Four Questions for Cullen Roche

My friend Cullen Roche is out with his first book, Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance, and I’ve already begun going through it.

Cullen is the proprietor of one of the top blogs in finance, Pragmatic Capitalism, and has been a pal of mine for almost five years now. I’ve learned so much about the intersection between markets and monetary policy from his writing over the years and there’s a good chance you have too. Cullen, like Bill McBride at Calculated Risk and Eddy Elfenbein at Crossing Wall Street, is among the cadre of influential financial bloggers who have largely gotten the post-crash environment right over the last few years. Dogma doesn’t factor into his process, nor do the many discredited socio-political beliefs of the blogosphere that have steered so many toward erroneous conclusions and even more damaging portfolio errors. 

Cullen calls ’em like he sees him and I’d say he’s nailed just about all of the broad strokes these past five years – from the Fed’s actions to asset prices to economic realities. 

To help get the word out about the book, I’ve interviewed him as part of my Four Questions series. I hope you enjoy the exchange we had below! – Josh


prag capJB: Lots of people have written books on economics and plenty of people have written “how to” books for investors – but I’ve not seen many where the two halves are made into a consistent whole. Was that the slot you were aiming to fill? Why do think so many people struggle with this combination? 

CR:  Great question Josh. The worlds of economics and finance are extremely fragmented, but interrelated.  It’s difficult to find people who can traverse both fields because they’re different specialties and most economists/financiers aren’t trained in both fields.  I have a finance background and experience as a portfolio manager and trader, but as the financial crisis erupted in 2008 I found myself being forced to learn more and more about sophisticated economics.  Understanding what Quantitative Easing does, how the Fed works, how banking works and how the pieces of the macroeconomy translate to the financial markets became incredibly important.  So my views had to incorporate the world of macroeconomics like never before.

The book is a sort of summation of the things I’ve learned over the last decade or so about how and why I think understanding the macroeconomy is more important than ever before.  We don’t live in localized economies.  We live in this increasingly sophisticated global macro world where governments are highly involved, central banks are always taking action, and the global economy is interconnected like never before.  So the book is a reflection of what I view as a natural evolution of the way we have to view the global economy and how we’re going to apply that to the financial markets.  In order to succeed in this “new macro” world we have to expand our horizons, think big picture and learn how all the pieces fit together.

JB: You cite “Stocks for the Long Run” as a myth we need to get over as investors – and yet there is not a single twenty year period going back to 1926, an eight decade span, in which stocks have shown a negative return. In addition, stocks have returned something on the order of 5% per year during this period even after adjusting for inflation and taxes – bonds have shown something closer to 1% when adjusted for the same factors during this time. So, why not “stocks for the long run”? What am I missing? 

CR:  I am a hopeless optimist at heart as I think most Americans are, but I also know that we have to look at the bigger picture here and keep things in perspective.  I say, be optimistic in the long-run, but not naively optimistic. While it’s true that stocks are generally a good long-term bet it’s also true that markets are comprised of irrational participants operating in a complex dynamical system.  And that means this system is actually much more fragile than many presume.  And that’s why we see prolonged periods of poor equity market performance such as Japan over the last 20 years, Greece, China, etc.  The US economy and markets are a powerhouse, but I don’t think it’s prudent to assume that that powerhouse is impervious to sustained periods of poor performance as we’ve seen in many other global equity markets in recent decades.

More importantly, our financial lives are not clean linear 20 or 100 year periods.  Our financial lives are made up of a series of specific events that require stability and predictability.  We go to college in our teens, we get married in our 20s, we have kids, we buy the new car, we buy the house, we plan for the kids’ tuition, we plan for retirement, we break a hip, etc.  Our lives don’t start and stop.  Life is ALWAYS happening.   And our financial lives should reflect that.  I think too many people view their financial lives as having a start and stop date, apply some “long-term” approach to it and then when 2008 disrupts their financial life they have an emotional breakdown, become susceptible to our inherent biases and make matters even worse.  Treating your portfolio as a place to create stability and predictability as opposed to constantly trying to “beat the market” and maximize returns is an approach that applies to our lives in a much more practical and rational way.  While it’s important to remain optimistic in general, I think it’s a mistake to position ourselves in such an optimistic way that it can actually create near-term instability.

JB: Is “Don’t Fight the Fed” – a phrase coined by Marty Zweig 30 years ago – the most time-tested piece of investment advice of all time? Can you think of a scenario in which the Central Bank wouldn’t eventually get its way vis a vis asset prices?

CR:  “Don’t bet against human innovation” is probably my preferred most time-tested piece of investment advice.  But “don’t fight the Fed” has to be right up there.  An unconstrained central bank can create inflation if it really wants to and has the legal capacity to do so.  And that could always create higher nominal asset prices.  Whether the underlying economy is becoming healthier in real terms is a different matter.  A central bank can always boost asset prices and increase the money supply if it has the legal capacity to do so, but it cannot always force people to produce the underlying goods and services that make those asset values sustainable.  I mean, the Fed can print $100 into my bank account in theory, but they cannot make me do work that will add $100 in value to the real economy.  And that’s where central banks and some government policies often fail.  They sacrifice near-term gain for long-term loss.

My fear with some central bank policies is not that they can’t work in nominal terms, but whether they can make the economy better over the long-term in real terms.  And so there are times where I think some policies risk putting the cart before the horse which could be extremely destabilizing for the economy in the long-term even if it gives the appearance of creating short-term stability.

JB: How much of the great misunderstanding of QE / ZIRP came from just plain old ignorance versus a willful effort to mislead because of religious / political belief?

CR:  We’re in a brave new world of monetary policy.  I am not sure that anyone really knows what the impact of all these policies will be in the future. But that doesn’t mean we can’t look at the monetary system for what it is, understand some basic accounting, sort through the flow of funds, understand institutional designs and construct an understanding that is based on operational facts.  I think when QE started there was a strong political aversion to what was going on.  And when you mix politics with behaviorally biased people with money you get a concoction that is ripe to explode.  So we saw a lot of extreme predictions and irrational reactions to what was going on – hyperinflation predictions, stock market collapse, etc.

What I’ve tried to do with the book is get away from the politics and biased thinking.  I’ve seen how it can be destructive to my own life so the book reflects a personal lesson in many ways. I’ve attempted to provide a general framework for understand macroeconomics, macro finance and how best to apply that to our financial lives in a way that will not only make you a better investor, but will make you more confident and informed about your financial decisions, political decisions and most importantly, every day life.

In the book I said “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”.  And that’s the lesson I hope most people take away from this book.  While money is obviously important to our lives, my hope is that a better understanding of money will actually improve how we use it so we can remember the important things in life – the things that really make us wealthy (hint: it’s not money).


Thanks Cullen!

Check out the book here:

Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance

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