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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

Understanding the Modern Monetary System – Updated!

June 29, 2023

It’s been over 10 years since I published Understanding the Modern Monetary System, one of the most widely read papers in the SSRN research database. I published this paper because I was having trouble finding a succinct but thorough explanation of money and macroeconomics during the financial crisis. Further, many of the mainstream explanations of concepts like QE, banking, inflation and money appeared outdated at best and wrong at worst. Since then most of the concepts in this paper have been adopted by the mainstream or updated to account for the concepts. I am extremely proud of how well this paper has held up over time, but it needed some updating.

We’ve added sections on inflation, monetary policy, cryptocurrency and much more. It’s cleaner, even more succinct, less narrative

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We’re Moving!

February 27, 2023

Thanks to everyone who has read Pragmatic Capitalism for the last 15 years. I’ve loved writing this blog, but we need to consolidate our financial content going forward. It’s become too difficult publishing content to so many different platforms and when Google killed Feedburner it compounded the problems.

We’ve created a new, FREE newsletter service called Discipline Alerts. It will push macro research, outlooks and educational content to you using the same format as the old Feedburner RSS feed. You can subscribe here if you’re interested.

This will better streamline all of our content and help us provide more organized, actionable and educational material in one place. I’ll continue to publish some personal content here, but all the financial content will be consolidated thru

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Has Housing Bottomed?

February 22, 2023

There was a glimmer of hope in the housing data from January. The stock market rallied sharply and there was a lot of commentary about how the economy is headed back to boom time. I am not so confident and I still firmly believe that the “muddle through” scenario I mentioned in my full year outlook is the baseline. And I would argue that the asymmetric risk to this outlook is to the downside, not the upside.

Housing is the Economy.

I hesitate to attribute economic growth entirely to one sector, but the US housing sector is so large that it has a disproportionately large impact on baseline growth. So when housing moves a lot in one direction or the other it has a disproportionate impact on aggregate growth. This was the basic gist of the famous Ed Leamer paper which was

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The Economics of a United States Divorce

February 21, 2023

Congresswoman Marjorie Taylor Greene got a lot of attention over the weekend when she stated that the USA needs a “national divorce”:

I try to remain as objective as possible when I am writing here so I am going to apologize in advance if this post sounds political, but secession is a pretty political topic so let’s dig into the economics of the matter because I don’t think MTG has thought this one through.

First, I should start by making it clear that MTG’s comments are highly extremist and even more unlikely to come to fruition. While it’s a cute sound bite that gets a lot of media attention the economics of a divorce are disastrous. Let me explain.

The old joke is that divorce is expensive because it’s worth it. But the problem with this thinking is that the divorce

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Three Things I Think I Think – No Landing

February 16, 2023

1) Soft Landing, Hard Landing, No Landing?1

The COVID years just get weirder and weirder. The COVID hangover is especially weird. We’ve all been hoping for inflation to decelerate, but it remains stubbornly high. Meanwhile the economy is decelerating across the board, but remains…surprisingly strong.

You see it in almost all the data. For example, below is a chart of Real GDP and payroll growth on a one year basis. You’ve had a pretty significant slowdown in both. But they’re not going negative!

So now people are starting to talk about the “no landing” scenario – a situation in which the plane just continues to fly without ever landing.

Personally, I still think this has a long ways to go. The math on the economy isn’t that complicated in my opinion. When mortgage

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The Investor’s Podcast: ESG Investing, The Death of 60/40 and More

February 13, 2023

I joined The Investor’s Podcast again this week to discuss a wide range of topics. The YouTube chapters in the interview are linked below and you can listen to the full audio here.

I caught some flak for my comments on ESG investing and whether Central Banks should have a climate change mandate. I didn’t answer this as clearly as I’d wished, but my general comments were accurate in my view. In short, the Fed (and other Central Banks) operate with very blunt instruments. Fighting climate change requires a more targeted and precise policy approach. This is better suited, in my opinion, with regulations and fiscal policy. The Fed could nudge firms in the right direction there, but I think it would be a mistake for the Fed to start using traditional monetary policy tools with a goal on

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I am Not a Dog Person Anymore

February 7, 2023

When I was 10 years old I read the classic “Where the Red Fern Grows”. It’s a book about a young boy who adopts two dogs who eventually get into a fight with a mountain lion and die. I hated that book because it was the first time I was really confronted with the concept of death in a deeply emotional way.

When I was 30 I was bike riding through the Englischer Gartens when I came across a flock of sheep. The sheep were at the edge of a road and one decided to cross the road in front of us. And then, as if they were programmed robots, the other hundreds of sheep followed. I turned to my wife and said “this is what financial markets are like” – herds of sheep robotically chasing prices. Then, out of nowhere, a small dog came whirling around the corner and circled the sheep. The dog

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FAQ Answers – Part 2

January 31, 2023

Here’s the second batch of answers from the Ask Me Anything. If you missed part 1 you can catch it here.

Topics include Bitcoin, ESG investing, the debt ceiling, the death of 60/40 and more.

I hope you enjoy this and if you do please like and subscribe to the YouTube channel and we’ll do more videos in the future.

Video chapters:

00:00 Introduction

00:20 How should we think about Bitcoin?

02:48 Is the debt ceiling a legitimate default risk?

05:45 What’s your view on ESG investing?

09:19 Is inflation necessary?

13:17 Is the 60/40 stock/bond portfolio dead?

16:55 How should an older or more conservative investor think about navigating the volatility of the financial markets?

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Three Things I Think I Think – Bankrupt Ideologies

January 24, 2023

1) The Competition for Worst Ideology is Heating Up

There’s a battle of bad ideologies going on around the debt ceiling debate. Unfortunately, this is a microcosm of what has happened in American politics – the centrists have been silenced as both fringes scream over them. And it’s the fringe thinking that gets all the attention these days.

In the case of the debt ceiling we’ve got fringe thinkers on the right actively threatening to let the USA default on debt. And on the other side you have an equally crazy response where MMT advocates are saying we should send the military to the Federal Reserve if they don’t accept their trillion dollar platinum coin concept.

That’s the state of discourse in the USA. It’s gotten so bad that we have to resort to minting a trillion dollar

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FAQ Answers – Part 1

January 20, 2023

Here’s the first batch of answers from the Ask Me Anything. We covered a lot of ground in here including my view on factor investing, the FIRE movement, asset allocation in retirement, how bonds work and Fed policy.

I hope you enjoy this and if you do please like and subscribe to the YouTube channel and we’ll do more videos in the future. If you have another question feel free to leave it here and we’ll answer it in Part 2.

00:00 Introduction

00:05 What has caused stocks/bonds to become correlated?

02:14 Could we experience negative rates this year?

03:45 Would you take the job as Fed Chief?

05:02 Can you recommend books to learn macro?

07:45 Can you explain constant maturity bond funds?

09:55 What is bond duration?

12:23 Will the next 40 years of

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Ask Me Anything (Comments Open!)

January 13, 2023

We are going to do a new 3 Minute Macro “Ask Me Anything” edition. It should be out next week or so.

Please use the comments below to ask me anything and if you ask a really, really good question I’ll include it in the video. Each question will include up to a 3 minute response so anything is fair game.

You can also email me here if you prefer that they be privately submitted.

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Three Things I Think I Think – Silly Debates

January 13, 2023

Here are some things I think I am thinking about:

1) The 3 Most Important Charts Today

We posted a new 3 Minute Macro video about the three most important investing charts today. I discuss last week’s employment report and why it changed market sentiment so substantially.

Long story short – falling wages reduce the odds of a 1970’s style outcome. I’ve been saying that for the last few months, but the data is really starting to confirm that view. Yesterday’s update to the Atlanta Fed wage tracker also confirmed this.

On the other hand, there was some worrisome data in the employment report, including the fall in temp help and hours worked. These would typically be the leading indicators of a softening labor market as employees first move to reduce hours and temp workers

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Three Things I Think I Think – Happy Disinflation Year?

January 5, 2023

Here are some things I think I am thinking about:

1) 2023, the Year of Disinflation?

In my annual outlook I said that 2023 was going to be the year of disinflation. My guess is that Core PCE ends the year around 3%. That’s higher than the Fed’s 2% target but it’s all moving in the right direction.

I was pretty pleasantly surprised to see that James Bullard from the Fed, has a similar view of things. In a recent presentation he said that 2023 was likely to be a year of disinflation. And like my outlook, he said that a 5% overnight rate would be sufficiently restrictive. This was the key chart from his presentation which shows how the policy rate and Taylor Rule are likely to converge as the year moves on.

So, on the one hand I am happy to see that Fed officials have

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The Best of Pragcap in 2022

January 3, 2023

Here are some of my favorite posts from 2022. It was a busy year with my young kids so I didn’t write as much as I had hoped, but one of my goals is to start writing a lot more this year. I’ve missed it. In any case, here’s some of my favorites from this year. I hope 2023 is a great one for you.

1) What to do When the Market feels Crashy?

This post was written almost a year ago as the bear market was starting. It touches on some important lessons to remember about bear markets and how to better navigate them. It’s even more relevant today than it was then.

2) A Cautionary Note About Home Prices

I might go into house flipping. I was bearish housing before the 2008 housing crash, turned bullish in 2012 and then wrote this cautionary piece on housing in April 2022, which

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2023 Investment Outlook (Video)

December 29, 2022

Here is our 2023 investment outlook. I did this a little differently this year by providing a scenario analysis with different probability distributions. I think this is a much better way of analyzing potential outcomes and will allow you to better understand the range of outcomes.

My overarching view is that the range of outcomes still remains very wide because we’re digesting the COVID boom which is evolving into a bust. This means that portfolio concentration is likely to be a high risk endeavor and that broad diversification remains wise as we navigate this strange period. The Discipline Index was bearish in 2022 and still remains bearish. It’s hard to see that changing unless stocks fall substantially and/or the economy stabilizes significantly. On the other hand, markets are

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Needs, Wants and why We Always Feel Unfulfilled

December 21, 2022

By the age of 30 I was financially independent. My business was self sustaining, I enjoyed my work immensely and no one could tell me what to do. I wrote a best selling book. I wrote some great research. I spent years training for and finished a full Ironman despite having never run more than a few miles just a few years before that. I had a dreamy marriage to a woman who is way out of my league. All of my needs were taken care of. Life had transitioned into what I wanted. But as I get older I feel that the things I want are endlessly unquantifiable and so after years of feeling like I understood what was “enough” I began to increasingly fail to grasp what that meant for me.

This all multiplied when I had children. Children mess up your entire concept of “living standards” because

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What Are Eurodollars and Why do they Matter? (Video)

December 20, 2022

Here’s a new edition of 3 Minute Macro on the topic of Eurodollars. Eurodollars are a somewhat opaque part of the financial world, but have become increasingly important in the last few decades as dollar deposits outside of the USA have grown. In this video we discuss the basic concept and why Eurodollars are important. I hope you enjoy it.

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Three Things I Think I Think – Housing Risks

December 14, 2022

Here are some things I think I am thinking about:

Housing, housing, housing. If I had to distill my current macro outlook down into a sentence or two it would be “watch everything housing related”. Housing is going to steer the US economy and inflation in the coming 24 months and the current high mortgage rates create an unusually high level of risk to both house prices and consumer demand. But let’s dig into this a little deeper.

1) Shelter and inflation.

Today’s CPI report was much better than expected. And although it’s better to focus on core PCE (because it’s a broader index with less housing skew) the CPI is still widely followed and influences policy perspectives.

The interesting thing about CPI is that it uses Owners Equivalent Rent for shelter prices. And this

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New Podcast Interview – The Bitcoin Layer

December 10, 2022

I joined Nik Bhattia on the Bitcoin Layer podcast to discuss the outlook for the macroeconomy in 2023. This interview includes:

1) The general economic outlook for 2023

2) Why 2023 is likely to be a year of disinflation

3) Is the current environment more like 2008 or the 1970s?

4) How the current environment could evolve into more of a credit crisis

5) Portfolio strategies for navigating the next few years

6) How to assign allocations to stocks, bonds and other assets inside of your portfolio across time

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Three Things I Think I Think – Who Can You Trust?

December 6, 2022


The big story of the week remains Sam Bankman-Fried and the collapse of crypto exchange FTX. I haven’t written much about this topic because, well, crypto is not nearly as important as the amount of airtime it gets. It’s 0.5% of the world’s financial assets, but seems to get 50%+ of the media airtime. Additionally, I don’t believe that 100+ volatility assets should be a large part of anyone’s savings so in the scope of my asset management approach crypto is a fringe speculative asset (like venture capital) and not a core part of common sense portfolio construction.

That said, billions of dollars were lost here so I don’t want to downplay the real losses involved. I suspect it’s especially important here because the majority of losses were incurred by people

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The Business Brew – The Portfolio You Need

December 1, 2022

Sorry for the radio silence recently. I went on my first vacation in two years over the Thanksgiving week. But now we’re back and getting ready for 2023.

I was fortunate to sit down with Bill Brewster who runs the excellent Business Brew podcast. In this episode we talked about all things macro and why macro matters more than ever. My favorite part of the discussion was about the portfolio you need vs the portfolio you want. I am obviously a big believer in behavioral finance and rejecting the idea of trying to “beat the market”. Most people approach asset management trying to design the portfolio they want instead of the portfolio they need. And that can you into a lot of behavioral trouble as you discover that the the portfolio you want often results in taking risk you don’t

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3 Lessons From the Collapse of FTX (Video)

November 17, 2022

In this video we discuss the collapse of FTX and the crypto markets and what we can learn from this bear market.

This video includes:

1) Understanding volatilities relative to probable investment returns.

2) Learning to think in a first principles way.

3) Reducing or eliminating behavioral biases through systematic investment processes.

I hope you enjoy it.

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Do We Implement Portfolio Construction Completely Backwards?

November 15, 2022

I’ve had three big investing epiphanies in my investing career.

The first big epiphany was that macro matters much more than micro. The direction of the river is much more important than the strength of the swimmer. Anyone can float down a river, but trying to fight the current is often a losing battle.

Back in the early 2000’s I used to run a stock picking strategy that unknowingly took advantage of the “overnight effect” in stocks. I generated very high returns during a period when the S&P 500 was flat, but the strategy completely stopped working in 2008 when the financial crisis occurred. I thought I was a genius for many years, but one of the smartest things I ever discovered was that…I am not that smart.

It was at this time that I realized the importance of macro

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The Triffin Dilemma and Why it Matters More Than Ever (Video)

November 11, 2022

Here’s a new Three Minute Money video on the Triffin Dilemma and why it matters more than ever.

The basic gist of the video is that the reserve currency issuer in the global monetary system has an inherent conflict. The rest of the world needs their currency not only for foreign trade, but for reserve maintenance and commerce since that currency operates as the safest and most widely used currency. But the reserve currency issuer also needs to be vigilant about currency issuance so as to avoid devaluing the currency.

This is especially important today because the USA has an inflation problem so the Fed is tightening monetary policy and the Treasury has tightened fiscal policy. But the USD is surging, in part, because dollar demand is surging because the rest of the world needs

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Three Things I Think I Think – Is This The Bottom?

November 8, 2022

1) Is the bond bottom finally in?

I’ve been surprised/wrong about how fast the Fed moved this year. And while I’ve been pretty negative about virtually all asset classes all year I’ve been surprised by how badly bonds have performed. That’s almost entirely a function of the Fed moving so fast, but it is what it is. I think they’re making a policy mistake and that they’ll be back at a 2-3% Fed Funds rate in the coming years, but we’re going to have to be patient while things play out. After all, I am constantly harping on the fact that bonds are, on average, 5-6 year instruments so there’s no point in pancking over 1 year performance if you own the 5 year instruments for a specific time horizon in your portfolio. That is the basic point of All Duration investing – match specific

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Three Things I Think I Think – Changing My Mind

November 2, 2022

The last few years have been jarring in numerous ways. They’ve also forced me to reconsider how I help people navigate the financial world. Here are some things I’ve recently changed my mind about.

1) Am I a Permabear? Someone on Twitter was trolling me for being too bearish this year. It’s true – I’ve been bearish all year in large part because my primary macro index, the Discipline Index, has been indicating an underweight stock position all year. It’s consistent with an environment in which valuations remain frothy and macro conditions remain challenging. This likely means that expected future returns are relatively low, especially in equity markets.

The downside of this is that there haven’t been many places to hide this year so even though equities have been terrible, most

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Are the Bond Vigilantes Back?

October 26, 2022

Bond vigilantes reflect the idea that bond investors can attack a government debt market and dictate terms that the government wouldn’t otherwise desire. I’ve never liked this concept as I think it misconstrues the power dynamic at play in sovereign bond markets so let’s dig into this some more given the relevance in today’s high inflation environment.

In a recent Three Minute Money video I explained how interest rates are set. The analogy I’ve always liked is a man walking a dog. The Fed is the man and the dog reflects the long end of the bond market. The leash can be thought of as reflecting the yield curve where the Fed has absolute control at the short-end and lets the dog wander at the long end (long bonds). The government and Central Bank are currency monopolists and if they

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The Best Places to Invest Cash Right Now (Video)

October 20, 2022

In this new episode of Three Minute Money I discuss some of the best options for investing cash right now. A lot of banks are still yieldiong 0% on deposits and the best high yield savings accounts are still only offering 3% or so, but if you are willing to do a little legwork you can get over 4% with no principal risk.

I discuss some of the basics of how money market funds and savings accounts work and then offer a few options for how to maximize the return on your cash.

In my opinion this is one of the most important factors in achieving financial success. As you might know from my recent paper on “All Duration Investing” the cash and short-term buckets are the key components of your asset allocation. They are the buckets that give you certainty in a sea of economic

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TD Interview: Inflation and Future Credit Risk

October 14, 2022

Here’s my interview with Oliver Renick and TD from yesterday. I brought my sledge hammer with me to demonstrate how Fed policy is currently operating. I also go into detail about the current macro environment and the risks going forward. Specifically:

This environment is transitioning from an interest rate risk environment to a credit risk environment. This means credit markets could reamin under duress as benchmark interest rates adjust higher and debt gets reassessed at these higher rates. This is a credit and housing driven downturn. That means it’s going to be more of a disinflation story in the future and a longer drawn out economic event. The Fed can’t pivot at this point because they’ve already turned over the ball. I think they’re way behind the curve on inflation and this

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The Emotional Balance Sheet Podcast – The Most Important Financial Question to Ask

October 13, 2022

From Paul Fenner at The Emotional Balance Sheet Podcast:

Am I providing my family with the best possible life I can? That was the question that Cullen Roche, an accomplished author, writer, and expert in global macroeconomics, behavioral finance, and monetary theory, brought to our attention during our conversation.We also discussed the topic of inflation, what it is, how to understand it, and where it is going.  Do you ever wonder why the US government is not bankrupt because of the national debt?  It’s because the US government is not your average household, and we talk about why that is too. Cullen and I also discuss the critical aspects that a wealth advisor provides, which do not involve stereotypical investment management.  There is nothing sexy about helping people to

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