Stock Market Now Hostage To Passive Capital Flows | Mike Green

**SPEAKER_1** (0:00)
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**Michael Green** (0:59)
There is actually a passive factor that we've been able to isolate, and it appears to be the single most important factor that exists in the market today. My passive factor would suggest that about 1200 basis points of the return that we've experienced out of passive equities over the last decade can be tied to that passive factor. I can't possibly know all the permutations of how this will ultimately play out, but it does really seem that a lot of this is going to continue until either valuations get so extreme to the top side that we basically start to sell simply because we've accumulated so many assets that we all decide that we can live fantastically rich forever, or we change policy in one form or another. It's the same phenomenon, unfortunately, that played out with the XIV. It's going to keep going up until a volatile enough event occurs to break it.

**Adam Taggart** (2:00)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. When you're uncertain, they say to seek the counsel of those smarter than you. Well, amongst the many experts I interview on this channel, Mike Green is definitely in the top cohort intellectual horsepower wise. Mike's portfolio manager and chief strategist at Simplify Asset Management, which holds over 6 billion in client assets. And today, we'll tap his latest thinking on the stock market, the credit market, the economy, and whatever else 2026 holds for investors that he thinks important. Mike, thanks so much for joining us today.

**Michael Green** (2:34)
It's a pleasure to be here. Thank you for having me back, Adam. I do have to point out actually, we're almost 12 billion in assets now, actually.

**Adam Taggart** (2:42)
All right. Well, look, I'm just going to update the intro there. I must have been taking it out. It's one of your bios. So you got to update your bio. Yep. That's very impressive, though.

**Mike Preston** (2:50)
All right.

**Adam Taggart** (2:51)
Over 12 billion in assets. All right. So lots to talk about. It's been a while since you've been on. I am going to ask you about the giant mindless robot, but I'll try to be novel and not start with that. You've recently written that length about your concerns about private equity.
In addition to that, we've been starting to see cockroach companies causing trouble in the private credit space as well. So I guess let's start here. How concerned are you about these more opaque but very fast growing private markets?

**Michael Green** (3:30)
Well, I think the obvious component about the private markets is simply that because they have not had to mark to a public market level, they've been able to conceal the deterioration in returns that's happening within the private space. There's been an unbelievable flood of capital that has come into private equity and private credit. Private equity in particular has been unable to obtain the types of liquidity events that allow them to return capital to investors. At the same time, they continue to claim extraordinary performance in the marking, the pricing that they're putting on their security positions.

**Adam Taggart** (4:10)
Right. It's sort of a just-trust-me-bro kind of pricing mark.

**Michael Green** (4:14)
Yeah. I mean, I don't know if I'd add the bro. I think that degrades the degree of seriousness, which they try to present these marks. But they very much have an issue where the core of private equity is a levered operating company. Those levered operating companies are dealing broadly with an economic slowdown. Very few of the private equity investments are in the rapidly growing AI or data center type spaces, although they are looking to, particularly in private credit, lend to those areas, which of course opens up its own area of concern. If we look at publicly traded equities that are levered similarly to private equity assets with a similar industrial mix, biased towards older economy, etc., those have been down a cumulative 6 percent over the last five years. Private equity claims that its holdings are up 116 percent over that time period. There is no amount of leverage that you can apply to get from minus 6 to plus 115 It suggests to me that the collateral that underpins much of private equity, the actual value of the assets is well below where it is suggested to be. Unfortunately, that's matched by declining distributions, meaning that they have not been able to return cash as their valuations have supposedly increased. That suggests that the simplest conclusion is they're just not accurate or they're lying about the performance. Most Americans shouldn't care about this until it makes its way into either the labor market because of the failure of many private equity entities. We actually just saw a home renovation business that was shut down instantaneously going for a Chapter 7 liquidation. People lose their jobs when that happens and those bonds were marked at par just a month ago. Today, they're being written off entirely.