MacroVoices #236 Mike Green: Passive Investing Dynamics, Inflation vs. Hyperinflation, Digital Currencies & more

Episode Summary

Executive Summary: Episode 236 centers on the idea that market structure—not just central-bank policy—is driving asset prices. Eric Townsend warns of heightened U.S. civil unrest through Inauguration Day, while Mike Green argues passive investing mechanically inflates asset prices and could create instability. The discussion also covers the dollar, oil’s downside, gold’s consolidation, inflation/MMT, reserve-currency risk, and a possible shift toward higher inflation without true hyperinflation.

Main Topics: U.S. political unrest and market impact (Priority: 5/5): Eric argues unrest will escalate from Election Day through Inauguration Day because both sides may refuse to concede. He notes that while this sounds bearish, history suggests unrest and conflict can initially be offset by more central-bank accommodation and higher asset prices. Passive investing and market reflexivity (Priority: 5/5): Mike Green explains that passive flows can mechanically push prices up regardless of fundamentals: inflows force buying and outflows force selling. He says this market structure—not just the Fed—is the dominant driver of the post-2009 rally and may eventually destabilize markets through a melt-up or abrupt unwind. QE, MMT, and inflation regime shift (Priority: 5/5): The interview distinguishes between QE’s effect on asset prices and its weaker transmission to the real economy, then argues MMT could become more politically acceptable and eventually push toward higher inflation. Mike cautions that the evidence for broad real-economy impact is still limited and the current stimulus has mostly shifted spending into durable goods. Treasury yields, the dollar, and reserve-currency risk (Priority: 4/5): Eric and Mike discuss whether civil unrest, MMT, and inflation expectations could alter Treasury yields and the dollar. Mike argues the dollar’s reserve status remains supported by military and institutional dominance, and that a replacement would likely require a major geopolitical rupture. Gold’s consolidation and potential upside (Priority: 4/5): Gold is described as stuck in a consolidation/wedge after its August correction. Eric wants a healthy pullback toward $1,800 support, while Mike says substantial upside is possible if policy responses become more aggressive, but outcome depends on whether events force policymakers’ hand. Oil and commodity price breakdown (Priority: 4/5): Eric and Patrick see crude oil’s selloff as a meaningful correction, likely driven by weakening demand signals from refinery runs rather than only supply concerns. They think the bottom may not be in and discuss lower targets in the low 30s, with $26 as a possible deeper test. Post-game technicals: SPX, Tesla, Apple, Eurostoxx, lumber (Priority: 3/5): Patrick emphasizes that many charts are at or near 50-day moving averages and at a potential inflection point. He highlights SPX support, Tesla’s post-inclusion disappointment, Apple’s retracement, Eurostoxx weakness, and lumber’s sharp reversal as signs of a broad market pause or possible larger correction.

Key Arguments: Passive investing changes market behavior from discretionary valuation-based allocation to forced flow-based buying and selling; this explains a large share of the post-2009 asset-price rise. A market can remain elevated longer than critics expect because passive flows and policy responses can keep inflating prices even when fundamentals look weak. QE does support asset prices by purchasing securities from the private sector, but its effect on broad economic activity appears limited. MMT is likely to gain political traction and could eventually become inflationary if fiscal transfers materially increase consumption without offsetting supply growth. True hyperinflation is not the same as 1970s inflation; hyperinflation is a currency-collapse phenomenon and is unlikely in the U.S. while the dollar remains reserve currency. The dollar’s reserve status is hard to displace absent a major geopolitical/military shift that undermines U.S. enforcement of property rights and trade dominance. Oil’s recent decline likely reflects demand destruction via refinery runs, not just temporary supply disruptions, implying further downside risk. A broad risk-off episode would likely force more policy easing, which can paradoxically support financial assets even amid social turmoil.

Data Points: Macro Voices episode: 236 - Episode identifier Recording date: September 10, 2020 - Episode recording date S&P futures support level: ~3,230 - Eric’s technical support area for a possible retest U.S. Dollar Index level: 93.18 - Spot level during discussion Dollar trend threshold: Above 94 - Eric says a daily close above 94 would support a technical trend reversal case Crude oil price area: ~$37 handle - October contract after the selloff Crude oil low cited: 36.25-36.30 - Recent low discussed as possible bounce point Potential crude downside target: Low $30s - Eric’s expected eventual downside area for oil Possible deeper crude target: $26 - Patrick cites 26 as a meaningful support area if conditions worsen Gold support level: $1,800 - Eric wants a healthy correction to retest this area as support 10-year Treasury yield: 68 bps - Level cited as Treasury yields remained pinned in a tight range Passive investing share of market: ~44% - Mike’s estimate of passive share of the total market Passive exposure by younger generation: 90%+ - Mike says younger investors’ market exposure is mostly passive Passive exposure by older generation: ~20% - Mike contrasts older investors’ lower passive exposure Equity correction to 50-day moving average: ~50% retracement - Patrick says the move resembled a textbook retracement U.S. production after storm: 10.0 million barrels/day - Oil inventory report showed production back up to 10 million even U.S. production change: +300,000 barrels/day - Week-over-week rebound after storm disruption Crude inventory change: +2 million barrels - Reported build in crude inventories Cushing inventory change: +1.8 million barrels - Inventory build at Cushing, Oklahoma Gasoline inventories: -3 million barrels - Finished products drawdown in gasoline Distillate inventories: -1.7 million barrels - Finished products drawdown in distillates Gold appreciation scenario: ~7% annually - Mike notes $5,000 gold within a decade implies about this rate Hyperinflation threshold: ~15% per month - Mike’s description of technical hyperinflation, not annual CPI U.S. labor force/population growth in the 1930s: ~25% - Used by Mike to explain inflation dynamics in that period Oil-fired generation share going into the 1970s: ~1/3 of U.S. production capacity - Mike cites this as part of 1970s supply restriction dynamics

Pivotal Quotes: "I do think we're really looking at the potential for a situation where there is extreme disagreement, division, and unfortunately violence in the United States." — Eric Townsend: Eric’s opening macro view on unrest between Election Day and Inauguration Day "The market is quote-unquote unhealthy... the change in market structure driven by the growth of passive investing." — Mike Green: Core thesis on why prices have detached from fundamentals "Hyperinflation is something totally different... somewhere in the neighborhood of 15% inflation per month, not per year." — Mike Green: Clarifying the difference between 1970s inflation and true hyperinflation

Implications: Listeners should watch flow-driven markets more than simple valuation narratives, since passive investing and policy responses can prolong rallies or magnify breakpoints. Oil looks vulnerable, gold remains constructive, and political unrest plus MMT may push the system toward higher inflation and more volatile asset pricing.