Full Transcript: Mike Green and Joe Davis on Passive Flows and AI

The Excess Returns Weekly Wrap - 6/14/2026

Jack: Welcome to the Excess Returns Weekly Wrap. I’m Jack Forehand, and I’m joined by the man, the only man I know who can go on macro podcasts regularly and offer zero macro insights and somehow get around the “what’s happening in the next six months of inflation,” my good friend Matt Zeigler.

Matt: Jack, this is a secret. Don’t tell anybody if you’re watching this. This is just between, just between us, us chickens here. The Excess Returns strategy is to go on shows that are technically our competition and sabotage them by not giving them good content. And relatively over time, we’ll provide good content here, and we’ll get a systematic advantage by just occasionally lobbing these hand grenades into the mix of all the competition.

Jack: The problem with your saboteur strategy is you’re actually very, very good. You just went on the Market Huddle recently. And you’ve also been on, what, the Macro Dirt twice, I think.

Matt: Been on Macro Dirt a couple times. Usually they just have me on as culture consultant there, because I was spamming them with comments about their Billboard chart analysis that I needed to, you know, take issue with things they were missing. But yes. I am, I am hosting, it’ll probably be out not long after this one.

They’re about to do their 100th episode. And I was like, “Guys, come on. Let me come on here and help you out with your being number 100,” which I’m very excited for. I love, I love the college network of our co-channels and how we’re getting to play around with them.

Jack: Well, I think what we’re gonna do here is we’re gonna start a new podcast, and the goal is gonna be, I’m gonna try to get... I’m gonna be the interviewer and I’m gonna try to get your six-month take on inflation out of you, and you’re gonna tell stories about, like, ‘80s rock bands or something, and we’re gonna see who breaks first. I think it would be entertaining at least. I—

Matt: I’m in for this, because... So we’re doing our clip show. We’re looking back on the week. We have two incredible runs of clips here from Mike Green and Joe Davis. They need no introduction, either of them. But first, before we get into this, are you stoked for World Cup? Does World Cup matter to you at all?

Jack: Nah, I don’t watch it that much, no. But I will definitely watch the World Cup, but I’m not, like, a huge soccer fan by any stretch.

Matt: Okay. Well, I’m declaring it here, and then you can launch us into this. I’m calling you the Lamine Yamal of Excess Returns right now. I want you to look for this guy, this kid.

Jack: I gotta look it up, yeah. I don’t even really know what that means.

Matt: You gotta look up Lamine Yamal.

Jack: Yeah. I don’t know if that’s good or bad, but I will find out after we’re done.

Matt: Breakout star, and only because of immaturity and age, I’m taking Gilberto Mora, and that’ll be me for this episode. But I’m... My entire day right now is just preoccupied with World Cup thoughts. I apologize in advance to you watching along at home. But these are the non-macro insights.

Jack: We’re gonna start with Mike Green. He’s got some charts, and he’s got some new charts and some new research around his work on passive.

Mike: So this is actually some of the more recent stuff that I’ve done, and it ironically has been facilitated by the ability to use LLMs to rapidly build models and test some of this stuff. The really critical insight of passive is to think of it like a fire hose. It’s concentrating a flow of capital into a crowded theater.

The behavior of the participants in that crowded theater are kind of what you need to be thinking about. And what we’ve done is articulate, using market impact work that was created by JP Bouchaud all the way back in 2014, was the subject of a very interesting paper that he wrote in, I believe it was 2024, originally called “Ponzi Funds.”

It was highlighting the impact of flows of capital that becomes a self-endogenous momentum when the capital flows are large enough that the funds themselves become a significant source of the liquidity. He focused on the ARK Funds example and how that created its own endogenous liquidity by creating capital that then had to buy the securities that underpinned her holdings in driving those securities higher.

The same phenomenon plays through in the S&P once you aggregate together all of the S&P funds. They’ve now become a very large fraction of the total holdings. Nasdaq 100 is obviously an extension of that, slightly more concentrated, more tech-oriented, and as we’ve discovered, more prone to change itself to facilitate new IPO listings.

But what we’re really trying to do with that paper is identify how we should expect passive to impact markets. And so if you think of that fire hose, it’s basically sending the largest flow of liquidity towards the largest stocks. It has the largest impact on the largest stocks that have the highest volatility, Bouchaud’s framework.

We see the evidence of that in this chart, where historically, the large cap, high vol stocks have been significant underperformers. This is part of the work that Cliff Asness at AQR correctly identified in the Betting Against Beta framework. Basically, individuals overpay for access to highly volatile securities because it’s an embedded form of leverage that they typically can’t obtain in their accounts.

That means those securities have a tendency to become overvalued, and therefore their forward expected return on a discounted cash flow framework is expected to be lower. In a passive world, that’s reversed. Because they’ve become more richly valued, because they are more volatile, the impact of those flows that are allocated simply on the basis of market capitalization has a larger impact on those securities.

And if that flow becomes the underlying dominant flow as it has, we would expect those securities to suddenly start outperforming the remaining courses of the index, and that’s exactly what that chart is illustrating.

Matt: Mike Green, the Kylian Mbappé of passive flows. He’s still playing the hits. It’s like in 2018 when this kid comes out and scores those goals for France, and you’re going, “Who is this kid? This is amazing.” And we’ve watched him explode. Mike Green, still beating this passive horse, but man, he’s got new data. How cool is this?

Jack: Yeah, and he keeps coming up with new stuff. And, you know, it’s just so interesting, and he talked about this in the interview, thinking about where we were, like years ago with his passive work where everybody’s like, “There’s nothing to this. This is not right.” And now, like, just the acceptance as we come around the SpaceX IPO here, like the acceptance of Mike’s work. Like, everybody just assumes now that this is all true. So it’s amazing what Mike has done to sort of change the perception of all this.

Matt: And the framework works across these multiple angles, which is the mind-boggling part. It’s, once we understood the Volmageddon trade and why that theory worked, we’re now applying it to all this other stuff, like the way we are all talking about the SpaceX IPO. I will give you one other non-World Cup piece of trivia for this. Remember the movie Backdraft? You ever watch Backdraft?

Jack: Oh, yeah, yeah.

Matt: Early ‘90s thing. The fire thing.

Jack: Yeah.

Matt: Do you know what movie Backdraft is basically a complete movie architecture steal from?

Jack: No.

Matt: So it’s Top Gun for firefighters. And it’s a weird beat-by-beat thing if you actually break it down. Like even, you know, you have the whole training montage and sequence as the first part of the movie.

Then Goose dies in Top Gun, and Shadow dies in Backdraft. And the way the whole thing progresses, a little bit of a miss on the soundtrack for like the big hits that show up in the end of this thing. Nobody remembers the Backdraft song. It was “Set Me in Motion” by Bruce Hornsby and the Range. Not quite “Danger Zone” by Kenny Loggins or “Take My Breath Away” by Berlin.

But either way, it’s this format where once the format is there and it works, you can apply it to new areas. I did not foresee how much we’d be talking about Mike Green’s work around the giant tech IPOs this year, and it’s becoming one of the most important details of the conversation. My mind’s kind of blown.

Jack: Yeah. What he got at in that chart I love because obviously I’m a factor investor, and I’m thinking about premiums all the time. And you and I were talking before to make sure we like get this whole thing right. But, you know, there’s always been, or people have assumed there’s been, a small cap premium in history.

Now that’s kind of discounted to some degree. But this is sort of the opposite of that but not really the opposite of that because what he’s talking about really is a flows premium here. He’s talking about a passive flow, not necessarily large cap premium but a passive flows premium. And that premium has been positive, which is not what you’d expect.

You know, if you look at the factor investing work, smaller stocks typically do better, so you would not expect larger stocks to do better. But he’s showing that these passive flows are leading to this upward pressure on large cap stocks over time. And this chart was just an interesting way to kind of show what he’s been saying all along.

Matt: Yeah, it’s a validation of it. And it’s also wild because this has evolved, so you can also see it over time, especially in the second chart there where we look at the extended time period on how this is having influence. So as more of the market has become passive, we have seen this actually distort the way we think about returns, and that’s part of why Mike Green’s work continues to be super important here.

Jack: So our next clip is from Joe Davis, and they’ve done some excellent, excellent work around megatrends. They’ve got a book. They’ve got research papers around it. But here’s Joe talking about this concept of megatrends.

Joe: I’ve been in the business, you know, over 20 years. I think there’s a standard approach which looks at the near-term economic contours of the data. You can think of GDP or the inflation rate, what the federal funds rate may be doing.

And then, of course, there’s a mapping, you know, implicit mapping or explicit, to the bond market and the stock market. We do all that, but what we’ve added and what we spent some time, which is behind the book and the analysis, is looking at the evolution of these longer term trends too.

And what I found fascinating is that when those trends start to change, which can happen, you know, on a regular basis, they themselves affect the near term, not just some long-term assumption that say, “Hey, I’ll worry about that 10 or 15 years from now.” It affects the business cycle.

And so, you know, what we concluded two years ago with AI is that that was gonna have implications not just for the next five or 10 years, but it was gonna affect the economic growth projections, you know, and everything we care about in 2027, 2028. And so here we are. So that’s been the eye-opening, is that integrating them...

They tend to be separated in an academic sense, the near-term business cycles like the Federal Reserve, asset prices, you know, which all of us care about as asset allocators. And then these long-term trends are sometimes kinda left to the side or just thought loosely. What we did is just simply integrate them in a numerical way, but that’s affected our approach to not just our long-term assumptions, but our near-term ones for the next several years.

Matt: So let’s talk a little bit about the four structural drivers that are in this megatrends model you guys came up with: technology, demographics, fiscal deficits, and globalizations. Yeah. Walk us through the framework.

Joe: Well, and again, that’s taken some of these long-term trends, which we all know exist. I mean, we didn’t bring anything new. We certainly didn’t make up these factors. They’ve been known for over a century that they can impact long-term standards of living, long-term economic growth.

I mean, you can’t talk about long-term productivity and standards of living without talking about technology. And yet they’re just, again, parked to the side when you think about, “Hey, what’s my outlook for the next year or the next two years?” And so we brought them in. Those four— it’s effectively, it’s a fancy way for saying that there’s supply factors and demand. Supply, the supply of workers and people, so that’s demographic factors, the aging of society, immigration, you can think about that.

Globalization factors, again, can be in the headlines. It’s the openness to trade. It’s also tariff rates. And then you also— you know, it’s the rise of China into the World Trade Organization. That’s what’s behind globalization. So you can imagine they have cyclical effects.

They can also affect the long-run or medium-run trajectory of growth and inflation and interest rates. And then finally, the biggest one by far is technology, and what I’m proud of is that we look at through the lens of three factors of technology: its ability to substitute for human work, so automation; the ability to augment, to make us better.

You can think of Copilot, much like the personal computer for some jobs. That’s augmentation. And then third, which is really the magic and we don’t see that from every technology, that is the technology becomes a platform to enable new products, new industries. Electricity and personal computer were great examples of that, internal combustion engine.

And so again, we brought all those frameworks into the modern era, and then looking at AI and its ability to affect the world economy on all those three facets. And that is novel. That’s generally not done, even from central banks and practitioners, and something that’s really integrated in our system.

Matt: Joe Davis, the Michael Olise of Vanguard. I’m going there. So much potential, even if it’s first... Was this his first time on Excess Returns?

Jack: Yes. Yeah. I’m surprised we haven’t had him before, but yeah, this was his first time.

Matt: And we were both saying, and this deserves a shout-out, it’s amazing the quality and caliber. You would not expect this work to come out of Vanguard. I think the average investor or person who listens to their talks about this stuff does not know the caliber of some of Vanguard’s research.

Jack: It’s interesting because, like, you wouldn’t expect macro work to come out of Vanguard, but then once you accept that Vanguard has done macro work, this is like exactly what you’d expect to come out of Vanguard. Because, like, people get the macro stuff wrong. Like, I feel like there’s two different ways people look at macro.

One is like, “I’m gonna predict inflation in the next six months.” The other is, “This is complete garbage and no one should be paying any attention to it.” And they’ve kind of got it right, which is, this megatrend idea is they’re looking at the things that are moving markets or moving the economy over really long periods of time, and they’re trying to think about the impact of that for the types of investors Vanguard has.

And I think that’s kind of the best sweet spot in terms of how to think about macro.

Matt: Yeah, especially when he ties it into this how to think in the long term and balanced against the short term. Even that framework alone, where it’s not just, “We’re gonna talk about why stocks for the long run work.”

But here he’s breaking down tech, demographics, fiscal deficit, and globalization, which it’s basically productivity and efficiency, the average age of people in various stages of work in the workforce and retirement, the government spending part. There’s even an MPT component for you kids. We can love this stuff.

And then globalizing and de-globalizing. And putting those into, “Here are the long-term trends that we see with the short-term impacts that are tied to each.” That is a really, really great way to both help... I know this is helpful for me in client conversations, if nothing else. So I love seeing this breakdown.

Jack: And the point he made about people underestimate the impact of the long-term trends on the short term, which is what you talked about. Like, everybody’s trying to predict what’s gonna happen in the short term, but I think they’re missing, like, this overall, these long-term trends and the fact that they do have an impact on these numbers we’re seeing every day.

Matt: Yeah. They have catalysts. They have little triggers. They have parts that impact the market. It’s great in the broader... There’s part of it in the next clip, I think, from Mike Green. But in some of the Mike Green conversation, when Justin asks him about retirees and flows and how this is happening, this is also directly... These episodes belong together because there’s a bunch of directly overlapping pieces of this where Mike’s work in passive goes in a certain direction and Vanguard’s work on macro actually supports a mutual thesis here.

Jack: So moving to Mike, we had Justin ask the question, and there were actually some great insights in this answer, but Justin was originally asking the question about, people always wonder, like, are these flows gonna reverse? Like, whatever, as baby boomers retire in the short term or whatever. Like, these passive flows have been pushing up the market and pushing up certain types of stocks. What happens when they reverse? Here’s Mike’s answer to that.

Mike: We actually have seen some shrinkage of the 401k flow, but we’ve actually seen the exact opposite in terms of the aggregate flows. So as performance for the S&P has gotten better and better, and again, in my analysis, supported by the growth of passive as well as the demographic characteristics of boomers now having to effectively afford financial assets rather than try to replace income, as I’ve discussed in several recent pieces, you know, that has increasingly morphed into what feels like a discretionary buy every dip type phenomenon.

And we absolutely saw that play through in the April to give or take end of May flows, in which flows into ETFs actually exploded to the highest levels we’ve ever seen. Do I think that was tied to retirement flows? Not really. So the evidence that we have is there’s some weakening on the 401k component.

But as you would expect, as you get towards the end of any bubble, you’re seeing an increase in discretionary participation as more and more people basically just say, “Well, this only goes up. It’s a license to print money.” And I think that was a bigger impact combined with the systematic flows, the reversal of short positions, the CTA trend-following strategies which continue to attract additional capital, as well as things like vol control funds stepping back in for the very simple reason that we didn’t actually realize that much volatility.

It’s one of the things we actually talked about at a firm that I’m an advisor on, Tier One. As we looked at the market in April with the extraordinary skew and the bid for protection that was in place, it was behaving like a market that had already crashed. And we’re starting to see signs of that again, that people are starting to bid up fixed strike volatility.

Matt: When Mbappé scored the hat trick in the final and they still lost on penalties, I mean, this is— it’s almost like S&P rejecting SpaceX from the index for a year. It’s just one of those twists that you’re just shocked when you see it coming. Reality stares you down. I need to ask you this question. The hula dancer behind Mike. I know he’s in Hawaii. I don’t think... Do you think he chose the hula dancer?

Jack: I knew you were gonna, I knew you were gonna tap something with this. I was pretty sure.

Matt: I mean, Joe’s like, I’m assuming that’s like a big red boat. Like, if we zoomed all the way out, there’s a giant Vanguard ship or something that’s there, and we’re seeing the planks behind him. He has a very elaborate set, but he’s on the Malvern campus. I understand this. Do you think Mike picked the hula art? Did he handpick this himself?

Jack: I would say probably not. It is just also like, when you can’t think Mike Green can’t get any cooler with the stuff he’s doing. Like, he’s doing this confidential work he can’t talk about. It just adds to the whole mystique of Mike Green, I think.

Matt: I’m doing government work in Hawaii.

Jack: Yeah.

Matt: I can’t tell you anything.

Jack: Like, in an undisclosed location or... It’s just— the whole thing is great. It all works out really well. It’s—

Matt: It’s great. I am gonna track down that art. We’re gonna get on some serious CSI business. We’re gonna find out what place Mike is in with his weird wall art. I’m gonna crack this code. All right. What did you think about this? What’s your thoughts on this one?

Jack: But it’s interesting, ‘cause he didn’t get too much of it into the clip, because the answer is, like, in terms of the long-term passive flows, I mean, I don’t think Mike sees a reversal right now. I saw it in another podcast. I think he mentioned like 2030, 2035 or something where those might reverse. So that answer of like this catastrophic situation where these things reverse is probably not coming in the short term. But also like his idea of like this is exacerbating buy the dip to some degree, is interesting as well. Like, right now this seems to continue to be that upward pressure on the market.

Matt: Well, until you have— I’m extrapolating from his work, not his exact words, but in some of this. You have economic weakness. You have these things that happen. And unless you fully disrupt labor and you disrupt flows into a lot of these passive vehicles, then yeah, buy the dip just is gonna keep working. Because that unrelenting bid, I think as Josh Brown puts it, that unrelenting bid does not go away. And it’s really wild to think about, even as we move deeper into the baby boomer demographic retirement situation, we haven’t really seen a meaningful change in flows that would put downward pressure on this. And I think that’s part of why he has said in other places that mid-2030s or even longer before they could expect a change there.

Jack: But also his point that, I mean, you have to consider the active stuff here as well. Yeah. He talked about, like, 401Ks have, like, backed down a little bit. But obviously we’re seeing what you might call bubble-like behavior to some degree. You know, we’re seeing a lot of people just putting money in the market outside of this passive framework as well. So that at least has to be considered.

Matt: You have to at least consider it as well. And I agree. We’re at such a weird point in time, and I think it was in this clip, where, yeah, the market could sell off hard and then go straight back up to new highs again, and you shouldn’t be surprised by that.

Jack: I mean, everything has been... I mean, volatility’s just been so exacerbated. You know, all these... We get these massive declines out of nowhere. We get these big rallies. I mean, it’s just the nature of the market, I think, these days.

Matt: Just the nature of the market.

Jack: Let’s move on to Joe Davis here. And then this was probably the most interesting part of this interview, which is they talked about a range of outcomes here. And so the interview was very positive on AI and its impact on growth, but there’s a lot of other stuff beneath the surface. So here’s Joe talking about that.

Joe: Our most likely outcome is that AI is more transformative than the personal computer. I mean, that’s our baseline and it’s coming from the analytics of our projections. It’s not my opinion, as we mentioned before. So we already have a very differentiated... I mean, our neck is out there, but I feel good because we’re using data to bear.

We have growth projections that are the highest in any consensus survey. But that allows us, to your point, to kick the can on fiscal deficits. What happens in our scenario is that structural deficits are so-called the sustainable fiscal deficit, which is high in peacetime. We’re close to 6% deficits to GDP, and this is with an economy expanding.

You kind of hover in a 4% or 5% range. If growth goes from 2% in the US to 3%, you get higher tax revenues, higher... and allows you to forestall it. We saw this in the ‘90s. In fact, in the late ‘90s, we actually turned into a surplus. Our projections generally don’t show that because of the aging of society, which we also have in our projections, wanting to push the deficit up.

And so you can see the importance of AI in trying to forestall these fiscal pressures, which is why, you know, I’m... In one sense, I’m cheering for AI to be as transformative as it is along all three dimensions. Why... You know, if we’re wrong in our projections, it’s that AI only automates. We don’t get augmentation, so we don’t become better as workers.

It just saves us time, so much so that we have some job loss in some professions. We have seen technologies like that. The assembly line was one, the farm tractor was the other. You know, forgive the 100-year-old examples, but it was true. If AI only automates, again, that is not our likely...

That’s the second most likely, but it’s not nearly as likely as our baseline. It’s half as likely. The fiscal deficit issues come into the fore again in about two or three years because you have growth. The AI build-out still occurs, but the 3% GDP fades back after kind of the initial build-out.

We don’t get the new industries that our projections, you know, generally anticipate, and we get less benefit for us as workers. And so what happens is trend growth doesn’t ultimately change. We get this little, I’ll call it a sugar high, for two or three years, and we fade back down. Now you have a structural deficit that’s going to 6% to 8% to 10% deficits to GDP because the aging of society and our fiscal commitments, Social Security, Medicare, and Medicaid.

And so what happens is now you start to get pressure on our currency. You start to get pressure in the bond market, and you have the Federal Reserve trying to fight those inflationary pressures. And, you know, they’re forced to keep interest rates higher than they would, to keep long-term interest rates kinda low, but there’s fiscal pressures.

And so that’s this economic scenario I don’t like talking about, but that’s really... In the book, I call it Deficits Dominate. I... If I was writing the book today, I would just call it AI Only Automates, ‘cause it’s the same scenario. And so that, again— deficits are a serious issue, so I wouldn’t wanna portray our deficit issues are, like, there’s not a problem.

It’s just that deficits are conditional on other things going on in the world. And so we could have five or 10 years where they don’t materialize in terms of higher interest rates and so forth. And we have seen it before, but it does rest on AI becoming a general purpose technology like the personal computer, and it’s gotta augment our work. It can’t just save us time.

Matt: I wanna take you back onto some of the quant sides of what you just said because there’s a few more stats that really I think are eye-opening. 2% growth and 2% inflation going forward, you said a 10% probability of being correct. And then I’m lumping in too much, but you’re gonna unpack these together on the deficit point. A 20% probability that the 10-year Treasury yield could reach over 9% in the next five to 10 years if AI disappoints. Yeah. These are not your standard consensus takes here.

Joe: No, and again, we weren’t—

Matt: Unpack this.

Joe: Well, and again, AI— I was not, and we were not at Vanguard looking for this economic diagnosis. I was very comfortable in my 2% growth, 2% inflation planning world. That always— it always made sense to me. We may get a little bit of technology lift, yeah, but we got all these negatives that we mentioned before on the other side. Like, I wasn’t, like, taking it not seriously. Like, I always thought 2% growth, 2% inflation.

I fill out these consensus surveys. That was our forecast until this work. What’s been eye-opening through the data is that it’s just very difficult to generate that sort of steady state status quo forecast because of the push or pull. Either the trend for growth is going materially higher because of the innovation of AI that overcomes the demographics and the debt levels we have.

That is by far our most likely outcome. But if AI only manifests along certain... if it only automates, which means it has not become a general purpose technology. We use it all, but it’s like the farm tractor. That would be disappointing, and then that sets into motion this, eventually, not today, not tomorrow, but you get fiscal pressures because they’re already high.

Matt: Now, I know you’re a big fan of Michael Olise and his role on the French team. I know he is. But did you know he could have played for— he picked France. He could have played for England, Nigeria, or Algeria, and yet he still picked France out of allegiance and a childhood love for the team. I think that’s a beautiful thing. I feel like... Joe could also be anywhere, and that’s why—

Jack: By the way, with these international competitions, it’s, you know, they do it with the baseball thing, with the... You never— like, how you could pick which country you can go with is, like, it’s just, I still don’t understand it completely. Like, if you have certain... if you have any ties at all to the country, you can go. I’m not exactly sure how it works.

Matt: The baseball one feels almost extra comical because I don’t think there’s... The baseball one doesn’t have the hundred years of history that it feels like you have with the country allegiances that you have with the World Cup. The baseball one kind of feels like, if you have anything in you, you can go. That sounds like, um—

Jack: Like if you went on vacation there once in your childhood or something, you can pretty much go there, like—

Matt: It seems like that’s the... “I was always fond of that place.” That’s—

Jack: Yeah, yeah, exactly.

Matt: “If I play for the team and we win, do I get to go to the parade there?” I feel like there’s manipulative calculations here. At least with, you know, football or global soccer, it’s kind of— if you haven’t seen it, there are amazing clips of the Brazilian... It’s basically a convention where they announce who makes the team, and all these players are live streaming if they make...

So it’s like them and their families in their living room, with, like, a live stream camera set up, and it’s the president of the associations like on the TV, and they’re reading the announcements, and there’s always, there’s always snubs at these things. So there were a couple of things where like the live stream of the family is right there, and you realize they’re going in alphabetical order, and they’re getting left off the list, and you just... It’s intense, man. It’s intense.

Jack: It’s like an NFL draft type scenario.

Matt: It’s an extreme— it’s a more extreme NFL draft scenario. It is... Because again, you’re seeing the snubs. You’re seeing the people getting missed. And these are—

Jack: With their family with them. Like, that’s— that’s—

Matt: Gotta be rough.

Jack: Yeah, with multiple—

Matt: generations of family, friends, and neighborhood hanging out.

Jack: Yeah, grandma’s there and everything. Like, that’s not— yeah, that’s not ideal, right? Oh, man.

Matt: Yeah, yeah, it’s not. It’s not.

Jack: So in terms of Joe’s take though, it was really interesting. First of all, like they expect, I think they said 3% growth, which is definitely well above consensus. So that’s kind of their base case, is they think AI is gonna be very impactful, and they think we’re gonna see 3% growth. But also around that, like a 20% chance of a 9% Treasury, I think is what he said. Like, from Vanguard. Like, that’s an interesting... That’s— it’s not a bearish take, ‘cause that is a minority, you know, that’s only 20%. But still, I mean, just that they see that as a possibility, and that gets to this idea of if AI is not, you know, as positive as people think, then we’ve got these debt overlays, and we’ve got all these other problems we’ve gotta deal with.

Matt: Yeah, ‘cause then we have debt overlays, we have the risks of de-globalization, we have the demographic problems, and likely some form of a recession which is gonna impact technology and productivity and the efficiency part that they’re talking about too. So even with that disappointment, it’s like we run into this weird wall and all sorts of stuff backs up. Now I think it was a 20%. Was it a 20 per—

Jack: Yeah, it was a 20% chance.

Matt: Of a 9%—

Jack: 20% probability—

Matt: long-term Treasury.

Jack: I think. Yeah, I think—

Matt: that’s right. So please base that out accordingly. This is Curaçao winning the World Cup. Like, this is pretty slim odds of happening. But it’s really interesting seeing it through that four factor lens that they’re looking at when they look at these long-term trends because that’s where this thing ends up. I wanna talk too about that AI is more transformative than the personal computer perspective on this.

Jack: That was really interesting. They had data to back it up.

Matt: So, I feel like I’m fully in this camp. I feel like you are too, but I actually wanted to ask you this question. Why do you think— how do you understand it to be more powerful than the personal computer? How do you answer that if I ask Jack Forehand, “Answer me this question”?

Jack: Yeah, it’s what we’re— I mean, you and I are seeing it every day in our lives, and it’s still hard to translate it to economic growth. But, like, I mean, I feel like I have, like, three people working for me right now with what we’re doing with AI. Like, easily. Four. I think I’ve easily tripled my personal productivity. Three smart people. Yeah.

And— I mean, I guess if you put yourself back in the world of the computer, like, it did transform in many ways. But I also think that the fast-moving part of this is really interesting. Like, this is moving faster than the personal computer. If you think about when personal computers first came out, like it took a while to get them, and then like they couldn’t do that much for a while and like, it was just a long time before it like had the kind of impact it did.

And this is just moving at such an incredible pace. I mean, look at Anthropic’s revenues. I mean, if anything gives you an idea of how fast this is moving, and some people argue it’s all— it’s a hall of mirrors or whatever, and it’s not gonna work out. But, like, there is at least some demand behind those Anthropic revenues of like businesses that are actually improving themselves with this. So yeah, I just think— I do think this is gonna be the most transformative thing I’m gonna see in my life, and I’m trying to lean into it as much as possible.

Matt: Yeah, replacing snail mail and faxes with email and attachments was cool and nice, and that helps productivity in all sorts of levels. But plugging your Google Drive accessible via the MCP inside of Claude and having access to these things is a completely different productivity function. Not to mention, I mean, how long into AOL were we before we got the You’ve Got Mail movie? I don’t think... Have we had a rom-com about AI yet?

Jack: Yeah, that’s—

Matt: I don’t think... at an early point. This— it’s moving so fast that we haven’t even had a rom-com about this yet.

Jack: Well, if we had the rom-com where everybody in it is AI— is the other question, because that’s coming too. Oh my God. It’s a whole different story. That’d be so weird. There are no actors in the thing.

Matt: That’s the part that’s actually gonna happen. We’re gonna get the You’ve Got Mail version of the AI story, but it’s all gonna be AI, and it’s gonna be some weird post uncanny valley. Ah.

Jack: And I’ll tell you right now, I’m not gonna watch these movies, but then I probably will watch the movies eventually. I’m gonna be like, “I wanna see people in my movies,” but you know, eventually I’ll probably give into that and yeah. You... it’s hard to— like, you just don’t know how this is gonna play out in the future, and I always say I’ll never do things and then end up doing them.

Matt: And then you end up doing them. So here we are in this world of this. The if-AI-disappoints question, back to Joe Davis for a second, I do think is one of the most under-discussed conversations. Not that we’re not thinking about it, not that we don’t... Lots and lots of our guests talk about what’s the disappointment side of this probability distribution look like. But the way that Joe directly is taking this head-on, of you have to also weight in these probabilities of the disappointment side— understated right now. Overstated in our YouTube comments, understated in actual practice.

Jack: But really important because we are dealing with a world of probabilities now. And in our YouTube comments and in other places, people don’t recognize that. People don’t recognize, first of all, on the bull case that Vanguard laid out, there is a case where all of our debt issues and everything, like, that we do grow at a rate, that those— maybe not, aren’t— they’re not eliminated as problems, but they get pushed into the future.

They’re much less important. You know, growth does help with all that stuff. So if you’re discounting that that even exists, you’re probably not paying complete attention. But also, if you’re one of these bullish AI people, and you’re not paying attention to the fact that if this does disappoint, I mean, we’re— this is a... We’re betting on AI right now, like, with everything we’re doing. Like, if AI does not pan out, we’ve got these debt problems, and we’ve got these other problems, and it could be a bad situation. So just recognizing that both of those probabilities exist. And our YouTube commenters would tell you the 100% on the negative one. And, you know, Vanguard would probably give you a fair representation across all of them, but they all exist. You have to at least admit that.

Matt: Couldn’t agree with that statement more. So that being said, we ready to wrap this one up?

Jack: We are. Take us home.

Matt: All right. Excess Returns is on Substack. Make sure you go there. We got show transcripts. We got all the stuff. Scroll back. See these videos. If you haven’t watched them, I can’t express enough how much this Joe Davis and Mike Green conversation overlap and are related from two different brilliant perspectives, even if they’re backdrops. You know, maybe we can send Joe Davis a hula dancer. I don’t know. We should consider that. He had a very professional—

Jack: Backdrop going there. It was—

Matt: It was very— he— it was high quality... very professional.

Jack: One of the best we’ve seen.

Matt: Yeah. Yes, yes.

Jack: But nothing for you to comment on because of that.

Matt: I know...

Jack: Like, no random book behind him or anything like that.

Matt: Need a little color. Need a little color that’s not the weird glowing red death ship or whatever it is that’s back there. Let Mark, let him know that one. Anyway, you’re watching Excess Returns on YouTube, wherever you get your podcasts. We appreciate you. Like, comment, subscribe, all the things below, and we are out.