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This was brilliant by @profplum99 on The End Game Podcast with @ttmygh and @fleckcap
Every idea is so well thought through and Mike is an unbelievable thinker. Fascinating to better understand his ideas and how he has come up with his views on passive. https://ttmygh.podbean.com/e/teg_0003/
Every idea is so well thought through and Mike is an unbelievable thinker. Fascinating to better understand his ideas and how he has come up with his views on passive. https://ttmygh.podbean.com/e/teg_0003/
2) End Game
So many moving pieces right now. Impossible to know the outcome or where it will come from.
There's no beginning, middle or end. We are here now and we will only see the end of the phase when everything has culminated.
So many moving pieces right now. Impossible to know the outcome or where it will come from.
There's no beginning, middle or end. We are here now and we will only see the end of the phase when everything has culminated.
3) Mike's passive idea
From Dec 2014 - June 2015, there was a huge rise in the Shanghai markets.
Securities were going limit up or limit down with no transaction.
Biggest record with one security was 32 days going limit up.
From Dec 2014 - June 2015, there was a huge rise in the Shanghai markets.
Securities were going limit up or limit down with no transaction.
Biggest record with one security was 32 days going limit up.
4) In 95 - 98, Inside Ownership (low float) was the best indicator of performance. Strong correlation with tech companies who had recently IPOd, so we saw the funds flow.
Same idea in 04, 05, 06. CMBS and CLO created to satisfy the flows in to the market.
Same idea in 04, 05, 06. CMBS and CLO created to satisfy the flows in to the market.
5) "If you operate on false premises, a lot of things won't fall into place"
Fixating on certain ideas and/or assumptions can hugely distort your thought process. Can blindside you.
Naivety of youth can combat this.
Miss one little piece and might not come together.
Fixating on certain ideas and/or assumptions can hugely distort your thought process. Can blindside you.
Naivety of youth can combat this.
Miss one little piece and might not come together.
6) Valuation
Far less focus on it today than in the past.
The purpose of valuation is to try to prepare yourself for assessment of what is happening in the market. This wasn't happening in 2016, which led Mike to delve further.
Far less focus on it today than in the past.
The purpose of valuation is to try to prepare yourself for assessment of what is happening in the market. This wasn't happening in 2016, which led Mike to delve further.
7) Passive
An initial focus on outflows and what would happen when the baby boomers retired and starting withdrawing. In reality, it was/is a lot more complicated than this.
43% (market cap) of the current market is passive.
An initial focus on outflows and what would happen when the baby boomers retired and starting withdrawing. In reality, it was/is a lot more complicated than this.
43% (market cap) of the current market is passive.
8) The 43% is not uniformly held.
Younger than 40 buy significantly more passive.
Older than 65 and hold about 15 - 20% passive.
Discretionary has been sold in exchange for passive products.
Younger than 40 buy significantly more passive.
Older than 65 and hold about 15 - 20% passive.
Discretionary has been sold in exchange for passive products.
9) Cash on the sidelines
Makes no sense as every buyer has a seller.
The buyer simply transfers the cash to the seller in the transaction.
Great piece by @MishGEA on this https://finance.townhall.com/columnists/mikeshedlock/2017/10/12/more-sideline-cash-nonsense-from-bloomberg-and-merrill-lynch-n2393783
Makes no sense as every buyer has a seller.
The buyer simply transfers the cash to the seller in the transaction.
Great piece by @MishGEA on this https://finance.townhall.com/columnists/mikeshedlock/2017/10/12/more-sideline-cash-nonsense-from-bloomberg-and-merrill-lynch-n2393783
10) Continuous price action
Price on the screen is where the last transaction happened and we assume that the next will be at that price.
In the March sell off, we saw a lot of discontinuous price action.
Price on the screen is where the last transaction happened and we assume that the next will be at that price.
In the March sell off, we saw a lot of discontinuous price action.
11) Passive vs discretionary rules
Discretionary:
Propensity to buy falls as valuations goes up to extremes.
Gating of funds - aren't going to liquidate at extreme low points (Saw this in GFC)
Discretionary:
Propensity to buy falls as valuations goes up to extremes.
Gating of funds - aren't going to liquidate at extreme low points (Saw this in GFC)
12) Passive rules:
If cash, buy. If ask for cash, sell.
Price is irrelevant - whatever you can get.
Knowing when to sell and how to sell is the hard part.
Seeing a change in how the market participants act as passive increases.
If cash, buy. If ask for cash, sell.
Price is irrelevant - whatever you can get.
Knowing when to sell and how to sell is the hard part.
Seeing a change in how the market participants act as passive increases.
13) Quality Junk
High junk stocks will have huge amounts of debt, so the equity is much more volatile as its value become residual.
Vanguard and Blackrock
Can't make money on 0% fees. Make their money from lending securities. Supply of securities to lend is very high.
High junk stocks will have huge amounts of debt, so the equity is much more volatile as its value become residual.
Vanguard and Blackrock
Can't make money on 0% fees. Make their money from lending securities. Supply of securities to lend is very high.
14) Distressed Credit
Buy the debt and short the equity.
Realised debt value is unsure, but return from shorting equity mitigates.
Rallies in bankrupt stocks gives no mitigation. Forced to sell by risk team.
Looking at past prices - you never know why someone transacted.
Buy the debt and short the equity.
Realised debt value is unsure, but return from shorting equity mitigates.
Rallies in bankrupt stocks gives no mitigation. Forced to sell by risk team.
Looking at past prices - you never know why someone transacted.
15) Logica Portfolio Construction
In a casino and roulette wheel is 55% black. Can't bet 100% as that could wipe you out in one spin.
Some variant of the Kelly criterion is needed.
Options provide the necessary non-recourse leverage to the portfolio.
In a casino and roulette wheel is 55% black. Can't bet 100% as that could wipe you out in one spin.
Some variant of the Kelly criterion is needed.
Options provide the necessary non-recourse leverage to the portfolio.
16) Discretionary to Passive
Imagine going from 100% discretionary (5% - cash) to passive (0.1% cash).
Move to 100% passive shows markets up by 50x. At the same time the volatility goes through the roof.
Imagine going from 100% discretionary (5% - cash) to passive (0.1% cash).
Move to 100% passive shows markets up by 50x. At the same time the volatility goes through the roof.
17) If you're the 0.1% of discretionary before it goes to 100% passive, what price will you accept to sell at?
What happens if passive decides to sell 1% and only 0.1% cash. There is no price that the market will clear at.
This volatility is apparent way before we reach this.
What happens if passive decides to sell 1% and only 0.1% cash. There is no price that the market will clear at.
This volatility is apparent way before we reach this.
18) Euler Coefficient - What the Fed thinks
States that people's propensity to consumer is a function of interest.
Reduce rates, saving not as attractive so people spend more.
All the empirical data states otherwise.
The Fed are actually creating collateral.
States that people's propensity to consumer is a function of interest.
Reduce rates, saving not as attractive so people spend more.
All the empirical data states otherwise.
The Fed are actually creating collateral.
19) Consider 60 - 40 Target date fund.
Fed buys 10 year treasuries - price up. Now greater than 40% in bonds. Target date sells bonds and buys equities.
We reach a stage where the optimal portfolio is a levered portfolio.
Fed buys 10 year treasuries - price up. Now greater than 40% in bonds. Target date sells bonds and buys equities.
We reach a stage where the optimal portfolio is a levered portfolio.
20) Markets in 1930s Germany
Laws passed that transactions could only happen at all time highs. Markets chugged forward with less volume and eventually cease.
In rebuilding, allies reopened the markets and led to a 90% crash in one day.
Laws passed that transactions could only happen at all time highs. Markets chugged forward with less volume and eventually cease.
In rebuilding, allies reopened the markets and led to a 90% crash in one day.
21) Reduction in liquidity is concerning.
No real way out for central banks now as so much pain would be felt to allow prices to return to fundamentals.
Logica was built to trade the game as is. Doesn't mean they necessary like the game.
No real way out for central banks now as so much pain would be felt to allow prices to return to fundamentals.
Logica was built to trade the game as is. Doesn't mean they necessary like the game.
22) Mike highly recommends:
- @ole_b_peters - found here https://ergodicityeconomics.com/
- Mind of Wall Street - Leon Levy https://www.amazon.co.uk/Mind-Wall-Street-Legendary-Financier/dp/1586482084
- Logica Pieces - https://www.logicafunds.com/blog-research
- @ole_b_peters - found here https://ergodicityeconomics.com/
- Mind of Wall Street - Leon Levy https://www.amazon.co.uk/Mind-Wall-Street-Legendary-Financier/dp/1586482084
- Logica Pieces - https://www.logicafunds.com/blog-research
