Equity Market Strength is Masking a Recession | Mike Green
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Hello, everyone, and welcome to this special edition of Monetary Matters. I'm Max Wheatley, sitting in for Jack Farley, who is on a much-needed vacation in the Ionian Sea. Today, I'm speaking with Mike Green, Portfolio Manager and Chief Strategist at Simplify. Mike, thank you for joining us today. Oh, it's great to be here, Max, especially on a Jackoff episode.

A jack off episode. That's what we'll have to start calling these. I actually just interviewed Vincent de Loire today and he said you had very differing views on the strength of the consumer. So why don't we start there? I would argue that the high end consumer has been relatively strong, although much less so rest of world. We've seen weakness in China related spending.

than in the United States. My assessment for why that consumer is so strong is probably at odds with what Vincent is seeing. I actually think that the Fed hiking interest rates, by and large, has transferred a significant fraction of income from the government coffers to the hands of those who are very wealthy. It's actually very much in line with the stimulus that was created through the PPP and the ERC, largely in fraud terms.

But, you know, there's just been a tremendous transfer to the upper end consumer. We're now seeing pretty strong signs that that's starting to falter. So things like travel, things like leisure spending, et cetera, are starting to get hit.

combination of running out of kind of the rage spending or the payback spending for being locked up in the pandemic. And then the simple reality that incomes are really not growing that rapidly. And in particular, employment is no longer growing very rapidly. Whether you want to accept that we had 140,000 jobs created in the last non-farm payrolls, or whether you want to extend

the type of revisions that have now been carried through, which is suggest it was more in line with the ADP number at about 40,000 in an economy with 150 million people working. Like these are very, very small rates of growth. And so the only path to significantly higher growth is either through a dramatic increase in productivity while maintaining that employment that's looking unfortunately increasingly unlikely.

Or because the government enters into a magnificent stimulus, not dissimilar to what happened in 21-22. And I just see no signs of this. I actually look at the Trump tax, you know, the one big, beautiful tax bill, and we just emphasize that the vast majority of the stimulus is the extension of the Trump tax cuts, which are between three and a half billion and four billion dollars of the five billion dollars worth of deficit increase.

What is not scored by the CBO in that is the actual tariff increases, which are roughly a trillion dollars on the opposite side of the equation. So you're actually talking about a combination package between student loan repayments now coming back online. That is a tax. Why is that a tax? Because the holders of student loan debt were getting paid. The borrowers of student loan debt were not paying it back.

That's simply another form of stimulus that flowed through to the economy. That's coming off. You're now seeing the actual tax cut, quote unquote, is really just an extension. And we have another tax increase in the form of tariffs. There's no indication that that is leading to a surge of investment back into the United States. The tariffs are exclusively on manufactured goods. We chose to exclude the services component where the U.S. runs a surplus.

The simple reality is that manufacturing payrolls continue to contract, even if I use the last non-farm payrolls, which I think will be subject to further downward revisions. So I'm just not seeing the stimulus that's going to translate to the income increases that Vincent sees. I think what Vincent is really trying to explain is why the S&P is where it is, why markets have rebounded so sharply recently.

And that, for me, has much more to do with my passive thesis than any sort of argument around government spending, etc. Do you think it's a return to sort of a normal pre-COVID level of spending for them? Or are we going to see more post-2008 level of consumer spending from this high-end group? Well, post-2008 was a really important period, right? And so people need to understand that 2008 was basically two separate recessions.

There was the first recession that was declared in October of 2007. And the S&P barely gave up any real gains over the vast majority of that time period. There was a second event, which was the liquidation of Lehman and to a lesser extent AIG.

that effectively created a situation where a large fraction of investable cash, that was those held by hedge funds or by others, was vaporized and turned into claims similar to what would have happened with Silicon Valley Bank had the government not stepped in and bailed out all the holders.

Had we not seen the decision by the Federal Reserve to expand its support for the banking sector in 2023, I think we would have seen something far worse develop than actually occurred.

This time around, we haven't seen anything that looks like that yet. We have not seen any conversion of cash into non-cash. Liquid assets remain liquid. There's no real sign that the banking system is breaking in a way that happened in 2008 that basically instantly cut off access to credit across the economy.

We just haven't had that event. This is much more of a gradual, wait a second, we're suddenly discovering that the people we're lending money to thinking that they were high quality credits with 700 FICO scores had 700 FICO scores because we were not counting their student loan payments, or we were not recognizing their buy now pay later. And so you saw a number of, it has been a number of analysis. Most importantly, the New York fed has recently come out with a paper

highlighting that effectively FICO scores were just wrong, right? We had five fifties and seven hundreds. Those seven hundreds are now going back to five fifties.

That radically changes your ability to access credit on the household side, but it's not a systemic event like 2008. We haven't had that catalyst that forces people to say, wait a second, I really got to batten down the hatches, not by choice, but simply because I can't access credit, can't buy a house. It's not a question of do I want to buy a house or do I find them a compelling value now that they've fallen in price? I simply can't access the credit to do so.

We don't have anything like that this time around. There's not a well-funded single family home buyer like an Invitation Homes that is out buying these things up. Instead, we're basically seeing them frozen at a higher level of interest rates. And until the Fed starts to cut, and I would argue cuts aggressively, I don't really think we're going to see a return to that. We're also seeing a freezing up of private equity. Why? Because they can't return capital to investors.

This is unfortunately a direct byproduct of some of my work around passive. Remember that an index fund is not going to buy a new IPO unless it's been gamed through the SPAC framework and that rule has now changed. So that's not going to happen again either. So I just don't see where the expansion in credit is going to occur

Many people are correctly pointing to overall bank credit rising, but that bank credit that is rising is almost exclusively going to what's called non-depository financial institutions, effectively the shadow financing area. And it includes things like the financing of levered ETFs. It includes things like financing private credit to buy secondary issues. It includes lending to hedge funds to go long short. And a big component of that

of that is actually short exposure and things like treasuries for the basis trades. So, you know, I'm not seeing this expansion of credit. If I were seeing it, then I would agree. But we're seeing the opposite. We're seeing an increase in corporate bankruptcies. We're seeing a dramatic increase in delinquencies in the household sector. These are not signs for an incipient credit cycle.

So if 2008, post-2008 is not a good analog, do we have a good analog for more of this gradual slowdown in credit availability? I would argue that it is more like the 2000 time period where we've entered into a regime in which securities are significantly overvalued.

but we have not yet had a sort of cathartic event. Of course, the other analog to 2000 versus 2008 is the level of interest rates has again become the risk-free rate, has again become kind of the defining component. We see some issuance on the investment grade side where effectively it's much more of a spread product. In the high yield, we just aren't seeing the issuance, right? And that ironically contributes to credit spread tightness

because a high yield fund, I happen to run one, you know, will typically receive between 20 and 25% of its underlying assets back as cash in any given year. It's running a little bit behind because we're not seeing the refinancing that we would traditionally see, but that also means there's not a call on my capital to refinance. And so I'm being forced as a high yield investor to decide, do I return that to my end investors in the form of yield?

Or do I reinvest those proceeds into a low issuance market, driving secondary prices tighter, even as the corporations themselves can't afford to refinance at this higher level of interest rates? So the risk is rising. We're getting closer to a point where basically corporations are forced to say, we really can't afford this. Therefore, we're going to strategically default

Or we're going to hit an environment in which the economy weakens and the Fed starts to cut. And then it becomes very much a question of how stable is the underlying business? How much capacity do they have to pass through higher prices? And the consumer is pretty stretched on that front, too. Right. Savings rates are down, particularly for those at the low end of the spectrum. They've exhausted their access to credit.

And while they only represent a small fraction of the overall spending, the behavior from that group, things like consolidating households, moving back in with parents, engaged in activities that are meant to raise their individual balance sheets. This is the paradox of thrift, right? That slows the overall economy. And remember, a recession isn't a 20% decline in economic activity. It's a 3% decline in economic activity.

So that lower end consumer can have a very meaningful impact. We're seeing this across multiple areas of the economy. Spending on education is falling. Enrollment is now falling for secondary education. This is before we cut off access to foreign students. There's a lot of areas of the economy that are actually looking profoundly weak that historically have been quite strong.

Are lower rates really the only way to fix this? It seems increasingly unlikely that we're going to get that, barring some sort of major downturn in the economic data. One, do you think we're likely to get that downturn this year and see cutting? And do you think cutting is necessary to alleviate some of these problems? I think the challenge is in part that cutting is part of the solution, but it's also part of the problem.

So we've been supporting the incomes of those who have cash. There's $7 trillion worth, $7.5 trillion worth of money market funds out there that are earning somewhere in the neighborhood of 4.5%. That's a $300 billion surplus that is being provided to individual households, the majority of which is held at that high end, that would go away if we start cutting rates. Against that, the hope is that it would reinvigorate buying in households, etc.,

but there's just not that many households. And there's a record number of homes available for sale in many regions of the country that have seen positive population pressures

The costs of those homes are far higher than they were. The listing prices and the cost of making those new purchases are unattractive. If we lower interest rates, that will offer some improvement in that area. But I'm not sure it's going to translate necessarily to a dramatic increase in home building activity or actual economic activity. It may break a bit of the logjam that exists at the back end on the existing home sales.

but there we're starting to encounter the reality that the baby boomers need to start selling their homes or need to start, you know, giving their homes to their kids in order to, to, to move on to that next stage of life as well. So, you know, I'm, I'm much more cautious than Vincent is. I'm just not seeing the signs of the reacceleration or the stimulus that he's hypothesizing. If we do see significant economic weakness, all, you know, then, then he could be absolutely right.

But in the event that we see that economic weakness, I would expect to see a rise in credit spreads. I would expect to see a weakness in us equities.

that is hard to argue is a bullish outlook at this point. What is the economic data that you think is going to turn down first that might force the Fed to step in and start to cut rates? Well, I think the weakness in the labor market is ultimately going to be the driver. And for all, again, the claims that this was a very strong employment report, remember, we're talking about even before we adjusted downwards for the expected revisions,

you're talking 140,000 jobs gained. That's a give or take a 1.8 million job growth rate. That's suggesting that employment is growing somewhere in the neighborhood of 1%. If you're going to tack on a 1% productivity improvement on top of that, you're now talking about real growth of the economy of 2%. This is not an economy that is on fire by any stretch of the imagination. And for all the headlines about the re-acceleration of the very strong nominal growth,

The reality is nominal growth has fallen in every single quarter for basically the past three years. We are decelerating the economy. That is not consistent with the claims that financing or credit terms or monetary policy is incredibly loose. It just doesn't match up with what people are seeing. Again, what I think people are trying to explain is the strength in the stock market.

And for me, that's much more about the growth of passive than it is about the level of interest rates or the productivity potential for the U.S. economy. So how far are we along in your passive endgame? Well, we are now well over 50 percent in terms of like clearly over 50 percent. Actually, Bloomberg and I have been collaborating on some of this analysis. They'll come to the exact same conclusion.

that passive penetration has now exceeded 50% of the US stock market. That creates both opportunity if it continues to grow in that direction, as you know, my analysis suggests the valuations accelerate upwards as passive gain share

And so, you know, if employment remains strong, if we continue to move in a direction where passive is gaining share, then the stock market can rise even in a period of relatively stagnant employment simply by replacing active managers with those who simply buy whatever has gone up the most recently. And again, that unfortunately predicts a lot more of the behavior that we've seen than the argument that

you know, there's some fantastic productivity and miracle ahead of us. I think this is one area where you and Vincent would agree. He does say that he believes that there's sort of like a permanent floor on U.S. equity multiples at like 17 and that it's just going to be higher than the historical multiples. Would you agree with that? I would agree with that, but I also would caveat it and simply note that if we look at what's happening to flows at this point, and I'll actually share a screen here.

So we see a lot of headlines about ETF flows being at record levels. But part of what's actually happening there is that that is money that is coming out of mutual funds and going into ETFs at this point. We are largely flat in terms of our overall flows at this point if I combine across mutual funds and ETFs. Now, again, that's missing the share gain that's coming from passive. And so it continues to translate to higher multiples.

But it's nowhere near as strong as it was, right? 24 were basically flat for the year, somewhat consistent with what we would expect around this type of flow pattern. If the economy continues to weaken, if job losses continue to rise, and we are now seeing claims start to break out of the range that they've been in, then you will actually see the equity markets weaken because that would cut off many of those who are currently buying passive.

But, you know, we're still this is a change, but it's not yet definitive. As I put in my sub stack this weekend, I'm not yet at the point that I want to engage the Bill Paxton from aliens. You know, it's over, man. You know, but it's getting closer.

One thing we haven't really discussed is AI in employment. I mean, are you one of the people who is scared about what the advancements in AI are going to do to employment? I do fall into the camp that says that AI represents a threat where we're clearly seeing that play out as the dramatic increase in unemployment amongst recent college grads. As I've highlighted elsewhere, the response to uncertainty is not to fire people. It's simply not to hire people. And we are seeing that play through and it's

You know, you have two choices with the AI revolution at this point. Either it turns into a facsimile of the dot-com revolution in which the money that was spent on communications and infrastructure to facilitate the transition to a high-speed internet

was ultimately transformative in terms of our lives, right? You and I are sitting and discussing things from probably 500 miles away from each other with seamless transaction or seamless transmission, I'm sorry.

You know, that would have been a miracle in 2000, right? We've looked at this and we're like, oh my God, what an incredible world. Now we're in that incredible world and we're saying, well, there's an even more incredible world directly in front of us. And I do think there's a lot of truths to that. I think that we are seeing things like AI emerge that are replacing that first year analyst, that are replacing the eager, but unskilled and untrustworthy individual, right? If you look at a first year investment banking analyst,

I think the official term for them is they are lower than whale shit, except for the fact that this is the aspirational job for most young people is to go to work for Goldman Sachs, et cetera. As Jamie Dimon and others are pointing out, many of the traditional roles are no longer necessary. Putting together an S1 prospectus is a matter of a few minutes for an AI. It can be a matter of weeks.

for a first-year analyst and the investment banking team that is relying on his work product. So will we see that? I think the answer is yes. I think that'll likely manifest itself as relatively low hiring rates for young people, as we've seen in other jobless recoveries that have occurred over the last 30 years.

But that tends to be more a function of the backend, right? So once you've actually gone through a recession and a relative cleansing and people more like me who will probably never get rehired again, right? We've had our working careers. If we lose our jobs, we're not going to retrain ourselves as, you know, Python programmers or anything else. We're basically just going to figure out how to reduce our consumption and make by make do with what we have at that point.

even as we become a consultant or various other labels for unemployed people at my age, that's where that is unfortunately likely to hit. And you're starting to see some signs of that. There are some upticks across demographic features.

The other thing I think that's really important to remember is that we've lost a lot of the geographic mobility. It's been replaced by elements like this, like being able to work remotely, et cetera. But with that in a bit of a retreat, it's going to be a little bit harder to go through that next stage, right? Mobility geographically in the United States.

has declined precipitously. That makes it harder to balance employment across geographic regions. It means that California falls into recession. Nobody wants to move to California, which reduces some of the population pressures. But likewise, it means nobody new is moving to California to fill those new jobs that may emerge. You have structurally higher unemployment that emerges from that.

The other thing I guess I would just emphasize about what we're seeing with AI and the advances that are happening is that it's what I call the productization of services, right? So if my job as a portfolio manager requires me to have many analysts involved,

I can only work as fast as those analysts. I need to add an additional analyst in order to increase my output, you know, random production of analyses on either macroeconomic or single stock factors. But if I suddenly have a computer doing it, right, then I don't need as many analysts to do the same job. And so unless the economic opportunities expand, unless new sources of demand are created by AI, which tends to take longer to fill out,

It tends to be faster to figure out how do I get by with less and accomplish the same outcome than it is how do I do something truly new and innovative that people are desperate to get their hands on. That contributes to these sort of productivity increases in recessions as I accomplish the same with fewer people. This has been a characteristic of U.S. recessions and recoveries since about 1990.

You know, that seems like the more likely outcome to me that, you know, first we figure out how to do the same with less and then we figure out what to do with the surplus if we can ultimately figure that out. Yeah. Instead of software as a service, it's service as a software. Yeah. Service as a product. Right. And we've been through this before. Like when we talk about washing machines, we used to have washing women.

Right. We no longer have washing women. We no longer have milk delivery people. We no longer have many of these things because we figured out packaging techniques so that milk didn't have to be delivered fresh to my home. It could be delivered fresh and stored in a central depository. We call it grocery store. Right.

We're now moving away from those components to things like, well, I get my groceries delivered by DoorDash. I don't. I think that's completely obscene and disgusting that you would pay that much to have your groceries delivered. Among other things, you don't get to pick out your own fruits and vegetables and meats, which I enjoy doing.

But the reality is that the grocery store itself was an innovation that now seems to be losing ground to other innovations, like a central depository that is then sent via DoorDash or I'm blanking out what some of the other, you know, Peapod or whatever, the delivery mechanisms.

I'm in the New York bubble, so I have a slightly different perspective on it because of the cost of land is so high and the grocery stores just don't quite have the room to have all of the different options. And I don't have laundry in my building, so I drop it off at a place where there is a woman who does the laundry. She uses a machine, but there are still laundry women here in New York City. So it is hard for me to wrap my head around what you're saying because I'm like, none of that has changed here.

Yeah, well, it actually has changed quite radically. So my daughter is about to move to New York. You know what the great new luxury attribute for young people moving to the city is? What they're searching for in buildings. Washing machines and laundry in the unit. Oh, yeah. That is the new luxury.

And it runs somewhere between $500 and $800 a month in the difference in rent, I would say, at that end of the price range. But I will tell your daughter that she's wrong and that dropping off my laundry for $20 for a bag and it coming nice and folded is something that she is going to miss out on.

I don't think so, because she has a mom and dad who tend to still do those things for her on occasion. But I am very sympathetic to your argument. I agree as a relatively well off 20 something. It's a great luxury not to have to do laundry and now have kids. Yeah, right. Different experience.

I guess, Mike, you know, none of this sounds particularly bullish, I guess, to pin you down to a view. I mean, are you calling for a recession here in 2025 or at least what we will look back on 2026 in 2026 and say, hey, that's when the recession started?

So I think the evidence supports that, but I also have to be very cognizant that I have been relatively bearish on the economy for an extended period of time and would emphasize that a lot of the conditions that I'm highlighting, things like the deterioration of credit, were actually underway over the past few years. And so many of the metrics, I mean, I'll share another funny chart with you for a second here. This is looking at

the Chicago Fed National Activity Index, when that is negative, you are almost inevitably in a recession if you exceed a year of negative reports, right? We had two full years of the Chicago Fed being negative. It bounced back slightly positive on the election of Donald Trump. It's now negative again and climbing. You know, there's a little bit of a joke here, right? Which is the 2015-2016 time period also saw a similar component that was labeled your imagination.

The recession in 2020 was obviously sharp and deep enough that it couldn't be denied. What we saw in the 22 to 24 time period was also by almost any classical definition of recession,

It didn't show up in headline things like GDP largely because of what's called the imputed components of GDP. So perversely, things like investment in intellectual property, the way that is calculated is it is derived from the profitability of companies that are using intellectual property

Things like putting your IP in Ireland, you know, you're not actually making the investment. You ironically are seeing higher profitability of that investment for a company like NVIDIA or Apple. That in turn is then being interpreted as, well, they must have made these investments in order to generate that increase in profitability. There's no room for the, you know, they've just got a lot more market power than they used to.

Right. So that actually has been a significant contributor to the GDP growth that has kept us out of the recession during that time period. Likewise, the surge in immigration created an element of demand that now is going away. But we won't know the full impact of that once we until we net out basically the impact on employment.

But, you know, it does look to me like we will ultimately turn around and declare that this period of growth in hindsight was much weaker than we had thought.

Again, the stock market really plays into that. You see the same analysis if you look at things like leading economic indicators. The only real positive contribution has come from the stock market. And this is one of my fears, that the dynamics that I talk around passive investing and how that inflates valuations are being increasingly used by policymakers and by those who are declaring a recession. And they're ignoring a lot of the evidence that would suggest we're already in a very weak environment.

This is, as you said, it's something that has happened now how many times in the past 10 years. This is something that you and Vincent would, again, agree on. One of the charts he brought up was the percentage of the trailing 10 years that were spent in recession. And he went back to like the 1860s. And during like 1860 to 1940, it was something like on average 40% of the past 10 years were spent in recession.

post into World War II. And after that, it dropped down to like 20%. And if you look at the last 16 years, it's 1%. 1% of the last 16 years have been spent in recession. Do you think that there is some degree of new normal in that, both for the reasons of technological advancements, just

the economy is less physical. You're not going to have gluts and the types of things that lead to recessions because we've oversupplied the economy and then prices fall off a cliff and that has its cascading effects. I think there are components of that, but I also think it's really important to recognize how much our economy has changed. So we've gone from an environment, if I go back to the 19th century,

in which if you were a local subsistence farmer, basically producing for your own demand, feeding your family off of your 40 acres with your mule, and selling a small fraction of your surplus to buy things from the general store, your net contribution to GDP was highly cyclical. It was basically tied to how successful your crops were.

That's no longer the case. People are by and large employed. The vast majority of our economy is derived from a smoothing function that says, "Well, there may not be demand for the product right now, but we've built an assembly line and therefore we're going to provide the product on a relatively consistent basis, producing it into inventory." That's why inventory cycles play such a large role in recessions.

But as more and more of the economy has transitioned to services, those are provided on a continuous basis. Right. I can only fill out the mortgage application. I can only fill out and process the mortgage application. Once you decide to buy the house, you know, my commitment to doing that is perpetual. You show up, I do it. You show up, I do it, etc.,

That's smoothed the economy in a meaningful fashion. Now has the contribution of perpetual deficits and a growing share of the economy that is tied to things like social security and retirement income, has that contributed as well? No question about it. We've smoothed the consumption pattern over people's lives. And this is one of the areas where actually Vincent and I would agree and also disagree. What that has meant is declining savings rates.

And those declining savings rates, more than anything else, have been a reflection of the fact that people think that their retirement is increasingly funded, either because of a stock market that is appreciated dramatically in multiple and in earnings going into the corporate sector, or because they have managed to accumulate significant assets through preferred vehicles like 401ks that give them a clear path, or at least a perceived clear path to maintaining their spending in retirement.

That means that we're heavily dependent on the stock market, right? And if the stock market is inflated by passive investments, that means as the valuations are rising, we feel better and better and better about our retirement. We need to save less. We're able to spend more. If I'm correct in my analysis of the impact of passive, once that begins to reverse itself and it manifests itself as falling valuations,

then that entire security blanket goes away and we actually return to a much more volatile environment. I would highlight places like Japan, where we saw the labor force grow and turn a growth stop and turn negative. You know, they had high levels of fiscal expenditures. They had a high level of services in their economy, and they still managed to get five recessions in the 1990s. So I think it's a very selective application

to look strictly at the United States during this period of transition. I'm not, I'm not at all sure that I agree that that's a sustainable front. Okay. So to pin you down on it, you think we've, we're, we're getting very close. Yeah, I think we're very close and you know, I lean in the direction of a recession in the back half of this year. I lean in the direction that actually that we're probably in a recession for most people in terms of their individual experience.

The perverse component that I would introduce is if the Fed starts to cut interest rates, is the impact on income far bigger than the impact that it has on financial assets. Okay. Now, what about financial assets? Do you think they will falter in this recessionary environment or has that permanently changed? I don't think it has permanently changed, but again, it is a function of how those flows are coming in. And so, you know, you've heard me use these multipliers in the past.

a dollar coming out of an active fund, which is the majority of the redemptions that we're seeing at this point, the vast majority, probably more like over 100% of the net redemptions are actually coming from active. We're still seeing contributions to passive investment strategies

Even if those netted out, as I was showing, if passive remains positive, the multiplier of a dollar going into a passive investment, my estimate is now it's north of somewhere around 17 to 20 dollars. Money coming out of active has a multiplier of about two. The net impact of those two, obviously, is we could have zero flows as long as it's positive for passive. It's going to continue to be positive.

If we start seeing withdrawals from those passive funds, and this is an inevitability as passive gains share as it becomes more than 50% of the assets, we're seeing more and more older households with significant exposure to passive investing.

It's important to note that that has not always been the case. So while I talk about passive at 50%, that's not homogeneously distributed. It's not like an 85-year-old has 50% in passive and a 25-year-old has 50% in passive. It's more like those over the age of 70 are about 25% passive and those under the age of 40 are about 95% passive.

And so, you know, we're continuing to see share gain, but we are seeing more and more older people who have passive and who are going to be influenced by the demographic features and start to sell those products. It's a simple math issue. Contributions are always going to be a function of incomes. Withdrawals are always going to be a function of asset levels. As asset multiples increase, as effectively a Buffett-type indicator of stock market to GDP rises,

That's simply a reflection of asset levels versus income levels. GDP can also be derived from income levels. That's telling you that we're moving towards an eventual point where passive selling will occur. And when that occurs, it starts to get pretty ugly pretty fast, at least in my models.

And that multiplier effect that you're describing, is that just the price elasticity of what the passive funds are buying versus what those active funds are buying? There's a little bit of that. So let me actually see if I can pull this up here on the screen to show you guys. I actually was just sharing this with Carson Block. Was he talking to you about his new strategy that is playing on this somewhat? To a certain extent. So, I mean, a lot of people are seeking me out for various insights associated with this stuff.

You know, I've played a psychological counselor to short sellers for the past five years or so as more and more of them became aware of my work on this stuff. People are starting to move into the exploitation phase, right? They're beginning to recognize some of the rules that work around this stuff.

and the really critical component that is driving the difference. So this is drawing on the work of Valentin Haddad, who wrote a paper in 2021 called How Competitive is the Stock Market? It's one of many papers that have begun to hit on the impact of passive investing. And his work is largely around the elasticity within the market, right? So this really hits on exactly what I was highlighting. The chart here is showing on the right-hand side, this is straight from Haddad,

Market capitalization expressed in log form. So 12 and a half is about $3 trillion in market cap. You can see there's just a very few number of companies out there. And on the Y-axis, we're looking at the elasticity.

The elasticity is basically a measure of how much does price change for changes in supply and demand. That's a little bit reversed from the way we normally think about elasticity in the economic sense. Elasticity in the economic sense is how much does supplier demand change in response to a change in price. This just reverses that process and says, how much does price change as a function of changes in supply and demand?

you can almost take the inverse of this elasticity. You can actually take the inverse of this elasticity and use it as a multiplier. So the largest stocks, those that are basically above a billion dollars in market cap, that 10 and above, you can see they are almost perfectly inelastic. In other words, the multiplier effect from a dollar going into these is now hitting almost 100X. So a dollar going into Apple or into Nvidia

causes the market capitalization to rise by, my estimate is about $90 at this point, a little bit more than that because they're a little bit further out the curve, right? In contrast, the multiplier associated with your traditional active manager is skewed towards these smaller stocks

And this 1.88 is kind of the baseline component. But even there, we're now seeing higher multipliers. And so this is contributing to when we see periods of redemptions like we saw in February, March, April, the price response to a shockingly small amount of capital is extraordinary to the downside and then the reverse to the topside.

So many active managers simply just don't own a lot of stuff out here, certainly not in proportion to the index because they can't. Yeah. Nobody's going to pay you. Nobody's going to pay you for what they can get for essentially free. Correct.

I want to switch now to a little bit more discussion. I'm going to put on my OPM hat. I want to talk about what's going on in the ETF industry. Obviously, the money is flowing into the large passive ETFs with the exception of like iBit. Eric Balkunis every day posting a new chart about how much money is flying into Bitcoin. I'd be interested about what the multiplier effect is there. But the other trend that I see a lot

is the leverage ETFs, the double levered products. I haven't seen anything come out of Simplify on that front. I mean, what are the trends that you are seeing in terms of ETF issuance and the ways that it's also distorting markets? Yeah, so this idea of levered ETFs is actually a super important one. And to be totally transparent, Simplify does have levered ETFs. We have...

levered treasury ETF. So you can use a three X expression

against a seven to 10 year bond to get the effective duration of a 30 year bond without being exposed to that point. That's obviously outperformed the 30 year in this recent sell-off. The reason I would argue for the sell-off in the 30 year is mostly tied to the fact that it's underrepresented in passive indices. So if you're buying something like the total bond index, the duration on that product is only about five and a half to six years

Once you start talking about things with 20 duration or even TLT at 15 duration, it tends to fall outside of that category. So it's not getting the same positive pressure that you're getting at the belly of the curve. I think this is one of the reasons that we're seeing a relative failure to respond at the long end.

The good news is that contributes to steepening of the curve. And so steepening of the curve then introduces the possibility of levered buying of 30-year bonds, et cetera. Once that steepness hits somewhere around 100 basis points, it starts to become on a risk-adjusted basis relatively attractive to start buying that. So I'm very much not in the camp of people who think if the Fed cuts rates,

that you'll see the long end go crazy. I just don't see that. I think it's the exact opposite. I think the dominant feature is always going to be the Federal Reserve policy. The long end, in other words, is just a series of connected short terms. The second argument that people are making around the fixed income weakness or relative weakness is that inflation expectations are running amok.

That is true if I look at something like the Michigan Fed survey, which is an internet-based survey, so methodology changed.

We saw the data start to deteriorate the minute that change was made. And frighteningly enough, there's actually increasing evidence that a sizable fraction of the responses to that are now bots. So we have no idea whether those are Chinese bots or Russian bots that are talking about inflation in the United States or whether they are Republican or Democrat bots doing the exact same thing from a tribal component. But that data has become effectively useless.

If we look at market derived prices for inflation, we're seeing the exact opposite, right? Most of the increase is actually in real interest rates. Inflation compensation really hasn't budged. It's been almost constant for the past several years. And there's no signs that the Fed is losing control of that curve, at least yet.

Could that develop and could inflation protection be underpriced? Absolutely. I want to be very, very clear on that, right? The same screw ups that cause, you know, various behaviors in equity markets can contribute to fixed income markets behaving in what I would argue is an inappropriate fashion. But that's a hypothesis. We don't, you know, I can't speak to exactly what the right level should be.

you know, I would expect the next inflation report that we get tomorrow, for example, to actually surprise people to the downside. That's simply a function of the residual seasonality that now plays through those indices as well. And Jerome Powell has actually done an admirable job trying to expose the flaws in how we calculate inflation. He's highlighted the difference between market derived prices and imputed prices.

Those imputed prices, most people think, well, that's the nonsense, the hedonic adjustments that tell me a car is cheaper today than it used to be. And actually, the irony is that those imputed prices are the areas where we've seen the most inflationary pressures. So those would be ridiculous categories like, how much does it cost me to obtain portfolio management services?

almost any rational human being would look at what's transpired in terms of the falling costs of managing funds and saying, well, that's obviously declining. But when you actually calculate the inflation on portfolio management services as being driven by the cost of the ancillary services, things like securities lending operations or the imputed costs that I'm giving up by having a checking account versus a money market account, those are being interpreted as rising costs.

And so we actually have this perverse component where the imputed metrics are the ones that are rising the most rapidly. The most notable amongst those would, of course, be owner's equivalent rent, which is really basically just a three-year moving average of realized rents. That number remains elevated while Zillow and...

You know, S&P, uh, Schiller, Schiller, et cetera, are all telling us that home prices. And for that matter, the Cleveland feds new tenant rent index are telling us the prices are down. Yep. Just went down. Right. Um,

So, you know, it depends. Do we want to govern ourselves by, you know, what CPI says, knowing the flaws and how that's constructed? Or do we actually want to use a more recent metric? And before anybody jumps through the screen and starts screaming at me about egg prices, absolutely. Some prices are higher, right? We've discovered that there's intense fragility within the supply chain in many agricultural areas.

you know, exposure to bird flu is becoming a real issue. Had the Chinese nationals that were researching, you know, wheat rust at the University of Michigan been successful in their research, we might have seen a dramatic surge in wheat prices.

Those are real effects that will play through and can cause prices to increase. I also just want to emphasize again that inflation is the change in the price levels. So the fact that eggs suddenly cost $4 or $5 as compared to $2 several years ago, I don't think anyone in their right mind was telling you that egg prices are going back to $2 or to $1, right? That may eventually occur. There are reasons to believe that may eventually occur.

But that's not the claim when you say inflation is now controlled and inflation proved to be transient in terms of the rate of change of the price level. The price level is barely growing right now. Most metrics, whether I use true inflation or everyday pricing indices to address the complaints about the Fed or the BLS's measure of inflation, they're all saying the same thing. Inflation is quiescent. It's below 2%.

Right. We're within target. The Fed should be cutting, but they're not because they're just as scared as everybody else. Well, and I think they've been abundantly clear that despite what they know about these factors, they are going to wait. Yeah, I think that's correct. And so, you know, the catalyst that will be required to get them to move in the opposite direction, we are starting to see that that is weakness in employment claims, unemployment claims.

Those have broken out. We are starting to see a divergence, a significant divergence develop between those who are eligible to participate in the gig economy and those who are not. I'll share one more chart on. See if I can pull this up. So this is looking at the unemployment rate on a Z score basis, right? So I'm normalizing it and then I'm isolating to a particular economic experiment we can conduct.

So those under the age of 25 in about half the states are ineligible to drive for Uber or DoorDash because of the terms of commercial insurance. It's the same reason why you may remember early in your career going to rent a car at the airport. They couldn't rent to you because you were under 25 years old. Um,

We've seen just an incredible divergence between the unemployment rate for those who are somewhat ineligible for Uber versus those who are. This suggests that the gig economy is playing a very large role in suppressing unemployment claims.

And where we would start to see that break is where demand for Uber actually starts to fall or where it begins to be replaced by automation. This is going to be one of those areas that falls into the category of it truly is different this time because we've never seen it, right? We had a very brief experience in 2020 with a recession in which people were eligible to drive for Uber. In

In part, that was so bad because getting into a quarrel with somebody else was basically a death sentence, as we believed at the time. Obviously, that's not going to be the case this time around. And so what is likely to develop is that we find people going into Uber-type unemployment where they themselves think of themselves as unemployed or not appropriately employed. But on government statistics, you're employed.

And this is unfortunately a really big explanation for this divergence between sentiment and what we're seeing in government data. I would argue as well for the 25-year-olds that the user experience for applying for unemployment is extremely complicated. I cannot imagine a 25-year-old being able to navigate the archaic system that exists in most states, considering how easy it is to just

Get, you know, you can get a loan for a burrito now in two clicks to get unemployment insurance is a or to get to claim unemployment is a 30 step process and you have to go fill out a form and some places you have to go into an office. Like if I was 25 and I had everything in one click, I don't think I could do that.

Yeah, I do think that there is an element of the UI experience for unemployment claims is probably something that Silicon Valley could invest some money in and improve dramatically. Unfortunately, that's contra purpose to a lot of what's happening. We're seeing rejection rates for unemployment. Again, remember, prior to 2021, if you had been driving for Uber,

they would have a very hard time identifying that you were engaged in that activity and you might be eligible for unemployment if you answered the questions properly. Now, if you're driving for Uber, you are ineligible for unemployment. So we've seen an explosion in rejection rates. Some states like Alabama are running, I think it's 250% rejection rates. In other words, you apply for unemployment, you get rejected, you apply again, you get rejected, and about half the people apply again and get rejected again.

And as a result, nobody's getting unemployment, right? It's not just the 25 year olds. It's basically everybody at this point. The fed is not going to start to cut until unemployment starts to rise. And we're starting to see the early signs of that. I do think that this will have progressed enough by the time we get to the end of this year, properly defined unemployment is significantly higher. We are seeing, again, I could pull up any number of charts that would show you that the unemployment levels that we're currently experiencing as a rate of change

would suggest that we're in a recession. Unfortunately, the data sets that we receive, things like the non-farm payrolls from the BLS, are hopelessly corrupted by things like the birth-death model at this point. We're getting the data from the quarterly census on employment and wages, which is an actual census of workers, and it just keeps telling us the same thing. Those jobs didn't actually exist. Those businesses that we thought were being created were improperly classified.

And unfortunately that flows through to all the data. Most people don't realize that non-farms payrolls are used to give us the data that we get on personal income, right? It's just a multiplier effect.

If we presume that the jobs are there, then we assume that GDP grew by an amount consistent with that. If those jobs are not there, we discover that afterwards we're supposed to revise the data down. As we revise the data down, which we've actually been doing, that perversely causes the growth rate to look better on the new data because we haven't yet revised it down.

So I think, unfortunately, we're going to wake up from this semi-nightmare or fantasy, as the case may be as it relates to the stock market, and discover that things were actually a lot weaker than we thought they were and that our data systems were largely leading us in the incorrect direction. Now, we have made it approximately 55 minutes into a macro conversation. I think we used the tariff word one time.

Do you think that any of that uncertainty will delay the Fed's action on a downturn in employment data? I think it will, but I think unfortunately it will because of political concerns. Right. The Fed did this analysis in 2018. They were very straightforward and said, you should treat tariffs as a one time event and we should look through it for policy purposes.

Tariffs are attacks. Yes, they are attacks that are levied against the importer. They're attacks you can avoid by substituting products or by building stuff domestically.

But the simple reality is this level of taxation applied against wholesale prices, which is what's being imported, are really not enough to cause a dramatic change in sourcing behavior. It's still going to be cheaper to pay a 30% tariff on imported Chinese goods than it is going to be to manufacture them in the United States. That may change over time. We may introduce additional export or import restrictions that change that calculus or choose to support domestic industry in a way.

but we haven't done it yet. And so, you know, this excitement about normalizing everything is really just another way of saying we've just levied a tax on consumption goods that are coming from abroad. It's a tax. It reduces economic activity. It doesn't increase it. And I think unsurprisingly, we're starting to see that flow through and things like the depreciation or decline in prices for services

Those are areas that historically have not seen price retreats, but that productization of services is contributing as more and more stuff moves towards AI. We should expect those prices to fall. And eventually those much lower prices will stimulate economic activity. But the short-term phenomenon is unfortunately negative. Okay. So what are the trades, Mike?

Well, I continue to think that people have gotten their panties in a bunch as it relates to the financing of the U.S. government. I am looking at real yields on a 30-year tip at 2.75% or 2.8% and saying you people are crazy, right? I'm looking at areas like high yield where I think credit spreads are way too tight. But again, the product that I manage has the credit spread enhancement to it.

I think the yields that you can get off of fixed income, if done properly, are more than capable of meeting the aspirational needs of the vast majority of people in retirement, particularly from these levels of assets. Could I be totally wrong and the depreciation of the dollar and everything else is the real story here? I don't think so, but it's possible. In that case, I'll simply be wrong and that happens.

with distinct regularities, my wife will tell anyone. But the reality is that on occasion you're given these opportunities where there's a market structure feature, there's really a lack of demand for that long end bid. It's very difficult to finance that because of the relative flatness of the curve. If the Fed starts to cut, I think we'll be surprised that we could very well go back to the zero or negative rate environment in relatively short order.

For all the claims that we're never going to see negative rates again, what do we see in Switzerland right now? It's negative. It's clearly negative. Wow. Right. So like we're back there again in many regions of the world. The fact that Japan is making any number of errors, in my opinion, in terms of conducting its monetary policy is one thing.

But look at China, right? Chinese rates are plumbing new lows. Inflation in China is not only quiescent, but actually falling. If you strip out the rice impact in Japan, and again, no amount of AI development is going to change the reality that occasionally rice harvests are disappointing. When you see those things being the driving factor, it's like...

I mean, I just have a really hard time getting super excited about inflation when simultaneously people are saying no one's going to have jobs.

and the dollar is going to collapse in value. Right? But integrating those two is really hard. If you are concerned at all about being wrong on bonds, what about something with housing? It sounds like you're bearish on housing. It's obviously highly tied to rates. Is there some way you could pair your buy on long end bonds with some sort of housing short?

Well, when you think about the housing short, I would characterize it as remember that the housing market is very different. And so in general, I don't like shorting housing because of the increased concentration of new home building, right? There are related areas associated with it. And I'd highlight that the most important impact of home prices is actually on things like consumer goods. You know, my expectation is that we are going to discover just like we did in the 2005 to 2008 time period,

that this perception that there's an incredible shortage of housing is simply wrong, right? What we have seen is we saw a period of dramatic expansion of demand for housing associated with the pandemic

Where you as an individual living in New York probably realistically had to get rid of a roommate or you had to have a home office and therefore needed more housing space. Or you chose to move from a city to a single family home in Idaho where your kids could continue to go to school or Tennessee if you were coming from California.

Those all led to a significant increase in demand for single family housing. That is exactly like what we've seen in every pandemic in history, right? People flee the cities, they move to the countryside. It creates a momentary surge in home price indices, which referenced the same housing unit. And then we ultimately discover we didn't really need it. And in an environment in which we're shrinking our population, we're deporting people, slowing immigration,

in which fecundity has collapsed, we're seeing very low rates of new births in the United States. It's just really hard for me to get particularly excited about the housing demand story, even as I can acknowledge that a higher and higher fraction of that supply, where it is needed in new locations where new jobs are being built, et cetera, is somewhat monopolistically controlled by the major home builders who also have unique access to financing, et cetera.

That is, by the way, another feature that is impairing consumer balance sheets. Many of the new homes that were purchased, which represented about half of the homes, very different than prior cycles,

where the vast majority of homes were existing home sales. The dramatic increase in the proportion that was new homes, many of those were financed with the teaser rates that we remember from the 2004 to 2006 time period. And now those rates are actually starting to roll off. People basically gambled and said, I can afford this house at this teaser rate. The Fed is going to be forced to cut.

And now the Fed is not cut and they're looking at their mortgage rate going from 2% on their teaser to 4%, to 6%, to 7% if they're looking at current rates.

Those are households that are being impaired in their spending ability. The housing shortage thing has always kind of reminded me of a statement Elon made where he was like, there's infinite demand for Teslas. Yeah. Right? And it's like the idea of a housing shortage is really a difference in whether you're viewing houses as assets or as some sort of fundamental human right. And there's going to be some sort of policy shift in how...

Houses are going to be priced and distributed to people. We're going to change fundamentally the way we as a society live.

pay for housing. And that's just a very different thing than a shortage. Yeah. And you can see that in the data sets, right? I mean, if we were to return to the late 1960s and early 1970s, in which significant fraction of housing that was built was publicly funded, basically projects, could you see that drive housing supply? Sure.

right? At the same time, many of those public entities are under increasingly stressed financials. And the fact that the big, beautiful bill is under as much pressure as it is, even though it's barely expansionary versus current policy, suggests to me that the demand there is simply not in place for a dramatic expansion in supports for that type of housing. Can it happen? Of course. And I

And I really want to emphasize this, right? If we see a significant risk off period and significant weakness in the economy, I'm under no illusion that we're not going to see a return to Biden era supports.

But we have to get there first, right? The idea that there's some major crazy stimulus that's directly in front of us, which is largely a function of interest rates being much higher than had been initially anticipated. And then the very anticipated reality that the off balance sheet financing that we'd done for entitlements like social security and Medicare are now coming on balance sheet as the boomers retire.

We're actually exactly in line with the projections for the CBO in terms of deficits that we expected in 2003. We're literally exactly in line with the exception of the fact that interest rates are higher due to Fed policy of hiking rates. And that's even after we captured the dramatic increase in government indebtedness from the GFC and the COVID stimulus. So this idea that things are somehow out of control

I just have a really hard time with it. Mike, is there anything we missed? You asked me about Bitcoin, and I would just emphasize that Eric Balcunas actually has his own answer. So BlackRock announced that they were going to include Bitcoin in their model portfolios. If I look at the flows into Bitcoin, it perfectly explains the price. You've seen my analysis on this in the past.

Bitcoin is incredibly predictable, tied to the flows. BlackRock announces that they're going to increase allocations and model portfolios and expand a bit. You're going to see a bit grow, right? This is a distribution based business. It's what we all aspire to. I spend a significant fraction of my time trying to get simplified products included in model portfolios precisely because they are a source of demand.

Right. So, you know, I unfortunately look at the price behavior of Bitcoin and again, it's almost perfectly explained by what BlackRock has done. All of the shenanigans around Bitcoin treasuries and everything else is having almost no impact whatsoever. It's just facilitating the exit by whales. Yeah. And I mean, the question for me has always been, will it become state religion? That question.

That is essentially what determines whether it gets into the model portfolios. Well, there's a component of that. There's also just a component of it's very profitable for BlackRock to offer a product like Ibbott and then have it accumulate assets in their model portfolios, right? So the money matters. I think it's much less about religion than anything else. Well, I'm not suggesting Constantine found God. It was in, you know, it was a political decision. And I think that's actually an interesting one. Um,

You know, most people don't pay attention to this stuff, even within the Bitcoin community. But if you look at what Luke Deshir is pointing out, he's like, look, Bitcoin screwed up. Right. The core development has now turned this thing basically into Graffiti Central. And there's actually a schism that is developing within the Bitcoin community that's not dissimilar to what transpired with the block wars in 2015.

What Bitcoin looks like in another six to 18 months, I have absolutely no idea. And it is entirely possible that it is adopted by the state, you know, in a religious framework. But man, that would be the end of the Western empire exactly as it was when Constantine found religion. And Mike, I will close with this. You spoke at the Solana conference, sign of the end of times. What is going on here?

Well, Solana is something very different than Bitcoin. So I just want to emphasize this. I have been perennial. It's one of the reasons I actually spoke up against Bitcoin is because Bitcoin is, in my analysis, fundamentally flawed approach.

The idea that a finite quantity creating scarcity that somehow translates into value is simply not supported by history. Where gold has been successful, it has, as you articulated, a function of a state decision to adopt it as coinage in order to limit counterfeiting, etc. But gold itself actually had a supply response. Price of gold rose. In other words, deflation in monetary terms increased.

That created an incentive to increase the supply of gold. That's what we saw in the 19th century. It's what we saw in the 20th century. We mine far more gold today, even though it's in lower concentration than we did 100 years ago.

Bitcoin attempts to do the opposite. It presumes that it can actually have value, even though there's no more primary production, where I think it is 19 and a half million of the 21 million Bitcoin that will ever be produced. About three million of those have been lost. And so the distribution of Bitcoin as it exists today is basically exactly what, you know, as most diffuse it will ever be.

And this was a prediction that I made back in 2020, that the Gini coefficient on Bitcoin would continue to rise. That has absolutely been met with the facts. It has not distributed itself. It is not more accessible. It is not democratized finance for people around the world. The simple reality is it is concentrated wealth in a small segment of the Bitcoin population. And as I was just highlighting, it's creating a schism exactly as you would expect.

Digitally native tokens and tokenization and securities being digital tokens is a very different thing. And that's what my presentation at the Solana conference was actually about. I introduced the concept of what I call fiduciary tokens. What these are effectively tokens that embed a smart contract that says up front, here's what I do. Here's how I can be used. Here's why you might want to use me.

And that actually prevents the contract from being used in an alternate way. So an equivalent would be a limited charter for a corporation. Charters used to be issued for a finite period of 21 years. And they would say, this is an entity for the purpose of doing X. If that changed, the investors had the opportunity to redeem their money and effectively say, we want the corporation to cease to exist. This is one of the key debates in the early stages of Ford Motor Company.

Today's securities are basically you fill out a bunch of paperwork at the front end and you say everything that they could ever possibly do. And then nobody really has any agency check against that. The fiduciary token flips that on its head. It makes compliance embedded within the security itself. I'm going to do what you told me to do. If I want to change that, I need to get a vote of my shareholders to approve a change in my charter and in my smart contract.

Those become incredibly powerful. And that's true financial innovation, which addresses candidly what I think is a lot of the nefarious innovation that's occurring in the ETF space right now, where it's largely about, can we triple lever Tesla or MicroStrategy? Can we offer you access to things with leverage? Eric Balkunis had a fantastic tweet earlier in the year, 2025 strategy and ETF firms had a

John, what's his name, from Mad Men, let's add Leverett, right? That basically is the strategy at this point. And it's a clear arbitrage. If you are an individual investor and you want to lever your micro strategy, the most you can do in most traditional frameworks would be to put on a full recourse margin account and maybe take a 40% margin position in your micro strategy. Now I can access it

at very low financing costs through a 2x levered vehicle, right? Is that innovation? Kind of, right? Is it a good idea? Not really. Everything that we're seeing suggests that the losses are just magnified in those products.

Well, at least the chance of going negative is now shifted to the ETF issuer and not the individual. I think that might be the one benefit is that instead of people waking up one morning and having negative $50,000, the ETF company is going to be the one holding the bag there.

Yeah. That just means it's been put back into the banking system through the shadow banking system. Right. That may feel better, right. And it may protect the individual, but going to zero is still a significant loss for many people. And, um, unfortunately the, the existence of these levered vehicles, it magnifies that multiplier that I was talking about. So if you're, you know, if you look at a multiplier on Nvidia and you think it's a hundred to one,

If you turn that into a 2x levered, it's more like 275 to 1, right? And the reason why is because you are doubling up your purchases in the same period of time, right? So you have a larger impact. The same dollar is causing a bigger impact in the security. So again, like if we continue to see growth of levered ETFs, this can power equity prices higher. We've totally forgotten this, but in the aftermath of 2003, one of the most prominent financial companies

theorist, the guy by the name of Michael Jensen, wrote a paper called The Agency Costs of Overvalued Securities. And it basically highlighted that it's just as bad, if not worse, for a company to have an overvalued share price because it causes it to commit to capital spending and actions that it otherwise might not have done, that would have preserved option value and built a longer term, more stable company.

Unfortunately, I think that we are very much seeing that today. I think the agency costs of overvalued securities are causing many corporations to invest in a way that is probably too aggressive long-term. And as I mentioned, I think there's a lot of similarities to the dot-com cycle where it became totally accepted that there was unlimited demand for bandwidth and bandwidth would remain richly priced. Instead, bandwidth collapsed 99.99% in price.

I think something similar is likely to happen to AI. As AI goes further and further down the development path, we're going to find that low-cost AI is probably more than adequate to solve many of the problems of converting services into products. And therefore, the demand ends up being far less than we think it is. It's a threshold component. It's like crossing 100 IQ. You suddenly are capable of doing things that you couldn't imagine doing at an 85 IQ.

Going to 125 IQ doesn't mean you can do those things significantly better. It just means you get bored with your job. I actually just interviewed a hedge fund manager, focuses on semis, hard tech, PhD physicist from Princeton. And he argues that it's more like cloud, that it's less like

like cable in the late 90s and early 2000s and more like cloud. And we have seen sustained continued investment from the same, you know, the hyperscalers, the same group of people are investing in this and they have seen demand be met, continuously met, and that the lower the cost actually increases the use cases, that the demand actually rises as the cost goes down.

Well, that's not the least bit surprising. That's just economic theory. So I'm not disagreeing with that at all. But there is actually an inflection point at which those lower prices translate to lower revenues. And so that is unfortunately what we saw with the Internet or fortunately what we saw with the Internet. The price of a megabit transmission has collapsed by literally it's one one thousandth of the price that it was pre dot com cycle.

Part of that was innovations that occurred in terms of bandwidth, right? So multiplexing, part of that was innovations in amplification. Even today, we're using a fraction of the fiber that was laid in that 99 time period. So it could very well be right that this ends up with continued increasing demand, but that will likely lead to a point at which we see stagnant revenues and ultimately falling revenues, just like we did with the dot-com cycle.

Otherwise, you know, the entire world basically revolving around paying for AI is the inevitable conclusion from that. And it simply doesn't work that way. Never has. Mike, I think you're underestimating our ability to not think and ask AI every stupid possible question.

I'd have to check with my IAI before responding to that. Okay. All right, Mike. Well, where can people find you? I know you're on Twitter, x at ProfPlum99. I know you have a sub stack now. Where can people read that? That is yesigiveafig.com. And then obviously you can find me on the Simplify website and the products that we offer and the materials that we share, where I also do our monthly podcast, Keeping It Simple. I encourage people to check it all out.

All right, Mike. Thank you so much. My pleasure, Max. Thank you. Just close this door.