33: Passive Investing, and the China Conflict with Mike Green

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Hosted by
Will Jarvis

On this episode, I’m joined by Mike Green to discuss some potential downsides of index investing, the coming conflict with China, and more. Mike is a partner at Logica Capital Advisors.

Some things we mentioned:

Jack Bogle’s book.


Will Jarvis 0:04
Hey folks, I’m well Jarvis along with my dad, Dr. David Jarvis, I host the podcast narratives. narratives is a project exploring the ways in which the world is better than it has been the ways it is worse in the past or making a better, more definite future. I hope you enjoy it.

Will Jarvis 0:33
Could you go ahead and just give us a quick bio and and what you’re about and what you’re interested in? Sure.

Mike Green 0:39
So I’ve been involved with investments and markets for somewhere in the neighborhood of 30 years graduated from the University of Pennsylvania Wharton School of Business. As an undergrad went into management consulting, I really wanted to try to understand businesses recognize that my interest within businesses was largely around valuation and financial structuring. Left consulting to co founded a software company with some friends of mine from both school and the consulting world. With the focus of the software being on valuation effectively codifying the tools that I’ve learned to use over the first couple of years of my career. And to the extent any 25 year old can be an expert in something I become an expert in corporate valuation that actually unintentionally led into the public markets. Our software package was discovered by a gentleman named Mitch Julius, who is one of the founders of Canyon partners and is turned into a mentor throughout my career for me, Mitch suggested that we link our data at our calculation engine to the public equity databases, turned it into an equity valuation tool, which we then began to sell into the investment management space. And that led to the sale of that business in 1999, to a firm that ultimately became Credit Suisse. And at that point, I made the transition to the buy side, effectively deciding instead of trying to sell valuation expertise, I was going to apply that valuation expertise in the selection of securities. And I managed to get incredibly lucky because I did that six months basically, before the.com cycle blew up. And if it had been a year and a half, I’m not sure that I would have survived, because it was really, really brutal. But I had a front row seat as the.com cycle broke, and small cap value came to the forefront of a kind of valuation regime shift. And was just very, very fortunate to have stumbled into that situation. And over the next six years, successfully manage small cap value portfolios first, for the first firm, I joined the firm called moody all its partners, and then for Royce and Associates, which is the largest small cap specialists outside of fidelity. And then in 2006, mochilas came back and said, Hey, you know, you’re no longer a snot nosed kid. And we’ve got a whole bunch of equities. Would you want to join Canyon partners,

Mike Green 3:04
and launch in New York office for us and help us manage the equity risk in our portfolio? And I said, well, it’s funny, you mentioned that because first of all, yes, I’d love to that sounds like an amazing opportunity. And second, I actually think that equities are really really richly priced, particularly small cap value equities. And so I extracted the concession that I can trade across the capital structure and trade anymore, discretionary, global macro fashion, and was fortunate that that allowed me to participate in a number of things over the next kind of eight years, right. So I was able to be involved with the housing trade, I was able to be involved with the selling of volatility and providing the protection that the world was seeking in the aftermath of 2008 with black swan funds proliferated, that became a source of returns for me. I was able to trade into credit, I was able to trade in the FX. And so you know, really, it was very, very fortunate that I had that experience to move process at that then led to me being hired out of Canyon partners by Soros to launch my own firm, a firm called iceborn capital. That was an unmitigated disaster and was an interesting exposure to the dynamics of the legal system. I had a malicious lawsuit filed against me at the beginning of that by an individual who claimed that he had an agreement from me he had no agreement there was man. It was it was really quite destructive. but ended up winning that lawsuit but lost the war because right after I won the lawsuit, the CIO at Soros had brought me in guidance. And Scott Besant left to found his own firm key square and Soros just fired anyone who had anything to do with them. And I was, again fortunate in that after taking, you know, basically a year off to think about market structure and try to understand why what seemed very clear in 2014 2015 that this was kind of a replay of the.com cycle, right that, you know, the markets had gotten really expensive. The valuations suggested that everything should go down. We just didn’t see that right. And so again, I was I was fortunate in that my performance was positive over that time period. But I recognized that I was beating my head against the wall trying to, you know, run my portfolio on a valuation basis. And I just wasn’t seeing that, that coming through in the markets. And so I spent, you know, some I took some time off and cleared my head and, and really tried to understand the dynamics that were playing through. And that’s where I kind of started to wake up to the passive dynamics that people know me for this, this understanding that the market structure has changed. And, again, very fortunate that at exactly that time, a gentleman named Laci Peterson at AQR wrote a paper called sharpening the arithmetic of active management. And that paper challenged the seminal paper in passive management and Bill sharps the arithmetic of active management that was written in 1991. And that, for most people forms the core of why passive, right, so the arguments and Bill Sharpies are very straightforward that all active managers and all passive managers in aggregate have to own the same underlying securities. And therefore the only difference between the two is going to be fees, since the passive managers chose to charge lower fees than the active managers, then passive is going to outperform over time, right? The problem with that paper that Laci Peterson identified is that there that there are periods of time where passive investors cease being passive investors, right. And lastly, focused on the dynamics of index rebalancing. What I recognized was that it wasn’t just index rebalancing, that was actually a component that because of flows, there was a continuous need to be an active investor. And so what you really have with the Vanguard’s and BlackRock, so the world is money is continually making its way into their funds, which they then constantly need to be active investors allocating those flows into securities. And the minute you recognize that, then the question becomes very different, right? instead of searching for, you know, well, you know, how can an active manager outperform a passive manager, you recognize that they’re just fake distinctions? Right? What’s really going on with passive is they are active managers, with the world’s simplest, you know, algorithm, did you give me cash? If so, then buy, right? Did you ask for cash? If so, then sell? Right. That’s it. Those are the rules, and what proportion Should I buy or sell in proportion to how the stock is represented in the index? Right? Well, how does the stock changes positioning in the index? Well, it goes up or down, if it goes up, I allocate more capital to it. If it goes down, I allocate less capital to it. Right? That’s how an index construction works. And so what you discover is that passive investors are actually giant, super simplistic active investors with a massive momentum bias. And all of a sudden, things start making sense, right? Why has value stopped working as a strategy? because money is flowing to passive vehicles and passive vehicles invest on a momentum strategy, they reinforce momentum. Right now, does that change? Are there periods where that changes? Absolutely. Right. So in 2016, we saw value cycle that was driven off of the recovery from the January February 2016. Lows, right that drove a period of high vol, there was a period of high volatility and recovery that effectively reflected investors reinvesting in a thoughtful fashion right, so looking for value or things that matched it. That was a period of value outperformance. We just came through another one post Coronavirus. The active managers fled the market in March, right uncertain as to how to invest and as they attempt to reinvest, they’re forced to go and buy stuff that is now held by passive investors who are never going to sell to you. Right. So what happens the market exhibits increasing elasticity. And that simple insight I mean, it feels almost absurdly comically easy.

Mike Green 9:20
But the minute you kind of stop thinking about it in the context of, you know, active and passive actually meaning something and instead really obscuring the fact that they’re the same investor, they just operate off of different rules. They have to be active by definition, because they’ll sharp to go back to Bill, sharps paper, his definition of passive is somebody who never transacts Well, how does that person get into the market they can’t write. It has to be magic. Exactly. By definition, they can’t be passive investors, they can’t exist. And that just changes the way you think about it.

Will Jarvis 9:56
That makes a lot of sense. And Stuart and I, you know, we came out of college. We started with Looking at investing, and we’re like, wow, you know, Pat, you know, we read jack buggles book and we’re like, wow, that that makes a lot of sense. And so when Stuart actually found your work, we’re like, wow, this is this is a different voice. And we want to kind of bring you on and talk to you about this. Can you tell us what shifted in 2006 was 401 K’s? I think this is really an important fact most people don’t realize.

Mike Green 10:21
So in 2006, there’s something called the pension Protection Act and the pension Protection Act changed the character of how 401k is were used. So remember that, you know, this is almost a residual of the Cass Sunstein sort of nudge type dynamic right? concern was that, or at least the stated concern was that American investors were not adequately saving for retirements. And they needed that nudge, right, they needed an additional incentive. And so the pension Protection Act of 2006 had a couple of changes to it. One is it dramatically expanded access to 401 K’s and created significant incentives for corporations to offer 401 K’s it also created incentives for compensation in the form of employee matching, right? So all of a sudden investing through a 401k. If your employer offers you, you know, you withhold 6%, your employer offers you a 4% match, oh my god, that’s like a dream come true. Right, you know, you’re generating incredible returns simply by participating. The other thing that was changed is that the default vehicle that you were invested in, when you entered into a 401k, prior to 2006, the default investment would be a money market mutual fund. In other words, it would just become cash. And one of the big complaints is that many people did not ever change that election. And so they were just a accumulating relatively low yielding cash. Now that wasn’t a problem if it’s 1990 and the feds paying 9%. But as you look at 2006, this is still an environment in which the Fed was basically had lowered interest rates to near zero savings and money market mutual funds were returning very, very little. And as a result, it became you know, okay, we need to get people invested in stocks. Now, I will tell you, there’s a lobbying arm behind that and everything else. But what was decided was that the human resource manager at the company that offers the 401k would designate something as a qualified default investment alternative. And you would automatically flow into that. The first implementation of that tended to be what are called balanced funds. So you know, 50% stocks, 50% bonds, and the Vanguard’s, etc, the world realized that there was an opportunity for a more customized product that would better suit the objectives of a kind of overlapping generations model in the form of target date funds. And so target date funds are vehicles that invest in proportion to stocks and equities based on your age, right. So you start out with a 95% allocation to equities and a 5% allocation to bonds. And that falls over time to a 25%, or a 40% allocation to equities versus a 60% allocation to bonds. Those did not exist prior to 2003. Today, they represent the vast majority of incremental contributions in 401k. Plans. Right, and so a target date funds, like a target date fund complex, like Vanguard, you know, is giant, the aggregate target date complex has grown to around $3 trillion. Vanguard has close to 40% market share, which is very different than when you think about Vanguard ownership of the US equity markets, for example, right, they own somewhere in the neighborhood of seven to 8% of most securities. That 40% share, though, means that they’re controlling a giant component of incremental contributions. Right. And this is, this is what we’re seeing, we’re seeing the growth of passive being largely created through a very different demographic split, those who are over the age of 65, who control about 70% of the assets, their passive penetration only appears to be about 20%, the age of 40, who represent the vast majority of savers by number, but have relatively low assets, they’re like 90 plus percent passive at this stage. Wow, simply by virtue of the population aging, you’re moving to a model that is more and more passive. Gotcha. Generally, people don’t understand that, and that creates its own feedback loops, once you begin to recognize that the market structure is changing in that way.

Will Jarvis 14:36
Right, that that makes a lot of sense. And it does bring up the thought, you know, I think you may have mentioned this in one of your talks, but this this explain, part of the reason why Americans own so much negative yielding, like German bonds, is that they’ve got these automatic vehicles that are just you know, pumping it in from their 401k.

Mike Green 14:55
So Vanguard fund, Vanguard target date fund will typically seek it By the way, I use those mason jars to make moonshine so Oh, nice moonshine. We’re in good shape.

Will Jarvis 15:06
Yeah, we’re from we’re from North Carolina. So we love moonshine.

Mike Green 15:09
Um, but so this, this structure of the fixed income vehicles that these target date funds typically use will be things like what used to be referred to as the lemon bond aggregate right? In Vanguard world, it would be the vanguard total bond market index. So the vanguard total international bond market index, those are market indices that are constructed on the basis of the market value of investment grade or better credits that have been issued. And so vt, I think is vt VX is the ticker for the vanguard total bond index. BMD is the equivalent ETF, right? The structure of that index is such that it weights stuff on a market value basis. And the perverse impact of cutting interest rates is that when you cut interest rates, bonds that are longer in duration, and higher and coupon rise in price, right, the duration sensitivity matters. And so perversely, you end up with a, you know, on the lower your coupon is, the higher your duration, effectively, the longer it’s going to move, right. So, when interest rates get lowered, these negative yielding bonds rise in price and actually become the largest components of the index. And so, you know, you have this fantastic over representation of these indices buying negative yielding bonds and as a results, in many situations, the we see very different dynamics in terms of passive outperformance in active versus passive vehicles on the bond side, because the bonds, you know that that exposure duration that exposure to coupon, there’s many more ways the game can be played to improve the cash income relative to what we’re seeing in those products. But yes, you know, the simple answer is if you actually look at who owns negative yielding German bonds, and everyone kind of is like, who would buy this stuff? Well, the answer is your mom. Right?

Will Jarvis 17:08
That makes sense. So what you mentioned some of the negative effects, but But why should we be concerned about this, these massive inflows, and, you know, people aren’t thinking about this, it’s just automatic. And people don’t even know it’s happening in the past,

Mike Green 17:24
so I think there’s there’s two separate issues that are actually that are really important. The first is we know how this system works, or at least more accurately, like I’ve demonstrated how this system works as money flows in. The problem is, if money tries to flow out from passive vehicles, that lack of discrimination is going to manifest itself in the opposite direction, right. And the second problem that I would argue is that is occurring is because we no longer have a sense of discrimination or discounting embedded is the core component of how capital is allocated. We’ve lost much of the point of markets, which is to help us establish the marginal cost of capital for a corporation, right to to understand how capital could be allocated more properly, right. And that’s the objective of markets. We’ve perverted the message of markets into one that they are designed to deliver a return for savings, right? That there they exist as a utility for American retirements, or or UK or European retirements. That’s not what markets do. Right. That’s not what they’re supposed to do at least. And by confusing that role, I would actually suggest that we’re creating all the problems that everybody points to, right, you know, the Fed needs, there’s a brilliant paper that just came out, by the way that actually highlights the fact that the Fed has been captured by the fear of systemic risk, right, that the reaction function of the Fed changed when you introduce the concept of non diversifiable risk and a cap m type framework, right? Because, you know, the way it’s supposed to work is you’re supposed to bear the risk of the individual security that you’ve selected. But the market risk, the the aggregate risk, right, that exists, that’s non diversifiable. Well, the Fed views that as part of its role to smooth that process out and prevent the catastrophic effects of a generalized increase in the systemic risk factor, right, a crash in other words, or a major recession. And so if the Fed views that is its objective to prevent a crash to prevent a recession, then you create this general stagnation and zombification where companies that shouldn’t stay alive continue to receive funding and financing because the perspective is that the Fed will be there to bail them out. Under those conditions, right, and I think it all links back to the same underlying problem, which is, we fundamentally have forgotten that the role of markets is to set the cost of capital set the marginal cost of capital not to deliver a guaranteed return to you, me or anyone else in the room.

Will Jarvis 20:19
That makes sense. Stewardess, you have a question?

Unknown Speaker 20:22
Yeah. So I guess, with that issue of the MIS allocation of capital, yeah. Which, you know, manifests itself in zombie companies, as you mentioned. On the other side of that, I guess a company at a higher valuation, could raise additional equity cash, and go from there. What does that mean, for you know, us as an economy, corporate growth? What would that look like in the coming years if there’s this huge distortion, and misallocation of capital?

Mike Green 21:01
Well, a simple example of what that would mean is that an incredible amount of money gets wasted on, you know, Virgin, I’m gonna pick on a name, and I don’t research it, and I don’t care. But you know, Virgin Galactic, right, you know, tourism in space, right? Well, this is, you know, whether it’s it’s real or not, the simple reality is, is that the mechanisms of index inclusion and the SPAC process, have created the perception that this company has something to offer or any number of electric car companies that have no revenues today, but huge prospective revenues off into the future. We’re receiving the message that these are valuable entities, and we’re providing them with the capital that effectively allows them to hire engineers, that would otherwise be available to real auto companies like General Motors or a Ford, right. If those companies end up succeeding, then you have what’s called a positive bolt, right? You have positive effects, very similar to the positive effects from the build out of the internet in the.com cycle. I’m fairly skeptical that we’re seeing that right, what we’re actually seeing is resources being provided and tied up in unprofitable companies that are pursuing various forms of r&d or activities that offer very little reward. Right? I mean, space tourism, at some point, sure. Right, in the next five years, next 10 years. And I’m going to take the other side of that equation, right, but we receive a message from the market that says, hey, this is a super valuable component. If you believe that the market is trying to send you a discounting mechanism, right, there’s supposed to be information there. What I’m highlighting for people is, is that information no longer exists, what you’re increasingly seeing is a series of forced transactions created by systematic rules.

Unknown Speaker 22:59
Right. And, I guess with the way, you know, after learning of your core thesis of involvement of passive, it becoming one of the biggest players in the market, that combined with the Fed, which seems to be a similar situation, where now you have two of the biggest players in the market, that are saying we’re going to support this almost regardless of their circumstances, as it is currently. How does that trend, reverse itself? And I know you’ve mentioned in the past, some measurements of safe passive moves past 50%, of managed assets.

Mike Green 23:48
And so the question that you were asking very quickly, so just to reorient myself, you were saying, Is there anything that can stop this? You mentioned issues when it passes? 50%? Is that

Unknown Speaker 23:59
correct? Correct? Yes. What would if we go look to the future from here? What are the forces countervailing forces that could reverse this trend? And what would that look like?

Mike Green 24:14
So unfortunately, I don’t think there are a lot of forces that can reverse it other than regulation and adverse events, right, because the simple reality is nobody. There is nobody who is incentivized to listen to Mike green, right? You guys are generous with your attention and others who follow me in the financial media are generous with their attention. But the simple reality is, is that Vanguard and BlackRock control the regulatory apparatus, through lobbying activities, regulatory capture, the general narrative, etc, right. I mean, I am hopelessly conflicted as a hedge fund manager to tell you that you your interests are adversely affected by choosing to go with the cheapest solution to allocating your capital. All right, I understand that I there’s no reason for me to have credibility when making that argument the world’s smallest violin plays for the active managers who are charging fees for managing other people’s assets. Unfortunately, what that means is that I don’t think that this stops right target date funds continue to grow in popularity, the regulatory environment continues to favor allocating assets to passive vehicles. Recently in Australia, they just passed a regulatory ruling as it relates to their superannuation funds, which are similar to the 401 K’s in the United States. The rule is that if you are an active manager participating in superannuation, which is basically everything in Australia, and you underperform your benchmark for two years in a row, you are now barred from participating in superannuation. So what’s the solution set? Everybody moves passive. Right, right. Same thing is being considered in the UK, in the United States, under the Biden administration, one of the proposals is being evaluated for 401 K’s is that not only do you have the target date funds as the qualified default investment alternative, but once you’re in a target date fund to get out of the target date fund allocation would require you to pass a financial literacy test. All right, so now imagine your 25 year old and you’re trying to decide how you want to allocate on your 401k, you know, first year automatically participating in it second year put into, you know, you’re you’re 25 years old, so you’re put into something like the vanguard 2065 fund, right, that is supposed to pay off when you’re, you know, 65 or 70 years old, you feel very comfortable with that, and, but if you want to change it, you’re gonna have to pass a financial literacy test, right, like, nobody’s gonna do this, it’s already got a 5% plus share. Now we’re talking about raising the barriers even further. And so what that means is that no incremental capital is going to come into active managers. And you know, what people misunderstand at their core is they can look at the market and say, well, it’s 50%, active, 50% passive, but if it is more than 100% of the flow going into passive vehicles, and all of the outflows are happening from active managers, then the relative signal that they’re going to send to the market, right, the active manager has some form of value signal, they have some form of, you know, prospect for the future returns based on fundamentals, right, or at least they historically would have to survive, I would suggest they’ve increasingly become momentum oriented, right? You know, so the Cathy woods, it’s out of the world who basically say, you know, the price of Tesla going up means that Tesla’s successful, even if they haven’t managed to grow their revenue for a period of time, or their profits appear to be fake, and nobody does forensic accounting, etc, right. So like, all of these things become very challenging to unseat, right. And I just don’t think there’s a realistic prospect of it, which means that the markets are going to take on more and more of the character that they’ve already had. Right. And just the simplest form, every time you have a major correction, the marginal buyer and kind of a steady stream is going to be passive. And when you try to go back into the market, right, so the problems have cleared, what you discover is that those shares that you sold are no longer available to buy, right? They’re buried inside the vanguard, Borg. And so what’s going to happen to the price as you try to buy back in, it’s going to show higher inelasticity. In other words, the increase in demand causes the price to go up even faster. And this is just gonna keep playing its way through until we end up breaking the markets.

Will Jarvis 28:42
Got it? So what’s one to do? I mean, that that’s the million dollar question. Right? You just

Mike Green 28:49
know, I’m not selling the answer to that for a million dollars. Gotcha. Um, no, I’m the there is no easy answer. That’s actually part of the problem, right, is that what we need to do as a society is make some really hard choices among them, that we don’t rely on gifts from the market in terms of return to determine the adequacy of your retirement savings, right, you know, something that started in the United States and basically put it as the responsibility of every individual with a huge stochastic component as you approach retirement that basically says, you know, look, this is how you’re supposed to behave. All of that is all the theories of how markets work in a portfolio construction are predicated on ideas like the efficient market hypothesis, that empirically become less true, as more and more players are forced into systematic decision making. Right like by definition, the markets become less efficient. When people can’t make a considered but somewhat random choice right geometric Brownian motion ceases to exist. And as a result, markets impure become less and less efficient, even as the perception is they’re becoming more efficient because more of its being managed passively, right? I mean, anyone looking at what’s happened in this past year, would really struggle with the characterization of markets as efficient, right? We’re games from four to 400. Right? nobody in their right mind is actually looking at that and saying, Oh, you know, that represents the consideration of information that is available to, you know, basically everybody at the same point in time and reflects the underlying fundamental, that’s not what it means anymore. And we know that. And unfortunately, I would suggest that that also breeds an element of nihilism, right, which is people just are tired of trying to figure it out. And so what they just want is something that always goes up, right, so what’s our next step? Well, hey, Bitcoin goes up, right? Right here is if it actually has any value to it, right? demonstration, like Tesla is the price goes higher.

Will Jarvis 30:57
It’s very much like this indefinite optimism about the future, it’s just gonna, it’s gonna be better. We don’t really know how, in any concrete ways, but it’s just gonna be better to just buy the index.

Mike Green 31:06
Yeah, I don’t think it’s an optimism. I think it’s a cynicism. I think it’s a nihilism. It’s, I I very much think that we are going through the equivalent of the time periods of, you know, the peasants crusade or the children’s Crusade, or, you know, various forms of religious revivalism the differences, we just don’t have that religious overtone to it, right, we have a, we have a portion of our society that is split into religious fundamentalism, and then we have another portion of the society that believes that it’s deeply secular, but worships at the pillar of science, right? And climate change, right. microaggressions and, you know, various other stuff, right? So is it as a society, we are very deeply religious right now, we’re caught up in this fervor. And I think the markets are just another markets, Bitcoin and everything else are just another example of that, right? I mean, in all seriousness, I can tell you what I think happened to Bitcoin, or what I think happened to GameStop. But I can’t know it. Right. I mean, you know, like, there’s just too many competing explanations for it. And so at the end of the day, there’s an element of faith. And that faith, you know, faith applied in a cynical framework, that’s basically you know, I’m just gonna get rich, I don’t actually care if the thing is any good, or what I hear from people all the time, when I talk to them about the inevitable issues associated with Bitcoin, is they’ll say, Well, I still think the price can get to 100,000. I’m like, okay, so you actually don’t believe in Bitcoin. But you’re trading it on a greater fool theory, because you think you can get to 100,000 All right, that’s great. I mean, I, you know, your big boy or big girl, go in and do it. That’s, that’s your choice.

Will Jarvis 32:47
That makes sense. I wanted to ask you quickly, and move on from passive. What’s your view on the US China relationship? How do you think this ends up playing out? It’s a complicated issue.

Mike Green 32:59
Yeah, I was gonna say, so we got, we got 15 seconds now. Um, so I think the US China relationship is, unfortunately, one that was founded on mutual self deception. And like, any relationship that has a flawed underlying foundation is coming to its inevitable conclusion, which is a messy divorce. Right? And

Will Jarvis 33:30

Mike Green 33:33
the relationship between a centrally planned or centrally guided society, and a free market society in a pseudo free market exchange, inevitably is going to create opportunities for abuse, right? China by virtue of being able to guide its policy, and choosing very mechanically is making some of the same choices that Japan made under the Ministry of technology in the 1980s. Is that true? That proved to be very difficult for the US to manage. Right. So the challenges to the US auto industry. The difference between China in Japan is that Japan made a choice in 1990, that it was going to embrace itself as a US client. And so they exceeded to two limitations on on exports, they have ceded to limitations in terms of their policy. China doesn’t see itself that way. Right? It doesn’t see itself as a supplicant of the United States or as a client state, if anything it sees itself as an emerging rival. And as a result, the relationship between the two I think, is much more hostile. The US is both more afraid of China than it was of Japan. And China, candidly, is more hostile to the United States than Japan was. The irony is is that I think they end up the same place, or with similar outcomes for similar reasons, I think China may have a worse outcome than Japan did. The demographic pressures are similar, they don’t really have a, you know, the US has a unique feature in terms of being a geopolitical heavyweight, we have our own, you know, giant Island, effectively North America, right, where we have relatively friendly neighbors to the north and to the south. No need to worry about significant invasion from either of those. And then on either side, we’ve got these incredible moats that we call the oceans, right. And so staging and invasion of the United States to permanently take away our land or to permanently take away our resources is extraordinarily difficult. And it’s something nobody has managed to accomplish since the British in the war of 1812. Right. China’s a very different story, because it has tons of continental neighbors, some of which are of similar scale and resources. Certainly the broad cultural dynamic, right. So India, while it is smaller, economically is larger on a population basis, slightly larger on a population basis. The Middle East is significant. Russia is significant in terms of its natural resources and technological base, Europe is significant. They all occupy the same Island, right? They they can’t allow each other to grow to be the sort of hegemonic, that the US is there in a Nash equilibrium effectively, there’s constantly incentive to defect from any Alliance, right? That’s the work of Harold mackinder, you’ve probably heard me talk about it before, he didn’t know the term Nash equilibrium. But that’s the underlying state of affairs. So Japan was smaller than China. But like China, like it really has no prospects of ever rising to be a global hegemonic unless it captures all of its neighbors. And that’s really hard to do. Right? People don’t like to be people don’t like to be occupied. We’ve discovered that in the United States by virtue of our attempts to do so in places like Afghanistan and Iraq, right? That’s not a good policy. We didn’t like it in Vietnam either. Right? I mean, it’s just like, it’s not a good policy, it’s not easy to pull off. Right. And so I don’t think there’s a lot of prospects for China doing it successfully. But they’ll have to find that out for themselves. And my guess is, and you’ve heard me say this as well, I think they’re being goaded, but encouraged to do this by other players who want them to move too soon. Taking advantage of of, you know, China’s sense of, you know, the century of humiliation, now’s the opportunity to recover from the innate dynamics of you know, that that insecurity that comes from being a great nation, right, like they, they need to move faster. America is incredibly arrogant, right? And I understand how arrogant I sound in terms of saying something like this, but the reality is that we kind of earned that arrogance, right. And it’s not a function of us being better or anything else. It’s just geographically, we have this incredible asset that, you know, lay it on a, you know, board game and the game of risk, right?

Mike Green 38:23
How do you actually beat the United States, it’s really hard, really, really hard, really, are doing the best job we possibly can do it up. So it’s, you know, the way you beat us is you create, you cause our society to fracture. And we intentionally give up those assets, right? We create the two United States, and then we’re fighting constantly for superiority on the North American continent with ourselves.

Will Jarvis 38:47
Right? That makes sense? Well, one more really quick question, Mike, are you an optimist or a pessimist?

Mike Green 38:53
It depends on how you want to think about those terms. So I am an optimist in terms of the eventual outcome from human ingenuity and our ability to solve problems, when liberated to do so, right when we are when we are able to use a market system and a system of free market exchange, to communicate our wants and desires with each other. My sense is, is that human innovation will solve virtually all of those problems over time, right now wants are unlimited. So there will always be relative positioning, you know, and no one will ever be perfectly satisfied. But if I compare the ones that I have when I wake up in the morning, right, which basically consists of I want to lose weight, I want to be happy, I want to make sure that my children are doing well etc. Right? Like the vast majority of those concerns, pale in comparison to what my ancestor in a cave would have worried about in the morning, which is if I step outside the cave, am I going to be attacked by a saber toothed Tiger as they attempt to gather, you know, a subsistence level of berries and nuts, right? Man, I problems are really small. And I assign all that to human ingenuity. And so it’s tough not to look forward and say, the world is going to be a much better place. 100 years from now, I look the next five years, I’m concerned, guys, the short term is that we don’t want to make the hard choices right now. Right, right age in the process of kicking the can down the road. And we do so over and over and over again, and anyone who’s been through that process knows, that’s fine. If you know the road widens out, and there’s a recycling center at the end of the road where you can kick the can to. But if the road just gets worse, and worse and worse, right, you’re not actually solving anything done. I kind of think that’s it, you know, you’ve heard me say this elsewhere, what people tend to miss is the story of basically 1870 to 2000 was one of unbelievable expansion of human capital. Right, the global labor force in 1900, was somewhere in the neighborhood of a billion people, by the end of the 20th century is five and a half billion people with a record number of those able to communicate their interests and wants through market economies. Right, as I look at the next 100 years, that five and a half billion really only grows to about 6 billion. And that’s relying on very generous estimates of population growth in places like Nigeria and Indonesia, right? That’s a world that struggles for growth and struggles to solve the problems of how do we handle inequality, right? Because growth is one of those things that solves many of these issues. How do we handle the dynamics of deep, deteriorating population growth or negative population growth in many of the richer countries of the world, and population explosions in many of the more subsistence areas of the world? Right, I’m not Malthusian at all, I actually think that what we’re dealing with is almost perpetual level of surplus. But the unwillingness of the developed market to share its systems of laws, its systems of markets, with those in the developing world through things like immigration, you know that very clearly, as we’re turning against that as growth becomes more challenged. And I think there’s a link between those two, I think it’s a fundamental misunderstanding of what generates growth. But, you know, so to answer your question, optimist, long term, concerned about some of the short term issues, but ultimately quite bullish on the United States, as long as we don’t, you know, basically commit social suicide. That’s great.

Will Jarvis 42:37
Well, thanks, Mike. Where can people find you?

Mike Green 42:41
They can find me my house. only place you can be in Corona in.

Will Jarvis 42:46
Right, that’s right.

Mike Green 42:48
Now, the easiest way to find me is on twitter at profile app platform 99. You can find me I do a regular series on real vision, and you can find us find me and my partner lane on our blog at logical funds.com. Awesome.

Will Jarvis 43:02
Thank you, Mike.

Unknown Speaker 43:04
Thank you.

Will Jarvis 43:08
Well, that’s our show for today. I’m William Jarvis, and I’m Will’s dad. Join us next week for more narratives.

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