The Practical Implications of the Rise of Passive Investing | Mike Green

[00:00:00] It is becoming harder and harder and harder to beat the S&P 500 or the total market index for the very simple reason that more and more people are crowding into these products.

[00:00:11] Unfortunately, as any individual investor, you should absolutely try to maximize your proceeds associated with this effect.

[00:00:18] And that means that you're going to put your portfolio into names that have a much larger market impact from passive inflows than names that don't.

[00:00:29] Haddad's estimate of the strategic response to offset the impact of passive investing at 50% market share, which is roughly a tipping point that I have as well, that suggests that things start to break in that neighborhood.

[00:00:44] There are very substantive changes in the underlying behavior and data that we've just never seen before.

[00:00:50] Welcome to Excess Returns, where we focus on what works over the long term in the markets.

[00:00:54] Join us as we talk about the strategies and tactics that can help you become a better long-term investor.

[00:00:59] Jack Forehand is a principal at Validia Capital Management.

[00:01:01] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital.

[00:01:06] No information on this podcast should be construed as investment advice.

[00:01:09] Securities discussed in the podcast may be holdings of clients of Validia Capital.

[00:01:12] Hey guys, this is Justin.

[00:01:13] In this episode of Excess Returns, Jack and I sit down with Simplify's Mike Green to talk about the rise of passive investing and its influence on the markets, investment flows, and how investors approach this in their portfolios.

[00:01:23] We'll explore the potential risk, the impact on market dynamics, and what the future might hold if passive strategies continue to dominate.

[00:01:30] Mike also shares his insights on how investors and advisors can adapt to these changes and think about this in the context of their own portfolios and positioning.

[00:01:38] As always, thank you for listening.

[00:01:39] Please enjoy this discussion with Simplify's Mike Green.

[00:01:41] Hi, Mike.

[00:01:41] Thank you very much for joining us today.

[00:01:44] Thank you for having me back, Joseph.

[00:01:45] What we wanted to do with you, and we appreciate all the time that you spend with us and our audience, but I think start by continuing the conversation that we've had with you over the past few podcasts about passive investing and its influence on the market.

[00:01:58] But maybe try to get a little bit more down in the weeds and thinking about, from a practical standpoint, what investors should be thinking about with their portfolios.

[00:02:08] And then hopefully, if we have time, we can talk about the markets, the economy, some of the investment strategies that you guys are running at Simplify, and just how investors should be thinking about the current market.

[00:02:17] But I think the rise of passive and your thoughts are where we want to start.

[00:02:21] And I thought it would be good because not everyone that's listening to this will know what your views are.

[00:02:27] But maybe if we could start just briefly explaining how your thoughts have evolved over the past decade into the rise of passive, and then we can get into some of these other detailed questions.

[00:02:37] So the work that I've done around passive is actually just a very straightforward recognition that the definition of passive investing in the academic literature is somebody who – a passive investor is somebody who holds every security.

[00:02:51] Not holds an index, not holds a subset of security.

[00:02:55] It's somebody who holds every security.

[00:02:57] There's also no mechanism for passive investors to buy or sell.

[00:03:02] And so the minute you start recognizing that the structure that we've actually built involves people who are buying indices, whether those are total market or the S&P 500, and we label those investors passive, we're doing ourselves a disservice.

[00:03:17] They're not passive.

[00:03:18] They are algorithmically simple investors that are choosing a very common strategy, which is to buy stocks in proportion to their float-adjusted market cap weight.

[00:03:28] That can be within the S&P 500, which is a popular strategy, or it could be a much broader exposure to something like the total market index.

[00:03:37] At its core, that's where the theory of passive breaks down because these are not passive investors.

[00:03:43] By definition, if you're putting money to work, you're doing so with your paycheck, you're doing so with your discretionary thoughts, you cease being a passive investor, and it becomes very valid to turn around and say, what is the impact of this?

[00:03:56] Now, that insight, effectively, that the key story was about transactions or the actual flows as compared to the stock is kind of the only unique thing that I've brought to this process.

[00:04:09] The really key insights around what's actually happening with passive have been fleshed out by a lot of academics over the last five years.

[00:04:19] And I just want to remind people that when I kind of stumbled across this stuff and I found my way to it through other thinkers, guys like Lasse Peterson and AQR, wrote a very important paper called Sharpening the Arithmetic of Active Management,

[00:04:33] in which he highlighted this definition of passive investing and then noted that there were periods of violation around that.

[00:04:39] So my work was simply extending that and saying, hey, wait a second, any time a flow is contributed, that makes you not passive.

[00:04:45] Therefore, these are never passive investors.

[00:04:47] You have to think in a slightly different way.

[00:04:50] Beginning in 2020, really 2019, academics began to really start to chew on this problem.

[00:04:56] And unfortunately, all their work at this point, or at least the work that I have read, is increasingly pointing in the direction that my views are correct, that ultimately we're creating a distortion in the market that is tied to the growth of passive investing, that is changing the actual features and behaviors of the market itself.

[00:05:15] Now, you can argue those are good.

[00:05:17] You can argue those are bad.

[00:05:19] But when you run through the models and you actually recognize what the long-term impact of this, it unfortunately is that we either have a total loss of utility in the markets because people can't get shares public, because people can't use the markets to raise capital,

[00:05:36] or you end up with a situation in which the attempt to withdraw from those same passive investors overwhelms the available liquidity in the market and the market ultimately collapses.

[00:05:48] When I started doing this work, I looked around at different markets to try to find ones that had the highest fraction of passive or systematic investors who had a defined strategy and a known response to flows and to price behavior.

[00:06:03] And that's where I stumbled across the XIV, which was a trade that kind of launched me into the public sphere.

[00:06:10] This is no different, right?

[00:06:12] What we're actually seeing is we're seeing a pattern of the traditional discretionary investor, a professional investor who attempts to do a discounted cash flow type analysis to figure out what something is worth,

[00:06:24] is being replaced by investors who presume that everybody else has done that work, and therefore they're not having any impact.

[00:06:31] But that's simply untrue.

[00:06:33] So you could probably go a lot of different ways with this question, but let's just take me.

[00:06:39] I'm in my late 40s.

[00:06:40] I have a large position in equities.

[00:06:43] Should I just...

[00:06:45] Is holding the S&P 500 still like a logical thing to do, or is holding maybe even a more concentrated S&P 100 portfolio logical?

[00:06:54] I mean, what do you think a long-term investor that has a high degree of equity exposure in the U.S. should be thinking about because of this?

[00:07:03] So I think the core of the answer to this is, unfortunately, as any individual investor, you should absolutely try to maximize your proceeds associated with this effect.

[00:07:12] Right.

[00:08:10] You're concentrating even larger into something like an OEX.

[00:08:13] The entire point behind what I'm saying is, it is becoming harder and harder and harder to beat the S&P 500 or the total market index for the very simple reason that more and more people are crowding into these products.

[00:08:26] That drives up the prices of the names that are in the index.

[00:08:30] It drives up the largest names within the index even more.

[00:08:35] And by and large, that makes it impossible for people to choose something else.

[00:08:40] That responsible choice ultimately falls on the shoulders of regulators who need to recognize the damage that is being caused.

[00:08:47] Thinking more on the individual side, I mean, are there things investors should potentially be thinking about in terms of the risks of this?

[00:08:53] So like, for instance, I could buy the S&P 500 and I can hold puts, although, you know, that might eat away my returns too much over time.

[00:08:59] Or I could use something like trend following or I could use tail risk.

[00:09:02] Like, would your research suggest that maybe coupling the S&P 500 with something like that would make sense?

[00:09:07] So there's a couple of separate components to it, right?

[00:09:09] One is, is remember, any time you buy protection, you are subjecting yourself to a drag associated with that protection, right?

[00:09:18] That will cause you to underperform.

[00:09:20] Now, you can comfort yourself with the idea that I will have a risk-adjusted return.

[00:09:24] But then you have all sorts of other issues around, did you choose the right hedges?

[00:09:28] Did you choose the right strikes?

[00:09:29] Did you choose, did you choose, did you choose, right?

[00:09:31] These are all challenges that you face.

[00:09:33] And candidly, the most important question is, did you happen to pick the right time to hedge?

[00:09:37] Because if you run it on a continuous basis, almost by definition, you're going to underperform, particularly if you have a bull market type environment.

[00:09:46] But on the flip side of that, you know, if I'm correct, which I think I am, and ultimately this ends up being far worse than people could possibly imagine as people start, as the flows turn negative, as people start to withdraw.

[00:10:01] First of all, that challenge ultimately is something that you have to ask yourself, like, what is my benefit associated with that, right?

[00:10:11] Can I actually hedge enough of my portfolio or my behaviors to fully profit from that?

[00:10:16] And so this really is, like, this is a tragedy of the commons that is built on a fundamental misunderstanding.

[00:10:22] It's like we imagine that the commons, right, classically referring to common grazing fields, it's like we imagine that they are capable of supporting 10 times as many cattle as they actually are.

[00:10:33] If we're wrong about that, that means we're going to starve.

[00:10:36] Do you have any thoughts on trend following?

[00:10:38] It would seem to me like at a high level, at least, the idea of using some sort of technical indicator, if things are going bad, to get out might fit well with this.

[00:10:44] But am I right about that?

[00:10:45] Well, the issue with trend following is that ultimately it's going to pull you out as prices move lower, right?

[00:10:52] So as long as these principles are in place, you're actually going to benefit from staying invested.

[00:10:58] The minute these things actually turn strongly negative, the minute that the market actually does begin to meaningfully deteriorate, then yes, absolutely you'll benefit from trend following.

[00:11:07] As it relates to a portfolio, if you're building a broader portfolio, now the question becomes, can you actually use trend following to identify things that are changing without actually trying to apply knowledge to it?

[00:11:21] And one of the obvious components around trend following is as prices begin to fall, right, a trend following strategy will reduce your exposure or find negatively correlated assets.

[00:11:31] So, I mean, the key advantage of trend following is that it effectively is a form of protection that you can carry in your portfolio that seems very idiosyncratic.

[00:11:41] But ultimately, if the portions of your portfolio that are your primary investments begin to deteriorate, that trend following can rotate into negatively correlated assets as longs and effectively protect your portfolio in that way.

[00:11:58] If you're going to do that, though, and this is part of what we've done and simplify in terms of building our trend following strategy, you also have to recognize that one of the trend assets that you include in that portfolio, that trend following strategy, should actually not be equities, right?

[00:12:14] Because then effectively, you're just double loading the beta associated with equities at any point in time in which the trend is really strong and you become very subject to reversals.

[00:12:24] Same underlying issue, by the way, that you can face with puts.

[00:12:26] I remember like five years or so, though, I thought I was a better quant investor than I actually am.

[00:12:30] And I'm like, I'm going to make a factor based on this.

[00:12:32] And so I'm like, I'm going to use the market cap to measure the liquidity, you know, the money coming in.

[00:12:36] And I'm going to use daily dollar volume to measure the liquidity.

[00:12:39] And both of those are wrong because I should have used float adjusted market cap.

[00:12:43] And daily dollar volume, I don't think very well represents the actual liquidity.

[00:12:46] So I ended up with the stock I should buy because of passive is Berkshire Hathaway, which was totally wrong.

[00:12:52] But I'm wondering like what you think about the ability to maybe take this a step further than the market cap weighted indexes and say,

[00:12:58] can I create some sort of factor here that says these are the stocks I should buy that are going to benefit the most from this?

[00:13:04] So just out of curiosity, why was Berkshire Hathaway wrong?

[00:13:08] I mean, I don't think Berkshire Hathaway is the one benefiting the most from passive investing.

[00:13:11] I thought like it didn't pass the smell test to me.

[00:13:14] Do you think that's, do you think it could be?

[00:13:17] I think it is.

[00:13:18] Well, the biggest issue you have is the relatively low float, right?

[00:13:22] So the float is like 20% or something.

[00:13:24] It's very low, isn't it?

[00:13:26] I figured that was my big mistake.

[00:13:30] It can't be that low.

[00:13:32] Okay.

[00:13:33] Very quickly here, let's take a look.

[00:13:36] But overall, I mean, the part of the point is, is that Berkshire Hathaway, since entering the S&P 500, it's just the S&P 500, right?

[00:13:46] It behaves like every other stock in the S&P 500.

[00:13:49] It modestly outperforms the function of Buffett's buybacks and potentially superior fundamental performance.

[00:13:55] But overall, I don't think that's a terrible trade that you did, right?

[00:13:59] I mean, you bought one of the largest leading stocks, one of the stocks that has effectively the most, it doesn't quite compare to maybe micro strategy today, but it has the most zealot and ardent supporters.

[00:14:12] And so if you think about it in terms that I often frame market behavior in, the holders of Berkshire Hathaway are highly inelastic.

[00:14:22] The price can go up.

[00:14:23] What are they going to do?

[00:14:25] Nothing.

[00:14:26] Right?

[00:14:27] No, that's definitely true.

[00:14:28] They effectively become like passive holders.

[00:14:31] Right?

[00:14:31] And by the way, Berkshire Hathaway has actually outperformed the S&P 500 over the time period that you would have invested in it.

[00:14:38] So you came up with the right answer, I would argue.

[00:14:42] Was it as right as NVIDIA?

[00:14:44] No, but there is also different characteristics associated with NVIDIA.

[00:14:47] To my knowledge, I can think of nothing transformative that Berkshire Hathaway has created or invented over the last 15 years that would in any meaningful way explain the performance in line with the S&P and the rise in correlation that you've seen with the S&P, other than the fact that it's not included in indices.

[00:15:06] I thought the other thing I did wrong is the daily dollar volume is probably not a great proxy for actual liquidity, like actual liquidity in the order book.

[00:15:13] And I thought maybe with Berkshire that would be more pronounced than with other companies.

[00:15:17] So you're hitting on points that effectively boil down to market impact, right?

[00:15:21] So this is the work of Jean-Claude Bouchaud, Jean-Pierre Bouchaud, J.P. Bouchaud, and his work around market impact highlighting the impact of any given order size can be measured as a proxy of the volatility of the stock and the trading volume of the stock.

[00:15:38] Effectively, how wide the bid and the ask is contributes as well.

[00:15:43] When you look at stocks that have relatively low dollar trading volume relative to the size of the order that would come in from a passive player, that becomes a prime candidate for a large market impact stock.

[00:15:56] The larger the share of passive or the more fanatical the holders are, again, a micro strategy, for example, or even a Cathie Wood at ARC, right?

[00:16:06] You have those types of characteristics that effectively prevent people from reacting to it.

[00:16:12] This is J.P. Bouchaud is the work on market impact.

[00:16:16] The work on elasticity is largely tied to Valentin Haddad at UCLA, whose paper, How Competitive is the Stock Market, is really important in understanding the various response functions.

[00:16:29] And so let me actually just share a slide with you very quickly here.

[00:16:31] So Haddad's work is all the stuff around elasticity, which effectively says how aggressively do stock prices react in terms of price relative to changes in supply and demand?

[00:16:45] Right.

[00:16:46] One of the things that you could argue that causes a meaningful change in supply is if a company announces disappointing earnings results.

[00:16:54] Right.

[00:16:54] Jack, you look at it, you're like, wow, I thought this company was going to blow out earnings.

[00:16:57] It turns out it's not.

[00:16:58] What a piece of garbage.

[00:17:00] I'm going to get rid of my shares.

[00:17:02] Right.

[00:17:02] That's an increase in supply in the market.

[00:17:04] On the flip side of the equation, Justin could look at that and he could say, wow, this company really missed earnings, but I'm convinced that they're the greatest thing since sliced bread.

[00:17:13] Therefore, I'm going to buy.

[00:17:14] And the price has fallen a lot.

[00:17:15] Therefore, I'm going to buy.

[00:17:16] And so I have an increase in demand.

[00:17:18] Right.

[00:17:18] The intersection of those two is what always causes transactions and the price history that we see.

[00:17:25] The relationship between those two players is a function of how aggressive each of them is.

[00:17:31] What Hada refers to as the strategic response or the aggressiveness of that trading activity.

[00:17:38] So if Justin becomes convinced that buy the dip is the absolute right strategy, anytime the market dips, he's going to be a buyer.

[00:17:47] Price action leading to changes in supply and demand, which in turn influences the price action.

[00:17:53] Right.

[00:17:54] Does that make sense so far?

[00:17:55] Yes.

[00:17:55] So what Hada's work is, is on this subject of passive penetration.

[00:18:02] This would be an example of a change in elasticity.

[00:18:05] So here is the dark black line is the baseline change in elasticity.

[00:18:11] You can see how that has declined sharply from since 2008.

[00:18:16] Right.

[00:18:16] So a stock that was an aggregate 50 percent elastic is now basically 25 percent elastic, a 50 percent reduction.

[00:18:23] Now, Hada highlights two separate components.

[00:18:28] Right.

[00:18:28] In response to other players becoming less active, becoming more passive and having a lower elasticity.

[00:18:35] Right.

[00:18:36] If basically I discover that when I go to the Easter egg hunt, nobody else is bothering to look because they presume everybody else has found the Easter eggs already.

[00:18:45] Right.

[00:18:46] The proverbial $20 bill that economists pass by because they assume it must have been resolved by an efficient market hypothesis already.

[00:18:54] Therefore, it can't be there.

[00:18:55] Right.

[00:18:57] If in reaction to that awareness, I turn around and become even more aggressive.

[00:19:02] Right.

[00:19:03] I run around that Easter egg hunt faster and faster and faster, finding more and more Easter eggs.

[00:19:08] That's the red line in which the strategic response largely offsets the increase in people saying, well, they can't possibly view any Easter eggs here because those are valuable things and valuable things aren't left laying on the ground.

[00:19:22] Does that make sense?

[00:19:23] Yes, it does.

[00:19:24] On the flip side of that equation is if nobody reacts to it, then basically we all sit around the Easter egg hunt and we say, oh, I guess there's no Easter egg.

[00:19:34] Right.

[00:19:35] That's the no strategic response complaint.

[00:19:37] Now, what Hada finds is that the strategic response accounts, you know, basically is real.

[00:19:45] People become more aggressive.

[00:19:46] This is the constant bemoaning of the reduced holding period and the wild and crazy trading that we see out of hedge funds or pod shops or whatever.

[00:19:55] Right.

[00:19:55] They have become more aggressive in response to a less aggressive competitor.

[00:20:00] But they don't offset it fully.

[00:20:05] And Haddad's estimate is around 33 percent is offset.

[00:20:09] So about 60 or I'm sorry, 67 percent is offset.

[00:20:12] So about 33 percent of the responses is there.

[00:20:15] When I go through Haddad's analysis, I come closer to 50 percent.

[00:20:22] So I think there's a larger impact than Haddad does, but not by all that much.

[00:20:28] All of this is just a very simple way of saying, like, if you actually believe that passive investing is changing the market and causing this type of behavior, the only possible conclusion to it is flows into passive vehicles will continue to raise valuations because people just will not respond.

[00:20:48] Right.

[00:20:48] The existing holders will not be sellers.

[00:20:51] The new buyers will not be sellers until something completely exogenous occurs has nothing to do with the earnings of the company.

[00:20:59] It has nothing to do with any of that.

[00:21:01] All of that helps to explain the behavior of the active managers around it.

[00:21:06] Just to wrap up the question on the factor.

[00:21:08] If let's say I could perfectly build that factor in terms of looking at the flows relative to whatever I would measure liquidity with.

[00:21:14] Do you think that's a worthwhile exercise or do you think I'd end up pretty much near the S&P 500 anyway?

[00:21:19] So there's really no no point of doing it.

[00:21:22] Well, I think the biggest challenge that you would run into is getting the data.

[00:21:25] Right.

[00:21:25] So individuals like Ralph Koijin in Chicago have tried building models that attempt to trade around this sort of stuff.

[00:21:34] He's reporting to me that he's consistently getting sharp ratios in excess of one simply associated with measuring this type of demand function associated with it.

[00:21:44] But, you know, that's a Ph.D. at the University of Chicago is one of those brilliant minds in finance who's working with countless Ph.D.

[00:21:53] candidates to try to solve these systems.

[00:21:57] I would suggest that it's quite hard, right?

[00:22:00] You're probably better off actually trying to build an estimate of how the market making response function behaves.

[00:22:07] I would argue that's really what Jim Simons did at Renaissance or what several other high frequency traders have done.

[00:22:15] They've effectively simulated the order book and behave almost as market makers themselves.

[00:22:20] It almost seems like, you know, passive has become or is becoming a monopoly.

[00:22:29] And, you know, we have government agencies that sort of regulate monopolistic companies.

[00:22:35] I mean, do you see a future where some type of I mean, you mentioned regulatory before.

[00:22:41] So the government is I don't know how you regulate and you break up Vanguard or have some limits on the passive options in 401k.

[00:22:49] I don't know. Have you given any thought to what that might look like, what that regulatory framework might look like?

[00:22:59] Well, so, yes. Right. And the question is, are any of them plausible or realistic?

[00:23:06] So first, yes, I absolutely agree that we have increasing monopolization and particularly if you look at flows.

[00:23:12] Right. So Vanguard and BlackRock, between the two of them, account for basically 100 percent of the flows that are currently going into the market on a net basis.

[00:23:21] Nobody else is really growing.

[00:23:24] There are new entrants like Simplify, for example, that try to offer products that are not currently offered in the marketplace.

[00:23:30] We are attracting assets in that framework.

[00:23:34] But as I like to joke, you know, over the course of four years, we've grown by basically four days of Vanguard inflows.

[00:23:41] Right. So it doesn't feel like we're making that much progress.

[00:23:44] Vanguard has has far exceeded our growth.

[00:23:48] You start with small numbers. Right.

[00:23:51] You mentioned the antitrust component.

[00:23:53] I'm actually going to show you another chart.

[00:23:55] This is one that's going to come out in our quarterly review.

[00:24:01] So we're going to sneak peek here.

[00:24:03] You're going to sneak peek.

[00:24:04] It's actually is presented right next to a chart from Valentin Haddad.

[00:24:09] So I'll talk through that in a second.

[00:24:10] But this is what's called the Herfindahl-Hirschman Index.

[00:24:12] It's a measure of market concentration.

[00:24:15] And we're just attaching that to the S&P 500 here, right?

[00:24:18] So what is actually happening?

[00:24:20] It could be a measure akin to monopolization.

[00:24:24] The S&P is becoming more and more monopolized by the large companies.

[00:24:28] The same thing can be said about what's happening in the passive investment industry

[00:24:32] or in the investment industry in which Vanguard is now over $10 trillion.

[00:24:36] BlackRock is over $10 trillion.

[00:24:38] The entire space, right, the entire asset management industry is estimated at somewhere in the

[00:24:45] neighborhood of $30 to $40 trillion.

[00:24:48] And so you're talking about almost 50% of the assets being managed by two firms at this point,

[00:24:54] right?

[00:24:54] Now, I'm overstating that.

[00:24:56] I don't think that's actually entirely correct.

[00:24:59] Obviously, they have different concentration and share.

[00:25:01] But when it comes down to things like 401ks, for example, it's absolutely correct, right?

[00:25:06] Vanguard's market share in 401ks is well over 40%.

[00:25:09] So you're looking at a situation in which I would argue there's absolutely components of

[00:25:15] monopoly that's influencing the regulatory environment.

[00:25:18] And candidly, it's influencing the messaging because these institutions do not want people

[00:25:24] to be, do not want to have the alarm raised.

[00:25:27] And why should they?

[00:25:28] I wouldn't want to if I was in their situation.

[00:25:31] I was thinking about diversifying a portfolio beyond stocks and bonds.

[00:25:35] And this may not totally play into the passive thing, but I was just thinking, you know,

[00:25:39] in a world where we could have this continued situation where the largest stocks just lead

[00:25:43] the market up for a long period of time, we also could have this major meltdown.

[00:25:48] Is there a case to be made that I want to be more diversified in a world like that?

[00:25:52] I want to have more of a permanent portfolio type thing where I'm willing to be able to deal

[00:25:56] with a bunch of different possible outcomes that could come?

[00:25:59] Well, just remember, any portfolio that is, you know, structurally rigid is by definition,

[00:26:05] short volatility, right?

[00:26:07] Because what you are presuming is, is that the data that you have in the past is going

[00:26:11] to accurately represent the future.

[00:26:13] Your correlations are such that if I put a portfolio to steal, you know, the Jacob Fugger

[00:26:20] portfolio, you know, 25% bonds, 25% gold, 25% stocks and 25% commodities, I think that's

[00:26:27] what it was, you know, that I end up with a perfectly diversified portfolio.

[00:26:31] Well, yeah, that's a very accurate description of a portfolio that couldn't possibly have been

[00:26:36] created in 1600, right?

[00:26:39] But certainly sounds good when I backtest it against 20th century data.

[00:26:44] I don't know what the 21st century looks like.

[00:26:46] And candidly, I would argue that there's very real evidence we're moving towards a form of

[00:26:51] post-scarcity, right?

[00:26:53] I mean, I constantly remind people of this.

[00:26:55] They'll point out to me how small commodities are relative to the investment universe.

[00:26:59] And I am forced to point out to them like, okay, Jack, how much time did you spend sourcing

[00:27:04] commodities today?

[00:27:05] Did you spend any time going to the natural gas well to actually get the natural gas to

[00:27:11] eat your water?

[00:27:13] Did you spend any time getting the water?

[00:27:15] Did you spend any time getting the electricity or the coal that's required to burn to generate

[00:27:20] the electricity for your house?

[00:27:22] No, this little bill shows up.

[00:27:24] It's a tiny fraction of your income.

[00:27:26] You write it every month, right?

[00:27:28] And it pays for access to those things.

[00:27:30] So like how much share of the investment universe should something that actually captures

[00:27:34] no mind share anymore and is almost certainly going to become less important and less impactful

[00:27:40] in the future?

[00:27:41] How much should that represent of your investable world?

[00:27:44] Every scenario that people talk about that type of portfolio, one, I would suggest that

[00:27:48] they're way overweight, unproductive assets like commodities based on some historical analysis

[00:27:53] in which that commodity basket was a sizable fraction of my consumption basket.

[00:27:58] Take me back to 1850 and ask me the exact same question.

[00:28:01] I'll say, well, I went out and chopped wood this morning to heat the water so that my wife

[00:28:05] could make coffee so that I could eat, you know, and we could heat the bath water so that

[00:28:09] we could take our weekly bath, right?

[00:28:11] And we had to go to the grocery store or make our soap and do all that.

[00:28:15] Like these were huge components that were replacing large fractions that you're purchasing by

[00:28:19] do.

[00:28:20] And today they just don't.

[00:28:22] Right.

[00:28:22] Now, is there a dystopian scenario, a walking dead type universe in which we are, you know,

[00:28:29] forced to seriously consider commodities again?

[00:28:32] Sure.

[00:28:33] But you know what's not going to help you in that scenario?

[00:28:36] A permanent portfolio.

[00:28:39] That is very true.

[00:28:41] Have you, um, has there been any work done around the impact of passive on bonds?

[00:28:45] I was just thinking about this.

[00:28:46] We've never asked you about this, but a lot of these flows are going into like target

[00:28:49] date funds and a significant amount of them is going to bonds.

[00:28:52] Has there been any work done and like if there's any impact in the bond market from this?

[00:28:56] There's actually a ton of evidence behind that.

[00:28:58] This is in part the work of Jonathan Parker at MIT, Hannah Lustig at Stanford, and a young woman

[00:29:06] by the name of Zhu Liu, who's now at the University of Washington.

[00:29:10] They've proposed what's called the Portfolio Rebalance Channel that looks at these systematically

[00:29:14] rebalanced portfolios, things like a target date fund, and simply notes that an increasing

[00:29:22] fraction of the volatility of those portfolios can actually be explained by the rebalancing

[00:29:27] process.

[00:29:28] 2022 is a great example of that.

[00:29:30] And just to parameterize this, my estimates on passive investing is it's now about 44

[00:29:35] to 45% of the market.

[00:29:38] Um, on the equity side, the fixed income, I would, I would estimate that we're somewhere

[00:29:43] between 27 and 30%.

[00:29:45] So it's quite a bit smaller.

[00:29:47] That means it has less of an impact.

[00:29:49] And I'll actually show you some of the equations that Haddad uses to estimate some of these types

[00:29:54] of things.

[00:29:56] Um, but if you, if, if you think about what happened in 2022, a lot of the behavior can

[00:30:02] actually be explained by the systematic rebalancing of portfolios that are simultaneously long bonds

[00:30:09] and long equities.

[00:30:10] Something like a target date fund is going to have an allocation to bonds and equities.

[00:30:13] It's simply a function of when you're anticipating retirement data.

[00:30:17] If the Federal Reserve hikes interest rates, that's an exogenous impact on the bond market.

[00:30:23] It causes bond prices to go down, all else being equal, particularly if it's a surprise hike,

[00:30:28] as were, as was the case in early 2022, right?

[00:30:32] Where in November of 21, Powell announced that we weren't going to be hiking for years to

[00:30:37] come, right?

[00:30:38] And by March, 2022, we were hiking by 50 and then 75 basis points, right?

[00:30:46] When that happens, bond portfolios fall in price.

[00:30:50] So let's just make the math simple.

[00:30:51] I own a portfolio that's 50-50 bonds and equities.

[00:30:54] Powell hikes rates, driving down bond prices.

[00:30:58] What do I have to do in my systematically rebalanced portfolio?

[00:31:02] I had to buy bonds.

[00:31:04] How do I get the cash for that?

[00:31:06] Sell stocks.

[00:31:07] Sell stocks.

[00:31:09] Sell stocks.

[00:31:10] Right?

[00:31:10] Right.

[00:31:10] And so Fed hikes, I sell stocks, buy bonds.

[00:31:14] Fed hikes, sell stocks, buy bonds.

[00:31:15] And if you look at the flows into this fund, that's exactly what ended up happening.

[00:31:20] Right?

[00:31:21] Now, the great irony, of course, is that did I talk about the right thing for me to do as

[00:31:25] a discounted cash flow analysis in which I recalculate the weighted average cost of

[00:31:29] capital based on the new input of the Fed's change in interest rates and the potential impact

[00:31:34] that that might have on the macroeconomic economy, right?

[00:31:37] That adjusts the level of cash flows that I'm forecasting off into the future, the potential

[00:31:41] payback mechanisms between stock buybacks and dividend.

[00:31:44] Did I mention any of that?

[00:31:46] You did not.

[00:31:47] I did not.

[00:31:47] Because nobody does it anymore.

[00:31:50] That's not how people manage their portfolios.

[00:31:53] They're basically chasing flashing lights on a screen or choosing not to do anything.

[00:31:58] How do you think about the potential endgame here?

[00:32:01] So I'm just wondering, like, I mean, we've talked about this could lead to a market meltdown.

[00:32:08] You know, this could continue to go on for a long time.

[00:32:10] Like, if you're seeing as we progress towards those potential outcomes, are there warning

[00:32:16] signs?

[00:32:17] Is there a certain level of passive that gets you more worried?

[00:32:19] Is this something that'll just come out of nowhere?

[00:32:21] Or is this something where you'll see warning signs as we get closer and closer to those

[00:32:25] endings?

[00:32:25] So this is where Haddad's work, again, becomes really towerable, right?

[00:32:32] The quote from Haddad is actually, or the analysis from Haddad in terms of thinking about

[00:32:36] the dynamics of changing elasticity can be very easily thought about as the elasticity

[00:32:42] of active management, the strategic response to changes in share of total market elasticity

[00:32:52] or the elasticity of the new investors, and then the elasticity of the passive investors.

[00:32:57] To quote Haddad, the elasticity of passive investors is zero, right?

[00:33:01] They will not change their supply and demand in response to a change in their response to a

[00:33:07] change in price.

[00:33:08] That's not entirely true for new additions because there's actually a negative load-in for the

[00:33:13] value factor in passive strategies.

[00:33:15] Meaning if the price of any one security rises relative to the market, I will add more dollars

[00:33:22] to that name than I would to other stuff.

[00:33:24] So that's just called the negative loading factor for value.

[00:33:28] If you look at the required strategic response, how much more aggressive people have to become

[00:33:34] in response to that new entrant who simply stands at the Easter egg hunt and says, well,

[00:33:39] there clearly are no Easter eggs here because those are valuable things left lying around.

[00:33:43] I'll just take the average of what everybody else collects, right?

[00:33:48] The response function that Haddad estimates, that strategic response function is in response

[00:33:54] to the emergence of that zero elasticity investor, the traditional investor basically becomes three

[00:34:01] times more responsive, right?

[00:34:03] But the problem is that the share percent is measured as a fraction of the existing share

[00:34:10] of the active manager.

[00:34:12] And so when active managers go from 99% to 50%, that's a 50% decline on a market gain of

[00:34:20] 50%.

[00:34:21] If we go from 50% to 25%, that's another 50% change, but on much less market share, right?

[00:34:29] And the market share increments of passive gain are getting larger and larger tied to the demographic

[00:34:35] features of more and more new investors are pushed through to passive vehicles.

[00:34:41] Haddad's estimate of the strategic response to offset the impact of passive investing at

[00:34:47] 50% market share, which is roughly a tipping point that I have as well that suggests that

[00:34:53] there's things start to break in the neighborhood, or at least they become increasingly unknowable.

[00:34:58] Haddad's estimate is that the strategic response would have to be around 18, right?

[00:35:03] The current number is three, is his estimate, right?

[00:35:07] Like we're just so far off and we're not going to see that type of change.

[00:35:11] It's not like millennium is going to become 10 times or 100 times more aggressive over

[00:35:16] the next five years as we move to that level.

[00:35:19] And so the impact of everything that we're watching is just going to get larger and larger.

[00:35:23] We'll see larger volatility around information flows on things like earnings.

[00:35:27] We'll see larger impact on things like volatility and events like we saw in July and August.

[00:35:35] Right.

[00:35:35] But paradoxically, none of those should actually change your view that as long as the net

[00:35:40] inflows are positive, that you actually want to basically just find the stocks that are being bought by

[00:35:46] Vanguard and BlackRock.

[00:35:47] It seems to me like this trend is largely possibly a result of two things, the financial crisis and

[00:35:56] impassive investing options and vehicles coming on the market and those being available to investors

[00:36:03] through all the different ways they can invest.

[00:36:06] What do you think would happen?

[00:36:09] Well, I guess two things.

[00:36:11] You know, it seems like you're there's a possibility here.

[00:36:15] Like I'm thinking back to like the lost decade where between 99 and, you know, 09, basically

[00:36:20] the S&P was flat.

[00:36:22] And so pretty much no one want to be an investor in the S&P after those 10 years because they

[00:36:27] had lost money or they were flat.

[00:36:31] I'm wondering, like, could a really bad bear market sort of change this in the other direction

[00:36:39] possibly or a very long market of stocks going nowhere.

[00:36:42] But to counter that, maybe what you would say is just the flows, given the power of the

[00:36:47] flows, you know, that that that's there's a likelihood that might not happen.

[00:36:52] But if investor behavior changes a lot, maybe that could happen.

[00:36:56] I don't know.

[00:36:58] So I'm just kind of wondering, like, what your thoughts are on, I guess, this idea that,

[00:37:03] you know, a very prolonged bear market changes the mindset of investors and it maybe starts

[00:37:09] to reverse itself.

[00:37:10] I mean, is that a possibility?

[00:37:13] So I think it's a low probability, right?

[00:37:15] For the very simple reason that the vast majority of people at this point have been taught that

[00:37:20] markets return, give or take, 8, 9, 10 percent a year.

[00:37:24] And I'll share another slide.

[00:37:25] This one is actually brought to you by Vanguard.

[00:37:28] We should call the entire program brought to you by Vanguard.

[00:37:31] Might as well.

[00:37:36] When they start sponsoring all the podcasts and we know we're really in trouble.

[00:37:40] So this is actually from a September report from Vanguard, right?

[00:37:49] One of the things that's really interesting is look how stable investor expectations over

[00:37:54] the next 10 years were, like, roughly in line with the historical average.

[00:37:58] It was about six and a half to 7 percent, which is the arithmetic average return to equities

[00:38:02] over time.

[00:38:03] And it started to rise.

[00:38:06] Right?

[00:38:07] So what we're seeing is investors are reacting to, and you've seen the charts on this, right?

[00:38:13] That curvature that's created by the penetration of asset, which raises valuations, which causes

[00:38:18] people to think that equities have higher returns, which makes them want to allocate more

[00:38:23] to equities.

[00:38:24] And any short-term setback against that is highly unlikely to change anything.

[00:38:30] If we have a very long extended bear market, then sure.

[00:38:34] But now you have to flip it around and ask yourself, well, what is the mechanism other than valuation

[00:38:39] for a long extended bear market?

[00:38:42] Yeah.

[00:38:43] Yeah.

[00:38:43] I mean, there could be a really deep recession that just coming off of a very high valuation

[00:38:49] that maybe you have a longer bear market than normal.

[00:38:54] I don't know.

[00:38:55] If you have that very deep recession, I would assume that that translates into a loss of employment.

[00:39:00] And in turn, that would impact the flows and likely mean that this happens in an accelerated

[00:39:05] fashion as compared to an extended fashion.

[00:39:09] Okay.

[00:39:11] Well, and I think on the rebound, I mean, investors, again, probably would gravitate towards the

[00:39:18] cheapest, most accessible stuff, which would...

[00:39:22] S&P 500 or ETFs, yes.

[00:39:25] I think that's probably right.

[00:39:27] How would we...

[00:39:28] If we were going to get back to a world, because we have a lot of investors who follow us who

[00:39:32] are fundamental investors or factor investors or people who are trying to pick securities based

[00:39:36] on their fundamentals, how would we ever get back to a world where that mattered more than

[00:39:41] it does now?

[00:39:41] I mean, David Einhorn had the famous podcast where he talked about your work and he talked

[00:39:45] about the small cap stocks he was investing in and he was hoping the multiple would go up

[00:39:48] when good news came and it just didn't.

[00:39:50] And a lot of people are seeing that type of thing.

[00:39:52] I mean, do you only get back to that world after some sort of massive passive washout

[00:39:56] where we have some sort of massive market meltdown?

[00:39:58] Are there other ways we could get back to that?

[00:40:00] Or do you don't think we're ever getting back to that?

[00:40:02] So the quick answer is, I don't know.

[00:40:04] Right.

[00:40:05] It really becomes a question of how it plays out from what the response function is.

[00:40:09] Part of the reason why I'm speaking out is not because I actually think that I can

[00:40:13] change anything now.

[00:40:14] But when the event actually occurs, I want people to hold Vanguard's feet to the fire

[00:40:19] and say, wait, we're not doing this again.

[00:40:21] Right.

[00:40:21] If we survive through that process, I actually want to see us try to reassert ourselves in

[00:40:26] the same way that we did in 1933, 1934, I think it was with the Pecora Commission, where we

[00:40:32] actually reset Wall Street and said, what is the purpose here?

[00:40:36] The purpose is not rampant speculation.

[00:40:38] The purpose is to attract investment.

[00:40:40] That requires a degree of honesty and trust and good behavior in markets that allowed us

[00:40:46] to then fund any number of activities for the next, you know, give or take 70 years.

[00:40:52] Right.

[00:40:52] It wasn't until the late 1960s, early 1970s that we began to talk about things like indices

[00:40:57] or the efficient market hypothesis that presumed that everybody else had done the underlying work

[00:41:03] associated with it.

[00:41:05] But that has actually, you know, we have seen a very substantive change.

[00:41:10] Let me actually just show you one chart.

[00:41:12] So this is actually, this is speaking to that negative loading to the value factor.

[00:41:17] This is using the Ken French database to go back to 1925 and looking at the correlation

[00:41:22] between value stocks and glamour stocks.

[00:41:26] All right.

[00:41:27] You with me so far?

[00:41:28] Okay.

[00:41:29] Yep.

[00:41:29] Okay.

[00:41:30] So over basically a 70 year period, the two assets were actually very tightly correlated

[00:41:41] between 75% and 95%.

[00:41:44] That was true if you used an equal weighted portfolio or if you used a market cap weighted

[00:41:52] portfolio.

[00:41:53] All right.

[00:41:54] So a market cap weighted portfolio of value stocks will put larger weights on the largest

[00:41:59] value stocks.

[00:42:01] Does that make sense?

[00:42:02] Yep.

[00:42:03] Okay.

[00:42:04] That all changed.

[00:42:05] Today, we're actually running effectively no correlation on market cap weighted components.

[00:42:12] Right.

[00:42:13] I mean, this is like, this is just a very stark illustration of how different the market was.

[00:42:18] And coincidentally, I entered, it must be my fault, right?

[00:42:21] But I entered the market, you know, back here.

[00:42:23] Right.

[00:42:24] And so I could look back through all of that history and say, look, this is such a fantastic

[00:42:30] strategy and yet it's ultimately correlated with the market.

[00:42:33] Therefore, I can run long short.

[00:42:35] These two asset classes are strongly correlated.

[00:42:37] Therefore, I can run long short and have very little risk.

[00:42:40] Well, part of what Einhorn's referring to is this time period, right?

[00:42:44] Where the stocks became actually negatively correlated in some situations because it was

[00:42:49] a function of value managers being fired and passive managers being hired.

[00:42:54] That actually drove differences in the allocation schema that ultimately created this breakdown

[00:43:00] in correlation that we've seen.

[00:43:02] And if you have low correlation between assets, it can't really be short one and long the other.

[00:43:08] Right.

[00:43:09] That's just exposing you to idiosyncratic correlation press.

[00:43:13] So there are very substantive changes in the underlying behavior and data that we've just

[00:43:19] never seen before.

[00:43:21] Particularly after QDIA shift there, you know, it's, you could see it's a very, very pronounced

[00:43:25] change.

[00:43:26] Correct.

[00:43:27] And one of the things that I would argue actually happened in the aftermath of the dot-com cycle

[00:43:31] is that you had the Pension Protection Act come in in 2006.

[00:43:35] The Pension Protection Act was what turned 401ks from opt-in vehicles.

[00:43:40] You had a discretionary choice to participate to opt-out vehicles.

[00:43:45] You had to make an active choice not to participate in a 401k.

[00:43:49] If you're going to automatically default somebody into a 401k as part of their job package, you

[00:43:54] then have to have something to put them in.

[00:43:56] That's what a QDIA refers to, qualified default investment alternative.

[00:44:00] It is a legally advantaged structure that is dominated by Vanguard and to a lesser extent

[00:44:07] BlackRock and a few other participants.

[00:44:09] In 2006, it was, the QDIA was set across basically all companies as a balanced fund, right?

[00:44:16] A portfolio that was roughly 50-50 bonds and equities.

[00:44:19] Who would be the biggest beneficiary of that type of portfolio from an asset management standpoint?

[00:44:24] Yeah.

[00:44:24] Those two companies, Vanguard and BlackRock.

[00:44:27] No.

[00:44:27] PIMCO.

[00:44:28] Oh.

[00:44:29] All from a balanced.

[00:44:30] I'm sorry.

[00:44:30] Yeah.

[00:44:31] Well.

[00:44:31] All right.

[00:44:32] From the balance portfolio, absolutely PIMCO.

[00:44:34] In 2012, in response to lobbying from Vanguard, QDIAs were changed from balanced funds to target date funds.

[00:44:44] When did things seem to start going wrong at PIMCO?

[00:44:46] Well, flows stopped the minute the QDIA moved away from that balanced fund.

[00:44:51] It also paradoxically meant that if I'm going to build a portfolio that is 50-50 bonds and equities,

[00:44:57] and I shrink the quantity of equities, or I don't, effectively I'm coming from a portfolio analysis that as of 2000 would have said I was 70% in bonds and 30% in equities and 30% in bonds.

[00:45:12] Right?

[00:45:13] What do I have to do?

[00:45:13] I'm going to sell a ton of equity exposure.

[00:45:15] Who's going to look really good if you sell a ton of equity exposure?

[00:45:19] Market neutral funds, right?

[00:45:21] Funds that don't actually have the type of underlying exposure.

[00:45:25] And so, like, what did we see in that time period in which we structurally reduced the marginal participants' equity share by moving them to balanced funds?

[00:45:35] We saw valuations contract.

[00:45:37] Who were the primary beneficiaries in that time period?

[00:45:40] Hedge funds.

[00:45:40] They went from a $1 trillion business to a $4 trillion business over the time period from basically 2003 to 2009.

[00:45:50] Today, hedge funds are dying, right?

[00:45:54] There is no real growth.

[00:45:55] There's a big deal that Millennium tries to raise $10 billion and gets $20 billion.

[00:46:01] Why?

[00:46:01] Because they're very much like buy IBM.

[00:46:03] If you're going to buy a hedge fund, you might as well buy Millennium because nobody's going to get fired for buying Millennium.

[00:46:11] Right.

[00:46:12] But once we reverse that to the QDI is, to your point, we actually saw this process meaningfully or change.

[00:46:18] So, Mike, as we get sort of toward the end here, which our goal was to do half on passive and then the rest on the economy.

[00:46:25] So we'll definitely have to have the back.

[00:46:28] But that's okay because this is important stuff.

[00:46:30] And I think just to sort of, if I were to sort of summarize like your view of this, it's like you're here making people aware of this happening in the market.

[00:46:42] It's not to say you're negative on stocks.

[00:46:44] You may have a view of the macro environment that may make you positive or negative.

[00:46:48] But generally speaking, this isn't making you positive or negative on securities.

[00:46:54] This is just the reality of the situation and that as a society, you know, this is probably going to have to be addressed at some point because of these things that it's causing in the market.

[00:47:07] Does that sort of capture you accurately?

[00:47:09] I think that's reasonable.

[00:47:10] I want to show you one more quick chart that actually probably does a better explanation.

[00:47:19] Maybe I'll show you two charts here.

[00:47:20] This is what I think about stocks, right?

[00:47:22] It can literally be thought of as simple as this.

[00:47:25] This is a, you know, kind of a structural distribution that historically existed for stocks.

[00:47:30] Skewed slightly positive with tails fatter than to the downside than to the upside, right?

[00:47:37] This is the world that we looked at kind of right around 2000.

[00:47:42] This is what my models would have suggested we should have had.

[00:47:45] It was true for the majority of stocks, even as we had an isolated bubble, low float stocks associated with the IPO and the dot-com cycle.

[00:47:57] What has happened is we've shifted the center point of that distribution to the right.

[00:48:03] So on average, stocks win more frequently than they used to, right?

[00:48:10] But they also have much fatter tails.

[00:48:14] And so the point that I would make is I absolutely think that for the vast majority of people, the right strategy is to be invested.

[00:48:21] I also think from an individual and societal standpoint, you need to be very aware that if this outcome occurs, it's going to be far worse than you think.

[00:48:33] Right?

[00:48:34] That's really what it boils down to.

[00:48:36] So I'm perfectly happy to have people say stocks are going to continue to march upwards.

[00:48:40] The things that can cause that to change are a structural rise in unemployment.

[00:48:45] In other words, a decrease in contributions.

[00:48:47] Continued rising valuations ultimately should lead to more and more wealth concentration amongst the asset-owning class.

[00:48:55] We've absolutely seen that play out.

[00:48:58] And as their income, as their wealth rises, they start to make withdrawals and spend more.

[00:49:03] However, the really key thing to remember is that withdrawals are always a function of asset level.

[00:49:10] Contributions are always a function of income levels.

[00:49:13] And so as something like stock market to GDP continues to rise, it's currently at the highest levels it's ever been in history.

[00:49:20] You eventually get to the point where the outflows outweigh the inflows.

[00:49:25] And then you have to find the next marginal buyer.

[00:49:28] Right?

[00:49:28] And that's what a crash really is.

[00:49:30] It's where money has flowed in and said, I don't care what the price is.

[00:49:34] I know this is going up.

[00:49:36] And then once it starts to go down, your next marginal buyer is down 30%, 40%, 50%, 60%, 70%, 80%.

[00:49:45] Yeah, you had an interesting chart.

[00:49:46] I think you just shared it on Twitter recently.

[00:49:47] It was the idea of you talked about stock market cap to GDP.

[00:49:50] You talked about if returns keep doing what they're doing, what US stock market cap to global GDP would go like.

[00:49:56] And it would be something that does not seem plausible.

[00:49:58] I think it's actually totally plausible.

[00:50:01] You did.

[00:50:01] The approach to the visit is sustainable.

[00:50:03] Right?

[00:50:03] That's a very different question.

[00:50:05] And so there's the old Hemingway quote, how did you go bankrupt?

[00:50:09] Slowly and then all at once.

[00:50:10] Right?

[00:50:10] Well, what we're kind of experiencing is how did you get rich?

[00:50:15] Slowly and then all at once.

[00:50:17] Right?

[00:50:17] That's what's happening.

[00:50:18] People are suddenly discovering that their portfolios are rising in a way that they hadn't anticipated.

[00:50:24] And the funny part about it is that they're unhappy that they're not keeping up with the Joneses.

[00:50:30] Right?

[00:50:30] So they want more.

[00:50:32] And so they'll take more risk.

[00:50:33] And they'll expect higher returns.

[00:50:36] And they will want to put more of their money into these assets.

[00:50:39] That's what a bubble is.

[00:50:42] Thanks.

[00:50:42] So, Mike, this has been eye-opening as always.

[00:50:44] We really appreciate your time.

[00:50:45] Thank you for joining us.

[00:50:47] Yeah, we look forward to having you on next time.

[00:50:49] Fantastic, Jack.

[00:50:50] I appreciate it.

[00:50:50] Next time we'll talk about the macroeconomy.

[00:50:52] We will.

[00:50:53] We've already got the agenda written.

[00:50:54] All right.

[00:50:55] Thank you, Mike.

[00:50:56] This is Justin again.

[00:50:57] Thanks so much for tuning in to this episode of Excess Returns.

[00:51:00] You can follow Jack on Twitter at Practical Quant.

[00:51:03] And follow me on Twitter at JJ Carboneau.

[00:51:06] If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube.

[00:51:12] Or leave a review or a comment.

[00:51:14] We appreciate it.