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Some More Q&A…

Here’s some more on the Q&A from last week:

Q: The return on these option indexes created by the CBOE look way to good to be true. Basically they are indexes of writing covered puts and calls on the S&P 500, and the way outperform it. Wondering if you might be able to point out what I am missing. Seems like if these returns were true everyone would be doing this.


CR:  1)  I don’t see the word “fee” in that PDF at all.  I’d be interested in seeing the real, real returns there….2)  Many of those benchmarks are available ETFs.  They haven’t performed nearly as well as that fact sheet says.  See PBP the SP500 buy/write for instance….

Q: Cullen, I was wondering where you think a 30 year mortgage might be in 2017?

CR:  If I had a gun to my head I’d probably bet that they will be marginally higher than today….

Q: I wanted to get your thoughs on the Fed’s recent push, by some members, to push up rates sooner rather than later. It seems like bank lending is just still too slow and new bank Capital requirements restrict them from lending out as heavily as before: hence less inside money in the system and therefore lack of inflation. Wage growth also seems too low to make much of a difference. Am I wrong in thinking this way?

CR:  You’re dead right.  Any fears of inflation are likely overblown.  The Fed is at risk of looking like the ECB in 2011.  There is way too much slack in the economy today to warrant a rate increase any time soon.

Q: How come I suck at investing?

And if you had one question you could ask Yellen what would it be.

CR:  1)  Investing is hard and you probably don’t have a very good process that you can stick to.  2)  I’d ask her what her largest personal asset holding is.

Q: I’m wondering what about the current US fiat system that makes inflation good in comparision to a gold standard where inflation is always bad?

CR:  Well, the idea of inflation has to be put in the right context.  Inflation can rise and have no meaningful negative impact on your life if your wages also rise.  If inflation doubles, but your wages also double then you aren’t worse off.  And for the most part, we’ve seen wages handily outpace inflation over the last 100 years.

Q: Rocky’s? The Tap Room? or Cass Street Bar?

CR:  A local.  I love it.  I lived in PB for 8 years and am moving to north county now.  I’ll miss it, but I’ve hit my expiration date.  Rocky’s – best burger in San Diego.  Cass – best local bar in PB.  Don’t love Tap Room.   I pretty much live at Fish Shop….

Q: You may address this in your book, but why did the world (generally) decide to outsource the creation of money to private banking? What’s the history involved there?

CR:  Good question.  I think that most free economies developed with a high degree of skepticism about the govt controlling the money supply too much.  The private banking system created a buffer of sorts and allowed the money supply to be only loosely controlled by governments.

Q: Farmers that have a bad year might expect a higher price for their milk/wheat/vegetable. Less supply should equal higher price. But they are then told that the markets are global and just because one country have bad crops one year, prices don’t rise unless global supply is down.
Now Russia cut food imports from Europe. Suddenly the price crashes. European diplomats urge other countries not to step in and take the market.
I don’t get it. If the market is global. Supply is the same. Demand is the same (Russia can import from other countries). Why does the price of food crash in Europe? Is the market so inefficient?

CR:  The real effects here are probably too micro for my pay grade, but my guess is that yes, the markets are a lot less efficient than people generally think.  Just look at the volatility in the global price of oil.  I mean, every little shock causes a huge ripple through prices.  But time and time again we see that these big geopolitical events don’t have nearly the impact that people assume.  But the end producers still have to hedge their bets and ensure that the risk of less supply is not borne entirely by them.  So yes, I think the market is inefficient in part because the people setting prices have to be rather imprecise in how they manage their risks (which is efficient for them, but looks very inefficient to everyone else)….

Q: Given the constraints of a finite resources and the law of diminishing returns, do you think it is probable that over the long term that productivity growth can/will outpace that of credit growth?

CR:  I don’t think productivity has to decline because of the lack of available resources. The global economy is becoming more diverse than ever.  More and more of what we “produce” are services that don’t necessarily translate from real resources.  This is actually a big part of the increase in productivity.  It’s a lot easier to build a webpage than it is to build a factory.  It can be as efficient also depending on your business….

Q: https://finance.yahoo.com/news/yellen-says-u-job-market-141202972.html

You think Ms. Yellen is reading your website?

CR: God save us all if the Fed Chief takes me input into serious consideration.  And no, I don’t think she reads my website.

Q: Do you believe that America is sustainable as a whole(unemployment, bubbles, banks, wars, energy, entitlements, population growth, government ect.)? When you look at the macro picture that you seem to put in a lot of effort to understand, do you honestly think the U.S. is progressing, or regressing? Do you think Americans will see a lowering standard of living in general(for larger portions of the population) as future progresses?

CR:  My general view is that we’re sort of like Micrsoft.  The USA is this big developed entity that has likely seen its best days, is now losing market share, but continues to do a lot of really great things.  So we’re making progress, but at a slower rate.  I am not a permabull, but I am an optimist.  But there are places in the world where I am much more optimistic than the USA over the long-term because I think the USA is bound to lose global market share….

Q: What are your thoughts on expanding the EITC vs. increasing the minimum wage? Perhaps it should be an “either/or” question.

Lot’s of discussion about inequality, Piketty, a $15 minimum wage, etc. these days.

Perhaps a better question for you is what do you think the federal government should do to help low income workers?

CR: The minimum wage debate is a moral debate.  I mean, increasing wages doesn’t necessarily make the economy better off because it doesn’t mean that households will necessarily save more of their income.  So raising wages is just a redistribution of sorts.  Which means that it’s really a moral discussion that centers around making sure that corporations don’t mistreat their employees.  I am not against an increase in the minimum wage.  But that has nothing to do with me thinking it’s good for the economy.  It’s because I think corporations can and will take advantage of their employees if given the opportunity and I think someone should stand up for the workers of the world who can’t stand up for themselves.

Q: are you going to launch an ETF based on the Global Financial Asset Portfolio? i suppose the Vanguard 40/60 LifeStrategy would perform similarly and i might switch to it soon – my main 80/20 is far too risky now i think about it.

CR:  No, I have no ETF plans in the future.  But I am getting back in the asset management game this year.  🙂

What do you think we will see first, 1% or 4% on the 10 year Treasury?

CR:  That’s a hard one.  It would take a real shit show for the world’s safest asset to hit 1%.  I’m not bearish right now, but I can’t see that in the coming years.  I also can’t see 4% any time soon….Can I guess neither and update you later?  🙂

Q: “If the output of a society declines or is viewed as less valuable to its users then the money which is used as a medium of exchange will also be viewed as less valuable.”

I could not understand that. I certainly would agree that the two would be highly correlated in a statistical way, but I couldn’t understand why it was (absolutely) necessary.

CR:  Well, it’s about understanding how the outstanding balance of assets relates to price/value.  If there is a fixed quantity of money in the economy and the quality of output is declined then the value of the money MUST, by definition, decrease in value because its value relative to the reduced quality of assets makes it less valuable, all else being equal.

Q: How would you interpret this chart?


CR:  Well, there’s a blue line and a red line and the red line appears to be winning the race to the upper right hand corner which is pretty great for the red line because that means it’s winning and winning is good, right?  Oh wait, that’s not a sports scoring sheet.  Sorry.

That’s just a representation of QE.  There has been weak loan demand in recent years so loans are stagnating, but QE has resulted in deposit creation so QE has resulted in a continued expansion of M2 by reducing the pvt sector’s quantity of T-bonds.  Some people make this out to be very scary, but it’s just a representation the basic asset swap accounting behind QE.

Q:  the left sees the economy as a fixed pie, with some people taking more than their fair share. the right says that the pie grows enabling everyone opportunity to benefit. how do you see it, and where are they wrong?

CR:  They’re both right to some degree.  The economy does expand the pie for all of us by creating goods and services that enhance our lives.  But it can also become very uneven in terms of who benefits most from producing these goods and services.  I think the living standards of Americans are expanding at a faster rate than economic growth would imply.  But I also think the disparity between how people benefit from this is expanding more rapidly.  So they’re both right to some degree.

 Q:  I would be interested in your comments on this article in Foreign Affairs entitled “Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People” (by Mark Blyth and Eric Lonergan).


Basically, they propose a helicopter drop equal to 2% of GDP (which works out to around $1000 per person), along with using interest rates as a control valve for inflation.

CR:  If the Fed were to print dollars and shoot them out the front door then that would clearly have a big impact on the economy.  It would be similar to deficit spending in that it adds to the private sector’s financial net worth dollar for dollar.  In an economy where so many people are debt burdened I think that would be a net positive.  I think firing dollars out the front door is a bad way to do it.  I’d prefer a tax cut or some government investment in infrastructure or something like that….

Q:  What do you think will cause the next recession?

CR:  Corporate America will stop investing.

Q:  Federal debt takes two forms. Debts to individuals, institutions, and other governments. The other form is where it owes itself for the money it has created.

If we maintain the obligation to the individuals, institutions, and other governments but erase the balance sheet obligations for the second kind of debt, what would be the consequences? Why recognize any type of obligation for debt we have purchased with created money?

CR:  Well, most of the debt the government owes to itself is actually owned by citizens.  It’s military pension funds, Social Security and things like that.  So I don’t think it would make sense to wipe it off the books.  The government’s liabilities are generally the non-government’s assets.




  1. Steve Roth

    “increasing wages doesn’t necessarily make the economy better off because it doesn’t mean that households will necessarily save more of their income”

    Surprised to hear this from you. I don’t think you’re under the impression that households spending less of their income results in there being a larger stock of monetary savings, hence investment. Am I wrong?

  2. Cullen Roche

    My point is that boosting the minimum wage doesn’t mean the economy will necessarily get stronger. It just means we’re requiring a redistribution from companies to to employees.

  3. Steve Roth

    Won’t necessarily, of course. But there is one inexorably arithmetic economic effect suggesting that it will.


    Not the only economic effect, of course, not by a long shot. But a damn powerful one.

    That said, MW is small beer in the great big redistribution picture. (Think: free public schools.) That said, MW makes a huge immediate difference to millions of people. (In the long run, we’re always in the short run.)

    Still don’t understand your comment on HH saving, suggesting it’s beneficial in aggregate.

  4. CharlesD

    Cullen don’t understand your comment that increasing the minimum wage is just a “redistribution”. At the macro level, if these higher wages are spent, then business receives additional revenues – so it’s a “wash” for business – not a redistribution. out of the coffers of business to the employees.

    And overall GDP goes up from higher consumption. Or am I missing something? Thanks.


  5. Steve Roth

    CharlesD: Right. Redistribution results in higher velocity of wealth–more spending (hence more production hence more wealth long-term). See my little model linked above. Again, this is only one economic effect, but it’s a damned significant one. For some reason liberal economists continue to pooh-pooh it. Conservatives would have been screaming about it nonstop for decades, as with their spurious lower-taxes-spurs-growth mantra. Go figger.

  6. Cullen Roche

    Sorry guys. I see the confusion. I wrote:

    “better off because it doesn’t mean that households will necessarily save more of their income”

    Should have been “save less”. Yes, if the redistribution results in dissaving by some entity (that would have otherwise saved the income) then it will be beneficial. But my point is that it’s not a guarantee. If firms are saving some amount of income at present and are forced to save less then households could just end up saving more of their income and so you just redistributed saving from one entity to another.

    Personally, I am in favor of a min wage increase, but not because I think it will be stimulative necessarily.

  7. Steve Roth

    Kay so let’s try this:

    Corps are forced to pay more wages, save less. Both sides of their balance sheets decline/don’t grow as fast — assets (cash) and shareholder equity.

    So households have less assets and net worth (their equity claims decline).

    But, they have more income.

    Will there be more or less spending as a result?

    The asset changes are felt almost purely by low-marginal-propensity-to-consume households. The reverse for the income changes. Which would suggest that the income increases would affect spending more strongly than the asset declines.

    Which is all to suggest that distribution matters. Simply considering aggregate income, “saving,” and assets doesn’t tell you much.

  8. CharlesD

    Steve thanks nice “little model”. Requires some thought but not rocket science either. Reminds me of a (true) story. While a sophomore in college, this person (who was good in math) was trying to decide between astrophysics and economics as his major. He discovered that his math skills would make him a “below average” student in astrophysics. But then he discovered he would be the “smartest guy in the room” if he majored in economics. So he took the latter route (he ultimately was succesful in the finance industry).

  9. JGF

    I think part of Cullen’s point is that *if* the increased income is saved and not spent (or, say, is used to repay debt), then, in the near term, the MW increase doesn’t really help.

  10. Steve Roth

    JGF, right. But per my above, if these are the two possibilities:

    1. Households gets more wages, but their stock portfolios grow less.


    2. Households get less wages, but their stock portfolios grow more.

    Then because equities are owned more by low-MPC households, and wages are received more by high-MPC households, #1 would result in more spending.

  11. Cullen Roche

    As I said, that assumes that the high-MPC households don’t save more of their income. If they save more of their income because they earn more then the economy isn’t better off as they become LOWER-MPC households than they would be otherwise.

    There’s a boat load of research on the effects of the MW. I think economists pretty much universally agree that it’s not a great stimulative variable….

  12. Steve Roth

    Right it’s totally small beer macro-wise (though redistribution isn’t). I should stop. But:

    “high-MPC households don’t save more of their [extra] income” *than the low-MPC households would of their equity appreciation.*

    They wouldn’t. Don’t.

  13. Cullen Roche

    Okay. I think we can agree there. Maybe there’s a small positive impact on the economy so maybe I should say this is *mostly* a moral discussion and not a big economic driver.

  14. cobaltbluedolphins


    Concerning your response above . . .

    “That’s just a representation of QE. There has been weak loan demand in recent years so loans are stagnating, but QE has resulted in deposit creation so QE has resulted in a continued expansion of M2 by reducing the pvt sector’s quantity of T-bonds. Some people make this out to be very scary, but it’s just a representation the basic asset swap accounting behind QE.”

    So to make it clear to me, T-bonds are not included in M2? The Fed buys the bonds and the “money” that paid for those bonds shows up as deposits which then increases M2? Is that right? I thought the T-bonds would be included in the “Net Federal Savings” aspect of the chart. Wouldn’t total new money creation equal loans/leases minus NFS (which of course is a negative value) with the exception of currency in circulation (bills and coins)?

  15. Cullen Roche

    I don’t think it’s very useful to focus too much on how the govt defines “money”. “Money” is a very misleading concept. The point regarding QE is that the private sector’s net financial assets don’t change as a result of QE. The composition of those assets change, but the amount doesn’t.

    T-bonds are a weird instrument because banks use them like money. But the rest of us just hold them like they’re savings accounts.

    I hope that helps.

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