June 19, 2026 • 26 mins
Merryn Somerset Webb and Bloomberg Opinion columnist and senior markets editor John Authers discuss how SpaceX’s market debut has highlighted the hidden risks of passive investing, from index concentration to the growing influence of benchmark providers. They also assess new Fed Chair Kevin Warsh’s first policy signals and debate whether today’s AI boom is a bubble—and what could bring it to an end.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. I'm Marin Sumside, web
editor at Large with Bloomberg UK Money and with me
this week in the place of John Steppek, who is
(00:22):
on holiday again. There's another John John author's John is
a senior editor for Markets, a Bloomberg opinion columnist, and
he also writes a brilliant newsletter that if you don't
subscribe to it yet.
Speaker 2 (00:33):
You really really should do.
Speaker 1 (00:35):
So we are going to talk about a couple of things.
We're going to talk about, Well, obviously SpaceX, we always
talk about SpaceX.
Speaker 2 (00:40):
We're going to talk about.
Speaker 1 (00:41):
SpaceX and its impact on passive investing, what it means
for the way you invest. We're going to talk a
little about Kevin Walsh and his starting out at the FED,
what we think about that. And finally we're going to
talk about the AI bubble or not. Is it a
bubble in share prices? Is it a bubble in earnings?
And if it is either of those things, when might
it come to an end?
Speaker 2 (01:02):
John? So good to have you on this week.
Speaker 3 (01:04):
Great fun to be in London for a change, escaping
Nick Spever and World Cup Fever in there in New York.
Speaker 1 (01:10):
Yeah, I only wish I was in London with you.
Speaker 4 (01:14):
That we are.
Speaker 1 (01:14):
We are down the line today because I am in
Edinburgh having just left London, So round and round we go.
Speaker 2 (01:19):
Right.
Speaker 1 (01:20):
What I want to talk about this week is I've
just mentioned your absolutely brilliant newsletter and you wrote about
something this week that is an absolute bugbear of this
podcast and John other John and I talk about it
all the time, which is our fury at people speaking
about passive investing as though it's just a passive thing,
and it's it's completely different to active investing, and it's
(01:42):
a default and you can just say I'm a passive
investor and leave this algorithm, index provider whatever to do
it for you, and somehow you get exposure to the
broad global stock market, or in many cases just the
broader US stock market. And of course it's not really true, true,
is it? No?
Speaker 3 (02:02):
And this is one of the paradoxes that well, both
of us you have to deal with for our entire careers.
Really that, first of all, passive investing is one of
the worst monikers ever. I think robo investing might be
another one. Nobody in their right mind wants a robot
to manage their money, or I hope they don't. And similarly,
(02:23):
passive investing, if it were passive, would sound like a
pretty miserable idea, and as you just said, it really isn't. Also,
there is a problem which is a bit like Kines's
paradox of thrift, which is the idea that dinner recession,
it pays any individual to save money, but for the collective,
you want everybody to spend money so that you get
out of recession. In the same way, if you're trying
(02:45):
to guide people as to how they should manage their money,
they probably should have a fair amount of money in
what is known as passive investments, not because they're passive,
but because they're cheap. That is the point of a
passive investments is that it finds a way of reducing
the costs of buying stocks and shares that with you,
(03:08):
the client, so that it's a sensible deal that does well.
Jack Bogel, the founder of Vanguard, the spiritual and practical
father of passive investing in many ways, was referred to
what he called the CMH, which is the cost matters
hypothesis that you can invest more cheaply if you're just
(03:30):
tracking an index.
Speaker 1 (03:31):
And then you get average average returns and they just
compound better.
Speaker 3 (03:35):
Because there's less costs coming out, which is extremely boring.
And it's not necessarily passive. The problem that we are
coming up against, and there are numerous problems if there
was ever a sense in which it was passive. It's
very much harder when passive investing. It's very irritating having
(03:55):
to keep using that word because that's the name for
these things.
Speaker 1 (03:58):
Well we have there's a brilliant headline not written by me,
but by somebody else on top of my nused letter
this week that calls it passive aggressive investments.
Speaker 3 (04:05):
Yeah, that's fair enough. Thirty years ago, vanguards and a
few imitators were growing and they were maybe two three
four percent of the whole US stock market, And at
that point you could be somewhat closer to passive in
some senses, in that what they were buying and selling
really didn't affect the market that much at the margin.
(04:27):
Now they are considerably more than half the entire market.
It's like being an elephant. You can, if you're you know,
Daddy long legs or something, you can skate across the
top of the water without affecting it. That much. If
you're an elephant, you can't. And similarly, with the scale
of passive investing at the moment, it's not no longer passive,
(04:49):
it will have a huge active impact. Now, that's one
big issue with any so called passivity is really no
longer possible. And then the other issue, which becomes much
more apparent with this this week's or last week's now
news on SpaceX.
Speaker 1 (05:07):
Last week's Yeah, that's why we're talking about this now
because of the launch of SpaceX on Friday, bringing a
lot of these problems to the forefront and making them
much more obvious than they were even two weeks ago.
Speaker 3 (05:17):
You can't dismiss it as a technical problem. Whether you
are going to whether you are going to include this company,
which is currently trading at a value that implies it's
worth more than two trillion dollars, whether you include it
in any given index or not, whether an investor tries
to expose themselves to that or not, is material. There
(05:42):
is nothing passive about it. I doubt you I think
it's worth two and a half trillion either. I certainly
don't think it's worth two and a half trillion, But that's.
Speaker 1 (05:50):
I at least have I have shares, and it's very
important to say this that I applied for my shares
on Hargouz Lambs and I am the proud owner of
nine shares in space.
Speaker 2 (06:00):
Oh congratulations, thank you very much, thank you very much.
Speaker 1 (06:03):
And I had dinner with a group of investors last
night who told me that they had all done something
similar privately, and that they had all stagged from salt them.
I was the only one left holding onto my nine shirts.
Speaker 3 (06:13):
So you are at least being passive in one sense,
which is that Elon Musk has structured it so that
you can have no active effect on how he runs
that company. So there is a nast one pertinent sense
in which you are being passive.
Speaker 1 (06:27):
I will say about that John that you know I
looked at what he said about that, and he said, well,
you know, he was damned if he was going to
have put all this effort into creating something extraordinary only
to lose control of it because a pilet of being
counters at the proxy agencies felt that there wasn't enough
diversity on his board or wherever it was that they
would get cross about. He wanted to make sure that
(06:50):
in this environment he was able to maintain control of
his his company, and I'm very against this kind of
thing in general, against it in general. I'm super prochure
helder democracy, goodness, I' written a book on sholder democracy.
I'm super keen on one chair, one vote. But the
truth is that the market tolerates this very very rare
(07:11):
and the market has chosen, in the case of Elon Musk,
to tolerate it. So I'm kind of I feel like
it's a bit of a moral panic. I'm not that
bothered about that in this case. I'm bothered about a
lot of other stuffs, but I'm not bothered about Elon
Musk maintaining control over eighty five percent. Eighty four percent
is a note of the voting rights over us.
Speaker 2 (07:27):
Yeah, company, fair enough, you think fair enough.
Speaker 3 (07:30):
It deters me from investing in them. That being said,
and this is where we're getting into the arguments of
how can you be passive or not. I do have
some of the money in my four oh one k
I'm based in the States. I have a four oh
one k is in an s and P five hundred funds.
So I have passively made the decision not to buy SpaceX,
(07:56):
or rather the index compiler. Who is we were saying
before we came on air is effectively a stock picker
has decided, for good, consistent reasons not to put SpaceX
in there. Had I exposed myself via a Russell index
or a Nasdaq index, then any day now I would
(08:16):
be buying SpaceX passively quote unquote, because those index companies
made the decision again on somewhat defensible grounds. I think
I think S and P has certainly been more consistent
than they have, but making the grounds that if we
want to mirror the market, and the market says this
(08:37):
company is worth this much, we need to be in
this company. They have made a different decision.
Speaker 1 (08:42):
Yeah, if you had bad index, you wouldn't have the
fomo that I know you have now. You wouldn't be
sitting there thinking, Maren's got all that exposure to SpaceX,
She's going to be rich with her nine chares, and
me sitting here I'm just not going to be so.
I wonder if you're thinking, maybe you made the wrongs.
Speaker 3 (08:59):
I can live without it. I think I might miss out.
I think there are all kinds of scenarios where SpaceX
does very well. There are many opportunities in life there
are some things I am scared of missing out on.
I can live with missing out on any given investments opportunity.
Just fine. I think my money is tied up.
Speaker 2 (09:18):
I will wave to you from my retirement yacht.
Speaker 3 (09:20):
You mean your retirement rocket.
Speaker 2 (09:24):
Rocket, from my holiday home on the moon. I will
wave to you. I may even ask you for the
weekend if you play your girls.
Speaker 3 (09:31):
Okay, okay, okay, thank you.
Speaker 2 (09:33):
Okay.
Speaker 1 (09:33):
So here we are having this conversation. SpaceX has prompted it,
although obviously I think you've written about it quite a
lot over the years, and we've certainly gone on about
it relentively on the podcast. But SpaceX really does bring
it to the force. And it's not just this business
of do you buy an index that has SpaceX in
it or do you buy an index which does not
have SpaceX in it? By a way, very very active
decision you have to make there a one that could
(09:54):
make an appreciable difference to your future.
Speaker 2 (09:55):
Not to your future, obviously, John, but to other people's suits.
Speaker 1 (09:58):
But there other problem that this kind of throws up
that you talk about in your news letter, and I'm
afraid I talk about it might as well, because on
both our big time great minds is the concentration. And
I was at a conference yesterday for Aubrey Capital and
a Chilean Group LV and one of the topics that
(10:19):
came up again and again and again is how incredibly
difficult it is for emerging market managers in particular we
were talking about and to outperform their index because the
way the MSCI Emerging Markets Index is constructed, a very
large part putting fifty percent of the indexes in Taiwan
and Career, which I think most of us wouldn't even
(10:40):
think of of emerging markets. And in those two markets
the majority are three stocks.
Speaker 2 (10:46):
That's it.
Speaker 3 (10:47):
And the MSCI Emerging Markets Index, which has don't quote
me on it, but I'm pretty certainly it's got more
than a thousand stocks in it. The top three are
a third even more concentrated than the SMP, which we've
been talking about.
Speaker 1 (10:59):
Two hundred and five I've stocks in there, and a
third of it is Taiwan Semiconductor, Something Electronics, ske Hannis
it is, and then you've got you've got ten Cent
and Alibab bringing up behind right. But it's those three
that take up this huge amount. So if you buy
an index in an emerging markets index in particularly about
(11:20):
MSCIM here. If you buy that, thinking yourself, well, this
is great. I've seen a million charts over the years
about the growth of the middle class and in the
emerging markets, and I'm going to get a piece of
that consumption for myself. Or you think to yourself, I'm
going to buy this index and get a piece of
that greater you know, energy and commodities, et cetera in
Latin America. Goodness me, did you see that Latin America
abuse is forty percent of the world's copper.
Speaker 2 (11:42):
I want a bit of that.
Speaker 1 (11:43):
And you go out and you buy the MSCI Emerging
Markets Index, you are not going to get any of that.
Which you're actually going to get is a momentum driven
AI focused group of companies based in what you don't
even think of an emerging market.
Speaker 3 (11:56):
Maybe right that these companies are worth so much, But
because as they are now worth so much, the index
is no longer an overall exposure to those interesting macro trends.
You could it was used and abused to exploit those
trends in particularly in the years ahead of the global
financial crisis, and if you got out in time you
had a lot of money from making those exact judgments.
(12:20):
That's not what it offers you at all now. And
you could make an active decision of I want to
expose myself to these macroeconomic themes, and I'm going to
put together a basket of stocks that will capture it,
probably having a bunch of copper miners or whatever in there,
(12:42):
I don't know, And then you could call it an
index and put money in it. But is that passive investing? No,
it isn't it. It's probably quite a sensible cost reduced
form of thematic investing which we can maybe it's a
good idea, or maybe it isn't to be in that
particular theme, but it ain't passive. You have to make
(13:03):
some kind of an active call. All you're really talking
about is just being sensible about how much money you spend,
the costs you devote to try to buy your market exposures.
But because these these funds have made a lot of
sense for a long time, but they have also been Yeah.
Speaker 1 (13:19):
Yes, but you're still you're still being brought in by
by an idea that isn't really true anymore. You're being
told that there's a default option, a sensible, diversified, inexpensive
default option which will serve you.
Speaker 3 (13:33):
And it's very hard to argue that that's truly the
case anymore. You can argue that with electronification, with the
lower costs of lots of things, that it becomes easier
to put together your own bespoke quote unquote indexes or
try to come up with ways to overcome all the
biases personal biases. We have to mimic at having some
(13:56):
degree of emotional intelligence to have disciplined, systematic, low cost investing.
But you don't actually call it passive because it isn't
in a meaningful sense, and the main vehicles that are
currently on offer for you to do that don't in
fact do.
Speaker 4 (14:13):
That for you.
Speaker 2 (14:27):
If these bubbles burst, let's not argue right now about whether.
Speaker 4 (14:30):
That's another topic we come on about the minute.
Speaker 1 (14:34):
How might we come on that in the minute. But
you know, let's say that it is a bubble. Let's
say that it bursts. Let's say that that that that
happens after we've had these other big launchers that are
coming open AI, Anthropic, etc.
Speaker 2 (14:45):
And those to SpaceX.
Speaker 1 (14:46):
You've had that huge new supply of equity coming into
the market after years and years of the equalization, and
maybe something prompts a market crash of some kind. And
when you have or a sector crash, stay and when
you have that extraordinary constant creation at the top of
every passive vehicle, that's going to give everyone a horrible shock.
As what we're talking about now becomes obvious to the
(15:07):
entire investing communditty.
Speaker 3 (15:09):
It'll be like the dot Com shock, but worse.
Speaker 1 (15:13):
Worse, much worse, because in the dot Com shock, you know,
that was relatively contained, that was contained. It wasn't anywhere
near as big people went, anywhere near as invested in
these vehicles.
Speaker 3 (15:23):
It was easier to avoid. There were easier way, there
were easier ways to sidestep, and that was that way
lay the growth of the hedge fund industry because lots
of clever hedge fund managers did manage to avoid it,
and then they didn't manage to avoid the GFC. And
that's yet another story. We don't need to have to discussion,
We don't have to stay, but but this is much harder.
You need The only way you can avoid this is
(15:44):
by painfully missing out very big time from now until
whenever the bubble does best yeah.
Speaker 1 (15:53):
I mean, occasionally we talk about the possibility of buying
equal weight indices instead of the market cap weighted industries,
but they aren't nearly as easily available. It's not that
you can just go out and buy an equal weight
index and everything in anything you like. It's not quite
the same.
Speaker 3 (16:09):
Trade a lot more. I mean it has to. It
has to sell a lot of video along the way,
because in video keeps getting to be more than zero
point two percent of the index, because it keeps growing
in an academic, friction free environment which none of us
get to live in. It's definitely got a lot of
arguments in favor of it. They do weaken when you
actually have to again, that's why people got so excited
(16:31):
about these vast hippo bottom as elephants s and P
five hundred funds. That the economies of scale are enormous.
You just set them running and they trundle along cheerfully,
and the costs get defrayed over ever larger amounts of money,
and their economics get ever harder to beat. But they're
like dropping a whale into a bath tub or whatever.
(16:54):
Eventually they really do have an impact on the environment
around them. What else is on your mind other than
the World Cup.
Speaker 2 (17:02):
Other than the World Cup. There is a firm rule.
I'm not going to talk.
Speaker 1 (17:06):
About the World Cup on this podcast, and there's not
going to be any of that stuff about investing with
the World Cup, and you know what happens to markets
of the teams that win or don't win or whatever.
Too many press releases about that and not doing it.
Speaker 3 (17:19):
No, I'm not doing it. I did find that very tight.
I do remember. I actually have a video and I
talked to Goldman Sachs's chief economist in the UK at
the time ahead of the twenty fourteen World Cup, when
they explained all their reasons why their model predicted with
high confidence that Brazil was going to win that World
Cup and they lost to Germany seven one final.
Speaker 4 (17:45):
I've already lost interest already. Well, I've lost interest in
your story, but I've also lost interest in the whole
thing because the team that I was allocated in the
neighborhood sweepstake has already lost.
Speaker 3 (17:56):
Oh dear. In terms of the other things that going
on in the markets, it's always very exciting. I think.
I think the arrival of Kevin Walsh at the FED
is very very interesting, and very glad that he has
at least set himself out in his first press conference
as not being the Donald Trump stooge that he needed
(18:18):
to present himself to be to get the job in
the first place. We don't need to have a conversation
about Donald Trump. The central bank. The head of a
central bank should not be the stooge for any given
political leader ever, because you need them to have a
degree of independence. That's their job. They have to be
prepared to take away the punch bowl. And I did
(18:39):
see the way Kevin Walsh presented himself. I mean, he's
committed himself to nothing yet and he was lucky to
start with a meeting when there's pretty much no case
at all to do anything to interest rate, which is
very lucky to him. There was no dilemma going on.
But certainly the way he chose to present himself as positive.
(19:00):
The messaging is actually, I'm serious about being a real
independent central banker, and I'm going to be tougher and
clearer about the way I operate.
Speaker 2 (19:13):
Yeah, so I really liked it.
Speaker 1 (19:14):
A little statement little being the the operative word here,
what three hundred and fifty words or something nice short
it's very important thirty one hundred and thirty, sorry, not
hundred and thirty. And you know, as a as an
ex editor, I found it very very pleasing. There was
nothing to cut.
Speaker 3 (19:31):
No. I was actually thinking once once, once he's finished
his term, maybe we should hire him a Bloomberg. We
need we need something, We need it. We need some
more sub editors to to really knock things into shape
in the good, good, hard, tight copy. And actually I
don't think the FED chairman gets paid all that much money,
so we might even be able to afford.
Speaker 2 (19:52):
Him him over.
Speaker 3 (19:54):
Yes, it's not an economically rational thing to do be
the head of a central bank unless you and cash
in when you retire. But that's yet another story we
perhaps shouldn't get into just well.
Speaker 1 (20:05):
Is the is the head of the fad allowed to
inside trade in the same way that American politicians are,
because in which case it would be very financially, it
would be very financial.
Speaker 3 (20:14):
We had two we had two resignations. What was it
was about? When did we've had two resignations in recent
history for the appearance of insider trading. There was a
very spurious I thought, reports suggesting suggesting that Powell had
been insider trading that came out when people were trying
(20:34):
to which I thought was nonsense.
Speaker 1 (20:36):
Yes, I vaguely remember that. One. Imagine imagine if you
could do that in the UK. You've got a lot
more people clamoring to be MPs these days. You can't
drag anybody into it. But if you're allowed to insider
trade once you were there, I reckon it become a
lot more popular career choice.
Speaker 3 (20:50):
Yeah, it's the end of the FOMC. You've made your
decision which will supplies the market, and then you open
up your Charles Schwaber that would Yes, that the mere
thought that that would be remotely acceptable is a little
is a little scary.
Speaker 2 (21:04):
Extraordinary, extraordinary carry on.
Speaker 1 (21:06):
So we're pleased with Kevin watched so far. This looks
good so far. Let me take you quickly to the
bubble conversation. Is there anything right now? Because I've talked
about what an extraordinarily difficult thing it would be if
these big text docs came to a sticky end and
destroyed all the returns from the indices, et cetera. Where
(21:27):
do you stand on the likelihood of matter? And my inbox,
probably like yours, is jamfull.
Speaker 2 (21:31):
Of report after report after reporter for report.
Speaker 1 (21:33):
And I'm now I would say I'm pretty evenly balanced
on the information I received between the AI bold and
the AI Bears.
Speaker 3 (21:40):
My inbox is probably slightly skewed towards Bears.
Speaker 1 (21:45):
I would say, are you're not signed up to Yardini
research that that.
Speaker 3 (21:50):
There is a point at the point that gets made
repeatedly and is correct as far as it goes, is
that this is if there is a bubble, it is
in people buying at chips. It's the price of chips
that has gone up absurdly, and the share prices of
the companies that make those chips have actually gone up
(22:11):
sensibly to react to the price of those chips. Are
the bubble in some ways? Is Are we going to
discover that this money that the hyperscalers A companies is
just makes no sense?
Speaker 1 (22:22):
Yes, so maybe that the bubble is not in the
share prices, it's in the earnings. But if it is
shown that the earnings numbers are a bubble, then obviously
the share prices are way too high.
Speaker 3 (22:33):
Yes, If then earnings numbers prove to be a bubble,
if it becomes obvious that one or more of the
hyper scalers just can't afford to keep doing what it's doing.
Isn't making a return that would become the problem. It
wouldn't be the wily coyote moments of people looking at
what they've paid for their stock and asking myself, asking themselves,
is this really worth it? No bang, which is kind
(22:56):
of what happened to the or the most ridiculous of
the dot com stocks. That was kind of what happened.
This is more about the economics. We need to establish
that the amount of money that people are paying for
chips at the moment was wrong, was crazy, was in
a bubble, and that bubble needs to burst. Could that happen?
I don't know enough about chip technology and AI technology
(23:19):
to say with total confidence, I think it's a pretty likely,
pretty likely outcome. I think the other thing I would
say is that I was in New York for for
nineteen nine and two thousand. Experience is useful, but it
can sometimes skew your view of the present. I suspect
we're in ninety nine, not two thousand, though I think
(23:40):
you need. If there was any trigger for when the
bubble finally burst in the spring of two thousand, it
was that lock up periods were over after companies had
gone to IPO and you finally, you know, so somebody
was worth a billion dollars on paper, and they now
that they were allowed to, they try to sell some
(24:01):
stock to be worth at least so that they could,
you buy their house in Palm Beach and you know,
get their kids into school and whatever. And that was
the moment, once the real demand, right, real supply of
stock at this price came onto the market, that people
really just bulked. And to some extent, I don't think
(24:23):
Elon wants to sell more than half of his current
stake in SpaceX if he were to do so in
reasonably quick order. Let's say, so if a trillion dollars
worth of stock comes on the market there, and if
all the other big IPOs none of you know or
all of them were talking about next year before they
can really start trying to sell their stock at its
(24:46):
paper value. I think the great concern comes a we've
had two or three years and let's say Meta or
somebody is beginning to groan under the weight of all
the money they've been spending on chips and it's not
make it not delivering for them yet. And then be
(25:07):
all these founders of anthropic and open AI at al
as Ala trying to are now trying to sell all
this stock at the prevailing price. I can more easily
imagine a bubble bursting a year from now. This feels
more like the spring of ninety nine than the spring
of two thousand. But again, you've always got to be
(25:30):
very careful. This is a very different world. The level
of positivity in society as a whole is so much
less now than it was in ninety nine, and so
the world is a very different place. And while I
do think that in a sense this could well prove
to be a bubble, because AI is really going to
have to deliver fantastically quite quickly for all this money
(25:51):
to have proved to have been worthwhile, to have been
well spent. Those are the similarities I see with ninety nine.
But my best guest, transposing from there, knowing that I'm
the prisoner of my own experience, it's probably until next
year that we I'm more worried about a burst bubble next.
Speaker 4 (26:08):
Year than this.
Speaker 1 (26:10):
Okay, that is good to know, heard it here first.
Speaker 2 (26:12):
Don't worry.
Speaker 1 (26:13):
Everything's fine next year, brilliant John, Thank you so much.
Speaker 2 (26:18):
For joining us today. I really enjoyed Twitches.
Speaker 3 (26:20):
I enjoyed talking to you. Mar Thank you, it's always fun.
Speaker 1 (26:23):
Thanks for listening to this week's Marin Talks Money debrief.
If you like our show, rate review, and subscribe wherever
you listen to podcasts. This episode was produced by some
Asadi and Moses, and questions and comments on this show
and all our shows are always welcome. Our show email
is Merror Money at Bloomberg dot net
Bloomberg Audio Studios, Podcasts, radio News. I'm Marin Sumside, web
editor at Large with Bloomberg UK Money and with me
this week in the place of John Steppek, who is
(00:22):
on holiday again. There's another John John author's John is
a senior editor for Markets, a Bloomberg opinion columnist, and
he also writes a brilliant newsletter that if you don't
subscribe to it yet.
Speaker 2 (00:33):
You really really should do.
Speaker 1 (00:35):
So we are going to talk about a couple of things.
We're going to talk about, Well, obviously SpaceX, we always
talk about SpaceX.
Speaker 2 (00:40):
We're going to talk about.
Speaker 1 (00:41):
SpaceX and its impact on passive investing, what it means
for the way you invest. We're going to talk a
little about Kevin Walsh and his starting out at the FED,
what we think about that. And finally we're going to
talk about the AI bubble or not. Is it a
bubble in share prices? Is it a bubble in earnings?
And if it is either of those things, when might
it come to an end?
Speaker 2 (01:02):
John? So good to have you on this week.
Speaker 3 (01:04):
Great fun to be in London for a change, escaping
Nick Spever and World Cup Fever in there in New York.
Speaker 1 (01:10):
Yeah, I only wish I was in London with you.
Speaker 4 (01:14):
That we are.
Speaker 1 (01:14):
We are down the line today because I am in
Edinburgh having just left London, So round and round we go.
Speaker 2 (01:19):
Right.
Speaker 1 (01:20):
What I want to talk about this week is I've
just mentioned your absolutely brilliant newsletter and you wrote about
something this week that is an absolute bugbear of this
podcast and John other John and I talk about it
all the time, which is our fury at people speaking
about passive investing as though it's just a passive thing,
and it's it's completely different to active investing, and it's
(01:42):
a default and you can just say I'm a passive
investor and leave this algorithm, index provider whatever to do
it for you, and somehow you get exposure to the
broad global stock market, or in many cases just the
broader US stock market. And of course it's not really true, true,
is it? No?
Speaker 3 (02:02):
And this is one of the paradoxes that well, both
of us you have to deal with for our entire careers.
Really that, first of all, passive investing is one of
the worst monikers ever. I think robo investing might be
another one. Nobody in their right mind wants a robot
to manage their money, or I hope they don't. And similarly,
(02:23):
passive investing, if it were passive, would sound like a
pretty miserable idea, and as you just said, it really isn't. Also,
there is a problem which is a bit like Kines's
paradox of thrift, which is the idea that dinner recession,
it pays any individual to save money, but for the collective,
you want everybody to spend money so that you get
out of recession. In the same way, if you're trying
(02:45):
to guide people as to how they should manage their money,
they probably should have a fair amount of money in
what is known as passive investments, not because they're passive,
but because they're cheap. That is the point of a
passive investments is that it finds a way of reducing
the costs of buying stocks and shares that with you,
(03:08):
the client, so that it's a sensible deal that does well.
Jack Bogel, the founder of Vanguard, the spiritual and practical
father of passive investing in many ways, was referred to
what he called the CMH, which is the cost matters
hypothesis that you can invest more cheaply if you're just
(03:30):
tracking an index.
Speaker 1 (03:31):
And then you get average average returns and they just
compound better.
Speaker 3 (03:35):
Because there's less costs coming out, which is extremely boring.
And it's not necessarily passive. The problem that we are
coming up against, and there are numerous problems if there
was ever a sense in which it was passive. It's
very much harder when passive investing. It's very irritating having
(03:55):
to keep using that word because that's the name for
these things.
Speaker 1 (03:58):
Well we have there's a brilliant headline not written by me,
but by somebody else on top of my nused letter
this week that calls it passive aggressive investments.
Speaker 3 (04:05):
Yeah, that's fair enough. Thirty years ago, vanguards and a
few imitators were growing and they were maybe two three
four percent of the whole US stock market, And at
that point you could be somewhat closer to passive in
some senses, in that what they were buying and selling
really didn't affect the market that much at the margin.
(04:27):
Now they are considerably more than half the entire market.
It's like being an elephant. You can, if you're you know,
Daddy long legs or something, you can skate across the
top of the water without affecting it. That much. If
you're an elephant, you can't. And similarly, with the scale
of passive investing at the moment, it's not no longer passive,
(04:49):
it will have a huge active impact. Now, that's one
big issue with any so called passivity is really no
longer possible. And then the other issue, which becomes much
more apparent with this this week's or last week's now
news on SpaceX.
Speaker 1 (05:07):
Last week's Yeah, that's why we're talking about this now
because of the launch of SpaceX on Friday, bringing a
lot of these problems to the forefront and making them
much more obvious than they were even two weeks ago.
Speaker 3 (05:17):
You can't dismiss it as a technical problem. Whether you
are going to whether you are going to include this company,
which is currently trading at a value that implies it's
worth more than two trillion dollars, whether you include it
in any given index or not, whether an investor tries
to expose themselves to that or not, is material. There
(05:42):
is nothing passive about it. I doubt you I think
it's worth two and a half trillion either. I certainly
don't think it's worth two and a half trillion, But that's.
Speaker 1 (05:50):
I at least have I have shares, and it's very
important to say this that I applied for my shares
on Hargouz Lambs and I am the proud owner of
nine shares in space.
Speaker 2 (06:00):
Oh congratulations, thank you very much, thank you very much.
Speaker 1 (06:03):
And I had dinner with a group of investors last
night who told me that they had all done something
similar privately, and that they had all stagged from salt them.
I was the only one left holding onto my nine shirts.
Speaker 3 (06:13):
So you are at least being passive in one sense,
which is that Elon Musk has structured it so that
you can have no active effect on how he runs
that company. So there is a nast one pertinent sense
in which you are being passive.
Speaker 1 (06:27):
I will say about that John that you know I
looked at what he said about that, and he said, well,
you know, he was damned if he was going to
have put all this effort into creating something extraordinary only
to lose control of it because a pilet of being
counters at the proxy agencies felt that there wasn't enough
diversity on his board or wherever it was that they
would get cross about. He wanted to make sure that
(06:50):
in this environment he was able to maintain control of
his his company, and I'm very against this kind of
thing in general, against it in general. I'm super prochure
helder democracy, goodness, I' written a book on sholder democracy.
I'm super keen on one chair, one vote. But the
truth is that the market tolerates this very very rare
(07:11):
and the market has chosen, in the case of Elon Musk,
to tolerate it. So I'm kind of I feel like
it's a bit of a moral panic. I'm not that
bothered about that in this case. I'm bothered about a
lot of other stuffs, but I'm not bothered about Elon
Musk maintaining control over eighty five percent. Eighty four percent
is a note of the voting rights over us.
Speaker 2 (07:27):
Yeah, company, fair enough, you think fair enough.
Speaker 3 (07:30):
It deters me from investing in them. That being said,
and this is where we're getting into the arguments of
how can you be passive or not. I do have
some of the money in my four oh one k
I'm based in the States. I have a four oh
one k is in an s and P five hundred funds.
So I have passively made the decision not to buy SpaceX,
(07:56):
or rather the index compiler. Who is we were saying
before we came on air is effectively a stock picker
has decided, for good, consistent reasons not to put SpaceX
in there. Had I exposed myself via a Russell index
or a Nasdaq index, then any day now I would
(08:16):
be buying SpaceX passively quote unquote, because those index companies
made the decision again on somewhat defensible grounds. I think
I think S and P has certainly been more consistent
than they have, but making the grounds that if we
want to mirror the market, and the market says this
(08:37):
company is worth this much, we need to be in
this company. They have made a different decision.
Speaker 1 (08:42):
Yeah, if you had bad index, you wouldn't have the
fomo that I know you have now. You wouldn't be
sitting there thinking, Maren's got all that exposure to SpaceX,
She's going to be rich with her nine chares, and
me sitting here I'm just not going to be so.
I wonder if you're thinking, maybe you made the wrongs.
Speaker 3 (08:59):
I can live without it. I think I might miss out.
I think there are all kinds of scenarios where SpaceX
does very well. There are many opportunities in life there
are some things I am scared of missing out on.
I can live with missing out on any given investments opportunity.
Just fine. I think my money is tied up.
Speaker 2 (09:18):
I will wave to you from my retirement yacht.
Speaker 3 (09:20):
You mean your retirement rocket.
Speaker 2 (09:24):
Rocket, from my holiday home on the moon. I will
wave to you. I may even ask you for the
weekend if you play your girls.
Speaker 3 (09:31):
Okay, okay, okay, thank you.
Speaker 2 (09:33):
Okay.
Speaker 1 (09:33):
So here we are having this conversation. SpaceX has prompted it,
although obviously I think you've written about it quite a
lot over the years, and we've certainly gone on about
it relentively on the podcast. But SpaceX really does bring
it to the force. And it's not just this business
of do you buy an index that has SpaceX in
it or do you buy an index which does not
have SpaceX in it? By a way, very very active
decision you have to make there a one that could
(09:54):
make an appreciable difference to your future.
Speaker 2 (09:55):
Not to your future, obviously, John, but to other people's suits.
Speaker 1 (09:58):
But there other problem that this kind of throws up
that you talk about in your news letter, and I'm
afraid I talk about it might as well, because on
both our big time great minds is the concentration. And
I was at a conference yesterday for Aubrey Capital and
a Chilean Group LV and one of the topics that
(10:19):
came up again and again and again is how incredibly
difficult it is for emerging market managers in particular we
were talking about and to outperform their index because the
way the MSCI Emerging Markets Index is constructed, a very
large part putting fifty percent of the indexes in Taiwan
and Career, which I think most of us wouldn't even
(10:40):
think of of emerging markets. And in those two markets
the majority are three stocks.
Speaker 2 (10:46):
That's it.
Speaker 3 (10:47):
And the MSCI Emerging Markets Index, which has don't quote
me on it, but I'm pretty certainly it's got more
than a thousand stocks in it. The top three are
a third even more concentrated than the SMP, which we've
been talking about.
Speaker 1 (10:59):
Two hundred and five I've stocks in there, and a
third of it is Taiwan Semiconductor, Something Electronics, ske Hannis
it is, and then you've got you've got ten Cent
and Alibab bringing up behind right. But it's those three
that take up this huge amount. So if you buy
an index in an emerging markets index in particularly about
(11:20):
MSCIM here. If you buy that, thinking yourself, well, this
is great. I've seen a million charts over the years
about the growth of the middle class and in the
emerging markets, and I'm going to get a piece of
that consumption for myself. Or you think to yourself, I'm
going to buy this index and get a piece of
that greater you know, energy and commodities, et cetera in
Latin America. Goodness me, did you see that Latin America
abuse is forty percent of the world's copper.
Speaker 2 (11:42):
I want a bit of that.
Speaker 1 (11:43):
And you go out and you buy the MSCI Emerging
Markets Index, you are not going to get any of that.
Which you're actually going to get is a momentum driven
AI focused group of companies based in what you don't
even think of an emerging market.
Speaker 3 (11:56):
Maybe right that these companies are worth so much, But
because as they are now worth so much, the index
is no longer an overall exposure to those interesting macro trends.
You could it was used and abused to exploit those
trends in particularly in the years ahead of the global
financial crisis, and if you got out in time you
had a lot of money from making those exact judgments.
(12:20):
That's not what it offers you at all now. And
you could make an active decision of I want to
expose myself to these macroeconomic themes, and I'm going to
put together a basket of stocks that will capture it,
probably having a bunch of copper miners or whatever in there,
(12:42):
I don't know, And then you could call it an
index and put money in it. But is that passive investing? No,
it isn't it. It's probably quite a sensible cost reduced
form of thematic investing which we can maybe it's a
good idea, or maybe it isn't to be in that
particular theme, but it ain't passive. You have to make
(13:03):
some kind of an active call. All you're really talking
about is just being sensible about how much money you spend,
the costs you devote to try to buy your market exposures.
But because these these funds have made a lot of
sense for a long time, but they have also been Yeah.
Speaker 1 (13:19):
Yes, but you're still you're still being brought in by
by an idea that isn't really true anymore. You're being
told that there's a default option, a sensible, diversified, inexpensive
default option which will serve you.
Speaker 3 (13:33):
And it's very hard to argue that that's truly the
case anymore. You can argue that with electronification, with the
lower costs of lots of things, that it becomes easier
to put together your own bespoke quote unquote indexes or
try to come up with ways to overcome all the
biases personal biases. We have to mimic at having some
(13:56):
degree of emotional intelligence to have disciplined, systematic, low cost investing.
But you don't actually call it passive because it isn't
in a meaningful sense, and the main vehicles that are
currently on offer for you to do that don't in
fact do.
Speaker 4 (14:13):
That for you.
Speaker 2 (14:27):
If these bubbles burst, let's not argue right now about whether.
Speaker 4 (14:30):
That's another topic we come on about the minute.
Speaker 1 (14:34):
How might we come on that in the minute. But
you know, let's say that it is a bubble. Let's
say that it bursts. Let's say that that that that
happens after we've had these other big launchers that are
coming open AI, Anthropic, etc.
Speaker 2 (14:45):
And those to SpaceX.
Speaker 1 (14:46):
You've had that huge new supply of equity coming into
the market after years and years of the equalization, and
maybe something prompts a market crash of some kind. And
when you have or a sector crash, stay and when
you have that extraordinary constant creation at the top of
every passive vehicle, that's going to give everyone a horrible shock.
As what we're talking about now becomes obvious to the
(15:07):
entire investing communditty.
Speaker 3 (15:09):
It'll be like the dot Com shock, but worse.
Speaker 1 (15:13):
Worse, much worse, because in the dot Com shock, you know,
that was relatively contained, that was contained. It wasn't anywhere
near as big people went, anywhere near as invested in
these vehicles.
Speaker 3 (15:23):
It was easier to avoid. There were easier way, there
were easier ways to sidestep, and that was that way
lay the growth of the hedge fund industry because lots
of clever hedge fund managers did manage to avoid it,
and then they didn't manage to avoid the GFC. And
that's yet another story. We don't need to have to discussion,
We don't have to stay, but but this is much harder.
You need The only way you can avoid this is
(15:44):
by painfully missing out very big time from now until
whenever the bubble does best yeah.
Speaker 1 (15:53):
I mean, occasionally we talk about the possibility of buying
equal weight indices instead of the market cap weighted industries,
but they aren't nearly as easily available. It's not that
you can just go out and buy an equal weight
index and everything in anything you like. It's not quite
the same.
Speaker 3 (16:09):
Trade a lot more. I mean it has to. It
has to sell a lot of video along the way,
because in video keeps getting to be more than zero
point two percent of the index, because it keeps growing
in an academic, friction free environment which none of us
get to live in. It's definitely got a lot of
arguments in favor of it. They do weaken when you
actually have to again, that's why people got so excited
(16:31):
about these vast hippo bottom as elephants s and P
five hundred funds. That the economies of scale are enormous.
You just set them running and they trundle along cheerfully,
and the costs get defrayed over ever larger amounts of money,
and their economics get ever harder to beat. But they're
like dropping a whale into a bath tub or whatever.
(16:54):
Eventually they really do have an impact on the environment
around them. What else is on your mind other than
the World Cup.
Speaker 2 (17:02):
Other than the World Cup. There is a firm rule.
I'm not going to talk.
Speaker 1 (17:06):
About the World Cup on this podcast, and there's not
going to be any of that stuff about investing with
the World Cup, and you know what happens to markets
of the teams that win or don't win or whatever.
Too many press releases about that and not doing it.
Speaker 3 (17:19):
No, I'm not doing it. I did find that very tight.
I do remember. I actually have a video and I
talked to Goldman Sachs's chief economist in the UK at
the time ahead of the twenty fourteen World Cup, when
they explained all their reasons why their model predicted with
high confidence that Brazil was going to win that World
Cup and they lost to Germany seven one final.
Speaker 4 (17:45):
I've already lost interest already. Well, I've lost interest in
your story, but I've also lost interest in the whole
thing because the team that I was allocated in the
neighborhood sweepstake has already lost.
Speaker 3 (17:56):
Oh dear. In terms of the other things that going
on in the markets, it's always very exciting. I think.
I think the arrival of Kevin Walsh at the FED
is very very interesting, and very glad that he has
at least set himself out in his first press conference
as not being the Donald Trump stooge that he needed
(18:18):
to present himself to be to get the job in
the first place. We don't need to have a conversation
about Donald Trump. The central bank. The head of a
central bank should not be the stooge for any given
political leader ever, because you need them to have a
degree of independence. That's their job. They have to be
prepared to take away the punch bowl. And I did
(18:39):
see the way Kevin Walsh presented himself. I mean, he's
committed himself to nothing yet and he was lucky to
start with a meeting when there's pretty much no case
at all to do anything to interest rate, which is
very lucky to him. There was no dilemma going on.
But certainly the way he chose to present himself as positive.
(19:00):
The messaging is actually, I'm serious about being a real
independent central banker, and I'm going to be tougher and
clearer about the way I operate.
Speaker 2 (19:13):
Yeah, so I really liked it.
Speaker 1 (19:14):
A little statement little being the the operative word here,
what three hundred and fifty words or something nice short
it's very important thirty one hundred and thirty, sorry, not
hundred and thirty. And you know, as a as an
ex editor, I found it very very pleasing. There was
nothing to cut.
Speaker 3 (19:31):
No. I was actually thinking once once, once he's finished
his term, maybe we should hire him a Bloomberg. We
need we need something, We need it. We need some
more sub editors to to really knock things into shape
in the good, good, hard, tight copy. And actually I
don't think the FED chairman gets paid all that much money,
so we might even be able to afford.
Speaker 2 (19:52):
Him him over.
Speaker 3 (19:54):
Yes, it's not an economically rational thing to do be
the head of a central bank unless you and cash
in when you retire. But that's yet another story we
perhaps shouldn't get into just well.
Speaker 1 (20:05):
Is the is the head of the fad allowed to
inside trade in the same way that American politicians are,
because in which case it would be very financially, it
would be very financial.
Speaker 3 (20:14):
We had two we had two resignations. What was it
was about? When did we've had two resignations in recent
history for the appearance of insider trading. There was a
very spurious I thought, reports suggesting suggesting that Powell had
been insider trading that came out when people were trying
(20:34):
to which I thought was nonsense.
Speaker 1 (20:36):
Yes, I vaguely remember that. One. Imagine imagine if you
could do that in the UK. You've got a lot
more people clamoring to be MPs these days. You can't
drag anybody into it. But if you're allowed to insider
trade once you were there, I reckon it become a
lot more popular career choice.
Speaker 3 (20:50):
Yeah, it's the end of the FOMC. You've made your
decision which will supplies the market, and then you open
up your Charles Schwaber that would Yes, that the mere
thought that that would be remotely acceptable is a little
is a little scary.
Speaker 2 (21:04):
Extraordinary, extraordinary carry on.
Speaker 1 (21:06):
So we're pleased with Kevin watched so far. This looks
good so far. Let me take you quickly to the
bubble conversation. Is there anything right now? Because I've talked
about what an extraordinarily difficult thing it would be if
these big text docs came to a sticky end and
destroyed all the returns from the indices, et cetera. Where
(21:27):
do you stand on the likelihood of matter? And my inbox,
probably like yours, is jamfull.
Speaker 2 (21:31):
Of report after report after reporter for report.
Speaker 1 (21:33):
And I'm now I would say I'm pretty evenly balanced
on the information I received between the AI bold and
the AI Bears.
Speaker 3 (21:40):
My inbox is probably slightly skewed towards Bears.
Speaker 1 (21:45):
I would say, are you're not signed up to Yardini
research that that.
Speaker 3 (21:50):
There is a point at the point that gets made
repeatedly and is correct as far as it goes, is
that this is if there is a bubble, it is
in people buying at chips. It's the price of chips
that has gone up absurdly, and the share prices of
the companies that make those chips have actually gone up
(22:11):
sensibly to react to the price of those chips. Are
the bubble in some ways? Is Are we going to
discover that this money that the hyperscalers A companies is
just makes no sense?
Speaker 1 (22:22):
Yes, so maybe that the bubble is not in the
share prices, it's in the earnings. But if it is
shown that the earnings numbers are a bubble, then obviously
the share prices are way too high.
Speaker 3 (22:33):
Yes, If then earnings numbers prove to be a bubble,
if it becomes obvious that one or more of the
hyper scalers just can't afford to keep doing what it's doing.
Isn't making a return that would become the problem. It
wouldn't be the wily coyote moments of people looking at
what they've paid for their stock and asking myself, asking themselves,
is this really worth it? No bang, which is kind
(22:56):
of what happened to the or the most ridiculous of
the dot com stocks. That was kind of what happened.
This is more about the economics. We need to establish
that the amount of money that people are paying for
chips at the moment was wrong, was crazy, was in
a bubble, and that bubble needs to burst. Could that happen?
I don't know enough about chip technology and AI technology
(23:19):
to say with total confidence, I think it's a pretty likely,
pretty likely outcome. I think the other thing I would
say is that I was in New York for for
nineteen nine and two thousand. Experience is useful, but it
can sometimes skew your view of the present. I suspect
we're in ninety nine, not two thousand, though I think
(23:40):
you need. If there was any trigger for when the
bubble finally burst in the spring of two thousand, it
was that lock up periods were over after companies had
gone to IPO and you finally, you know, so somebody
was worth a billion dollars on paper, and they now
that they were allowed to, they try to sell some
(24:01):
stock to be worth at least so that they could,
you buy their house in Palm Beach and you know,
get their kids into school and whatever. And that was
the moment, once the real demand, right, real supply of
stock at this price came onto the market, that people
really just bulked. And to some extent, I don't think
(24:23):
Elon wants to sell more than half of his current
stake in SpaceX if he were to do so in
reasonably quick order. Let's say, so if a trillion dollars
worth of stock comes on the market there, and if
all the other big IPOs none of you know or
all of them were talking about next year before they
can really start trying to sell their stock at its
(24:46):
paper value. I think the great concern comes a we've
had two or three years and let's say Meta or
somebody is beginning to groan under the weight of all
the money they've been spending on chips and it's not
make it not delivering for them yet. And then be
(25:07):
all these founders of anthropic and open AI at al
as Ala trying to are now trying to sell all
this stock at the prevailing price. I can more easily
imagine a bubble bursting a year from now. This feels
more like the spring of ninety nine than the spring
of two thousand. But again, you've always got to be
(25:30):
very careful. This is a very different world. The level
of positivity in society as a whole is so much
less now than it was in ninety nine, and so
the world is a very different place. And while I
do think that in a sense this could well prove
to be a bubble, because AI is really going to
have to deliver fantastically quite quickly for all this money
(25:51):
to have proved to have been worthwhile, to have been
well spent. Those are the similarities I see with ninety nine.
But my best guest, transposing from there, knowing that I'm
the prisoner of my own experience, it's probably until next
year that we I'm more worried about a burst bubble next.
Speaker 4 (26:08):
Year than this.
Speaker 1 (26:10):
Okay, that is good to know, heard it here first.
Speaker 2 (26:12):
Don't worry.
Speaker 1 (26:13):
Everything's fine next year, brilliant John, Thank you so much.
Speaker 2 (26:18):
For joining us today. I really enjoyed Twitches.
Speaker 3 (26:20):
I enjoyed talking to you. Mar Thank you, it's always fun.
Speaker 1 (26:23):
Thanks for listening to this week's Marin Talks Money debrief.
If you like our show, rate review, and subscribe wherever
you listen to podcasts. This episode was produced by some
Asadi and Moses, and questions and comments on this show
and all our shows are always welcome. Our show email
is Merror Money at Bloomberg dot net
Host
Merryn Somerset Webb
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