Passive Investing's Endgame and America's Hidden Precarity Crisis with Mike Green
Markets weren't designed to provide retirement security—they were designed to price capital. Mike Green's research reveals how the Pension Protection Act of 2006 accidentally created a system where more than 100% of marginal capital flows into passive strategies, fundamentally breaking market mechanics. Meanwhile, we've been measuring poverty with a formula hard-coded in 1963 that now describes fantasy rather than reality.
These aren't separate crises. They're symptoms of the same problem: asking systems to do things they weren't designed to do. Passive investing grafts social insurance onto capital allocation mechanisms. The poverty line multiplies a food budget representing 5-7% of household expenditures by three, pretending it still represents the one-third it did sixty years ago. Both are accelerating toward breaking points because we changed objectives without changing systems.
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What We Cover in This Conversation
Why Mike chose Vizzini from The Princess Bride as his avatar: understanding actual rules versus being clever
The critical flaw in Sharpe's 1991 "Arithmetic of Active Management": passive funds trade continuously, making them perpetually active systematic strategies
How the Pension Protection Act of 2006 created a market where more than 100% of marginal capital became "passive"
Why contributions tied to income and withdrawals tied to asset values create fundamentally unstable dynamics
How Mike stumbled onto the poverty line calculation and "felt sick" understanding what it meant
The 1963 origin: families spent one-third of budgets on food, so HHS tripled the USDA minimum food budget, then locked that number in place
Why that same food budget now represents 5-7% of household expenditures, not 33%—making the poverty line meaningless
The real number: for a family of four in Caldwell, NJ, the inflation-adjusted equivalent isn't $32K—it's $140K
The "valley of death": benefit cliffs where earning more makes you functionally poorer
Why childcare became the single largest budget item for young families when informal support networks collapsed
What we've forgotten: capitalism requires redistribution for system sustainability and provisioning the next generation
Key Takeaways
Passive investing isn't passive—it's a systematic algorithmic strategy that trades continuously. Sharpe's 1991 framework assumed passive investors never transact, but cash flows in and out of passive funds force constant trading. This makes them active systematic strategies rewarding size and momentum. The Pension Protection Act of 2006 defaulted new 401(k) participants into these vehicles while early baby boomers began withdrawing from active managers, creating a regime where more than 100% of marginal capital flowed into passive strategies. This negative loading against fundamental security selection explains why small-cap value failed for a decade despite appearing cheap.
We grafted a social insurance system onto a capital allocation mechanism, and both are breaking. Financial markets price the marginal cost of capital through competitive information expression. Retirement systems are meant to provide economic security through guaranteed outcomes. These are incompatible objectives. When policy makers declared markets must provide retirement security, they forced reactive intervention to prevent crashes because retirement systems cannot fail even though markets can. We've effectively put a lid on a pressure cooker.
The poverty line measures fantasy, not reality, because we hard-coded numbers in 1963 and watched the world change. Mollie Orshansky observed families spent one-third of budgets on food, so HHS tripled the USDA minimum food budget to define poverty at $32K for a family of four. That same food budget now represents 5-7% of household expenditures. We've inflated this number by CPI—which overstates inflation for those with consumption choices while radically understating it for those trapped in fixed baskets. The real equivalent for Caldwell, New Jersey is $140K. Benefit cliffs create a "valley of death" where earning more makes you functionally poorer as after-tax government support disappears while taxable obligations rise. Childcare became the largest budget item because informal networks collapsed, housing supply restrictions created rent premiums, and we forgot capitalism requires redistribution to provision the next generation.
Timestamps
00:00 - Introduction: Mike's path from Wharton to correctly predicting the XIV collapse
14:00 - Vizzini from The Princess Bride: being clever versus understanding actual rules of the game
18:00 - The critical flaw in Sharpe's "Arithmetic of Active Management": passive funds trade continuously
25:00 - The Pension Protection Act of 2006 and how it accidentally broke markets
28:00 - Why more than 100% of marginal capital became passive: the loading factor problem
30:00 - Contributions flow from income, withdrawals from asset values: the Buffett Indicator tension
40:00 - We can't afford crashes anymore because retirement security depends on asset values
43:00 - Stumbling onto the poverty line calculation and feeling sick
48:00 - The 1963 origin: hard-coding a number that no longer describes reality
51:00 - The Caldwell, NJ analysis: $140K not $32K for a family of four
52:00 - The valley of death: benefit cliffs where earning more makes you functionally poorer
59:00 - What we've forgotten: capitalism requires redistribution to provision the next generation
01:02:00 - Rapid-fire questions
About Mike Green
Mike Green is Chief Strategist at Simplify Asset Management, where the firm manages approximately $12 billion across 30 strategies. He attended the Wharton School, spent six years in small-cap value management, built Canyon Partners' New York office from one person to 25 managing $5 billion in assets, and ran Ice Farm Capital funded by Soros before managing Peter Thiel's personal capital at Thiel Macro. His research on passive investing's market structure implications and his viral analysis of America's precarity crisis have made him one of the most rigorous and controversial thinkers on systemic risk today.
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The content of "Treussard Talks" is for informational and educational purposes only and should not be considered financial advice. The views expressed are those of the host and guests and do not necessarily reflect the opinions of Treussard Capital Management or its affiliates. Consult your own financial advisor before making any investment decisions. For full disclosures, visit treussard.com.