Did Passive Investing Fuel A Bubble In Ultra-Large Tech Stocks?

the index funds. A lot of people think it's a really good trend, but there is more attention and more questions being raised by what is it really like mean for markets and market structure when so much money isn't going towards individual security selection? Right, there's this assumption that passive investing is actually good in many ways because investors are paying lower fees so over the long run they

make more money. But also in the sense that passive investing, because you're just putting money into these big benchmarks that are reflective of the market as it is, that you're not actually impacting the market at all, and only now are we starting to see some real criticism of that thesis and also some academic research where people are saying that actually passive investing and benchmark index construction can impact the market itself. Right, And of course, you know passive investing.

You mentioned the low fees. There is also a body of academic research on the side of passive investing, believers in efficient markets and so forth, to essentially say, look, the sum total of all active investors is just going to be the index self, and you're unlikely to beat the market with your own stocks selection, so why not just buy the market itself and then you get the same return as everyone else, but at least you didn't

pay the fees. My Green's argument when we talked to him was essentially, it's creating all these distortions because the money just sort of goes to the index itself that drives the index higher, and anyone who's trying to buy individual stocks, you know, can't possibly compete with a strategy

that's just put it all on the index. Right. And there's this sort of underlying theme that's running through all of this, which is what does passive investing actually imply about the functioning of the market, and I suppose, uh the state of capitalism, right, markets are supposed to be funneling money in an efficient way, and if passive investing is causing these sorts of distortions where these overvalued companies just get more and more overvalued, I guess then is

capital some really working exactly right? So today we're going to explore this topic further because it's clearly something that's of growing interest, and we're gonna talk with someone else who's done research on this exact question, also making the argument that the rise of passive is creating weird, anomalous bubble type behaviors in some stocks that's clearly different than

the old days. And so I think we're gonna get more granular on what we're really seeing in the market that says something is weird about how the market is behaving specifically specifically because of the rise of passive. Great, let's go granular. All right, We're gonna go granular. We're gonna be talking today with Vincent Deliad. He's the director of Global Macro for I N T l F C. Stone.

UH major broker dealer recently came out with a report talking about the connection between passive investing and the sort of rise of these mega caps and the connection between the incredible performance of stocks like Apple and Microsoft and Alphabet and so on, and what that has to do with passive investing. So, Vincent, thank you very much for

joining us. Thanks for having me a pleasure. First of all, before we get into the question of the distortionary impacts of passive investing, what is I mean, some people debate what that even means passive investing, and some people say, oh, it's a myth, passive investing isn't even the thing or whatever it is, or that everyone is making some sort of active decision. But when we talk about this, how do you define the phenomenon that seems to define this, uh,

this sort of age and investing. Yeah. Absolutely, I mean I've been in my work. I've just define it as investing it in um market gap weighted in the season. And I do realize that people use them for short term trading as as a replacement to other vehicle and that at the end of the day there is a human behind it. But my my focus, um, I think and that's what the I think that the missing link is for for a lot of people is to ask not so much where the money is going, but where

is it coming from? And I think that's what creates a distortion. So in the research note that Joe mentioned, you subtitle it as dumb alpha how to be an intelligent investor in a stupid age, which I find very amusing but maybe a lot of index investors would find kind of insulting. Why do you think passive investing or

index investing is dumb alpha? Walk us through your thought process here, because, as you point out, actually following the indusicries putting money in the most overvalued stocks would have paid off in recent times. Absolutely. I mean this was the driver for for the title is you look at last year, I think the SMP five index out before

maybe five sound of global stocks. So if you wanted to generate alpha, then you have this traditional framework right where you have beta, which is just buying exposure to the index, and an alpha I'm gonna, you know, pick stocks and because I'm smart and I'm going to beat

the market. What I would slap on its head last year, the way to generate alpha was to own the index, and pretty much anyone who did not own Apple or Microsoft in proportion to their weights in the index ended up under performing, regardless of how skillful you were with with your trading. And you know, it's recently talking to a friend who runs a hedge phone and had a good year but underperformed the index because Apple was reclassified, and just that simple factory classifying Apple men that a

great year ended up being a bad year. And I think that's an experience that's very common for for many investors last year. So you mentioned that the SMP five hundred itself is essentially where the alpha is, and that it beat the majority of stocks. Of the stocks underperformed.

I was under the oppression that historically most stocks did bad and that historically the vast majority of gains in any environment, whether it's passive or whatever, are often generated by a handful of stocks, and that over time most stocks do underperform the index. How different is what you're seeing now with that level of out performance of the index versus a twenty years ago or forty years ago or long before. Just sort of buying the s P y E t F was a major thing that investors

did right. So what you're referring to, I think is is Barto's law. You know, you get eighty percent of your revenue from your top customers, or the same thing with stock market returns. Uh, what's unique about last year, or maybe not unique, but at least rare, is that the larger stock in the index massively outperformed. Then you can go back. I mean, it's it's a very easy simulation to run. I mean, you can go back on the data you know up to the beginning of the

twentieth century. And one of the easiest way to have generated consistent alpha would just be a void your larger stock in the index. I mean, that's the I care scurs if you want. You know, once, once I car runs too close to the sun, he falls down. Like usually stocks that become the largest in the world even face increased competition, regulated scrutiny, just ubers because you know,

it's hard to grow and usually fall back. And of course last year was the big exception, with you know, Apple up like probably on a toll return basis close and then Microsoft closely behind. So all you have to do last year to a fantastic year is just on the largest two stocks in the world, which is usually not the way you make the money. So can you walk us through the mechanics of what's actually happening here, Like why are these you know, big overvalued stocks like Microsoft,

like Apple? Why does money continue to flow into them? Right? And I think that's that is the part where I think the the criticism of passive is traditionally weak, and I think part of it comes from a bigger place of resentment. Like you have a lot of active managers that are the performed and and every year they read the SNP a active versus passive reports that says, oh, of the age underperform and that number rises over time,

and it's a it's a very painful fit. So you have a lot of like resentment and and and he said, well, it's because you know the index functions by the larger stocks, and that's not exactly true. I mean it's very easy if you're Vanguard or black Rock to to respond, well, no, if we market gap waiting, we are not overweighting anything. We let we let the active segment of the markets at price, and we just span wagon. We don't do price discovery, So any sort of um miss pricing is

not coming from us. And that's a powerful argument one that I I don't think we should take the correct argument is more, okay, passive does not create distortion, But can we think about where where the money coming into passive vehicle is coming from? And if this sector is structurally underway these megacaps, then shifting from them into market cap weight will result in net buying of the megacap stocks. So what do we see empirically in terms of the

performance of across the spire or other indicries. So you and you made the point right in the beginning, which I think was key. It's not enough to say that the money is going into pass of it's that it's come what it's coming out of it. So what you're said in that last answer is essentially the money is coming out of active managers. The active managers were probably underweight the very largest companies, and so therefore there is this rotation of people putting money UH into funds that

are are more heavily exposed to the largest companies. Do we see the reverse though? Where do we see UH Now just the upward pole on the biggest companies, but do we see drags on smaller companies relative weakness of the lower end of the five. So that's not just about the behavior of a few tech mega caps. Yeah, absolutely, I mean you have because generally it's you know, you say, an asset to buy another one, so it's not really

new money. I mean, if anything, that's been one of the um peculiarities of this cycle is how little new money has gone into the market. You know, the investor mostly sides size staying on the sideline pretty much. Is really since the Vics armageddon in into January eighteen, you've seen steady outflows on equity phones, more more and more outflows some metual phones than you have from ets on net selling, which is very unusual as the market makes

the top. So it's been indeed not new money but shifting money, and and so the place where the money to to MEAs of that effect, what I did is I looked at the top two d largest mutual froms in the US with management field more than one percent, and I thought that would be a very good proxy for the asset losing segment of the market obviously, uh. And I looked at the top twenty holdings and I looked whether they had any of them are called the

thank plus Fang plus Microsoft testline. So for fact that the big megacaps have been driving the rally. And what I found is that more than half of these mutual forms do not have the Fank plus in their top ten holding UH, and the vast majority of them who own these stocks have them in a much more proportion

than they were in the index. So to me, that is the source of this distortion, as these guys lose money, and as that money flows into market cap waiting index the way UM in terms of of net flow, it means net selling of these guys on which is primarily value oriented small cap stocks into large growth And to answer finally answer your your question, UM, you certainly see that enormous valuation discrepancy that has open between you can

growth and value. Um. Actually it's higher today than it was back at the peak of two thousand if you get the FAMI French data that goes back all the way to the twenties. The slope of the market meaning how how expensive your most decides, which is your cheapest decide, has never been greater and she's consistently we being seeing What do you say to two people who would argue that, UM, the price on something like an Apple or a Microsoft is justified by the amount of dividends or buy backs

that they've been doing in the market. So if you can't get a massive growth in the share price, maybe you can get growth through the dividend for instance. So that would be one argument for buying these things even at inflated levels. What do you say to that, right, Well, first of all, I wouldn't exactly define the dividend deals

as extremely high. I mean, you could probably have made that argument in December December twenty four eighteen when went Apples, you know, trading at a UM I don't like eleven twelve p something like that. After last year, it becomes a lot harder, especially and again as as I explained that the money is coming from forms that have a value tilt to them, So if anything, they're probably selling stock to the higher dividion deild to go into into

lower dividient deal. But the buyback question is is also quite interesting um and I think it adds to this kind of supply and demand demanding balance. If you look at last year, it's no surprise at the best performing stock where Apple and Microsoft the two large gap texts

with the largest buyback programs. So you have this rotation that resulting kind of structural buying at these stocks, and then on top of that you have a I mean, I don't have the exact number, but I think for Apple it was a closed to five to s person on the market gab that they brought back last year. And I mean, I hate to sound to say it, but sometimes the market goes up because there's mobiles and

set us what about Okay? So one of the things that you point out is that historically speaking, you could generate alpha simply as easily as avoiding the biggest companies in the index, and that you know, there's just sort of like a natural I guess maybe the icarous effect following too close to the sun or some sort of natural diseconomies of scale where there's always so forth so

far you can go. What about the idea though, that tech is unique and the way it's unique is that the competitiveness of data driven companies goes up as they get bigger. So if you're a Facebook and you have Instagram, you can serve a higher quality of ads with a billion users than a company that just has a million users because you have so much more data and your

business runs better. And of what you could make the argument that these megacaps are better and more competitive and more in a position to grow organically, setting aside share price then big companies in the past, because there are returns to scale and that maybe you just can't compare a really large tech company that has the advantage of all this data versus I don't know, a big steel

company from fifty years ago. Yeah, that is a very white u K argument, which you know, coincidently that the last time we saw this this phenomenon was you remember when when Cisco in the in the fourth quarter. You know, I think triple quadrupled in just three months, and I think it end up at a close to sixion market gap, and and then that was the top of the market.

But the argument was exactly the same. It was it the network effect, right, I mean, as we enter in this dematalized world, we no longer have the you know, the low of the mission return, which from montl principle of economics no longer applies because you're dealing with we with data instead of things, and the more people are are on your network, the more valuable it becomes. Today, there is more of a big data AI uh tweak

to the argument, but it's definitely the same one. Um I mean, I'll just point to the experience of of two thousand. You know, it didn't work out all that wealth for Cisco, uh, and then for the companies for which I think there was indeed some sort of a natural monopoly, like Microsoft, Eventually the regulators caught on with it.

Because if reality is the way you describe it, and I think then we have a almost a social and political problem that you know, wealth just accrues to the one that have the most powerful platform, and competition becomes impossible, right, which is when you would expect regulatory pressure to come into the play as well. And that's exactly what happened to Microsoft back in you know, with the various and probe in the both Europe and the US in the

late nineties. One of the really interesting things in your report is you talk a little bit about demographics and different approaches to investing between baby boomers and millennials, who are you know, really just starting to accrue wealth in

the stock market. Can you talk about how that plays into your thesis about you know, money flowing into certain things, but also money coming out of certain things, right, I mean overwhelmingly, um, you know, baby boomers are in you know, they came of age, you know, really started saving in the nineties at the time when you had the Peter Lynch, the big you know mutual from managers and they were happy to pay you know, one percent management fee to

invest with an exceptional type at the time active manager actually did perform quite well and anywhere returns were higher, so people were not less constensitive. And as as as I'm sure everybody knows here that the medium baby boomer

is somewhere around six sixty five. As you head into retirement, you reduce your allocation to risk as that increased that of bonds, which in many way explains the floor paraducts that I was highlighting before, where we see the market making you high, but money coming out of major funds. So boomers are selling their holdings which are primarily made of high fee value tilted small cap tilted mutual funds.

And to the extent that millennials are building wealth, which you know, as you all know, is not as fast as everyone would wish, um, that that money is primarily invested yeah, you know, robot advisor or even directly in local CITF and it's a very it's very hard to see the strength change, um, in two thousand twenty two one. As much as like and you know, someone who believes in market based allocation of capital and and and the value of price discovery, it's very hard to see this

change in the near or even medium term. I want to go back real quickly to the question of, uh, comparing mega caps today versus back of the day when it was a big steel company. So as if the day were recording this just for people's uh, you know knowledge, we're recording this a few weeks before it comes out. But the day before we recorded this, we got earnings from one of those mega caps, Alphabet the core advertising business up seventeen percent, the cloud business, I mean whatever,

it was, the biggest company in or whatever. I don't know what it was, but probably some big industrial right like they were growing like this, were they you had such incredible like I just want to push I mean, these are like incredible numbers. That's what would say, okay forgetting passive, forgetting all of this, Like it's just it's uh, they're incredible juggernauts that make more and more money every year.

And it's funny you should bring up the sixties and seventies because you actually had something very similar, which is the nifty fifties, right. Um, so at the time it was your your IBM, your Coca Cola, American Express McDonald's, UM. And I don't have off the top of my head down on on how fast they grew. But it also seemed like, you know, they had these kind of new methods of management that had been you know, invented after the war. They were the first multinational. They had you know,

some sorts, you know, Europe was recovering Asia. It seemed that they also had endless growth. And the argument that was made at the time, you know, they were one decision stock, don't worry but the valuation they'll grow into it, which is exactly what we hear today about you know, Google and the other the other mega captain. The one thing I would point on on the the earning side these well actually two things. Uh one watch for margins

and cogs um actional salary costs. I mean, that's that's an area that's been really painfully growing much faster than earning the revenues. And people cannot focus oh, you know, you know top line revenue. Look at how much SARAH expenses are growing, especially stock based compensation and I think that's a that's a huge advantage that these companies have over traditional companies. You know, you look at a typical

sary package at Google or Facebook or Amazon. First of all, it's very very high inter I was reading a piece that I think it was in Bloomberg. Interns at Facebook start at eight thousand, eight thousand dollar a month. Entry level jobs are probably more round two hundred, and then

mid level you're looking at four hundred. But half of that is paid in stock, so you don't really feel the pinch, right because if you pay, if you pay your new employees in stock or half of your camping stock, hey, you can steell end up with the cash at the end, so you can do a buy back. You can you know,

invest in the next big startup. You can. I guess if employees assume that the stock is going to keep going up year, that's the sumplicitly worth more than cash, even if it's the same award and in to some extent it also adds to my my supply and Amanda argument before, and that's only. Another peculiarity about a lot of these TEX stocks is that the float is actually smaller than the market gap because well, in many cases, you have a found that that has a significant stake.

I mean you can think of Amazon with Bazos and Mackenzie, and then you have employees who have also been given stocks over the year and sometimes been quite reluctant to sell. So if you have a base of investor that's not willing to sell the stock and you have index ones that are trying to buy in proportion to the market gap, that kind of add to that squeeze that we're describing earlier.

So there's this sort of virtuous cycle at play. It sounds like where as long as your share price is going up, and it probably is if you're one of these big successful companies like Pole, you can reduce your expenses by paying your employees with stock, and the assumption

is it will keep going up. And you can also embark on big buy back or dividend programs because your shares are going up and your cost of funding in the debt market is probably pretty low as well, and all of that just combines again to flatter your bottom line and maybe increase the share price. Again, Uh, when does the cycle actually stop, not just that virtuous cycle of flattering share prices encouraging better share prices, but also the cycle of passive money flowing into overvalued stuff. To

say the truth, the passive rotation. I don't know. I don't know whether it will. I I mean there's always this hope, like every year mom active managers, it's like, oh, well, you know typical investment outlook from an active manager. Well, last year was bad, but it was because of this unique brexit, the FED hiking rate, the FED cutting rates, correlations being higher, correlations being low. But next year, because there's going to be that other than that, I'm uniquely

positioned to take advantage of, it will be different. And and then I mean we've seen it for twenty years, so I don't know. I mean, maybe you'd have to maybe have a Black swanlike event, like like some sort of like you know, massive panic, and then the E E T they the T starts selling and and and but I really can't imagine the market going back to the structure that it is at twenty years ago. What what I will? I will rebound on on what you said about the virtue cycle, because I have done a bit

of work on that. I looked at the about two hundred companies that are incorporated in the San Francisco Bay area plus Silicon Valley, and then I created index of these companies and I looked at their weighty average costs of equity, the cost of debt, and their effective tax rate, and how much of their compensation was going in the form of stock. And what I found was, you know, the cost of equity effective cost of equity was very, very low because most of them don't pay dividends, uh

mostly don't buybacks. If they do have buybacks is to offset delusions, so that on net it's very low. The cost of debt is extraornarly low because either they are verial debt or that debt is really pushed far away so they don't really need to to service at any point. The customer employees is low. I mean it's high in absolute number, but it's very low if you look at what is actually paid in cash. The taxes, of course are non existent. And then most of them, actually a

majority of them, don't have earnings. So then if you start thinking about it that way, I think, okay, well, you know, if you want to run a business and you don't have to turn earnings, you don't have to pay dividends. You don't have to pay taxes, you don't pay interest on your debt to artistic and postpone it. And even better you can pay you only pay half of your employee saries. Yeah, I think it could be

the competition too. I want to get into a little bit more soon about how you think investors should be position to sort of prepare for the end of this

and or take advantage of this. But before we do that, I'm curious in your work, have you looked at non spicas to see if there's the same effect as a result of market cap waiting, Like if you look at, say, people putting um money in the i w M, which tracks the Russell two thousand, do you see a similar distortionary effect there were the larger companies within the small cap sector benefit disproportionately from some people from the existence

of these vehicles. Right. What I've done is, you know how the the sp index is not a he's not a truly market cap waiting index. I mean it has a bunch of other the requirements. The SNB found is not the largest five right exactly because they have some requirement about about earnings I believe, and liquidity, which I guess it should. That's another reason to write this about here you go. That was a joke, But yes, I was looking at companies that are h should have qualified

based on their market gap. The other question I was gonna ask, like SNP five s companies that weren't in the SMP exactly, and it's about like thirty to forty companies that quality found a market gap segment. But for what other reason they don't? They don't match the other rules that by the SNP comedy and yeah, indeed they having to perform massively because they're not attracting the same flow. I mean, if you're not in the SMP five frontally,

you don't get the spy V or flow. So you're structurally let's underbod what are some of those other names? I mean, Tesla is the weird one, but what are some other companies that, uh if you remember them off the top of your head, that are like should be almost fit the sp five hundred, but they're not quite in there. I think there's a I forget it's it's named are the big casino companies in there? Um? And I think it's it's a an anomaly where the founder

owns that that that that sorts off. In the case the founder owns a bunch of the flow, then the phote requirement is not met. Okay, I'm gonna do Joe's quite And then uh, it's the age of dumb alpha. And you think that the flows into passes probably aren't ending anytime soon. So what should investors actually do? Should we just be following the herd? You know? This is

how like chillions of wealth were lost, right. I think it's stupid, but everybody's doing it, so I'm going to do it anyway, right, I mean, this is how you get the you know, if you pay a lot of money for two leaps or the you know, the Dutch, the south Sea company. So it feels horrible to say that. I think eventually, I don't know when, I don't know how. But markets have a way of fixing things that are unsustainable.

I mean, things that are unsustainable cannot last forever um, So you know, I think over the long term, if what we're describing is indeed happening, what this means is that the expected return on on these you know, over own stock is gonna fall, and the expected return on the kind of small gap value that are under owned by the index crowd should be higher, DID and as

a result, the return to investors should be higher. So in general, the DID the idea would be to look for uh, you know, kind of opportunities outside of the index. At the same time, I would caution that by saying, you know, you should be happy we've basically dividend deal traditional um you know, Ban Graham style analysis, and not

worry about under performing the index. By well, I was gonna say, it seems like in this environment, and it's kind of um like insult to injury because we're just we're talking about all the money coming out of active and the the the pool of mutual funds that are greater than one percent fees and so forth. But it seems like in an environment like this, you really don't want to have the job of having to write a

letter at the end of a quarter. So that like, if you're like a sort of normal individual investor, you can diversify. You could say, look, maybe I didn't I wasn't overweight Apple and Amazon last year, and I underperformed the SSP five hundred in a little bit in my personal account. But it's fine because it was a great year and a bunch of stuff went up, but you know that the individual doesn't have to write a letter to some other limited partners saying explaining why they underperformed

or coming up with some excuse. So it kind of feels like that is a I really wouldn't like. That is not a very desirable job in this environment. They have to pick stocks um and explain. You know, it either be in this situation where you have to really lean into the megacaps and risk blowing up when it all turns around, or avoid the megacaps and underperform on the way up. No, No, I mean, indeed, it's been

a pretty terrible environment for active manager research channel. It's um and it's I mean, it is probably things you can do to metigates. Did this I mean in the report I was mentioning, Uh, again, it's it's somewhat of an expensive strategy. But maybe one way to play this is too cannot have your your traditional value oriented, you know, and stick by the book and hope that eventually things fall into place and I own good company that I understand and I do my DCF work and all that

good stuff that's been completely useless for ten years. And at the same time to hedge against the risk of this kind of blow off top by co options on the big names. I mean, one worry that I have is that this rotation would actually accelerate partly as as people open up their r and statement in I think, you know, a lot of the money that's invested in in these um hi fi muture from this kind of sticky money that has been then forever, you know, great

years in the nineties. People don't really know how much are paying that, but then like if they realize, I mean, two thousand nineteen was so brutal. I mean because basically, if you didn't have Apple of Microsoft, I me're gonna be up like you know five. You know, you know, when the market is of thirty five, that kind of delta could be the kind of thing that you know,

I'm giving up And I worry that. And you can certainly see that in the first weeks of the year when basically you had UM I think Google was up, like app of Tla was even even out of this world. But it could have been just people opening the say okay, I dumb, this guy, let me go in the index, and that rotation actually accelerating in some sort of a feedback loop right, trade about the virtuous cycle, but this

is the vicious cycle. Yes. For so I alluded to this in the intro, which is basically that there is a strain of thought that if passive investing is misallocating capital in some way, then it poses a giant question mark over the economy and the way capitalism works in general. What's your view of that particular argument. Is there a particular area where you see passive investing misallocating capital and

impacting the economy in a negative way? But I think you see it anecdotally in you know some E t F related distortions. I think there was one like last week. It was a a high dividende of stock that was owned by a high diven in E t F. I forgot to take it right now, but and then the the stock kept getting cheaper or the division increased, and then it nonger met the market gap requirement of the t F. So the phone hat told dump it, and that result in a kind of a really large down

there for a stock that was actually doing well. And you can find many of these uh distortion. You see it also in the gold minor et F, for example, the junior gold minor et F owning the senior gold minor ITTF because there's not enough shares to buy UM. So you know, and you know these are anecdotes, but it tells you that this this starts to matter in general. Um. You know, the question is what is the tipping point

for for the passive share? I mean you can almost think as a almost like a Laugher curve, you know, like if you if you tax people up to a certain point, then you revenue start decreasing as the passive share arise and economic efficiency starts starts to to be suffering. The first that point you need for that is, okay, what is the actual passive share? Um? And And it's a hard one to answer, going back to your first question, like what is passive if you just go by you know,

adding UM then Guard, black Rock, and State Street. I think it's about of the market, uh, for the the average stock. Basically that the third larger the three larger shareholders for most stocks are in that order, Van Guard, black Rock, State Street. It's probably even at higher because you have a lot of This company is also of index replications. They're not explicitly index poons, but they replicate

the index ferences clients. You you don't see that money into the trading vehicle, but it is act So my understanding is close to forty percent in terms of the ownership of of the US equity market, and probably when it comes to trading and flows, which I think matters most, because that's where price discovery is set right. Price is

discovered by people trading with one another. So even though the ownership share is just if you know, trading at the end of the day is driven by by passiving vehicles, you get to this potential problem that the price discovery mechanisms do not work well. On that uh, on that cheery note of our price discovery mechanisms ceasing to work. Vincent, thank you very much for joining us. It was great. Thank you so much for having me. Thanks Vincent, that

was really good. Tracy. I really feel like this is just gonna be a bigger and bigger topic. One thing that has come up recently that we haven't even talked about since we've explored the effect of index funds and passive investing is all like the antitrust angle, and of

course that's becoming a bigger and bigger deal. This idea, as Vincent pointed out, like, Okay, if every company is owned by that same basket of like three investors, more, there's more and more scrutiny just on the question of, like what does it even mean for the companies to compete with each other anymore? Yeah, I think we need to get Matt Levine on again to talk about that particular angle. But I know that's yeah, that's one of

his big that's one of his recurring themes in his newsletter. Yeah, exactly. But one of the things that really interests me from that conversation is the notion of how all of this

is actually influencing the wider economy. And I keep thinking about deflation and you know, the mystery of missing inflation of the past ten years or so, and you can kind of see if markets are funneling money in an inefficient way or doing it in a way that means the biggest players just keep getting bigger, and those players have more and more pricing power, market more ability to dictate wages. That that might be one reason why, for instance,

wages are staying so low. Yeah. Absolutely, there's all kinds of sort of interesting ramifications. Hearing Vincent describe that feedback loop, the incredible natural competitive advantages of the two d companies are so headquartered in Silicon Valley or the Bay Area, tons of different avenues to explore about just the incredible amount of money that's accruing to a fairly uh small

group of players. There's one other thing that I really like about Vincent's research and the way he's approaching this topic, which is that he's looking at investor behavior and he's looking at it on a relative basis. So of course it's not enough to have you know, five percent returns in a given year if someone else is up ten percent, right, which I think is reflective of how most people actually

think and view their portfolios. And certainly you saw Donald Trump do this, uh not too long ago, where he was talking about the stock markets up and your portfolio is only fifty up? What have you been doing wrong? And I think that's also a point that sort of missed in a lot of the analysis here. Yeah. No, I love that point about the sort of sticker shock at the beginning of the year, because all anyone heard is such an amazing year for this not market, one

of the most incredible ones on record. But there are a lot of investors who I don't think had such a great year, and essentially like either Okay, if you owned the spy, you matched it. But you know, if you like had any sort of normal diversified portfolio of equities, unless you happen to be like a really long Apple and Microsoft, you're looking at your portfolio or you look

at your manager and what do you what's wrong? And it could be the type of year or if you know, as that dispersion between the biggest and the rest grow so big, as he points out, that could be a catalyst for even more acceleration from UM from active to passive. So you know, kind of like we were saying, it's a it's a tough time obviously an active management sympathy for the fun managers, that's for sure. I need to write another song about I should write a song about that.

Do it for our next live episode? Wait? Is it going to be a Rolling Stones cover? No? I gotta write a new I gotta I gotta write a new one. I gotta create something totally originally. Fine, Okay, well, we look forward to that. This has been another episode of the All Thoughts podcast. I'm Tracy Halloway. You can follow me on Twitter. At Tracy Halloway and I'm Joe Wisn't all. You could follow me on Twitter at the Stalwart, and be sure to follow Vincent on Twitter. He's at Vincent Delard.

Great follow there. Be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy. She's at Francesca Today. And for the whole family of Bloomberg podcasts, you can find them all under the handle at podcasts. Thanks for listening.