Sunday , October 13 2019
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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 – Banning Billionaires and Other Stupid Ideas

4 days ago

Here are some things I think I am thinking about on this beautiful Wednesday before the Washington Nationals defeat the Los Angeles Dodgers¹:
1) Should we ban billionaires? Bernie Sanders says we should ban billionaires. It’s all part of the growing trend in the idea of wealth taxes that have become popular with some Democrats. It sounds like an okay-ish idea if you’re into progressive taxation, but it’s also an impractical idea that is predicated on misunderstandings. For instance, the majority of extremely wealthy people don’t actually have billions of dollars sitting in their bank accounts. They are paper billionaires who mostly own illiquid assets (like corporations or real assets). If they actually liquidated their assets they might quickly find out that they’re not worth what they

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The Upside of Commission Free Trading

12 days ago

I hate short-termism and anything that feeds on it (financial news, get rich quick schemes, etc). It is, in my opinion, one of the most destructive aspects of any financial plan as it chews up taxes and fees thereby making the average investor more active and mathematically worse performing. Commission free trading feeds on this. It is essentially an incentive to trade more, as these trades, which are quite costly, are viewed as being cost-less.
I bring this up as Schwab and Interactive Brokers join other brokers in eliminating commissions. It’s a move to try to retain or attract customers who view commissions as an important cost. Given that these firms still generate substantial revenue from trading it’s clear that the move is mostly targeted at the high churn customer. This isn’t

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Three Things I Think I Think – Impeachable Ideas

16 days ago

This website is, to a large degree, about impeachment and impeaching bad ideas out of the worlds of finance and economics. So, here are some impeachable ideas I’ve been thinking about lately:
1) Market Cap Weighted Index Funds are “immoral”. WHAT? Here’s an article on MarketWatch where someone who runs a “socially responsible investment” firm says that owning a simple index fund is “immoral”. The basic argument is that owning things like gun makers or cigarette makers in an index fund makes you an immoral person. Look, this is nonsense and I explained it in detail in my ESG article. When you buy stocks on a secondary market you aren’t funding the company. You aren’t making that company any more capable of achieving success. You are literally just buying an existing share of stock from

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Three Things I Think I Think – Repo Madness!

24 days ago

Here are some things I think I am thinking about:
1.2.3. The Great Repo “Crisis” of 2019. If you’ve opened the financial section of the newspaper in recent days then you’ve probably been blasted in the face with lots of confusing jargon about a liquidity “crisis” in the repo market. This sort of stuff really bugs me because it’s a market that is relatively opaque and just confusing enough that people can blow it out of proportion and make it sound like something really scary when in fact it isn’t. So let’s drill down here a little bit.
First, this all starts in the reserve market. If you haven’t read my primer on bank reserves you might want to go sneak a peak. But the basic lesson is that there are two banking systems in the USA. There is a banking system for the banks and there is a

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What is the Value of Financial Advice?

25 days ago

Vanguard released a new study showing that financial advice provides “meaningful” beneficial changes in behavior, performance and financial outcomes. They had previously published a study citing a 3% “advisor alpha”. I am not gonna lie – I always thought that number was BS and probably way too high. But is there a more reliable way to measure this? Let’s see.
Investing is like being healthy – everyone knows how to do it, but implementing a plan and remaining disciplined is difficult. And financial advisors are a lot like personal trainers. We aren’t going to turn you into Warren Buffett. But we will make sure you’re better off than you otherwise would be. In the world of personal training this is analogous to the fact that most personal trainers won’t turn you into Mr. Olympia, but they

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Is This The Hardest Investing Environment Ever?

September 13, 2019

I was on the Stansberry Investor Hour last week  with Dan Ferris discussing the markets and the broader macro environment. My segment starts at 29:30. Topics discussed:
The general macro environment and why growth could remain sluggish.
I was very bullish about bonds 24 months ago at the Stansberry Investment Conference, but that view has changed….
Bond math and why 0% yielding bonds make investing so difficult. FUN!
Why I wouldn’t be surprised if markets don’t do much for a few years.
Why the impatient investor will have a lot of trouble navigating a stock and bond market that generate lower average returns.
Enjoy!

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Why Do Countries Borrow in Foreign Currency?

September 5, 2019

We’ve seen a number of foreign debt based crises in the last few years with both Turkey and Argentina suffering from substantial episodes of inflation related to foreign denominated debts. Without getting bogged down in the specifics of these cases I want to touch on a more general question:

Why do countries borrow in foreign currency? 
I reached out to an international banker I know for his opinion on why this theme seems to keep occurring. Here’s what he had to say:
Many countries have to borrow dollars for both internal and external purposes. If their currencies are not freely convertible currencies and/or are not accepted by the other party or parties in payment for goods or services, the country has to borrow a more liquid currency (usually USD) to meet such obligations. If the

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EVERYONE Funds Their Spending

September 3, 2019

One of the most confused (and confusing) elements of endogenous money is the idea of “funding”. Endogenous money is not a new theory, but it is not well understood even to this day. Even many supposed endogenous money theorists, like the MMT people, misunderstand it and as MMT has gained some popularity I am seeing increasing misinterpretations. So let’s dive in and see if I can’t explain this more succinctly and clearly.

Endogenous money is the fact that anyone can expand their balance sheet from nothing so long as they can find a willing counterparty to agree to that balance sheet expansion. For instance, I can write an IOU on a piece of toilet paper for $100 and as long as someone is willing to accept that toilet paper I have essentially created a new contract that agrees to deliver

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Three Things I Think I Think – Bubbles Edition

August 30, 2019

Here are some things I think I am thinking about:
1) Is there a bubble in passive investing? Michael Burry of Big Short fame, says there’s a bubble in passive investing. The basic argument is that passive investing has skewed the markets and caused small cap value stocks to underperform. Burry, unsurprisingly, is invested in many small value stocks. Soooooo.
This seems to happen once every few years where an active manager blames index funds for their performance. They’re an easy scapegoat, but as I’ve discussed previously, these arguments are mostly nonsense. Aside from the fact that “passive investing” isn’t even a homogeneous thing, there’s the fact that passive investing couldn’t even be a thing without more active investors. So this discussion doesn’t even make sense from the

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Let’s Stop Talking About “Paying Off the National Debt”

August 26, 2019

When we talk about personal finance we often talk about paying off our debts to become financially free. But this is a fallacy of composition. While some households can pay off their debts, the economy actually relies on expanding debt (and assets) to have liquidity and growth. After all, debt isn’t necessarily bad. Yes, there are bad types of debt (like credit card debt which almost always have a negative long-term return), but there are also good types of debt (for instance, when someone borrows to invest in a firm that results in productive output and income for the economy). Further, all of the money in our economy is necessarily an asset for one party and a liability for another. So we rely on a certain degree of long-term risk taking (via balance sheet expansion, ie, asset AND

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Black Hole Monetary Economics

August 23, 2019

Economic nerds are converging on Jackson Hole for their (our?) annual meeting and the big story of the event will be a controversial opinion by Larry Summers, which he laid out on Twitter yesterday. He is presenting a paper in which he argues [gasp] that monetary policy isn’t as effective as the economics profession has been led to believe. This is nothing new to readers of this site and anyone sympathetic to Post-Keynesian economics. I had publicly argued with Paul Krugman about this topic for years and it now looks like they’re coming around. So Summers is on the right track and massively validating an important Post-Keynesian position, but I want to dive a little deeper here because he isn’t going far enough in my opinion. This one’s going to be long, boring and nerdy so you might

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Let’s Get Inverted

August 15, 2019

Alright, nerds. It’s time to put on our thinking caps and fill up our pocket protectors. We’re gonna talk about inverted yield curves.

First things first – What is an inverted yield curve? 
An inverted yield curve is a description of the comparison between 10 year Treasury note yields and 2 year treasury note yields. Those are the only two instruments that matter here. If anyone else says an inverted curve is some version of some other set of instruments then take away their nerd badge. They’re out of the club. So, for instance, if the 10 year is yielding 2% and the 2 year is yielding 2.5% then the curve is inverted by 0.5%. Here’s a current picture:

Inversions are weird because the curve should normally shift upwards. Short maturities should yield lower amounts than longer maturities

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Three Things I Think I Think – Recession Alert Edition

August 7, 2019

Here are some things I think I am thinking about.
1) About this negative yield thing….Interest rates just keep pumping lower. There’s now over $15 TRILLION worth of bonds in the world with a negative yield. Now, negative yields aren’t as crazy as some people think. There’s perfectly practical reasons for yields to be negative (for instance, if you believe inflation will be very low or negative). But check out this price action in 30 year Austrian Government Bonds:

If that’s hard to see, let me explain – that’s a 0.25% yielding instrument that has increased in value by 60% in the last 12 months. This is an extreme case I am cherry picking, but it shows what is happening to some degree across the entire bond market.
The thing is, this is only sustainable in the case that these yields

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How I Think of the Stock Market During its Ups and Downs

August 5, 2019

I’ve previously written about how I like to think of stocks as bonds. Of course, I know this is a bit of overreach, but it’s a useful exercise when putting things in the proper perspective. For instance, I find bonds intuitively easy to understand. After all if you buy a AAA rated T-Note with a 5 year maturity then you know your time horizon, nominal risk, and return. In other words, you know every single element of this instrument when accounting for how it fits into your portfolio. The only way you can make a behavioral mistake when managing this position is by misunderstanding one of these aspects. For instance, if interest rates rise by 1% 1 year after you buy the bond and you get scared out of your 5 year bond because you treated it like a 1 year bond then you just flat out

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Three Things I Think I Think – Rate Cut Edition

August 2, 2019

It’s almost the weekend, folks. Hang in there a few more hours. In the meantime, here are some things I think I am thinking about:
1) The Fed did whaaaat? The Fed cut rates for the first time since 2007. Things are a bit different this time. In 2007 the housing market had been screaming higher and was softening quite a bit. GDP was consistently over 6%. Rates were 5.25% and inflation had been consistently close to 4% for years. This time around inflation can barely get over 2% and GDP is lucky to get over 4%.
One major similarity between the two environments is that the yield curve was flat or inverted. I don’t like to read into the yield curve too much, but one obvious message from the long end of the curve is, when it refuses to rise as short rates rise, bond traders are basically

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Three Things I Think I Think – Negative Rates and Stuff

July 26, 2019

Here are some things I think I am thinking about:
1) Q2 GDP – more of the same. Second quarter GDP came in at 2.1%. Pretty weak. But more of the same. As I’ve long been pointing out – this is the golden age of low and stable growth. It really is a sort of Goldilocks economy. Not too hot, not too cold. Just right. But this general trend has been going on for 10 years now.

2) Negative rates everywhere. There has been a lot of chatter in recent weeks about how bond yields are going negative all over the world. Some people think this doesn’t matter. Others think it’s insane. Others think it’s the new normal. No one really knows and it’s probably more specific to each individual economy than most people think, but one thing that is certain is that this has completely changed the risk

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Congrats on Your Debt Ceiling Increase

July 24, 2019

Hooray! We did it folks. We raised the debt ceiling again and averted a self imposed default on US government debt. And to celebrate this joyous occasion I wanted to write my 3,589th article explaining some of the never-ending misconceptions about government debt and borrowing.¹ And to do that I found this David Stockman interview from last week. Stockman was Reagan’s budget director in the 80’s and seems like a good guy from everything I’ve read. But he’s also become the poster-child for government debt fear mongering. So let’s dive into this interview because he hits on lots of persistent myths:
“The Fed has accommodated the Congress over and over again…” [~2:20]
I don’t like this reasoning. The Fed hasn’t been “funding” the US government via QE. It’s better to think of QE as pure

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My View On: ESG Investing

July 15, 2019

I write this post with some hesitancy because I suspect that it is going to annoy lots of people. This annoys me because the goal of this post is to emphasize the importance of being objective and emotionally agnostic when we’re investing. I’ll put on my flame retardant suit and see how well I can communicate this view without enraging people. Wish me luck. 
ESG investing (environmental, social and corporate governance) is a hot new space in the investment product landscape. The basic goal of ESG investing is to construct index funds and portfolios that are more morally acceptable. So, for instance, you might think that Exxon Mobil (XOM) is hurting the environment so you construct a portfolio that doesn’t own that stock. Makes sense. Or does it? Let’s explore.
1) ESG investing is more

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Seeing Both Sides of the Argument

July 11, 2019

Here was another fun question this week from Tadas at Abnormal Returns:
Question: What have you learned in the past year (or so) that genuinely surprised you? Or said another way, what thing have you changed your mind about recently? 
A: “I’ve started doing this thing where I always assume that other views are right before I assume they’re wrong. For instance, I often hear political narratives about this or that and I tend to defer to my priors first. But now I start by considering all the reasons why that view might be right. Even if I end up disagreeing in the end it’s a nice thought process that helps me better understand the other side of an argument and where it’s coming from.”
My answer was more geared towards a specific change in the way I try to approach things now. I am trying

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Will Active ETFs Save Active Management?

July 9, 2019

Here’s Tadas again with a good question for a bunch of influential financial thinkers, and also me:

Question: Traditional active management is dying a slow, painful death. Is the introduction of non-transparent, active ETFs a potential turning point or simply a finger in the dike of an unstoppable trend?
Answer: “This conversion has been slowly taking place for years. ETFs are a flat out better product wrapper. 10 years ago I said that mutual funds are dinosaur products and that’s been mostly right.
But you have to be careful with ETFs because of this transition that’s occurring. Despite being a better product wrapper they can still be bad product wrappers. For instance, a high fee active mutual fund that simply rolls itself into a slightly lower fee ETF wrapper is no better than the

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Is Value Investing Dead?

July 8, 2019

There’s been a lot of chatter in recent years about the underperformance of value vs growth. This has led some people to declare that value is dead. But is it? Tadas Viskanta recently asked this question of some influential financial thinkers (and also me). Here’s a link to their answers. And here’s what I said:
”I have never liked the idea of “value investing” as a data traceable “factor”. That is, we are all value investors in the sense that we are all looking to buy assets that we can sell at a higher price in the future. Whether you can use historical data to trace when something is undervalued or not is suspect in my view.

It seems like sometimes Wall Street finds these datasets, assigns causation where there is only correlation and wraps it into a neat narrative to sell for high

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Four Fings I Fink I Fink

July 4, 2019

It’s the 4th of July so here’s an extra special three things…
1) Nike is Being Unpatriotic Again?…So, Nike decided not to release a new shoe with the Betsy Ross flag on it. They said that the flag was perceived by some as being a symbol of the slave era. Apparently this decision was influenced by Nike spokesperson Colin Kaepernick. Naturally, everyone lost their shit over this because that’s what we do these days – we lose our shit over things that we shouldn’t be losing our shit about.
Anyhow, Nike was just catering to their base customers (progressive Millennials). It’s good branding and the stock market agreed as NKE jumped 1.5% yesterday. But then Conservatives came out saying that Nike is anti-American and Fox News ran countless hours of free Nike advertising which is exactly what

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When “Bonds” Aren’t Bonds

July 3, 2019

In finance and economics we tend to use oversimplified terms like “money” and “bonds” when the reality is that it’s important to be more nuanced in understanding these terms. That’s why, for instance, I prefer the term “moneyness” when I refer to a money-like instrument. It conveys the proper degree of flexibility about the item. Sometimes cash has more money-like properties than a bank deposit. Sometimes it doesn’t.

We can apply the same type of thinking to the financial markets and in this particular case I will use the bond market. Of course, all bonds are not the same. In fact, many bonds are what I would call “stocks in drag”. Here’s a nice chart from JP Morgan showing the correlation between stocks and certain types of bonds (I added the red commentary):

As I described in

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The Longest Recovery Ever – Does it Matter?

July 1, 2019

Today officially marks the longest recovery in US economic history. At 121 months the 2008-2019 expansion officially overtakes the 1991-2001 expansion. Here’s an overview of the post-war economic expansions:

The most interesting bit here is that the expansions seem to be getting longer. I’ve written about this in the past and the reasons why the expansions seem to be expanding. The key points are:
Monetary policy combined with fiscal policy’s automatic stabilizers are more likely to support any downturn than they were in the past.
The global economy and the US economy in general has become much more diversified which makes it a more stable overall growth pattern.
On the flip side, while this is a long recovery, it’s also a relatively weak one with real GDP coming in at just 2.2% per

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My View On: Student Debt Forgiveness

June 25, 2019

Bernie Sanders and Elizabeth Warren have proposed forgiving all student debt. Naturally, this is somewhat popular and garnering a lot of attention because free stuff is fun and having the government give out free stuff is also very controversial. Where do I sit on this issue? Well, it’s a complex one, but I’ll try to condense my thoughts here.
The Student Loan Market – An Overview
The student loan market is $1.6T spread out over 44MM people. That’s an average balance of ~$36K and a median balance of ~$19K.¹ In terms of broader household debt student loans are a relatively small piece of the pie at just 10% of household debt.

One interesting trend is the recent slowdown in the growth rate of student loans. The financial crisis had a significant impact on student loans as it became

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Three Things I Think I Think – Libra Edition

June 18, 2019

I’ve been doing investment management long enough that it’s only logical that I begin to transition into horoscopes and fortune telling so here we go. Just kidding of course. Libra is not a strangely opaque reference to a kind of scammy pseudoscience. It’s a reference to Facebook’s new kind of money, which, err, hopefully won’t be based on a kind of scammy pseudoscience….
1) What is Libra? Libra is what Facebook is calling their new cryptocurrency. Here’s a short primer on it from Facebook. In essence, Libra is structured to be a fully reserved payment tool that will operate as a form of stablecoin (meaning it will always settle at par, $1). So, Facebook will take in $1 of deposits from Joe Schmo and issue Joe 1 Libra and Joe can use his Libra account just like his deposit account.¹

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Three Things I Think I Think – Soccer Edition

June 15, 2019

“Woohoo, the Three Things we’ve all been waiting for – the soccer edition.” – Said no one ever. 
1) Women’s Soccer and equal pay. The US Women’s National Team has been involved in a longstanding lawsuit against US Soccer over equal pay. Basically, the men’s team makes a lot more on average than the women do and the women argue that this is discrimination.
Now, this is a tricky discussion because there are a lot of moving parts, but here’s where I stand on this.  You have to look at this based on financial performance because that’s the only thing that makes all of this viable. Although the US Soccer Federation is a 501C non-profit their viability is based primarily on the revenue they generate from their operations. For most of the last 100 years the men’s game has been the primary

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Three Charts I Think I’m Thinking About

June 11, 2019

Here are some pretty pictures I think I am thinking about:

1. The USA is bankrupt, part 3,478. It’s been at least 1 or 2 blog posts since I talked about the USA being bankrupt so I would be remiss if I didn’t remind you that the USA is actually not bankrupt at all.
This chart comes to us courtesy of Mary Meeker’s annual internet report. Now, the annoying thing about this chart is how the government is being compared to a corporation. This doesn’t make sense. The government is more like a non-profit. For instance, let’s pretend we live on the Island of Pragcap and the neighboring residents at the Island of Mises.org find us to be intolerable defenders of fiat money and attack us. In response, we form a government to organize our defense and fund that war operation by pooling our

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Three Things I Think I Think – Don’t Piss in my House

June 6, 2019

Here are some things I think I am thinking about:
1) Don’t Piss in my House. YouTube demonetized some people and now Conservatives are up in arms about the first amendment. In case you missed it – basically, there’s some Conservative guy on YouTube who says a lot of inappropriate things about homosexuals and other people. A VOX Media reporter was the target of some of these insults and made a big stink about it. Big enough that YouTube decided to demonetize the YouTuber (meaning, he won’t make money from YouTube ads).
I’ve expressed my view here before. I’m not a huge fan of the growing trend in political correctness, but I also don’t think the internet is a public park giving us broadly public rights of expression. When we upload content to social media platforms we are specifically

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Is the Bond Market Predicting Recession?

June 4, 2019

Sorry for the radio silence here. Real work got in the way of blogging about work. 
A lot of people seem to think that the bond market is forecasting a recession now that yields are declining again and the curve has completely flattened. Is a recession coming? Do you need to jump in your bunker? Do you need to build your bunker? Let’s explore.
I’ve touched on the flattening and inverting curve a number of times in the last few years. Here’s my general view over time:
November, 2017 – The curve isn’t inverted, no recession is on the horizon and you don’t need to worry about recession until well after the curve actually inverts.
March, 2019 – The curve has finally inverted (by some measures) which increases the odds of recession about 18-24 months out, but don’t go panicking just yet.
In

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