Sunday , November 17 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 – I’d Like to Report a Mass Murder

4 days ago

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

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

This is over

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Let’s Talk About Sectoral Balances

8 days ago

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

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

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

11 days ago

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

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The Permaeverything Approach

13 days ago

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

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Three Things I Think I Think – The Nats Win!

16 days ago

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

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

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Three Things I Think I Think – This Might Make You Mad

25 days ago

Here are some things I think will make you mad to think about:
1) Did Adam Neumann deserve to make a billion dollars? I asked a controversial question on Twitter yesterday – did Adam Neumann, the recipient of a billion dollar payout from suffering WeWork, deserve to make a billion dollars while the company struggles? Some people were furious about this. I very much get the anger and I didn’t mean to make people mad. After all, I just want to make people happy by discussing reserve accounting and quantitative easing so inciting anger is totally against my philosophy and I sincerely apologize in advance for making heads explode all over the Internet. But this topic raises the interesting prospect of how we assess what is “excessive” executive pay. For instance, Neumann started WeWork from

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No One Knows What Individual Stocks are Actually Worth

26 days ago

This is probably the most important thing you can learn about allocating your savings:
No one really knows what individual firms are worth at any given time.
When you recognize this fact you immediately step back from the constant media frenzy surrounding individual stocks. You recognize that it makes no sense to even try to have an opinion on individual stocks because they are so complex and unpredictable that trying to pick the winners and losers will inevitably result in excessive risk, taxes and fees along the way. So, you index.
This is even more true in the private equity markets where valuations are more opaque. For instance, the Internet is outraged today because SoftBank bought out WeWork owner Adam Neumann. Now, I can’t speak to the nature of the self dealing and all, but the

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Three Things I Think I Think – What if it All Comes Crashing Down?

October 18, 2019

Here are some things I think I am thinking about:
1. Do you need gold if it all comes crashing down? The Dutch Central Bank stated that we would need gold to recapitalize the system in the case that it all comes crashing down. I’ve never understood this view to be honest. If the whole system comes crashing down you’re not gonna care about gold and recapitalizing the system. If this zombie apocalypse scenario unfolds my guess is you’ll be fighting (perhaps hand to hand) for resources. The only metal you’re going to be worried about is lead. For bullets. You’re not going to be lugging around gold bars so you can purchase stuff at the store. So, sure, gold could be used to recapitalize the system, but if the system ever needs to be recapitalized with gold I wouldn’t go out buying gold bars

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Three Things I Think I Think – Banning Billionaires and Other Stupid Ideas

October 9, 2019

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

October 1, 2019

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

September 27, 2019

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!

September 19, 2019

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?

September 18, 2019

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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