The Cult of Passive Investing: How Wall Street Engineered a $10 Trillion Mirage

There’s an old economic adage that bureaucrats and Wall Street suits desperately wish you’d forget: When a measure becomes a target, it ceases to be a good measure. They call it Goodhart’s Law, and it should be carved into the granite above every investment firm’s headquarters. It’s the single most damning indictment of the cult of passive investing—this mindless march of trillions into index funds, ETFs, and so-called “retirement solutions” that promise safety while hollowing out the market’s integrity. Because here’s the ugly secret they won’t print in the glossy Vanguard brochures: The index is no longer a measure of American prosperity. It’s a target—a giant, lumbering target for money flows too big to question themselves. And like all targets, it has become corrupt, distorted, and dangerously fragile. Goodhart’s Law, from Soviet Nails to the S&P 500 If you want to see Goodhart’s Law in action, look no further than the Soviet nail factory. Command a quota by weight, and you get enormous, worthless spikes. Change it to count, and they churn out mountains of flimsy tacks. Each time, the metric devours the mission it was supposed to serve. Fast-forward to our century: the same perversion infects every pillar of modern life. Inflation targeting? Central banks chasing 2% have ignited asset bubbles that make the Gilded Age look quaint. Standardized tests? Schools game the numbers and rob kids of genuine learning. GDP worship? Politicians conjure debt-funded booms while the real economy rots underneath. The most grotesque manifestation of all: the S&P 500, once a rough compass for corporate vitality, now hijacked as the mandatory dumping ground for every 401(k), pension, and lazy allocation strategy on the planet. The Giant Mindless Robot Mike Green, one of the rare voices willing to torch the consensus, calls passive investing the “giant mindless robot.” He’s not exaggerating. Here’s how the machine works: Every dollar you send to an index fund gets deployed immediately, without judgment or hesitation, into the largest stocks. The bigger the stock’s price, the bigger its slice of your money. The more its price goes up, the more you’re forced to buy it. The cycle repeats, inflating megacaps to absurd valuations. This is momentum investing on autopilot—without a single grown-up in the cockpit. Remember the analogy: If a shopkeeper keeps raising the price of a rug, a rational buyer walks away. The passive robot, by contrast, nods and pays whatever number flashes on the register. $1,000? Sure. $1,500? No problem. $2,500? Take my money. That is the essence of passive investing in 2025. A system that punishes prudence, rewards bloat, and decouples price from reality. The Myth of Riskless Wealth The whole premise behind passive investing is a fairy tale: that markets can never stay overvalued because prices always “reflect all information.” But what happens when the marginal buyer no longer cares about information—only allocation? What happens when flows, not fundamentals, dictate price? Here’s what happens: The S&P 500 trades at 29 times earnings, a valuation more absurd than during the dot-com bubble. The SPY ETF yields 1.1%, while Treasuries pay nearly 4%. Profit margins sit on a crumbling foundation of cheap debt and cheap labor, both ending in our lifetime. Yet your pension fund doesn’t care. It will keep buying. Until the day it doesn’t. On that day, the same flows that pumped this grotesque balloon will suck the air out twice as fast. The Fatal Feedback Loop This is the part the financial media never wants to discuss. When passive funds dominate the market, they don’t merely distort price on the way up—they also guarantee catastrophe on the way down. Consider the arithmetic: Active managers once provided balance. They would sit on cash when stocks soared and step in when prices fell. Passive funds don’t do that. They buy without hesitation and sell without remorse. In a downturn, passive flows become forced liquidation. This is the nightmare scenario: Retirees start withdrawing en masse—because they have to. Boomers face mandatory distributions after age 72. Younger generations, saddled with debt and stagnant wages, can’t plug the gap. So the selling begins. And there is no human in the loop to ask, “Is this rational?” It’s sell, sell, sell—just as mindlessly as the buying spree. The Demographics Time Bomb Wall Street strategists avoid this topic like plague: demographics are destiny. Baby Boomers own most of the market. They are retiring at a rate of 10,000 per day. They must liquidate assets to survive. The entire edifice of perpetual passive inflows—the myth that trillions will keep pouring into the S&P 500 indefinitely—rests on a demographic assumption that was obsolete 20 years ago. Meanwhile, the next generations are crushed by housing costs, student loans, and a gig economy that can’t deliver real wage growth. In this environment, the idea that passive inflows will continue forever is not merely naïve. It’s delusional. The Illusion of Entitlement Ask a room of wealth managers how they justify 8% perpetual returns, and you’ll hear the same incantation: “Just look at the long-term chart. Stocks always go up.” They never mention that this backward-looking extrapolation assumes the very flows that created the bubble will never reverse. They never ask what happens when the price-insensitive buyers become price-insensitive sellers. They never acknowledge that Goodhart’s Law has rendered the index itself a hollow idol. The S&P 500 is no longer a measure of American enterprise. It’s a measure of how many people still believe the con. A System Ripe for Collapse This isn’t hyperbole. It’s arithmetic. Passive funds now account for over 50% of all U.S. equity assets. Their market cap weighting means they buy the winners until they are grotesquely overvalued—and abandon everything else. This has created a monoculture, as fragile as any ecosystem dominated by a single crop. When the weather turns—when inflows stop or reverse—the devastation will be biblical. Don’t expect the central planners at the Federal Reserve to let it burn. They will be called upon to buy stocks outright, in a final act of desperation to prop up the illusion. But no amount of printed money can reverse the consequences of a system that has replaced judgment with inertia. Preparing for the Reckoning Markets are not self-correcting mechanisms when the human element is stripped out. They are machines of narrative—and right now, the narrative is that passive investing is riskless and eternal. It isn’t. It is a slow-motion train wreck of distorted incentives, misallocated capital, and an entitlement mentality that will be shattered when the demographics shift and the flows reverse. This is not a call to panic. But it is a call to think independently and question the orthodoxy. Because the day the giant mindless robot starts selling, there won’t be a warning bell. Just a black hole where your retirement was supposed to be.

The Cult of Passive Investing: How Wall Street Engineered a $10 Trillion Mirage

Bill Brocius Jul 14

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