Wednesday , October 21 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

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

6 days ago

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

13 days ago

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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Three Things I Think I Think – Muting Trump and Biden

21 days ago

Sorry for the recent radio silence. I’m trying to focus my energy on writing about the markets when it’s pertinent as opposed to just spewing a daily or weekly note for the purpose of generating eyeballs. 
1) Hit the mute button. There is going to be a lot of noise in the coming months about who will win the Presidency and why that person is good or bad for the country. As I’ve noted on many occasions, politics is the absolute best way to wreck your portfolio. The objective fact is that the economy is extremely complex and the political relationship between markets and politicians is even more complex. For instance, you might claim that President Trump is the most important factor in an economic cycle. But what if he has a Democratic Senate and House? What if he has a Republican Senate

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The COVID Price Compression in Technology

September 3, 2020

If I had to summarize my view of the Efficient Market Hypothesis it would be this:
Markets tend to be more inefficient in the short-term and more efficient in the long-term.
One way of thinking about this is that the information we obtain in the short-term tends to be incomplete. So investors have to make informed guesses about market prices. This makes the short-term prices “wrong” at all times.
In my book I talked about one of my favorite ways to think about the inefficiency of markets – price compression. The basic gist of the concept is that most markets (such as stocks and bonds) are comprised of inherently long-term instruments. That is, they accrue their cash flows over long periods of time and so sustainable gains can only be realized in the long-term. The instruments literally

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Three Things I Think I Think – Lumbering Along

August 27, 2020

Here are some things I think I am thinking about:
1) Holy lumber, batman! Have you checked out lumber prices lately? Prices have TRIPLED since the March bottom. It’s one of the most interesting economic developments since the pandemic started. Basically, people started staying home and realizing they wanted to remodel the house. Other people started moving out of big cities driving demand for new construction. Young home buyers tried to pounce on the economic weakness. Lumber mills got shutdown due to the pandemic. And the government printed a few trillion dollars and bolstered disposable income. And here we are.
It’s hard to say how this is going to filter into the economy in the coming months. I remodeled our house over the last 2 years and we placed a $60,000 lumber order in 2019.

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Three Things I Think I Think – Moar Stuff

August 12, 2020

Here are some things I think I am thinking about:
1) Moar Home Owners? There was a funny (and serious) Tweet going around in recent days.

This made me laugh.¹ Homeownership is massively overrated. I used to rent. I miss it all the time. Don’t get me wrong. I love my house. I bought this old beat up house near the beach and I basically drove a bulldozer through it (which was amazing) and then I spent much of the last 3 years building it myself. It’s been fun, educational and truly horrible at times (boy do I have some stories for you…). But the bottom line coming away from my experience as a home owner is that it’s massively more expensive (in many ways) than most people realize. Aside from the mortgage cost and the property taxes you’re constantly paying the maintenance expense ratio.

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The Investor’s Podcast Interview

July 29, 2020

You’re not gonna believe this, but I recorded a Podcast recently. But trust me, this one is really good. I joined Stig Brodersen and Preston Pysh on The Investor’s Podcast. They always ask the best questions and deep dive into topics in a very educational and informational way. In this one we covered the whole gamut of financial topics including:

The main advantage of centralized currencies
Why the risk of inflation is more likely to come from the Treasury than from the Federal Reserve
Why growth stocks typically perform better in a low inflation environment and value stocks perform better in a high inflation environment
Where to find value in international equities
How should investors navigate the current market conditions?
Ask The Investors: What is the relationship between

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Three Things I Think I Think – Bad Tweets Edition

July 23, 2020

Here are some things I think I am thinking about…there are a lot of bad tweets these days. Come to think of it, maybe all tweets are bad tweets. But on the scale from bad tweet to very bad tweets these were some that triggered me this week:

1) 401Ks are actually very good. There was this article in Bloomberg arguing that the 401K is no longer a good retirement vehicle. Seemed like click-bait, but then I started reading it and the numbers were somewhat compelling. The author had really put some effort into quantifying the good and the bad. But the deeper I got into it the more I realized how misleading the assumptions were. In summary, the article argues that the tax benefit of a 401K is no longer worth it because the median user is in a very low tax bracket, is charged high fees, has

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The 2020 Podcast World Tour Continues

July 10, 2020

I know. It’s getting to be a bit much. But I did another podcast. What the hell else am I gonna do on lockdown? Anyhow, I joined Dan Ferris on The Investor Hour to talk about the financial markets. Some of the topics included:

The impact of the stimulus and the state of the markets.
Why Fed Trutherism is dangerous.
Why the stock market rally makes more sense than people think.
How the Fed influences interest rates.
Why future returns could be lower than many expect.
Why patience is going to be the ultimate diversifier in the coming years.
The interview starts at 13:30 here. I hope you enjoy.

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40 Things I’ve Learned in 40 Years

June 30, 2020

I turn 40 years old today. Since I hate birthday presents I figured I’d pass along some of the presents people have taught me over the last 40 years. 
1) Always try to be a good person. This is the most obvious one and also often the hardest one. Life is hard and everyone is fighting their own personal battles. Help them through it by being kind enough to try to understand their battle.
2) Never mistake money for wealth. The person who mistakes money for wealth will live a life accumulating things, all the while mistaking a life of owning for a life of living.
3) Never stop learning. Life is one big lesson and the older you get the more you’ll realize how little you know. Never lose an unquenchable thirst for knowledge and understanding.
4) Don’t do something you love. Do something

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Three Things I Think I Think – Wear a Mask (Please!)

June 29, 2020

Here are some things I think I am thinking about.
1) The Mask Controversy. 
I manage risk for a living. It’s something I obsess about every minute of every day. Understanding risk helps you optimize risk and reward by understanding when things have an asymmetric payoff. We all want to do things that have a high payoff and low amount of risk.
COVID is obviously a very high risk virus. We don’t know exactly how to stop the transmission of the virus, but it is becoming clear that mask wearing is consistent with reduced rates of transmission. Mask wearing is also a very low cost and low risk act. It is, in the current environment, one of the perfect asymmetric trade-offs. So, there’s your trade of the year – if you want life to return to normal and the economy to recover then do your part

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Three Things I Think I Think – Market Bonanza!

June 23, 2020

Here are some things I think I am thinking about.
1) Are the markets losing their minds? 
I’ve tried my best to caution people in recent months over the excessive pessimism of the permabears. There have been numerous comparisons from the usual suspects about how this was the next Great Depression and how the next financial crisis was right around the corner. As I noted in April and is now becoming clear this was very wrong. But there’s still a long road ahead and I somewhat sympathize with people who now say the market has overreacted.
As of now it appears as though COVID isn’t going away any time soon. In fact, it might be spiking again as we head into the second half of the year. This. Is. Not. Good. As I noted in my March market note, the recovery is likely to look be short-ish and

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What if the Stock Market is Exactly Right?

June 5, 2020

(Sorry for the radio silence here. It’s been a crazy couple of weeks between this whole new dad thing, the global pandemic, running a business, STILL building my house and eating my way through the lockdown.  Hopefully life starts to normalize a bit now and I can find more time for writing!) 

I always describe the stock market as a temporal conundrum. What I mean by that is that the stock market is basically a perpetual instrument whose future cash flows are unknown so its price movements end up looking like a series of random guesses about the future. Sometimes it makes overly optimistic guesses and sometimes it makes overly pessimistic guesses. But on average it gets those prices pretty close to “right”.
This is wildly different from something like a AAA 1% 1 year CD, an instrument

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I Did Some Podcasts. They Were Great.

May 15, 2020

I did some podcasts recently that I think you might enjoy. Or you might hate them. I guess it depends. But I figured you might want to give them a listen in any case.

The Alpha Trader Podcast – I joined Aaron Task and Stephen Alpher to discuss the current state of the financial markets including:
Why the recent rally makes more sense than some people seem to think.
Why this isn’t the next Great Depression.
Why value stocks might finally become more attractive.
The risk of future inflation.
Has Buffett lost his touch?
The Pomp Podcast – I joined Anthony Pompliano in a longer and wonkier podcast to discuss:
What is the Fed?
What is the Fed doing today?
Common misconceptions about the Fed.
Gold, Bitcoin and lots of other nerdy stuff.
I hope you enjoy!

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What the Hell is the Stock Market Doing?

May 1, 2020

The stock market just had its best month since 1987. And the economy just had one of its worst months ever. How is this possible? What is going on? Is it all a conspiracy by the Fed? Are stock traders just insane? All of the above? What do we make of all this? Let’s talk about it.

First, the stock market is forward looking. So, while we see everything for what it is, the stock market is looking for what it might become. This ebbs and flows across time. The stock market’s fluctuations are a series of guesses about future outcomes. Warren Buffett always describes this as “Mr. Market”, a man (yes, a man) who is bi-polar, constantly screaming out his opinions in a manic way. Sometimes right, sometimes wrong, but never in doubt.
To better understand how the stock market thinks let’s review

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Letting States Default is Very Dangerous Thinking

April 23, 2020

There’s a growing narrative that states should be allowed to default if they can’t fund their spending needs during the pandemic. Let me be very clear about this:


Get the message? Let me explain.
During the Euro crisis I explained the important difference between the European Monetary Union (EMU) and the USA. The Euro had a series of rolling crises coming out of the financial crisis and they experienced depression-like growth in many countries. Overall, their recovery was much weaker than the recovery in the USA. The primary reason for this is that the member countries in the EMU do not have access to a federal treasury that helps them remain solvent.
This is crucial to understand why the US monetary system works and Europe remains somewhat

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Understanding the COVID-19 Aid Package

April 19, 2020

I was watching CNN the other day when a commentator, discussing the government aid package, said that individuals were only getting $1,200 checks and the rest of the money was going to “big business”. This seems to be an increasingly popular narrative and the confusion over the aid package seems widespread. The new COVID programs are much more targeted towards Main Street than the media has been reporting. I was vehemently against the bank bailouts in 2008 and thought that they didn’t help Main Street nearly enough. These programs are very different.
There’s a lot going on here and the confusion is understandable so let me see if I can unravel this mess and help us all better understand it.
CARES Act and Fiscal Policy (government spending). 
The CARES Act and fiscal policy include the

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Three Things I Think I Think – (Mo Ron)a

April 15, 2020

Here are some things I think I am thinking about:
1) What’s up with the stock market?
There was widespread outrage that the stock market didn’t go all the way to zero in the last few weeks. This image from Mad Money seemed to symbolize the outrage well:

The global stock market is down 20% over the last 5 weeks. It was down 35% at one point. But then things started to look a little better on the virus front. And so the stock market recovered a little, but is still pricing in a pretty bad environment.
That’s basically how the stock market works. While we see the world for what it is the stock market sees the world for what it might become. The stock market doesn’t care that people are getting fired today or last week. The stock market is thinking about how many people might get fired in

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Fed Truthers Are Wrong (Again)

April 10, 2020

Fed Truthers spent much of the last 10 years screaming about hyperinflation. When that turned out to be wrong they pivoted and claimed the “inflation” was all in asset prices. That was also wildly misleading and based on the same underlying fundamental misunderstandings that led them to believe in the hyperinflation narrative.
Unfortunately, now that a pandemic has hit the global economy they’re using the same set of misleading narratives to argue against any sort of Fed intervention in the economy. Most of these narratives are  unsupported by data and facts. In fact, it’s become clear that most of these narratives are really just political narratives from anti-government types who are doubling down on a decade of bad opinions.
Let’s spend some time diving into the details so we can

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This Isn’t the Next Great Depression

April 8, 2020

In my recent research note on COVID I noted two potential scenarios:
Short and painful. Basically, 6 months of lockdown with a modestly fast recovery (~15 months).
Short-ish and painful. Basically, 12-18 months of lockdown with devastating economic pain and a much slower recovery (24+ months).¹
Case 1 happens if social distancing is working, herd immunity is building, treatments are improving, warm weather helps and we can stave off the virus long enough for a vaccine to be developed before the next flu season.
Case 2 happens if the virus turns out to mutate and linger through the summer decimating us like the Spanish Flu did in the Fall/Winter of 1918.
It’s virtually impossible to make an economic prediction based on the outcomes of an exogenous virus, but from what I gather it does

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Pragmatic Thinking on COVID-19 – The Podcast

April 7, 2020

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

April 2, 2020

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?

March 24, 2020

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

March 15, 2020

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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