The Derivative - The Trillions of Dollars tracking Three Million Indices, with F.T.'s Finance Correspondent, Robin Wigglesworth

Episode Date: March 24, 2022

Interesting times in the world bring interesting guests to the show. And, there's no better time than now to sit down with a global finance correspondent, especially with the U.S. unleashing their USD financial war against Russia. Robin Wigglesworth, a Financial Times journalist, joins us all the way from Oslo, Norway, for a captivating chat about his home country, the current turmoil between Ukraine and Russia and its impacts worldwide, and why there isn’t more of an uproar over the current “tech wreck”. We also flip the script and talk to Robin about his many fascinating interviews, from industry icons like Larry Fink, Cliff Asness, and Jack Bogle, to the infamous bet between Warren Buffet and Ted Seides, and uncovering the inside scoop from his latest book, Trillions: How a Band of Wall Street Renegades Invented the Index Fund and changed Finance Forever. Plus, we take a deep dive into the massive growth in passive investing indices (3 million to be exact), ETFs, and more! Chapters: 00:00-01:28 = Intro 01:29-06:32 = Norway 06:33-20:25 = Death of the Dollar? & the Oligarch Class 20:26-30:41 = Tech Wreck & Artificial Smoothness 30:42-43:52 = Memorable Interviews, Industry reporting & a $1.5 Trillion Sovereign Wealth Fund 43:53-53:41 = Trillions: a Chicago angle, and why Credit ETFs held up ok 53:42-01:11:14 = Trillions: Jack Bogle & Active vs Passive is BS 01:11:15-01:21:16 = Trillions: What the future looks like/ the Big get Bigger Follow Robin on Twitter @RobinWigg and check out his latest book Trillions at robinwigglesworth.com Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Howdy, everyone. I hope you enjoyed the first weekend of March Madness and have at least one bracket alive as we head into the Sweet 16. We've got a good one for you today with Robin Wigglesworth joining us from Oslo, Norway. That's pretty far away. Hope you enjoyed the first weekend of March Madness and have at least one bracket alive as we head into the Sweet 16. We've got a good one for you today with Robin Wigglesworth joining us from Oslo, Norway.

That's pretty far away. Robin's the global finance correspondent for the FT, Financial Times, where he writes about all that's happening in the global financial world. You know, like the U.S. unleashing massive U.S. dollar sanctions on Russia. And gets to talk to all sorts of interesting folks like Larry Fink, Cliff Asness, and Jack Bogle, all three of which we talk about in this chat. He also wrote a book not so long ago, Trillions, about the massive growth in passive investing. Indices, he mentions there's now about 3 million indices, hard to believe, and ETFs. So send it. This episode is brought to you, maybe for the last time, by RCM's algo execution group, RCMX,

which was acquired by TT last week. That means those super cool algos like Prowler and such will be native to the TT platform and available to all of their clients sometime soon. Go to tradingtechnologies.com slash news dash releases. That's news dash releases for more. And now, back to the show. All right, here with Robin Wigglesworth. Welcome, Robin. Thanks for having me, Jeff. Great to be here. Yeah. So I was upset to read in your Twitter bio that you are not, in fact fact part of the Harry Potter universe. That's correct? Yes, sadly. I think there's probably more money in being a Harry Potter character than there is in financial journalism these days. But yeah, the last name, despite being Norwegian, is a legacy of my English father, who's from the north of England, Cumbria.

Got it. And you're born and raised in Norway? Yep. So my father came over here. Both he and my mother were architects. They thought they'd live in Norway for a few years and then the UK for a few years. And then they kind of decided that Norway was not the worst place in the world to live and basically stayed here. So I grew up with a very Harry Potter-esque name on the west side of Oslo, which was, you know,

where everybody else is called Hanson, Svensson and Johnson. But, you know, Norway's getting a bit more international these days, at least. Yeah. And tell us a little bit more about Norway. Never been on my list for sure. Well, I mean, I used to joke that Norwegians were the only people in the world that could go to Switzerland and think it was cheap. It's changed a little bit since I was young, but it's still diabolically expensive. So it pains me to admit this, but when people say they want to visit Scandinavia, I quite often point them towards Copenhagen or Sweden, because Copenhagen, capital Denmark, and Stockholm, the capital of Sweden, are beautiful cities as well, and they're just cheaper.

But we have the fjords. It's a very long, beautiful country. And if you like midnight sunlight or Northern lights, then you have to go to Norway. You can't see that in Sweden. Right. That's,

that's probably how most people do it. Right. On those little cruise ships in the fjords. Yeah. And, you know, obviously you need to, you know,

depending on your job, you have to save up for a lifetime to afford them, but's just it's beautiful my wife is from the west coast and it's stunning i i mean as much as you know visiting the in-laws can be painful at times i just like just look out the window and it's just incredible um so that's really nice and you know norway is also incredibly boring which is why when I grew up here, I desperately wanted to leave Norway. But as an adult with children, you kind of realize that being boring is kind of Norway's superpower. It's not oil. It's being boring. After living in the US and the UK and the Middle East, boring, I think, is underrated.

So I'm glad to be back here now. And why so expensive? Well, it's just generally speaking, because of oil that pushed up the cost of everything and very high labor costs. So, I mean, certain things aren't that much more expensive in Norway than it is in the US or the UK or elsewhere. Like if you buy an iPhone, that's basically the same price. Except, you know, the minimum wage is 10, 15, 20 bucks an hour,

depending on the labor unions. So, you know, anything that touches the hand of a Norwegian woman or man, it's going to be a lot more expensive. And then we decide also to skew taxes towards more consumption rather than labor. So the labor taxes aren't the income tax isn't actually that much higher here in Norway than what I had in New York, actually. But VAT is dramatically higher. It's 25%. And there's extra charges on booze, cigarettes, anything the Norwegian government thinks is bad for you.

So especially having a drink after work gets pretty pricey. Gets pricey. And I respect Norway. You're basically the size of greater Chicago here, right? Five, six million people, right? And you win the medal count at the Winter Olympics almost every time. That's amazing. Well, I call that the real Olympics.

The Summer Olympics is the bullshit Olympics. The Winter Olympics is the real deal. But obviously, I'm a little bit biased when it comes to being Norwegian. Sometimes I feel bad about this. I feel I'm not kind of holding up my side of the national bargain by not having any Olympic medals. Right. In my mind, everyone's walking around with like a gold medal around town. Yeah, a few of them, two or three, right?

I mean, it's just the done thing. So yeah, I'm lagging on that respect. I like cross-country skiing, but was not olympic level quality put it that way and then i'm a big tour de france fan so i know thor hushfold from back in the day uh yeah and who's the current one bosenhagen i think is your current pretty good cyclist yeah we've had a few and it's kind of a weird i mean it comes and goes in spurts but norway is a fairly sporty country you know even people that aren't into kind of athletics and sports do quite a lot from an early age so obviously skiing is a big thing but across the board people get quite into it um but it is weird

how we occasionally have a really good cyclist or you know the world's best chess player is norwegian as well that's never happened before and then we get very um puffed up and proud and think that Norway's best place in the world yeah you got an argument let's start take us through what you've been writing about for FT over the past few months um kind of what stood out to you is rather important well I mean it's hard to get look beyond Ukraine it's Ukraine Ukraine Ukraine these days I mean I'm thank God I'm not you know writing the the really nasty kinetic stuff I did join the FT as a Middle East correspondent and briefly was a war correspondent in in libya and bahrain during the arab spring

but um you know i just covered the financial ramifications and there's so there's so much going on and i think the really huge stuff is probably going to play itself out over decades there's the financial sanctions the west have slapped on russia was way beyond anything we've ever done, outside of a few niche examples like Iran and North Korea and Venezuela. And Russia is like, that's a big country. So if I was, you know, a policymaker sitting in the central bank in Beijing, I'd be thinking quite heavily what this might mean for my country, and frankly, for a lot of countries around the world. I mean, it wasn't that long ago that we had a president in the White House that was actively threatening European allies as well. So now that the US has kind of discovered that it

can nuke a country's financial system, inflict immense damage without sending a single cruise missile, the temptation to do that again is going to be quite significant. So I think that's one of the main things I'm thinking a lot about and writing about these days. And what are your thoughts on the unintended consequences from a U.S. perspective there? Like, right, U.S. dollar could be in trouble. People say, I don't need that much exposure if they can nuke it so easily.

Yeah, and this is where I think actually why I think it's so interesting in that I think that is bunker. Essentially, there are people that have been calling for the doom of the US dollar for decades, and obviously has been declining slowly over a long period of time. And whenever a country prices some export in a different currency, people say, oh, my God, it's the death of the dollar. And essentially, people forget that there are no alternatives.

I mean, if you're being charitable, you can say the U.S. dollar and the U.S. financial system is the least smelly shirt in the closet. In reality, it's the only thing in the closet that is realistic. The euro's capital markets just aren't deep and liquid enough uh there are all sorts of you know solvency issues with all that can the eurozone keep together issues that were dogging um you know that that currency for us not so long ago and after the dollar and the euro, which the dollar is 60% of global reserves, the euro is 20%,

you have to drop down many, many notches before you found the renminbi or the New Zealand dollar. I'm sure the Russians would love to put all the money in the Kiwi dollar or something like that, but it's just not realistic. China, for example,

cannot buy anything but US treasuries. So I don't think actually this is a threat, but actually that makes the consequences even more interesting because if the US can do this without worrying about the standing of the dollar or not worry too much about the standing of the dollar, that's why the temptation to do this is going to be pretty powerful. The next time some country thumbs its nose at the US, maybe doesn't invade a neighbor, but does something reprehensible,

that means that you look around for tools to punish them with. And do you feel it was a message to China as well? Like, hey, here's what we can do. Stand down a little bit? Possibly. And there are many sort of secondary sanctions, parts of, of,

you know, the aspects of, of the sanctions that Russia that might still affect China or will deter China from actively helping Russia evade these sanctions. I think, you know, they weren't keen on, on showing this off.

This has been percolating in policy making circles for decades uh and i think they were quite keen to keep this weapon uh up the sleeve knowing that the chinese know it's there already the chinese aren't stupid they knew this was you know potential if there was ever a whole war um but it certainly has demonstrated the awesome power of the US control of the dollar-based global financial system, which is they've been careful not to misuse in the past. And in this case also, you know, it was very multilateral,

but I still think, you know, it has precedence value that, you know, we shouldn't discount. And explain what you mean by multilateral, like UK participated, rest of the euro. Well, so let's say the US had done this unilaterally. That would have been incredibly painful. They could have bombed the financial system of Russia pretty heavily. But as long as they could sell and deal in euros without any kind of impediment, that would still be pretty powerful.

The central bank reserves, you know, a lot of it is in dollars, but some of it, again, is in euros or Swiss francs or British pound sterling. The fact that they got the Europeans on board, or the Europeans seem to have belated, have actually pushed some of this, the UK, Switzerland, even countries like Singapore, means that the effect of this kind of de facto financial and economic damage to any country's financial system if they choose to. But it's harder to do anything about it if it's a multilateral, a truly multilateral attack. Do you think some of this is pushback against the Russian oligarchs and the Russian money? I think that you see more of in Europe than here in the US.

But the public was like, yeah, get those guys. They're flaunting their money all over Europe and whatnot. Well, I think that actually probably made it harder, certainly initially in Russia. There is so much Russian money floating around, especially in the UK, for example, but also in Germany and a few other countries. I think what, frankly, even Western politicians underestimated and Putin clearly completely missed is that, you know, sitting in Norway and having lived in the UK and in France and lots of German friends, you know, Russia's being acting increasingly aggressive for a very long period you know we had georgia we had crime in 2014 we had the interference in the u.s election you know russia had increasingly being seen even among norwegians who are very touchy about being friendly with our big neighbor we share a border with russia

um you know we're increasingly feeling quite under the cosh. I mean, getting buzzed by Russian jets for a long time. So deliberately provoking every single neighbor. So I think when finally Russia did something so obviously wrong, that even, let's say, NATO opponents or friends of Russia in Norway or Sweden or Germany or the UK, it just became indefensible. So suddenly we reached a tipping point where essentially everybody, there was a gushing of political sentiment the other way around. And the

politicians just frankly had to get on board with it, no matter how much Russian money might be sloshing around. And then your recent article was talking a little bit about how it would be very, in some cases, it's going to be very difficult to actually get at that oligarch money. Talk a little bit about what you found out there. Well, I spoke to a guy called Jay Newman, who was a senior portfolio manager at Elliott. He's a really interesting guy. He's now actually written a really fascinating thriller called Under Money, about some of the seedy money and how it runs the world,

which is kind of interesting, giving his background fiction. But I think heavily inspired by, you know, some of his experience. And also, you know, he's pretty plugged in certain foreign policymaking circles. And, you know, he spent over a decade suing Argentina over the terms of its 2001 restructuring. And as part of that, basically make life hell for Argentina and its government led by Christina Kirchner. He went after all of her assets as well and the assets of her husband, her predecessor, Nessa Kirchner, and anything that they could try and seize of state-owned artisan property around the world.

So he has a lot of experience in digging out these things and trying to attach them. And his view was that, you know, even with the awesome power of the US government, these guys are very good at hiding their money. You know, I mean, the US government has always fought against organized crime as well, but we haven't managed to eliminate that. There's still a lot of dirty money in the world, and there's still a lot of people are very willing and able to help you hide it. So apart from seizing a few yachts, a few chairs,

like a football club here and there, he felt that, you know, we could dent their wealth, but we weren't going to be able to eliminate the oligarch class and really bring that much pressure to bear on Putin. Because this is a tool for him. He doesn't care if the Russian oligarchs lose a few billion dollars here and there. Putin doesn't, right? No.

And was Elliot the one who seized the state-owned Argentine old sailing ship that was in London I think right? in Ghana actually it's good to show how far Elliot will go yeah it was called the Libertad three mastered frigates beautiful ship that once docked in New York when I lived there and I didn't actually get to visit it which was a bit of a shame but yeah that was wild right and what they i think i was in the book too right eventually they got back something um yeah they did well essentially they just managed to you know through some legal jujitsu and i think a a u.s judge called grise who had grown so sick of Argentina, essentially just ignoring the US courts, that he interpreted a, frankly, nothing burger clause in a very aggressive way and essentially kind of forced Argentina to deciding whether either if they wanted to keep paying all the new restructured bondholders,

which they'd been doing for over a decade or almost a decade, then they had to pay Elliott. And Argentina decided they would rather default again than pay Elliott a cent. But eventually there was an election in Argentina. Reformers called Macri came in and he just wanted to set aside this entire saga and kind of turn Argentina

as he put it into a normal country. So he, after over a decade of litigation, I think it was close to 15 years, settled with Elliott and all the others of hold that creditors, as they were called. And we might have experienced the same thing with Russia now, right? With some of the Russian bondholders. Well, Russia paid their bonds recently, which was interesting, but I think it's because, frankly, they paid it, as far as I understand, with money that is already frozen abroad. So their view is, well, actually, this money is frozen, so why not we just ask OFAC, we'll just transfer the money. And OFAC, the Office for Financial Control in the US, basically let them pay that because it doesn't help Russia in any way.

They're able to unfreeze the money and use it to prop up the ruble. They're just paying overseas creditors, mostly US and European bondholders. But I think a default is very, very, very likely, probably April, May time. And yes, that's going to cause an almighty messy restructuring, if we can even restructure it under the current circumstances.

Because under the current set of financial sanctions, you in practice can't actually restructure Russia. It's going to be put in the deep freeze. And there's going to be legal hell to pay eventually. Have you done any reporting on who are the main bondholders? So like geographies is mainly in Europe? Europe and US. If you look at the list of it,

it's the usual suspects, some just because of their size. Like BlackRock has huge exposure to Russia because they're a huge asset management firm. PIMCO had pretty hefty exposure in a few of its funds. Also product that they're so big that they have to be in all the big markets. And below that, it gets kind of a few California pension plans. It's really standard.

Russia was not that huge. Russia is not China, right? Russia is not what we remember it back in the Cold War. It is actually a middling-sized country with vast oil and gas exports. But it was a reasonably-sized part of the global emerging markets complex. So there were very few people that escaped, entirely unscathed from it. And it's going to be interesting to see how they deal with these assets because they're frozen.

You can't sell. You can't get out of them now. Yeah, and have all those firms marked it down properly. There's a whole Gordian knot to untangle there. Switching gears a little, one of your recent pieces was on this what i call the tech wreck i don't know what you're calling it but right there's all these tech names big names that are down 60 70 80 90 percent uh the apples the microsoft's have held on but it seems to me kind of underreported of all the carnage that's going on under the hood what are your thoughts no i think that's

a great way of looking at it actually and i also call it a tech wreck because frankly i love terms like that i think the reason why it kind of goes underappreciated or maybe even is kind of cheered is because like we obviously had an insane market from 2021. And when some of the air started coming out of some of these tech names in 2021, it was mostly the spec tech names, the more speculative size. So the non-profitable, wildly expensive moonshot stocks. And for a lot of investors investors that felt like kind of justice like they had like lost out on all these kind of kind of stupid names that were levitated to like the heavens by central bank money and retail traders and you know go-go growth managers like Cathie Wood. So people almost kind of cheered it.

Will Barron 1,000 But I think almost without people realizing what was initially a spec tech crash has kind of morphed into something far bigger. So I did some numbers on this a few weeks ago, and obviously this is a kind of journalistic Apple-Surpears comparison, but the NASDAQ has lost over $5 trillion worth of market cap since the peak in November 2021. That is more than its entire market cap drop from the peak in 2000 to the bottom in 2002, 2003. Right. So just in a few months. Which seems like a big deal now yeah well

obviously the market is vastly bigger now i mean the dot-com crash was just mammoth but in dollar terms i think we can't underestimate that a lot of people are hurting and some of these people might just be sitting on reddit or you know nursing some option trades on robin hood but there's some serious people have lost out of money like some target cubs went very big in some of these names kathy wood you know she was the queen of the bull market not so long ago now you know arc is kind of taking on water um so i guess i think underperforming the nasdaq as a whole now right yeah and Yeah. And frankly, it's underperformed, I think, Berkshire Hathaway, the ultimate boomer stock since the beginning of 2020.

So for me, the question now, and I still haven't kind of made up my mind or what I think and what will happen, but to what extent will the carnage and public markets start echoing to private markets and then start boomeranging back and forth? I mean, I think

we can already see that, but I think the next stage is if we start seeing some big, nasty, hefty down rounds in private markets. And I think we're on the cusp of that. And that's going to slow down everything again, because there'll be less VC money going in. That means more rounds will be down or the duration of the investments in private markets will be stretched out. That means public market valuations probably have further to come down and so on. So it's going to be interesting to watch. Will Barron And it seems to me, right, private equity can kind of do no wrong for so long, for 20 years here. And maybe finally, there's a little chink in

their armor here. And everyone's like, oh, yeah like oh yeah they're paying right they were paying premiums to the public market um it used to be you got a discount because the illiquidity and that was the theory behind the the gains but now they're paying premiums and maybe it's going to come home to roost yeah i think across the board and this is one of my strongly held hot takes, but I think it is quantitatively backed as well, is that what was a private market discount? There was an illiquidity premium that you could harvest in private credit, private equity, growth capital, venture capital, and so on, has become a discount. You are paying up for the artificial smoothness of private markets where you don't have the kind of whiplash of daily marks. And institutional investors, because of some fairly simplistic way of how they just show their portfolio and risk adjust stuff,

I think would just incentivize to go over their skis on privates. Now, this still might end up being fine, but it's definitely the longer running train wreck or longer running thing that I think might end up being a train wreck, that a lot of people are going to rue kind of doubling their private, quadrupling their, in some cases, their private market allocations over the past five, 10 years. And do you think that's interesting to me, right? The artificial smoothness, you called it, right? They know they're smart, all these institutional.

So they're kind of willingly and putting the blinders on and saying, oh, this is smooth. This has a better sharp or whatnot because of this artificial smoothness. Like that's just always odd to me. Like they must know that they're doing it but they don't either don't care what are your thoughts it's one of the attractions i'm just straight up like i mean frankly if you could find a way of doing leveraged small caps but uh an institutional investor could only look at it once a quarter or once a year. I mean, people will beat down doors to get into them. Yeah, I mean, essentially, they know this.

I've talked to people. It's not something they will say to a journalist in the first five minutes, but they'll willingly admit that, no, of course, that is one of the attractions. And I don't see that inherently as a problem. Fundamentally, these are long-term institutional investors. A pension plan doesn't care that like the stock market drops 20% in a month. They just don't really care because they're long windows. They only care so far it becomes a really nasty headline in a financial newspaper like the FT.

And I sometimes have a lot of sympathy for them for that. The danger is when they are overpaying for this smoothness. The smoothness in itself is not potentially problematic as if they overpay for it. And also if they increase their investments to such an extent that it erodes the returns for everybody, like how much money can go into large scale LBOs and it not crimp the overall return for the industry after fees. And that's why I think people have seen, well, private equity or venture capital has delivered IIRs or 15, 20% a year over the past 20 years.

We'll expect that for the next 20 years, even though the size of those asset classes has gone just ballistic. I think that's the fantasy that people maybe are kidding themselves a little bit about. And now, is it BlackRock that's taking it out to the retail public? Well, BlackRock a little bit,

but Blackstone is obviously the big... Yeah, yeah, no, I mean, they did grow out of each other. It's a pretty natural mix. I once joked to Larry Fink that he should team out with Steve Schwartzman again to make it a Black Black or a Stone Rock or something like that.

He didn't find it funny at all. But, yeah, Black Stone wants to go retail and, you know, you can say, I mean, by retail, we don't mean but yeah, Blackstone wants to go retail. And, you know, you can say, I mean, by retail, we don't mean kind of me. We mean people that are, you know, high net worth individuals that do have a few million of liquid assets.

I can see in theory the argument for that, that, you know, private markets could, and are a completely legitimate part of a even an individual's portfolio but i can also see roughly 50 000 ways it'll get abused and they'll end up mis-selling not necessarily a blackstone or like the big firms but smaller firms fly-by-night firms will start shoving stuff down the throats of retail investors that don't know better. Because that's kind of how it goes all the time. Will Barron.

And to me, it's more like the arc issue, right? Of all this money flowing into these smaller cap companies that really can't support the new investment at scale in these private companies. Say there's 50 billion goes into some private market ETF, how are they going to deploy that? Yeah. No, I mean, it's going to be interesting how it works. And some of that still makes sense to me in that, you know, one of the things both in private and public markets that, you know, we have more actual quantitative proof for now is that the skew or returns is just wildly greater than we ever thought before so we all thought that maybe 20 30 percent of companies account for the vast majority of gains

in reality it's close to like five percent five percent roughly of all companies listed in the united states over the past century account for $30 trillion worth of wealth creation. So that means, I think the stats are over half of companies lost all their money or you would have made more money in T-bills over the past century, over the 20,000, 30,000 companies have listed in the US. And venture capital kind of takes that to the next stream. Like it says, look, we don't care about, we'll invest in like 50 companies 20 will go bust 10 will break even another 10 will do okay and hopefully in those kind of the last cohort we'll have a few kind of thousand baggers or one facebook or something

like that and that kind of works so and especially if you don't have return expectation of 20, 30, 40%, if all you want to do is break double digits, that kind of does make sense. Like buy a few lottery tickets. Yeah. You mentioned talking with Fink. So have you interviewed him personally? Yeah. A few times. What's he like? What was it like? Is he all business or does he lose himself?

No, he's a pretty easygoing guy. No, I mean, look, I haven't spoken to him so much that I know the contents of his soul, but he's a smart, intelligent, chatty individual. And I think one of the things I still think that people don't realize that I really get out of it when I do it. He's got one of the finest strategic minds

in the business, I think, at least in the business of the financial services world. I've never spoken to people like Jamie Dimon, but there are some people that are just great operations people or they're very innovative in products and all these things. I think Larry thinks superpower is that he has seen the way that the investment industry is going to evolve quicker and has made the right moves to capitalize on that quicker than everybody else.

And that really does shine through when you talk to him. What are some of the other big names you've interviewed that have stood out? Ken Griffin is an interesting guy. Yeah, I was just like a Zoom phone call, you know, during the pandemic. He's an interesting guy. Who else? God knows. I'm trying to remember, there's been a few over the years. I'm trying to think of my favourite ones. I did, the FT has a famous interview slot called Lunch with the FT, where we sit down for a nice meal, ideally boozy as well,

and interview somebody completely on the record and it can get quite personal. And I did one with Bill Gross and, you know, there's nearly a journalist in the world who hasn't interviewed Bill Gross at some point, but he's still so relentlessly open and thoughtful about everything that, you know, it's just a fascinating interview. He has no he doesn't hold back at all.

And that was actually really interesting. No filter, no filter at all. A bit like that. Jack Bogle as well was fascinating. I mean, just his voice was incredible he had like even when he was very old and very sick when i spoke to him shortly before he passed away i did one of the last interviews with him before he um yeah he died in january 2019 and you know he still had just immense presence you know, when you walk in to room or you talk to somebody and you just, there's nobody in that room, but that person, I think that was incredible. And

his voice itself was just, yeah. Yeah. Incredible. Uh, and I see you brushing up against the hedge fund space a lot in your articles. Um, a lot about AQR Bridgewater, the biggest names. do you ever go downstream a little bit and talk some about emerging managers or some of the smaller european hedge funds any managed future stuff oh yeah i mean although see i know ray dally i've spoken to a lot and cliff hasness and um and yeah i mean generally speaking i'm willing to talk to everybody uh because quite a lot of the best stories are not necessarily from the top people. I think, look, I mean, I'm dishing industry dirt in public here, but, you know, sometimes journalism can, even financial journalism can be a little bit like celebrity journalism. We care about our celebrities. Like a Bill Gross is a celebrity in our world. I remember when I started Bloomberg News, I was told,

these are the people, the newsmakers, the people that are so well-known, if they say almost anything, you can turn into a news story saying, person X, Y, Z said Y. But essentially, it becomes thoughtless and you end up having the same roster of famous people that you talk to all the time.

And that's why I've always tried to talk to as many interesting people that are emerging or lesser known or just doing something really weird and niche. And sometimes that's sadly through, let's say, a PR person. But most of the time it's through word of mouth. Like I'll know somebody who said, oh, by the way, Robert, you'll really get a kick out of talking to person X or Y because she's amazing or he's incredible or he's insane or she's mental. I mean, who's got something interesting to say that is somehow out of the normal stuff that you hear was able to articulate it better, or maybe they're terrible communicators and the pr person doesn't want to put them in front of a journalist to save their lives but they're still really

interesting i love those people the people that you you can never put on cnbc but it's still absolute legends in the financial field maybe they're just not famous um i remember there's one guy i interviewed called arman avanassins at goldman sachs i mean he coded sec db that kind of made their programming language in the chi operating system at goldman he's now the head of their quant investing um qis goldman sachs asset management and he's one of these people there's like massive brain you know rambles on uh but just really fascinating to talk to so look i'd never book him on cnbc but i'd talk to him for two hours about quantum investing any day of the year which as a consumer of this content right i appreciate i think a lot of the consumers get sick of like, oh, great. Let's hear what Ray Dalio has to say again.

Right. It's almost tarnished their reputation because they're so everywhere. You're like you're sick of hearing about it. Yeah. And speaking of the business of newspapers, do we even call that anymore? Right. What's that been like for you as a reporter of like the gating and the subscription model and all that is it has it worked is it still in progress no i mean my personal career that way has been pretty lucky in that you know i became a journalist in a small crappy trade magazine but trade magazines you know if they do it well they can print money like people love reading about their own little niches and industries um and if nobody else cares about it then you know you can do really well like i i wrote about islamic

finance and and it's like it's really esoteric stuff but i i love esoteric kind of complicated weird stuff so i love kind of figuring out how islamic reinsurance works as opposed to normal conventional reinsurance for example. And then I worked at Bloomberg News which has the best business model in the world in that they're subsidized by these outrageously expensive terminals. And then the Financial Times which had frankly struggled for decades but when I arrived in 2008 had kind of just crossed kind of the tipping point, I think, I feel, on a successful transition to being far more completely subscriber financed and digital. So the transition wasn't complete, but basically they decided, look, we just need to make sure that we can't depend on advertising because all the arrows are pointing the wrong way.

We need to live off our subscribers. And we have to then, to do that, we have to sell them a product that they're willing to pay for. So we started jacking up the price quite a lot, year after year after year. So it's now one of the most expensive newspapers in the world. But then reinvesting that in both the journalism, but also the product itself, the website, the graphics and things

like that. And touch wood, we got ahead of that big industry trend before many other places. And last bit on, before we get to the book, last bit on Norway, the largest sovereign wealth fund in the world, I think, right? One and a half trillion, is it? Yeah, 1.23. I mean, you can literally go onto the website and see the numbers. The Norwegian Sovereign Wealth Fund is so outrageously transparent. They have a daily ticker. That ticks by second. You can see the money going up and down,

mostly depending on whatever oil prices and the stock market is doing on that day. I think it's 1.3 trillion now. Last time I checked. And yeah, we think that's the biggest in the world. If you count GPF in Japan, so that's a government pension plan in Japan, that's a bigger pool of money overall,

but it's not technically a sovereign wealth fund. And for a long time, we kind of all pretended it would probably be the Abu Dhabi Investment Authority, which I used to cover, but they've never said how much money they have. And I think there's a reason for that. That's not quite as big as what people used to expect.

And the returns haven't been that great either. So though the returns are now being published. And what have some of your research over the years, like, is that too big to do anything meaningful? Do they just have to own everything and basically accept whatever happens? Yes, basically. It's basically a giant index fund with a few bells and whistles added on. I think it's an interesting way that they don't always uh do this as well as sometimes maybe

they pretend but i think it's a good way of showing that you can do you can be massive and lumbering a passive player but still add a little bit of value with tweaks like if they can just do smarter indexing like rebalancing slightly more opportunistically for, if you can add a couple of basis points of returns a year on a figure that is $1.3 trillion, that adds up to a lot of wealth for the Norwegian people. So that's kind of what they do. And they have some sleeves

that are to external managers, typically in areas where public markets aren't that good. And they'll do some real estate. They'll partner with certain big owner operators, for example, or professional management companies to buy big properties in Boston, New York, Paris, London, and so on. But just moving their 5% target allocation up,

basically they have a 5% target allocation, getting 5% target allocation up. Basically, they have a 5% target allocation. Getting 5% of the fund into that, it's just been slow because it's so big and property is a pretty liquid asset class. And does it work like the Alaska Permanent Fund? Like, do the citizens get a distribution every year? I wish, but no. Well, we do in practice right so the way that the way

that it was built was actually mostly to Shield the Norwegian Kroner because Alaska is just part of the U.S right so the problem was with when countries when they discover some sort of natural resource boom it quite often drives the cost of the currency up and it makes all other exports uncompetitive so that the fund was set up to house oil revenues offshore and it would be just gradually slip into the economy over a long time so they kind of said the long-term return that average we can expect four percent four percent was pretty conservative now but that's when you know it was mostly in bonds. So the idea is that basically the governments of the day, whoever they are, can spend roughly 5% of the fund a year.

And then some years that has in practice been close to 1%, 2%. And some years, like the financial crisis and the pandemic, they take a lot more out of the fund. But yeah, it's worked pretty well well and we all see the benefits indirectly in that you know healthcare is free education is free universities pretty much free um so as much as norwegians do love to complain having lived most of my life now abroad i think they're very little to complain about actually yeah that's a big number it's like what are you saving it for it's like the endowments here in the u.s right gotten a lot of trouble during the pandemic because they were

taking ppp money and not firing cafeteria staff it's like you have 40 billion in your endowment what are you using it for if not to to, you know, for those hard times. Yeah, I actually had some sympathy with that. I mean, it's a slightly cruel joke, saying that US universities are hedge funds with schools attached to them, but only slightly cruel. And I do think that endowment is there specifically for situations like this. And taking government money and basically gouging students full-time tuition fees when you know everything's remote i think was in poor taste personally but um you know i understand it it's like when you have a big pot of money the temptation is to always keep growing it right and i guess what the norwegian government back in the day kind of harnessed that they knew

it's so tempting to spend all this money immediately so they kind of turned it into a bit of like a civic virtue that Norwegians are proud of their big fat oil fund though we don't call it an oil fund anymore we call it the government pension fund global yeah a bit more boring well it's going to be growing uh big bigly recently right a bit more boring. Well, it's going to be growing big, bigly recently, right? So onto the book, Trillions, which I read this week. It was a great book. Not sure what I was expecting, but I really liked it. You weaved in a rich history of each of the characters and what has become this trillions of dollars behemoth of passive investing. but I really liked it. You weaved in a rich history of each of the characters

and what has become this trillions of dollars behemoth of passive investing. And it's a Chicago story in many ways, which I like. Taking on New York and Boston fund world with some unbelievable connections I wasn't really aware of. So what's something you didn't know going in

that you uncovered and sort of couldn't get enough of after that? Ooh, that's a good question. Yeah, I mean, it varies a Chicago story. I mean, half, I'm going to say half the book is set there, but a decent chunk of it happens there or is inspired by people from there. There were certain things around like, let's say before writing the book, I was somewhat in the kind of the camp of Jack Bogle in that I thought exchange traded funds, you know, would be useful. But I worried that they were leading people were misusing them or using them stupidly. And it was an imperfect structure or a flawed structure that could lead to severe problems in a massive market crash, specifically around, let's say, credit ETFs and fixed income ETFs. Now, I thought a lot of the scaremongering I've heard over the years has been ridiculously shrill.

But I think, you know, I just instinctively was worried about, you know, how this would work out in a severe stress test, but as luck would have it, you know, not quite halfway through writing the book, but not far from it. We had a massive stress test in the form of COVID and we saw all sorts of hell break loose in financial markets in March, 2020. And a lot of people, I think still still think, oh, ETFs, credit ETFs were only saved by the Fed. And the more I looked at it then, and certainly after the fact, I've actually come more around to the fact that credit ETFs did an incredible job in March 2020. By pricing risk continuously in a way that bond funds,

traditional bond funds did not. Traditional bond funds came far closer to collapsing and causing a real systemic crisis, a global systemic crisis, than credit ETFs did. And that the ETF structure, I haven't quite married this theory, but I'm flirting a little bit with it, is actually a better structure than traditional USITS funds in Europe or 40X funds in the US for all sorts of issues,

and maybe particularly good for less liquid asset classes, which was diametrically what I would have told you two, three years ago, let's say. And dig into that, what happened during COVID there. I think we've talked about it on the pod before, but essentially in some of those bond ETFs, there was a big discount to NAV. Well, yeah. So a huge discount to NAV.

And part of it, if you think back in March 2020, I mean, we've seen this through every major crisis and certainly even smaller crises, that when a fund has outflows or when somebody wants to raise money, you don't sell what you want to sell because the markdown you have to take on that. If you want to sell a portfolio of junk bonds in March 2020,

the bids were just ridiculous, right? If you could get a bid. So you sell what you can sell. That's typically investment grade paper, treasuries, stuff like that. And that's why we see actually some of the stresses happening more in the investment grade ETFs because they're just like things got pummeled, short duration stuff, stuff that was frankly going to mature, let's say in 2020 anyway, maybe a few months

away. People, well, okay, so I might have to accept three points down on that. That's ridiculous for something maturing in a few months, but I'm at least getting 97 cents on every dollar, which you wouldn't be getting for anything else. The ETFs essentially, when the underlying market kind of gummed up and froze, both investment grade and junk, the creation and redemption process that makes sure that the ETF prices match the NAV kind of just broke, in my view. And this is like ETF industry insiders say I'm being too sure about that. But I think it kind of broke. It didn't work.

I don't think we can be honest about that. When the bond market is not trading, it's very hard to create or redeem these bonds for the authorized participants that kind of lubricate the trading in this. But what happens, of course, is that the shares of the ETFs trade completely freely so yes when j and k and hyg or lqd or hyg essentially couldn't create or as many new shares um or redeem them you know the nav kind of stayed roughly the same what kind of was stale but can move around a little bit but the the price just plummeted, opening up these big discounts. But in my view, that actually shows how they were able to price risk continuously. The liquidity in this secondary trading of credit ETFs was just insane. And I bet you, and I've talked to institutional investors about this, if they wanted to sell like a portfolio of investment grade bonds,

corporate bonds in march 2020 at the worst they couldn't do it but you could transact in credit etfs and that's why we've actually seen an inflection point in adoption that quite a lot of institutional investors that used to be wary of credit etfs and fixed income etfs have actually now um started incorporating them as a liquidity management tool and a way to get cheap, easy liquid exposure into certain risk asset classes. And more broadly, more specifically rather, in a bond fund,

and we saw this with the Third Avenue Credit Fund that blew up in 2016. They sold all the stuff that they could sell to begin with. So what investors were left in this Fortiac fund was a bunch of non-rated or extremely junky stuff. It was essentially a distressed debt fund in drag. And they eventually had to gate. For a Fortiac fund, that's like a big deal.

And people are worried about that having a ripple effect through the entire credit ecosystem but that's because there's an inherent bank run like dynamic embedded in in bond etfs because you know that they sell the high-grade stuff first you have an incentive if you're invested in a pimco fund or blackrock fund to get out of the door first because then the cost of liquidity is borne by the remaining investors. You get out, you get liquid, but the remaining investors don't. They're left in a smaller, slightly junkier fund on average. But then ETF solves that because the people that pay the cost of liquidity, if you sold an ETF at 8 percentage points below the NAV, well, that's the price of exiting.

That's the price of you turning that exposure into hard cash. And that cost is borne by the seller, not the remaining investors. And that seems to me both just fairer, but also better from a financial stability point of view. Will Barron It seems the regulations for the 40 Act are in place in theory to prevent that right you can only have so much of your assets in illiquid stuff and um yeah but the difference is it's liquid until it becomes illiquid right exactly yeah liquidity is very much in the eye of the beholder and uh you know it can vanish exactly when you don't need it to and it's such a weird concept you have there like this thing this thing works, it broke and it worked, right?

You're saying two opposing ideas at the same time. Well, I think the creation redemption process gummed up rather, this slightly less shrill way of putting it. But because of the pressure valve of secondary trading of shares, that was kind of fine. Now, could there have been, if the Fed decided to sit on its hands and decided that the financial fires had to burn, you know, could credit ETFs have gone down the drain somehow? Yes, I think at some point, yes. But I'm pretty sure we would have seen mortgage REITs, bond 40-act

funds, a lot of relative value hedge funds just get absolutely carted out a long time before that happened. And eventually someone's going to step in, right? Because what would that look like? The ETF is zero bid, right? There's no price for it.

The ETF, the shares of the ETF had tons of bids. No, I know what I'm saying. In a total collapse, the ETF broke world. Yeah. I guess they're thinking it would totally disconnect from the assets and go to zero. Well, yeah. If it went to something like, I think the breaking of an ETF or credit ETFs is more that your everyday investor looks at an ETF and sees that it is radically out of whack with the market. Bond market is down 2%, my ETF is down 20%. And people start fearing about the structure. So you cause a bit of a run. That I think is kind of the worry i mean these things going to zero like if somebody wants to sell me lqd for like zero i'm i'll buy

that all day long and even in a crisis at some point somebody's going to do that but of course yeah what's the clearing price well the clearing price today is different than what it was in mid-March 2020. Tell the story. I like the story in the beginning about Bogle, who you talked about with the booming voice going out to Omaha. Yeah. Well, I mean, I wanted to tell it, you know, there's been dummies guides written to index funds and ETFs.

And if you really want to understand the mechanics of ETFs, I hope I'll give people a good introduction. But most people don't want or don't need that. And if they do need that, there are many other parts they can go to get that. I want to tell like a cinematic fun story that really kind of brought the people to life. So I think of the index fund and ETFs as the next generation of it. It's just basically this incredible piece of American innovation. It's American financial technology long before the idea of fintech was ever invented.

It's one of the most disruptive inventions in the history of finance as well. And the people, people don't really know that much about them. But the first inspirational guy was a French mathematician called louis bacchelier but i thought it was maybe unfair to dump readers into 19th century france at the beginning of the book so i thought jack bogle and warren buffett and that the famous bet that warren buffett made with ted saunders or proche partners at the time about who would win over a 10-year period an index fund or a bunch of hedge funds. I thought that would be a good way of getting in like a human story way into some of the basic concepts for some people that, you know, might not be as much in the weeds as you and I am.

And we, we still got to tell the story, but we had Ted Seides on the pod and he was saying like the real winner was the, the T-bills. Right. Basically, where they put the collateral performed better than either side. Yeah. Which was amazing. But yeah. So tell the story about him going to Omaha and getting called out by by Warren there. Yeah. So Ted and Warren Buffett had made this bet and, you know, initially Ted's side is did really well because the financial crisis was, you know, really bad for a passive index tracker. And and the passive index tracker that Warren Buffett. And the Vanguard 500 basically absolutely smashed every single cohort of the hedge funds that Ted Siders had picked.

So at the sort of the year after, the year that Ted had officially admitted defeat, threw in the towel before the bet had officially closed, there was the annual meeting of Berkshire Hathaway in Omaha and a friend of Jack Bogle, the founder

of Vanguard, called Steve Goldbraith said, look, I want to do something, a surprise for you. So he surprised Jack Bogle by flying him into Jack Bogle's first ever annual Berkshire Hathaway annual meeting. And Bogle by flying him into Jack Bogle's first ever annual Berkshire Hathaway annual meeting. And Bogle thought it was fascinating because he was a huge fan of Warren

Buffett and they talked and being pen pals over the years, but never been, but he was 80 years, 88 years old that year. This was his birthday present. And he kind of wondered what the hell he was doing there. Cause you know, Omaha was pretty cold and he's an old dude. But then warren kind of stands out and said by the way by the way

stop for a second and you know somebody i've been told is here he's here somewhere oh there he is yes jack bogle has done more for the american investor than anybody alive he saved you all tens of billions of dollars and it's going to be hundreds of billions of dollars so jack it's your birthday stand up and please give him a big applause and you know for jack bogle that was just incredibly emotional um i talked to him about it and you know he's he's very good at joking about stuff and kind of self-deprecating humor. But, you know, having that kind of acknowledgement from Warren Buffett shortly before he ended up passing away, I think, was just a tremendously emotional and proud moment for him. And kind of crystallized what he built with Vanguard.

He never became like a billionaire. He was a very wealthy, well-off guy. But he created an $8 trillion asset management company that has largely grown on saving people money. And what are some of the stats on those trillions? Like how big has... So let's back up. Is the book more about passive or about ETFs? It kind of morphs from that into ETFs, right? Yeah. So I'd say, I mean, I call the book about

like passive investing, even though I think the active and passive terms, I use them liberally, but they're kind of the bullshit. They are imperfect terms for a messy reality. But yes, it's about the birth of index funds. And I classify ETFs as part of that. So the last third of the book goes into the invention of ETFs and how they've changed as well. Because I think ETFs have transcended their roots as a passive index tracker. But the numbers are just astonishing.

I mean, I call the book Trillions for a reason. And when I started researching what was going to become the book in 2018, we cost across $10 trillion in index funds and passive ETFs, $10 trillion. And by the time I started writing it in 2019, I think we were at $14 trillion. By 2020, you know, I'd kind of finished writing it. We were at 16 trillion by the time the edits were through in early 2020, we're 17 trillion. I think 17 trillion is what I have in the book. And at the end of last year, we crossed 20 trillion, 20 trillion. And that is just the public side because there are tons of funds like the Norwegian sovereign wealth funds. I talked about, they don't put money in Vanguard or BlackRock.

They don't need to do this. This is plain vanilla stuff. BlackRock once estimated that there was like four years ago, four or five years ago, there was another $7 trillion worth just in passive internal or separately managed accounts index tracking strategies, just in equities. So assuming a similar growth rate, we can say there's easily, easily $30 trillion in this passive index tracking strategies today.

And that's not even including some of the people doing like portable alpha with S&P futures or things like that, which is probably another couple trillion. Two things there. One, explain what you mean active versus passive is bullshit um it's just nomenclature or you're saying it's morphed into more active or an index picking is an active endeavor yes so first of all it is like there's always

there's a slight semantic issue but i i sometimes have like somebody from the finance industry. So, well, there's no real active because, you know, somebody is making active decision to choose the S&P 500 index. Right. And that is completely true.

I think that is the kind of the, the hair spitting active passive thing that yes, of course, in every choice somewhere along the chain, there's somebody making a choice whether it's a financial advisor you as an end investor the cio and investment committee somebody's making a choice out of what index to use or how to use it or with tweaks and so on but in reality i think it is the fact that it's easy to think of indices as mathematical reflections of truth,

a platonic ideal of what the market is. And for a vast majority of time, the S&P 500 is an excellent proxy for the US stock market. But you and I know it's not perfect. And the interesting exceptions is when stuff starts getting quite hairy and the sp500 famously you know it is largely quantitative but not entirely so but even for the indices that are almost entirely quantitative like the russell indices that people game all the time because you can kind of predict what's going up and down just the fact that there are humans choosing what metrics to use how to weight them like maybe the the formula is set in stone

when it's done but like humans design that formula so i think that's why active and passive have always been messy terms anyway also because frankly a lot of active managers were essentially lazy index huggers and just charged active fees for it this has been an issue since the 70s congress used to hold hearings about this closet indexing it was called or is still called um and then you know in the modern day like with the proliferation of indices there are now three million active indices in the world three million there's only three million there's only around 60 000 stocks in the world and that's stretching the definition of what is a mainstream liquid stock so you know these days i think what kind

of index you you use and especially with etfs and the rise of direct indexing, indexing with a twist or enhanced indexing or smart beta, all these things essentially mean that this always kind of messy line between active and passive, I think is kind of wiped out. And I still use those terms all the time when I talk about these things or when i write but i think it's important sometimes to stress to both of myself and also other people that take these terms with a pinch of salt because like broad terms always hide a lot of important detail underneath and sometimes that's detail that isn't vital to that moment but sometimes it's huge important that there is a difference between a vanguard total stock market fund and a charles schwab one and a black rock one and a six street

one for example and in my experience on the hedge fund world right passive means basically just long only right we're just holding this thing long and passive right we're going to hold it long until something happened versus active is i'm going long i'm going short i'm doing different asset holding this thing long and passive right we're going to hold it long until something happens versus active is i'm going long i'm going short i'm doing different asset allocations and then you mentioned with respect the american financial innovation but in america a lot of times that term is met with some right like it's overdone this financial innovation and we're just creating you know frankenstein's monster, so to speak. What are your thoughts there? Is it, it's a good innovation or a bad innovation in this case?

And you'd mentioned Bogle saving tens of billions. I think it's a good one, but where do we, where do we draw the line of levered ETFs and all that becoming too cute, so to speak? Yeah. I mean, it's slightly arbitrary. Like, I mean, look, I write a lot about the stupid stuff that the finance industry does but i broadly speaking think the finance industry probably gets too much stick i mean there's there's there's an inherent distrust of finance

that frankly goes across every society across every time uh and it sometimes is mystifying to me and that like most people don't understand how their tv works but they don't think that that's a conspiracy theory or magic either and when it doesn't work it's not because of like some hedge fund over innovating yeah it's just kind of but finance attracts a lot of this and i think like some of it is quite right but i think that all the bad aspects of finance just mirror society and us as a species at large we are a very innovative species that's why we are where we are today but we also overdo things we do everything too much so look i i will pretty much defend almost every part of financial innovation up to limit.

But I know we also overdo things like securitization, actually a really good innovation, actually helpful. But, of course, you can see all sorts of ways that people have misused that over the years. Most famous in the financial crisis. Junk bonds, again, hugely important innovation that has expanded access to credit for a huge new class of companies. But again, lots of dumb stuff happens because of that or people using that. ETFs and index funds, hugely beneficial. I think, broadly speaking, this is a case where the pros wildly outstrip the downsides. But again, we will overdo it. And for me, and this gets a little bit,

you know, it's a little bit arbitrary, but I think the leveraged and inverse ETFs are at best a rent extraction tool sold to people who don't know better or are actually expressly prohibited by regulations from accessing derivatives because they're unqualified for them. Like no legit hedge fund manager would actually express their short position

through some of these things or the long position. They have better, cheaper ways of doing it. These are tools given to day traders that over time just extract rent from them. And that's the best case. In the worst case, I think they're actually dangerous or potentially dangerous for the integrity of the financial system. And I think we have February 2018 and the blow up of XIV as a good example of what can happen when some of these products go bad. I had a blog post once on the double natural gas ETF and the double inverse natural gas ETF.

And they both looked like the same graph. They just both went straight down into the red. I'm like, they're supposed to do the opposite thing, but they both constantly lost money because of the rebalancing. I don't think it's clear enough for the average retail investor these things are to be used on a day or maybe on two days notice right not it's not buy and hold no at all um i mean some of these aren't used i mean my favorite example of this i'm just because this is like my own personal jihad but the vix linked etlinked exchange-traded product universe,

I say ATP because they're both exchange-traded funds and notes, I almost run the numbers on those. You would have been better off investing with Bernie Madoff than investing in that ecosystem as a whole. And that's the long VIX and the short VIX products. They have incinerated tens of billions of dollars for zero societal value and has only made money for the underlying market makers and the sponsors and i i struggle to see any sort of value in those

products and i don't want to be a prude that says you know and i don't think people should buy x and y because like some people like this brand of beer and other people like that brand of beer, and all this stuff is bad for us. But those products, I think, are stupid and potentially dangerous. And if I was the almighty SEC chair with supreme power, the VIX, or certainly the trading tool ETP ecosystem would have a scythe go through it. And what about on that topic of Barclays suspending the creations for the VXX and for OIL? Was that last week? Got any, what's going on there? It's a very good question.

I don't know. I haven't spoken to Barclays about it. I have been following it just because it has been, you know, something from my world that has kind of percolated upwards and is causing a bit of issues in some corners of that market. Because suddenly VXX is now trading at a premium because they're not creating any more shares. It's kind of fascinating. I've been surprised that the banks have been willing

to keep sponsoring these things giving the reputational risk i mean credit suisse didn't lose money on the xiv blow up in in 2018 but it definitely didn't help its reputation and we don't really know i don't think they lost much or maybe made made a bit of money well in many ways it blew up because they didn't lose money right they yeah exactly they cancelled it so they wouldn't lose money. Yeah, they had a kill switch on it. But I suspect that in a world where banks are more reputation aware than they used to be before 2008,

I'm surprised that there remain big mainstream sponsors of these things. But I mean just just earlier this month somebody filed for quintuple leveraged and quintuple inverse triple q's like qqq etfs i mean do we really need that i i don't know i mean it's just like where does it end um and i feel like investors feel like it's their god-given right. It's like on Maslow's pyramid of needs right after Wi-Fi, right? As ETFs should always be created. But there is, and especially the VIX ones are ETPs or ETNs, right? So they're exchange-traded notes that the bank basically is on the hook for.

So in that case, they have to hedge it behind the scenes. There's a lot of different mechanisms going on there. So it's risk. They have to put capital at risk. They have to hedge it behind the scenes. There's a lot of different mechanisms going on there. So it's risk. They have to put capital at risk. They have to hedge it. And at some point, I think in Credit Suisse, it was dwarfing the size of the entire bank. When it was up at 80, they had to put up billions and billions of dollars. And someone said, hey, what are we doing here?

We don't make this much fees to be putting up all this money. Yeah, no, what are we doing here? We don't make this much fees to be putting up all this money. Yeah, no, exactly. And then you finish the book talking about all the challenges. It's kind of me, the important part. So just talk a little bit about what you uncovered of some of the unintended consequences and what the future might look like if we keep getting bigger and bigger in this passive space. Yeah.

No, so I mean, generally the four concerns that other people have or I explore towards the end of the book, because I think it's important that even fans of index funds like me, we're honest about what the downsides can be. And ascending order of importance in my view, the first one is like, are index funds and ETFs ruining markets? It's the most popular thing I hear from the industry. And look, smarter people than me think they are. I just don't see it. On a macro level, I think it's bunkum.

On a micro level, clearly the growth of indexing and index funds is having a footprint on markets. That's just unquestionably. But is that any worse than the footprint that, let's say, hedge funds are having on the marketplace? I don't see it. We always want some bogeyman to blame, whether it's passive funds or central banks or hedge funds or whatever.

And I think it's passive funds or central banks or hedge funds or whatever and i think it's i think it's tosh i think markets work a lot better than a lot of big people give them credit for including people in the finance industry um so i'm unconvinced by that the second one is the the index fund innovation cycle the proliferation of products i i think there is a lot of stupid stuff going on there um against that you know like you say i mean who am i to tell people what they're allowed to buy or not buying you know if people want their wi-fi on their triple q then you know go for it but i think like we are gonna at some point if we haven't already come up with products that are just really stupid and probably dangerous because that's the product cycle we see in every other corner of finance and frankly every other technology

the third one is and this is kind of the boring one but i think people underestimate the most is that obviously we talk about the index fund providers like a black rock or a vanguard a lot but they're underpinned by the index providers themselves. And they have their own big three and they are utterly dominant in a way that even a BlackRock isn't in asset management. S&P, Dow Jones, MSCI and FTSE Russell control around 80 to 90% of all the financial indices in the world and all the assets that track them. And in a world where so much more money just slavishly tracks these indices

or is far more benchmark aware like a lot of active managers are far more aware of their benchmarks and their indices what happens to them than they ever were 20 30 years ago i think these kind of former utility like companies have become first first of all, wildly profitable, just insanely profitable, but also kind of quasi regulators without anybody kind of being aware of it or making that decision. But what these companies decide in how they construct their indices is hugely consequential to global capital flows. Whether to include China, how much to include China, where to include China, what to do with Ecuador, what to do with Greece, what to do with the UK,

what makes a company a tech company versus a communications company? What makes a company a bank? I mean, all these things are things that they decide and have consequences. And I don't think that has been grasped fully. I think in the book you had, sorry, in the book it was Peru, I think, of like if they fell out,

if they went from emerging to frontier, it was going to crater their economy. So it's like real world consequence. Yeah. I mean, it could have, I mean, it's not implausible. It could have triggered a financial crisis because essentially the drop-off between MSCI emerging markets, which is a widely tracked index with several trillion dollars worth of money in it, and going to the MSCI frontier markets is just so huge, it would have inevitably meant capital outflows.

And, you know, and kind of made a tricky situation worse. So yeah, these are huge important things and there is discretion involved. Will Barron. All right. And sorry, I cut you off. The fourth. Peter Lawrence. Oh yeah. The fourth one is the least tangible one, but I think the one, and it's the least, it's more the more long-term one, but just the concentration that we are seeing. I don't think BlackRock and Vanguard and State Street or Fidelity, which is also growing very quickly in indexing, these are companies that do try to do the right thing.

But I don't feel comfortable with the idea that in the foreseeable future, not in some sort of sci-fi reality, but over the next 10 or 20 years, it's entirely possible that just a handful or two or three asset management companies control over half of all the votes of every major US listed company and quite a few around the world as well. Because the economics of indexing

does inevitably mean that the big will become bigger. And already BlackRock and Vanguard, between them are, you know, 13 trillion and change, 18 trillion and change. I mean, a lot of that is in fixed income as well. You know, you throw in a few of the other big ones that are growing quickly, like Fidelity,

more on the active side, but also growing quite aggressively on passive. It's a very top-heavy industry that concentrates a lot of power in just a few hands. And you don't need to be kind of conspiracy nut to think that it isn't healthy for capitalism that just two or three asset management companies control half the capital of every major listed company.

Right. And even Jack Bogle. Push their way onto boards and do some things. I think... Sorry, go ahead. Well, yeah, I mean, it's not even getting on the board. I mean, people used to criticise them for being lazy owners. But now with the whole ESG wave,

we kind of expect them to do more. The problem is it's kind of a Goldilocks. We either criticise them for doing too little or too much, but broadly speaking, they are getting dragged into some sensitive areas. And I think that's going to cause a backlash and, you know, they can't really dodge it. And it's, it's already starting and it's going to become even bigger in the coming decade. Yeah. We had Dave, uh, Nadig on the pod from Trends, and he was saying a future of, right, there's not one S&P ETF. There's the ESG S&P ETF. There's 17 of them, and each one votes differently with each company. And so you kind of go down a path of I'm doing it. I'm passively investing with this ETF,

but it aligns with what I want the boards and the corporate structures to do, which was interesting to take. I mean, you can see a world where product proliferation, also technology makes it easier for people to give the vote to the actual asset owners, which is us or our pension plan and so on. Already BlackRock has said they're going to do that to a lot of big institutional clients. They can't do it to the smaller ones. It's too fiddly. But maybe in the future, it'll just be something that we got

on our phone, like every proxy season. I think most of the time people won't be bothered to vote anyway, because there's a lot of really boring bureaucratic stuff. And different index funds will become in different kind of flavors. But as much as ESG is growing, I mean, the difference between an ESG SP500 fund and variants of it, they're not huge. And BlackRock, Vanguard, and State Street have between them maybe a hundred people

that do stewardship across thousands of companies, tens of thousands of companies around the world and trillions of assets. They just can't do that fine-tuned decision. It starts becoming mass-produced corporate governance, essentially. Awesome.

I think we'll leave it there. I was going to get your hottest take, but I think you already gave it, that these VIX ETFs are, are what'd you call them? Bonkers, bunkers, some good Norwegian term. So we'll put a link to the book. Everyone go out, get the book. It was great. We'll put a link to it in the show notes. Any last thoughts before we let you go? No, I think that pretty much covers that.

Even got a few hot takes in so i appreciate that that was a lot of fun go visit norway read the book yeah buy the book then visit norway and i'll sign it for you as well ah done all right robin thanks so much this was fun we'll talk to you soon fantastic thanks for having me on. hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference

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