Michael Green, chief strategist at Simplify Asset Management, argues that the US equity market is in a late-1999-style bubble driven by relentless passive inflows. In a candid conversation with Wealthon’s Maggie Lake, he explains why price discovery is breaking down, why AI infrastructure may be over-built, and why high-quality bonds—especially US Treasuries and inflation-protected securities—now offer the clearest risk-adjusted opportunity for the decade ahead.
Green’s core message is simple: when every marginal dollar is allocated by market-cap-weighted index funds, valuation ceases to matter. Prices rise because inflows demand it, not because cash-flow prospects improve. The result is a self-reinforcing loop that masks underlying risk and amplifies volatility once the flows reverse.
Key take-aways from the discussion
- Bubble dynamics: Green sees “extraordinary concentration” in mega-cap names trading at 5–15× sales, reminiscent of dot-com euphoria. The difference today is that passive vehicles, not retail day-traders, are the marginal buyer.
- AI infrastructure: Massive data-centre build-outs mirror the fibre glut of the late 1990s. DeepSeek’s efficiency breakthrough hints that demand may be satisfied with far less capital than currently assumed.
- Policy overhang: Tariffs, antitrust and shifting political priorities erode corporate moats and inject non-economic risk into equity cash flows.
- Bond opportunity: Long-duration US Treasuries and TIPS offer real yields (≈2.6 % on 30-year TIPS) last seen in nominal terms during the 2010s. Passive bond indices are structurally underweight these issues, creating price-insensitive selling that Green believes will reverse.
- Currency and flows: Tariffs reduce the US current-account deficit and therefore the supply of dollars available to foreign holders of gold. A stronger dollar and lower yields would both benefit Treasuries.
Why passive investing changes everything
Green estimates that the US market is “well past” the threshold where passive behaviour becomes volatility-enhancing. Each incremental dollar buys existing weights, so the float available to active sellers shrinks. When outflows eventually occur, the same mechanism works in reverse: with no natural buyers, prices gap lower. He cites recent 100 % single-day moves in Kohl’s and extraordinary volume in Opendoor as early evidence of this fragility.
Putting the bond thesis into practice
Green’s preferred expression is straightforward:
- Lock in real yield: Buy 20- to 30-year US Treasury Inflation-Protected Securities (TIPS) directly or via a low-cost ETF. The 2.6 % real yield is contractual and immune to inflation surprises.
- Exploit index distortion: Longer-maturity Treasuries issued at 1 % coupons now trade near 65–70 cents on the dollar. Passive funds must under-weight them because the bonds are off-the-run; active investors can capture the pull-to-par.
- Hedge equity risk: Use Treasuries as a counterweight to equity exposure. If recession arrives and risk assets fall, duration should outperform.
- Currency overlay: Australian investors can hold unhedged US Treasuries if they expect further USD strength, or hedge if they prefer to isolate the real yield.
What could go wrong
Green concedes that a sustained fiscal blow-out or deliberate dollar devaluation could undermine the bond bull case. Yet he notes that China’s far higher debt-to-GDP ratio has coincided with falling yields, illustrating that flows and policy choices matter more than headline leverage. He also warns that equity bulls are implicitly betting on perpetual multiple expansion—an assumption that history has repeatedly rejected.
Bottom line
For investors seeking a decade-long plan rather than a quarterly momentum trade, Green believes the risk-reward now favours high-quality bonds over equities. Passive flows have distorted both markets, but only bonds offer a contractual path back to par plus a real yield that already compensates for subdued growth and inflation. In his words, “You know what you’re going to get over the next 30 years”—a clarity that the equity market no longer provides.