Thread by @garrytan

Index funds are the next CDO

Central banks have removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism. Passive investing has removed price discovery from the equity markets. bloomberg.com/news/articles/…

The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.

This is very much like the bubble in synthetic asset-backed CDOs before the Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.