MacroVoices #482 Mike Green: What The Market Is Not Discounting
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This is Macro Voices, the free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics telling it like it is, bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Ceresna.

Macro Voices Episode 482 was produced on May 29th, 2025. I'm Eric Townsend. Simplify's Chief Investment Strategist and Portfolio Manager, Mike Green, returns as this week's feature interview guest. We'll discuss the tariffs, what they're really being used for, and why Mike says the president is contradicting himself every time he talks about them.

And I'm Patrick Ceresna with the macro scoreboard week over week as of the close of Wednesday, May 29th, 2025. The S&P 500 index up 75 basis points, trading at 5,888. After a quick 200-point market correction last week, the markets are attempting a new bull breakout, targeting the all-time highs. We'll take a closer look at that chart and the key technical levels to watch in our post-game segment.

The U.S. dollar index up 19 basis points, trading at 99.88. The U.S. dollar retested the April low and bounced, establishing a new support line along this 98 handle.

The July WTI crude oil contract up 44 basis points, trading at $61.84. After a May double bottom test, the question is, will the bulls be able to put together a bull breakout here above the $64 level? The July Arbob gasoline down 190 basis points, trading at $2.06. The June gold contract down 54 basis points, trading at $32.95. Gold is maintaining its

bullish trend. But will we see the key breakout and resumption of the bull trend? July copper unchanged on the week at 467. Uranium up 106 basis points, trading at 71.70 as the positive price action continues. The U.S. 10-year Treasury yield down 12 basis points, trading at 448. And the key news to watch this week is Friday's core PCE price index. And next week we have the ISM manufacturing and services PMIs.

the Bank of Canada and the ECB monetary policy statements, and the much-anticipated U.S. jobs numbers. This week's feature interview guest is Simplify's Chief Investment Strategist and Portfolio Manager, Mike Green. Eric and Mike discuss inflation expectations,

true inflation, market structure, equities, and passive investing. Eric's interview with Mike Green is coming up as Macro Voices continues right here at MacroVoices.com. And now with this week's special guest, here's your host, Eric Townsend.

Joining me now is Mike Green, Chief Strategist and Portfolio Manager for Simplify Asset Management. Mike, it's great to get you back on the show. It's been way too long. I want to start with something that you've been talking and writing about lately, which is when you have the scope and level of change in government that we're seeing under the Trump administration, not only does that change the economy, but it also brings into question the metrics that we use for measuring the economy.

Tell me what's going on in your assessment. Is the market correctly discounting what the real economic effects of Trump policy are? Or is Trump policy actually interfering with the way we measure these things to the point that we're losing track? Well, I think it's a combination of the two. And I don't think it's unique to the Trump administration, although I do think the disruption that is underway in the Trump administration will play a role as we roll forward.

Your listeners who have heard me talk before know that my primary area of research, my primary focus is on the market structure impacts of the growth of passive investing.

And what that leads you to understand or believe is that the market is being inflated by our style of investing. You put money into a passive index fund, it allocates very large sums of capital to the largest companies. Those companies are highly inelastic in their price response, meaning small changes in supplier demand can cause significant price change.

You can think about it as a multiplier, right? So the traditional thought process behind something like the efficient market hypothesis is that a dollar into the market has very little impact on security prices because it's really an information exchange. You're saying I have a strong view about X, but somebody on the other side of the trade has an equally strong view that X is not true or they have their own reasons for selling. And so the net impact of flows into the market under the EMH

are very, very small. We now know that is not true. With the academic research that has emerged in the past decade, starting with Ralph Poisson's work and extending to his work with Xavier Gabay called The Inelastic Market Hypothesis,

identified that stocks are highly inelastic. And in fact, what we're seeing is somewhere in the neighborhood of about $7 to $8 worth of market cap created for every dollar that flows into the market. So that suggests that the EMH has misspecified about 800 to 1. That research has now gone further, augmented by an individual named Valentin Haddad at UCLA, who has looked at the market cap impact of that

And I've done a lot of work with Valentin at this point. And what we're finding is that for many of the largest stocks, the NVIDIAs, the Apples, et cetera, of the world, that inelasticity is an order of magnitude higher there. So we're seeing between $75 and $100 of market cap created for each dollar that flows into the market.

As long as people have jobs and are contributing to 401ks and their retirement flows continue to be positive, and that's been augmented by policy choices like Secure Act 1 and Secure Act 2 that have increased participation and increased employer contributions, that means that the market isn't really pricing anything anymore. What it's really doing is reflecting those flows.

And Trump's policies, while they've interjected uncertainty, uncertainty doesn't mean fire the workers you desperately tried to obtain over the last five years. We basically have businesses in a holding pattern where they're starting the process of thinking about firing people. You just saw Facebook introduce performance metrics, et cetera, and the objective being to move to a GE type model where they lay off the bottom 10% of performers on a continual upgrading basis.

That's telling you that the uncertainty is likely to morph into some form of increase in unemployment. We see this in employee uncertainty indices. Jobs hard to find are getting higher relative to jobs plentiful. Fear of losing your job is starting to rise.

All of those are telling you that we're looking at a scenario in which unemployment could begin to rise fairly significantly. And if that happens, then those flows can change. But in the meantime, we're used to thinking about markets as discounting mechanisms. And we ask ourselves, what is priced in? And if the market is going higher, it must be good things are about to occur, right? The market is discounting something positive in the future. I just don't think that's true. I think that it really reflects the fact that companies have not yet laid off the employees

despite the fact that we're seeing significant weakness and demand. I want to clarify and better understand the basic premise of what you're saying. You started with the efficient market hypothesis and other thinking was that, you know, $1 coming into the market was only going to make the difference of $1 worth of market cap. You're saying it's more like about 8 to 1. Are you saying something has changed since the days when the efficient markets hypothesis was

first posited and it doesn't work the way it used to? Or are you saying it's always been this way and they just had it wrong before? So it's a mixture of the two. It definitely has changed. So again, this is the work of Valentin Haddad and also Marco Salmon, who is at Harvard. What we're finding is, is that as companies get larger in market capitalization,

Their need to be included in the index rises. So if you think about it in the concept of substitution effects, if I'm buying the S&P 500, I don't really care whether I buy United Airlines or American Airlines. They're both 0.002% of the index. They have no meaningful impact on performance. And candidly, I can buy one or the other. It doesn't matter. I could buy two times as much one. It's not really going to matter in any meaningful way. And for that matter, I could even leave them out.

But I can't do that with Apple. I can't do that with NVIDIA. I can't do that with Microsoft. I have to buy those at whatever price they're offered to me. And as a result, those large stocks actually have much lower elasticity or higher inelasticity than the smaller stocks do.

And so the impact of this is to actually increase that multiplier over time as we get a more and more concentrated index, which in and of itself is a byproduct of this effect. So indexing is driving concentration. Concentration is driving inelasticity. Inelasticity means as long as money is coming in, prices will react more and more favorably. What looks like a booming economy in the stock market

is really just a stagnant labor force.

Mike, let's talk about what the effects of this are. You're saying basically that there's kind of a new regime in the marketplace that's changing the way that we make decisions. What will the knock-on effects of that be? Well, I think that there's a couple of things. One is, as I mentioned, end demand is weak. We know this in part because commodity prices in gold terms are not rising. That's telling you that the demand for money is exceeding the demand for industrial materials.

If we were watching a booming economy, you would typically see the opposite effect. And we see this on gold. We see it in iron ore. We see it in copper. We see it nickel. We see it in softs, et cetera. That suggests that the economy is significantly weaker than we would expect.

With that said, the tariffs that are being introduced will absolutely cause some portions of our consumption basket to rise in price because the government has effectively introduced the sales tax. When we saw this in Japan in 2014, it caused prices to rise instantaneously in many situations by nearly the 10% increase in sales tax.

Because you are actually artificially driving up the cost side of the equation, reducing the supply of goods and services in that framework. And that then translates to higher prices. So we will see higher prices in some areas, particularly areas like electronics, in which the costs are going to go up to the end consumer in a meaningful way.

What's different this time around versus, say, 2021 is that we don't have a giant stimulus occurring in line with this. So there's not the consumption boom that's happening or the demand side of the equation that's happening alongside the supply restriction. That means that we'll see prices increase in those areas where consumers have no real choice because it's sourced from China or it's sourced from Europe.

But in other areas, it means that they're going to have to economize and reduce their consumption. And the most obvious one of those is in the housing market, which people fantasize is an inelastic market. It's one that people can't replace, right? If you need a house, you need a house. But that's really only true in periods in which employment is growing rapidly. So people need to relocate to where their new job is.

Or where the population is growing very, very rapidly, either in terms of individual households because you suddenly discovered that your roommates were toxic and could kill you in a COVID-type framework. Or as we saw in the 1970s, where there was simply huge growth in population that required that increase.

That makes it much harder. But in today's world, we're seeing something different. We're starting to see household size begin to rise. That means that young people are staying with their parents longer. It means that adult children are moving back home to be with their aged parents to help them care for their aging parents or to help them care for their young children because the cost of child care services have risen dramatically.

perversely, you can create an incredible amount of elasticity in the housing market simply by doubling up, right? Increasing people per household. And that takes time. There's a slow response to it, but we're starting to see that. And now we see metrics like the Cleveland New Tenant Rent Index

falling significantly. This is being validated in other private sector metrics. We just saw housing prices fall for the first time in the past four years in the S&P Shiller indices, the core Shiller indices. You know, this is telling you that that largest portion of the inflation basket shelter is actually meaningfully under pressure

And we're likely to see that offset a significant fraction of the inflation that we will see on the good side of products that are imported from places like China. Mike, I have an utterly simplistic and unsophisticated view of what's going on here. And it's very simple. It goes like this. Finance guys like you and I and most of our listeners get it and understand that tariffs inherently pose an inflation risk.

But I think the average American citizen, the average Joe Q. Public hasn't really figured it out yet. They don't understand that what a tariff is, is a gigantic sales tax that is assessed and paid by American citizens for

on the hope that foreign suppliers of goods, in order to maintain a level selling price, will reduce the cost of their exports in order to compensate for that massive new tax that's being charged. I don't think most people have any idea that that's what's on the table, other than finance people who study this stuff. And I think that when that sinks in, if you think inflation expectations are high now, just wait. Am I on to something?

Well, I just want to make sure that I understand what you're saying. So you're saying we're introducing a giant tax and then you're saying that you think inflation expectations will rise further because of that tax or you think that they will? I think that inflation expectations will rise even further because I don't think that current inflation expectations, as high as they are,

have fully contemplated what's really about to happen here. And this depends, you know, if we end up with tariffs, we're all a bluffing negotiating game and we don't have any tariffs.

Well, that would reverse it. But assuming that we really are intending to rely on tariffs as a revenue production mechanism, that means that revenue, you know, it's coming from someplace. It's got to come out of someplace else. So either Americans pay more for their foreign products or foreign sellers of exports reduce their prices in order to offset that tax.

It's got to be one or the other. And I don't think people have figured that out yet. Well, I think it's a combination of both. But I think part of what I would argue is that inflation expectations, first, we have to be very careful in terms of what we're defining. So, you know, the headlines are filled with the Michigan survey of consumer expectations. This shows Democrats thinking that inflation is going to rise 12 percent, Republicans thinking inflation is going to be less than 2 percent.

You know, and there's been some retreat of those Republicans moving slightly higher as the headlines basically wear people down. I'll be honest with you. I actually think that inflation expectations is proxied by those types of metrics are hopelessly corrupted by both a change in methodology and the increasing tribalism of the response. If I look at market based metrics, things like a five year, five year forward inflation swap.

Those are actually falling. Right. So what that's telling you is, is that the market is pricing inflation in the second half of the next decade is actually being lower than they were at the start of these discussions. You know, it's possible that that rises because we have terrible policy and we make all sorts of bad choices and we seem uniquely suited to doing that. If that's your belief, then tips as an investment opportunity are significant.

But the metrics that we're getting on the surveys, I actually think are really screwed up by this tribal dynamic. And then the other thing, and I put a tweet out on this in which I jokingly

pointed out the old New Yorker cartoon on the internet, nobody knows you're a dog. I rephrased it as on the internet, nobody knows you're Doge. But what we saw was a change in methodology where we moved from telephone-based surveys to online surveys. And once we removed that human filter, the inflation expectations just went nutty.

The variants of inflation expectations are no longer filtering out the extreme views where somebody says, I think inflation is going to be 100% for the next couple of years. That was very hard to do in a telephone survey because you'd hang up with somebody like that. There's another interesting thing that seems to be happening, which is an increasing number of surveys seem to be answered by LLMs, by chat GPT equivalents.

And the chat GPT equivalents will search for the answers to these surveys by using the popular press and the written materials. And so we've constructed a narrative that prices are going to unmoor themselves. And the surveys are increasingly reflecting that, even as market-based measures of it suggest the exact opposite. So let's get your assessment, your outlook for inflation for the next several years and how it relates to consensus.

Well, what I would argue is that we are likely to see the impact of that tax increase that you're referring to, right? Anytime you tax something, you are going to get less of it. The way you get less of it is because the price has effectively gone up relative to other goods or services. And so we'll likely see a reduction in economic activity, as you would expect with a tax. And there's multiple taxes. While people have focused on the expansionary nature,

of the Trump administration passing the big, beautiful tax bill that basically extends the Trump tax cuts. So in other words, extends the status quo, but is scored on a baseline as very expansionary because it's taking taxes that would have a tax cuts that would have expired and extending them out. So it looks on a baseline like a very big stimulus.

But it's not really right. And the money that it is taking away, it's taking away money from income supports, things like SNAP or nutrition supports or welfare that are flowing to households that spend a large fraction of it. And it's increasing the flows to people who have lots of income and lots of assets who basically have a very low propensity to spend. So it's actually a fairly contractionary policy.

My hunch is that we will actually find, as we did in the 1930s, that the impact of tariffs is to be deflationary by slowing economic activity. Mike, I want to introduce AI into this because as we change tariffs,

the world to depend more and more on AI, I'm going to make the argument that it's too late to stop or shut down AI. In other words, we're at the point or we're well past the point where for military reasons, if there was any effort to, you know, we're going to shut down AI globally, there would be several military interests, including the United States, that would say, yeah, but we're going to do it anyway.

you know, behind closed doors because we need to get a leg up on everybody else or else they would do the same thing to us. That logic guarantees that AI cannot be stopped now.

Given that, to what extent do you think that AI is really going to immediately help us? Or could there be kind of a tax on the economy from the sense that we've got to pay for AI and all of the development and particularly the burden it's going to place on our energy infrastructure? That's all coming no matter what. We can't stop it. What's that going to mean for the economy?

Well, you know, yes, there will be investment that's required in energy. And if you look at areas that you and I have talked enthusiastically about in the past, things like nuclear, you know, and by the way, my son who was in the U.S. Navy is going nuclear subs and off to nuclear power school in another year. So I'm a firm believer in this, both in terms of human capital and physical capital.

You know, the nuclear power indices are up nearly 100% on a year-to-date basis. Uranium has not performed in quite the same way, in part because it was the only mechanism that was really available for people to invest for a long period of time. So I'd argue people bid up uranium in expectation of what does actually appear to be a very real need.

I think we have to be very cognizant that while the increase in supply is necessary and that will require capital investment and that can help power the economy,

energy is a very small fraction of overall economic activity. And in fact, the investment in energy infrastructure is likely to be significantly less than much of the contribution that's coming to GDP through things like intellectual property, which is a purely imputed metric that I think is very overstated in terms of its impact. So again, I, you know,

The work in productivity studies and analysis is pretty straightforward. If AI is going to radically lower the cost or improve productivity and services, what you're actually doing is what I call productizing services. And we've been through this before, right? We used to call, we call them washing machines because they replaced washer women.

Women who literally their job was to come around and wash people's laundry because it was a time consuming task that ideally you'd outsource to an Irish immigrant.

We replaced those with physical machines. The first people to actually benefit from that were actually the housekeepers who went out and bought vacuum cleaners or who bought washing machines that they then used to expand their business, centralizing it in laundry centers, what we call now dry cleaners, et cetera. Those used to be actual laundry centers where you would have higher productivity. What that does is it lowers it as a fraction of your purchasing basket

improving the access to it for more and more people. And so AI is likely to be a hugely deflationary force in the services area, which makes up 75% of the US economy.

Mike, let's go a little bit further on AI. I've drawn an analogy before to the early stages of the internet where in the beginning, everybody was excited. They knew correctly, they correctly understood the internet was going to be a big deal. So they just started buying anything with .com in its name with absolutely no understanding of what they're buying. I've made the argument that a lot of people buying AI-related stocks have been doing the same thing. They don't really know, you know,

The fact that NVIDIA just makes the chips and doesn't actually make the AI that runs on the chips. Most people buying NVIDIA stock don't even know that. They just know it's the play on AI. It's the thing to buy.

Is that the way you see it? And what could the implications be if that's true? Yeah, I think the internet, the early days of the internet, and more accurately, what I would describe is the build out of the infrastructure of the internet. That's the fiber optic. It is the subsea cables. It is the internet providers and the switching equipment and the data centers, et cetera, that were also built in that time period is a very apt analogy.

What people often forget about what happened in that time period was that you actually saw an extraordinary build out under economic expectations that you would be able to continue to price the Internet services at a high level. Right. In a manner that's not dissimilar to what we're seeing for AI today.

But what actually changed was the technology around things like switching and amplifying, which meant that we didn't need anywhere near as much fiber as we actually put in the ground. Even today, roughly 25 years after the dot-com cycle collapsed, we're still using significantly less than half of the fiber that we actually laid at that point.

The introduction of wave multiplexing, which allows you to send different colored lights basically down a fiber optic so they don't interfere with each other because wave theory meant that you could dramatically expand the quantity of data that was transmitted. Likewise, the introduction of amplifiers meant that you needed far less equipment put in place. You could send a signal much further.

The way this manifested itself is in the late 1990s, we were paying the equivalent of $800 per megabyte. That was actually the number that was used by Global Crossing when they were building their investor presentations about what the opportunity set looked like. I think today we're down to about 32 cents per megabyte.

And an analogy in AI is the move from the training period to the exploitation period. We're still very much in the build out. We're discovering what these machines are capable of doing. But once we actually cross a threshold,

most AI will satisfy at human levels of intelligence, right? And candidly, relatively low levels of human intelligence, because many people in services that are doing the sort of routine jobs like call center work, et cetera, that are very likely to be the first to be automated. They're not the people that came out of MIT to be very straightforward. And as a result, once we cross that threshold,

we radically lower the cost, right? Further innovation basically means that becomes super easy to do.

And as a result, the costs are likely to become incredibly deflationary in the AI space as well. I would guess that the cost per token, which is effectively the equivalent of a megabyte type analysis, is going to collapse over the next five to 10 years. And we'll discover that we have ubiquitous AI. Now, that may create its own interesting challenges, right? But the actual impact of it doesn't strike me as possibly inflationary.

Let's bring all of this AI talk back to the equity markets and passive investing and so forth, assimilating all the various different things that we've talked about. Give us your outlook for equity markets and an update on the role that passive is going to play in terms of influencing them. Well, the critical component that I would emphasize is that as long as people have jobs and as long as our policy is you're going to contribute to a 401k by default, you're going to contribute to retirement,

And we've created a liability bias through what's called qualified default investment alternatives, which is what causes you to open up your 401k, your new job, and see you have basically 10 choices of investments, all of which are various forms of Vanguard target date funds. As long as that maintains itself, we are likely to see equity prices inflated by the mechanisms that I saw before.

The issue is, if I'm correct in my analysis of the ultimate impact of AI, that it's going to cause disruption and ultimately companies try to lay people off as the demand does not expand enough to offset the improvement in productivity, that that will ultimately prove to be negative to equity prices as those flows potentially begin to reverse.

as baby boomers head into retirement, that's finally here. And as fewer people have high value jobs that are creating or driving effectively an increase in contribution to financial assets, you could see that reverse itself quite sharply. I think that's not at all priced into markets right now. It's a key risk that I've been emphasizing. And unfortunately, I think the uncertainty that's being created right now could very well prove to be that straw that breaks the camel's back.

But against that, I would argue that the neglect that has occurred in the fixed income market in the same manner that we saw during the dot-com cycle, when tips got to 4% real yields, you know, that was an extraordinary return relative to what you could expect from equities going forward almost

Almost everything we see, whether it's a Shiller PE or equivalent, would suggest something very similar exists out there in the future. And the 2.8% real yield that you can pick up in a 30-year treasury or 30-year tip, that's going to be an interest. You know, that would be a very hard number to beat in the equity markets. And so I'm encouraging people to recognize that the fixed income markets simultaneously suffer neglect under these models.

And they don't have the same propensity for Ponzi type dynamics where the price you sell it to the next person is your primary source of return.

Fixed income ultimately pulls towards par. Your return is your coupon plus the return of your capital. That is much less susceptible to the types of passive distortion that occurs in the equity markets. And so I think that people should really be very closely evaluating, do they want to actually increase their exposure to bonds?

One of my favorite examples of that right now is Harvard Management Company, which is, as you know, being called to task for its high allocation of things like private equity and venture capital, with Bill Ackman calling out that those are highly likely to be mismarked. I'm actually doing some work on this right now. You know, Harvard has 5% of their assets in bonds, 5% of their assets in bonds.

That gives you some idea of how neglected this asset class actually is at this point.

Let's go a little bit further on real rates and what they mean, because I would argue that we always know what a nominal rate means. But the real rate is only as accurate as the inflation number that you plug in to calculate it. Are we calculating inflation accurately? Are the real rate indications that we're seeing now truthful or are they just a reflection of misanalyzed statistics? And in either case, what are they telling us? What's the outlook?

Yeah, so I think this is actually really an important one. And I encourage people to check out the sub stack that I wrote on this. You can find my sub stack at yes, I give a fig dot com. You know, we're seeing metrics like true inflation, which was the darling of the inflationista set in the 2021 time period when it correctly highlighted that inflation was running much higher than government numbers were printing.

The primary reason for that was the owner's equivalent rent component and the way rent is calculated in the CPI. It's intentionally designed as a slow lagging indicator that you can almost think of as like a three year moving average.

That metric was slow to respond. Truflation recognized it quickly. Truflation has pulled back down. And now, of course, we're introducing another disruption that is likely to cause some of those inflation metrics to rise. Something like Truflation is starting to show that we're starting to see a little bit of inflationary impact there.

But true inflation does not have the negative impact of that OER now falling back towards earth. It's already happened in their indices. And so I don't think the government numbers are actually that far off. I fully recognize that it doesn't feel like that. And people, when they hear inflation retreat, often are talking about the absolute level of the price level as compared to the change in prices.

Egg prices are high. There's no question about it. Right. The price of many of the products that we buy at the grocery store have been increased. Whether that's a function of monetary policy or whether that is a function of market power is really up for debate. And my hunch is, is that what we're actually seeing is the evidence of market power that has been created by

There are two separate sources of that. It can be the market power from increased consolidation that has occurred through private equity or through M&A activity in the United States. There's very strong evidence that we are an increasingly monopolized and monopsonized economy where there are fewer employers and there are fewer sellers of goods and services that are able to extract higher margins and greater prices. But that's not inflation. That's market power.

And so, you know, you can see this. I encourage people to go check out your Amazon listings for monitors. U.S. listed monitors from Dell or from U.S. brands or name brands like Sony, etc., are already reflecting much higher prices. While Chinese imports are actually incredibly cheap. I just picked up a 34-inch monitor for my daughter who's getting her new apartment recently.

And it was 150 bucks for a 4K 34-inch monitor. That's insanely cheap. Mike, let's tie all of this into monetary policy. President Trump says that Jay Powell ought to be fired for his failure to cut interest rates more aggressively. Jay Powell has almost alluded to thinking he needs to go the other direction, although I don't know that he said that directly. What should be happening here? Where should we be headed with monetary policy and why?

Well, the idea that, I mean, first, let's call out Powell's disingenuousness, right? So the Fed itself in 2018, as they evaluated the tariffs, made very clear in their research that it should be ignored for purposes of monetary policy. If anything, you should look through it to the economic implications of it. The bizarreness of saying, hey, let's increase taxes and therefore let's increase interest rates as well, that's absurd.

Right. Like, you know that that is not correct. But because it's tied to, quote unquote, prices and we imagine that every increase in price is an inflationary activity, the Fed is kind of on pause in this framework. Again, for me, that means they're keeping interest rates at too high of a level for too long, which is creating an incipient credit cycle, which we're just now discovering how advanced it is.

Does that mean that it's finally time to go long bonds here? I lean in that direction. But, you know, I've been wrong about this in part because, you know, Jay Powell very much thinks that the increase in prices means that they have uncertainty in terms of the economy. To me, that's absurd, right? You don't raise taxes and then say, oh, look, taxes went up. Therefore, we should increase interest rates.

This is the equivalent of tacking on a value added tax, right, or a sales tax. It would be absurd to penalize the market with less stimulus or with contractionary policy in an environment in which you've already introduced contractionary tax policy.

But I don't get a vote on the Federal Reserve. And Jay Powell also has significant political objections to the Trump administration. And candidly, I think that he's probably quite happy to sit where he is right now. Does that mean that bonds can't rally? It means they are limited, right? If the cash yield is at four and a half percent,

you don't have a lot of incentive to go out and make a bet that those rates are going to be cut until you start to see material representation of the weakness in the economy in the traditional data sets. And that's another area, unfortunately, where I think a lot of the changes that we made to try to adjust and accommodate in the post-GFC era are now candidly coming back and biting us and creating a lot of data that makes absolutely no sense whatsoever.

Mike, let's talk about a part of the market that you are extremely familiar with, which is high yield. You run Simplify's high yield fund. That ticker symbol is CDX, Charlie Delta X-Ray. Why would a guy like you, who's expressed a fair amount of, I don't know,

of conservatism or criticism that bull markets might be out of control. Why would a guy like you be investing in high yield? It seems like I'm missing a little bit, or maybe I don't understand what the investment rationale is. Yeah, I know. So that's a great point.

What we do that is unique within CDX is we actually hedge the credit exposure. So we have a proprietary index that we use, an equity long short overlay that is designed to replicate credit spreads and do so at very low to even negative costs. It takes advantage of a theoretical framework called the Merton model of capital structure

which says that, look, an equity is effectively a call option that sits over and above the claims of creditors to the company. Right. So it's the residual that's left over.

By constructing a index that is long, high quality companies that never really need to tap capital markets and short companies that continually tap capital markets, these would be serial refinancers, companies that are losing money, etc. What we're actually doing is effectively isolating the hitting the capital market or needing to tap capital markets factor.

And so by overlaying that with a high yield exposure, we're able to hedge out the credit spreads. That's the unique thing about high yield as it relates to other fixed income is when the economic conditions weaken, you see a credit response that impairs high yield. If you're able to take out that credit response and neutralize that,

You can actually feel very comfortable investing in the space. If I'm wrong and the economy is going to be totally fine, then high yield is going to do great. And my hedge is not going to hurt me too badly. I'll modestly underperform my benchmark, but significantly outperform treasuries. On the flip side of the equation, if I'm correct that there's an incipient credit cycle, then

My hedging allows me to actually reallocate capital at much more attractive prices while I've protected my investors from those credit spread widenings. I would encourage you when you look at the product, run it against an equivalent product like HYG and make sure you're looking at the total return components. You can see the outperformance that is created during credit cycles that just continually accumulates. And so over the history of the product,

We've had roughly 12 separate mini cycles of credit spread widening and tightening. During periods of credit spread widening, we add about 300 basis points versus the benchmark. During periods of credit spread tightening, we give back about 100 basis points of outperformance. The net impact of that is just to accumulate to outperformance over time, which is really the signature I'm always looking for in a market.

Well, Mike, I can't thank you enough for another terrific interview. But before I let you go, tell us a little bit more about what you do at Simplify Asset Management, where people can follow your work. And again, the ticker symbol, please confirm, is Charlie Delta X-Ray for the high yield fund?

Yep, that is the right ticker. At Simplify, I'm the chief strategist and portfolio manager. I was one of the early members of the firm. Simplify itself is actually an outgrowth from a regulatory change that was introduced in September of 2020. It's called the derivative rule alongside a rule change in 2019 that occurred called the ETF rule or very exciting titles we have here.

The ETF rule made it much easier to create new ETFs. It reduced the comment period. And then the derivative rule actually established the guidelines that allow you to do complex strategies like the overlays that I provide within CDX, basically bringing hedge fund like strategies to the ETF space. Now,

Both of these have actually been behind the explosion in ETFs that we've seen and have in many cases been used to create very aggressive products. I'll be honest with you, I'm a worrier, right? I like to actually present things in a way that reduces risk while potentially increasing return.

And that's really what we've tried to achieve with CDX, exposure to the high yield universe without necessarily the risk associated with credit. That is the primary issue that you face within high yield. And it is really important to understand that, you know, that has been created. Now, those components created the opportunity to take my hedge fund background and transition it over into the ETF space, which is a much more tax efficient and low cost manner

for the traditional investor to access these types of markets. You know, Simplify has grown from about $200 million when I joined in early 2021 to today, we are around $7 billion with approximately 25 different strategies offering exposures, about 40% of which are going to be in the fixed income space. Another 20% of that is going to be in various managed futures. I know you've spoken with Charlie Magara in the past about our managed futures strategy, CTA.

Those types of strategies really are powering the growth of the business. We are slowly making our way as we get those three-year track records into the Morningstar five-star ratings and the distribution into retail accounts that we had hoped to accomplish when we identified the opportunity. And so I've been really pleased to see how the firm has grown. We're really happy when we can help investors build their portfolios in ways that we think could be quite beneficial to them over the long haul.

Patrick Ceresna and I will be back as Macro Voices continues right here at MacroVoices.com. Now, back to your hosts, Eric Townsend and Patrick Ceresna.

Eric, it was great to have Mike back on the show. Now let's get to that chart deck. Listeners, you're going to find the download link for the postgame chart deck in your Research Roundup email. If you don't have a Research Roundup email, it means that you have not yet registered at Macrovoices.com. Just go to our homepage, Macrovoices.com, and click on the red button over Mike's picture saying, looking for the downloads. All right, Eric, let's start off with the equity markets. What are you thinking here? Well, Patrick, on a technical basis, we're clearly overbought.

But at the same time, I don't think there's any catalyst on the horizon, at least any immediate one, to bring on a correction. I think that's certainly possible. There's plenty of downside arguments. But I remain of the view that this is a headline-driven market and that anything is possible in either direction.

Well, Eric, let's just technically size it up. We have a primary bull trend, even if it's overbought. We had a 200 plus point pullback that basically came towards the 50 day moving average for a retest, got bought on dip. And now with Nvidia's earnings, we're seeing a market that's attempting to break this month's high and head right back for a double top retest of its all time highs established back in January and February, just above the 6100 level.

Now, this is still the path of least resistance, and there's no reason at this moment to expect this to deviate from this course this week, especially now that we're past NVIDIA. But we do have a pretty important jobs numbers at the end of next week.

which would be interesting to see if we find by the time our next episode comes that we retested the highs and then we're getting into that jobs numbers and maybe it causes some sort of a correction to ensue, solidifying that previous high as overhead resistance.

Basically, there's room to trade the market higher, but this is not a tactical new entry for the S&P. In fact, as we approach those previous highs, the risk reward of being long in the market from a trading perspective is substantially diminished.

We'll watch how it plays out. I don't see any immediate reason why there should be an alarm for the downside. But after we go and test out some of these highs in the coming weeks, we'll really see whether or not that resistance marks some sort of meaningful stock market top.

All right, Eric, let's touch on that dollar. Well, we're back above 100 on the Dixie, just barely. Looks like we're going to consolidate sideways for a while here before most likely resuming the downtrend. Of course, this could be the beginning of a reversal pattern. I don't see any sign of that yet.

We went back down to the previous lows to do a key bottom retest and we're bouncing. This is a very important level at the 100 mark in my mind because if that was a retest of a low and establishing the bottom end of this trade range after a very ugly bear decline in the dollar,

We could see a period where the dollar is just spending time consolidating, mean reverting. And we could see 102, 103 on the upside. That wouldn't necessarily make me bullish the dollar, but it is so oversold that it's hard to anticipate another major leg down this early in the year. Um,

if it was September, October, and we had a multi-month consolidation, could we have another full leg down in the dollar? It's entirely plausible, just not something that I think is a high probability here in the months of May and June. And so expecting this to be far more range bound seems the most logical thing, expecting that 99 level to probably be

the lower boundary of the zone and the 102-103 levels to be the upper boundary and expecting like a ping pong match between support resistance likely a very choppy dollar experience. All

All right, Eric, let's move on to crude oil here. Still grinding sideways here. I don't see a directional trade on flat price. I did put a term structure trade on this week, though. Buying calendar spreads, long CLZ 5, short ZLM 6.

The argument there is that an inflection point has formed in the, the forward curve that basically has put a whole bunch of contango behind the December contract and the backside of that with a bunch of backwardation ahead of it that can resolve either of a couple of waves. Well,

What I'm betting on is that what we'll see is the front of the curve will stay in backwardation as those first several months from December, January, February, March, as we get into the autumn months and those start to get a little bit closer. I think that those are going to move into a backwardation condition out of contango now. That's the impetus for the trade. The counter argument is we could be setting up here for a structural shift.

out of structural backwardation at the front of the curve into structural contango at the front of the curve. And it could be that we're seeing the beginning of a setup for that. So the trade's not without risk, but that's the only trade that I see that's opportune right now in the crude oil market.

There's no denying that there is a primary downtrend in crude oil. Persistently was making lower highs, lower lows, continues to trade below its 50-day moving average. Anyone that's trying to assess the primary trend has to acknowledge that it's still a bear decline. But we did see a direct double bottom retest of its lows. And now we're actually consolidating where negative news is not really spurring a new wave of selling.

This is a very logical place for there to be a consolidation. Now, if that ends up being the case, then the question here is with so many people being short, so much negative sentiment and no one having almost any interest in the oil market, is this setting up for a short squeeze? A short squeeze doesn't need to have a, uh,

fundamental reason for happening. It just needs to have enough traders on the wrong side of the trade to spur a liquidity-driven short covering squeeze that can rip. The last time we had one, it was a $10 plus rise in crude oil prices with no fundamental reason to doing so. So the question here is crude oil setting up for a short squeeze. That's certainly the puzzle to solve here in the weeks to come.

All right, Eric, let's move on to gold here. What are your thoughts? Well, Patrick, we just put in a lower high on the chart. The stochastics are still high, but rolled over. We're set up here to put in a new lower low or at least retest the recent lows with a double bottom or an undercut low or whatever your favorite outcome is.

I think, though, if that doesn't hold that previous low, $2,800 to $3,000 could easily be in play if we go towards a lower low. So I remain bullish long term. I would definitely buy the dip below $3,000 if that happens in order to add to my longs. But for now, I'm kind of bracing for a little bit of turbulence here before this is over.

Well, gold has now been in about a six week consolidation and, uh, we've pretty much held, uh, the 50 day moving average and all basic fib zones. This is still a primary bull trend and we're now trading right up along, uh,

a key trend line connecting all of the previous highs that is essentially something that technical traders are going to be watching for a breakout to see whether it's a re-resumption of trend. If we can see a breakout above this May high, it would open the window for a move up towards 36 to even 3700 on the upside.

And so we'll be watching what kind of bullish follow through that gold will be able to do and whether this hurdle is even beat. Like you were suggesting, if that breakout doesn't happen, the natural mean reverting corrections would measure down to about $2,900 to $3,000. But I'm not actually yet in that category.

because so far the bulls remain in control. So I'm going to give the bulls the benefit of the doubt that they're going to be able to break this out. And then we'll go into a more of a correction in gold thesis if we see that there's failed rallies and then eventually a breakdown below the 50-day.

All right, Eric, we got to touch on uranium here. What are your thoughts? Well, Patrick, President Trump's executive orders on nuclear energy signed on Friday were widely anticipated. Our friends over at uraniuminsider.com had been all over it for more than a week telling their subscribers what to expect, what was coming and so forth. So it was all

really a textbook setup for a sell the news event. I was bracing myself after seeing a really nice up day on Friday in my uranium positions. I was thinking that Tuesday after the holiday was going to be a heavy down day on that sell the news event. So far, the market hasn't sold the news at all. In fact, several uranium related issues have accelerated their rallies above their 200 day moving averages and are continuing to rally.

So I say it's game on for uranium. Now, at the same time, we're way overbought on a technical basis. So all we need is a catalyst here for a significant correction. I sure hope we get one. I'll buy that dip and add even more to my already overweight lungs when we get it. Well,

Well, it's interesting, Eric, because there's a tale of two types of charts. First of all, there's the uranium equities, which is exactly what you're referencing, which is there was an extraordinary punch to the upside where back in March and April, we were trading down, let's say on the URA down at the $20 level. Now we see it trading at $33 just above

month and a half later. Just an extraordinary rip trading right back to the 2024 highs. And so now can we just on pure momentum break to an all-time high? Well, that's like you're suggesting we're way over BOT going into a key overhead resistance.

And typically, you would have to assume that this is going to meet some sort of distribution up along the highs and create a consolidation. Therefore, like you were suggesting, we need to wait for a tactical buy-on-dip opportunity to be calling new long trades online.

for continuation, but it is definitely out of the bear market zone. And now it's just about dip buying for continuation patterns, which could easily take this to a fresh new high from the ones established last year. But when we're looking on page six to the Sprott Physical Uranium Trust,

The physical spot prices of U308 simply have not participated with the enthusiasm of equities. And this is the more interesting part. Are we going to see ultimately the U308 prices finally participate and we have a new bull market here as well? Is this just lagging behind?

Or is it a sign that the equities are way overdone and they're all about to mean revert if we don't see spot prices confirming this? That's a puzzle to solve. Overall, it really, from a technical perspective, makes a whole lot more sense from asymmetry to be long the physical uranium through things like the Sprott Fund.

than it is to be chasing these uranium stocks until there's been some sort of a correction to reset that risk-reward proposition. Patrick, you have a chart of the 10-year Treasury note in this week's chart deck. Walk us through it. Well, Eric, we have the Treasury yield around 450 basis points right now. It is above its 50-day moving average, and there has been pressure on bonds on the long end.

But where the real stresses are actually on page nine on the 30-year yield. We went for a direct retest on yields to the 2023 high, just over 5%. Now, this is the puzzle to solve. Are we now reaching an overhead ceiling where these are a no-brainer to own these treasury bonds up along these highs?

Or are we about to see something break in the long bond market? I mean, if we see a breakout to a fresh new high on the 30 year yield, there's going to be a point where the markets will start to care because something is not right.

And this is certainly the thing to watch as to whether or not this is now going to be the ceiling or whether or not something accelerates causing the long bonds to maybe have some sort of a list trust moment in the U.S. Now, I don't give that a high probability, but we are on a cliff's edge here on these yields. And we're going to see whether this breakout happens from probably within the week.

Folks, if you enjoy Patrick's chart decks, you can get them every single day of the week with a free trial of Big Picture Trading. The details are on the last pages of the slide deck or just go to bigpicturetrading.com.

Patrick, tell them what they can expect to find in this week's Research Roundup. In the Research Roundup, you're going to find the transcript for today's interview, as well as the chart book we just discussed in the postgame, including a number of links to articles that we found interesting. You're going to find this link and so much more in this week's Research Roundup.

That does it for this week's episode. We appreciate all the feedback and support we get from our listeners, and we're always looking for suggestions on how we can make the program even better. Now, for those of our listeners that write or blog about the markets and would like to share that content with our listeners, send us an email at researchroundupatmacrovoices.com and we will consider it for our weekly distributions.

If you have not already, follow our main account on X at Macro Voices for all the most recent updates and releases. You can also follow Eric on X at Eric S. Townsend. That's Eric spelled with a K. You can also follow me at Patrick Ceresna. On behalf of Eric Townsend and myself, thank you for listening and we'll see you all next week. Music

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