The Kingmaker Economy and Capitalism

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Mount Sinai is proud to answer the call Announcing our new Carolyn Rowan Center for Women's Health and Wellness, the future of womomen's healthcare in New York City. One destination where leading specialists, evidenence based medicine, and a whole person approach come together under one roof to support your health and wellness at every stage of life. No more fragmented care, no more dead ends, just seamless transformative women's health carere designed around who you are and where you're going We at you And we've got you The Carolyn Rowan Center for Women's Health and Wellness at Mount Sinai We find a way evils and that building is helled Welcome to Property Markets. I'm Ed Elson. It is july seventh. Let's check in on yesterday's market vitals The major indices rose as chip makers climbed out of last week's slump. The dow closed about fifty three thousand for the first time Oil was stable as Saudi Arabia cut its prices and OPEC increased its production target. And finally, Dell stock popped as much as eight percent After some comments from the president More on that later Okay What else is happening It's official. BaseX is part of the NSDAQ one hundred. as of this morning SpaceX' performance will influence the more than one point four trillion dollars that is benchmarked to the index. The stock currently has a weight of about one percent And now tens of millions of Americans invested in the NSDAQ one hundred index funds indirectly own it SpaceX got in under new fast track rules which cut the required trading history to just fifteen days and also got rid of the float requirements altogether The NSDAQ's rapid inclusion of SpaceX leaves investors with many questions, one of them being, has this company proven itself enough? to be included in one of the world's most followed stock indices. Here to discuss this question. We're speaking with Michael Green, Chief strategist and portfolio manager for Simplify Asset mananagement Michael, it's good to see you again. I think a lot of people We're wondering if this company should really be a public company if it was profitable enough and also if the price made any sense But now there's sort of another question, which is Should it be in passive index funds, specifically the NasSdAQ one hundred, which a lot of passassive investors own indirectly U what do you make of it Well, I mean, unfortunately, I think this is the logical conclusion of America's shift towards passive index investing Rather than have a choice being made by an individual or by a portfolio manager, we now have choices that are being made simply by the index which has an obvious incentive to get companies public, get them listed on the NSDAQ, offer NASDAQ inclusion as a component of that In order to get the listing on the NASDAQ index as compared to the New York Stock Exchange or other exchanges they could potentially have listed on So we understand why this is occurring or we have a very strong sense for why this is occurring. It is an opportunity to effectively exploit the index position to bring the company public, get it listed, drive the capacity for insiders to sell shares and ultimately create liquidity for those inside investors. As to whether or not that's a good idea. Obviously, I think it is not from the tone that I'm using. I think it is candidly quite manipulative. We have allowed index investing to receive special treatment under the law and which it under which it does not have the same requirements that active management has for fiduciary standards or suitability standards If I run a strategy that says I'm going to do X When I suddenly unexpectedly change that I'm allowed my investors are allowed to sue me. We are by and large protected from that in the index world as long as the index methodology has changed rather than simply the inclusion of a new stock. In this case, they published their intent to do this in advance of the listing. it was open for comment period My understanding is the comments were almost universally negative. I certainly contributed several of those myself. It was much like Chicago. I voted twice and often. even after I had died Um the simple reality is that they were intent on doing this. It's a profitable decision. It draws attention and gets us discussing the NASDAQ one hundred or the QQQ ETF, which is part of the objective as well. And now we're confronted with a scenario in which funds can actually be invested in under the idea that they are passive, that they receive special treatment under the law. And yet they've exposed themselves as not at all being passive. It's the logical conclusion of what you would expect, eventually we'll figure out how to manipulate anything to generate profits. It seems as though if we were to just sort of go through the winners and losers here I think you and I both agree that the loser is passive investor who doesn't really know what's happening and the rules are being changed basically for this specific company, SpaceX potentially for Elon Musk Po being, it almost breaks down the whole point of pass investing. As for the winners clearly It's kind of a win for NASDAq. It's probably a win for some of the ETFs that track the NSDAq like you, Inestco QQQ being the largest one. Um probablyably a win for SpaceX two because it means that you're getting all of this passive investment, which boost your share price Um, just spepecifically this index from the NSTAC one hundred There was a question as to whether the S andP was going to include them. They were debating it. the S andP decided no The NASDAQ is smaller than the S and P, but it has included it in the index. Tens of millions of Americans own an index that tracks the NSDAQ one hundred. one point four trillion dollars in capital as I suggested What kind of upward pressure will this actually put on the stock. Like how much of a win is it for SpaceX to be included in the NASDAQ one hundred Well, when you highlight that it is in the neighborhood of one point four trillion that is tracking it and it is roughly a one percent weight, although it is receiving additional weight because of the float multiplier that is being used You are talking several billions, tens of billions of dollars that are ultimately going to flow into these investments. The big winners there are those who are seeking liquidity, the insiders who are actually looking to sell shares, whether those are investors who invested during itsriv its extended private period or whether those are employees who have waited for liquidity The answer is it's the insiders. And that unfortunately, I think contributes to the general perception that the stock markets are really not set up for the average investor at this point Although we're thrilled to see them move higher given our participation through things like four hundred one Ks It's, you know, It's a little bit of a slap in the face to see somebody become the world's first trillionaire on the basis of manipulating an index that we were all told we could trust What do you think this means for passive investing in the future? I mean, if we're getting rid of the float requirements. We're getting rid of the the amount of time that you have to be listed before you're included. We're changing all of the rules It feels like this is kind of just a race to the bottom I mean I don't see why you don't just get rid of all the rules. I think there's definitely some truth to that. I think, you know, what we need to remember is that passive was never passive by its own definition The definition of a passive investor is somebody who never buys or sells That makes sense to many individual investors who through their four hundred one K or quote unquote buy and hold But that first step, the buy, actually is a really critical component because you are contributing cash to the portfolio that causes the portfolio to need to be rebalanced That causes trading and influences prices Over the last five to seven years, we've learned an extraordinary amount about the influence of passive investing. My work suggests that the impact of passive strategies is rising the S andP, increasing the S andP by nearly eighteen percent a year now. I know that sounds like an astonishing number, given that the S andP was only up fifteen percent last year So we're actually looking at an index that overall probably would have declined had we not chosen to invest this way. We decided to do this because we thought that it simplified the process. It did simplify the process for average investors. It also simplified the process of taking advantage of those investors as we have just seen Do you think that passive investing is something that we should just be reconsidering altogether. Are you not a fan of passive investing in general? or is it only recently that your tune is changed I've been doing research and reporting and writing on this for well over a decade now. Sime around twenty sixteen. The formative literature and the awareness began to grow that there was an impact from passive investing, which had always been presented as effectively a not meaningful impact on the market. Even today, you will hear Vang Guarden, others talk about the small fraction of trading that is involved in passive trading. Those are simply misrepresentations, unfortunately. What they consider is what's called the organic trading. It excludes all of the flow characteristics that I just walked you through So when we look at what's happening in the markets today, we have about a trillion dollars that is flowing into index funds. We have somewhere in that neighborhood that is actually leaving the discretionary active community My lament is not about the active community. it's about the impact that has on the markets We're destroying the process of price discovery. You asked Is it the right price for SpaceX? The reality is nobody knows and nobody bothered to look at it and everyone who has has come to the conclusion that it's fantastically overvalued In fact, it really shouldn't even be called SpaceX. It should be called XAI because three quarters of the expected value in most of the forecast are tied to its money losing, nonpfitable and lagging AI business Why that justifies such an extraordinary multiple in valuation is somewhat beyond me But once you declare it into the index at those levels The index accepts that the last price was right. And that's really the key of passive. It passively accepts the price. And so when you involve them in the process of listing in this manner, You are structurally changing outcomes It's a tough one because you know, a lot of the I like to the point that you bring up that There's no such thing really as passive investing. Someone has to buy at some point and someone has to be the one to make that decision. And the thing that seems to hold it all together, at least from my perspective is trust in the rules and the regulations that sort of govern those passive index funds. I mean, if you trust that there is a framework in place that says we're only going to buy these types of companies that have proven themselves over the long term that only makes sense in these conditions, then it sort of makes me feel a little bit more comfortable to close my eyes and say, okay, you guys handle it. You at the NASDAQ you at the S andP. and I'm down and I'll put it in. and to be fair, it's worked for a lot of investors who have just dollar cost averaged into the S andP and it's all been fine It does seem that there will come a point though where if they continue to make these change requirements, that might not work out because SpaceX could implode over the next six to twelve months. We've got all of the lock upps expiring over the next few months, which is going to put huge downward pressure on the stock. It could ultimately be a bad decision, which ultimately may lead to outflows And I wonder if that's the next chapter in the story that people say, you know what? we don't trust these people managing our money anymore. I'm taking matters into my own hands. I'm going to choose exactly which stocks I'm going to buy personally. Is that the next chapter in your view? I don't think so. I think actually the next chapter is we will see more of this type of manipulation. There are many, many publicly privately held companies that would love to list under these types of conditions and to receive the multiplier My hune is is that we will actually see that exploitation and a repeat of the late nineteen nineties IPO boom. before we see anything resembling the outflow type components that you're highlighting Final question here on SpaceX. I think we both it sounds like we both agree on SpaceX, but many people wouldn't. Y views on the company, the valuation, the financials and whether or not it is a sound investment Ultimately, I want to be clear. for an investor into the NASDAQ one hundred or into any index like the total market indices that have already included SpaceX because of its size in their indexes Ultimately, whether it turns out to be a good investment or a bad investment is not going to be all that material. It is relatively a small fraction of the index. So even if it went to zero, The ultimate impact on the index investor would be largely negligible. The downside is actually what's happening from a societal framework. This is an enrichment tool that allows corporate executives and insiders to dump shares onto an unsuspecting public And the last thing I would highlight out is just that I think you're giving people By and large, too much credit. I think this audience very well may be aware of what you're discussing But the really critical changes were made in two thousand six when we created what's called the Pension Protection Act rolled people, we switched our retirement system of four hundred one Ks from what's called an opt in framework in which they had to choose to participate into what's called an opt out framework where they had to choose not to participate That exploded the number of people who held four hundred one Ks dec cllb from around twenty five percent today's around sixty five percent. It radically reduced the investment choices that most people are exposed to And candidly, I would argue that most people are sleepwalking through this process not really aware of what they're investing in or why they're investing in it. They're simply doing as they are told That's always that can be a good thing. It can also be a bad thing if everybody starts doing what they're told as we are seeing It creates the distortions that we are experiencing as markets become increasingly disassociated from fundamentals. So should this be happening? No But we made a choice to do it this way. And this as I said at the very beginning, is likely the logical conclusion. We will figure out a way to exploit this phenomenon and turn it into profits for you know those who are highly incentivized to create those profits Michael Green is Ch chief strategist and portfolio manager for Simplify Asset management. Michael Really appreciate your time. Thank you. My pleasure After the break wororrying signs in the jobs repeport And for even more markets insights, you can subscribe to my weekly newsletter simimply put at simply putut. profgmedia. com Support for the show comes from Anthropics. 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The economy added just fifty seven thousand jobs in June, less than half the number of economists were forecasting April and May payrolls were also revised downwards. And while the unemployment rate actually fell to four point two percent That was largely due to a sharp decline in the labor force participation rate rather than a surge in hiring. Roughly seven hundred twenty thousand people left the labor force between May and June which dragged the participation rate down to its lowest level in about five years. So joining us to discuss the June Jobs report We're speaking with Pod Favorite, Catherine Anne Edwards, PhD economist, economic pololicy consultant and columnist. Bloomberg News. Catherine Welcome back to the show. It's great to see you. This Jobs report here It doesn't seem great. And the Labor force participation number doesn't seem great either, In fact it seems quite Concerning What's the truth? What's the reality? What should we make of it? I mean, I think in some ways this report really puts us in the place that we've been for about a year and a half, which is the labor market is treading water And so many of the indicators that we look at so closely, I mean, it's almost like they're bouncing within their standard air You know just they're right around zero, they go up a little bit, they go down a little bit, but we're not seeing a trend that we can monitor over time. We're not seeing it just fall apart and just decline. We're not seeing it just take off and recover and become stronger. We're just seeing this almost like noise around the mean and the mean is treading water. I think it makes it hard to parse on a monthly level, but the upshot is This is a weak labor market because if it weren't weak, it'd be very obvious to see it growing, showing signs of strength, and we just don't see it. The strangest part to me is the labor force participation rate. and just to clarify what that means for people, this is the share of the working age population that is either working, obviously or looking for work which fell which to me tells me that A lot of Americans are saying, I'm no longer going to look for work now And we see that that rate was especially among the twenty five to fifty four year old demographic, It was especially pronounced How do we make sense of that Labor force in the US this century, people tend to, not that you're doing this, but people tend to pick the rate that they want. If you look just at the overall rate for sixteen and older, it's really low this century because it's reflecting the retirement of the baby boomers, right? It doesn't have an age cap on our overall labor force participation rate, which is why you're right to look at the prime age. It's not really taking into account those big demographic shifts But how much are people who are really expected to be working, working? And the cutoff for leaving the labor force because you've gotten because you're no longer looking for work is really tight. It's just four weeks So it's basically since the last survey, have you looked for work in the past four weeks? If you say no, you fall off. So there could be people who have sent in, you, like a lot of us have looked for a job, you're so frantic. You fill out fifty applications and then it's almost like waiting trying to buy a house. You've got to wait for something else to come on the market, and that can push you kind of mechanically out of the labor force You know, for interpreting the market's strength, what to get from the prime age labor force participation falling in a month? You can think of it as maybe it's just noise, like I said at the beginning, or it's a function of what we have seen to be true in the labor market for some time, which is it is not generating jobs for people who have been looking for some time. Hiring is slow. The share of unemployed workers who have been unemployed for six months or longer has been increasing for a year and a half and has shown no signs of slowing, including in this report So we have a lot of people who have been looking without much success for a long time, and even amongst prime age workers, that can result in them leaving the labor force in a month Historically prrimeary labor force participation is at a near high, but this particular you know time in the labor market has not shown as many opportunities for workers as it should, particularly for workers who don't have a job. One of the big themes that we have continued to discuss whenever we have you on is the fact that Almost all of the job growth that we've seen is coming from healthcare and social assistance been true It continues to be true each report. Was it true in this report? Is that still kind of what's happening in the job market? Yes, we are still seeing that kind of the only sector that is very consistently and predictably adding jobs are healthcare and social assistance. I think a lot of people were hoping that this month would see a big boost to leisure and hospitality from the World Cup But it actually shed jobs in June Justin Wolf has also pointed out that since january twenty twenty five, ninety percent of all new non farm payroll jobs have gone to women. Actually women now hold a majority of all non farm payroll jobs. how do we make sense of that statistic, whyy is that happening? Do you think that trend will continue Well, men and women don't work the same jobs. And if you're adding jobs in places like leisure and Hospitality and in health carere and social assistance, those can often be dominated by women. And so it's really it's not so much that the labor market is favoring women versus the labor market is giving opportunities that women are much more likely to take You know, some of your typically male jobs, especially something like manufacturing has seen a hit over the past year and a half. Construction has been a little bit more stops and starts, but has seen some growth. But we just know we have gender differences in employment, which is natural, but that means that men and women can fare differently based on how the economy is doing two thousand seven, the Great Recession was notoriously very male. I mean, it was a cratering of constructuring and manufacturing employment. The COVID pandemic recession, that hit women so much harder because it hit healthcare and social assistance as well as leisure and hospitality.. I don't think these patterns spell like shouldn't be over interterpreted Because at the end of the day, it comes down to are we pursuing policy that helps the labor market and helps workers? I think the answer is no. You can't look at the wararneron, you can't look at tariffs, you can't look at deportation. You can't look at a deficit financed tax cut that cut Medicaid and food stamps and say all of this is benefiting the worker Who hurts from weak policy isn't going to be uniform? that's going to hit different people at different times. And right now we're just we're seeing male employment take a hit. I wanted to ask you about immigration as well, because that was one of the big themes in our previous conversation. it's timely because Trump just posted on his truth social, he said that There was a Federal Reserve paper that according to Trump, showed that illegal immigration under Biden increased home prices by thirty percent In reality, that's not what the paper said It actually said that that immmigration had driven up prices by around six percent during the Biden administration. And then it also had some details about how actually wage growth had not been suppressed or taken a hit because of immigration and also that employment actually increased being There's some data that might suggest that the immigration that we saw was problematic to the housing market. Trump is obviously exaggerating it and using it as a way to sort of score some political points and kind of distorting the truth But while we're here What do you make of those comments and also What do you make of how immigration is affecting the economy I'm the job market right now I mean, I think it speaks volumes about how terrible his immigration policy is in twenty twenty six that he's pointing to an effect of twenty twenty three as being a reason why immigrants are bad for the economy. I mean, he we've had a historic year in the United States. We had a net loss and immigrants and the majority of them were legal immigrants that did not come because of restrictions on spousal visas, restrictions on H one Bs. I mean, restrictions on student visas. hit United States hard. We had a net decline in immigrants In twenty twenty five. And if there was some miracle cure waiting at the end of immigrants not being as important part of our economy, surely we would have seen it in twenty twenty six, the year after. And yet here we are talking about speculative and misrepresented comments about a paper that took place years ago. For me, the hoowness is obvious If there was some cure to not having immigrants in the economy or having fewer immigrants, you would have seen it by now. But instead, what you really see is that the people who have benefited from the decline in immigration are the immigrants who are still here who are seeing lower unemployment rates and more opportunities. becausecause just like men and women don't hold the same jobs, native workers and immigrant workers, they don't hold the same jobs either. part of the immigrant workforce it tends to leave the remaining immigrants in higher demand and helps their wages accelerate because now they have more market power. So I mean, I suppose in some backwards way, he is doing some immigrants a favor, but at a really high cost to our society and the fabric of our democracy I mean, I do wonder at what point Americans will learn the lesson on immigration that nativism has no economic benefit. It's unclear to me when that will happen. You know, so long as you need me to make the case on the show, I'm always happy to do it Well I always do appreciate it because it's a helpful reminder. Just looking ahead, you pointed out that There's a lot of noise in these reports always and it's kind of hard to know what to even pay attention to, what is actually important and what matters going forward Open question, what does matter? What are you focused on in the job market What do you think people are not talking about enough that that they should be talking about I think what matters most to me tends to be what matters most to people, which is wage growth R? The reason why we care about the payroll employment number is because if we're adding enough jobs, we can bring down the unemployment rate. And the reason why we care about bringing down the unemployment rate is so that people who need economic livelihood have it. And if the unemployment rate is false enough, that pushes up wages and we all earn more money. I mean, this is a market It's called the labor market. It operates off of supply and demand and we want it to be tight so that we can have higher wages. And given the oil price shocks from the war in Iran and given the weak wages or the weak labor market we've had for the past year and a half, we've had months where price growth is out matching wage growth. That is a pay cut for every American worker And I don't think I will feel like the economy is in a strong enough place or the labor market is in a strong enough place until we have consistently good wage growth for every worker, not just the workers at the top, but workers in the middle and at the bottom. And we have not seen it. O the aggregate, on the average, we haven't seen it in months. It hasn't really picked up since twenty twenty two, but we've also are coming off of decades when the bottom half of Americans have not seen good enough wage growth. So for me like everything is wages because that is the payout the literal payout for workers Weak wage growth like we've seen this spring. I mean, it that is just it's so hard on families to have prices go up even inches at a time when your paycheck is not going up at all Yeah, and the negative real wage growth that we were seeing, to me, I totally agree seems to be the most striking. Do you think that that will continue in twenty twenty six or is it just impossible to tell at this point? I mean, Wh knows about inflation I mean, the real question is will Will wages keep up so far they haven't? And how much longer will that continue to be the case? You know if the economy is not producing jobs fast enough to get employment to the workers who want it, it's very hard to imagine a scenario in which workers have enough bargaining power to really bid up wages. I mean, at the end of the day Yes, it's a market, but that market's tightness is a way to give workers power to ask for more, to demand more from their employers. There has to be some channel of gettingiv power to workers to ask for money to see wages grow up. If the market's not doing it, you could do it through things like unionization, collective bargaining, labor market regulation to give workers a lift. The labor market remains to be seen. I don't see it going up this year. I don't see a Republican controlled Congress and House and Senate and presidency to really do much for the working class. All right, Catherine An Edwards PhD econist, economic policy consultant and economist for Bloomberg News, Catherine. We always appreciate your time. Thank you. Thanks for having me back Dell stocks surged as much as eight percent yesterday, not because of any material information or any news related to the company, instead because the president Yes, yesterday on live television, Trump encouraged Americans to quote, go out and buy a dell computer And it was exactly at that moment that shares of Dell soord. Does President Trump own Any dell shares you might ask? The answer is, of course, yes, according to his recently released financial statements, Trump purchased nearly a million dollars worth of deell last year And now he is actively pumping it on TV. This is yet another example of a dynamic that we are calling the Kingmaker economy. and that is, the best way to increase your stock price in America today isn't to improve your product or to sell more goods and services, it is to have your stock anointed by the highigh priest of American Markets, AKA the Pident. If you can do that,