Wednesday , April 8 2020
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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

Pragmatic Thinking on COVID-19 – The Podcast

1 day ago

I joined Taylor Schulte from Define Financial to discuss the potential impact of COVID-19. We covered:
The recent research paper I published.
Two potential scenarios for COVID-19.
Why this recession is more like a natural disaster than a standard business cycle recession.
The temporal dislocation between the economy and financial markets that makes this environment difficult to navigate.
What makes the government unique in times of crisis and how it creates money.
I hope you enjoy it!  More importantly, I hope you are staying safe and healthy.

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Pragmatic Thinking On…COVID-19

6 days ago

Given the severity of recent events I want to start writing more broadly and providing more in-depth research pieces. I’ll be starting to publish long form letters on topics of interest. The series will be called “Pragmatic Thinking On…” This will hopefully provide more detail than the blog posts and provide readers with more in-depth understandings of the topics I write about.

You can find the new letters on the front of the Orcam website under “Letters From Our Founder.” I hope you enjoy them.
The first edition:

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What Do you Do When the Shit Hits the Fan?

15 days ago

Full blown panic has set in. And no one knows when it will end. The uncertainty is like a daily replay of the worst moments of the financial crisis. Except on warp speed. A global pandemic is the type of event that you expect to see in movies, not in reality. And there’s no precedent for how to navigate such an acute and fast economic/market downturn. So, we’re in uncharted territory. What can we do now?
Match Your Liabilities
Good asset management is about asset liability mismatch. What I mean by this is that we have short-term liabilities (rent, mortgage, bills, etc) that require liquid assets (cash, short-term bonds) and long-term liabilities (retirement, college payments, etc) that require less liquid long-term assets (stocks, real estate, long bonds). When we allocate assets the

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It’s Time to Declare War on COVID-19

24 days ago

We’re going to see an economic contraction due to COVID-19. No one knows how deep it will be, but there are going to be sectors of the economy that experience depression-like pain. Restaurants, bars, travel, etc are very likely to see 50%+ year over year declines in revenue. I don’t know how long this will last, but based on past experience with Coronaviruses we should assume that it won’t be brief. We should assume this will last 6, 9, 12 or more months.
Now, all recessions are painful. But most past recessions are just monetary events that indirectly harm people in terms of their actual health. This is different. This is a human health recession. And because of that the response should be completely different. We have to attack this thing like we’re at war with it. And we should throw

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Three Things I Think I Think – Corona Edition

March 5, 2020

Here are some things I think I am thinking about:
1) Is it different this time? 
I wrote in my book that it’s always different this time. No two economic environments will ever be the same, but we can learn a bit from history and better prepare ourselves for what might be coming.
I wrote a short Twitter thread about my general thoughts on the Coronavirus. No one really knows what to expect. So be careful putting too much faith in anyone’s forecasts and narratives. The one thing we know for certain is that many people will shoot first and ask questions later. So don’t overreact. The media and the permabears will, of course, blow this out of proportion because they make a living by keeping your attention by preying on your biases. Maybe the best thing we can do at times like these is turn

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A Crisis is the Worst Time to Learn Your Risk Tolerance

February 25, 2020

When I talk to new clients I always tell them “a crisis is the worst time to learn your risk tolerance”. Unfortunately, far too many people do exactly that. They chase returns during a bull market when investing looks easy and then when times get tough they learn that, while they thought they were chasing higher returns, they were only chasing higher risks. Then they rebalance and sell low to align their portfolio closer to their actual profile except usually too far in the other direction.

Look, I’m not gonna bull shit anyone. This whole corona virus thing sounds scary. According to some people it’s going to wipe out a big part of the population. According to other people it’s going to burn itself out like a common flu once the weather improves. I don’t know. And neither does anyone

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Three Things I Think I Think – Bubbles, Bernie & the Recliners

February 16, 2020

Here are some things I think I am thinking about:
1) Is there another stock market bubble? 
Over the course of the last 6 or 7 years I have consistently shot down the idea that there is a stock market bubble (see here and here for example). My view of a bubble is pretty simple. It is when the price of an instrument becomes unsustainably detached from its fundamentals creating the risk of a very significant price decline (50%+). So, I was pretty interested in this chart going around Twitter this week showing a bubble in the “Disruptors” (basically, big tech). Hmmm. I’m not so sure about this.

(Source: Merrill Lynch)
The first problem with this chart is that it’s basically a handful of cherry picked instruments. The FANG stocks are just 5 entities and the DJECOM index is only 16 entities

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American Living Standards Have Never Been Better

February 10, 2020

Gallup released a series of polls in the last few weeks that contradict the narrative that the US economy is performing poorly and that Capitalism isn’t working for everyone. This is a narrative that I have been trying to convince people of for much of the last 5 years. I’ve called this period of US economic growth the Era of Irrational Apathy because living standards have continued to increase, but the Financial Crisis and a handful of misconstrued media narratives have created the illusion that Americans are somehow worse off.

Now, in fairness, there’s no doubt that things could be better and that we still confront many problems. I believe that one of the greatest mistakes of the financial crisis was allowing ourselves to get scared into beliefs about high inflation thereby foregoing

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Why is Shorting Stocks so Difficult?

February 5, 2020

Did you hear about Tesla? Yeah, it’s up a lot. A lot. A lot. Like, hundreds of percent a lot. Or, 400% from its recent lows. Now, that might not matter much except that that rally now makes Tesla an extraordinarily large business by market cap. At 160B market cap they’re now the 44th largest firm in the world. That’s roughly the same size as McDonalds and larger than Nike. It’s FOUR times the size of Ford and GM. TWO times as large as Ford and GM COMBINED. Whoa. Much of this growth seems to be related to an extraordinary short squeeze that has made a lot of very smart people look very bad.
Now, I don’t pretend to know a damn thing about the future of this stock. Back in another life I was a pretty good stock picker who took advantage of a pretty unusual discrepancy in analyst reports,

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Sorry, but Your ESG Funds Probably Suck

January 30, 2020

I’ve previously discussed ESG investing and how investing in what you view as subjective morality is actually nothing more than old school stock picking. I get it – we want to do what’s right and make money. That’s all well and good, but as it pertains to secondary markets and stock picking this is mostly a fools errand and the investment management industry is taking advantage of this timely topic to sell what is nothing more than high fee active management sold as a do-gooder strategy that has its cake and eats it too. No. Just no.
The problem is, in addition to the fact that secondary markets are the wrong place to enact change, the same basic arithmetic of active investing applies here – the more active you are the more likely you are to underperform a correlated index. In recent

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Do Recessions Need to Happen?

January 29, 2020

There was an interesting Twitter spat that, aside from personal nonsense, raised a pretty interesting question – do recessions need to happen? There tend to be two views on the subject with one side claiming that recessions are a healthy sort of “cleansing” part of the business cycle and the other side tends to argue that policymakers could smooth the business cycle so that recessions become a thing of the past.¹
First, it’s helpful to understand the terms we’re using here because they’re a bit vague. So, when we talk about “business cycles” we aren’t really talking about anything that cyclical. The economy tends to trend, not cycle. Here’s a visual of the fluctuations in NGDP for the USA:

(Nominal GDP is much smoother than most people might think)
For the most part the US economy

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Growth

January 28, 2020

GROWTH. It’s what we all strive for as investors and people. At the end of the day, we’re all just trying to grow and become a little bit better. Better spouses. Better workers. Better parents. Better friends.

The Kobe Bryant death hit me harder than I would have expected. Honestly, I didn’t like Kobe early in his career. He seemed self centered and the sexual assault case only worsened the way I felt about him. But I’ll never forget seeing his apology and how sincerely sorry he seemed. It really felt like he knew he had made a colossal mistake and wanted to learn from it and become a better man (he was never convicted of anything, for what it’s worth). What more could you ask for? And over the next 17 years he redeemed himself as he grew and became a role model and incredible father.

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The Investors Podcast – Contrarian Investing Ideas

January 21, 2020

I joined Stig and Preston again on The Investor’s Podcast to talk about about contrarian market ideas at the start of 2020. Topics include:

Why you can’t truly be a passive investor
Why the stock market is a better inflation hedge than gold
What are the differences and similarities between financial markets and the economy
Is the US government running out of money?
Ask The Investors: Should I invest in a leveraged ETF if I think the stock market will go up over the next few decades?
I hope you enjoy it!

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Let’s Talk About the Utility of Balance Sheet Consolidation

January 11, 2020

I caused a bit of a fuss in my last post regarding MMT and what I believe is an obscure consolidation of government entities in their accounting. But I want to go into this a bit more because it’s useful to understand in a bit more detail.
Accounting is a nice way of constructing and deconstructing the financial world so we can better understand it. Part of the way we do that is by looking at the various components of the world in terms of sectors. There are households, corporations, governments, and then governments inside the governments, corporations inside corporations and households inside households. These are very general views of the world, but they do provide some perspective. For instance, you can consolidate every financial asset and liability in the world and conclude that

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Stop Saying MMT Describes Reality – It Doesn’t

January 8, 2020

I had a good laugh at this Tweet from Jo Michell (who is a very good economist by the way). It seems to be from a UK blog advocating for MMT:

Now, I may not be an expert on sexual intercourse, but I am an expert about money creation and so that qualifies me to tell you that, based on this comment, this guy doesn’t know what sexual intercourse is. The simple fact is that MMT does not, definitively does not, describe the existing reality of the monetary system. Let me explain.
First, MMT assumes that the government is a “sovereign currency issuer” to reinforce the lack of funding constraints.¹ Okay, but this is like assuming that I am really really rich before I tell you that I don’t have a credit constraint. So, this whole narrative around “sovereign currency issuer” is a classic case

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Does War Matter for Your Portfolio?

January 8, 2020

Happy new year everyone. I hope it’s off to a bombastic start. Too early for that joke? Okay. Sorry. Anyhow, with the news in Iran and the potential of another war in the Middle East I wanted to discuss what this may or may not mean for portfolios.
The media will obviously whip you into a frenzy over this stuff. Remember, their job is to sensationalize everything and keep you tuned in. If the news was honest every day it would be roughly this:
“Some assholes did some bad stuff. The majority of people did good stuff. We all ate some food, took some shits and that’s about it. Tune in tomorrow for the same exciting update.”
Okay, that’s not exactly right. But you get the main point – in the grand scheme of things the world doesn’t really change that much every day. But wars are somewhat

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What Should You do When the Stock Market Goes Bonkers?

January 1, 2020

The stock market was sneaky strong this past year. The MSCI All World Index was up 27% in 2019. The S&P 500 was up 31%. Those are big numbers when you consider that the global stock market averaged a return of about 6% in the last 10 years and 8.5% in the last 15 years. It’s often tempting to look at an environment like the current one and think “gosh, I should have been more aggressive, maybe I should be more aggressive in the future?” Now, this might not be an inappropriate mentality. But you have to keep things in perspective. Even if we exclude the 50%+ declines during the financial crisis the MSCI All World Index still suffered six 10%+ drawdowns during the current bull market.

(Source: Portfolio Visualizer)

This is important because, as I’ve described previously, the stock

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How the Democrats Can Embrace Capitalism and Crush Donald Trump

December 20, 2019

I see a growing narrative in some wings of the Democratic party arguing that Capitalism is the cause of all the world’s current ills. This is wrong in a very fundamental way and one which has the potential to hurt the Democratic party’s chances to take back the White House.
In a recent article I described how the economy is essentially a bunch of private businesses that create a capital base that we then leverage into a government. Think of the government like a Homeowners Association. The bigger the wealth base of an HOA the more services that HOA can provide to its various homeowners. This is basically how any government works. And Capitalism helps to create that wealth base that allows us to leverage public policy. If government is a general form of “Socialism” then Capitalism helps

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A Pragmatic View on the Existence of Billionaires & Government

December 17, 2019

I’ve spent a lot of time defending the government on this website. And I’ve also spent a lot of time defending capitalism on this website. To me, they are both good when they work together. Recently, I’ve discussed how this might not be occurring optimally and the political left has pilloried billionaires as the primary culprits. This is true to some degree. And it also taken out of context to some degree.
The following things are all true in my opinion:
Billionaires are good in the sense that most of them exist because they’ve created a good or service that added value to society and the firm they created was valued higher by the market.¹
Government is good in the sense that it will spend on social needs that do not have an expected positive net present value (NPV). Ie, the government

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Intangible Returns

December 16, 2019

Financial professionals love to talk about beating the market. I won’t bore you again with why this is the wrong mindset for most people when they allocate their savings. In fact, I want to discuss how underperforming is sometimes a good thing.
I’m in the 8th inning of a home remodel that turned into an almost entirely new rebuild of the home. It’s been three years in the making. It has, at times, consumed every ounce of my mind and body. Funny thing is, real estate listing websites say I’ve already made a lot of money on the house before even reassessing. I suspect this is how most people think of their real estate purchases – they remember the purchase price and the sale price and forget all the negatives in between. I know the financial truth on my house – when you account for the

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Three Things I Think I Think – More on Socialism

December 9, 2019

Here are some things I think I am thinking about:
1) Scandinavia really isn’t Socialist. I got a lot of emails over the weekend about my piece on Socialism and Capitalism. One of the common themes was about how “Socialist” Scandinavia is. This is a tired old myth. Scandinavian countries are predominantly Capitalist with an average of about 33% of wealth owned by the state.¹ Some are quite high (like Norway at 56%) and some are quite low (like Denmark at 12%). But even countries like Norway are actually just state run Capitalist systems because the government takes large stakes in public companies and runs them based on a shareholder value basis.
In any case, you can make an argument that Norway is relatively Socialist, but the others are all predominantly Capitalist systems run for the

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My View on “Late Stage Capitalism”

December 6, 2019

I am going to spend some time trying to put the debate about Capitalism and Socialism into perspective here. But before we can do that I need to properly define the terms because they’re used in a rather lazy manner in the mainstream media. So, let’s establish some understandings:
Capitalism – a system in which the means of production are privately owned and the economic benefits of that production are distributed by the owners and regulated by the government.
Socialism – a system in which the means of production are owned by society as a whole and distributed based on contribution while being regulated by the government.
It’s worth noting that Capitalism and Socialism don’t really exist in a pure form. Pure Capitalism would have no government at all and all private property would be

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Do Rich People Debunk MMT?

December 4, 2019

Someone emailed me this Tweet about MMT asking whether I thought it was accurate or not:

Okay. Disclaimer – I like a lot of what MMT says. But they take this funding narrative too far and I think it discredits their other more important narratives.
This Tweet gets to a pretty fundamental problem in the MMT narrative. MMT people like to say that taxes don’t fund government spending and that the government doesn’t need income to spend. This is wrong in a rather basic sense. After all, in theory no one needs income to spend because we can spend on credit. As long as you have a willing creditor you have spending power. At the aggregate private sector level all the things MMT says about governments are true – they don’t pay back their debts, they expand their balance sheets endogenously,

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Let’s Talk About Banks and Magical Money Trees

November 26, 2019

Banks aren’t magical money trees. But banks also create money more independently of Central Banks than most economists think. 
So, there was a big blow up in economic circles last week when David Graeber published this piece basically claiming that mainstream economics is a mess that needs to be blown-up and totally overhauled. My personal view is that laypeople tend to go overboard with these criticisms of economics. They’re usually empty nonsense like “but economists didn’t predict the financial crisis!!” Yeah, almost no one predicted the financial crisis and it turns that the people who did predict the financial crisis have been predicting financial crises for most of their lives. In any case, the economy is extremely complex and while mainstream economics might be imperfect it’s not

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Three Things I Think I Think – Tesla and the Broken Window Theory

November 22, 2019

Here are some things I think I am thinking about:
1) Tesla broke some windows. The unveiling of the Tesla Cyber Truck was a smash. Literally. They installed bulletproof windows on the truck and somehow didn’t properly test the vehicle’s ability to sustain damage before doing a live demo in which they busted the window with a small bowling ball. It perfectly summarized what appears to be a flop of a product unveiling.
I am not gonna lie – this really disappointed me. I have no stake in Tesla, but I’m rooting for Tesla to succeed mainly because I just generally like the way Musk is pushing the limits on what we can do in so many different spaces (no pun intended). But this one seems waaay out of touch.
I’ve driven trucks for most of my life.¹ I drive them because they’re simple and

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Three Things I Think I Think – I’d Like to Report a Mass Murder

November 13, 2019

Here are some things I think I am thinking about today:
1) Hello, 9-1-1: I’d like to report a mass murder. Here’s a JP Morgan note that has been going around twitter the last 24 hours. I don’t have much to say here other than this – most of the people on this list have a few things in common – political bias and/or a permabear bias. So, don’t be biased or one day you might end up on a list like this getting carried out in a body bag.

(Thoughts and prayers – image via @nickatfp)
2) Here’s the worst take ever on Twitter. The socialism movement seems to be gaining traction. Unfortunately, it seems to be largely due to people presenting fake news about capitalism. For instance, here’s Robert Reich on Twitter declaring that all billionaires are basically defrauding the system:

This is over

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Let’s Talk About Sectoral Balances

November 9, 2019

I am a big fan of looking at things through the lens of the sectoral balances. For instance, I sometimes post this chart on this website which depicts the government’s balance vs the non-government.

(This is a stupid chart without a lot more context)
It’s a decent (though incomplete) depiction of the private sector’s balance versus the government’s position and it’s helpful to understand because, mainly, if you believe the private sector is too heavily indebted, then the government’s position might be insightful. For instance, I would argue that the late 90’s were a period of concern because there was an equity market bubble and heavily leveraged corporations combined with a government running a surplus which created recession risk. That’s not necessarily a bad thing. After all, if

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Three Things I Think I Think – Has The World Gone Mad?

November 6, 2019

Here are some things I think I think about Ray Dalio’s provocative piece titled “The World Has Gone Mad and The System is Broken”.
So…Ray Dalio wrote a short piece that is getting A LOT of attention. It basically implies that asset prices are insanely overvalued and the markets are due for a big “paradigm shift”. I think he makes some cognizant points, but I also don’t agree with the basis from which he makes some of these points. Let’s see if I can explain:
1) Are Central Banks “pushing money” on people? 
The whole premise of the first paragraph is that Central Banks have implemented QE and forced money onto people which has resulted in a lot of asset chasing.¹ I’ve never understood this mentality to be honest. When the Fed engages in QE they expand their balance sheet and buy a bond

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The Permaeverything Approach

November 4, 2019

I’m a permaeverything. Not a permabear. Not a permabull. A permaeverything. What the hell does that mean? It means I try to always maintain a relatively balanced exposure across my financial assets. I am never too heavily leveraged to stocks. Never too heavily leveraged to bonds. Never too heavily leveraged to cash. I am balanced. I am permanently bullish AND bearish about everything to some degree. 
The Permaeverything mentality is essentially a type of Permanent Portfolio or All Weather Portfolio. That is, you’re never all in on anything. So you’re never so exposed to any specific allocation that you expose yourself to excess behavioral risk.
I’ve always loved the idea of a Permanent Portfolio because it makes you relatively agnostic to short-term market moves. For instance, in my

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Three Things I Think I Think – The Nats Win!

November 1, 2019

Here are three things I think I think about the Nationals winning the World Series¹:
1) Patience. Prior to the 2019 MLB season the Nationals were 18/1 odds to win the World Series. It was always a long shot, but there was never doubt that this team was pretty good and arguably the best team in the National League East. After all, despite losing their superstar, Bryce Harper, they’d been wise in picking up Patrick Corbin and Anibal Sanchez and bolstering their main 2018 weak spot – starting pitching. But even these changes gave them just a 5% chance of winning the whole f’in thing. But they also weren’t a bottom of the basement team.

(Nationals’ Odds to win the World Series – Predictwise)
On May 23rd the Nats lost their fourth game in a row against the Mets dropping their record to

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