In a recent discussion, market veteran Michael Green offered profound insights into the forces shaping financial markets today, drawing upon decades of experience and a deep understanding of market structure. From the formative crash of 1987 to the rise of passive investing and current economic dislocations, Green provided a framework for understanding market behaviour that prioritises forced action over desired outcomes.
Green’s journey through the financial world began with the pivotal 1987 market crash. This event, alongside the film ‘Wall Street’, sparked his interest and instilled a fundamental principle: markets are driven by what participants are *forced* to do, not what they *want* to do. This concept has remained central to his approach to understanding market dynamics.
His career included significant roles at Canyon Partners and running Peter Thiel’s family office. At Canyon, he was involved in shorting the ABX index during the 2006 housing market peak. Notably, this successful trade was initially intended as a hedge against a long equity position, highlighting the unexpected ways market forces can play out.
A particularly insightful period came during his time with Peter Thiel, where Green focused on market structure, specifically the growing influence of passive and systematic strategies. This led to identifying fragility in the inverse VIX complex, culminating in a highly profitable trade on the XIV product’s collapse in February 2018. Green explained that this event was triggered not by internal market dynamics, but by a regulatory change (the Federal Reserve’s CCAR provision) that altered the capital costs of being short volatility, forcing market participants to unwind positions.
Green argues that the term “passive investing” is a marketing misnomer. He views it as a systematic, algorithmic process, primarily market-cap weighted, that simply buys when cash comes in and sells when cash is requested. This process reinforces momentum and, crucially, adds money to assets that have gone up, regardless of fundamental value or prevailing market conditions. He contends that this systematic flow-driven behaviour has become a dominant force, overwhelming fundamental analysis.
Key points on Passive vs. Active:
- “Passive” is better understood as systematic or algorithmic investing.
- Market-cap weighting reinforces momentum, buying more of what has already risen.
- Passive flows have reduced the market impact of fundamental analysis.
- Active managers, while potentially adding value through stock selection, are often hampered by shareholder flows (money entering/leaving funds based on past performance).
- The dominance of flow-based trading (e.g., payment for order flow, index arbitrage) means market information is increasingly focused on flows rather than fundamentals.
Green links this shift in market structure to current economic dislocations. He describes the present situation as a “mini COVID,” where known economic weaknesses (like potential tariffs) are not immediately reflected in market prices because flow-driven strategies dominate. Markets, he suggests, have lost some of their forward-looking capacity.
Addressing the current economic environment, Green highlighted the risks associated with high levels of government debt ($37 trillion against a ~$27-28 trillion economy). While acknowledging that a sovereign nation issuing debt in its own currency cannot technically go “bust” in nominal terms, the real risk lies in the potential for that debt (viewed as national equity) to be devalued through inflation if people lose confidence in the government’s stewardship and convert their holdings into immediate spending power. This risk is amplified when combined with policies that increase the tax burden on the populace, such as tariffs and student loan repayments.
On the role of alternative assets, Green offered a critical view of Bitcoin, describing it as a system built for wealth extraction and concentration due to its hard-capped, deflationary nature which he argues makes it unsuitable for widespread transactional use and detrimental to debt-based systems essential for young people accessing capital. In contrast, he views gold as a historically proven tool for temporarily exiting the system. Gold’s price responsiveness to innovation (increased mining at higher prices) differentiates it from Bitcoin’s fixed supply schedule. The current rise in both Bitcoin and Gold prices, in his view, signals a clear message from the market: a desire to exit the traditional system due to a lack of trust.
Green also touched upon Artificial Intelligence (AI), characterising Large Language Models (LLMs) as a “universal interpreter” for human-machine interaction. He sees AI as a powerful tool for talent magnification, education, and service provision, but anticipates a potentially painful adjustment process for the workforce, akin to the transition from agrarian to industrial economies.
Green is currently writing a book titled ‘The Greatest Story Ever Sold’, which explores the impact of passive investing on markets and society, questioning the notion that market outcomes necessarily reflect merit or truth.
Here are some charts illustrating the performance of key global indices, yields, and gold, relevant to the discussion:
Putting into practice:
- Understand Market Structure: Recognise that market movements are increasingly influenced by systematic flows and policy decisions, not solely fundamental value.
- Question Passive Dominance: Be aware of the potential fragility introduced by large, systematic strategies and their impact on price discovery.
- Consider Policy Impact: Pay close attention to government policies (tariffs, debt levels, regulatory changes) as they can trigger forced actions in the market.
- Assess Trust Signals: Monitor assets like gold as potential indicators of declining trust in traditional financial systems and currencies.
- Look Beyond Fundamentals: While fundamental analysis remains important, acknowledge that flow dynamics can override fundamentals, particularly in the short to medium term.
Michael Green’s insights underscore the complexity of modern financial markets, where the interplay of structure, policy, and human behaviour creates dynamics that require a nuanced understanding beyond traditional valuation metrics.