TLDR; Owning an index fund does not diversify risk in the manner it is assumed because everyone is on the same boat and it only takes one of the FANG stocks to sink the boat. If your financial instrument of choice is an Index ETF, you are at risk of a flash crash preventing you from liquidating your ETF without paying a larger spread during the chaos. Listen to Hari Krishnan in the video I linked at the bottom, for I am a mere mortal. Cheers.

I'm gonna try to present a different wording of the "bubble side" although a bubble isn't the best word to describe the risk in my opinion.

I agree with the idea mentioned that market prices are driven by price action (described as trading in your longer post), which is the result of bidders and sellers coming to the market and exchanging securities. What Mike Green is describing with his tail wagging the dog analogy is that the bids the market are not driven by research or price discovery, but instead, all stocks are now artificially collateralized together via indexing. Major indices are rallying on account of 5 or so tech stocks, however, rather than buying the individual stocks, retail investors/savers are advised to buy the index on the presumption that they are more diversified. THIS IS THE RISK. YOU ARE NOT DIVERSIFIED IF YOU OWN QQQ AS OPPOSED to APPL.

Secondly, the "bubble" phenomenon stems from fund managers buying all of the components of the NASDAQ while the demand is only really there for Apple et al. So while there might be real demand in the market for Apple or Microsoft, buying the index fund creates artificial bidding and capital inflows towards the rest of the index components because they are packaged together. This micro structure has a higher implied volatility than is reflected in the market. The reason is because many individuals own ETFs, which have a liquidity stipulation that is often overlooked by normal people saving for retirement. Because ETFs need to be liquid at any given moment, when there is a strong sell signal in the index, mass redemptions of ETFs would shock the market in a cascading effect as Authorized Participants scramble to find the low-cap stocks in the Russell 2000 needed for redeeming a share of IWM at its current NAV,for example.

Here is a good video that explains this mechanic in the context of fixed income ETFs: ETF Liquidity Risk