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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

Three Things I Think I Think – When Things Break

8 days ago

Here are some things I think I am thinking about:
As a housekeeping note – check out my new YouTube channel. It’s short hits on money and finance so people who like the long form reading might not enjoy it as much, but I am giving it a try. Constructive criticism is extremely valuable as I want this to be valuable to people. 
1) Will interest rate risk transform to credit risk? 
One of the things I’ve been hammering on lately is that I think that Fed made a policy mistake by not being more proactive and then overreacting and raising rates very rapidly by essentially pricing in 12 rate hikes in a matter of months. I think all this stuff going on in financial markets is disinflationary at best and deflationary at worst. We’ve lost $35 TRILLION of total market value in the last 3 months.

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Is It Time to Panic?

9 days ago

Here are two short videos discussing the current market environment and how we can think about navigating it.
In short, I am feeling very cautious about the next 18-24 months and I think there’s a very good chance that this downturn is part of a more prolonged economic adjustment that involves digesting the War in Ukraine as well as the COVID boom “giveback”. This doesn’t mean you should panic though. The key to navigating this envionrment is understanding your risk profile, matching your assets/liabilities and maintaining a behaviorally robust asset allocation.
I hope these videos add some perspective.

Part 1:
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Part 2:
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Three Things I Think I Think – 3MM, Student Loans & Passive Investing

15 days ago

Here are some things I Think I am thinking about:
1) Here’s a new episode of Three Minute Money.
This one is “Where Does Money Come From?” I’m still getting the wheels greased here and building up for more interesting and advanced topics, but these are good building blocks. I hope you enjoy it.
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2) Passive investing is ruining the world (again).
Marc Andreessen and Elon Musk were railing against passive indexing over the weekend and that sparked a big debate about the long-term impact of passive investing and how it’s causing all sorts of market and economic distortions.
I don’t want to downplay the potential risk of a few firms having huge amounts of voting rights over  corporate actions, but I tend to think this whole narrative is exaggerated. The primary reason I

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Three Things I Think I Think – 3 Minute Money, Inflation & Elon Buys Twitter

21 days ago

Here are some things I think I am thinking about:
1) Three Minute Money – What is Money?
Here’s the first installment of Three Minute Money, my new YouTube series. My goal is to develop this channel into educational content, current events, myth busting, Q&A and whatever viewers want. The short video content is much more digestible and I think I can communicate these points more succinctly than I do in writing. It also creates a better archived content feed which I think users will appreciate. I love feedback so please let me know what you think or want from the channel as it grows.
Here’s the first one – What is Money? Yeah, yeah, I know. Pretty boring and basic, but how can you make a channel about money without first defining what money even is!?!?!
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2) It’s not the

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Introducing Three Minute Money

24 days ago

I listen to a ton of YouTube and podcasts these days, but have to be honest – I just don’t have the patience or time for the long videos anymore. I know that time is our most valuable asset and so that prompted me to start a new YouTube channel called Three Minute Money. Every video will be under three minutes and will range from educational content to current events to Q&A to who knows? I hope you’ll subscribe and engage with the YouTube community there to help us all get a little smarter with our money.
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A Cautionary Note About Home Prices

28 days ago

This note is intended to provide some perspective on what appears to be turning into an increasingly speculative fervor in residential real estate. I hope it provides some practical views on the current environment. 
It was just a year ago that I was here saying residential real estate is not a bubble and that hyperbolic narratives were going too far. And then in my 2022 annual outlook I said that speculating on residential real estate looked increasingly dangerous. Today, I feel bearish and I think new buyers need to be extremely prudent in navigating their home purchasing decision. To be clear, I am not here to declare a “housing bubble 2.0” or an imminent crash, but my baseline expected return is flat to modestly negative in the coming 3-5 years in an environment that could mirror

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Some Pleasant Arithmetic Behind Falling Prices

29 days ago

A few years ago I wrote a post about how I was having trouble constructing portfolios that could meet a conservative 4% rate of return. With bond yields near 0% across so much of the global bond market it was becoming increasingly common to hear that “3% is the new 4%” withdrawal rate. But with the recent bump in interest rates the story has changed dramatically and as is so often the case, lower prices today mean better returns in the future. Let me explain.
One thing I love about high quality bonds is how they tell you all the information you really need to know about the future. For a high quality bond (like a T-bond) you know the exact maturity date, its current price, its future returns and its credit risk. For example, if you buy a 2 year T-Bill today because you have 2 years of

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Loans Create Deposits & Deposits Fund Loans (Again)

April 19, 2022

One of the most valuable lessons from the Financial Crisis was that banks don’t lend their reserves to non-banks in the way that the textbook money multiplier implied. This had important implications for inflation since it meant that there was little to no risk of high inflation from the Fed’s “QE money printing” because it was operationally impossible for those reserves to leave the banking system and cause more money to chase fewer goods. Thinking of QE as an “asset swap” was a useful distinction during the GFC and COVID because it became clear that the real “money printing” is done mostly by the US Treasury when deficits are run and the Fed just changes the composition of those newly printed bonds to reserves after the fact. But it was also crucial to understand that banks don’t take

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The Fed is About to Make a Huge Policy Error

April 6, 2022

In May of 2020 I was on Anthony Pompliano’s podcast describing the likelihood of high inflation in the coming years and the Fed chasing their tail as this became evident in 2021/2022:

“I don’t see how there can’t be some inflation that comes out of this…I’m not transitioning into a hyperinflation sort of mentality but I don’t see how there’s any chance that coming out of like, say 2021 or 2022, that if the economy is really rebounding that we don’t have three, four, five percent [core] inflation and I think you could have the Federal Reserve chasing their own tail raising rates.”

Now, we shouldn’t blame the Fed for everything. After all, they didn’t cause all of the current inflation. That was mostly caused by trillions in government spending (the Treasury and fiscal policy) and the

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Three Things I Think I Think – Where Did This Idea Come From?

March 25, 2022

Here are some things I think I am thinking about.
1) 60/40 Stocks/Bonds – Where did this idea come from?
Here’s Corey Hoffstein on Twitter asking where did the 60/40 portfolio come from? It’s an interesting question – after all, the 60/40 has become the gold standard of portfolios so you’d think that there’s very strong empirical support for this specific allocation. Except there isn’t really. In fact, when we look at the historical data the exact opposite portfolio (a 40/60) has been the optimal risk adjusted return portfolio.
This isn’t just an empirically supported fact – it makes sense from a basic efficient market understanding as well since the Global Financial Asset Portfolio is approximately 45/55. So it makes perfect sense that a portfolio that’s relatively close to this is

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Is The Fed on the Verge of a Policy Mistake?

March 22, 2022

I’ve never been a big fan of discretionary Fed policy. In my opinion the overnight rate is something that should be automated rather than being controlled by the subjective views of a few people at the Fed. This is a major point of contention in economic and political circles as many people argue that discretionary Fed policy leads to an unnecessarily subjective management of QE and interest rates. I broadly agree with this view.
The basic criticism is that a subjective rate policy leaves too much to discretion and is too data dependent. That data of course is well after the fact so it often leaves the Fed being too reactive. And we’re seeing this again this time around as the data rolls in and the Fed is behind the curve. This was my major concern in early 2020:
“I don’t see how there

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Three Things I Think I Think – Rising Recession Risk

March 14, 2022

Here are some things I think I am thinking about:
1) Are we on the verge of a recession?
My theory about the COVID recession is that it wasn’t really a recession in the traditional boom/bust sense. It was more like a natural disaster or an exogenous shock to the economy because of the way the government shutdown so much of the economy. It was a self imposed recession as opposed to some naturally developing boom/bust. Then the government responded with unprecedented stimulus, the economy snapped back very quickly and that took the boom part of the cycle to its inevitable speculative peak. If you use annualized data  the 2010-2021 boom looks like one big long cycle with a huge blow off at the end.
That set the stage for a very fragile economic environment. Booms can cause busts when the

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The Fed is in an Impossible Bind

March 9, 2022

The inflation story looked pretty clear to me before Russia invaded Ukraine. COVID had caused supply constraints and unemployment, we responded with $7T of government spending and so we ended up with the perfect recipe for high-ish inflation. By the beginning of this year there were signs that auto prices were rolling over, commodity prices were slowing their rate of change and the global economy was fully opening back up and supply chains were loosening. And then boom. Russia invaded Ukraine and commodity prices went absolutely berserk.
This surge in prices is very clearly supply driven, but the problem is that we already had a demand driven inflation problem building before that. So the Fed is now in an impossible position. We’re going to get some very uncomfortable CPI readings in

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Three Investing Lessons from the Russian Stock Market Collapse

March 3, 2022

The Russian stock market collapse has been jaw dropping with a near 80% loss in just a matter of weeks. Here are some important lessons we can all learn from this epic catastrophe.
Lesson #1 – Beware of home bias. 
Below is a great chart from Jeffrey Kleintop at Schwab showing how much investors tend to overweight their home country. Virtually everyone does it. And it makes some sense especially if you can access a market like the USA where a good amount of the domestic corporate revenues come from abroad. But the key lesson here is that even investors in the developed world have a huge amount of home bias in their portfolios which exposes them to unnecessary country specific risk.
We often talk about diversification in an allocation sense, but less so in a location sense or even an

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Three Things I Think I Think – War, Nails & Broken Markets

March 1, 2022

I’m thinking mostly about the war in Ukraine, but here’s some other stuff to distract you (although this will be mostly about the war in Ukraine, sorry). 
1) The limits of government solvency. 
So much to say about the Russian invasion of Ukraine. Honestly, it has me pretty depressed. Maybe it’s just being a new dad and worrying about the world my daughter’s will grow up in. I’m not sure. I’m usually a very optimistic person, but I think Putin has lost his marbles and I don’t see how this ends well unless there’s a coup that overthrows him. And maybe that’s the optimistic case here. After all, the economic situation in Russia is truly catastrophic and there’s no way Putin expected this.  Some of the economic data here is unbelievable. In a matter of days the Ruble has collapsed over

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Three Things I Think I Think – War

February 25, 2022

I’ll break this down into three things, but it’s really just one thing – war. 
1) Is it time to panic? 
Here’s some good perspective of geopolitical conflicts and market returns over the last 75 years from Tom Morgan and BCA research (Tom is a great follow on Twitter by the way in case you don’t already). Long story short, this always causes short-term turmoil with the market generally falling at least 10% and then rebounding over the course of the coming year. Of course, this is an unusual situation given COVID, high valuations and generally frothy conditions coming off all the stimulus of the last 24 months. But the long and short of it is that geopolitical conflicts are a lot more frequent than we might like to admit and the market always overcomes the short-term turmoil.
I think

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Is the Bond Bear Market Over?

February 16, 2022

The Total Bond Market is down 5.5% from its 2021 peak. The 10 year T-Note is down 10.7% from its 2020 high. But with the market pricing in 7 rate hikes and inflation showing signs of topping it’s worth asking if the worst is behind us? I believe we’re getting close to the end of this bond bear market. I’ll explain why.
1) Bond bear markets are a totally different beast from stock bear markets. 
It’s become increasingly common to hear that we should abandon bonds in favor of stocks or other higher risk income paying instruments. But it’s important to understand the difference in risks here. The chart at the right shows the calendar year drawdowns of the stock market vs the bond market. In short, a -10% decline in bonds is very bad whereas a -30%+ decline in stocks is very bad. So we’re

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A Little Love for American Economic Data

February 14, 2022

Since it’s Valentine’s Day I might as well spend some time expressing thanks for my one true love – good data.
I spend an exorbitant amount time compiling data. And I often feel very grateful to live in a country where data is transparent and abundant. And oh boy is it abundant. While there are numerous private data sources some of the very best data sources come from the US government. Consider just a few of the resources here that compile regularly updated data:
I use most of these public resources every day. They are incredible resources that I am very grateful for.
I bring this up because it’s becoming increasingly common to question the validity of the data and the sources. And while I think a healthy dose of government skepticism is healthy I often find myself analyzing these

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Three Things I Think I Think – All About Inflation

February 10, 2022

All I am thinking about is inflation these days. That’s it.
1) How about that CPI report? This morning’s CPI came in at 7.5%, hotter than expected. Not really that surprising. As I’ve been saying, we’re going to see a bunch of these high readings into the Summer. The statistical “topping effect” I’ve been talking about won’t start to really kick in until around June and then it should put a pretty likely top on the year over year data. If some prices fall (commodities and car prices) then the back end of the year is going to see inflation decelerate back into that 3-4% core PCE range pretty quickly. In any case inflation is going to be high all year long.
That said, I do think inflation has likely peaked for the year (or we’re very near the peak) and that the major scare is behind us.

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MMT Failed Its First Big Inflation Test

February 7, 2022

Here’s a NY Times piece calling for a MMT “victory lap”, with an asterisk. It’s an interesting article, but the asterisk seems to be doing an awful lot of heavy lifting here. The basic gist of the article is that the government spent a lot of money and the government didn’t go broke. And sure, on the one hand, the economy is robust. On the other hand, inflation is worrisomely high. Depending on how you pick your narrative you can frame this as either very good or very bad. But does MMT deserve a “victory lap” or is the current economic experience a worrisome sign of how they’d handle a truly scary inflation? My view is the latter. I’ll explain why.
First of all, there’s a lot to be proud about in the COVID policy response. Yes, inflation is high, but the alternative scenario would have

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Bitcoin is a Terrible Form of Money (but a Very Good Store of Value)

February 1, 2022

I have to put on my flame retardant suit for this one because the Bitcoin community is not going to like this. Here goes nothing.
Most definitions of money say that money has to have three properties – unit of account, medium of exchange (MOE) and store of value (SOV). I think this definition is contradictory and the evidence of all financial assets through history bears this out. Stay with me for a few minutes.
Money always has to be defined in a unit of account. That could be Bitcoin, USD, whatever. But the last two components are explicitly at odds with one another. Money cannot be a perfect MOE and SOV at the same time. No asset in human history has ever served as a perfect SOV and perfect MOE over long periods of time because there are necessary trade-offs in the temporal

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What to do When the Market feels Crashy?

January 27, 2022

The Nasdaq is down 14%. The S&P 500 is down 9%. Even the gold standard of portfolios, the 60/40 is down 7%. They’re not catastrophic numbers, but they’re fairly sizable given that we’re only 27 days into the year. At this rate the Nasdaq will be at $0 by July. Just kidding. That’s not how that works. But still, it’s an uncomfortable environment. So what should we do? Here’s a quick check list:
1. Revisit your financial plan and goals.
A lot of people will overreact during market corrections for one simple reason – they don’t have a plan in place. All asset allocation should start with a simple financial plan so you create goals and time horizons for specific assets. I’ve personally become a huge fan of simple bucketing strategies using ETFs because they create behaviorally robust and

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Three Things I Think I Think – When Things Crash

January 21, 2022

Here are some things I think I am thinking about:
1) Grantham calls for a market crash. 
Here’s a provocative piece from Jeremy Grantham saying we’re in the 4th “superbubble” of the last century. I won’t ruin the uplifting read for you, but I will just say this – I don’t love making these sorts of huge extremist calls because this sort of emotionally charged rhetoric tends to lead people to make extreme portfolio moves. If you think a crash is around the corner then you move to 100% cash. And then what? What’s your plan to get back in? Do you get back in? What if the market keeps grinding higher? That’s the problem with taking these maximalist positions in things. You end up with hyper-emotional reactions to the way the markets change over time.
Then again, what if Grantham is right?

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Three Things I Think I Think – Has Inflation Peaked?

January 16, 2022

Hope your long weekend is going well. Here are some things I think I am thinking about:
1) Has inflation finally peaked? 
I am ready to call it. Inflation has peaked or will peak in the coming few quarters.
I’ve discussed the broader picture in the past (see this big piece for details), but the biggie here is an increasingly impactful statistical topping effect that is going to start putting downward pressure on the data in the coming quarters. Used cars are a great example of what’s been happening here and why the big rise in prices bodes well for future rates of inflation. Here is the current state of used car prices in the CPI:

I stretched the data out assuming a 5% increase in annual prices into 2023. The rate of change is already slowing and 5% is a high average rate relative to

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Who Will Buy the Bonds?

January 10, 2022

I like to emphasize that QE is a simple asset swap that happens after the primary asset issuance. That is, the government issues some amount of bonds when they run a deficit. And then the Central Bank implements QE by expanding their balance sheet by creating reserves and then swapping some quantity of those reserves for bonds. The private sector ends up holding more deposits and the Central Bank takes the bonds out of circulation. It is the logical equivalent of changing a savings account (the bond) into a checking account (the deposit). We don’t have more assets in aggregate even though we technically have more of what we call “money”. Another way of thinking about this is if the Treasury had just printed a deposit (instead of a bond) in the first place the Fed would have never had to

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Do We Really Understand Inflation?

January 6, 2022

I recorded a great podcast with Peter McCormack when I was in NYC last month. This one was a little different for me and I think you’ll enjoy it. Peter runs the What Bitcoin Did Podcast, one of the few Bitcoin podcasts I listen to regularly. Peter is a Bitcoin maximalist, but embraces his maximalism without a lot of the brash arrogance that you sometimes find in other Bitcoiners. He’s a great guy and very thoughtful. I loved talking to him.
We covered a whole range of topics. I think you’ll like this one.
TIMESTAMPS:
00:00:00 Introduction
00:01:23 Inflation, causes and potential
00:11:29 Money printing myths & how some Bitcoiners overstate the inflation argument for Bitcoin
00:23:18 Economic growth and inflation
00:29:06 Economic crash, market intervention 

00:42:10 Bitcoin, role

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10 Questions for 2022

January 2, 2022

I don’t love to forecast the short-term moves of what are inherently long-term financial markets, but I also know we live in the short-term and that perspective provides us with knowledge which helps make us more robust to behavioral mistakes. I hope these 10 questions/answers provide you with some useful perspective on the year to come and that your 2022 is a fantastic one.

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The Best of Pragmatic Capitalism 2021

December 28, 2021

Whew. What a year. Pragcap passed 50 million total page views this year. Crazy. I’ve stopped writing as much in recent years mainly because of some personal stuff and getting bogged down building a damn house, but I am hoping to get back to it more this year so stay tuned. In summary, here’s some of my favorite pieces from this year.
Best wishes in 2022. I hope it’s an amazing year for you.
Hope is a great strategy. This was a really personal piece and not finance related, but one of the most important pieces I’ve ever written. I had no idea, but infertility is an increasingly common problem especially if you’re an idiot like me who waits until the geriatric age of 40 to start having kids. But there’s hope. There’s always hope.
Is hyperinflation coming? In late October Jack Dorsey,

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Three Things I Think I Think – Bye Bye Bye BBB

December 21, 2021

Here are some things I think I am thinking about:
1) Bye Bye Bye BBB. 
It looks like Build Back Better is getting nuked. Or, at a minimum, reduced.
I haven’t talked about this bill that much because I didn’t think it was a hugely important short-term economic driver. To put things in perspective, it was estimated to add $150-200B to the deficit in the next few years. The spending was drawn out over 10 years so even though the trillion $+ bill sounds big it was relatively small when broken up over 10 years. For comparison, we ran $3T+ deficits each of the last few years. This bill was not moving the needle all that much in comparison to recent policy that I said was inflationary.
That’s actually part of what makes its demise somewhat shocking. Reports say that Joe Manchin has been

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Hope is a Great Strategy

December 16, 2021

“Hope is an optimistic state of mind that is based on an expectation of positive outcomes with respect to events and circumstances in one’s life or the world at large.”

Five years ago I pulled over on the I-5 freeway sobbing. I couldn’t drive. I had been on my way home from a fertility clinic where I’d just learned that it was going to be hard for us to have children. But I still had hope. And so I called the doctor and asked for a more specific answer:

Me: “I’m a numbers guy. Shoot me straight. What are the odds that this can work?”
Doc: “They’re very, very low. I’d say less than 5%.”

BOOM. 95% odds of failure was like a bomb going off in my heart. This was the moment where I started to lose hope. I’m not a crier. I’m one of those guys who holds in his emotions even when I know I

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