Here are some Frequently Asked Questions in case anyone cares:
Who is Cullen Roche?
I am an entrepreneur, author, financial expert, outdoorsman & animal lover. I’ve been self employed since I was 25 having started multiple financial firms. I am currently the founder of Orcam Financial Group where I specialize in global macro asset management. Prior to founding Orcam I briefly worked at Merrill Lynch on a $500MM team and then managed a private partnership which generated 14% annualized returns between 2006-11 vs 1.9% annualized returns for the S&P 500. The partnership had no negative calendar year returns during this period (including 2008).
I wrote my first book, Pragmatic Capitalism in 2014, but am probably best known for the writing I do here at this site. In 2015 I was proud to be named as one of Investment News’ top “40 Under 40” in the finance field.
Although I am not an academic economist I’ve become well known for my work on monetary economics including my white paper “Understanding the Modern Monetary System” which is one of the 10 most widely read papers in the entire SSRN database. My work on Quantitative Easing is widely read and many of my contrarian views on QE have been validated over time (including my low inflation and low interest rate predictions). As a market practitioner who has been directly involved in the financial markets, banking system and accounting world I bring a unique understanding to how the financial markets and economy actually work. While many economists work from a theoretical policy perspective I try to base all of my work on a more operational perspective thereby working more like an engineer trying to establish truths about how our financial world is actually constructed.
Though I’ve become best known for my work on the monetary system, I am really a portfolio construction expert. My 2016 paper “Understanding Modern Portfolio Construction” includes much of my original thinking on the subject and has quickly become one of my most distributed pieces of research on the topic. As a market practitioner I’ve found that my lack of exposure to professional academic training (like a PhD program) has been a strength as it’s resulted in a more independent, unbiased, operational and less theoretical understanding of the financial system.
I am an avid outdoorsman and a sucker for pretty much all animals (including the human kind, though I do make exceptions for the exceptionally closed-minded!). I grew up in Washington DC to two amazing parents and my 7 best friends in the world, my brothers and sisters. I now live in Encinitas, California with my wife Erica, our Australian Shepherd and our five laying hens. In my free time I obsess over extremely nerdy financial theory, surf badly, run slowly and make many bad jokes. For the last 10 years I’ve been on a relentless search to find my six pack, but seem to consistently find myself in front of a stack of carbohydrates. I am on an endless search to understand the “big picture” of everything slowly learning that the further along the journey I get the more I realize how little I know. I fight every day just to be a little bit better than I was yesterday. It’s not always easy….If you care (which you probably don’t) you can learn more about me on my personal website here.
What’s your view on “investing”?
I think it’s important to be clear about the word “investing”. Investment, in an economic sense, means “spending, not consumed, for future production”. Real investment is done by firms and individuals who spend for future production. Unfortunately, the term “investing” has taken on a whole different meaning in the world of finance. When firms issue shares of stock to raise funds for the purpose of investment the buyers of these shares are not truly “investors” in the firm. They have merely allocated their savings to the shares. All the financial assets issued in the world are held by the world’s savers who merely reallocate them at times. We are not actually investors in the pure sense of the word. We are savers. I think it’s important to be specific about the terminology because the allocation of savings is not sexy or exciting, but that tends to be the way “investing” is perceived. You have “Mad Money” and “Fast Money” and the idea that this is all a “get rich quick” scheme. I think that’s highly misleading and when one approaches the world of financial assets as a place where you allocate your savings I think you’re inclined to take a much more practical and realistic view of the world.
I am an advocate of low fee, tax efficient index based diversification. I think asset allocators should keep things simple and control what they can control – their taxes, fees and allocation. While I believe a market cap weighted approach (like most of what Vanguard does) is sufficient for most people I am personally an advocate of a countercyclical indexing approach. Unfortunately, I think Modern Finance is constructed on several false precepts. Concepts like “risk” and temporal concepts such as “the long-term” often mislead investors into thinking too narrowly and in highly unrealistic terms. For instance, we are often told that our portfolios can sustain large downturns because the financial markets tend to rise over the “long-term”. As a result, portfolios are usually dominated by stock market exposure resulting in an imbalance in the way the investor exposes themselves to permanent loss risk. In reality, our financial lives are a series of short-terms inside of a long-term, however, too many investors sacrifice the allure of big gains at the expense of big drawdowns.
Countercyclical Indexing is a low fee and tax efficient form of indexing which uses systematically constructed cyclical market models that help hedge an investor from permanent loss risk as stocks become more riskier the market cycle while reducing hedges as stocks become less risky. Unlike most indexing strategies which are procyclical due to the stock position this strategy maintains better balance between the risks in the portfolio’s assets. I call this approach to portfolio construction Countercyclical Indexing. This strategy is designed to keep an investor’s risk profile aligned with the relative risks of their underlying holdings as the business cycle evolves and their lives change. By implementing this strategy we are able to maintain a low fee and tax efficient approach while better controlling for risk than traditional indexing strategies do.
What’s Your View of Economics In General?
“Economics” is a big tent and there’s a lot of good and a lot of bad out there. As a market practitioner I tend to find Post-Keynesian Economics quite useful because it’s operational in nature and accounting focused. This means that thinking of the economy in the form of balance sheets and income statements is intuitively appealing. Admittedly, this is probably more useful for financial analysis than political analysis, but it still reflects the real-world in a manner that I find highly intuitive and accurate. That said, I wouldn’t call myself a “Post-Keynesian” because there are elements of it that I disagree with.
Many elements of mainstream economics remain excessively theoretical in my opinion. That said, I certainly don’t reject mainstream econ. There’s a lot of good and bad in both heterodox and mainstream econ. I tend to think that the two sides overlook the good in the other and in doing so reject quite a bit of useful content. As such, I wouldn’t describe myself as being aligned with any single “brand” of economics as I take many understandings from the different schools. I do tend to lean towards the Post-Keynesians in many of my views, but I am not a Post-Keynesian in the sense that a proper Post-Keynesian economist might think. Therefore, I am essentially an economic independent.
What are Your Political Leanings?
One question I get a fair amount is about my personal politics. I’ve always thought of myself as a fiscal conservative and a social liberal. I like to think I am fairly open-minded to different perspectives and different people’s political views, but it helps to get an unbiased gauge on where things stand. So I decided to take the Political Compass test. According to this test I am a slight leftist libertarian which is pretty consistent with centrist views. Pretty much what I would have expected.
What’s your View on Politics in Economics?
Many people claim you can’t separate politics and economics. I don’t think that’s true. I think you can understand the modern monetary system at its core operational roots and devise an understanding that is based primarily on facts rather than beliefs. There are real truths in banking, finance, economics and the institutional design of the money system that should not be controversial, but remain hotly debated in economics due to competing ideologies. The creation of Monetary Realism is an attempt to bridge that divide and establish a foundation for understanding the monetary system by taking the politics and ideology out of the discussion.
What Do You Think About the Federal Reserve?
First, it’s important to understand why the Fed exists at all. Long before there was a Fed system we essentially had rogue banking. So you had a system where banks issued loans and payment settlement was extremely inefficient and at times impossible (for instance, in a crisis). This created a very unstable banking system. What the Fed’s creation did was sustain private competitive banking while establishing a stabilizing mechanism. This was achieved through the reserve system which helped bring payment settlement all into one place, the interbank market. Remember, an economy is really nothing more than a series of flows and payments are the most important element of this system. If payments cannot be made and settled then the flow stops like the blood in the human body stopping.
This was not all that the Reserve System achieved though. The Reserve system provided an independent body that was able to directly work with and stabilize the banks in numerous ways including monetary policy, regulation and playing a critical stabilizing role during crisis. Perhaps the most important thing that the Fed system achieves is the private competitive banking system. Though it’s clearly not perfect it’s far superior to the banking system of the 1800’s which helped lead the USA into SIX depressions in 100 years.
It’s important to understand how the Fed system helps to distinguish between the different types of money in our monetary system and the roles they play. Banks issue inside money (credit) and the government issues outside money (notes, coins and reserves). Outside money exists to facilitate the use of inside money, the dominant form of money in our economy. The Reserve system streamlined the use of inside money as if the banking system were under one roof. But importantly, it sustains private competitive banking. The alternative to this design structure is going back to rogue banking or going full nationalization of banking. One would destabilize the payments system and the other would result in the government managing the entire money supply thereby eliminating the competitive elasticity of money creation. The fact that extremists on both the left and right are in favor of one or the other is likely a sign that the Federal Reserve System is actually a healthy compromise. It might not be perfect (certainly in its implementation of monetary policy), but the design feature is very much a necessity given the complexity of our banking system.
For more on the purpose and functions of the Fed please see here.
Do You Have an Opinion on the Gold Standard?
As for the gold standard – well, I think its benefits are vastly overstated. First, the gold linked money eras of the 1800s were associated with rampant economic turmoil with SIX different depressions occurring during the century. But more importantly, in a global economy it’s an unworkable currency construct because of its inherent imbalances.
A gold standard or fixed exchange rate regime is basically what Europe has going on right now. It’s a really horrible monetary construct that involves no floating exchange rates, a single currency, ties the hands of the government and results in persistent trade imbalances (oh, and results in depressions!). See, Europe has no floating exchange rates because they all use the same currency. And there’s no fiscal entity (like the US Treasury) that can offset the fiscal imbalances by distributing funds to those who need it. No floating FX and no Treasury means the trade imbalances must be rectified through market pricing mechanisms. The problem is, the market mechanism doesn’t work like all the gold bugs wish it did. So the trade imbalances persist, the underlying economic imbalances persist and you get a result that’s a lot like Europe where depression basically makes itself nice and cozy. This restrictive currency design is inherently unstable and reminds me of the thinking that stability creates instability. It’s a total disaster and trying to go back to a system like that is madness.
What About Auditing the Fed?
As far as I can tell, they do get audited.
Do You Worry About the USA Going Bankrupt?
The US government is the issuer of the US dollar within a system in which it has a free floating currency and no foreign denominated debt. This means that the US government cannot be forced to default on its liabilities. There is no reason for the US government to have to worry about “running out of money”. The government could, however, be susceptible to causing high inflation. One of the primary reasons why the US government does not have to worry about solvency is because it can tax such an enormously productive economy. But if it were to establish policies that reduce the overall output or cause high inflation then the US dollar could begin to decline in value thereby causing a reduction in living standards.
What’s your Opinion on Government Spending & Taxation?
Economists and pundits often talk about spending and taxes as if they should always be this or that, but I think the world is much more complex than that. In a general sense I am a traditional Keynesian and I believe the government should run deficits during recessions and either small deficits or surpluses during expansions. But each environment is its own unique situation and requires its own analysis so it’s impossible to paint too broadly here as it simplifies what is really very complex situations.
From a budget perspective a tax cut is the same as a spending increase so much of this debate is political. But it’s important to understand the details nonetheless. The govt can “print” notes, coins, reserves and issues t-bonds. So in that regard it’s best to think of the govt as an important facilitator of liquidity and an issuer of some kinds of money. We call these portions of the money supply “outside money” because they are created outside of the private sector.
But most govt spending is taking bank deposits (inside money because it is created INSIDE the private sector by private banks) and recycling them through the economy. So govt spending can be really useful when the economy chokes up because they eliminate the paradox of thrift in essence by creating a flow of funds (see here for more on this). So yes, most govt spending is just a circular flow taking from the private sector and redistributing it. So, contrary to popular opinion, fiscal policy doesn’t actually increase the money supply. It just redistributes it.
But deficit spending involves an important component in that it adds net financial assets through bond issuance which can make the pvt sector more liquid in various ways. That is, when the govt spends it procures funds from the private sector and recycles it into someone else’s account. But it also credits the account of the bond buyer with a t-bond which adds a net financial asset to the private sector.
I generally prefer tax cuts over spending increases, but I am not ideological here. It’s just that spending has a tendency to be poorly allocated so I generally prefer stimulus that allows the people to decide how they want to spend their money. But I am certainly not against government spending, especially if it’s wisely implemented.
What’s Your Opinion on “The Job Creators”:
Late last year I explained the role of the entrepreneur in the capitalist economy. In short, the entrepreneur seeks to provide superior goods and services that ultimately offer consumers a more efficient means of achieving some end. This creates efficiencies which result in greater future consumption, economic expansion and more jobs in the future. The example I’ve used in the past is Alexander Graham Bell, the inventor of the telephone. When Bell invented the phone he destroyed thousands of jobs. Messengers and telegram services were slowly defunct. But Bell created efficiencies through making communication more convenient. And in doing so he helped generate higher economic growth and ultimately more jobs in the future by streamlining what was once an arduous process – long distance communication. Bell created countless jobs by creating this efficiency. In this regard, capitalists, producers and innovators can be seen “job creators”.
But producers are nothing without consumers. Bell’s telephone is nothing without consumers who want to use it. So production and consumption are ultimately two sides of the same coin. You cannot say that producers create jobs without consumers because without the consumers the producer has no revenue stream with which to expand his/her business and hire the workers that allow him/her to leverage the labor into future profits. The capitalists need the consumers before they can ever consider expanding. In this regard, demand is the driver of “job creation” and so consumers can also bee seen as “job creators” because they enable the capitalists to be able to hire in the first place.
So the answer to this silly debate is really rather simple. The real “job creators” are the consumers AND the producers.