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oh that's real good hello everyone and Welcome to our Channel Penny lesson we talk about everything Finance from tips on making money and proper investing to news about the different economists and situations affecting the global markets the goal of this channel is not only to teach you how to be more financially responsible but also to teach you how to be more aware of global events so why not just sit back and relax while we tell you what's happening in the finance sphere be sure to subscribe to my channel and hit the notification Bell to be constantly updated on my latest videos remember one penny lesson a day keeps being penniless away Michael Bree an American investor explains the dire situation of the index fund bubble with the economic conditions the way it is now how much worse could it be for the future in this video we will explain bury's insights into the current state of events the famed investor Michael burry recently stated on Twitter that the passive investing bubble that grew steadily over the last decade is the difference between now and 2000 also known as the.com disaster there are so many people in the theater that the only way anyone can leave is by trampling each other the door is also relatively small what does he mean by this though and could the gullible Market monitoring Index Fund lead the stock market as a whole to its knees let's find out then just to refresh your memory purchasing a market tracking Index Fund is equivalent to purchasing a stock that symbolizes Market diversification for instance Spa AI an index fund that tracks this 500 is the largest Index Fund in the world therefore investing in spy will result in very minimal ownership in the 500 Greatest American corporations the assumption is that you will eventually get the same return as the market by purchasing the market according to historical daughter the long-term return for this 500 is about 10 per year and over the past few decades passive investing has been very popular due to the astounding historical annual return of the strategy and its Simplicity and convenience of implementation according to recent research by Bloomberg intelligence passive instruments held an average of more than 20 percent of the shares of each business in this 500 for comparison passive structures held about 3.3 percent of the market in 2003 and given these figures it is now being questioned whether the mark Market will benefit from passive Investments dominance Michael Bree unquestionably believes that it is cause for alarm it's intriguing that he recently brought up the passive investment bubble on Twitter but this isn't the first time he's brought it up and in a male interview he had with Bloomberg earlier this year specifically about the subject he remarked that passive investment has eliminated price Discovery from the equities markets simple Theses and models that lure investors into sectors factors or index-based ttfs and mutual funds are not true price Discovery techniques because they did not call for security level examination this means that as passive investing gains popularity more and more shares of these major corporations will be held over time but not because the investor likes the company specifically just because it is included in the index over time this results in an overabundance in stock values the buying of shares is no longer just motivated by how well these companies are performing on a basic level it is also motivated by the fact that they are included in the appropriate index and that is a bubble in and of itself when an assets price increases for a factor other than its actual performance therefore the concern is whether the rise in popularity of passive investing could lead to a bubble that if investors began to switch in large numbers from index funds to cash could endanger Market stability as usual the solution is unclear consider once more how stock prices fluctuate based on supply and demand the stock price has changed therefore the stock price will increase if many investors want to acquire shares but only a few investors are willing to sell them on the other hand the stock price would decrease if many people suddenly wish to sell well but there aren't many buyers a typical daily trading volume or how many shares on average change hands each day is now available for each stock the important thing to remember about daily volume is that stock prices don't move all that much unless the daily volume is abruptly and significantly Disturbed but occasionally there might be such a torrent of volume seeking to get out that it can quickly destroy the stock price as in the case of a market crash and widespread selling there won't be many buyers but there will be many sellers therefore the price will be set by the player who is attempting to leave the most desperately until additional buyers show up to settle the dispute when Michael Bree States all theaters are overcrowded and the only way anyone can go out is by trampling each other and the door is only so big he is referring to this situation this alludes to a traditional stock market illustration that clarifies daily trade volume the scenario is that you are among 100 other people in a movie theater where the sole rule is that if you want to leave you must find someone else to take your place therefore under normal circumstances it's fine that someone will typically want to enter and watch a movie but what would happen if the theater suddenly caught fire a hundred people would suddenly be frantically trying to escape but few would want to enter the burning Cinema to watch the film Michael Bree is concerned that the stock market will experience this according to him if the situation worsens a lot of passive investors will attempt to exit the market and return to cash but if everyone does this in a panic stock values will plummet and the issue is when things go wrong isolated firms typically experience this what occurs if all of the company's passive investors who control a small portion of everything decide to depart at once I suppose it crashes everything then is that right the impact will be the same for all of the index stocks on the other hand even though there is a lot of trading activity and out of these passive funds there isn't much trading activity in the underlying companies that make up the index how is that possible the reason is that passive investors mostly trade back and forth among themselves in the secondary Market where the majority of vtf share trading occurs I want to give a big shout out to Ben Felix who made a fantastic video on the subject three years ago in that video he quotes two really interesting pieces of evidence the first is from Vanguard and it demonstrates the proportion of vtf trading that either occurs on the secondary Market or has an impact on the trading volume of the underlying Securities they discovered that the secondary Market was where trade took place 94 percent of the time in other words 94 of the ETF trading volume didn't even touch the positions of the underlying stocks that comprise the ETF what happens though if there is high demand for an EDF or on the other hand a large volume of sales all at once ETF units are indeed generated or destroyed in those circumstances in the underlying stocks do trade as a result however is noteworthy to note that even when you consider creation and Redemption as routine activities a study by Blackrock in 2017 reveals that this is still a relatively minor portion of trading as a whole they discussed the situation with apple which is the biggest firm in the world at the moment even though 331 ETFs worldwide held Apple they stated that July 2017 quotation a month which saw the high and flows to ETFs 65.9 billion dollars of Apple stock was traded we discovered that at least 95 percent of the Stock's trading volume in July 2017 was not directly connected to EDF flows therefore even the wedfs have increasingly taken market share over the past two decades they have a very small impact on the trading volumes of their underlying assets Breen may still have a point though because very honestly Michael burry anticipates The Apocalypse of the stock market within the next several years and if you believe that will occur then perhaps he still has a point because Panic can occur in the event of a stock market crisis and when an actual Panic occurs in the market frantic selling Cycles can occur when stock prices fall a wave of investors May Panic sell their Holdings but this spikes the selling volume and lowers the share price this may trigger a negative feedback loop quickly driving down the stock price Brewery therefore believes that there is a risk that the selling and destruction of vtf units could compound the decline in stock prices if there is a genuine and panic moment in the market and Market tracking edfs are panics sold in large quantities and he believes that the smaller less traded firms that are still included in many of these major indexes are those that are most at risk of duplicating this effect in a comment from 2019 he stated for example the great majority of the companies in the Russell 2000 Index are lower volume lower value traded firms over half of the stocks traded today 1049 traded for less than 5 million dollars during the day of those 456 stocks nearly half traded for less than one million dollars nevertheless hundreds of billions are linked to equities like this through indexation and passive investing this 500 100 is no different while including the largest businesses in the world more than half of the index 266 stocks today were trading for less than 150 million dollars that may seem like a lot but these stocks are indexed to trillions of dollars worth of assets worldwide the exit door remains unchanged despite the theater becoming increasingly crowded everything gets worse as you enter the world's less liquid equity and bond markets it's a pretty intriguing Viewpoint and it does make you question how these larger indexes smaller cap stocks would perform if many passive investors left the market during the next major crash normally when a smaller firm is eventually added to the index we applaud but perhaps index entry isn't such a victory in this intriguing case with that said please share your opinions on the likelihood that passive investing Vehicles will have a significant impact during the next major stock market crisis it will be interesting to hear your opinions please share the information in the section below there you have it quite possibly the largest bubble in history what do you think of Bree's sentiments do you agree let me know your thoughts in the comments below wow was that news why not ponder it want to know the latest comment if you want more articles like this this video is just one of many videos on my channel that brings you the latest news about the world of global finance and economics so go hit that 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