Cullen Roche - Why Macro Matters
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[The Business Brew theme]
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Cullen Roche. I found Cullen through The Investor's Podcast, a number of years ago and have enjoyed his explanation of macro investing, and reached out to him after seeing him on Bloomberg, I believe it was. He and I got chatting and we decided to do this episode.
Cullen is the founder of Pragmatic Capitalism. He also wrote a book called Pragmatic Capitalism that I thought was a good read. So, I hope you all enjoy this episode. As always, none of this is investment advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence. Happy Thanksgiving.
Ladies and gentlemen, I'm thrilled to be joined by Cullen Roche. We are talking about where I am and where he is. I am in the eye of a storm in the path. I'm pretty close. So, that should be fun. Little November hurricane.
Cullen: Raining in San Diego, which is the first time I think it's really rained here in like eight months or so.
Bill: 30 years?
Cullen: [laughs] We had like three rainstorms all of last winter, which was crazy. We only got five inches of rain or something, 5 to 10 inches per year. So, we don't get much rain anyways, but I don't know, it's been really dry the last year, so some rainstorms would actually be welcome.
Bill: I have not been to San Diego, one of the regrets I have. Do you guys have grass out there? Does everybody have fake grass?
Cullen: [laughs] My yard is loaded with fake grass.
Bill: There you go.
Cullen: You can't maintain it here.
Bill: Yeah.
Cullen: You just don't get enough rain. If you've actually tried to run your water all the time to keep grass alive, it's just like a losing battle because it doesn't get blazing hot, but it's consistently hot enough that your grass is dead within [chuckles] like a couple of weeks of no rain.
Bill: One of my favorite things that you had in your book, which I love to talk about with people is the home that you live in is not an asset. Though people like to think it is, it is a huge expense drain when you fully load the costs.
Cullen: Yeah, it's funny. Housing traditionally is a pretty good investment obviously and there're lots of intangibles with housing, obviously that are big benefits to owning versus renting, especially in the long run. But I think that the thing that a lot of people don't fully account for is the fact that your house has this huge quantifiable and unquantifiable expense ratio, which makes it cross its lifetime, the asset as a whole ends up being so much more expensive than people really consider. And so, it really is a super personalized thing where when someone's considering buying a house, you have to really consider all of the long-term real, real returns.
When I say real, real returns, I mean like the after inflation, after full fee return. And that includes taxes, and maintenance, and all the BS that goes into taking care of a house, pulling weeds, all the stupid shit. I was painting a fence yesterday and my number one rule of working on a house is to never do anything that involves covering large areas. So, painting drywall stucco, stucco is the worst thing you can ever do. But anything that involves covering large spans of area, if you can outsource it, you should always outsource it. So, I found myself yesterday painting this fence outside and I was just like, "I effing hate this house." [laughs]
Bill: Yeah.
Cullen: It's little things like that in the long run that you'll end up having to do yourself with a house that the night-- One of the beauties of renting is that you just call up the landlord you say, "Hey, somebody clogged my toilet. Get somebody over here." [laughs]
Bill: Yeah. I actually knew somebody that was-- I think these stories are a little bit overblown, but I knew somebody that was a landlord and somebody called him to change the lightbulbs and he just was like, "I'm not coming over to change your light bulbs. You can change your light bulbs."
Cullen: Yeah. [laughs]
Bill: I don't know, it's interesting. I think some of the myth is perpetrated by the fact that it's one of the assets that people can get leverage on and then the declining interest rate environment prices went up and it was levered. So, I think people misattribute housing specific versus just benefiting from decrease yet.
Cullen: Yeah. It'll be interesting to see what happens with housing in the next 5 to 10 years because one of the charts that keeps me up at night is, if you look at Japanese real estate, it has basically been flat to down for 20, 30 years. It's the equivalent of looking at US real estate and just imagining that the median price of a home right now is something like 450, 500 grand I think. Imagine if in 20, 30 years, the median home in the US was worth like 400 grand, you know like, "What sort of stagnancy does that reflect in the economy, if the central asset on all of our balance sheets is just flat to down for a multi decade period?"
Bill: From a rate of change perspective, reifying and spending the reify money, that's going out the window, right? That game is over at that-- [crosstalk]
Cullen: Yeah. Well, that's my big worry about what's going on right now with everything in the macro economy is-- We know, obviously, after 2008 that when housing falls apart, it can cause these big knock-on effects that are really unpredictable. I remember back in 2006-2007, I was really bearish about real estate, but never would have expected that period to turn into what it did with 2008-2009 becoming as frightening as it became. So, housing is such a big central component of not just the economy, but everyone's balance sheet that when bad things happen with real estate, there tend to be a lot of knock-on effects.
So, that's the thing that I'm hyper-concerned about right now, just because the Fed has moved so fast, interest rates have moved up so fast that I think it's reasonable to look at the real estate market. Especially going into like next year with rates going to be at 7%, 8% for probably all of 2023, what does that do to real estate and what does that do to the economy in the course of the next 18 to 24 months? I don't think anyone knows, but my baseline estimate is that it's not good.
Bill: Yeah. Part of why I wanted to talk to you is I found you on The Investor's Podcast years ago, I find you when you describe how you look at the world, I always enjoy hearing you talk. So, as somewhat of a fan, it's nice to be able to talk to you. So, thank you for saying yes to coming on. [Cullen laughs] I have said in the past like, housing doesn't really-- When I say, I don't know what happens with housing, when rates go up, part of what I'm saying is like, "I do buy that there's a structural shortage at least in areas."
Cullen: Yeah.
Bill: You get into the tertiary markets. The tertiary markets of Idaho, I have no idea what happens there. Good luck. But somewhere like Denver, I could see prices being pretty solid in the core, but liquidity, I think it could go out the window for a while, because people locked in payments that they can afford, but they may not want to sell their house. And two, when you think about all the knock-on effects in the economy, that housing, it's a NBER paper, the housing cycle is the business cycle or something like that. Man, then you linger on cars. I don't know how many autos are going to be purchased with rates here.
Cullen: Yeah, you can filter through all of the credit markets at this point and start thinking about, "Okay, even someone using a revolving line of credit to finance short-term items," everybody's starting to have to refinance at what's going to be higher interest rates. The housing thing is a way bigger problem in places like Canada or the UK, where a lot of the mortgages-- like a 30-year mortgage doesn't even exist in a lot of these foreign markets.
Bill: It's like five-year, right? And then you get a [unintelligible [00:09:32].
Cullen: Yeah, they're all two to five years. So, a lot of these people in a lot of those places, their central banks are being even more aggressive than the Fed. So, how does that interplay with the US economy? Again, nobody knows. But my baseline is that I think it's reasonable. Look at all this stuff and say, "Hey, nobody knows exactly what the knock-on effect is going to be here. So, let's be somewhat cautious about what we're about to encounter." Because who knows. Like you said, if the supply is just low and maybe the housing market. My baseline estimates for housing and nobody knows what's really going to happen with housing prices, but just using general guesswork like 10% to 15%, I think is a reasonable decline given the big boom we had, the give back in demand that we're likely to get from this.
If you got some, let's say, give back in rates at some point. Let's say we get into 2023 and things look-- inflation is coming down and the Fed's more comfortable with where inflation is headed, and the unemployment rate is bumping up a little bit and the Fed walks it back, let's say or starts to project that they're going to walk it back a little bit. You could see mortgage rates come back into 5% to 6% and then prices fall 10%. You reach some nice equilibrium there, where there's at least enough demand to hold up prices. You don't get this waterfall effect that we got in 2008.
That's a Goldilocks scenario in my mind at this point. But I, especially after having gone through, maybe I'm suffering from fighting the last war, but when I look at 2008, that period was so frightening. I think it humbled a lot of people. It certainly humbled a lot of central bankers. I think it's naive to look at what's gone on in the last few years. Just the boom in prices across the board and so much stuff, and not at least entertain the idea that house prices, if they fell back to just they're like 2019 levels, you're talking about a 25% decline, which that would I think cause a lot of potentially frightening knock-on effects in other credit markets.
Bill: Why do you think that? The argument that I have heard and somewhat believe against that is the loan structures are pretty solid, consumer balance sheets which are tied to the housing. Consumer balance sheets are in good shape, then again, how much is that mark to market versus reality? So, outside of banks maybe have to reserve a little bit more capital on loans because losses could go up. What are you concerned about in that way?
Cullen: Yeah. So, you start getting a little bit of seizing up in the banking system. Housing is just as a collateralized asset, just such a huge asset in the-- It's 75% of all mortgage debt is housing. So, from a basic balance sheet perspective, when you get that 25% reduction on the asset side, you just have a lot more capital at play to do everything. Is it a problem in the long run? I would argue almost certainly not, but in the short term it's one of these things where a deflationary price impact like that, I think has the--
What it's going to do to consumption is it's going to suppress it even more, because not only do you have the reduction in capital on really all household balance sheets and the aggregate economic balance sheet, but you have consumers who then start to experience this price decline and it's the opposite of a wealth effect. You start getting this poverty effect, basically, where consumers now, they feel they need to be more cautious because they just have a lower net wealth.
This is Schiller's old work on the wealth effect that housing actually has a really significant impact on the long-term wealth affecting consumption because consumers recognize it as the vast majority of wealth in the United States and across the world is real estate. And so, when you get big variance in this price, you get big variance in consumption.
Bill: Yeah, that makes sense. I'm probably six months late on this thought. The other thing that I've been thinking about lately is, so, rates going up should have a lagging impact on spending and capital budgets and whatnot? Do we get into a scenario where 2023 to 2024 is slow? We've gone through this period of increasing margins. One might be able to argue that that's operating leverage. If the Fed really over tightens, do we flash the negative impacts of operating leverage and do people freak out? What does that mean? I have not thought the possibility of a real big downward pressure in asset prices. I hadn't thought that that was probable, but I believe in the reflexivity of all this stuff and starts to make me pretty nervous, that probably means I'm late. I don't know.
Cullen: That's the weird thing, especially with real estate. You could have walked through all of 2006 and 2007 being super bearish about everything. The Fed at that point, the Fed had raised rates from 2003 to I think halfway through 2006 and then they started to walk back rates a little bit as inflation started to come in a little bit. But the impact of all that adjustable-rate stuff and the credit markets didn't really hit the financial markets until 2008.
Milton Friedman wrote a paper 50 years ago about the long and variable lags of monetary policy. I think that that's the thing that, looking at this through more of a lagging perspective, it makes sense that when the Fed raises rates, especially when they've raised rates as fast as they have, well, it doesn't have an immediate impact. Especially, housing is such a slow-moving beast.
Bill: Yeah.
Cullen: We built a house two years ago and it took me 18 months just to get a permit for it. So, it's weird, I mean, California is weird. It ended up taking us three years from start to finish to actually submit permits and then finish the house. And so, all of this, building a home is an inherently long-term process. And so, all of this is going to have this lagging impact because monetary policy primarily moves through the real estate market. And so, I don't think it's unreasonable to look at what's going on in 2022 and say, "Hey, this is going to have an impact through, who knows 2025?" How bad is it going to get? Nobody knows, but I think it's naive.
I see a lot of people talking about how this hasn't had any negative impacts, yet. There hasn't really had an impact on the unemployment rate or consumption. That's in part because when you start getting the slowdown that results from credit, well, you actually weirdly get this short-term boom in credit because consumers actually start borrowing more at the current rates to make up for the fact that incomes are starting to slow. So, GDP is starting to slow, domestic income starts to slow down, consumers actually start to borrow more weirdly in the front end of this.
You look back at almost all credit cycles, as the Fed starts to raise rates, this happens almost every time. Credit didn't really turn until late 2007 back during the financial crisis. And so, you could have an instance here where the consumers actually are spending, they're borrowing more to keep up with consumption and that doesn't really turn until unemployment starts to really come in. I don't know if we're there yet, but there's certainly a lot of headlines that are talking about how firms are.
Look at Big Tech. Big Tech for the first time in what, 10 years is finally starting to really reign things in and say, "All right, we went a little too far here. We need to peel things back." And so, how bad is that going to get? I hope it doesn't get that bad, but my worry is that the Fed is sitting here and they're so worried about the short-term inflation rate that they're ignoring the potential that you could get into the back half of 2023 or early 2024. The impact of what they're doing will only then start to really be having a negative impact. What if it's a lot worse than they expected at that point?
It's the opposite of the whole transitory thing, where they kept rates really low for a really long time and I think misinterpreted how much the fiscal packages were going to impact inflation and how much low rates would impact inflation. They waited on all this lagging data to confirm that the economy was on firm footing before they started to raise rates. There was no forward-looking guidance into any of this. What if they're doing the opposite of that now, they're waiting on the data to confirm that inflation is really under control. A big part of that is they're going to wait for the unemployment rate to bump up.
By the time you start getting a big bump in the unemployment rate, well, what if it happens a lot faster than they expect? What if they find themselves in a position where inflation is actually falling faster than a lot of people expected and then you're getting just the exact opposite of what we saw with the whole transitory narrative?
Bill: Yeah. Well, it's interesting. I don't know enough about energy to have an informed opinion. So, why don’t I just talk about it now. But a lot of people, it seems are hiding in energy and I wonder-- You take airline ticket increases. What are they? They're up like an astronomical amount year over year. A lot of that appears to me through the income statements to be just like fuel pass through. If energy breaks a little bit, then the fuel comes down, the ticket prices inevitably follow with a little bit of a lag.
To your point, we could be in a scenario where autos are highly discounted because they can't move them. Homes are discounted because people can't afford them or whatever. All of a sudden, airline tickets are coming down and then what do you do? if it is true and I believe it is that these policies work on a lag, it's not going to be so easy to just cut and turn it back on. You're going to need the fiscal side and then that's scary in itself, I think.
Cullen: Well, that's another thing that's really interesting about the current environment is that what is the likelihood. So, it's starting to look increasingly like the Republicans are going to win not only the house, but also the senate potentially. At best, it's going to be mixed. And so, what's the likelihood that we're going to pass any sort of fiscal package into a big downturn? I would be shocked if we're able to cobble together anything after-- The inflation is so psychologically scarring. I think that the impact of the last few years, I feel fiscal policy is dead in the water for a long time. So, it's interesting to think about the scenario analysis, where--
What if you did get a bigger downturn than a lot of people expect here? Maybe it's not like 2008, but you find yourself in a situation where the Fed is really walking things back. You're not going to get as much stimulus as I think a lot of people are used to where you're getting a big fiscal response like we did in 2008 and then 2020 combined with the big monetary policy response. So, how do markets respond to that?
Obviously, they'll respond well to the Fed, but even in that scenario, I don't think the Fed is going to be super-fast or aggressive to respond just because I think they're still in this wait and see mode, where they really want to see-- They're going to wait until inflation is really back to their target before they do something really aggressive. And so, how do we get there? Maybe it's this nice little slow glide that the Fed is hoping for or it could end up being something a lot more jarring that is going to make the financial markets really, really volatile in the next 18 to 24 months.
Bill: Yeah. Man, what a pain in the ass? You've got COVID stops things, arguably overstimulated. I think it's probably we over stimulated. Rates stay low. Now they're going up. It's like a bullwhip after a bullwhip lately since COVID.
Cullen: It's one of the reasons why-- It's funny. A lot of people think I'm like a Fed apologist, but really a lot of what I do is I'm just explaining how the Fed works and why the Fed exists. And so, I think a lot of people read my work and they're like, "Oh, he's like a big advocate for the Fed" and I'm like, "Well, no." If you look back at the history of banking and whatnot, banks on their own, private banks, just really the kicker. They don't operate well in panics and that's the whole history of private banking. And so, we created central banks basically to come in and act as an intermediary, a buffer that especially during financial panics, the central bank comes in and says, "Okay, we know that Bank of America doesn't trust JPMorgan, but here, we're the independent intermediary, and we've looked at both of your balance sheets, and we think you guys should be perfectly fine clearing payments between each other." That's the basic gist of what a central bank does for the most part.
They get all this airtime for tinkering with interest rates, and quantitative easing, and a lot of the stuff that the media focuses on. They don't get any credit really for the fact that just in the course of our discussion, billions of dollars of payments have settled in an Interbank Clearing System run, in part, by the Federal Reserve. And that system, it works seamlessly almost all the time. It actually works pretty seamlessly even when the shit hits the fan. So, 2008 was actually a great piece of evidence that this central clearing house function of central banks, it works really well even during a panic. So, even when the banks are looking at each other and saying, JPMorgan's looking at Bank of America and saying, "I don't trust you and you don't trust me." Well, the Feds there actually intervene in a really positive way where they're able to be that third party intermediary.
Where this all gets really messy and discretionary is with the way they manage interest rates and the way they manage their balance sheet through quantitative easing. That's the thing that I have been much more critical of over time because taking this to investment management, I'm not a big fan of discretionary investment policy to begin with. I just think that once you start getting a lot of opinion involved and a lot of fingers in the air like, "Oh, well, how do I feel? It was in my gut about this investment." You tend to get a lot of behavioral biases involved in that. I think monetary policy falls for all the same biases where you can be data dependent and have the smartest PhDs in the world operating interest rates and the Fed's balance sheet and they will still make mistakes because they're human beings. And so, I'm a big advocate of automating a lot of this stuff and creating more of a rules-based system, which is still going to have its own errors, but you're not going to have the same level of like Neel Kashkari and Jerome Powell just going around and doing speeches and saying, "Hey, we feel inflation is too high."
Bill: [laughs]
Cullen: Your feelings are that inflation is too high or is there some more robust forward looking empirical model for this?
Bill: How much of what they're doing do you think is a function of--? They have a dual mandate. One of the parts of the scale is price stability, the other is employment levels. If employment isn't cracking, you can really lean into one side of the scale. Obviously, the problem is employment cracks on a lag, but I just wonder how much of it is talk versus what they actually think and just trying to do whatever they can. I don't have a good answer.
Cullen: Nobody does. That's the other screwy thing. The last 10 years broke the dual mandate narrative because inflation was low and unemployment was low. So, there was this weird period where there was almost no correlation. Typically, you look at like a Phillips Curve model and it's like there's some inverse correlation between inflation and unemployment, especially in the long run. So, a 10-year period where inflation is 1% to 2% and unemployment is near record low. That shouldn't happen inside of these models, but it did and it does happen. And so, I don't know.
To me, in a lot of ways, the dual mandate is almost like a conflict because you do end up having these periods where inevitably, in order for the Fed to be really effective, they do basically have to crush unemployment in order to bring down a high inflation. This is the like Volcker Fed sort of sledgehammer approach to monetary policy. You could argue that that's perfectly necessary, but at the same time, it's really strange actually to see people like Jerome Powell right now saying, "We essentially need unemployment to go up in order to bring inflation down," because you're like, "Wait a minute, that's indirect reach of one of your mandates," right?
Bill: Yeah.
Cullen: You could even argue that there's like a-- I've argued there's a third mandate that's-- Last year during 2021, anyone who I think more in tune with the financial markets like, "My warning flags were all up last year. So, I was really early being bearish on everything going on" just because-- when you look around at the crazy things going on with the crypto markets and NFTs and equities going up every day. Things like GameStop, AMC, those things shouldn't really happen in an efficient market. The thing that really set me off was, I had a relative who moved to San Diego actually and I went out looking for homes with him for like weeks on end. The things I was just seeing, I was like, "This is crazy." People are losing their frigging minds.
This was early mid-2021 and I was saying, "Hey, we need to start being worried about financial instability here because what's happening in the financial markets is really unhealthy almost across the board." That's the third leg of monetary policy that the Fed doesn't have an explicit mandate there, but they really do always get involved when there's financial instability. That's the thing that I think they were negligent about during the big boom was that they were so hyper-focused on bringing unemployment down that they actually were just ignoring the fact that the financial markets, people were just doing so much idiotic stuff all through late 2020 and 2021 to the point where a lot of what we're seeing unfold now is the direct effect of just that boom bust cycle where we allowed-- The old Minsky statement that, "Stability breeds instability." What was the seeming stability from 2021 was really a building instability. A lot of what we're seeing now is this big give back.
Bill: Yeah, that makes sense. Something that worries me a little bit is, I know that when you drink too much, it hurts a lot more than you want it to the next day and I'm not sure that we felt all the pain.
Cullen: Yeah, how big is this hangover going to be? It's starting to feel like-- I always tell people because I work with a lot of individuals. I say, "Hey, the next 18, 24 months, there's going to be a process and you have to be patient." It reminds me a lot of ways of the early 2000s recession. There're facets of it that remind me of 2008 although that one was obviously, I think, a lot scarier than anything that we're likely to experience in the next couple of years. But I think a scenario a lot like 2002 or that early 2000s environment, we're just slogging through this really a housing downturn, a housing give back, and a lot of financial markets just resetting. It sucks in the short term, but it's probably a really good thing in the long run.
Bill: Yeah, I think that's right. I know for a fact that we can't have price appreciation like we had for more than a few years without it becoming a really, really big problem. So, I don’t know, I guess, I just hope for all of us that we've nipped it closer to the bud than not, but who knows?
Cullen: Yeah.
Bill: One of the things that I've enjoyed you talking about over the years and I don't want to make you, I guess, repeat yourself too much, but do you mind explaining exactly what QE is and what it does? I've heard you actually argue that it could be potentially deflationary, which I do not think is a normal take. So, I'd just be curious to hear you talk about that a little bit.
Cullen: Yeah. So, one of the things, especially with quantitative easing is I think it's really-- I started studying quantitative easing a lot back during the financial crisis in part because I knew I was lucky to have a lot of friends who lived in Japan who worked at banks and they understood all of this stuff because the Bank of Japan had been doing quantitative easing for 20 years. And so, some of these guys, one of them actually worked on the equivalent of the SOMA desk like the New York Feds trading desk. And so, this guy had the craziest inside scoop on how QE worked and when I started talking to him, he was like, "Cullen, all the Americans have this wrong. Americans think this is money printing and the reality is that, let me walk you through the accounting here and show you how this actually works because we've been spending outrageous amounts of money in Japan and then implementing quantitative easing. And so far, all we've had is deflation. So, let's walk through the balance sheets."
That's really useful because when you think about the way that QE actually works is, well, what happens initially is the government has to deficit spend. The government has to issue a bond in order for the Fed to even be able to buy back that bond. So, when you think about where the real asset printing comes from, well, it's actually the Treasury or the government as a whole that issues the net asset in the first instance when it runs a deficit. And so, running the deficit is the thing that-- I think this is also a big lesson from COVID is that when the government runs big, big deficits that can cause big, big inflation. That's the big difference between 2008 and 2020 is that you get this big deficit and then the Fed comes in and basically runs the exact same policies they did during both panics. What was the big difference though? The big difference was that, well, we spent $800 billion in 2008. We spent $7 trillion over the course of the COVID period. And so, what the Fed was doing was pretty close to equal in size in terms of their response. But the difference was that there was a huge amount of bond printing from the Treasury through deficit spending. And so, from an order of operations perspective, you get this big initial boost in bond issuance because of the deficit. Then what does the Fed do? The Fed comes in after the fact and they basically just remove bonds from the private sector and give people deposits. And so, you can almost think of it like, "What if the Treasury had just issued deposits in the first instance?"
Well, you could properly call that money printing. People, for some reason, they don't think of deficits really as money printing in the same sense that dumping wheelbarrows of cash out on the ground would be. But essentially, the government is printing assets, let's call it that, when they run a deficit and so, what the Fed does after the fact, not that it doesn't matter, but from a balance sheet perspective they're really just swapping one safe asset with another safe asset. The kicker with QE, especially from a household perspective is that, well, before QE the household not only held this net financial asset as a bond, but that asset yielded, let's say 3%, 4%. Whereas when they get to deposit, at least for most of the last 10 years, the deposit yielded nothing. And so, private sector incomes actually go down.
People talk about how the Fed was making so much money. They're talking about how the Fed is losing money now, but for 10 years there, the Fed was making so much money. Well, that money was money that private sector should have been making or would have been making if they had just held the bonds because it's just interesting to come from the government, that now the Fed is taking on. So, that's the narrative that or the argument that QE could potentially be deflationary is that private sector balance sheets are the same size in essence, but incomes actually go down as a result of QE.
The thing that makes all of this really impossible to analyze is that, well, what is the knock-on effect of the deposit? Well, the Fed would argue that what they're really trying to create is like a portfolio rebalancing effect. They really want people to sell their bonds, take on deposits, and then they want people to go out and fund investment. They want people to go out and buy junk bonds, fund to private investment, buy stocks, bid up assets, and create this portfolio rebalancing effect, where everyone gets wealthier through essentially funding more investment and really revaluing balance sheets in essence.
How much truth is there to that? The evidence is pretty mixed on it. The Fed's balance sheet was flat to down from 2015 to 2019. The stock market just went up up up. There's a lot of evidence in Japan that there's no correlation really between QE and stocks. Europe has been doing all the same stuff that the United States has been doing and the US stock market [unintelligible [00:39:12] the pants off of Europe for the last 10 years. And so, there's this weird effect where it's like, "Well, wait a minute, even when you dig down into the US stock market, the US stock market, the bull market from 2010 to 2020, it was largely large CapTech." That was the dominant driver of it, at least. When you peel that off, the US stock market's performance doesn't look that much different from the rest of the world.
Did QE only impact large CapTech? I don't know. There's a lot of conflicting evidence. I certainly don't think that QE does nothing, but I'm not convinced that QE has nearly as big of an impact as something like deficit spending does.
Bill: It was part of the issue that in addition to-- The Fed puts the deposits into individual's hands, which sit in banks. Banks go out and lend that. It is part of the issue that the restrictions on banks to lend, got so much tighter following 2008 that we just didn't get the aggregate credit that maybe people expected and that's why inflation stayed low?
Cullen: Yeah. My view of the post-financial crisis period was basically that you had a big change in lending standards. But really when you look at that period, consumer balance sheets, they were broken. People weren't borrowing in large part because there wasn't demand for borrowing. So, how much of that was like a change in regulations in lending standards versus demand?
Bill: Yeah.
Cullen: It's like looking at the housing market today and getting into the supply-demand argument. That's the beauty of economics is that whether you're a supply sider or demand sider, you can always make up a BS argument about which one's more important, you know?
Bill: Yeah. The interesting thing too is, right now we're talking about lagging data series or whatever. The tax receipts from wages and salaries are quite high. The deficit is quite a bit tighter this year or lower than was projected. But I think that next year it could widen out. I wonder how much of multiple compression is a function of the Treasury tightening like in a phantom way, tightening liquidity this year and then next year it's going to go out now that which is not to say the assets will expand next year at all, but I just wonder how much of that I-- [crosstalk]
Cullen: Well, it is a natural ebb and flow in the way the government's balance sheet works in large part because we have a lot of built-in automatic stabilizers in the way that the budget works. This is largely a function of like what you are saying. As tax receipts, as the economy strengthens, tax receipts naturally increase. If you don't have a corresponding increase in spending or in a year like this year where a lot of discretionary spending is actually being peeled back in, especially compared to a year like 2021 or 2020, when you had the big discretionary COVID boom, well, you got a natural decline in the balance sheet or the amount of deficit spending that goes on just because you get that big surge in tax revenue.
The alternative is, let's say, the unemployment rate goes up next year. Well, you're going to get a lot of people applying for unemployment claims, essentially. And so, you're going to get the opposite effect, where tax receipts are going to decline and then government spending goes up because essentially, unemployment goes up and you get a lot more people who are getting unemployment benefits. And so, there's this natural kind of ebb and flow between taxes and deficit spending across time just because of the way automatic stabilizers are designed to respond to, essentially, the amount of unemployment claims relative to the amount of tax receipts that are built in.
Yeah, in a weird way, you could get the economy weakening a lot into the next 12 months and 2023 deficits could end up being bigger in part because the economy is just weaker. That's going to have a positive impact. A lot of this flows through. Deficits flow through to corporate profits to a large degree. So, you could get the opposite effect for corporate America that's beneficial in large part because they're the beneficiaries in the long run of some of this economic weakness.
Bill: It's bizarre. This stuff is very, very hard for me to figure out, but that's why I like listening to you so much. I don't know how a guy that started out reading Buffett turned into such a macro prognosticator, but I really like how-- First of all, your book, Pragmatic Capitalism, I've been working my way through it. I'm about 50%. I really enjoy it. I like how you've broken down topics that I find hard to understand. You write to me like I'm a fifth grader and I appreciate it because [Cullen laughs] I can understand it. So, thank you. But basically, when I read it, the conclusion that I come to is be diversified because who the hell knows what's going to happen?
Cullen: Well, that's the thing. A lot of my existing, I think, framework for navigating the world is framed in the 2008 period, where-- I'm running back then. I stupidly left a good job at Merrill Lynch and started my own private partnership. I was really following a Buffett ethos where I was picking individual stocks and I'm running the strategy that I had no idea that this was the benefit at the time, but it was essentially an overnight strategy where I was only owning stocks overnight. This is the famous overnight effect. I had no idea this was even a thing, but I thought I was a genius for like five years, because we were beating the pants off of the S&P 500.
In 2008, everything stopped working. I started to notice. I had been running the strategy for five years and it was super systematic. The research and the way that I was operating, it seemed almost too predictable. In early 2008, it very clearly broke. It just stopped working. I started to realize, especially as 2008 unfolded, I realized like, "Holy shit, if you don't understand how the macro system works and especially how the Fed system works and the Treasury system, you can go through these periods of multiple years, where your strategy, it will be completely broken." So, to me, that was kind of the transformation where I realized like, "If you don't understand this big picture stuff, well, it doesn't matter how good of a swimmer you are. The momentum of the river will take you wherever it's going." And so, I realized like that and being--
I am, over the course of my career, especially as I've gotten older and working with individuals, you start to realize the importance of stability in a portfolio. The inherent instability of a long only equity portfolio, it doesn't really jive with retirement and portfolio stability. And so, all of this coming together, I became much more of an investor who not only from a behavioral perspective, but from like a financial planning perspective, I realized like, "Hey, you've got to be more well-rounded than just picking stocks." Most people need to be doing lots of other things in addition. I don't have a problem with picking stocks, by the way. I don't have a big [unintelligible [00:47:35] with like a Buffett approach by any means. But I think people need to be doing other stuff to complement, if they're trying to implement a stock picking portfolio. It's prudent financial planning to be doing lots of other diversifiers inside of a portfolio.
Bill: Well, you say you don't have a problem with Buffett approach and I tend to agree with you. But I do have a problem with most people's perception of the Buffett approach and I think you do as well. He's doing some sophisticated things, right?
Cullen: Yeah.
Bill: This is not, "Hey, this is some cheap company that screens value and I'm a minority shareholder, so I'm going to bet a huge bet on it," which is not to say that can't work. But it is to say that's not what he was doing, right? You've got an activist early career. To your point, you've got distressed investing that worked out in a big way in Coca Cola or AMEX and GEICO, those were not necessarily like, "Hey, it's cheap. I'm going to bet the farm and it worked."
Cullen: Yeah, it's super alternative. His whole structure is really, especially at the time, running Buffett partners just with the fee structure that he had and then transitioning it into basically like an insurance focused company, and then doing a lot of what is essentially just almost like venture capital or private equity style investing, he was lightyears ahead of what everybody else was doing. When did private equity and venture capital even become really big mainstream things? Not really until the last probably 20 years. Arguably, they're not even still very mainstream. Buffett was doing things like that 50, 60 years ago.
So, the structure of Berkshire and that to me is the real alpha that Buffett capitalized. It was really the structure of what was originally Buffett partners and then the structure of Berkshire as this weird insurance focused company that really then started to do a lot of private equity style investing, that was just a really unique innovative structure at the time that took advantage of a lot of big long-term trends that he was way ahead of the curve on.
Bill: Yeah, and I think, I don't know, maybe a modern-day person is Ackman. Some people have problems with him. I don't have an opinion. But if you're following what he's doing, he's got the CDS stuff that he does. Sometimes, I think that people read the history of Buffett and overlay that with a couple of value-- Maybe I'm just personalizing it, maybe I should just say, "This is what I did." But I read Buffett, I read some books that show that value works and I'm just really grateful that I didn't have a whole lot of money when I did that because my conclusions were pretty flawed.
Cullen: Yeah. [laughs]
Bill: [chuckles] I think I'd be pretty sad right now, if that had-- I don't know. I'm just glad that risk didn't manifest itself at the time.
Cullen: Yeah, and honestly, I think that's a pretty natural progression for especially, as I've gotten older, and made more money, and gotten married, and had kids, I don't know, maybe I'm just a big wimp, but I've become a lot more conservative-
Bill: Just kind of like me.
Cullen: -over the course of my life just because-- The things that I would do before I had kids are I look back and I'm like I'd never jump out of a plane now or I won't even ride a bike fast downhill. I'll drive in the right lane. I'm so much more hyper aware of--
Bill: Yeah. Well, you've got something to live for now.
Cullen: Yeah. Other people rely on me to be around for 20, 30 years or whatever. But that's top of mind all the time now. And so, I become a lot more conservative. If I had 100% of my portfolio in stocks right now, it scares me too much to be blunt.
Bill: Yeah.
Cullen: So, I think that's the natural progression though of investing and realizing, learning what your risk profile is over time and God bless Buffett that he can go through these big ups and downs and not really get too scared, although I'd argue-- Even when you look at Buffett, he's a lot more diversified than people probably think like, "This guy's got hundreds of billions of dollars of Treasury bills, basically, in his portfolio."
Bill: That's always bothered me. Charlie's like, "I only have three positions." It's like, "Yeah, but one is Berkshire," which is hundreds of positions, I'm sure when you really drill down into it. That's not really an honest comment.
Cullen: Yeah, in a lot of ways, especially with as diversified as Berkshire is now like, it's become very highly correlated to the S&P 500. You could argue that Berkshire is the cheapest index fund in the world now.
Bill: Yeah.
Cullen: It's just a big S&P 500 fund that has a 0% expense ratio. That's how a lot of people treat it.
Bill: Yeah, I think it's got a little idiosyncratic risk than, I don't know, maybe I'd like to think at times. Can we talk about the intertemporal conundrum because I love this concept? I think it's something that gets people in trouble a lot. I really liked when I'm reading about stocks for the long run and you said, "The problem is, you don't always have the long run" and I was like, "That is exactly the problem."
Cullen: Yeah, this is the other thing. As I've gotten older, I've become much more of like a behavioralist. I am increasingly hyper focused on just investor behavior. I'm fully convinced at this point in my life that the deficient portfolio that you can stick with will probably perform better than chasing the optimal portfolio because you'll constantly make mistakes around chasing the optimal portfolio. Whereas when you work at things from more of like needs versus wants perspective, when you invest in the portfolio that you need relative to the portfolio that you want, you just realize that you're making some sacrifices in the portfolio that you need. Those sacrifices actually in the long run, they end up smoothing returns in a way that result in a lot less behavioral bias.
It's like, 2021, everyone's looking at Cathie Woods portfolio. That's the portfolio everybody wants. But by the time you typically buy into the portfolio that you want, well, that portfolio sometimes ends up being the disaster portfolio like it has been in 2022. Then all of a sudden, you realize that, "God, if I'd been a little less greedy and gone for the portfolio that I need," well, you'd still be down this year, but you wouldn't be down 70% this year.
Working from behavioral perspective, the concept of the intertemporal conundrum is really all about-- It's all about sequence of return risk and navigating time horizons. I think one of the interesting things that I've realized, especially in the last 5, 10 years is that people need to cover all of their time horizons. When you're going through a proper financial planning perspective, I just published a paper a couple of months ago called All Duration Investing. The basic gist of the concept is that it's a lot like a bucketing strategy in that I think people need buckets for all facets of the time horizons because that's ultimately--
The key to good financial planning in my opinion is basically asset liability management. We all have liabilities across all these different time horizons. We're all going to retire at some point, we're all going to break our hip at some point or run into health problems in the long run, but in the near term, we've all got a monthly rent or mortgage we have to pay, we all have credit card bills in the short term we have to pay, we've all got, let's say, you want to put a down payment on a house in the next five years, let's say you've got kids that are going to college in 10 years. There's a sequence of liabilities across all these time horizons.
The problem with owning something like a 100% stock portfolio is that-- the 100% stock portfolio, it probably with almost near certainty, it covers all of those long-term liabilities. But owning that 100% stock portfolio, what it does is, because of the volatility of the asset class, it creates all this short-term instability and uncertainty, where if you're going to own a lot of equities, in order to meet your liabilities in the short term, you need a short-term bucket. You need to hold a cash bucket. And so, from a behavioral perspective, I'm a big advocate of not just owning just two buckets. I'm an advocate of owning lots of buckets that cover all of these time horizons, where you can basically build something that's equivalent to like a bond ladder.
The beauty of a bond ladder is that the bond ladder gives you certainty of principle across very specific time horizons. And so, I always build bond ladders for people, because from a behavioral perspective, nobody questions the stability of a bond ladder, because you have certainty of time across the return spectrum in that portfolio. Whereas the problem with the stock market is that, what's the time horizon of the stock market? Nobody really knows. You said stocks for the long run. What the hell does that mean? It doesn't mean anything. What is the long run to me versus a retiree? Well, they're totally different concepts.
What I did with the All Duration paper was, I really tried to quantify what the time horizons of all of these different instruments were in the stock market, for instance, in my model is an 18-year instrument and so, you can go in and you can plug and play these different instruments, where Treasury bills are a one-year instrument, essentially. The intermediate bond market is like a five-year instrument. A portfolio of preferred stocks is like a 10-year instrument. A multi-asset portfolio, stocks and bonds together ends up looking basically a 10-year instrument. And then the stock market is this 18-year instrument. You can take all these assets and you can apply them using a financial planning focus that it gives people greater certainty of what their assets are going to look like across specific time horizons.
I think from a behavioral perspective that's a really powerful tool because it gives you greater certainty of how much money am I going to have at certain times in my life as I navigate all the uncertainties of my liabilities. You're doing the old diversification thing where you're sacrificing some return in order for greater certainty. But to me, that's the kicker with good asset management in the long run is that if you create an imbalance between your assets and your liabilities, well, what you really end up doing is you end up creating a lot of behavioral risk in your portfolio, where in a year like 2022, you inevitably end up selling a lot of the equities into a downturn because you need liquidity. And that's the worst thing that you can possibly end up doing in portfolio management.
Bill: Yeah, that was one of the reasons that I really wanted to-- So, I was a credit underwriter before this. And one of the reasons that I left the bank was I watched people close to me bailout in 2008 because they had to. I told my wife, I was like, "We got to set up something where that is not what we do." One thing led to another and now I got this podcast. But I don't know what's next. I may go back into banking. I don't know what I'll do. This has been a fun ride thus far and I'll ride it as long as I can. How did you start your firm? What happened? You left Merrill, you read some Buffett letters or did you read those before you went to Merrill? What happened? I don't know your background as well as I should.
Cullen: Well, gosh, actually I started my career selling insurance. So, when I was first getting into financial services, I basically couldn't get a job doing any of the things I actually wanted to do. I really wanted to be a stock picker. I really wanted to run portfolios for people. That was in large part because I had studied Buffett in college. I had the naive dream of becoming the next Warren Buffett, I guess. So, I get into insurance and I'm [unintelligible [01:01:16] long-term care insurance to people in a boiler room, horrible, horrible environment. I'm more of like a quant type where I was really digging deep into these products and especially with whole life stuff, I was like, "These things, they don't work. Why do we sell these things to people? Compared to a 40:60 or 60:40 portfolio, what do we do in here? We're just selling really, really expensive portfolios for people basically." That sound really appealing, but kind of prey on their fears.
So, I eventually ended up transitioning from my insurance job into Merrill working for a big team. I was the young guy that they immediately gave me $200 million, which was crazy to think of at the time. But then I'm doing something similar where I was just selling stocks. This was old school Merrill days where we were basically, like, we were getting a research report from Richard Bernstein or David Rosenberg in the morning and it was saying, "Hey, this stock is a downgrade now and we're removing it from all of our portfolios." And so, this was the approach that we were taking. Again, it felt more salesy and more like we were taking advantage of people's behavior in essence. So, I eventually came to the realization that like, "Hey, I could peel off with a little bit of money and I brought in enough on my own that I could leave with something that would at least allow me to make a decent income, but I could cut all my client fees in half." And so, that's essentially what I started doing.
Then I'm running the strategy for five years and then the financial crisis happens. That's where I really became more of like a big macro portfolio construction is where I was really starting to focus more, in like a hyper-sense on helping people not only from more of a planning perspective, but really from a behavioral perspective where you can operate a portfolio that's low fee and tax efficient, but also diversified. Somewhat active, but consistent with how people actually perceive behavior and markets over these big ebbs and flows where you're not just naively buying either stocks for the long run type of portfolio or even a 60:40. I think there're tons of behavioral problems with a 60:40 portfolio.
Bill: Why is that?
Cullen: Well, using a simplistic example, the biggest problem with a 60:40, if you were to buy just like a Vanguard Balanced Index Fund, for instance, well, they call this a Balanced Index, but really, 90% of the volatility is coming from the 60% component. So, behaviorally, you're way, way [unintelligible [01:04:18] equities. There's no balance of risk inside of this portfolio but the bigger problem with something like that is that you end up, especially if you own just one balanced index fund or a target-date fund, well, you don't have any liquidity in that portfolio because the portfolio is dominated by what the equity markets are doing or in a year like this year, the whole portfolio is down. So, you don't have any liquidity in that portfolio.
From a behavioral perspective and from a cashflow management perspective, well, if you need liquidity in that portfolio, you've got to sell your stocks and your bonds. And so, it's a big part of why I've become more of a fan of really segmenting your investments, where your portfolio may end up looking like a 60:40 if you take all these components, but I'm a big fan of breaking things down into specific components. I think you're crazy if you don't own a ton of Treasury bills right now. Treasury bills are yielding 5%, technically like a 60:40 owns some Treasury bills inside of it in all probability, but you can't tap the liquidity in that.
From a cashflow management perspective and from just a risk management perspective and a behavioral perspective right now, I think that having these short-term buckets that give you certainty of being able to navigate the next few years, I just think that's a huge, huge advantage over somebody that just is holding a big lump of all this stuff in one diversified portfolio and saying, "Okay, well, I know that this is my target retirement fund and I'm going to hold that thing for 10, 15 years or whatever and I'm going to pray to God, I don't lose my job or need to tap liquidity in that thing."
Bill: Yeah, I think the other thing about Treasuries is circling back to the beginning of our conversation. If we do get into a scenario where there's some turbulence here in the next two years, I suspect that Treasury ladder outperforms a lot of stuff that may appear to have a higher return right now.
Cullen: Yeah.
Bill: I think the Treasury ladder may be a good source of funds down the road if it makes sense for people at the time. Yeah. I don't know, man. I really like your book. I think it's great. Like I said, diversification was the thing that I really thought about as I read it more and more. One of the benefits of doing all this is I get to have people tell me like how dumb I am a lot of the times and they're right.
Cullen: [laughs]
Bill: [chuckles] I just wonder how much of the way that I look at the world is. I've only seen for my adult life rates go down and globalization increase. What is a potential other set of facts that the next 20 years could introduce?
Cullen: Well, that's really the whole-- The definition of diversification should be that basically everyone's stupid.
Bill: [laughs]
Cullen: What you're really doing when you diversify across all these different asset classes is you're diversifying across the fact that nobody knows what's really going to happen. And so, you want to own a lot of stuff because nobody knows and the future is uncertain. And so, by owning all these different things and especially, I think using it across this specific time horizon perspective, you're able to better navigate all this stuff, because especially when everything gets really highly correlated, you won't find yourself in a scenario where you become a forced seller.
Investing is, it's a process of being humbled, I think. That's the biggest lesson, I think that a good investor learns across their careers that the markets may not be efficient. But even if the markets are really stupid and you're the smartest guy in the room, well, the stupid decisions of everybody else are going to drag you down along the way because all the stupid people are doing things that you didn't predict, because you're seemingly a genius. You're finding yourself having to ride the wave of the decisions of the stupid people who are doing irrational stuff.
A lot of people find themselves in those scenarios even if you're the smartest guy in the room seemingly, you find yourself in a scenario like 2021-- Well, all the so-called stupid people are bidding up homes and you find yourself in a scenario where you're like, "Oh, my gosh, I have to run with the crowd now because I have no other choice, because for whatever reason, I just moved to this new city and I want to get into the real estate market and I feel like I need to be in this for the long run or whatever it is." And so, it's weird. Markets will, I think, humble everybody in the long run and that's a really valuable lesson to learn that you don't know what you don't know.
Bill: Yeah, until something like 2008 comes and exposes that and then it's probably too late, right? That's the other thing I'm trying to remind myself like learn from those that have been around the block, so that I don't have to learn those lessons.
Cullen: Yeah.
Bill: I don’t know, it's been interesting. How was the first Investor's Podcast that you went on? What did that do to your career? Because I feel that's a big show and you got on in a while ago. I don't know, I'm just curious. What had podcast done for you?
Cullen: It's interesting. I don't remember the first Investor's Podcast. I think I've been on with Stig and Preston like, I don’t know-
Bill: A bunch.
Cullen: -10 or 15 times at this point.
Bill: Yeah.
Cullen: The story that I always found the funniest was, I went on Bloomberg TV. I think it may have been 15 years ago at this point. I remember thinking, I was on with, who was it? It was David Rosenberg of Merrill. It might have been. But anyways, I was on the big morning show and I go on and I expected my phone to just like explode. I expected my email inbox to just like explode afterwards. I'll never forget, like, going on the show and I'm on there for, whatever, 15 or 20 minutes. Nobody reached out to me, nobody texted me, nobody emailed me, I don't know, if I just bombed or it sounded like an idiot or what. I'm thinking back on it, I looked, I was like 12 years old. So, maybe people just saw me on TV [Bill laughs] and they're like, "Who the F let this kid on TV to talk about macro finance?" But I died laughing after that because I was like, "Man." Literally, nobody reached out to me after that.
Bill: [laughs] This is my big break, folks. Call me.
Cullen: Yeah, literally. I was like, "This is going to be a huge moment for me." Podcasts were totally different, obviously. Especially podcasts would become so popular and podcasts have become a huge, arguably like my main source of media now just because they're so popular. It's such a concise and efficient way to communicate topics and people can fast forward and watch it at their leisure or whatever, listen at their leisure. So, it's funny though with media. It's especially working on the side of building media content, building my website over the years. I just started a YouTube channel. It's a slog. It's a big, big space with a lot of people and a lot of people are saying really smart stuff, which is the benefit of, I guess, the media world we live in now, where it's not just comprised of like-- God, when I was coming into the business, it was basically CNBC and Bloomberg TV. And then some people were writing blogs and that was it.
Bill: Yeah. I like your short clips. I think you're very good at media. It's been fun to follow and I've said it a number of times, but I mean it. I like how you package what you say and I think what you say is smart. And that's a good combo. I think the thing that's nice about podcasts is you can get in deep on different topics. You're not limited five-minute run or whatever, say what you say and then leave.
Cullen: Well, that's what I was dying. So, I'm doing these three-minute money videos on YouTube now. The first time I recorded one, it took me, I don't know, it took me 24 hours to actually film and edit all the content and get it all back. I remember thinking to myself after I published the first one, I was like, "Holy cow. This was a huge mistake. [Bill laughs] I'm publishing-- It's taking me a day, a full day to make a video that's literally three minutes long." And so, arguably, three minutes is way, way too short. But no, I love the fact.
One of the problems with mainstream financial TV is that you go on there-- If you watch an interview, they'll have somebody on for even if it's 5 to 10 minutes, half of it is the interviewers talking and then the other half is-- It's just not long enough to say anything relevant. And so, the long form content is nice because you can actually get into some of the details about all the stuff, because that's the other thing. Finance and investing are like an endless rabbit hole of different topics in intertwined components of the financial system and whatnot and nobody ever is going to figure out how all this stuff is actually intertwined and works together. It's nice to be able to at least cover a lot of these topics in a more wide-ranging discussion.
Bill: Yeah. I have found the more topics I cover, the less I think I know. I was certain that I knew everything 10 years ago and now I'm not certain I know anything.
Cullen: Oh, yeah.
Bill: [laughs]
Cullen: Yeah, that's how-- [crosstalk]
Bill: That's a life-- [crosstalk]
Cullen: When I was doing stock picking thing, God, running the strategy for four or five years and I was making real money from my, basically, rolling out of bed and jumping on an interactive brokers account and making money that back then seemed it was crazy. And then going through 2008 and being really humbled and realizing like, "Oh, hey, this is actually a really complex system and maybe you haven't figured it out."
Bill: Yeah, I think the concept of paying attention to the macro to try to figure out which way the stream is going, I think it at least makes sense. I don't know if people can do it accurately or I don't know if I can do it accurately, but not thinking about it seems silly.
Cullen: I think that the bigger thing is, I technically like some of the strategies I run are-- I actually think that even a Vanguard Balanced Index Fund, I would argue it's a macro strategy. It's a lazy one, but it's really at its core. It's just a big, broad macro strategy that just runs a very simple, systematic, fixed rebalancing structure. But I would argue the biggest advantage or the biggest benefit of understanding macro is, it'll shield you from a lot of mistakes. Because I think that the more we understand about something, the more comfortable we are with the way that it functions over time.
For instance, in today's environment, you might have a 10-year bond ladder and the 10-year component of that bond ladder is a mess right now. But you know because you've actually internalized and understood the structure of the way that the ladder works and the way that the actual instruments work. Well, you know the function of that in your portfolio. You know that this is just the way things work across any long period of time. But you also know that over the course of a 10-year period, the average returns of that ladder should be relatively stable.
Bill: Yeah.
Cullen: So, I think a lot of that is understanding things like quantitative easing and the way that the government's deficit policies work and stuff like that, are you going to make money from doing stuff like that? No, but will you avoid a lot of mistakes? Will you avoid running into bitcoin at the wrong time or running into gold at the wrong time because you think that hyperinflation is coming? Those are the things that I think a lot of this stuff, it's so grounded in erroneous narrative that you take more of a foundational or first principles approach to this and you understand it for what it is, you can look at someone who is screaming about money printing because of quantitative easing. You can say, "Well, hey, maybe I'll own a little bit of gold or bitcoin, but I'm not going to buy into the dollar is collapsing narrative because you've fundamentally misunderstood the way that this thing works, you know?"
Bill: Yeah, and those narratives tend to be so scary. It's like, "Oh, my God, the dollar might be collapsing because of money printing."
Cullen: Yeah.
Bill: At least coming out of 2008 that was such a scary time that when you layer on a scary sales pitch, I think it sets people up nicely to make a lot of behavioral errors.
Cullen: Yeah, it brings you back to really, I think a more grounded perspective where you can look at something more for what it is rather than so much of the narratives, especially in the investment world are. They are salesy. I come from a sales background where that to a large degree what you're doing is, I mean selling life insurance is to a large degree, you're selling the fear of death.
Bill: Yeah.
Cullen: That is essentially what it comes down to. That can have a very functional financial planning perspective. From a sales perspective though, it can also be a dirty nefarious thing if you're doing in that sort of way. I think that when you step back and you understand a lot of this stuff more for what it is, well, you're not likely to be prey to a lot of the sales pitches because you can look at things for what they are or from a more grounded perspective and say, "Okay, well, your narrative about buying gold sounds very intriguing, and convincing, and hyper emotional, but I also know that I probably need to own some other stuff because your narrative isn't actually grounded in factual reality.
Bill: Yeah, that's right. Well, if people have enjoyed this conversation, where can they find where you write and how can they reach out to you?
Cullen: So, I write mostly at Pragmatic Capitalism, which is the website that is the same name as the book. And then my company is Discipline Funds. So, we run very planning-based, I call it all duration-based strategies that are really designed to help people build diversified, low fee, tax-efficient portfolios that are helping them navigate all the behavioral troubles and the time horizons that we navigate over time.
Bill: All right. Well and on Twitter, you are at, what is it?
Cullen: My full name, @cullenroche.
Bill: Yeah, I thought it was @cullenroche. Okay.
Cullen: Yeah.
Bill: Well, there you have it, folks. Cullen, I'm really thankful that you came on. I loved when you were on TV with the hammer. That cracked me up. [Cullen laughs] I've enjoyed talking to you. So, thank you very much for coming on the show.
Cullen: Thanks, Bill.
Bill: All right, have a good one, man.
Cullen: I've got it right here, by the way.
Bill: You've got it right there. Yeah, there we go.
[laughter]
Cullen: You got to keep this thing close with what's going on with the Fed these days so.
Bill: I love it. All right, man, well, have a good day.
Cullen: Yeah, thanks, Bill.
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