MacroVoices #416 Mike Green: Inflation is Dead? Can You Buy Commodities Anyway?
Mike Green discusses with Eric Townsend why inflation may not be rebounding as dramatically as some predict, the structural distortions created by passive investing in markets, and opportunities in commodities due to returning backwardation and positive carry dynamics.
Summary
In this MacroVoices interview, Mike Green from Simplify Asset Management provides his perspective on several key market themes. On inflation, Green disagrees with Jim Bianco's call that inflation has bottomed and is about to accelerate, arguing that markets already price in about a 15% chance of Fed rate hikes this year and that much of the recent inflation data reflects technical factors rather than broad price pressures. He explains how falling natural gas prices paradoxically show up as higher rent in BLS calculations due to how utility costs are stripped out. Green discusses the growing awareness of passive investing's distortive effects, comparing the current dynamic to Bernie Madoff's 'wink, wink, nod, nod' approach where investors know something isn't quite right but participate anyway. He argues that passive flows create disproportionate buying pressure on the largest stocks while active managers face redemptions, breaking the market's traditional price discovery mechanism. On commercial real estate, Green sees significant risks from refinancing needs at much higher rates, describing an 'avoid and pray' strategy where borrowers delay refinancing hoping for rate cuts. He views this as potentially systemic, drawing parallels to Bernanke's 'subprime is contained' comments. Green is optimistic about commodities not because of spot price appreciation, but due to the return of backwardation providing positive carry - historically the main source of commodity returns. He discusses geopolitical risks but argues that modern warfare's precision munition focus may be less materially intensive than previous conflicts. Green concludes by describing Simplify's ETF offerings, including CTA and HARD for commodity exposure that captures carry dynamics, and CDX for credit cycle protection.
About this episode
MacroVoices Erik Townsend & Patrick Ceresna welcome back Mike Green. Erik & Mike discuss backwardation in commodities markets, where rates and markets are headed from here, precious metals, and much more. https://bit.ly/3wthEFq ⚫ Follow Mike on X: https://www.twitter.com/profplum99 ⚫ Follow Mike on Substack : https://www.yesigiveafig.com/ 🔻Download Big Picture Trading Chartbook: 📈📉: https://bit.ly/42MYjuW ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/46Ul2FD 🔴 Subscribe to Patrick’s Youtube Channel: https://www.youtube.com/@Patrick_Ceresna 🔴 Subscribe to Erik's Substack: https://eriktownsend.substack.com/ 🔴 Check out Energy Transition Crisis on YouTube: https://www.youtube.com/@EnergyTransitionCrisis1 🔴 Check out Nick's YouTube channel: https://www.youtube.com/c/Optionfinity ✅ Join OptionFinity discord: https://discord.gg/Rvnsv6Y 🔴 Subscribe to Nick’s Medium: https://medium.com/@ngalarnyk Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- Green argues that markets already price in about a 15% chance of Fed rate hikes this year, contradicting claims that rate hike risk is being ignored
- He explains that falling natural gas prices paradoxically show up as higher rent in BLS calculations because utility costs embedded in rent get stripped out as energy services
- Green contends that passive investing creates a 'free rider' problem where investors benefit from price discovery done by others without contributing to it themselves
- He argues that passive flows create disproportionate buying pressure on the largest stocks, with $70 going to Apple or Microsoft for every $1000 invested versus only cents for smaller stocks
- Green describes commercial real estate as using an 'avoid and pray' strategy, delaying refinancing at higher rates while hoping for Fed rate cuts
- He sees the return of backwardation in commodities as creating positive carry opportunities that historically provided most commodity investment returns
- Green argues that modern warfare using precision munitions and drones is far less materially intensive than traditional wars with tanks and heavy equipment
- He suggests that growing unemployment is being masked by people driving for Uber instead of filing for unemployment benefits due to inadequate compensation levels
- Green contends that China's economic model of relying on export customers is fundamentally challenged as those customers resist one-way trade relationships
- He argues that academic literature is increasingly documenting how market cap weighting in passive strategies differs significantly from liquidity weighting
- Green sees the Fed as more concerned about cutting rates too early rather than too late, based on recent FOMC minutes
- He views true inflation data from private sources as showing lower price pressures than official BLS statistics, particularly in housing costs
Topics
Transcript
This is Macro Voices, the free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics telling it like it is, bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Ceresna. Macro Voices episode 416 was produced on February 22nd, 2024. I'm Eric Townsend. Simplify Asset Management Chief Investment Strategist and Portfolio Manager Mike Green returns as this week's feature interview guest. We'll discuss Jim Bianco's call that inflation may have already bottomed, backwardation in commodities markets. Where rates and markets are headed from here. Precious metals and much more. I also have…
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