liquidity assumptions around things like AIG relative to the illiquidity of the underlying components. Larry Fink obviously came back in and disputed this for a variety of reasons, the most obvious being for purely business purposes.


But in Larry's defense, these systems work great as long as money is going into them. Right. So the provision of liquidity is fine as long as there is a net inflow in the other component that I love in terms of ETFs and Vanguard and others defend themselves on this basis, it actually just made it into a piece from the Boston Fed talking about is is passive investing a systemic risk? Right. They always come back to us like, well, look, we don't actually have to pay you cash or AIG.


We can just give you the component parts. Right. And therefore, there's not a problem that's completely insane. I didn't come to you and say I'm selling my AIG because I want to receive a series of schlocky bonds. Right. That I'm then I'm going to have to dump into the market without the ability of the sponsor from GE to efficiently do that. I'm going to suddenly have thousands and millions of retail investors and other players who now have corporate bonds that they have no idea what to do with.


They're going to be forced to dump this stuff. At the end of the day, what Larry Fink argued is that there's no evidence that this is the case and they have delivered on the positive liquidity associated with it. And to be honest, he's right so far. I mean, the system works as long as money goes into it. It is Ponzi like in that frame. And I want to be very careful when I say that. I don't mean that it is Ponzi and that they aren't actually trying to do something, but it is Ponzi like and that once the process begins running in reverse, that's where you care about the liquidity.


So we can make the argument that back in March, the system was running in reverse and then the Fed stepped in with this huge elephant gun, just loaded the economy with liquidity, when you see what happened with the extra liquidity in 2002 and whether the days of tightening are just over, which we see twice as much liquidity being pumped in, and perhaps the actual amount is not the key point here. How do you see the Fed reacting to a new crisis, Mike?


Yeah, I think that's right. The question is always when you say double the liquidity, does that actually mean anything? Right. Because I mean, there's two sources of money creation as money creation that comes directly from the government so the government can spend money into existence the other way that money can be created as to the credit system. So I can lend you money into existence if I'm a legal entity called a bank or have access to the leverage that can be obtained through a bank in order to break that system, you need to have defaults which effectively destroy collateral.


And so this is the thing that I think is actually happening when the Fed steps in. I don't think they fully appreciate it. I think that there is some market participants that think in these terms. But it's not that the lowering of interest rates radically changes purchasing behavior. If you look at things like credit card interest rates or you look at auto loan interest rates, housing is a little bit different because it has some components of it that have fallen significantly.


But housing interest rates have fallen 90 basis points for the highest quality credit borrowers, lower quality credit borrowers struggle. We're already seeing dynamics of tightening credit availability in that space. So the pass through is not really that meaningful. And you've done the analysis right. The difference between a three and a half percent mortgage rate and a two and a half percent mortgage rate, if that's what you're relying on to buy the house right, then that's just kind of silly.


I mean, it really is, because at some point you're going to take a zero. If you have a 30 year mortgage, you're still going to have to pay back the principal. And so you can engage in rank speculation and get a zero interest only loan with zero interest rates. And then, sure, you get to live in the House, quote, unquote, free for 10 years or five years, whatever the length of your no interest mortgage is.


But how is that really positive for the economy? Because what happens to rents then? Effectively, you just end up in a situation which nobody in their right mind is going to do anything other than build and sell houses until you've exhausted the supply. And then you need to be thoughtful about what you're going to get back in 10 years is going to be enough to pay off that no interest loan. So you're kind of trapped in that framework. But at the end of the day, when the Fed cuts interest rates, all they're doing is making bonds go up in price.


And when bonds go up in price, if you have a balanced portfolio or you have a risk parity type portfolio, the bond portion of your risk has now expanded relative to your overall portfolio. You need to turn around and buy equities. Well, the stop levering part is hard, right, because all of a sudden the interest costs associated with your leverage are short. Interest rates have fallen. It's easier if you're doing it in the corporate sector and you don't have to worry about personal liability associated with it.


Whereas for the household sector, we've got an incredible way towards eliminating the discharge ability of various types of debt. And I do think that that's another factor that people need to consider, is that in the last 15 years, we've eliminated the non discharge ability of student loan debt. We've eliminated the discharge ability of student loan debt. We've eliminated the discharge ability of many forms of credit card debt. We've created conditions under which people can't escape many forms of debt that they take on, particularly when they take it on an incredibly young age.


I mean, it's completely absurd to me that a 17 year old is supposed to figure out how they're supposed to take on enough debt.


That is the equivalent in many cases to buying a house for the generation that came before and then go study something where the availability of that debt has destroyed the price signal from the market that says, hey, you should really become an engineer.


Even if you think French medieval literature is more interesting. We've built a system that is slowly driving people back into serfdom, trapped in a system where they have to work, whether they want to or not. You had multiple conversations with Peter Thiel and Seth Klarman, two people who are just amazing critical thinkers. What is something that you feel is distinct about the personalities? And what did you take away from those conversations? First on Peter, Peter's a brilliant thinker, he surrounds himself with really, really smart people and allows himself to be challenged in a way that many don't right now.


I think the hardest part about being Peter Thiel is when you're working for Peter, it becomes an interesting situation when many of those around him would place the value in being in his orbit higher than they do in the intellectual curiosity. And so I do think that, like everyone else, there becomes a component of an echo chamber. I think Peter offsets that for the most part by surrounding himself with people outside of his organizations and regularly bringing people in that are amazing, just absolutely, unquestionably talented.


If I'm thinking about, like one thing that Peter does that I think everyone should do, it's just every once in a while he'll feel comfortable and stopping you say something to Peter and he will literally sit there and just go, hmm hmm. And the vast majority of us feel a need to actually say something. You feel a need to actually verbalize why you either agree or disagree. He doesn't have that. And it's an incredibly powerful tool. Seth is a really, really interesting guy.


I interact with him a couple of times. First of all, he is so warm and so genuine and such a kind person. Like it's almost impossible to reconcile the idea of a hedge fund genius and one of the truly warmest, kindest people that you'll ever meet. He does this very consistently. If you meet Seth, he's always happy to listen to what you're saying. And I don't think that's just me. I think it's true for everyone. The thing I would say with Seth is that he's one of those people who makes leaps that are extraordinarily well founded in logic, but does them faster than logic would actually allow you to make that leap.


The way I describe value investing, I think would intuitively appeal to anyone who has read that book when he talks about margin of safety, what he's really describing is actually like figure out all the possible ways you're wrong and how that's not going to cause you to lose money. And for me, value investing is about figuring out why somebody has to sell something to me if they're coming to me like, hey, you want to buy this from me? And I can't figure out that now they've got to make their mortgage payment.


Therefore, they're going to give it to me for a really nice price. But I constantly find these things where people are saying, oh, this is being sold by so-and-so and it's being sold because he's diversifying his personal assets, etc.. It's like that's not how the world works, right?


You want to find somebody who's being forced into a liquidation mode, being forced to give you something, or you need to figure out a totally different angle in which it fits into a piece of your puzzle and complete something, creating a quote unquote synergy that radically changes the outcome. To me, that's just the only way that value investing makes sense. The idea that you're going to look at a company and do a better job of forecasting their cash flows than everybody else put together and calculate their weighted average cost to capital to the seventh decimal point.


All you're doing is building an incredibly fragile model. I mean, like I spent the first 10, 15 years of my career in one form or another trying to figure out better than somebody else what was going to happen next. Right. The free cash flows would be with X, Y, Z company. And the access to the cost of capital is and in really simple terms, you just creating fragility. When you do that, you're creating a portfolio that is very brittle to your individual forecast as compared to very robust to the possibilities that can emerge around you.


Why does the book why is it not listed now? Why is he refuses to have anyone printed, why copies all over the place?


No, no, no, I know that. But why would Seth do that? To put an element of scarcity into the number of copies that are out there? Like what's his logic of not keeping it in print? I mean, look, I think it's a little bit like Paul Tudor Jones with his trademark video, right, to enhance the legend by keeping it away. Right. If everybody had access to like. Oh, yeah, I know.


I read Zuckerman's book. I mean, it's like securities analysis. It's sitting on everybody's bookshelf. Right. Graham and Dodd. I'm an acolyte of Graham and I'm a sober value investor and I've read it, but I read everything. And if you took away something remarkable from that book, that's impressive to me.


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Let me go to a question from Lynn Aldan, who said, My understanding is that you think that Volcker was a bad Fed chairman, which is a very contrarian point of view. Ask him about that. I think that Paul Volcker was an extraordinary political animal. I think that he was a terrible Fed chair and the simplest example that I would use of that is the actual data that exists. So there's a paper written in nineteen eighty three by Alan Blinder called The Anatomy of Double Digit Inflation in the United States in the 1970s.


Very readable, quite easy. And what it points out is something very straightforward, which is that the metrics of inflation that the Fed was monitoring during the early periods of the Volcker administration from seventy nine until eighty one, included mortgage rates and inflationary conditions. So when the Fed hiked interest rates, whether it was actually doing was raising mortgage rates, which then was showing up as an increase in the mortgage payment, which was then coming through the CPI and saying, hey, the inflation rate went up.


And so it was a positive feedback loop that Volcker created where that became the driver of inflation in the seventy nine to eighty one time period. And he literally just kept hiking it until he destroyed the entire economy.


And his lack of awareness of this is appalling to me. And I think it's perfectly fitting that the post GFC worse legislation that's had almost no positive impact whatsoever. The Volcker Rule bears his name. He was a terrible Fed chair. He truly did not understand what he was doing. So, look, the story of the nineteen seventies, most people think of the nineteen seventies as this terrible decade in which unemployment was high, jobs were hard to find, etc.


, inflation was running rampant. Your life was terrible, blah, blah, blah, blah, blah. The nineteen seventies had the highest level and rate of job creation of any decade in the United States history. The fact that it's not a disputed number, that's not my opinion, etc.. That's a fact. What actually happened in the nineteen seventies was that we had to deal with the dynamics associated with an explosion of our labor force tied to the baby boomers, tied to the entry of women into the labor force, tied to the formal entry of minorities into the labor force.


Under the Civil Rights Act, most people tend to think about a labor force as a reduced labor force means the cost of labor goes up. They forget the demand side of the equation. Somebody entering the labor force is making the single simplest and most powerful declaration they can possibly make.


I want to consume more and otherwise you can sit on your sofa. So when you enter the labor force, you're saying up front, I want to consume more. And what form does that consumption make? Well, you need a place to live that required somebody to borrow money in advance, construct a structure for you to live in, put a dishwasher and put a refrigerator and put air conditioning in it, etc.. All that has to be done before you touch it and you're doing that entire thing on credit.


So it's money that is being created in another form. What did Volcker do and what did the Fed do in the nineteen seventies by reacting to the increase in prices associated with this outward shift in the aggregate demand function tied to an explosion of the labor force largely tied to demographics and some regulatory changes, they chose to respond to it by trying to hike interest rates to keep prices from going up. Well, that has almost no impact. I don't know if you remember what it felt like to be in your 20s and your income's rising rapidly.


And you could literally care less about why so many 20 year olds rely on credit card debt because they presume that their income is going to rise so rapidly and they absolutely need that toaster oven right now. And so it has very little impact. Effectively, there's a hyperbolic discounting rate for younger generations that were streaming into the labor force and wanted everything. And we're being presented with a variety of financing options that allowed them to obtain it in a manner that they hadn't previously.


And the Fed's out there hiking interest rates at the exact same time that the oil crisis destroyed a significant component of the capacity of the US economy that relied on oil fired generation. So you had an outward shift in the aggregate demand curve, an inward shift in the aggregate supply curve. Guess what? You get a spike in prices. And Volcker's reaction to that was more cowbell. You know, Ray Dalio, that he was the best Fed chairman that ever was, there we go, green.


You're just going to have to disagree on that. They wrapped up the discussion. I had to throw that in there.


Yeah, I know. One of the things that I would encourage people to do is to look around the world and look what happened to inflation rates. They rose on a coordinated basis on a global front from basically nineteen sixty five to nineteen seventy nine. The minute that Volcker took office. Everywhere else in the world, inflation rates fell starting in nineteen seventy nine, except for the United States where Volcker hiked interest rates. Driving this dynamic is well documented on a contemporary basis in Alan Blinder piece in nineteen eighty three that the Fed itself drove that inflation.


And yet we celebrate. Volcker is having solved inflation. It's not true.


All right, the last question, you're such a well-read person, we talked about how Claremont's book, Margin of Safety is perhaps the best value investing book out there, but which other books would you recommend that has really shaped your character as a critical thinker?


I don't like the world that we live in and passive, so I would not encourage anyone to try to replicate what I have done in terms of building that body of knowledge, because my hope is, is that it doesn't continue to exist. So I would encourage people to try to focus themselves on doing what you're supposed to be doing with investing, which is figuring out how to identify valuable companies, how to be thoughtful about how you allocate your capital to them, et cetera.


And one of the things that I always want to make very clear to people is while I'm extremely concerned about the environment that we're in, I don't think that means that we should all throw up our hands and walk away and stop. And so books that were particularly powerful for me early in my career. Phil Fisher, common stocks on common profits is world class given a choice between the enjoyable read of common stocks and common profits by Phil Fisher and rereading securities analysis, I'll choose a gun.


The second thing that I would say on that is, is that I encourage people to read biographies. I know you do your stuff on billionaires, for example, because what you want is you actually want the anecdotes. And if you can retain those, right. I mean, if there's one thing that I would say that I'm really, really good at, it's at holding these like really apparently meaningless pieces of information until they become valuable. So, like a huge chunk of my insights on on the dynamics of Vanguard Vanguardia remembering reading a newspaper in nineteen ninety four.


I mean, this is crazy, right? This is literally twenty two years before I began to really develop my theories around passive and reading this paper in nineteen ninety four. And there was a discussion around the challenges the Vanguard was having in terms of tracking error. Right. And I have no idea where that sat in my memory and how that sat there in that way. But read is kind of the most important. It doesn't actually matter what you read, it could be an opinion piece of information if you can hold on to it.


But the other thing that I would say is I read Jack Swagger's market wizards read things that inspire you personally, that give you the ability to capture little pieces from history. Right. That allow you to capture how people were going to react. One of my favorite books people have heard me recommend before is The Mind of Wall Street by Leon Levy. It's out of print, I think, at this stage. I mean, he has even less incentive than Seth Klarman because he's passed away.


But it's just such an extraordinary insight into how somebody could approach investing after the Great Depression. And I really think that that's part of what we're looking for as we come out of the desert of passive, which we eventually will. I don't know how it's going to resolve itself. I don't know how we're going to come out of it, but I know we will. And so to be prepared on the other side of it, that's part of the reason you hear me talk about things like the dynamics of crypto and smart contracts, et cetera, because I'm trying to already prepare my mind for what that's going to be like.


And if I allow myself to be overcome by the despair of what we're watching right now, that's totally useless. It may not come in time for me to have a serious career doing it. I am. I mean, I'm fifty years old, but that's what I would encourage people to be thinking about. What do you want to be doing in 10, 15, 20 years and how are you preparing your mind for that world? Well, Mike Green, while can't thank you enough for coming on our show, if people want to learn more about you, give me a hand off where they can find more about you.


You can go to logic of funds, dotcom lojka funds, dot com. I'm well followed on Twitter. Confusingly, I'm an old bald guy from The Princess Bride on Twitter, but it makes for interesting cocktail conversation. My Twitter handle is at Proform ninety nine and I would encourage people to follow my partner, Wayne Himelstein, who is absolutely brilliant as well. He's at Wayne State. We'll be sure to have all that in the show notes, Mike, thank you so much for making time for us.


My pleasure. Thank you very much. All right, guys, so this time the show will play question from the audience, and this question comes from Anthony. Hi, president, my name is Anthony from Melbourne, Australia. I'm a huge fan of the show, so keep up the incredible work you guys are doing. I recently listened to an interview with an expert investor who said that for insiders, there are plenty of reasons to sell a stock, but only one reason to buy.


I think the price is going to rise. How often do you look inside of transactions of directors, stock CEOs as confirmation went to buy stock? Also, what stock options do insiders get access to that gives them an edge over retail investors? How do these stock options generally work? Thanks for having me on and I look forward to your response. Thanks. So, Anthony, you bring up a good point that all investors should include in their analysis of a stock, we should always look up what the insiders in the business are doing, insiders per definition, no more than anyone else about the company.


So whenever they buy or sell, we should pay attention. As you mentioned, insider selling is not as significant as buying.


Insiders are usually exposed to the company much more than other investors.


For instance, you can have a CEO that's already been compensated based on how well the company performs.


So it is not surprising that the CEO wants to lower his or her exposure to the performance of the company by selling options.


Another example could be that a founding or employee got stock options as a part of the conversation plan and they're now looking to cash in for private consumption, that is perfectly understandable and there's nothing wrong with that. Buying is more interesting because it often indicates that the company will do well in the future.


That is also why insiders are required to disclose their actions to the S.E.C.. An example is Warren Buffett, who recently added to his stake in Bank of America. He already owns more than 10 percent of the company.


So even though he's not holding a formal job at the management or the company, he's considered to be an insider because he has information that the market does not have.


So whenever you ask whether or not I look at insider trading before buying individual security, the answer is yes.


I always look at it, but it's never the deciding factor. I've multiple times bought into a stock, whether it's own insider selling. And while that is not a plus, I don't consider it an issue in most cases.


Having said that, I don't think I ever sold a stock whenever I saw a lot of insider buying.


It is one of the key factors that is interesting to look at.


Insider trading is one of the key factors that is always interesting to look at. All companies have different key metrics that are very important. And you should, first of all, pay attention to what the business and industry specific curators are telling you.


But really, what is neat about insider trading is that is important for all companies to understand. So at least you should take note of if you see anything significant. And keep in mind that is very common for most companies to do a little insider selling. Really what you're looking for as an investor is a significant change in the volume.


You can find much more information about options of warrants in the annual report, and we tend to use the terms, options and warrants interchangeable.


But technically there is a difference since warrants issued by the company itself, less options are traded between investors.


But whenever you look at it, at first glance, it can look a little overwhelming. Looking at the annual report and especially about options and warrants, but with a little practice, you will see what is important. The exercise price, meaning at which price this year can be bought is one thing. And then you have how many options they have and the expiration date.


Unfortunately, you have this crazy accounting rule that options are not expensed so you can find a significant dilution of the shares outstanding there, meaning it's not unimportant if you want to invest in the company. And even worse, you see new management being higher, getting a lot of options that can be exercised way below market price.


Now, there's nothing wrong with options persay, but since they are tied to the performance, it's hard to see why they want to issue options at a price that traded that years ago. Whenever that new person in the management didn't even have an impact on that performance, it is effectively taking money away from the owner and giving it to the new management. And again, it's not even been expensed the income statement, but hidden as a support in the report.


But OK, enough about my rant here to your question and then you have expiration date. And that's important to look at, because if you suddenly see a high degree of selling, often simply because it's near quarters and where the money would be lost if the options were not exercised. So, Anthony, I don't have too much to add beyond what's already covered, because he pretty much covered everything from the same vantage point that I see this as well.


I pay much closer attention to the buy side than the sell side. Just like Stic had mentioned, though, the one big tip I would like to give you is a resource that I personally use. The name of the website is Inside Arbitrage Dotcom. We'll have a link to this in the show, notes the founder of the site. His name is a SIFF Syria and he does just a fantastic job laying out all sorts of not only buys and sells of insiders, but he also does merger arbitrage spin offs, buy backs, and he does a fantastic job just laying out all the information for key executives and people that are holding significant chunks of stock in various companies.


And whenever they're making big moves that are getting published in the open markets, a Seif's website is just capturing all this information. So I would highly encourage you to go there and check that out and hopefully it'll be a useful tool for you.


So, Anthony, for asking such a fantastic question, we're going to give you access to our top finance tool, which helps you do intrinsic value calculations. It helps you out with capturing momentum, information, correlation, data, all sorts of things. It helps you manage your portfolio, the sizing, all that kind of stuff. So we're really excited to be able to give that to you. If anybody else wants to get a question played on the show and to potentially get access to type finance, just go to ask the investors.


Dotcom, you can record your question. If it gets played on the show, you get free access to tipi finance. All right, Anthony, thanks so much. All right, guys, Preston, I really hope you enjoyed this episode of the Masters podcast. We will see each other again next week. Thank you for listening to IP to access our show notes, courses or forums, go to the Investors podcast Dotcom. This show is for entertainment purposes only before making any decisions, consult a professional.


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