Mike Green on Passive Flows, Market Concentration and What Could Change the Cycle

Michael Green · Tier1 Alpha Asset Management

Today's post-election rally reflects removal of hedges, not any insight into new policy.

Green says there was a lot of hedging in the short-dated and zero-day options market, which were remarkably rich. Options were pricing a one-day VIX around 26, which he thinks is hard to sustain. He concludes that the rally can largely be read as a reaction to removing those hedges. He says the market has no insight into what the election's policies or behaviours will be, so the election itself is not the driver.

“I think we were predicting 26 on the one day VIX. It's very hard to sustain. And so the rally today can largely be thought of in my view, at least as a reaction to the removal of those hedges.”at 2:21

Michael Green · Tier1 Alpha Asset Management

Vanguard raising target-date equity allocations will push more retirement money into equities.

Green says Vanguard is increasing the equity allocation in its target-date fund retirement configurations. He argues this restates the historical return case for equities, with a favourable framing of the 2022 bond drawdown, and that it will contribute to higher equity holdings and flows. He links this to the broader pattern of retirement contributions flowing into passive vehicles, which he sees as a major driver of the buying pressure behind large-cap stocks.

“Vanguard is now increasing the equity allocation in their retirement configuration for target date funds... That's going to contribute to an increase in equity holdings and flows.”at 16:37

Michael Green · Tier1 Alpha Asset Management

Passive fund flows now set prices as marginal buyers; a shift to discretionary flows would change market behavior.

Green frames passive investing as a restatement of Keynes's beauty contest: what matters is what other people will pay, not one's own view of a security. The vast majority of buyers are marginal purchasers, and as long as that marginal purchaser is a passive entity, prices follow passive demand. He notes that if flows shift toward discretionary active vehicles, the market could change in material ways. He cites earlier this year, when market behavior shifted, and his 2021-era work showing that as discretionary flows grew they changed market behavior materially. He says his approach would adjust emphasis rather than change, but he treats the passive-dominance regime as the current one.

“We really view passive [investing] as a refinement and a restatement of the classic Keynesian beauty contest, which is it doesn't matter what I think about a security, it matters what other people think. The vast majority are marginal purchaser.”at 44:30

Michael Green · Tier1 Alpha Asset Management

The JOLTS job openings analysis is fundamentally flawed because of revisions and a low survey response rate.

Green argues that people comparing JOLTS year-over-year are misreading the data. Pre-January 2026 figures were revised down substantially after the QCEW business dynamics survey, which is more complete than JOLTS, and JOLTS had only about a 25% response rate in the latest survey. As a result, reported year-over-year job openings growth of about 332,000 is measured against a September 2025 baseline that was revised down by about 489,000. He says he may be slightly off on the numbers, but the core point stands that the headline growth is overstated.

“Data we just received, for example, the JOLTS job openings analysis is just fundamentally flawed.”at 7:42

Michael Green · Tier1 Alpha Asset Management

A rise in unemployment would cut middle-aged 401(k) contributions and break the passive buying pattern.

Green says the main catalyst that would change equity flows is rising unemployment, which would reduce retirement contributions, particularly from middle-aged workers. In a low-hire, low-fire environment, the workforce is turning over toward 22-year-olds contributing about $1,000 to their 401(k)s while 55-year-olds keep contributing up to $60,000, and those older savers are increasingly allocated to passive vehicles. This is why there is no churn of baby-boomer assets away from passive. Active manager flows have accelerated downward, but a significant rise in unemployment among middle-aged workers is what would stop the catch-up contributions. He says that has not happened yet.

“The obvious catalyst, the changes is a rise in unemployment and they fall in contributions, particularly from middle aged workers.”at 17:20

Michael Green · Tier1 Alpha Asset Management

Hiring is shifting to gig work with weak benefits, so a slowdown could trigger a sharp real-wage drop and unemployment.

Green says a disproportionate share of incremental hiring is happening in the gig economy, which he describes as a private-sector unemployment pool. Unlike public unemployment benefits, these gig-workers' support has not been upgraded since 2013, so state benefits such as California's maximum of roughly $11,000 over three years are economically immaterial. Because those benefits are worthless, workers do not apply, so official unemployment claims miss the distress. If the economy weakens, labor supply in the gig pool expands while demand contracts, causing a catastrophic decline in real wages that forces people into unemployment. He says this risk is invisible to conventional reporting but is already building.

“I'm very worried that we're watching something very similar where disproportionate amount of incremental hiring is largely happening in the gig economy.”at 48:55

Michael Green · Tier1 Alpha Asset Management

Damodaran's historical cost-of-capital approach misapplies to AI giants like Anthropic, OpenAI and SpaceX, which have no precedent.

Green says DCF is a correct articulation of equity valuation, but the problem is in the inputs. Damodaran derives his cost of capital from historical equity returns, which is what should not be done. Nothing on the scale or behaviour of Anthropic, OpenAI or SpaceX has materialised before, so applying past-return frameworks to them is a mistake. He still says valuation is ultimately true and creates constraints on how far the system can extend, but the constraint may come later than frameworks suggest.

“Part of [Damodaran's] problem is that he's deriving his cost of capital from exactly what we're not supposed to do... Not considering that nothing on the scale or behavior of an anthropic or an open AI, or even a SpaceX has ever materialized before.”at 12:46

Michael Green · Tier1 Alpha Asset Management

AI companies' returns on capital may look as poor as the Dutch East India Company's without state backing.

Green argues that if policymakers treat AI as a national security risk and either let the AI firms go bankrupt or let them enforce monopolies, the result would resemble the Dutch East India Company, where return on capital was remarkably low except for military support from the state. He says a holistic return calculation would include taxpayer-funded support, which is not how returns are normally measured. The argument is a conditional scenario about how AI economics could look once state support is counted, not a forecast of a specific outcome.

“we've recreated the condition of the Dutch East Indies company in which the return on capital was remarkably low, except for the support of the military from the British empire.”at 37:27

Michael Green · Tier1 Alpha Asset Management

Passive dominance pushes value and size factors into persistent underperformance through their inverse flow mechanics.

Green argues that value and size factors are statistical approximations of active human behavior. Value managers buy when DCF value exceeds market value, which is a flow. Passive allocation is set by market value relative to everything else, so as passive dominates, the value factor's numerator and denominator move inversely and the aggregate marginal flow runs against value. Size works the same way. He also says the passive factor's correlation with momentum is unstable: when it is positive, momentum does well, and when it is negative, momentum crashes.

“The aggregate marginal flow is against it. And this is why the value factor is uniquely underperformed. It's the same phenomenon as the size factor, which has the exact same characteristic.”at 20:42

Michael Green · Tier1 Alpha Asset Management

Passive flows concentrate returns in the largest stocks because liquidity does not scale with market cap.

Green says liquidity scales sublinearly with market capitalization, with an exponent of about 0.75 over long history. Between the smallest S&P 500 stock (about $15 billion) and the largest (about $5.5 trillion) there are many doublings. Liquidity should therefore be roughly 300 to 400 times greater for the largest stock, but it is only about 10 times greater. This mismatch means the largest stocks receive a disproportionate share of index flows, and as they are pushed higher the flows concentrate further. He sees growing dispersion as a product of the replicating portfolio: if one stock were 99% of the index, buying the index would have no material impact on the other stocks.

“liquidity does not scale with market capitalization[, it] scales in what's called a sublinear fashion.”at 25:22

Michael Green · Tier1 Alpha Asset Management

California voters rejected new taxes and lack trust in representatives; voting no on Prop 42 was a mistake.

Green reads the California results as voters saying they do not want new taxes and want government to do more with less. He sees a yes vote on Prop 42 alongside no votes on Props 40 and 41 as consistent with that. He argues voters did not trust representatives to handle the responsibility of optionality thoughtfully. He also says that voting no on 42 is a mistake because removing optionality carries a negative cost for society. This is a political read rather than a market view.

“the vote on Prop 42 is a yes, while voting no against forty and forty one, ... really basically saying, we don't want any new taxes.”at 3:18

Michael Green · Tier1 Alpha Asset Management

Index inclusion of low-float giant IPOs creates mechanical demand, so trillion-dollar IPOs get done while small ones struggle.

Green argues that overweighting low-float securities into indices has created false demand, turning the indices into monetization vehicles for large IPOs. He sees a pattern where small IPOs cannot be completed while giant ones are completed successfully, and says it is easier to get a trillion-dollar company public than a $500 million one. He expects the SpaceX and Anthropic listings to go off because the system is built to absorb them, and to produce a relief rally in the AI complex as liquidity flows in. He frames the outcome as mechanical rather than an informative read on fundamentals, and says he could still be wrong about his interpretation.

“We created conditions for false demand through the overweighting and low float securities into the index. And we've turned the indices into monetization vehicles for large scale IPOs.”at 4:29

Michael Green · Tier1 Alpha Asset Management

The economy is deteriorating rapidly with an undeniable K-shape, and California job losses are a warning sign.

Green argues that elements of the economy are deteriorating rapidly and that the K-shape is increasingly undeniable. He cites California employment contracting for nine consecutive months as evidence. He says a significant rise in unemployment would be the trigger that determines which part of the economy breaks first. He also argues that weakening sentiment data, which policymakers dismiss as soft data, is showing increasing stress in employment opportunities.

“elements in the economy are deteriorating very rapidly. The K shape is increasingly undeniable. ... California's employment numbers are actually contracting now for nine consecutive months.”at 7:19

Michael Green · Tier1 Alpha Asset Management

Gasoline and diesel inflation stems from underinvested refining, not crude production.

Green says the inflation in fossil fuels is in refined products such as gasoline and diesel. This is because the US has underinvested in refining operations, even as domestic oil production has risen sharply. The real bottleneck is processing and refinement, so crude output growth does not translate into lower product prices. He presents these frictions as the reason higher prices show up in many situations.

“Like we clearly have had inflation in fossil fuels, right? Products, gasoline, diesel, where we have underinvested in refining operations, even as we radically increased production of oil itself in The United States.”at 28:34

Michael Green · Tier1 Alpha Asset Management

US LNG export buildout takes years, and the infrastructure frictions keep prices elevated.

Green cites Doomberg's point that US natural gas production growth this year exceeds the total natural gas production of Europe. He argues the real issue is processing and refinement. The US is building LNG export facilities at terminals that were built as import facilities, a process that takes a long time and requires new infrastructure and trade routes. These frictions show up as higher prices in many situations.

“And the real issue is on the processing and refinement. We're in the process of building LNG export facilities at terminals that historically would have been LNG import facilities in The United States... Those take time.”at 29:13

Michael Green · Tier1 Alpha Asset Management

Consolidation and monopoly pricing power create lagged, persistent inflation in groceries, insurance and autos.

Green argues that monopolies price to average total cost rather than marginal cost, so their rational behaviour is to restrict output and push prices higher. He points to consolidation of the centre of the grocery store to three providers for 85% of goods, and says companies can pass costs through and shrug at inflation. He also describes a chain in which insurance mandates and automakers underproducing to keep prices high push up auto replacement prices, and insurance follows with about a one-year lag, making inflation look persistent.

“capitalizing on the fact that we were allowed to consolidate the center of the grocery store down to three total providers, of 85% of the goods that people buy in a grocery store.”at 32:08

Michael Green · Tier1 Alpha Asset Management

AI data center buildout may be commoditised like the 2000s fiber buildout, collapsing high-priced business models.

Green says the same phenomenon played out in the dot-com fiber buildout, where pricing was expected to hold at premiums to voice. Packetisation, wave division multiplexing and fiber amplification then created a dramatic jump in throughput that commoditised data transmission, and the high-price business models collapsed. He answers the question on AI capex ROI with 'it depends' and uses this analogy to suggest the data center buildout could face the same commoditisation.

“We saw this same underlying phenomenon with the build out in the .com side going to fiber out, fiber optic rollouts in which it was expected that pricing would maintain at the time... they ultimately collapsed.”at 34:50

Michael Green · Tier1 Alpha Asset Management

Superintelligence could radically compress the cost of AI access, as consumers prefer cheap bandwidth.

Green draws on the fiber analogy and the observation that people want cheap access to low-value content, such as cute puppy videos, which would not justify high prices at $800 a megabit but makes sense at 3.5 cents. He says people also want to be smarter, so demand for intelligence is broad. He concludes that superintelligence capable of evaluating its own algorithms would create innovations that radically compress the cost of accessing it. The reasoning is brief and speculative.

“the logical conclusion here is that if we introduce super intelligence and is uniquely capable of evaluating its own algorithms, that it is going to create innovations that radically compress the cost of that access.”at 37:15

Michael Green · Tier1 Alpha Asset Management

Bond yields now reflect passive bond-aggregate buying, so rate moves signal that control has been ceded.

Green argues that the primary investment into bond markets runs through bond aggregate indices that buy whatever is issued, so the market no longer sets yields through price discovery. When yields move higher or lower, bond participants are effectively asking the market to pay more, and that reaction is then read as evidence the bond market is losing control. His point is that the market lost control when it ceded price-setting to passive, index-driven buying, so yield moves reflect index mechanics rather than a free-market verdict on Fed policy.

“Well, of course we're losing control. We just ceded control.”at 40:16

Michael Green · Tier1 Alpha Asset Management

AI-driven productivity gains may mirror the 19th-century collapse of apprenticeships, bringing severe unemployment.

Responding to his daughter's fear that AI will cost jobs, Green argues that similar transitions have happened before. He cites the shift away from homespun goods in the early 1800s and the collapse of the apprenticeship system as factory automation spread, when New York City unemployment reached 63% in 1837. Productivity breakthroughs paused the craft economy, and the same productivity gains, combined with an economic slowdown and impaired credit, produced extraordinary unemployment because the number of marginal purchasers did not rise fast enough. He says he is very worried the current AI transition could look similar, with incremental hiring concentrated in gig work. The argument rests on historical analogy and a credit-driven demand mechanism, without a timeline.

“I'm like, well, if you read my stuff, you realize that this sort of transition happened in the early part of the nineteenth century as we transitioned to factoring away from homespun goods.”at 47:02