TSS Episode 119: Michael Green on Passive Momentum, Fed Puritanism and Rate-Inelastic Consumers

Michael Green, portfolio manager and chief strategist of Simplify Asset Management, joins DoubleLine’s Jeffrey Sherman and Samuel Lau in this episode of The Sherman Show, recorded July 5, 2022. A student of market structure for more than 30 years, Mr. Green begins with a discussion (6:04) of how Simplify tries to deliver complex exposures and strategies in the form of simplified wrappers — specifically, exchange-traded funds – that allow investment advisers to deploy them to enhance or hedge client portfolios without having to actively manage those products. “The objective of this product,” Mr. Green says (14:05), “is to give you the ability to participate [in markets] while avoiding events, or reducing the impact of events, like March 2020 or a crash of ’87 or a 2008 sort of environment.”

Turning to macro (19:04), Mr. Green makes the case that the Federal Reserve “is in the process of making a terrible mistake. I understand that embedded in the American psyche is a component of puritanism that basically says we should suffer for our sins of the past.” In seeking to reverse its past “artificial suppression” of interest rates, the Fed has embarked on a path of raising rates. Unfortunately, Mr. Green points out, the level of interest rates has little impact on excess consumption. However, interest rate levels do have a significant impact on investment, he says. Thus, the Fed’s rate-raising campaign could discourage investment precisely at a time when the U.S. needs to reinvest in itself.

“We’re experiencing supply-chain shocks that were a function of us creating supply chains that were too dependent upon China” as well as European supply chains too dependent on cheap Russian energy imports, Michael Green says (21:00). The U.S. needs to be “subsidizing the investment in infrastructure, manufacturing, energy production, transportation networks,” he says. “And the only tools we have available to us perversely work in the opposite direction.” The Fed’s raising rates will ultimately slow consumption, Mr. Green notes, but not as a function of consumer behavior in response to interest rates, which is nonexistent, but “because people are going to lose their jobs.”

The iconoclastic interview with Mr. Green extends to what he considers the popular misperception (41:28) of the Federal Reserve’s approach to combatting inflation under the lionized Paul Volcker, Fed Chairman (1979-1987). “I think the entire Volcker narrative has been completely corrupted,” Mr. Green says. “[P]eople think Volcker was this hero who decided to hike interest rates to crush inflation. That’s not what he did. Going back and understanding that is really important. What he chose to do was to actually target the money supply in a monetarist framework, stealing the ideas of Milton Friedman. That meant that interest rates behaved wildly. And so Volcker actually spent more time in his administration cutting interest rates than he did raising interest rates, but the objective was to try to keep the supply of money relatively fixed by hiking and lowering interest rates. That volatility was catastrophic for the economy.”