Friday , August 23 2019
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Cullen Roche

Cullen Roche

Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

Articles by Cullen Roche

Let’s Get Inverted

8 days ago

Alright, nerds. It’s time to put on our thinking caps and fill up our pocket protectors. We’re gonna talk about inverted yield curves.

First things first – What is an inverted yield curve? 
An inverted yield curve is a description of the comparison between 10 year Treasury note yields and 2 year treasury note yields. Those are the only two instruments that matter here. If anyone else says an inverted curve is some version of some other set of instruments then take away their nerd badge. They’re out of the club. So, for instance, if the 10 year is yielding 2% and the 2 year is yielding 2.5% then the curve is inverted by 0.5%. Here’s a current picture:

Inversions are weird because the curve should normally shift upwards. Short maturities should yield lower amounts than longer maturities

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Three Things I Think I Think – Recession Alert Edition

16 days ago

Here are some things I think I am thinking about.
1) About this negative yield thing….Interest rates just keep pumping lower. There’s now over $15 TRILLION worth of bonds in the world with a negative yield. Now, negative yields aren’t as crazy as some people think. There’s perfectly practical reasons for yields to be negative (for instance, if you believe inflation will be very low or negative). But check out this price action in 30 year Austrian Government Bonds:

If that’s hard to see, let me explain – that’s a 0.25% yielding instrument that has increased in value by 60% in the last 12 months. This is an extreme case I am cherry picking, but it shows what is happening to some degree across the entire bond market.
The thing is, this is only sustainable in the case that these yields

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How I Think of the Stock Market During its Ups and Downs

18 days ago

I’ve previously written about how I like to think of stocks as bonds. Of course, I know this is a bit of overreach, but it’s a useful exercise when putting things in the proper perspective. For instance, I find bonds intuitively easy to understand. After all if you buy a AAA rated T-Note with a 5 year maturity then you know your time horizon, nominal risk, and return. In other words, you know every single element of this instrument when accounting for how it fits into your portfolio. The only way you can make a behavioral mistake when managing this position is by misunderstanding one of these aspects. For instance, if interest rates rise by 1% 1 year after you buy the bond and you get scared out of your 5 year bond because you treated it like a 1 year bond then you just flat out

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Three Things I Think I Think – Rate Cut Edition

21 days ago

It’s almost the weekend, folks. Hang in there a few more hours. In the meantime, here are some things I think I am thinking about:
1) The Fed did whaaaat? The Fed cut rates for the first time since 2007. Things are a bit different this time. In 2007 the housing market had been screaming higher and was softening quite a bit. GDP was consistently over 6%. Rates were 5.25% and inflation had been consistently close to 4% for years. This time around inflation can barely get over 2% and GDP is lucky to get over 4%.
One major similarity between the two environments is that the yield curve was flat or inverted. I don’t like to read into the yield curve too much, but one obvious message from the long end of the curve is, when it refuses to rise as short rates rise, bond traders are basically

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Three Things I Think I Think – Negative Rates and Stuff

28 days ago

Here are some things I think I am thinking about:
1) Q2 GDP – more of the same. Second quarter GDP came in at 2.1%. Pretty weak. But more of the same. As I’ve long been pointing out – this is the golden age of low and stable growth. It really is a sort of Goldilocks economy. Not too hot, not too cold. Just right. But this general trend has been going on for 10 years now.

2) Negative rates everywhere. There has been a lot of chatter in recent weeks about how bond yields are going negative all over the world. Some people think this doesn’t matter. Others think it’s insane. Others think it’s the new normal. No one really knows and it’s probably more specific to each individual economy than most people think, but one thing that is certain is that this has completely changed the risk

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Congrats on Your Debt Ceiling Increase

July 24, 2019

Hooray! We did it folks. We raised the debt ceiling again and averted a self imposed default on US government debt. And to celebrate this joyous occasion I wanted to write my 3,589th article explaining some of the never-ending misconceptions about government debt and borrowing.¹ And to do that I found this David Stockman interview from last week. Stockman was Reagan’s budget director in the 80’s and seems like a good guy from everything I’ve read. But he’s also become the poster-child for government debt fear mongering. So let’s dive into this interview because he hits on lots of persistent myths:
“The Fed has accommodated the Congress over and over again…” [~2:20]
I don’t like this reasoning. The Fed hasn’t been “funding” the US government via QE. It’s better to think of QE as pure

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My View On: ESG Investing

July 15, 2019

I write this post with some hesitancy because I suspect that it is going to annoy lots of people. This annoys me because the goal of this post is to emphasize the importance of being objective and emotionally agnostic when we’re investing. I’ll put on my flame retardant suit and see how well I can communicate this view without enraging people. Wish me luck. 
ESG investing (environmental, social and corporate governance) is a hot new space in the investment product landscape. The basic goal of ESG investing is to construct index funds and portfolios that are more morally acceptable. So, for instance, you might think that Exxon Mobil (XOM) is hurting the environment so you construct a portfolio that doesn’t own that stock. Makes sense. Or does it? Let’s explore.
1) ESG investing is more

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Seeing Both Sides of the Argument

July 11, 2019

Here was another fun question this week from Tadas at Abnormal Returns:
Question: What have you learned in the past year (or so) that genuinely surprised you? Or said another way, what thing have you changed your mind about recently? 
A: “I’ve started doing this thing where I always assume that other views are right before I assume they’re wrong. For instance, I often hear political narratives about this or that and I tend to defer to my priors first. But now I start by considering all the reasons why that view might be right. Even if I end up disagreeing in the end it’s a nice thought process that helps me better understand the other side of an argument and where it’s coming from.”
My answer was more geared towards a specific change in the way I try to approach things now. I am trying

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Will Active ETFs Save Active Management?

July 9, 2019

Here’s Tadas again with a good question for a bunch of influential financial thinkers, and also me:

Question: Traditional active management is dying a slow, painful death. Is the introduction of non-transparent, active ETFs a potential turning point or simply a finger in the dike of an unstoppable trend?
Answer: “This conversion has been slowly taking place for years. ETFs are a flat out better product wrapper. 10 years ago I said that mutual funds are dinosaur products and that’s been mostly right.
But you have to be careful with ETFs because of this transition that’s occurring. Despite being a better product wrapper they can still be bad product wrappers. For instance, a high fee active mutual fund that simply rolls itself into a slightly lower fee ETF wrapper is no better than the

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Is Value Investing Dead?

July 8, 2019

There’s been a lot of chatter in recent years about the underperformance of value vs growth. This has led some people to declare that value is dead. But is it? Tadas Viskanta recently asked this question of some influential financial thinkers (and also me). Here’s a link to their answers. And here’s what I said:
”I have never liked the idea of “value investing” as a data traceable “factor”. That is, we are all value investors in the sense that we are all looking to buy assets that we can sell at a higher price in the future. Whether you can use historical data to trace when something is undervalued or not is suspect in my view.

It seems like sometimes Wall Street finds these datasets, assigns causation where there is only correlation and wraps it into a neat narrative to sell for high

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Four Fings I Fink I Fink

July 4, 2019

It’s the 4th of July so here’s an extra special three things…
1) Nike is Being Unpatriotic Again?…So, Nike decided not to release a new shoe with the Betsy Ross flag on it. They said that the flag was perceived by some as being a symbol of the slave era. Apparently this decision was influenced by Nike spokesperson Colin Kaepernick. Naturally, everyone lost their shit over this because that’s what we do these days – we lose our shit over things that we shouldn’t be losing our shit about.
Anyhow, Nike was just catering to their base customers (progressive Millennials). It’s good branding and the stock market agreed as NKE jumped 1.5% yesterday. But then Conservatives came out saying that Nike is anti-American and Fox News ran countless hours of free Nike advertising which is exactly what

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When “Bonds” Aren’t Bonds

July 3, 2019

In finance and economics we tend to use oversimplified terms like “money” and “bonds” when the reality is that it’s important to be more nuanced in understanding these terms. That’s why, for instance, I prefer the term “moneyness” when I refer to a money-like instrument. It conveys the proper degree of flexibility about the item. Sometimes cash has more money-like properties than a bank deposit. Sometimes it doesn’t.

We can apply the same type of thinking to the financial markets and in this particular case I will use the bond market. Of course, all bonds are not the same. In fact, many bonds are what I would call “stocks in drag”. Here’s a nice chart from JP Morgan showing the correlation between stocks and certain types of bonds (I added the red commentary):

As I described in

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The Longest Recovery Ever – Does it Matter?

July 1, 2019

Today officially marks the longest recovery in US economic history. At 121 months the 2008-2019 expansion officially overtakes the 1991-2001 expansion. Here’s an overview of the post-war economic expansions:

The most interesting bit here is that the expansions seem to be getting longer. I’ve written about this in the past and the reasons why the expansions seem to be expanding. The key points are:
Monetary policy combined with fiscal policy’s automatic stabilizers are more likely to support any downturn than they were in the past.
The global economy and the US economy in general has become much more diversified which makes it a more stable overall growth pattern.
On the flip side, while this is a long recovery, it’s also a relatively weak one with real GDP coming in at just 2.2% per

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My View On: Student Debt Forgiveness

June 25, 2019

Bernie Sanders and Elizabeth Warren have proposed forgiving all student debt. Naturally, this is somewhat popular and garnering a lot of attention because free stuff is fun and having the government give out free stuff is also very controversial. Where do I sit on this issue? Well, it’s a complex one, but I’ll try to condense my thoughts here.
The Student Loan Market – An Overview
The student loan market is $1.6T spread out over 44MM people. That’s an average balance of ~$36K and a median balance of ~$19K.¹ In terms of broader household debt student loans are a relatively small piece of the pie at just 10% of household debt.

One interesting trend is the recent slowdown in the growth rate of student loans. The financial crisis had a significant impact on student loans as it became

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Three Things I Think I Think – Libra Edition

June 18, 2019

I’ve been doing investment management long enough that it’s only logical that I begin to transition into horoscopes and fortune telling so here we go. Just kidding of course. Libra is not a strangely opaque reference to a kind of scammy pseudoscience. It’s a reference to Facebook’s new kind of money, which, err, hopefully won’t be based on a kind of scammy pseudoscience….
1) What is Libra? Libra is what Facebook is calling their new cryptocurrency. Here’s a short primer on it from Facebook. In essence, Libra is structured to be a fully reserved payment tool that will operate as a form of stablecoin (meaning it will always settle at par, $1). So, Facebook will take in $1 of deposits from Joe Schmo and issue Joe 1 Libra and Joe can use his Libra account just like his deposit account.¹

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Three Things I Think I Think – Soccer Edition

June 15, 2019

“Woohoo, the Three Things we’ve all been waiting for – the soccer edition.” – Said no one ever. 
1) Women’s Soccer and equal pay. The US Women’s National Team has been involved in a longstanding lawsuit against US Soccer over equal pay. Basically, the men’s team makes a lot more on average than the women do and the women argue that this is discrimination.
Now, this is a tricky discussion because there are a lot of moving parts, but here’s where I stand on this.  You have to look at this based on financial performance because that’s the only thing that makes all of this viable. Although the US Soccer Federation is a 501C non-profit their viability is based primarily on the revenue they generate from their operations. For most of the last 100 years the men’s game has been the primary

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Three Charts I Think I’m Thinking About

June 11, 2019

Here are some pretty pictures I think I am thinking about:

1. The USA is bankrupt, part 3,478. It’s been at least 1 or 2 blog posts since I talked about the USA being bankrupt so I would be remiss if I didn’t remind you that the USA is actually not bankrupt at all.
This chart comes to us courtesy of Mary Meeker’s annual internet report. Now, the annoying thing about this chart is how the government is being compared to a corporation. This doesn’t make sense. The government is more like a non-profit. For instance, let’s pretend we live on the Island of Pragcap and the neighboring residents at the Island of find us to be intolerable defenders of fiat money and attack us. In response, we form a government to organize our defense and fund that war operation by pooling our

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Three Things I Think I Think – Don’t Piss in my House

June 6, 2019

Here are some things I think I am thinking about:
1) Don’t Piss in my House. YouTube demonetized some people and now Conservatives are up in arms about the first amendment. In case you missed it – basically, there’s some Conservative guy on YouTube who says a lot of inappropriate things about homosexuals and other people. A VOX Media reporter was the target of some of these insults and made a big stink about it. Big enough that YouTube decided to demonetize the YouTuber (meaning, he won’t make money from YouTube ads).
I’ve expressed my view here before. I’m not a huge fan of the growing trend in political correctness, but I also don’t think the internet is a public park giving us broadly public rights of expression. When we upload content to social media platforms we are specifically

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Is the Bond Market Predicting Recession?

June 4, 2019

Sorry for the radio silence here. Real work got in the way of blogging about work. 
A lot of people seem to think that the bond market is forecasting a recession now that yields are declining again and the curve has completely flattened. Is a recession coming? Do you need to jump in your bunker? Do you need to build your bunker? Let’s explore.
I’ve touched on the flattening and inverting curve a number of times in the last few years. Here’s my general view over time:
November, 2017 – The curve isn’t inverted, no recession is on the horizon and you don’t need to worry about recession until well after the curve actually inverts.
March, 2019 – The curve has finally inverted (by some measures) which increases the odds of recession about 18-24 months out, but don’t go panicking just yet.

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Is Vanguard Better at Predicting Future Returns?

May 23, 2019

I sometimes poke fun at short-term forecasts. It’s not that I don’t believe in making forecasts (we all have to do that). It’s just that I find it a little silly to try to forecast short-term stock market moves because the stock market is an inherently long-term instrument (the stock market has at least a decade+ duration depending on how you calculate it).¹
Forecasting the monthly or annual changes in stocks is like looking at a one year 2% yielding bond and trying to forecast the ten day moves to generate more than 2% from it. This is an instrument that is designed to provide its 2% returns over a certain period of time. No matter how impatient you are we can’t all make a 2% yielding one year bond yield more than that. In fact, in the aggregate, the more we trade the lower we

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Three Things I Think I Think – It’s Rubio!

May 18, 2019

Here are some things I think I am thinking about on this beautiful Saturday morning….
1) Are buybacks propping up the stock market? One of the more annoying narratives going around these days is this idea that buybacks are propping up the stock market. I was reminded of this yesterday while reading a Ned Davis Research piece which said the stock market would be 19% lower without buybacks. Let’s think about this rationally….

This sort of thinking assumes a hyper inefficient market where corporations can essentially dupe investors into buying stock that is overpriced with no fundamental underlying support. It’s like we all know the S&P 500 should only be at 2,200, but we’re all just being kinda stupid and allowing ourselves to buy it at 2800. Now, I’m no efficient market lover, but I

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Capitalism Vs. Socialism

May 8, 2019

I really enjoyed this segment on CNBC about capitalism and socialism. In this short clip Warren Buffett, Charlie Munger and Bill Gates discuss the nuance of their view and many of the confused narratives that are going around these days. Take a look for yourself, but here’s how I basically see this debate and the many problems around the use of these terms:
Socialism means social ownership of the means of the production. Capitalism means private ownership of the means of production. No need to confuse it more than that. 
No country is purely capitalist or socialist. In fact, all countries are some blend of social and private ownership. The USA leans more heavily towards private ownership of the means of production, but there is still quite a bit of government intervention in

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Three Things I Think I Think – Berkshire, Jobby Jobs and Chase Tweets

May 3, 2019

It’s almost Cinco de Drinko weekend so hang in there for a few more hours. Or, if you’re reading this on Sunday, salud! In the meantime, here are three things I think I am thinking about:
1. Buffett buys….zzzzzzzzzz. So, Berkshire bought some Amazon stock recently. I am not gonna lie, this is a big snoozefest. The financial media always goes crazy when Buffett buys something new, but why is this news? Seriously? Berkshire stock hasn’t outperformed the S&P 500 in over 10 years. It’s just a great big index fund at this point.
I’ve written about this in detail in the past and it’s not a failing of Buffett. Berkshire is just too damn big and as they’ve gotten bigger there’s been a steady downward trend in their per-share book value growth vs the S&P 500. At a market cap of $540B there’s

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Whom Would I Nominate for the Federal Reserve?

May 2, 2019

So, Stephen Moore is no longer being considered for the Fed. As I explained in detail this is a good thing. Moore was nowhere near qualified and had a long track record of misunderstanding basic things about the Fed. So good for Trump for recognizing this and dropping the nomination. Now what? 

Someone asked me an interesting question on Twitter:

“Who would you nominate?”

I (half jokingly) answered FRED PCEPILFE. That refers to the Fred data set for core personal consumption expenditures, the Fed’s preferred measure of inflation. I wasn’t really kidding though. I think the Fed operates with too much discretion in setting policy. I would prefer that they implement some sort of systematic approach that takes the guesswork and board meetings out of the equation.

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How Will The Fee Structure of Financial Advisory Change in the Future?

April 29, 2019

Financial advisory fees are a huge controversy at present. After all, there is significant evidence that paying higher fees for asset management services is detrimental to your portfolio. And while the average fee for portfolio managers has fallen significantly the average financial advisory fee remains pretty much where it has been for the last decade at 1%. What explains this and will it persist?

When I started in the world of financial services we were mostly commission based. You were only as good as what you sold. Over time it became clear that this model created lots of conflicts of interest because you were most incentivized to sell things that generated fees rather than things that were in the best interest of the client. So the business slowly evolved. The growth of the

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Having a Printing Press Doesn’t Mean Money is Infinite

April 24, 2019

Deutsche Bank put out an imprecise piece of research saying that higher debt levels mean higher government interest payments. This isn’t really true because the government can technically set its interest rates at whatever it wants. For instance, there was nothing stopping the Fed from keeping rates at 0% forever.¹ What DB was really implying was that there is a direct connection between debt and inflation (which interest rates are primarily a function of). But this is not really a good conclusion considering that there is ample evidence that higher government debt does not necessarily lead to high inflation (eg, see the USA or Japan over the last 30 years). So, we shouldn’t claim that government debt necessarily causes inflation or higher interest rates.
Anyhow, Stephanie Kelton of MMT

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Was the GFC a Once-in-a-Lifetime Event?

April 23, 2019

Someone emailed me with a very good question yesterday:

“Did we really go through a once-in-a-lifetime Great Recession in 2008, or is the global economy overleveraged to an even greater extent, just in different ways?”
My basic view of the Great Financial Crisis is that is was not unique in that it was a debt crisis, it was unique in that it was a debt crisis attached to such a significant household asset. Back in the old days we used to have regular panics or Depressions. The reason for this was simple – we had a much more consolidated and unstable economy. For instance, the following chart shows the US economy by sector contribution over the last 70 years:
(GDP by Sector Contribution)What stands out here is that the US economy has become much more diverse over time. So, just as basic

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Hard Truths for the Inflation Truthers

April 17, 2019

The main goal of this website over the years has been to search for an operationally sound and empirically supported perspective of how the monetary system works. I’ve debunked tons of myths in the process of this search, but the inflation truthers have been hard to convince for some reason. Strangely, there are still people out there who believe that the BLS lies about inflation stats and that all the data is manipulated. But I have some hard truths for the inflation truthers.
Hard truth #1 – Millions of traders are not wrong. When someone says that low inflation data is wrong they are essentially saying that millions of free markets are also wrong. For instance, commodity traders have priced in near record low commodity prices. Are all of these commodity markets wrong?

Or what about

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April 14, 2019

Everyone deserves second chances in life. And everyone is a work in progress. Those are the big lessons for me after watching Tiger Woods win The Masters today.

It took me a long time to learn to like golf. It’s a frustrating game that requires a terrible amount of patience. But as I get older it dawns on me – golf is a lot like life in that you spend huge amounts of time waiting to become average at something only to get glimmers of hope bunched in with persistent disappointments. And that’s what golf is – the ultimate game of second chances and work in progress.
Even the very best athletes in the sport are not immune to this. They are persistently challenged mentally and physically. Perhaps more so mentally than physically which is another aspect of golf that makes it such an

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My View On: Minsky’s Financial Instability Hypothesis

April 11, 2019

Hyman Minsky’s Financial Instability Hypothesis (FIH) has been an influential component of how I think of the financial markets and the economy. The FIH, in a nutshell, says that capitalist economies will, at times, deviate from an equilibrium into substantial inflations and deflations. In other words, booms can beget booms which can beget busts which beget busts.
This view, that booms lead to busts, has garnered renewed interest in the wake of the GFC where a housing boom clearly led to a significant economic bust. Additionally, it has put pressure on the more mainstream economic idea that economies are best understood by viewing them thru a state of equilibrium that moves thru periods of trend plus shocks.
The FIH is a two part theory – 1) The economy moves through multiple equilibria

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