Passive Investing in a Tri Polar World

Published on
July 27th, 2017
62 minutes

Passive Investing in a Tri Polar World

The Interview ·
Featuring Jay Pelosky

Published on: July 27th, 2017 • Duration: 62 minutes

Jay Pelosky’s long career in investment banking has led him to focus on the benefits of ETFs and passive investing for the millennial generation. With more opportunities from Asia and Europe than the US, Jay is calling for regional deepening for the resurgence of the global economy from the slow growth, low returns environment he sees persisting and passive’s share of investing to grow significantly, encompassing major pension funds and sovereign wealth funds. Filmed on July 14, 2017, in New York.


  • AC
    Andrew C.
    4 August 2017 @ 05:03
    This interview -particularly the Europe discussion- reminds me of this. Not mine, but I love this quote: "I asked the CEO 'how's business?' He said 'fantastic, couldn't be better!' So I sold the shares. "I asked the CEO 'how's business?' He said 'bad, disgustingly bad, couldn't be worse!' So I backed up the truck and loaded up on the shares.
    • KV
      Koen V.
      4 August 2017 @ 21:38
      Reminds me of a joke made by Jerry Seinfeld
  • AC
    Andrew C.
    4 August 2017 @ 05:07
    I think we need to define passive. Is it really passive, or just final realisation that the two and 20 model has been ripping investors off for years, and better real returns in a pension/retirement portfolio can be had just through indexing?
  • rr
    rlw r.
    3 August 2017 @ 16:04
    Grant exactly, getting another perspective is an awesome thing. I often read comments prior viewing, and with so many negative ones cropping up just knew it would be an excellent thought provoking interview piece. It was. Excellent RV value add.
  • VS
    Victor S. | Contributor
    28 July 2017 @ 19:20
    I enjoyed Jay's comments and voted as such .... but Jay has a half glass full view of Asia and the Euro and i posit this question/fact-When did Socialism ever work in the long run? Please show me where -never!!! 5000 year low interest rates covers up a lot of problems. A long time ago a man taught me NEVER TO JUDGE SUCCESS UNTIL YOU SEE A "FULL CYCLE". Sadly these models are a double edge sword and Jay is playing the "Black knight " in Monty Python's Holy Grail !
    • PJ
      Peter J.
      1 August 2017 @ 16:51
      I thought Grant was the Black Knight 😊
  • KV
    Koen V.
    28 July 2017 @ 12:48
    42:15 "The global economy is in a better shape today than its been in the last decade" After governments and central banks enacted the most extreme and unorthodox policies in history. ZIRP and NIRP are historical anomalies (Read Homer and Sylla A History of Interest Rates). We're in the third longest businesscycle, surely there must be some point at which we go into recession? The global economy was in its best shape in 1928, just prior to the crash of '29, just as the global economy was in its best shape in 2007. 43:15 "Removing NIRP is actually a positive, at least flat is going to be good for the financial system, and good for the European economy" Is it really positive for Europe? There are numerous Italian and Spanish banks that have been teetering on the brink of collapse. Wouldn't an increase in interest rates lead to a slowdown around the world, and in Europe in particular? Numerous large Spanish and Italian banks have atrocious balance sheets. "If the Texas Ratio is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%." It might be that I am just too pessimistic about European financials, but I suspect that the Europe Growth Story is nothing but an exercise in Irrational Positive Groupthink. Sure there are positive developments in Europe, but do they outweigh: 1. A South European financial sector wrought with bad debts, which is tightly interwoven with a healthier Northern European financial sector, and can as a result bring down the whole of Europe 2. Bad demographics 3. Serious political disagreements within the EU over migration There is also the danger of populism. While commentators may claim that the Dragon of Populism has been vanquished by Macron and the like, it seems more likely that populism has temporarily been put to sleep. This slumbering populism, which is sure to come back to the fore once (a) the migration crisis heats up again, (b) we go into recession, or (c) if terrorists manage to pull off a Bataclan, or 9/11 sized attack. It usually takes quite a long time before the average person opts for extreme measures, but if the suffering goes on for a long enough time, then populism in one shape or form is inevitable. Extremist politicians Weimar Germany did not gain power after the Great War and Hyperinflation, and in, at the height of the Roaring Twenties business cycle in 1928 relatively few Germans supported Hitler's NSDAP and the hardline communist KPD who gained 2.63% and 10.62% respectively. It was clear that the Germans preferred stability and economic growth under moderates over unorthodox policies lead by extremists. Two years later, the NSDAP stood at 18.25% and the KPD stood at 13.13%. Four years later Hitler became chancellor with 37.27%, and the communists ended up with 14.32%. Similar developments occurred in many countries around the world. ( I dont know what roadmap the global powerelite has set out, but I do suspect that if they make mistakes, then some countries will suffer horrible. And it would not surprise me at all if the citizens of these countries will choose populism.
    • PU
      Peter U.
      28 July 2017 @ 16:03
      Nice, hard hitting response. Good facts plus references. Now Real Vision needs to let us post graphs and tables too!
    • js
      jacob s.
      31 July 2017 @ 09:21
  • AE
    Alex E.
    30 July 2017 @ 05:20
    Two points to make. I think anyone who invests in the passive ETFs is going to get slaughtered because of the fees (9 basis points on 100,000 is still $ 900.00 a year every year whether the market goes up or down) and because ETFs get pushed to the back of the line in a market crash! Two, humans have not changed in 150 years of market existence. Humans panic in large market downturns, buying at the top and selling at the bottom. this has happened 13 times since the NYSE has been in existence. What makes anyone think it will change in the next crash?
    • JL
      J L.
      30 July 2017 @ 19:28
      9bp would be 90 bucks
  • AM
    Amit M.
    30 July 2017 @ 13:33
    Lots of sizzle n very little steak
  • CM
    Carl M.
    28 July 2017 @ 15:00
    What happens when investors want to unwind their ETF positions in a bear/down trend market? It's always wonderful on the way up...but will there be enough of liquidity on the way down? How do they protect themselves when that happens or minimize the losses? Sell Short ETF's? Or long bearish ETF's?
    • DS
      David S.
      29 July 2017 @ 02:20
      Better shorting an ETF than trying to get out in a panic. Seems like a zero sum game to me. Maybe it could be addressed in a future interview. DLS
    • KV
      Koen V.
      30 July 2017 @ 07:45
      There is a good chance that when we get to an unwind the market will turn as dry as Death Valley on a summer's day. I suspect that High Frequency Trading bots will at first trade downward alongwith the great unwind, but as soon as the human HFT bot handlers realize that the market is really tanking, they may decide to turn off their bots. In the blink of an eye a big chunk of trading volume leaves the market. At that point the ETF holders may find themselves in a position where they all want to sell, because none of them really had strong bullish convictions in prior months, leaving investor sentiment to evaporate more quickly than any permabear's prediction. As sentiment turns sourer than a glass of milk left standing in Death Valley, the suckers lured into the market top will be forced to face the perfect storm: a market that has severely reduced liquidity because market HFT bots have left, and everyone trying to leave a sinking ship. ( At some point the Central Bankers will (try to) come to the rescue, but I have no idea whether or not they can manage to save the system. I have no idea when this might happen, and how it will play out. But I am pretty sure that at some point the market will go through some kind of crash, and at that point it would not surprise me if those left standing with a combination of cash, gold and crypto, will have some great investment opportunities. While some traders will probably be able to short the market succesfully, I am too fearful of this market staying irrational longer than I am solvent, and I'm unwilling to go through the stress of shorting this mother of all bubbles while all around me there's gullible fools going long Tesla and shorting the frigging VIX.
  • AE
    Alex E.
    30 July 2017 @ 05:35
    I'd also like to mention that Geopolitics were not mentioned in this interview, which, I beleive, can be a very big driver of negative implications i.e. Black swans that could seriously affect evryone's portfolio. Would have been nice to hear Mr. Peloshy's take on North Korea, et. al.
  • AB
    AJ B.
    28 July 2017 @ 00:49
    Very valuable to get a different perspective in which your disagree with. EFT's are not revolutionary. Cheaper is not revolutionary. ETF's are a step backwards, and at some point in the future will cause a major liquidity trap. It was ironic that he told the bear/Mexican peso story, then 5 min later said he does not see an imminent crisis.
    • DP
      David P.
      29 July 2017 @ 10:58
      ETF are a simple way to invest for people who do not have not wealth/time to do stock picking and want to have exposure to stocks. This might be one of the explanation why the PE for most stocks is much higher than before because of the cheap way to buy exposure to entire stock market through ETFs. For the mum and dad retail long term investors.
  • TW
    Thomas W.
    28 July 2017 @ 18:35
    Oh, thank god they bailed out the Italian banks so we can get back to business as usual , learn nothing from the crisis, and make the problem bigger down the road. Because, I mean, nothing does more for the health of the system long term than a good, well-timed bailout., right? Right?
  • GL
    G L.
    28 July 2017 @ 15:17
    A very good interview.
  • SS
    Steven S.
    28 July 2017 @ 07:15
    Ozzy Osbourne of the Black Sabbath band would ask the same question of any lowering of Interest Rates.
  • AG
    Austin G.
    27 July 2017 @ 19:31
    The herding is so important in my view. I don't think it ever ends or bottom... The ETFs and herding suggest to me that looking at individual companies has a bright future after the next reset...ETFs are agnostic to individual company management, vision etc
    • DS
      David S.
      28 July 2017 @ 01:46
      It is not ETF or individual stocks. Mr. Pelosky uses ETFs as market marker which gives him more time to study and buy individual stocks for the kicker. DLS
  • DS
    David S.
    28 July 2017 @ 01:36
    With the risk of equities, who would invest with an expected return of 2%. DLS
  • DS
    David S.
    27 July 2017 @ 21:00
    Excellent interview. I believe that Mr. Pelosky investment structures are smart and reasonable for the future. The fly in the ointment for me is the high P/Es in the market. I think we need a reversion to mean, and then use Mr. Pelosky's insights to buy in. DLS
  • jS
    jurgen S.
    27 July 2017 @ 20:16
    Really loved how Jay goes about it. Whether you agree with him or not you have to admire his passion and belief in his own theories. Great to hear someone who is more bullish than your average RV subs
  • JH
    Jesse H.
    27 July 2017 @ 19:50
    Would love to see Mike Green interview / debate Jay. That would be one to watch. I think Mike Green would quickly show Jay that in the next 5 years, it is probable that the emperor has no clothes. And ETFs are a highly risky experiment / house of cards.
  • JH
    Jesse H.
    27 July 2017 @ 19:47
    Found the key point of this interview to be, how the major switching of balance of power to the other nodes of the Tripolar axis takes place. When it does, things are definitely going to break, I think...or perhaps begin a slow crumbling in the US, Europe, etc. My biggest fear is that we are increasingly entering a more centralised world where wealth and power concentration is strengthening, and democracy and public control are weakening. We could see a two-tier world and market, one of low growth where the poor and middle class are really hard hit while the wealthy keep rising markets higher till they break. What we have is a recipe for social strife in the Western world, the beginnings of which we are seeing in Brexit and Trump.
  • PU
    Peter U.
    27 July 2017 @ 14:19
    He sounds knowledgable and very positive. However, I believe he should address the many large "elephants in the room" that are in opposition to his outlook. This would have been a more complete interview. Grant does a good job trying to bring the headwinds into the discussion.
    • JH
      Jesse H.
      27 July 2017 @ 19:39
      Totally agree Peter. This was one of my frustrations with this interview - it was very interesting and engaging, but the "many large elephants" (and even the 3 D's of debt, demographics and deflation) weren't really touched on. Neither was China's tremendous reliance on shadow banking, and other systemic risks. Next time I'd love to see Raoul, Grant or even Mike Green debate someone like this investor.
  • MN
    Mark N.
    27 July 2017 @ 18:47
    Highly entertaining if nothing else. Is entertainment what I got a RV subscription for? Not sure.
  • AM
    Alonso M.
    27 July 2017 @ 18:40
    The bit on ETFs was interesting. Perhaps ETFs will continue to gain market share as an investment vehicle, but nothing goes in a straight line. For example, in an equity bear market, an index ETF is more likely going to under perform an active manager who has the ability to hold cash. I suspect during the depths of the next equity bear market, broad based beta generating index ETFs will become unpopular again. But I don't think this necessarily means all ETFs will become unpopular. Seeing as how many are currently not using ETFs as passive investment vehicles to gain broad based long-term market beta, but are instead actively trading them in search of short to medium term alpha, it seems to me today's investor might actually be more interested in the ETF structure than the passive beta generating investment returns ETFs were originally designed to produce. This made me think about how much more downside there could be during the next equity bear market if, for example, the large and growing group of active ETF advisors (many of whom have not historically put on short positions for their clients) suddenly become attracted to price momentum of an inverse beta ETF in a bear market. If large capital flows into long ETFs can exaggerate price moves to the upside, does it not reason that large capital flows into inverse ETFs can exaggerate price moves to the downside?
  • TS
    Thomas S.
    27 July 2017 @ 17:01
    OK, I get it that RV guests are professional money managers whose livelihoods depend on telling a positive investment story to institutional investors. Upton Sinclair said, "it's difficult to get a man to understand something when his salary depends on his not understanding it." I'm not implying Mr. P doesn't understand certain things, but I am implying the current trajectory of economy and society is not going to turn positive until people like those interviewed on RV start couching their theses in language stating the current trend toward centralized everything isn't really working out for mankind. Because these are the thought leaders, they have to lead toward better thinking. Otherwise, if the world just continues lumbering toward total centralized control of everything - government, economies, money, media, you name it - then we in the finance industry are only putting hammer and nail to our own gallows.
    • TS
      Thomas S.
      27 July 2017 @ 17:15
      Having said that, and all things considered, this was a good interview which provided valuable insight into how one the most experienced international investors sees the world.
  • HJ
    Harry J.
    27 July 2017 @ 16:13
    If your going to panic be first. Buy the way the fed is in a crowded corner with no options left. The insistance on lower rates and a huge balance sheet won't end well. But what do i know. Just been
  • HJ
    Harry J.
    27 July 2017 @ 16:09
    Good job Grant. Every body has a plan going into the ring for the first time till they get hit hard in the nose. Young untested Player are often prone to panic. A wise man once told me that if your g
  • BA
    Ben A.
    27 July 2017 @ 15:45
    Each to their own I guess, but excuse me while I go visit Russell Clark for some "Real Vision"
  • WB
    Wes B.
    27 July 2017 @ 15:26
    I enjoyed hearing from someone that counters much of what we hear from other RV guests.
  • SS
    Sam S.
    27 July 2017 @ 15:01
    Who needs Real Vision when we got Passive ETF Investing. Just because it's happening and the only thing working right now, doesn't insure it's future. What we can count on is change and cycles. However, I did truly enjoy this interview with Jay, and Grant pressed the questions in such a way all this this discussion very meaningful. Bravo.
  • PU
    Peter U.
    27 July 2017 @ 14:56
    whoever is holding the camera should stay off the sauce . . . you seem smashed
  • PU
    Peter U.
    27 July 2017 @ 14:43
    he is a good story teller!
  • PU
    Peter U.
    27 July 2017 @ 14:40
    Ok, with only 17 mins left, his credibility has been damaged. "The Fed has optionality" with the recent and anticipated rate increases. Rose colored glasses. He sounds like he is selling his book. One question for him to answer: If things are as bullish as he espouses, then why are the major central banks controlling rates via over $3.6 trillion (current run rate) liquidity infusions? Why is it "ok" for central banks to purchase equities and corporate bonds? Why do we need such easy financing conditions?
  • PU
    Peter U.
    27 July 2017 @ 13:59
    I second "please keep the camera stationary". Let's not get cute here.
  • RM
    Richard M.
    27 July 2017 @ 12:49
    Please keep the camera stationary. thanks.