The Economic Divide Behind Record Stock Prices | Mike Green

Is passive investing the root cause of the major divide that we're seeing in the economy right now? And will it cause significant problems down the line if we don't get ahead of it? Today we sit down with Michael Green, CEO of Tier 1 Alpha Asset Management. He used to be the CIO and Chief Strategist at Simplify. The firm grew from $200 million under asset management to $14 billion in the last five years. Mike will tell us how passive investing is going to impact the future of markets and the economy. So if you think about what is actually happening in the fundamentals of the economy, we continue to see labor workers get less and less a share of the economy. Part of that is a function of rising monopolization, which itself is facilitated by how we've built our retirement system. I'm Siamak. Welcome to Market Insider. Mike, it's great to have you back. Welcome back on. Thank you for having me back. I really appreciate it. We want to talk to you about a number of topics right now. A lot is happening in the markets. You just started your own firm. We want to get into that later. But tell us about what you're seeing right now in the markets. Well, I think the really critical thing that's happening in the markets is that they've become increasingly mechanical in their implementation. And so I think, unfortunately, people are searching for information that is supposed to be conveyed through the market, right? We have the expectation of how cash flows or earnings are going to develop. And theoretically, we're discounting that back. If the markets are high, that means that the economy is doing well. I don't think that that is the case anymore. I think, unfortunately, the way that we've chosen to build our retirement system in the United States, in which it is increasingly mechanically directed by the mere presence of you having a job, right, which tells me very little macroeconomic information. If you have a job and you are a participant in the 401k system, as the vast majority of American households now are, we've gone from 25% participation to 65 plus percent participation just over the last two decades. That ultimately means that those flows are really tied to an information set that doesn't actually tell us anything about the individual companies or the behaviors. So when you direct those flows mechanically, it is creating price pressures that is pushing the market higher that ultimately doesn't convey much fundamental information to us at all. And that is becoming increasingly clear to more and more people that the fundamentals are separated from what we see in the actual economy. And what we see in the market and unfortunately our policymakers seem to be the last to be able to wake up to the joke When you say fundamentals are different from the market Do you say fundamentals of the economy or are you looking at the earnings of the companies themselves? Yeah, so it's both is the quick answer And so if you think about what is actually happening in the fundamentals of the economy We continue to see labor workers get less and less a share of the economy Part of that is a function of rising monopolization, which itself is facilitated by how we've built our retirement system. If you are going to allocate capital on the basis of market capitalization, that means you're going to send more money to the largest companies. That more money to the largest companies causes their prices to rise more than other companies because liquidity does not scale proportionately with market capitalization. It scales what's called sublinearly, meaning that every doubling in market capitalization, liquidity rises by about 75%. If you go from the smallest company in the S&P 500 at about $15 billion to the largest company at about $5.5 trillion, that's an awful lot of doublings that are occurring. And it means that there's much more impact in the largest companies that's driving consolidation in the markets and creating resources for the largest companies that unfortunately is much of what we see in our economy. Small businesses are struggling. The largest businesses are flush with cash and supported and able to make acquisitions or investments that allow them to behave in an increasingly anti-competitive manner with the rest of the economy. Now, why does the capital flows to them like that? Well, the quick answer is that it's actually a function of how market making is actually done. So if you think about a market maker, they're a facilitator of trading activity. Their profitability is determined by the spread between the bid and the ask, right? How much the market is pricing for something to be bought at and sold at. They are crossing that spread. So the larger the spread, the more profitable. And then as a function of the volume, how many of those shares are ultimately trading hands. When you think about the largest companies, it's a very competitive market-making environment. Those spreads are very tight, and there's also a significant amount of derivative financial products like options, et cetera, that demand those spreads be even tighter than they otherwise would for mechanical replication purposes. That means, ironically, that it's less profitable to deploy capital to the largest companies relative to some of the smaller companies. You may have seen the Wolf of Wall Street, right? You remember in the early stages of that, he's talking about how much more profitable it is to make markets or offer brokerage services for the pink sheet companies, the companies that are not properly listed. That's because they are exploitable in that phenomenon. It's that same phenomenon that means that the largest companies actually have less capital put up to facilitate liquidity on a relative basis than some of the smaller companies. And that is kind of the mechanical implementation of that. The secondary impact is as more and more money is going into passive indices, the size of the orders that they have to put in in order to match their market cap weighted allocations, their order sizes are rising relative to everybody else. And that means that you can very quickly clear out the available liquidity or what's called the order book depth in the largest companies relative to the smaller companies. Now, in terms of the indexing, how does that work that's weighting the bigger companies? Can you explain that quickly to our audience? Sure. So, you know, under the theory of an efficient market, right, the idea is that the existing market capitalization represents the best estimate of the wisdom of the crowds, the idea that everybody gets a vote and everybody has perspective on this and that we are capturing effectively the aggregate of those expectations. That's why there's a theoretical link to a market cap weighted index. You are theoretically buying everything in proportion to how much is outstanding and so ostensibly you're getting a picture of a total market in that process. Now the problem is that every stage of that we are making simplifying assumptions. When you talk about a total market in theory, you should be including the investment opportunity that exists in the local corner store. That's not included in the S&P 500 or in any total market index. You do not have access to companies that are privately held, for example. You also theoretically should be considering the investment that's available in your own human capital. You have the capacity to build your education or your experience base, and that is indeed an asset that is theoretically captured in that total market portfolio, but is nowhere present in how we currently allocate capital. And so we've already chosen a subset that we are going to differentially enable anytime we say we're going to put our investments into public companies. This is one of the reasons. Why we see relative lack of investment in small business in the United States, it's not publicly traded, and excess investment in many of the largest companies, and that gets exacerbated under the conditions that we're describing. So perversely, like many of the symptoms that we broadly see in our economy, the relative challenges of small business, the relative challenges of entrepreneurship, relative to the resources that are being provided to the largest businesses, have fundamentally changed the shape of our economy. And that is a byproduct of how we've chosen to fund our retirement system. All the people that shout about, well, we should just let the free market work. There is no such thing as a free market. Even go back to a primitive market like a Moroccan souk where you can go buy goods and services, primarily rugs and other things. Try to randomly show up into a Moroccan souk and sell your goods and services. You will be stoned out of the Moroccan souk because you are not an approved member of the exchange or of the market. It's not a free market. It's an imposed regulatory environment and when we make regulatory choices we are changing the structure of those markets. We're not receiving the information that quote-unquote market fundamentalists like Kevin Warsh think that we're receiving. Now in a sense from what you're saying we're preferring bigger companies in terms of investing in them because of this passive investing and the retirement money going there. We're excluding some smaller companies and We're excluding small companies, we're excluding the investment in young people that theoretically is part of the national investment choice that's available, et cetera. And so many of the symptoms that we see in our economy that make us think we're sick, right, underinvestment and entrepreneurship, the challenges of having to go to work for a superstar economy. If you happen to go to work for Google, you've got a great life. If you work for a small local business, you're pretty much struggling to get by. That is a byproduct of choices that we have made in our regulatory framework that everyone thinks are inconsequential, but they actually turn out to be incredibly powerful in their long-term implications. We want to come back to you with a potential solution to this. But before we get into that, tell us about the bond market. The rates are going up and the markets have been going up and the rates have been going up across the globe. Can you tell us how you see the bond market right now? Well, importantly, actually, they're going up across the Western world. So where we have chosen similar investment processes, primarily the marginal dominance of, again, this market cap weighting approach to bond markets, where people will invest through something called what used to be the Lehman Agg, and we all know what happened to Lehman, but now it's the Bloomberg Agg. Maybe the same thing will happen to Bloomberg in this next cycle. But this was ostensibly a measure of total representation in the bond market. Now in equities, the wisdom of crowds framework allows you to say, we actually don't know what the cash flows of these are going to be. And so we benefit from the use of the theoretical wisdom of crowds, even if it's not an accurate representation of what's ultimately going on, at least theoretically, we can make that case. But in the case of high quality bonds, like sovereign debt or high grade institutional debt or investment grade debt. We know what the cash flows are. And so perversely, when you move to a market-based representation, the variable that comes out of that is not the cash flows or an assessment of the future cash flows. Instead, what comes through is the cost of capital, which we call an interest rate and the shape of that across the curve. Unfortunately, my work suggests that what has happened in bond markets around the globe is that that improper representation of the market And the fact that we chose to invest along that front means we're receiving a very distorted piece of information in terms of interest rates and what they convey about the strength of the economy. It means we've ended up in a situation in which there are really two very different interest rates. One is the interest rate which normal financing, a house or a car or a credit card are occurring. That's what retail Main Street is seeing and we're seeing the result of those very high interest rates in a relative collapse in the quantity of sales and investment activity into the housing market or into the auto markets Where those have traditionally been financed what we think of as the interest rate sensitive portions of the economy Those are really very close to depression level Levels adjusted for our population increases perversely. We are building less houses today than we did in the 1970s when ostensibly we had stagflation. Despite the fact that our population has roughly doubled, right? So when young people talk about the shortage of homes, this is part of what they're encountering is the fact that the interest rates are inappropriately high, particularly for new housing construction, new automobile acquisition, et cetera, which is all a penalty that is borne by those who do not have assets and need to use financing in order to obtain those assets so that they can raise their income. So you need a car to get to a good job. You need a house so that your children have access to decent education so that you can then go have two parents work. These are all costs that are incurred and we ignore the impact of that interest rate on those sectors of the economy because we're seeing a second interest rate. which is the cost of building data centers and AI and in that market it's actually largely or at least has been largely financed by equity and the belief system that we're somewhat building a digital god right and you know what's the price of a digital god? What cost of capital do you use if you're going to create an all-powerful super intelligence? That solves all of our problems. But then it replaces all the employees. It replaces all the employees and everything else, right? What's the appropriate cost of capital on that? I don't think anyone really knows. Nobody really knows what those returns look like. And so really what we're unfortunately we're capturing is the activity that is being engendered by that inflated stock market valuation for the largest companies. That's being conveyed through an increasingly religious belief from their leadership that they are building the most important thing that's ever been built. If you are an independent thinker that's looking for factual information and when you read a story you want to know the multiple sides that exist in the story, you want to check out the newspaper Epoch Times, theepochtimes.com. We're actually part of the Epoch Times newspaper and the goal of the paper is to bring clarity for independent thinkers. Make sure to check them out and if you like, subscribe to them. Now let's go back to the rest of this interview. So from what you're saying, there's two economies, not only just in the stock market, but also in... And people increasingly characterize it as this K-shaped economy, right? If you hike interest rates, people like myself who have significant cash balances and significant resources suddenly get more income. The power is an inflationary condition at the top of the economy. My purchasing power goes up with interest rates. For most people in the economy, as interest rates rise, their ability to project forward their consumption and buy something like a house that you can't buy in a single period, finance a car, that's increasingly impaired. And this is driving the stress in our economy in which we simultaneously see the stock market rising to new all-time highs, which disproportionately benefits the older individuals who have managed to save and invest over their life. They're now seeing those assets inflated in value. And they're seeing the cash that they have accumulated offer them a higher return, lowering their need to work, lowering their need to make hard choices about what their consumption patterns look like, while the younger generation is increasingly disempowered in that same framework and forced to confront the reality that not only do they not have the ability to access these tools and resources that would allow them to move to the next stage of their life, But then the companies themselves are increasingly saying, well, why should we train employees if we're going to have a digital god that replaces all the employees going forward? It's to our benefit to hold off. And so we enter into this low-fire, low-hire environment that unfortunately is largely being borne by the younger generation. Now, is it possible for us to continue this way, or does it have to be a change made, or is it sustainable to have? One side of the economy that's doing really, really well, and then the other side, the other maybe half. I don't know what's the ratio. What portion is it half? Yeah, I mean, a lot of people who conspiracy theorists will basically say, well, this is a planned and intentional system in which this is being imposed. That eventually can happen. North Korea has a far more unequal society than the United States. Power and affluence is basically concentrated in the hands of a very limited number of people. The United States has historically had a democratic representation in which each individual gets to vote and therefore influence the outcomes. When we had a more equal society, another way you vote is with your dollars. As those dollars become more concentrated, the economic representation of this becomes increasingly separate. And as those resources further concentrate at the upper end of our economy, it then allows those individuals to influence the political system in a material way, either directly through graft or corruption, or through campaign advertisements, etc., that are designed to influence the outcomes in their favor. Historically, this is what was referred to as noblesse oblige, right? Those who are at the very top of the system have an obligation to those who have less access to the system to make choices that are against their own interests in order to facilitate a more equal and holistically inclusive society. We're losing a lot of that language. How do you analyze the midterm elections? I think it's premature to know how this is going to play out. I think what we're seeing in the repeated elections and which change of control of Congress or the Senate or the presidency. It's fairly rapidly, at least versus periods of history, shifting between Republican, Democrat, etc. What it's really telling you is that the two parties represent extremes on the political spectrum. So it's referred to as horseshoe theory, where basically the two extremes are actually more closely related to each other than they are to the center of the populace. And what you're watching is the center of the populace basically saying, well, that didn't work. Let's try the other alternative. And it looks like it's shifting back and forward. But the center of the distribution, I would argue, is actually remarkably stable. They just are people who want to be able to have children, have homes, have jobs, and live their lives in a largely, you know, self-determined fashion. But that's becoming harder and harder as the extremes basically compete for control of the overall resources and direction of the system. Going back to the markets, you know, some people argue that the earnings are at records. How do you see the earnings for S&P, for example, growing at records, and how do you look at the valuation? Is that also separate from the rest of the economy, from what you're seeing? Well, it's a feedback loop, right? And so when you think about these systems, you need to understand how they can become circular in reference. And many of your listeners will have seen reference to the circularity of AI financing, right? So if a firm like NVIDIA becomes remarkably well endowed in terms of its capacity to finance its customers, and the source of that financing increasingly relies on NVIDIA, Well, then those customers are not positioned to negotiate on the basis of price. They're simply negotiating on the basis of access. This is a broader concept that's really tied to the concentration and monopolization that has increasingly occurred in the U.S. economy. Competition is the heart of a capitalist system. People need to be forced to compete. We recognize at the tail end of the 19th century that many parts of that needed to be imposed. You needed to have the government enforce antitrust activity, and that was really what powered many of the improvements that we experienced, particularly in the aftermath of World War II, where there was an extraordinarily competitive environment in many frames. Lots of skilled individuals came out of the GI Bill and introduced new businesses that we now think of as much of the wealth of the baby boomers, et cetera, in the private sector. You have to impose that. Adam Smith wrote about this in 1776 with The Wealth of Nations, that the bane of existence of a capitalist economy is basically collusion and monopolization by the producers. And they have a huge incentive to do so, and if we don't actually create conditions under which that is frowned upon and punished, we will see more and more of it as we have seen. I'm seeing. In economics, a monopoly produces to their average total cost. That means that they will only engage in activities that are ultimately profitable for them across their existing business. A competitive environment is one in which production occurs out to the marginal cost, which is a much higher level of production. It means that some producers are going to be unprofitable and go out of business, and new producers need to emerge with innovative technologies. When you have underproduction, it means that those on the consumption side are basically scrambling for access to that. In many cases, that means households will need to borrow and put themselves further into debt to obtain what we think of as resources that are, quote-unquote, necessary for life, right? Access to health care in many situations or access to groceries and rent, et cetera, things that we take for granted. More and more households in the United States are finding themselves in what's referred to as a red queen race, where they are just running faster and faster to try and stay in place. What do you see in the future? Do you see us reconciling somewhere along the way, or do you think this trend will continue? I think it really depends, and I think it depends on the choices that we make. And this is part of the reason why I'm increasingly raising my voice on this, to try to help people understand what is happening in the world. Because the simple reality is, is it's a choice. You can decide that you're going to head down the path of the Roman Empire, in which you ultimately recognize that the... Substandard living conditions on the estates of Roman senators are not meeting the objectives of Roman citizenship and you pass laws that then say the citizens that happen to live on those properties can never legally live. This is the hukou system in China, this is why Joseph and Mary had to return to Bethlehem under the Roman system for a census in Bethlehem despite the fact that they lived elsewhere. Those costs can be imposed by a government that is ultimately captured by the elite and unfortunately I think we are headed in that direction. I think what you're seeing in the American electorate is an attempt to fight back against that system. And I think, candidly, we're doing a better job than many other places around the globe against these rising forces of authoritarianism. But there's no guarantee we're going to win. So essentially, you're seeing the financial markets and big companies. They are pushing for taking us to work. It's an integrated system, right? I mean, we pretend that finance and the market is separate from the economy at the same time that our political leaders point to the stock market and say, look how good the economy is doing, right? Like, that's absurd. We need to recognize that we live in a world in which there are repeated interactions. Every single person needs to wake up every single day and try to put forth their best efforts. And if they are not resourced in order to do so, They are going to be at a disadvantage against those who have surplus resources. That's the simple reality, right? And many people try to frame it in the concept of racism, you know, that there's white privilege or et cetera. Those are all canards. The simple reality is it's about economic resources. And if I don't have access to a car, then I have to take public transportation. If I cut back on public transportation because of the unaffordability of providing those services, then I'm taking a segment of our population that relies on those services and saying, you now have to work even harder to accomplish the same objectives. And that's increasingly what's constraining our society. So this is a country that we have had a very strong middle class compared to the rest of the world. Do you think there is going to be a breaking point for the way things are going if we cannot maintain this middle class? I don't know the answer. And so I think part of what has transpired is the American electorate is very different than the American electorate of the 19th century, in which many people had the flexibility and willingness, having already demonstrated their willingness to come from Europe to the United States to say, well, I don't like how things are going in New York, so I'm going to move to Chicago. And if I don't like how things are moving in Chicago, I'll move to California. That created the opportunity for reinvention. What we've seen in the United States is the rising cost associated with moving and relocating, giving up access to low-cost child care for your parents living nearby, for example, to move to a more robust job environment in a city in which you're not guaranteed that you're going to be able to obtain housing. That becomes an increasing barrier to optimizing the individual activities. And we see this in the data. The rates of mobility and people's willingness to move are collapsing in the United States. Which has historically been characterized by that flexibility of the labor force that wants to relocate, wants to move. Increasingly, we're becoming the serfs of the Roman Empire, where we are bound to where we were born. I, again, have been very fortunate in my life and my career to obtain the resources that allow me to move with impunity. If I want to move to Philadelphia, as I just did, I'll move to Philadelphia. If I want to move to California, I'll move to California. But for many people, those are barriers that prevent them from doing it. And our most elite within our society are increasingly largely stateless. They don't really care where they are because they are constantly in motion across multiple households and multiple polities. It's very similar to what you had as the political regime of old Europe, in which the nobility was tied by marriage across multiple, you know, Westphalian states. That meant that the people were never really actually receiving an aligned leadership. And I think that's really part of what people are reacting to in today's world. They feel that they are no longer represented by their leaders who are separate from them. Very interesting. And I think that's happening across parties. I think that's absolutely correct. We are increasingly dividing into a society of haves and have-nots. And the real risk is that the haves, regardless of their political alignment, say, The most important thing is protecting our have as compared to recognizing that we're increasingly creating a fractitious society that has the potential to break apart, whether that does so violently, whether it does so peacefully, whether it does, it occurs through a subjugation of the rights of the individual in an authoritarian setup, which is the classic cycle, right? You move from a democracy, which becomes increasingly dysfunctional as basically the elephants are dancing and we're all, you know, mice trying to avoid being stepped on. To the election of an individual who says, well, I'll solve the problem, right? And once you put them in that position of power, are they a Cincinnatus as we had in Rome and the model that George Washington tied himself to and which was the citizen governor who said, I resign and return to my farm? Or do we end up with somebody saying, no, I'm going to run for a third or fourth or fifth term as we see with Vladimir Putin in Russia? Now you brought up the Europe issues and Europe in general, right now they're going through a tough time, different countries in Europe. Are we similar to Europe or are we different? And what you're seeing in Europe with the unrest and the challenges they're facing, their bonds, the government, the rates are going up and they've gone up. Drastically, in certain countries like France, Germany. Well, so first, you know, for all the hype on what's happening in France, etc., and I do think it's legitimate we are seeing some differentials and dispersion is the technical term for it amongst rates in Europe as people assess the relative strength of Germany versus France, etc. Those are very minor. Relative to the aggregate move, which was simply driven by policy, Federal Reserve and other central banks hiked interest rates significantly in what I think is a flawed attempt to address the inflationary concerns. But... The behavior of French interest rates and UK interest rates and German interest rates, and for that matter, Australian interest rates, where they have debt to GDP of only 25%, and so ostensibly are not bound by these same phenomenon. Across the Western world, we've seen this shift in interest rates that I would argue is largely a mechanical output. The countries that are notably excluded from this are really China and Russia, where it's a separately imposed system and the capital is not able to flow freely across these regimes. And so they are, I think, much closer in many ways to the interest rates that we would be seeing in the United States if we were pursuing more appropriate policy. I just think our policy rates are improperly set right now. So you think the rates are completely tied to the policy? Not completely, but increasingly so. And I can walk through all the math on that, but I'm sure your readership would rapidly nod off to sleep and have no real interest in the conversation. You mentioned there is this separation, the K-shaped economy. We've been talking about it. A lot of people have brought it up. But are you surprised that the consumer spending is still hanging in there? Not at all. And I think this is actually one of the great ironies, right? If I have to spend 100% of my income, I can't save because I need to consume all of the staples of life, right? My rent, my food, my gasoline, my car, etc. Or my public transportation if I can't afford a car. If they already consume 100% of... Those necessities go up in price. I have to consume more and I will go into debt in order to do so. And that's exactly what we see at the lower end of the economy. That will continue until there is a catastrophic rebalance, which is called you move back in with your parents. And so this is a choice that we increasingly see in the younger generation. They're forced to live with their parents at a rate that no prior generation in U.S. history has really done. It's extraordinarily unusual for 30-year-old adults to be living with their parents in U.S. history because historically the opportunities were robust enough. Now they're being forced to suboptimize. Because they can't afford rent, or they can't obtain housing, or they can't afford the costs of participating, which is really what my piece, the $140,000 poverty line, was about. The costs of participating as a separate and distinct adult household in the United States is rising far more rapidly. So if you're forced to make those expenditures and your only alternative is to move back in with your parents, you'll go into debt and do so until you can no longer sustain it, and then you will make a catastrophic change. in which you will remove the housing and you will remove some of your marginal food consumption by moving back in with mom who will help you cook and prepare your food and you don't need a laundry because mom is now doing it or grandma is now doing it etc you don't necessarily need child care in the same way that you would if you were a separate and distinct household because your parents are now being suborned to provide those services for you that's what we are unfortunately seeing at the lower end of the K and that Consumer spending is going to hold up until it breaks in a material way. At the higher end of the K, right, the top of the economy, again, by holding interest rates high, we're actually increasing the income that they receive on their assets. And they aren't really being forced. Anytime you have real interest rates, meaning the interest rate is above the cost of inflation, that means that that segment of the society is not really suffering from the inflation at all. Where you do see inflation there, it's basically competition for extremely scarce resources, things like Vermeer paintings and true luxury goods, which I think is leading a lot of people to think that the story is all about real assets, right, and limited supply of extreme assets. That's really just the sign of a leading edge that is effectively forced to compete against a truly scarce resource. Now, do you think these numbers will get to a point where they will show up in the consumer spending when people are moving to their parents' home and cutting back significantly? Or do you think that the numbers of the higher end, the spending of the higher end luxury good will actually cancel this out when it comes to? Again, I mean, it depends, right? I mean, if you decide that your response to these stresses is to cut taxes. That is providing differential resources to those who have incomes high enough that they pay a significant fraction of their income in taxes. And so you are enabling those at the very top end of the K to continue spending a higher fraction of their income and wealth than those at the bottom end of the K who are already constrained by the available resources. You can nakedly try to buy the votes of that subset by offering them $5,000 if they vote in your direction. And I think, unfortunately, we'll probably see more of that type of activity. You know, how long it goes depends on the choices that we make. How far it goes depends on the choices that we make. And ultimately, you know, whether that process continues. And I just want to emphasize, you know, there was brief period of democracy and representation within Russia that is now gone. We take that for granted in the United States, and we tend to fantasize that it's going to be ripped from our fingers, you know, in some violent confrontation. Most of history suggests that it's actually, you know, a far more prosaic boiling of the frog, where it just gets slowly taken away from us, and eventually you're left with a population that doesn't actually even remember what it felt like to be free. Now, in terms of the fix, is there a way to deal with this now? How would you, if you had? We had all the resources to deal with it. What's the solution? Well, the solution set, unfortunately, requires a reinstatement of that noblesse oblige. Those at the top of the system need to recognize that the value of the system is greater than the value of themselves. And that is very much at odds with the narrative that exists today, both amongst the business elite and amongst the political elite, right? Donald Trump wants to believe that this is all a reflection of Donald Trump. He's a very minor actor on the stage in terms of most people's lives. They can express frustration or anger at it, but to my knowledge he's not showing up and helping them do their laundry. When you are talking about hard choices, hard choices involve sacrifice. It is not realistic to expect somebody who is barely making ends meet to make a similar sacrifice to those who are extraordinarily well resourced. And eventually we're going to come to a decision point where those at the top of the system have to decide that the value of preserving the system and the social harmony associated with it and being able to live in a community in which they participate more broadly, rather than deciding that they're going to retreat behind gated communities with the walls covered in glass as we see in many third world countries. Versus historically what's existed in the United States, which is that large, broad middle class meant that everybody experienced affluence and the rich were capable of walking downtown streets in the same manner that the average citizen was walking in downtown streets. That's increasingly gone. And, you know, it really becomes a need for self-reflection amongst those of us who are the most well-resourced as to whether or not we're willing to make the sacrifices for that. And history would suggest we don't have to. That's the sad part. And what are the sacrifices? How much is it? Well, among the other sacrifices is the recognition that most of what we're talking about in terms of stripping resources have largely been resources that have been stripped from the youngest among us, right? Mothers were stripped out of households, taken away from their children. We think about that as liberation of women, and for some it was. For many, it was an imposed condition that they couldn't afford children unless they returned to work. Now that's increasingly becoming a recognition that they simply can't afford to have children. And so many of the choices that traditionally reinforced that household environment, providing the resources for the younger generation to grow up in a relatively protected and relatively robust environment, are being slowly taken away. You're being forced to seek child care as compared to a mother being able to stay home. Now, I want to be very, very clear. I don't care whether a mother stays home, a father stays home, etc. But that investment in children is what is coming out of our economy. And we are increasingly pushing those resources to the older generation, the generation of millennials and Zoomers who are now beginning to confront true adulthood in which they make the choice, do I get married? Do I have children? Do I make the sacrifices? and being a parent is an extraordinary sacrifice. Do I make those sacrifices in order to build the next generation? They're looking at it and saying, nah. And that tends to be, you know, a real problem because, again, and go back to the Roman example, you saw falling fertility rates in the Roman Empire. This is actually extraordinarily well documented. Thank The Lex Julia, among other things, tried to enforce various levels of fertility onto the Roman populace in the face of falling fertility. you And it never works. You just can't do it. You can't force people to have children. You can't force them to make those sacrifices. very You need to actually provide the environment in which those sacrifices are quote-unquote worth it. So from what you're saying, much. we need to have a shift among the elite, people that are in these corporations, leaders of the society. We need to have a cultural shift in terms of caring more about the community, giving back and paying attention to the younger generation. I think that's right. And I think, unfortunately, what we're going through in the United States is a variant of a return of social Darwinism, the same thing that ultimately led to Nazism in the Final Solution sort of framework. But increasingly amongst the Silicon Valley elite, they treat it as a meritocracy that says, well, we're better and therefore we're doing really well, right? That's just neo-Calvinism for all intents and purposes. I am successful in life because I'm amongst God's chosen. Well, how do you know that you're amongst God's chosen? Well, because I'm successful in life, right? It's a circular argument. The reality is, is things like IQ and things like access to nutrition in childhood and things like access to sufficient and efficient and effective education. are all choices that influence long-term outcomes. The inherited component of that is significant, right? If you have a high IQ and you marry a high IQ or you reproduce with a high IQ individual, the odds are your children will have higher IQ. But IQ is far from dispositive in terms of outcomes and certainly not meaningful for the vast majority of people. Just remember, the vast majority of us are firmly huddled around average. All right, there's not that much difference in the averages in terms of their components. And I know that people are screaming at the screen and saying, no, this group has X IQ and that group has Y IQ. And understand that that really doesn't actually describe much of what's happening. It's the tails or the extremes of IQ that the information sets, as you see in terms of determining outcomes, are largely occurring. If you have 170 IQ, you are truly gifted. You are able of accomplishing any number of things that the average human being is not capable of accomplishing. If you have a 70 IQ, you are impaired on that same front. But the vast majority of people that are in the middle, it really shouldn't matter. And we need to actually wake up to that and recognize that many of these people that have been successful aren't nearly as smart or as gifted or naturally resourced as they think they are. And that's a very hard dialogue to have with people, right? You've been more lucky than good is not a narrative that plays particularly well. And being in the society that the legal system and the opportunities that this country has with the capital being free, that's how a lot of these people have built these companies, right? Well, I think that's actually a really critical one to think about, right? So access to the legal system for most people is a fiction, right? If you actually face an adverse consequence by a multinational that did something to you, right, a car that is a lemon or an insurance company that refuses to pay out or medical care that refuses to meet the expenses that you would have anticipated are being covered. You really don't have many resources unless you band together in a class-action lawsuit. The cost of accessing our legal system has created a condition for most people that it's a farce. And for those who are at the extreme end, it increasingly is weaponized, right? If you try to take action against Amazon, Amazon is going to sue you into oblivion. We see large fines that are paid by multinational corporations for violating laws that for many individuals would result in fines or penalties that would destroy their lives. And if you're a large multinational corporation and you receive a $500 million lawsuit settlement against your bad action, you just pay it and you go on. It doesn't matter. It's not material in terms of the impact of it. That's really the difference in economics as I try to promulgate it versus what many other economists focus on. In economist speak, this was called a dynamic stochastic general equilibrium. The idea that everything like solves for a stable point. An economy is never stable. It's like a river. It's not never the same, you know, one day to the next. It's different water that is flowing through it. And so what we really need to think about is the repeated interactions and when individuals can't access the legal system and they aren't adequately resourced with effective education early in life, it's not reasonable to expect them to be able to pursue the opportunities that exist to them in the same manner as somebody who's been resourced their entire life. And if you think about how that plays out, somebody who wins and wins and wins and wins Because they never really faced a real challenge or competition. They can easily interpret that as, well, I'm just naturally gifted. And the reality is you are largely lucky. And so you have to give back. You have to give back. And that, you know, that to me, I'm not a religious individual. I want to be very, very clear. But I very much support people's involvement in religion because it's one of the very few social tools that we have that force people to say, wait a second, I'm a part of something bigger. Mike Green, it was great to have you back on. Thank you so much. Thank you for having me. Tell us what you think about the passive investing. And did you know that bigger companies are getting a lot more money coming into them? Make sure to tell us in the comments. I'm Siyamak, this is Market Insider. We'll see you next time.