468 Mike Green: Index Funds, Bitcoins, and Telling the Truth

3/15/2021

Mike Green is the Chief Strategist at Logica Funds and has spent nearly 30 years studying markets.

These days, he calls on that experience and his proprietary research to educate the public, the Federal Reserve, the BIS, and the IMF about the shift from actively managed portfolios and investment funds to systematic passive investment strategies.

Previously, Mike has served as the portfolio manager for Thiel Macro, an investment firm that manages the personal capital of Peter Thiel, founded Ice Farm Capital, a discretionary global macro hedge fund seeded by Soros Family Management, and founded and managed the New York office of Canyon Capital Advisors, a $23B multi-strategy hedge fund.

In this conversation, Mike and Aaron discuss the popular narratives around index funds and Bitcoin, what those narratives get wrong, and how to effectively develop non-consensus views when investing.

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If you liked this interview, check out episode 427 with Ben Hunt where we discuss investing and the Coronavirus, or episode 339 with Jim DeCicco where we discuss building his healthy coffee company.

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Aaron Watson: Mike, thanks for coming on the podcast, man. I'm excited to be speaking with you.

Mike Green: Aaron. It's a pleasure. Thank you for having me.

Aaron Watson: So I wanted to start off for, for folks just defining your role at Logica Funds. You know, it sounds cool. It sounds like a, like a compelling part of the C-suite, but as chief strategist, what's your role there? And what is the larger service that Logica as a service provider is playing in the financial space to your clients?

Mike Green: Sure. So Logica is a hedge fund and a hedge fund is a effectively, a type of investment manager that is, has a particular limitation in terms of the number of investors that it can have.
It falls under a regulation called 501-C3 that requires the investors in hedge funds, which tend to be more complicated strategies to have a certain level of net worth or a certain level of financial experience that's driven by the regulatory framework. It also limits the number of investors that we can have.

Logical fills a role in the portfolio that is similar to protection. We have two primary products, tail risk product, and what's referred to as an absolute return product. The absolute return product is designed to deliver uncorrelated returns. With the objective of making profits under both up markets and down markets and does so by taking advantage of what we see as particular opportunities that are created in the options market.

And so in particular, the work that you may have heard me talk about about how markets are being changed by the growth of passive and systematic strategies, that, that actually changes the way that options should be priced and it should be evaluated, and that is influent. That influences the way that we construct our portfolios and that we trade our positions.
Most portfolios are looking for some type of protection. Over the past several years, that's been primarily obtained through the purchase of bonds. And so a portfolio that runs with an allocation to risk-free bonds will often have protection characteristics in strategies that are referred to things like risk parody, et cetera.

We think that as interest rates have gotten much lower, that it becomes less valuable on a riskier way to express protection in your portfolio. And so the strategies that we pursued, where we own options is what's falls into the category of long volatility funds. And you have to recognize that there are challenges associated with that.

There's also opportunities you tend to have what's referred to as a convex payout either to the top side or the downside. Or markets move in an extreme fashion. Your portfolio should respond with a positive return pulse. The role of the chief strategist is to do a couple of different things. So I play by my official title is chief strategist portfolio manager and partner.

My job is to collaborate with the rest of the team in terms of identifying the opportunity for us to structure our portfolio and to structure our strategies. It's also to represent the firm in terms of thought pieces to give us, give us a leadership role in the industry in terms of helping people understand how markets are behaving or what may be risks that they face in their portfolio, and to represent the firm publicly in situations like this, where I'm being asked to speak as a representative of the firm, or to provide some interesting commentary to individuals or corporations institutions that may ultimately become investors.

Aaron Watson: And so, you know, to use an imperfect analogy, I think about like basketball. And if I go and I play pickup at some park, I'm looking for, you know, someone that can handle the ball, someone that can shoot someone that can set a screen, but the, the heightened sophistication of an NBA front office. Looking for the perfectly complimentary, you know, shooting big that, you know, can also run because they have a young point guard with a ton of speed is very similar to how these large institutions, when they think about their capital allocation is basically what you're articulating is.

You know, we, we were going to put some of our money into say bonds, and we're going to try to find the best manager associated with. The ownership of bonds to handle that portion of our portfolio, but in order to compliment that whether that's exposure to equities or derivatives or cryptocurrencies or wherever, our kind of macro framework of the, the portfolio.

The same way a GM would have a framework of the type of team that they want to build your basically saying as Logica, if you maybe kind of by a couple of these assumptions, or you have this gap as a job that is to be done, which is associated with what you just explained, we can kind of fill that role within the context of your larger portfolio and you are playing with these large institutions. So it really is the kind of NBA, you know, prime time level, type of investor.

Mike Green: I mean, I think you're flattering us to a certain extent, but yes, I think that's correct. I mean, what you're describing is the role of the capital allocator. So when you are a large institution and endowment or a pension plan or a corporate treasury, you're looking for investors that can help you fill certain slots in your portfolio, very similar to a point guard or a big man, et cetera.

I fall into the big man category, larger than ideal and also large, but the that characteristic I think is correct. And then the role to, to fit that is you're both the player and also the agent. And so one of the challenges that you recognize as you grow into any business role is that there are jobs that are execution there's jobs that are sales there's jobs that are theoretical or, you know, tied to research and development activities and within an organization like Logica, if people wear a lot of different hats, cause everybody has to contribute to the thought process. Everybody has to contribute to the sales process. Everybody has to be capable of representing the firm in one form or another.

And it's just a question of, you know, who's playing that role at any given point in time, but that is one of the characteristics of, of hedge funds is that you tend to have individuals who or in smaller organizations. So the size of even the largest hedge funds with the exception of a few, like an AQR Bridgewater are going to be measured in the tens at most hundreds, right.

For large multi strats, those individuals tend to be relatively high achieving individuals. Right. And so you, you, you tend to have a somewhat self-selecting crew of people who have. Strong, theoretical backgrounds, strong selling backgrounds, strong strategic background, and the strong market backgrounds. And all of those have to come together in an interesting kind of stew to create a successful firm.

Aaron Watson: So before you're at Logica, you were at Tio macro helping manage the capital for Peter T on one of his big ideas is mimetics, which is this idea that humans copy each other. We copy each other all the time.

Way more than we probably realize way more than we probably appreciate it. And the two. Ideas, particularly for someone my age, I'm 29 years old, you know, you're, you're trying to like, just read some stuff, a little sophisticated, one form of everyone copying everyone else is just throw yourself money in passive index funds.

It's low fee. It's passive sounds great. Passive income like that. That sounds fantastic. Just sit there. Don't think about it. Don't touch it. You know, Jack Bogle designed this with Vanguard however many years ago. It's a great idea. You've got that on one end and then on the other side, a whole other contingent.

You know, I used to work at a software as a service from the two founders who are tech guys. They're like my entire life savings is in Bitcoin. And I'm just this super crypto believer. Just put your money in Bitcoin. You'll be fine. Don't look at it for however many years. And you've got nothing to think about.

And, you know, what's fascinating to me is that not only have you kind of pointed at those two very big, very widely dispersed memetic ideas and investing philosophies as potentially riskier than people appreciate. Do you see a connect? I, I guess there's a too big of a question. Now, maybe you can spend a little time explaining that for people that haven't heard, you share those two ideas, and then we can kind of explore how you actually get comfortable going out on a limb like that.

Mike Green: Well, so I actually do think the two are similar and I would suggest that they are, you did a very good job of actually describing exactly why they're similar, right? They are functionally offering you the same advice, put your money in, do so on a consistent basis and just ignore it. It should be fine. Right?

In the case of Bitcoin, you're buying into a quote unquote future monetary system or a store of value that is not only a store of value, but also makes you money because you've bought into the next operating system for currency or how the world is going to work or whatever the narrative that wants to be pushed out today.

On the passive side, it's effectively a narrative of incompetence on the aggregate market side, and that you're better served by simply matching the performance of all the active managers, which is the theory behind passive it's effectively a free rider on the information that is provided or created by those who are engaged in the capital allocation process.

It says by buying into that output at a fraction of the cost, you receive the same before fees results and your after fee results will be superior because you have paid less for it. Right. In both situations, they're encouraging you to put money in and basically ignore it. And that should create wealth for you in the future.

Right? The challenge with that is twofold. One is the idea that wealth is supposed to accumulate without effort at scale can't possibly work. Right. We know that, if we were all just decided that we would. Do the exact same thing as everybody else with our money and that nobody was actually paying any attention to it.

That's not a prescription for societal wealth to be created. And so in both situations, you're looking at a, an element of fundamental misunderstanding in the case of passive investing. It's the idea that you're actually passive. And my fundamental insight was building off the work of an individual at AQR, a gentleman by the name of Lasse Pederson, who in 2016, wrote a paper called sharpening the arithmetic of active management.

That paper ties back to a paper written in 1991 by a gentleman by the name of Bill Sharp. Those who are active in the investment world will know Bill Sharp for what's referred to as the Sharp Ratio, which is a measure of the effectiveness of managers for adding return per unit of risk. Right. He won the Nobel prize for his work on portfolio theory and portfolio construction, along with one of his advisors, a gentlemen, by the name of Harry Markowitz, their theory that passive managers are capable of free riding on the behavior of active managers. I'll say Peterson identified a flaw, which is that when an index rebalances, as the passive manager becomes an active manager, they have to make changes in line with the index construction. So many of your listeners will be familiar with the idea that Tesla was recently added to the S and P 500 right in 2020.

And so when that occurred, somebody who was managing an S and P 500 index fund would have had to sell an existing security out of their portfolio. They'd have to buy into Tesla. And Laci Peterson identified that when that occurs, that those passive managers become active managers. And therefore you really can't think of them in the framework that Phil Sharp originally laid out because by Sharp's definition, by his own definition, a passive manager is one who never transacts.

It's one who only holds in proportion to the existing market capitalization weighted index. My recognition was something, a little different, which is if everybody is putting money into passive funds, then those passive funds have to transact on a daily basis. So they aren't passive at all. What they actually are, are giant active investors who have the world's simplest algorithms, right.

The algorithms by which those funds are managed, or did you give me cash? If so then buy, did you ask for cash? If so, then sell, what is the proportion that I should allocate the cash? What, how much of things should I buy? Well, I'm going to buy things in proportion to whatever their existing market cap or more accurately float weighted market cap is.

Does that change? Sure. If the price of something goes up, I'm going to buy more of it. If the price of something goes down on incremental flows, I'm going to buy less of it. Right? And so what that does is it creates a momentum feedback, things that go up, get more capital allocated to them, things that go down, get less capital allocated to them.

It creates a feedback loop. And then the second component is, is when you think about the impacts that they themselves have by transacting in the market, you need to begin to actually look for that. And so that's what I've built my work off of is building agent-based models, building diagnostic tools to help understand how these strategies are affecting the underlying market.

And unfortunately, the answer is it relates to passive is that they're having a dramatic impact on markets. And, you know, we can demonstrate that in a wide variety of ways, one of which is what we're seeing in markets today, which is. Everything going up in price, right. The valuations rising dramatically.
And so I have different conclusions than a lot of other people that, you know, we'll look at the market and say, oh, well, clearly what's happening. Is this just the fed printer goes bur meme, right? Yeah. We're printing endless amounts of money. The dollar is collapsing and therefore everything is going up.

I don't think that's actually accurate. Right. I think that there's, there's elements of truth to that. Clearly the federal reserve is actively involved in trying to support the financials, but I don't actually think that's the causal factor that people think it is. And so that's kind of the first one is, is understanding that passive impact.

And my theories are far from universally accepted, by the way. Although the academic community is now starting to wake up and ask questions in a different way. Right? So until 2020, the questions that were asked were always some variant of how does membership in an index influenced the behavior of a single stock today?

They're starting to ask the question, how is the stock market influenced by the growth of these passive strategies? In line with my work, we're beginning to find that the answer is significantly.

Aaron Watson: So to that end, the exact notion that you just said, people are kind of coming around to it, but there's plenty of people that disagree.

There's plenty of people and they're probably a third, even more spirits when it comes to Bitcoin, we can get there. But you know, in a past interview we talked, we spoke with Andy, Rachleff a venture investor and he talks about this a two by two matrix of, you know, it can be right or wrong, but then consensus non-consensus and really the essence of any good investment is you have to be right.

But it's really about being able to land in that non-consensus bucket so that you are effectively ahead of that curve. So, so whatever narrative it is, there's, you can be at the back end of the narrative, the last one to receive it and you follow along. And then you're the person caught holding the bag.

As we saw evidenced with the game SOG and the people that rushed in when it was, you know, in the high three, four hundreds, where the people that really got creamed. So the, the essence of kind of, I just want to, I just, I'm really just trying to like, grab onto that for a second is the bet that you're placing or the, the sale that you might make to the institutional investor that backs this strategy is saying, we have this struck, this fundamentally non-consensus view.

We have a lot of evidence to support the idea because of the studies that we've done and what have you to indicate that it's right. And so therefore the way that we might convince you to allocate capital to us versus some other player, Is through the convincing pitch of that notion. Is that accurate?

Mike Green: Yeah, I think that's right. And you know, that is that's going to be true in any situation. I think that two by two matrix is actually quite useful to think about, you need to establish truth, right? And you need to establish, are you going to have other people begin to believe it? Right? And so as you point out, you can be right and you can be the last person to realize it.

And that can be a bad outcome, right? You can be right, the very first person to realize it and be an ineffective salesperson or an ineffective storyteller to help people understand what's going on and fail to attract people to your point of view. And that also can prove to be fatal. Right. That's you know, th there's a classic expression in markets, you know, early is wrong.

And so you have to be very thoughtful of that. One of the things that's interesting about the passive dynamic is just that it creates the immediate reaction that people tend to have when you, when you explain to them the impact of passive and that it creates an increase in prices. Most people initially will respond to that and say, okay, so it creates a bubble.

When's the bubble going to crash? And the hard part for people is to understand, you know, kind of the James Joyce, you know, the sign of genius is the ability to hold two opposing ideas, right? You're both going to crash and you're going to explode higher. We're nowhere close to the full impact of passive investing as it's currently set up.

And so perversely, this actually creates a lot of the behavior that we're seeing, where prices of securities are rising in an increasingly rapid fashion. Despite the fact that valuations are extreme. And that's a very hard thing for people to accept, because anyone who's been in markets has been taught over the years, that the price that you pay for something, if you pay too, if you pay a higher price that should lower your returns, that raise your returns, right.

We've seen the opposite. We've seen this happen over and over again. And again, it directly feeds back to who is the marginal investor. So if the marginal investor is someone who says, Hey, the price of this has gone up, therefore I should buy more of it for virtually. That's going to drive returns in a momentum direction, right.

It's going to reinforce a momentum factor. The other part of this is, you know, the dynamic of, of trying to make people aware and get people to buy into the narrative. And that I think is where the exciting stuff is happening. Right. So when I look at the challenges that I'm articulating. One, it creates a very negative feedback loop in the markets where those who try to approach markets from a standpoint of information collection and rationality, right.

Figuring out what a company's sales are going to be figuring out what a company's profits or cash flows are going to be, or more accurately calculating what they think the cost of capital should be for the company that you should be discounting those back out. Those individuals have been decimated in the markets in the past five, six years.

And we're actively seeing a narrative that emerges that says, well, the problem with active management in the fund space is that there's just too many active managers and the market is too competitive and therefore we need to have more passive to create opportunities. My work suggests actually the exact opposite, the greater the passive share, the worst the performance of the active manager community. Cause there we're actually changing the structure of the market and perversely things like the Sharp Ratio increasingly lead you in the wrong direction. Now for us, that creates all sorts of opportunities because the same thing suggested options are mispriced.

The same thing suggests that there are ways for us to take advantage of that. But you know, we're still very early in this process and there's a lot of assumptions that have been made in markets that are now embedded into the regulatory structure that are going to be very difficult to turn around. And I think that, you know, it's both terrifying and it's exciting because it suggests that these, these dynamics are going to persist and the opportunities will exist for an extended period of time.

Aaron Watson: So let's, let's move it to, to Bitcoin too now, because that's another you know, very, I mean, particularly for people in my age range that, that see themselves as a kind of digitally native, like it just checks these boxes. I, you know, for me, I have this memory of, you know, Jack Dorsey of Twitter and Square basically saying, well, what just kind of makes sense that there would be a form of currency that was native to the internet.

And you're like, damn. I mean, like. He, he seems to be a pretty prolific successful dude. And that kind of seems pretty matter of fact, particularly for someone of my age demo. So that's, that's another one that you've got a non-consensus view on.

Mike Green: Well, so I, again, I think it boils down to a core misunderstanding, right?

So in the same way that passive is not passive money, doesn't exist in a natively digital space. Right. Money is actually a construction of government. And by government, I mean, as a social setting, right, there are strong governments. There are weak governments, but at the end of the day, money is a mechanism that is used for one very particular purpose, which is to cancel out obligations.

Right? So when you think about what a dollar bill actually says on it, it says this is legal tender for the settlement of debts, public and private. That's actually a really important statement. Because it actually tells you what it is at its core. And that's what Bitcoin doesn't have. It is not legal tender for the settlement of debts, public and private.

And it's one of the reasons why you have seen it fail as a transaction mechanism, right? Merchant transactions have fallen on the Bitcoin network. They have not risen over the past four years. Since 2017, we actually have seen a decline in the end number of retail transactions occurring with Bitcoin.
What it has become as a speculative asset, similar to Beanie Babies or gold or anything else. And I would suggest that, that, that fundamental misunderstanding about what money is right, where people struggle with that dynamic. It doesn't feel good to say it doesn't feel good to say that, you know, the, the legal standing or the dynamics behind a dollar bill and, and the U.S. Dollar as money, ultimately rest with a system of violence.

And enforcement that resides in our court system, in our army and our, you know, our military framework, our police forces, et cetera. If you do not pay your debts, you will be thrown out of your apartment. You will have your car repossessed. All of that will be done by agents of the government who have a legal right to do so.

And you have a legal right to settle it with green pieces of paper, right. Those that just does not exist in the Bitcoin space. Right. And so what I would suggest is happened in the Bitcoin space is that you have had a number of individuals who have bought into this idea. Yeah. It just makes sense. Right.
It doesn't make sense that it would evolve this way and it's not the way the system works. It's the same thing as passive, you know, being quote unquote passive. It's not right. What you're actually building is you're building a system that is in opposition to the U S government and the points that I'm trying to make to people.

Is while we may object to the U S government. And we may think that the U S government is hypocritical. We may not like all of the actions of the U S government. And this is certainly true for us citizens. And it's probably even more true for those who are not us citizens, right. Younger generation, I think in particular feels robbed and rightly so by some of the policy choices that have been made by the U S government.

So I understand the frustration, but it's not true that the world would be a better place. If it was, if the us did not fill the role that currently fills, right? The lack of the U S dollar, the lack of the U S government to protect property rights, the lack of the U S government to be able to protect its citizens on the national, on the global stage.

And broadly speaking to maintain a global piece, the PAX Americana, right, while it's far from perfect is better than a system of competing warlords. And that's, you know, effectively with those who are trying to break this down. Are increasingly advocating for you. You're seeing a lot of people who are at their core are functionally and Arco capitalists, or the means is, is that they believe that the rules of capitalism should exist.

But the enforcement of those rules is functionally tied to the individual, right? Where might equals right on the individual basis. That's not a good system. That's, you know, that's a very, very dangerous system for the average person.

Aaron Watson: So, I appreciate you articulating those positions. I, I really, I want to get to this like next level past that, and I'm going to link to, for listeners that want to explore more, you've done fantastic.

In-depth articulations of these two ideas, more that people will be able to get to what I'm really fascinated by. Yeah. Is, you know, I think the people will benefit just from hearing that perspective if they haven't heard it before, but the, you know, the, not the give someone a fish, but the teach Amanda fish part here is that idea of mimetics and to be comfortable in a space of non-consensus you've firmly, particularly in the financial part of the world, Finn, Twitter, all that stuff. And I know you've got people that, you know, co-sign and, and, and ride with your ideas. But the reality is that that there's some vociferous people on the other side that, that, that don't care for this non-consensus view that you have. And it's very uncomfortable.

We're social creatures. You know, if you buy the, the memetic theory framework of Gerard it's deeply. Deeply uncomfortable to, you know, be ostracized from the tribe and to be in that type of, you know, cross hairs. So can you talk about the, the, the meta pattern that allows you to occupy that space with consistency in the work that you do?

Mike Green: Well, I think it ties back to the same underlying feature, right. Which is the recognition. That oftentimes markets don't mean what people think they mean. Right. So when you think about a stock market or you think about the price of Bitcoin, ultimately what you're looking at is a record of transactions, right?

So somebody bought Bitcoin, somebody sold Bitcoin, somebody bought a stock somebody sold a stock. My focus in my career has been on understanding. Why, why did somebody buy that? Right? Why did somebody buy the stock? Why did somebody buy Bitcoin? And when you do that, would you discover it. What you discover is that oftentimes transactions are not a function of a deeply reasoned and philosophical or, or thoughtful approach to, I think this is the right price for this particular security, right?

In the case of a stock. Buying and selling activity can happen on an individual stock. Not because it's being considered in an absolute sense, but because it's being considered in a relative sense, I don't have anything against Coca-Cola. I just think Pepsi is a better buy right now. Therefore I'm going to sell my Coca-Cola and I'm going to buy my Pepsi.

And so I'm making two separate choices there. And the price of Coca-Cola may or may not be too high in absolute terms, but in my judgment as an individual investor on a relative basis, it's too expensive relative to Pepsi. Likewise. An individual could need to buy a house and therefore they're selling their mutual funds and that's leading to the mutual fund manager, making a redemption, you know, having experiencing a redemption and being forced to sell, not because of anything that has to do with any of his securities, but because of what's happening in the life of one of his investors.

And so the minute you start to understand that you begin to understand that nothing is quite as simple as people think, right? So when the Bitcoin proponents say, well, the price goes up, right? Price just goes up. They're viewing that as validation. Same thing is true for Tesla. Same thing is true for the S&P 500.

Right? And so when you talk about the Geradi dynamic, as soon as there's things that people are deeply uncomfortable with, one of them is uncertainty. And so when people are uncomfortable with uncertainty, they seek out narratives that give them certainty. Bitcoin must be true because the price goes higher.

Therefore, I believe those who are Bitcoin proponents. Likewise, the economy is linked to the stock market. The stock market is the discounted future cash flows associated with the components that are in the economy. Therefore, a higher stock market price must mean that the economy is going to do well in the future.

If you recognize that that's untrue, that those are individuals seeking security in a narrative, right. I know you've, you've met with Ben Hunt and, and discuss some of these dynamics with him. If you understand that, that, that, that truth doesn't have to exist, right. That there's always going to be uncertainty.

Then you grow more comfortable with a non-consensus view because you're, you're able to say, well, that's, that's an, an explanation. It doesn't have to be the explanation. And so my objective is to actually just find out what I think is the most likely explanation that can be for the most part explained by the structural features, that force people to do something.

And so in the passive space, again, to go back to that example, figuring out the rules by which passive managers operate. That's very simple. If you give them cash, then buy. If you ask for cash, then sell it. Doesn't feel like a breakthrough once you've made it. But it's really hard to get to that point.

Aaron Watson: So you've led me perfectly into the, like the, the question that I was most excited to ask you, Mike, which is, I took very easily to your no index fund or anti index fund view because I've never spent any time or my money investing in index funds.

Conversely, I was, frankly, just insanely lucky because of a specific friend to get early into cryptocurrency investment. And it was so successful that it was actually enough for me to sell and pay off my student loans, which is the reason that candidly, I was able to buy my first piece of real estate.
Start a business, have a degree of financial security or independence that is just not granted to a lot of the peers in my generation. And so it's been a lot more kicking puling dragging screaming to maybe not completely accept, but like to appreciate your view as it pertains to the crypto, because that's been, you know, the thing that gave me comfort in the storm that made me feel good in all this complexity that we're, we're drowning in.

And so having. You know, maybe this isn't the right word, but blown up these two icons to which you know, loads of people are worshiping, what. Advice, can you give, when most of the listeners and most of the people, the humans out there are not accredited investors, they don't have the privilege of these copious amounts of funds and the ability to diversify between some of the best, you know, money managers and allocators in the business and are just trying to make.

Very simple decisions with maybe the 5,000 per year they can put in their Roth and the, you know, 2% that their company matches in the 401k. Like when you, and I'm guessing you're not talking to those characters that often, and like the day to day of the hedge fund business, but to those type of characters, what kind of breadcrumbs or advice might you leave?

Mike Green: Well, so this is actually, I mean, this is the hardest part of this process, right? Because what you're describing is a situation that, again, I think is improperly framed. So when you talk about security in retirement, which is, which is what you're describing. Right. The initial introduction of things like social security were designed as a social insurance program, it was designed to help individuals whose life expectancy had risen in a manner that they had not anticipated.
And if they effectively exceeded the genetic lottery in life, in terms of years of life expectancy, it was not reasonable to expect them to have also succeeded in the lottery and have accumulated enough financial assets to fund that retirement. All right. So, so that was the core of the observation about financial security.

And the way it historically was addressed is that you'd have children and you were relatively nice to those children. You didn't beat them too often. And if you didn't beat them too often, then they would probably feed you, you know, at least the leftover cross and gruel so that you would be able to survive into your old age. And again, that was much less of a problem because of, you know, an increasing communicable diseases and, and accidents and everything else that would have happened. We replaced that world with a social safety net. First from the government in the form of social security. And then because of competition with the government in the form of defined benefit plans, et cetera, that were introduced in the 1940s, in extraordinarily tight labor markets.

And in the 1970s, as the supply of individuals began to rise, strip the capacity to provide that safety net. We changed the structure so that it increasingly was pushed onto the individual to be responsible. All right. So social security became an increasingly un attractive retirement vehicle, right?

Relative to the contributions. It's one of the worst investments that you can make, right? If you stop and think about that every single year, roughly 15% of your income for the vast majority of people is going into something that you are then going to make withdrawals on an inflation adjusted, but not return adjusted basis.

Once you exceed the age of 70, in most cases today, it's just a terrible investment. Right. You'd be much better served taking that 15% and putting it into any number of things that you could identify yourself. Right. But we have augmented that weak social security system with a personal responsibility system in the form of 401ks and IRAs, where you are expected to be able to guarantee your own security in retirement.

Right. And I think that's actually where the core of the problem sits since the vast majority of people don't have that capacity. You were very fortunate. You nailed it. You were introduced to an asset early on, you generated enough income and wealth that you were able to give yourself a head, start in life.

That's an extraordinary gift. And I wouldn't take anything away from Bitcoin and the speculative activity that you were involved with that facilitated that. And I think that's actually part of what people see in Bitcoin is they see individuals like yourself. Whose lives were impacted by moving early into an asset and selling it to allow them to retire debts and obtain assets that have facilitated a level of fiscal independence that has changed your life.

And I think that's really powerful, but that's not what people are now being encouraged to do. Right. What people are being encouraged day is to buy Bitcoin and hold that Bitcoin. Because it's going to make them rich without them making any other choices. That's where my objection begins to emerge.
I can't possibly know the future.

I can't possibly tell you that Bitcoin is going to a million or the Bitcoin is going to zero. That's not my job. Right. What I'm doing within Bitcoin is identifying something very, very different, which is that the narrative that people are being told is not true. The us dollar is not collapsing. We are not seeing, you know, levels of money printing that are guaranteed to cause any particular outcome, whether that's inflation or deflation or, you know, the stock market going up or anything else.

Right. It contributes to those. I'm not gonna deny that, but the narrative that we're being pitched is one that's untrue. The narrative that Bitcoin is a truly decentralized system that can't be stopped. That is not true. Right. The nature of the system is increasingly centralized. They're being told that the energy consumption doesn't matter because it's being produced off for waste energy.

Again, these are not true statements and it's very uncomfortable to your point. Like what makes you deeply uncomfortable with in, in interactions? And it makes me uncomfortable, right? In interactions is to look people in the eye and say, no, that statement you just made is not true. Now that's a socially unfriendly thing to do.

It makes me very angry when people say it to me, right? That is, that was an untrue statement. Like I did it intentionally. If I intended to deceive somebody, I'm going to be very defensive. I'm going to be offended that somebody would, would feel that way. And I think you see that from the crypto community.

I think at the core, most of the people that are involved deeply in the industry know that they're engaged in a variant of fake it till you make it right. What's the hope. If they can get this thing large enough that effectively the government views, it is too big to fail. Right? I don't think that's going to happen here.

I think this is what has not been told to people is that this is different than Airbnb, right? Which was unlicensed, lodging. This is different than Uber, which was unlicensed taxis. This is different than YouTube, which was unlicensed communications or Facebook, which was unlicensed communications in a variety of ways.

Right. Those have managed to make it through, but now you're actually talking about money and the role of money in a government is very, very important, right? It is what actually allows the government creates the money. Where do you get that dollar from the only possible place you can get a dollar from is from the government.

You may not feel that way, right? You may have gotten it from your boss who paid you a check, you know, who, who wrote you a paycheck? And you think the money is coming from him or her? Who did she get it from? Right. Well, it was given to her by somebody who got it from a bank, which is a licensed agents of government or got it from the government and some of their purchasing activity, right.
The government isn't paid for by taxing government creates demand for currency via taxation. And so like all of these things just are the way it is presented within the Bitcoin or crypto universe. Is, Hey, this is just like everything else, right? This is just like all the other technology stuff. It's just totally native and totally normal.

And it's the way we should think about it. And it's not, it's just not the same thing. And if you, if you go a step further and you ask yourself, like, who are the actors and who are actually involved in this and you dig in and you start saying, is Bitcoin increasingly used for transactions? The answer is no, it is not.
Right. Is Bitcoin disproportionately used for money laundering, activity, drug activity, paying for various forms of nefarious actions? Yes, it is. Right. It represents the lion's share of the activity. If you dig into it and you look at it and you correctly do the analysis and you recognize that transactions shouldn't include things like exchanges, right?

Where it's one person buying some Bitcoin and another person selling Bitcoin. That's not actually a use of money. All right. This is speculative activity to do the same math on the U S dollar. It's not $20 trillion in GDP that you should compare it to or $20 trillion of monetary supply, right base money supply it's 700 to $800 trillion worth of transactions that occur in any given year that actually result in that $20 trillion of economic activity.

Right. The Bitcoin universe. Really only has somewhere in the neighborhood of $400 million a year in actual transaction activity. It's meaningless. It's totally, totally meaningless. I could go away tomorrow. And the only thing that would change is there would be a bunch of really ticked off people who kept their life savings in it.

Aaron Watson: And they'd be very mad online.

Mike Green: They would be extremely mad online and I'll be candid with you that like my wife is terrified that they'll be convinced that I caused it. Right. I mean, it's, it's That is that, that is the scary part is that, you know, rather than stopping and thinking, wait a second, we built a trillion dollar assets on $400 million worth of transactions.

You know, that's absurd, right? It's no different than Tesla stock or, you know, and people may disagree with me on Tesla stock. So, you know, pick something else, GameStop. Right. $25 billion worth of market cap on a company that is losing money and candidly, nobody is ever going to use, you know, a Game Stop is not going to become a central part of any economy going forward.

So it's a, it's a very similar setup and it's just made worse to, to continue down that path by the fact that the players that are increasingly involved. Is China, Russia, Iran, Kazakhstan, et cetera, countries that are using Bitcoin to evade us sanctions and effectively, you know, drive a narrative that is against the interest of the United States itself.

Aaron Watson: Mike, this is this has been heavy. This has been a lot. I really appreciate you walking us through all this stuff, because it is not a perspective that is easily gleaned. From most of the sources of media and education, I prepped you before the interview with the kind of standard last two questions that we always do actually have two, before that, the first little bit of a different vibe, would you pitch Keto as an effective diet to folks out there looking to try potentially a different diet?

Mike Green: So the quick answer is it works for me, right? It is very clear that. Consuming carbohydrates in large quantity is adverse to, to my health. And so embracing that and understanding that I've now done it twice, the sustainability of it is difficult, right? It's very hard to ignore carbohydrates and a society that throws them at you.

And, you know, a loaf of bread is an extraordinarily cheap source of calories. And as human beings we retain. The underlying features of our ancestors that say, Hey, get as many calories in as quickly and cheaply as you possibly can. Right? I mean, you don't see a paleolithic tribes, you know, walking around and be like, eh, I don't know.

That's kind of, you know, that, that mammoth meat thought, not the best mammoth meat. Let's go to the next group of mammoth and, you know, try to find like, you just don't do that. Right. You find food and you eat it. That's what we are. We're omnivores. And. You know, carbohydrates are remarkably calorie dense.

They do an amazing job of giving you the energy to stay alive and your brain needs to consume an incredible number of calories. And so we're, we're naturally evolved to gravitate to that sort of stuff. Now we happen to live in a world in which the biggest problem that we have is not how do we for, for the developed world, I just want to emphasize this.

The biggest problem is not, how do I obtain enough calories, but how do I raise the output of my body in terms of exercise or various other activities to dispense with the calories that are available to me or restrict my caloric diet and keto proves to be an effective way of doing that by isolating particularly towards proteins and to a certain extent toward fats, but at the end of the day, it's all calorie restriction and your body reacts to, you know, eat is very, very easy for people to eat a bag of chips.

It is very, very hard for people to consume, you know, a 64 ounce steak. Right. You, your body starts to shut down and says, please stop long before you make it through, you know, two giant steaks or whatever the equivalent calorie component would be. And so it, the the answer is yes, I would recommend it with the caveat that it works for me. I can't speak to everybody else.

Aaron Watson: I've done it and I've found that it helps. I did it with my, my now fiance and my mom to kick off a year and the little bit of like commiseration while you're going through it. And like staring longingly at the box of pasta in the cabinet is definitely a helpful part of it.

Mike Green: Well, the other thing that I would say, so my wife and I are both doing it between the two of us. We've lost crazily 80 pounds since October. And so I'm, I'm actually really pleased with the way that's gone. I will tell you that I've done it twice. This is the second time. And the number of choices that are available to you to consume is keto products.

Whether that is keto sweets or that is keto snacks or that is guidebooks or KIDO, pasta, pastas shirataki noodles. For example, I actually really enjoy it. It works, you know, your options are much better today than they were five years ago and that makes it easier to manage. So to answer your question yes, with the caveat, I'm glad to hear that it worked for you as well.

And I agree the secret is support.

Aaron Watson: For sure. I'll also link for folks. The, the DiCicco brothers and their key to life coffee is like a keto friendly drink. I freaking love it. It's protein and coffee. Amazing way to start the day, but there are a past interview doing really well. Mike, this has been fantastic.

I don't want to take any more of your time away from the, the swim meet weekend that you're participating in. So not participating in your you're you're cheering on with, with your son. Where can people connect with you in the digital world if they want to follow, you know, other, other things that you're finding.

Interesting. Learn more about logical, all that good stuff.

Mike Green: So for Logica you can go to logical funds.com, www.logicalfunds.com. We have a research blog where we regularly publish our thoughts to follow me in the electronic space or in the internet space. The easiest thing to do is, is Twitter, where I'm confusingly prof, plum 99, P R O F P L U M 99.

That's a, there's a long story behind that. And even more confusingly I managed to find the only better bolder guy as my avatar. So I've got Vicini from the Princess Bride is my avatar again, and an outgrowth of never thinking that I was going to have a meaningful social media presence, but now it's too late to change.

And if I were to replace Wallace Shawn with myself, people would be very confused.

Aaron Watson: So I yeah, I don't know if it was like 18 months or so ago. I was following some other fin twit characters and I saw them interacting with this guy. And I was like, who is this? Like, cause, cause you're used to some of the suit anonymous characters in, in financial Twitter.

Okay. But there was a couple of like characters that I had known current past guest of the show. And there was this guy with like this ridiculous picture. I was like, is this really who this is? I could not figure it out. And it took me like six months to realize it had been, cause I'd seen your real vision interviews.

It took me a while to figure that out. So hopefully a couple of more people will figure it out soon. This has been fantastic. Thank you so much for doing this. I'm going to link all the show notes or all the links you just mentioned in the show notes, going deep with aaron.com/podcast for every single episode or in the podcast app.

You're probably listening to this right now, but before I let you go, Mike, I'd like to give you the mic one final time to issue an actionable personal challenge to the audience.

Mike Green: So the challenge that I keep trying to get people to engage on and I've used the, you know, what may or may not be good language is vote better.

Right. And what I actually mean by that is that many of the problems that we see in our society, the reaction that people have to things like Bitcoin, et cetera, is actually a reaction to saying, Hey, the policymakers, aren't making choices that I support. I don't agree with the decisions that are being made.

And, do you attempt to take that power away from them? By changing the system in wholesale format is unfortunately somewhat doomed to fail and is rife for manipulation. What I would encourage people to do. And I actually think it's one of these things that the coronavirus could have an unintended positive effect here is to get people, to try to engage at the local level attend.
It sounds crazy, but attend your local city council meetings. Pay attention to who's running for office locally at participate, run for office. If you think you have good ideas, right. But become engaged as a civic citizen, because the core of the problem that we face in our society today is that we are coming apart.

We no longer have the capacity, or we don't seem to have the capacity to interact with people that are nearby us that may only share a geographic location with us in terms of our viewpoints. And so that is what I really truly believe is going to be the critical dynamic is seeing the young people like yourself who were brilliant, successful, have the future ahead of them.

Haven't had their children yet. And aren't looking at it from the lens of somebody who saying, boy, I really need to actually try to make sure that I'm securing a future for my children. Right. Look at it and somewhat dispassionately pretend that you're, you know James Madison and saying, how do I build this future society?

What do I actually want the restrictions on government action to be, and start with your local community? And you'd be surprised how enjoyable that process can be. It can also be a real pain in the ass, but it's, you know, it's a technical term, but it really is like if we're going to make this place a better place, we got to start there.

Aaron Watson: Well now it's your turn be, being into kind called me brilliant. But I really, really you know, I love the challenge. I appreciate the insights that you've delivered as we've shared this hour or so together. And I hope that we can, you know, continue to have the conversation at some point down the road as we all struggle to make sense of, of everything that's going on.

Your, your voice has been in, in certain ways of light in the dark. Yes, for me and hopefully for others as well. I really appreciate you coming on the podcast.

Mike Green: Well, I'm incredibly flattered by that statement and I hope it's true and I'd be thrilled to continue the conversation on the future. Thank you for having me as a guest.

Aaron Watson: We just went deep with Mike Green.

Hope everyone out there has a fantastic day.

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