Sunday , May 16 2021
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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 Talk About Inflation

4 days ago

Whooboy. What a CPI print. Here are some highlights in case you have a life and don’t drool over BLS reports:
The all items index experienced its largest increase (4.2%) since Sept 2008.
The used car index was up 10% in April, its largest increase since 1953.
The core index (ex food and energy) was up 0.9% in April, its largest increase since April 1982.
Fun. There will be a tendency in many circles to assume that this is the return of the 1970s or something like that. I think we need to relax and try not to overreact. Here’s why:
1) These figures are exaggerated by base effects. The price index troughed in May of 2020 at 256. So the year over year comps start looking exaggerated because of the COVID effect. Basically, the economy was in crash mode last April and May so prices

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Three Things I Think I Think – Losing Reserve Currency Status

5 days ago

Here are some things I think I am thinking about.
1. Is the Fed “Playing with Fire”? 
Stan Druckenmiller had an op-ed in the WSJ about how Fed policy has been too loose for too long. I think there are some reasonable perspectives here. I’ve been pretty vocal about the risk of inflation overshooting the Fed’s target this year. I also think there’s an increasingly convincing argument that the Fed’s policies have contributed to a lot of financial market craziness in the last year. It would not surprise me at all to see the Fed backpedaling later this year or in 2022 as they unwind the balance sheet a bit and raise interest rates to try to contain inflation and the housing market.
At the same time, I think this was a risk worth taking. For instance, let’s say the Pandemic had turned out to

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The Scarcity of Money Myth

19 days ago

I’m here to ruin some long running narratives. I apologize in advance.
Money is not scarce. It never has been and it never will be. More importantly, scarcity of money is not a strength.¹ It is a weakness. Sound weird? Yeah, I bet. Let me explain.
Back in college I was kind of obsessed with commodities and commodity money. I’d been reading a lot of Austrian econ and all that stuff. But then I came across the endogenous money theories and I learned over time that money is not a physical thing or a rock in the ground or anything “natural” at all. Money is actually a very unnatural thing. We’re the only species that uses it because it is pretty much something we conjure up in our minds. More specifically, “money” is really just a bunch of contractual agreements. It’s “I’ll give you 25

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Credo Wealth Interview on the Macro Landscape

27 days ago

I recently joined Deon Guows of Credo Wealth, a $5B wealth management firm in London, to discuss the macro landscape in the years to come. We hit on a huge number of topics. Check out the chapter time stamps in the YouTube video to navigate to specific parts. I hope you enjoy!
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Three Things I Think I Think – Housing Bubble 2.0, Passive Investing and Hyperinflation

April 8, 2021

Here are some things I think I am thinking about:
Is the Housing Market a Bubble (Again)?
I’m starting to see a lot of chatter about a housing bubble 2.0. So I went on Twitter and asked people what they thought. There were tons of smart responses if you want to review them. Ben Carlson also wrote a nice piece about the state of the housing market. I think Ben gets the big picture right. Basically, this isn’t that much like 2006 because:
The buyers are mostly high creditworthy wealthy people.
There hasn’t been a big building boom. In fact, supply is tight.
There’s a lot more to the story, but that’s the basic gist of what’s going on.
I’d only add that the current price boom seems to be more about COVID than anything else. In other words, I think that future demand has been pulled into

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Let’s Talk Some More About Assflation

March 31, 2021

One of the persistent themes since 2008 is the theory that there has been excessive “asset price inflation”. I’ve talked about this quite a bit before, but it is worth repeating. And no, “assflation” does not refer to the 19 lbs we’ve all put on during COVID. It refers specifically to the term “asset inflation”. This is the idea that the “inflation” that was supposed to show up in consumer prices has been showing up in asset prices like stocks and housing. There’s a bit of truth to this, but let’s discuss this in more detail so we can keep things in the right perspective.
Capital Goods vs Consumption Goods
It’s important to make a clear distinction between capital goods and consumption goods in the context of the term “inflation”.
A consumption good is something that you literally

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Understanding Government Liabilities

March 29, 2021

I keep running into a strange issue in macroeconomic discussions – no one seems to agree on how we should account for government liabilities. For instance, Gold standard economists believe government issued cash is not a liability (even though the Federal Reserve specifically shows it as a liability on their balance sheet). MMT economists say government “debt” is an IOU, but not borrowed debt. They also, at times, refer to government debt as equity.¹ Other people think the government’s debt needs to be repaid. Other people think it’s some sort of debilitating liability, as if there isn’t an asset side of the equation that balances out. There’s even a whole new monetary movement designed to argue for “debt free money”. Anyhow, I want to try to explain this in a simple way that hopefully

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Stocks Don’t “Only Go Up”

March 25, 2021

It’s become popular during the last year to argue that “stocks only go up”. And yes, it sure feels like that some times. In fact, in the long-term, it’s mostly true. The odds of you losing money in the long-term are low:

The problem with this view is that we don’t live our lives in the long-term. We live our lives in the short-term and a large portion of our financial liabilities are short-term – our rent, mortgage, car payments, etc. In financial portfolios we have what is called a perpetual asset liability mismatch. That is, you have certain short-term and long-term liabilities that you need to match with certain short-term and long-term assets. None of us can match those liabilities perfectly because we don’t really know what they’ll look like across time. And while the stock market

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Why Stocks and Bonds are the Core of any Portfolio

March 16, 2021

“Stocks are overvalued and risky. Bonds yield nothing and expose you to interest rate risk. So you need to invest in alternative assets.” – Pretty Much Everyone
I am a big advocate of a core and satellite approach to asset allocation. For instance, in my book I talked about the Total Portfolio approach. That is, everyone should own a diverse group of assets and consider how their Total Portfolio relates to what we typically think of as our “investment portfolio”. This might include real estate, cars, collectibles, art, Bitcoin, stocks, bonds, etc. Some of these items will lose value over time. Others will increase in value. You diversify specifically because you never know the future. But at the core of this portfolio are stocks and bonds. Why? Because everyone needs a high degree of

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How Worrisome is the Rise in Interest Rates?

March 1, 2021

The key to understanding the COVID-19 recession was in understanding that it was an exogenous shock. This made it quite different from your standard recession in the sense that a boom did not cause the bust. There was no endogenous build up of unsustainable forces that led to the decline in output. COVID was much more akin to a natural disaster. This meant that the recession could be deep and painful, but it was unlikely to last very long. This was crucial to understand (and a key component of my optimism last April) because it meant that the probability of a deflationary (or disinflationary) recovery was unlikely. For example, the 2008 recession was an inherent credit crisis. Credit expanded too much and when home prices collapsed that credit had to contract as well. Credit

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Why Pump & Dumps Are Dangerous

February 4, 2021

On Sunday evening, before GameStop had fallen 85% from its peak, I said:

My guess is GME will collapse in the coming months or year when this charade passes and a lot of people will get hurt along the way.

I can’t lie. I am really mad to be right about this. Mainly because all of the narratives surrounding this whole charade have been so disingenuous/misinformed and a lot of famous people promoted those bad narratives along the way. And now we’re finding out that a lot of small retail investors are left holding the bag. In fact, we’re finding out that hedge funds made a lot of money at the cost of retail investors. So, what happened here? How can we try to avoid this again in the future?
One of the worst narratives that started this whole thing had to do with how short sellers are

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Three Things I Think I Think – YOLO Gambling is Reckless

February 2, 2021

Here are some things I think I am thinking about. Actually, they’re all basically the same thing and they’re all GameStop, of course. But whatever.
1) The Short Sellers Did It!  The GameStop saga has been a nearly endless stream of bad narratives. And the one narrative that no one is discussing, the one that actually makes sense is “YOLO gambling is reckless”. But we’ll come back to that in a minute.
The bad narratives started with evil short sellers. You know how it goes – short sellers are bad and need to be destroyed. Luckily for us a Reddit Forum of day traders was just the right hero. Of course, anyone who fully understands how short selling works knows that that narrative was nonsense. Yeah, it’s kinda cool to see a big high fee hedge fund get caught up in a retail trading frenzy,

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My View On: Short Selling

January 29, 2021

The recent craziness in Gamestop has resulted in a lot of hot takes on short selling. I have the hottest takes, of course, so let’s dive into this a bit deeper and put this debate to rest. 
Here’s a piping hot take from the richest man in the world:

Wow. That kinda makes sense. But wait, does it really? No, Cullen, stop. Back up. Let’s explain how this works first. Just so we’re all on the same page.
Short Selling Basics. This whole convo kinda reminds me of the buyback debates or the national debt debates or the money multiplier debates. You know, the types of debates in finance where 95% of the popular narratives are based on a misunderstanding of the first principle basics of the things involved. So, let’s all get on the same page here about how this works.
If you want to bet on XYZ

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Three Things I Think I Think – GAMESTONK!

January 28, 2021

I’d love to talk about the mechanics of Central Banking or index funds, but the only thing that matters in financial markets right now is Gamestop. So…we’re going to talk about index funds. Seriously. But also we’ll talk about Gamestop so don’t worry. If you haven’t been reading up on the Gamestop saga then maybe circle back to yesterday’s article. 
1) Robin Hood or Robinhood? The big story of the day is that Robinhood the trading platform shut down access to buying new shares of Gamestop. This essentially locks out potential new buyers and forces existing holders to sell on their platform. The stock dropped 70% at one point on that news. A lot of people are outraged by this. They feel like Robinhood is protecting big hedge funds from further losses and taking advantage of the little

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Three Things I Think I Think – Civil WHAT?

January 26, 2021

Here are some things I think I am thinking about:
1) There’s Gonna be a Civil WHAT?  Here’s an interesting tweet from Ray Dalio:

I really like Ray Dalio. His All Weather portfolio is more or less the kind of permanent portfolio that I think most savers should try to implement (for most of their savings). But I have a hard time figuring out how some of his broader macro views fit into all of this. For instance, he believes that there are long-term debt cycles that create patterns in social and economic behavior. Okay, that makes some sense. But honestly, how could he have enough data to justify a view like this? If a long-term debt cycle is 100 years then we’ve had, what, one or one and half long-term debt cycles in the modern economic age? How could you formulate sound judgments about

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Rational Reminder Podcast – Understanding the Modern Monetary System

January 24, 2021

I recorded this podcast a few weeks ago with Cam Passmore and Ben Felix on the Rational Reminder show. Ben had read some of my work over the years and reached out to me before publishing this absolutely wonderful explanation of QE. He asked for my critique of the video, but I couldn’t find any. He had succinctly and thoroughly explained the topic like few can. Then he asked me to come on his podcast to do something I’ve never done before – go through my popular paper “Understanding the Modern Monetary System” point by point. Cam and Ben are great interviewers and really know their stuff. There’s a ton of good content on their page. I hope you enjoy this one.
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2021 World Podcast Tour Begins!

January 14, 2021

Well, it looks like it’s going to be another year of Zoom calls so what better way to start it off than a podcast recorded on a Zoom call.
I joined Stig and Preston on The Investor’s Podcast again and we covered a lot of ground including:
– Why money supply expansion is not equal to inflation– Understanding the new rules of bond investing in today’s inflation and interest rate environment– How to protect your portfolio against inflation– Whether there is a rational argument for stocks to be trading at 50 times earnings
I hope you enjoy!

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Is All of Finance Just a Big Network Effect?

January 7, 2021

In college I was a registered Republican. After I graduated I registered as a Democrat. And a few years ago I registered as an Independent. I guess I just couldn’t ever figure out which tribe I belonged to – which network I wanted to associate with. The last 8 years have been interesting to me mainly because I feel like I’ve watched two competing network effects trying to convince one another that their network is better and the more they can demean, retain and recruit others the more powerful their network becomes.
Anyhow, I am really exhausted from all the politics of the last few years so I won’t torture you with more of it. But it all has me thinking about the power of network effects and how people can buy into things that are only loosely grounded in fact (or sometimes void of any

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Is Inflation Really 10%?

January 6, 2021

One of the long running themes on this website is low inflation and debunking narratives about how very high inflation might be around the corner. I like to work from a first principles understanding, looking at things for what they are and trying to be as objective as possible. Overall, my predictions about low inflation and low interest rates over the last 10 years have been mostly spot-on.
Sure, in the last year I’ve been predicting rising inflation due to the huge stimulus measures, but I want to keep that in perspective – when I say I expect higher inflation I am saying that I expect inflation to return to 2019 or higher levels and that the Fed could start to feel pressure to raise rates by 2022. That means 2-3% inflation and rising rates. It doesn’t mean a return to the 1970s or

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Three Things I Think I Think – Happy New Year!

January 4, 2021

Here are some things I think I am thinking about.
1) Happy new year! 2020 – what a strange year. Awful in many ways and weirdly good in others. For asset prices it was a nightmare of a year, turned into a great year:
Global Stocks: + 16.3%
US Stocks: +18.3%
US Bonds: +7.5%
1-3 year T-Notes/Bills: +3%
20+ Year T-Bonds: +18.1%
Gold: +24.8%
On a more personal level this was a year of enormous struggle for many. From the pandemic and its health problems to the constant economic concerns. I won’t help you relive the memories. Instead, let’s focus on the future and try to remember the things that 2020 really highlighted:
The importance of health.
The importance of loved ones, friends, family and togetherness.
The importance of financial stability.
I’ll try my best to write a little more about

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This Man Lost Everything Betting on Stocks

December 18, 2020

The headline of this article is something you’ll very rarely, if ever, see in the financial press. You’re much more likely to hear something along the lines of:
“Joe Schmo made $1,000,000 buying Tesla stock”
“Jane Doe retired early buying Bitcoin”
“If you’d invested $1,000 in Microsoft in 1990….”tual
I will not parse words here. THESE ARE ALL HORRIBLE ARTICLES.

Most of this is survivorship bias that promotes an imprudent gambler’s mentality. Let me explain.
Back in 2015 there was a great study from Longboard called The Capitalism Distribution. They found, unsurprisingly, that roughly 80% of the markets entire gains came from 20% of all stocks from 1989-2015. 80% of stocks had a 0% gain.

JP Morgan came to similar conclusions in a research paper titled “The Agony and the Ecstasy – the

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The 2020 Podcast World Tour Continues!

December 17, 2020

We took a break from the 2020 podcast world tour due to some engine problems in the old RV, but we got things working again and we’re back. Just kidding of course, I have been mindlessly working from home and jumping on Zoom calls every few hours.

This time I spoke with Jack Forehand and Justin Carbonneau from Validea Capital. Jack and Justin are great guys and super open-minded about how to navigate the financial markets. You should check out their website and follow them on Twitter if you don’t already.
In this episode we covered a whole slew of topics including:
Lessons from building my house (check out that mother ‘fer of a door in the background. Took us 7 hours, with a laser level, to get it right.)
How QE works and why people tend to exaggerate its impacts.
The impact of the

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The Psychology of the Stock Market, in One Image

December 10, 2020

What a wild year it’s been. You could say that the pandemic was like an entire market cycle all rolled into one year. A boom, a bust and a boom.
In January I wrote the following piece about how to manage a crazy booming stock market and avoid the temptation to get overly aggressive.
Then just 3 months later I wrote this piece about how to manage a crazy collapse and avoid the temptation to get overly conservative.

But this is the battle we constantly wage with ourselves. Successful investing is mostly a battle between our ears and staying grounded when everyone else is losing it on the extremes. The key is, how disciplined can you remain through the boom, bust, boom and bust?

(The psychology of the stock market in one image)

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Revisiting S = I + (S – I)

November 30, 2020

Warning – this one could put you to sleep if you’re not an econ nerd. I will do my best to translate this into English for those who feel like it’s Chinese. 
About 10 years ago a huge war broke out in Post-Keynesian circles. Modern Monetary Theory (MMT) was becoming somewhat popular, but many people (including some rather prominent Post-Keynesians like Tom Palley and Marc Lavoie) thought they were being a bit loose with some of their descriptions. One of the big debates that raged had to do with the way MMT describes private sector saving. To keep things simple, the dispute had to do with the way MMT claimed that private sector net financial saving was composed of government deficits. Basically, their point was to create the view that the only way the private sector can obtain net

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The Other Side of the Trade

November 8, 2020

Joe Biden will be the next President of the USA. To many people this is happy news. To many others it’s sad news. Like 2016, it was a remarkably close race and our country is going to be divided as we head into 2021. This division could sow the seeds of further division and dysfunction. Or, if we choose to understand that division it can help us compromise and function better.
One of the nice things about thinking of the world from a macro perspective is that you necessarily have to understand both sides of all issues. You don’t see me talking about debt as necessarily negative or positive because, as a macro thinker, I understand that liabilities are just the other side of assets. You don’t see me talking about “cash on the sidelines” because that cash is only on the sidelines because

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The Markets and the Economy Don’t Care About Your Politics

November 6, 2020

In 2017 I wrote a detailed post about how political biases consistently hurt people’s portfolios. In that post I provided some historical data showing that the President doesn’t determine market returns. But I want to be even more direct about this – there’s zero reliable data on this point and the data points that would impact the outcomes are so random that they will render the data meaningless.
Let’s take two recent examples to emphasize this point.
In the post 2009 era we heard a lot about how the economy was weak and the national debt exploded. And this meant that President Obama was a bad President. This was, of course, nonsense in retrospect. President Obama inherited an economic disaster following the Financial Crisis and the national debt blew up primarily because tax receipts

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What the Heck Just Happened?

November 5, 2020

A post-election autopsy of what just happened and whether it matters….
1) What Happened to the “Blue Wave”?
As of this morning it looks like the Republicans will retain the Senate and the White House will likely go to Biden. The blue wave turned into more of a blue ripple. What’s going on here?
I think the big takeaway from this election is that the country is much more moderate than most people assume. There’s no need to over-complicate this. While there are clearly two tribes the majority of people don’t associate entirely with one tribe or the other. Most people don’t want extremism from either side so you end up with something that, statistically speaking, ends up looking very close on average.
2) Why is the stock market surging? 
I mentioned last week that a blue wave might be bad

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Three Things I Think I Think – Grossly Rich Edition

October 28, 2020

Here are some things I think I am thinking about:
1 – Rich People Being Gross. Do you remember that episode of the Sopranos when Tony sends a boat over to a neighbor’s house and blasts Dean Martin music to annoy him? This is, you know, the kind of stuff you only see in TV shows. Oh, but this is 2020 and anything goes this year so it’s no surprise that this is actually happening.
According to the LA Times, former “bond king” Bill Gross has been blasting the Gilligan’s Island theme song towards his neighbor’s house. The two have a long standing dispute over a million dollar sculpture that Gross purchased. It apparently impedes his neighbor’s view.
The choice of song is interesting. Gilligan’s Island was a story about, among others, a wealthy man who was stranded on a desert island. This

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Three Things I Think I Think – Cycles, Hunting Biden and Hacking Life

October 15, 2020

Here are some things I think I am thinking about:
1) When the boom doesn’t cause the bust. The new Howard Marks missive is typically excellent. Howard cites something that I discussed in my April note about the markets and why this market recovery could end up being much faster than many expect. My working thesis for the last 6 months has been that this decline isn’t a “cycle” resulting from a boom. It’s just an exogenous shock. Said differently, the boom didn’t cause the bust. The bust occurred because of an exogenous event. For instance, if a meteor had hit NYC in 2010 the economy would have taken another tumble following the financial crisis. But you wouldn’t have called that 2 year recovery a whole new “cycle”. I think similar thinking should be applied here. Yes, there was a good

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Government Bond Markets Aren’t “Free” Markets

October 8, 2020

This is one of those posts that is operational in nature, but will sound political to some people. Before you send me a mean email please try not to politicize the issue.¹ I hope this is helpful. 
Here’s a question I got from Twitter:
“Cullen, why not let government bond markets be free and not manipulated?”
I see this one a lot and it’s based on a misunderstanding of “free markets” and how they relate to the government. So let’s dive in.
First, currencies are essentially imposed on us. So are governments. You don’t get to choose the currency regime you’re born into or the government you have. Yes, you can alter it and you could even leave it, but most of us get what we get.
Second, governments set the rules of the game and can’t be forced by market forces to do things they don’t want

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