ReSolve Riffs with Cullen Roche on Decoding MMT: The Good, the Bad and the Ugly

Our guest this week was Cullen Roche, CIO of Disciplined Funds, founder of Orcam Financial Group and author of Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance. We discussed topics that included:

  • Disciplined Funds’ macro-oriented investment approach
  • Cullen’s rude awakening – classic economics learned in university is largely at odds with real world economics
  • Taking a step back and learning public finances from first principles
  • Digging into the mechanics of quantitative easing, fiscal policy and other major interventions
  • “If you’re not confused, you don’t understand what’s going on”
  • The Kalecki Equation and wealth concentration
  • Fiscal Stimulus – how much is too much
  • An introduction to Modern Monetary Theory
  • The role played by a “currency monopoly”
  • From an MMT perspective, unemployment is a failure of government
  • Why the median voter is so disappointed with the current system that they will likely swing to one of the extremes – the question is which one?
  • The need for productivity improvement to keep up with fiscal outlays
  • The Real Estate Conundrum – a depreciating block of wood on an ever-scarcer plot of land
  • What percentage of homeowners can withstand rising interest rates?
  • The demographic question, Japanification and home prices
  • Thinking of portfolio construction in the current environment – core and satellites
  • Cullen’s 90/10 Rule – helping investors stick with their structured portfolio allocations by “allowing” them to speculate on a small portion of their assets

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

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Cullen Roche
Founder and Chief Investment Officer, Discipline Funds
Founder, Orcam Group

Mr. Roche founded Discipline Funds to help investors obtain access to low fee, diversified portfolios that help them stay the course and meet their financial goals.

Cullen’s primary areas of expertise include global macro portfolio construction, quantitative risk management, monetary economics, financial accounting and behavioral finance. Prior to establishing his own business, Cullen worked at Merrill Lynch Global Wealth Management where he worked on a team overseeing $500M+ in assets under management. Upon leaving Merrill Lynch, Cullen managed a private investment partnership which took advantage of reporting irregularities ahead of major corporate events.

The strategy generated substantial positive alpha (high risk adjusted returns) without a single negative year of returns from 2005-2011. He formed Orcam Financial Group in 2012 to help better serve the much needed retail space with sophisticated but low fee asset management and financial planning services.

Cullen is also a prolific writer. In addition to the weekly musings on his website Pragmatic Capitalism, he is the author of the popular book Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance as well as “Understanding the Modern Monetary System,” one of the top 10 all-time most downloaded research papers on the SSRN academic research network. He is also the author of the popular white paper “Understanding Modern Portfolio Construction.” He was named one of the “Top Wall Street Economists, Experts and Opinion Leaders” of 2011 by Wall Street Economists and was named one of the “101 Best Finance People” by Business Insider, where he was described as “one of the most influential economic thinkers today.” In 2015, Cullen was named one of the “40 Under 40” most influential people in finance by InvestmentNews. He is regularly cited in the Wall Street Journal, on CNBC and in the Financial Times.

Cullen is a Georgetown University alumnus, growing up in the DC area and now living in Southern California with his family, troublesome pup Callie and flock of chickens.


Rodrigo:00:01:37All right.

Adam:00:01:38Good Friday.

Rodrigo:00:01:38Good Friday. We’re live.


Cullen:00:01:41Hey, everybody. Cheers, guys. I’m drinking coffee because I have a six week old baby.

Rodrigo:00:01:49Oh gosh.

Adam:00:01:50That’s what you say.

Mike:00:01:50Yes. Well, enjoy the coffee for the next 18 years of your life.

Rodrigo:00:01:57That’s roughly around the time I took up coffee. I met Mike and Adam that month that my firstborn — remember? Isabelle was born a couple of months after we partnered up, and then I never drank coffee, you guys would do these 10 minute session coffees. I was like, I’ll do it because I’m new and I never stopped. And I don’t know if it’s because I have to deal with these two or with my daughter. But yes, there is some correlation between giving birth to a — to a newborn and coffee for sure.

Mike:00:02:25Yeah. For sure. So, just before we start, anyone listening, remember, this is a wide ranging discussion with four dudes, at the moment, four dudes on YouTube, so this isn’t investment advice. It’s entertainment and education, and you should get investment advice somewhere else at the moment. And we’re ready to go. Whilst we’re here, if you are listening, hey, why don’t you smash up that Like button and share this one with someone you like? And maybe we try something a little new because we’re going to talk about MMT. And I wonder if we could get some folks who are here in the chat just to put in the number one if you’re for MMT put in the number two if you’re against MMT. And let’s see if …

Adam:00:03:14We should have a number three for what the fuck MMT is.

Mike:00:03:18Yeah, number three, you have no idea.

Adam:00:03:21I’m here to learn about MMT.

Mike:00:03:21Yeah, I’m here to learn…

Cullen:00:01:23That’s pretty much everybody.

Mike:00:03:25Yeah. Well, maybe, maybe. I mean, some people have …

Cullen:00:03:27I don’t even know what the fuck MMT is. And I’m the guy that’s supposed to be here to explain it.

Mike:00:03:33So, yeah, so pop that in there. And maybe we can — So, we got a couple of twos coming in. And I wonder if we can change those views or more inform those views so people get more informed and might understand a little better. Getting some funny ones in there too.

Adam:00:03:53Dave, you just refused to be in the box, man.

Mike:00:03:57Dave Nadig refuses to be in the box.

Adam:00:03:58Color inside the lines just for now, please.

Mike:00:04:02So, one is for, two is against, three is I don’t know what it is. And keep that going and we’ll start the discussion. So, where should we start, gents?


Adam:00:04:13Well, let’s introduce Cullen and give him a chance to give a little bit about his background and what he’s been doing lately.

Cullen:00:04:21Yeah. So, I run Discipline Funds, which is a, I guess our new asset management arm from my private advisory firm. I’ve been doing wealth management for — started at Merrill Lynch back in the early 2000s, spun off on my own, kind of naively I guess, at the time, but it all kind of worked out. So, I’ve been independent for basically, I guess, 15 plus years now. And we just started Discipline Funds back last year with Wes Gray and his team. And that’s kind of our new venture. So, it’s kind of doing similar stuff to you guys, I guess.

But yeah, I’m very macro oriented. My background is really like macro econ and really high level finance. I don’t do a lot of, really, I guess what we would call really active investment management. I’m kind of more of like a traditional financial advisor in that sense. I deal with typically very conservative investors. So, my typical portfolios end up being at least a little bit more conservative, more bond-oriented, people that want income, stability, so we’re not all equity focused. So, I end up building a lot of sort of planning-based portfolios that are really multi-asset. So, I end up doing a lot of macro work, in large part, because there’s just a lot of bullshit about the narratives in the macro environment.

And especially in the last 10 years, I’ve done like an inordinate amount of work on understanding a lot of the really big picture stuff regarding government spending, and the big fiscal packages that have been implemented; a lot of work on quantitative easing, and really trying to focus on a, really first principles understanding of how this stuff works, so that you don’t just see, oh, the Fed is implementing QE, and they’re printing money, and everything is going to blow up tomorrow, and hyperinflation is going to come and all the kind of narrative that we saw when a lot of this stuff started unfolding.

And so I was really lucky in that I happened to just in 2008-2009, I knew a lot of people mainly in Japan, weirdly, who had been through all of this. Japan had been doing quantitative easing, and all these big fiscal packages, to combat their own big asset bubbles in the early 90s. So, they’ve been doing all this stuff for 20 years, and I was able to basically walk through all of this with a lot of these colleagues of mine, and learned how a lot of this stuff really works at a first principles level. So, stepping back and trying to be very objective about it, and just trying to look at it through the lens of, okay, how does the accounting work? How does this money actually filter through the economy in a really practical way, and what is going to be the impact ultimately? So that my focus was basically to understand not only is this actually going to blow up the economy, but to be able to explain to people, okay, this is what these things actually do. And this is how much you should really be panicked about this or positioned this way.

Rodrigo:00:07:40So, you almost do it … Go ahead.

Adam:00:07:44So, just so you know the opening quotes can be just taking you completely out of context. You know, where you said, you wanted to inform folks about the fact that it’s not that QE is unleashed, and everything’s going to blow up and we’re going to have hyperinflation with — the opening quote’s going to be QE is unleashed, and everything’s going to blow up and we’re going to see hyperinflation. Right? That’s exactly — we’re going to position this conversation.


Rodrigo:00:08:12So, what I garner, Cullen, is that you’re deep into global macro so that you — it’s like The Defense Against the Dark Arts, right? You actually have to know it to be able to fight against some of the misinformation that exists.

Cullen:00:08:26Honestly, a lot of it is a defense against bad behavior for me. So, as I’ve kind of traversed my career and stuff, I’m pretty convinced that most people should put together simple portfolios that will help them behave well. And if they do that, they’ll do pretty well. It’s the portfolio that you’re constantly searching that is you think is optimal, and typically out of reach, the illusory perfect portfolio that everybody wants, that nobody gets. And the imperfect portfolio that you can stick with is way better, in my opinion, than the perfect portfolio that you can’t stick with. But so much of this, there’s so many bad narratives and so much I think misinformation in a lot of the media, that a lot of my job has ended up over the last 20 years being literally just like someone who kind of explains how this stuff works in a certain sense so that I can kind of help people be more comfortable with what’s going on so that you don’t read some Richard Kiyosaki quote on Twitter about how the markets going to crash every three months and say, “Oh, shit, I need to get 100% out of the stock market, because this sounds scary.” So, putting these things in perspective for me, is just really useful for putting them in not just the proper time horizons, but understanding them at a really operational level so that people behave better because they feel more comfortable about what they’re actually involved in.


Adam:00:09:58Yeah. You’ve written some really long foundational papers that are publicly available on SSRN. I remember reading through, I don’t think I ever finished them, it’s like 80 pages or something of deep fundamental first principles macro that you wrote back in, I want to say 08, 09, 2010, something like that. And you’ve got a book, right, Pragmatic Capitalist that came out a little after that, right? When did Pragmatic Capitalist come out?

Cullen:00:10:29I think I published 2013-14, something like that. So, yeah, a lot of this stuff that — a lot of the really big pieces of work that I wrote after the financial crisis, really, a lot of the stuff that people probably have read from me that they — I’m kind of somewhat known for, I guess, came out really around the financial crisis period. So, the financial crisis for me was really my — that was my big aha moment about so much of macro because I came up from a very sort of traditional macroeconomics background, where I basically learned the type of economics that you would read from a Paul Krugman or Larry Summers, very traditional, mainstream macro. And the crazy thing there, going through the financial crisis was that a lot of these guys that I was talking to in Japan were like, no, no, no, no, a lot of the stuff that the American economists are talking about, it just doesn’t work like that. And I was like what are you talking about? Explain to me what’s wrong.

So, some of the big ones, for instance, were like, if you go through a macro econ course, everybody learns the money multiplier. You learn that the central bank, for instance, if they create $10 of reserves, the banks now have the ability to multiply this $10 into $100 or something. And this concept is in every single textbook, in every single economics course, that’s taught, especially in the United States, and it’s fundamentally wrong. And the Fed, weirdly, just came out with a piece, this was like three or four months ago, I think, admitting basically, okay, this concept is really not how banks work. And so stuff like that was really crucial to understand, because when the Fed was expanding their balance sheet back in, 08, 09 a lot of economists were saying like, “Oh, no. Well, what happens if all these reserves get out into the banking system, and the banks start lending all of these reserves?”

And I’m talking to these guys in Japan and they’re like no, no, no that literally is not how banks actually operate. And we know from experience that when the central bank floods the banking system with reserves, the banks do not lend that to the non-bank borrowers, and cannot. So, there is no way this can cause hyperinflation, the way that some American economists are saying this might. So, stuff like that was really, I mean, super eye-opening, because it made you kind of question. I was like, holy shit, I got this supposedly great education at this great school. And now I’m kind of learning in the real world that a lot of the theory just doesn’t work like that.

Adam:00:13:08Who were you reading out of the Japanese school? Was that practitioners like Richard Koo, for example?

Cullen:00:13:17Yeah, Richard Koo was a big one. I talked to Koo a lot back in 08, 09 about a lot of that stuff.

Mike:00:13:25Did you get into Richard Werner a lot, or at all?

Cullen:00:13:28Yeah, talked to Werner a lot. He’s really great on all of this stuff. Steve Keen’s really great on all of this stuff. So, and that weirdly, learning that stuff, learning the banking stuff, because the banking was what really interests me, because it is directly correlated to the financial markets. So, I don’t really give a shit that much about high theory and honestly, don’t care that much about public policy, because it’s not really my business. I mean, it’s theoretically interesting, but it wasn’t directly interrelated with my job for the most part. But the banking stuff was really, really directly aligned with not just my accounting background in my finance background, but it seemed really essential to understanding the way that QE worked.

And so learning stuff like that was just super interesting because it completely transformed my understanding. But it took me down this path of sort of learning what’s essentially called post-Keynesian economics, which is basically the post-Keynesian ’s are the people in econ who were, they’re kind of outcasts, to be honest. They’re kind of like the heterodox school that a lot of the mainstream just shuns off as spouting nonsense to some degree. And they’re the economists who, they adhere really to what they would say, John Maynard Keynes really believed in.

So, a lot of the current money mainstream economists, what a post Keynesian would say about them or even someone would say about like a Larry Summers or even like Paul Krugman who’s commonly called the Keynesian; they’d say, no, no, no, no, no, those are bastard Keynesians basically. That they’re people that, they took bits and pieces of the general theory and Keynesian economics and they intermingled it with a lot of American economists or economics and Milton Friedman-type understandings. And they created their own sort of hyper free market type of economics that isn’t really the true Keynesian lineage.

But I started learning about all these post-Keynesian schools and Steve Keen’s like a big post Keynesian. I met actually a fellow Canadian Mark Lavoie, who is one of the most brilliant people you’ll ever meet, and started learning all of these sort of post-Keynesian ideas, and these very heterodox ideas, like the idea that banks don’t lend their reserves to non-banks. And that kind of took me down the path of learning about MMT. And then I met all the MMT people. And what all the MMT people say, I mean, it turns everything on its head. And that really is like, you go through the whole learning process of MMT. And you’re like, wait a minute. Bonds don’t finance government spending, taxes don’t finance government spending. And you’re like, holy shit, is everything that I learned about money and finance completely wrong?

And so that’s kind of like the path I’ve been on for the last 10 years of traversing all this stuff. And I got to a point in 2011 where I was like, holy cow, MMT seems like it’s very, very accurate. And then started talking to Lavoie and a couple of other people that are Tom Palley, and some people who are kind of critical of MMT and who have interacted with the MMT people for a long, long time. And they were like, yeah a lot of it’s right. But there’s some really, really highly theoretical stuff here that you cannot say is factual in any way. So, that’s kind of where I’m at now on all this stuff. Basically, I think everybody’s full of shit.

Rodrigo:00:17:20Yeah, let’s see. That’s exactly right. It’s all a bunch of stories. And what Mike always says is the only real thing is food and shelter. Everything else is a goddamn story. But why don’t you tell us a little bit about the MMT story for those that aren’t fully involved.

What’s Happening Right Now?

Adam:00:17:39Hold on. Hold on. I totally obviously want to go there. But before we go there, if you don’t mind, Rodrigo. I’d love just to pause for a second, because you sort of said what got you interested in this in the first place, was the practical aspect of how this might inform how you approach markets and investments, right? And so that’s your primary objective in gaining a better understanding about this in all your writing, etc. And you’re not even fundamentally interested in policy. And I want to definitely talk about policy, even though that’s not really your primary focus.

But since your focus is on the banking system, and by extension, capital markets, I think it’s worth stopping for a second and sort of getting your sense of what is happening right now. I mean, it seems to me like we’re undergoing maybe a fundamental shift in policy and how that’s affecting the banking system. And so I think it makes sense for maybe you to opine a little bit on the underlying mechanics of maybe what we’re observing here.

Cullen:00:18:50What is going on right now? I have no idea. Like, really, honestly, I always tell people, as much as I’ve studied all this stuff and as much as I think I know about this, I think the range of potential outcomes in the next six to 12 months are so wide, especially today with the news of Putin, all this stuff, everything that’s going on right now, it all seems to be changing so fast. And the COVID response was so big and so strange that I have no idea what’s going to happen in the next five years. I wouldn’t be shocked if we had 15% inflation in 12 months. I wouldn’t be shocked if we had deflation because all these bubbles just kind of lose their air.

So, at a really basic level, what’s going on? I mean, from a very high level, I think that, to me, one of the big lessons coming out of the financial crisis was that I tend to think that the people dramatically overstate how powerful central banks are. And it’s not to say that central banks aren’t really powerful. But I tend to think that a lot of what the central bank does is really responsive to things that have already happened in the economy. So, for instance, with quantitative easing, people often call quantitative easing, money printing, but when you look at the order of operations and you think of it from the Fed’s balance sheet perspective, yeah, the Fed expands their balance sheet, but what they really do is they take a bond that was already printed into existence and they change the composition of the private sector’s holdings with it. And they take that bond out of the private sector, in essence.

And so the real balance sheet expansion occurred when the Treasury expanded their balance sheet running the deficit. So, I mean, if you think of it from the perspective of, say, the Treasury, instead of funding their spending through a bond, say they literally printed a deposit into somebody’s bank account when they ran a deficit. If they did that, there would be nothing for the Fed to do after the fact. There would be no quantitative easing for the Fed to implement. It wouldn’t change anything for the Fed. There would be no bond to buy. They would literally be, if they did something like this, they’d be swapping a like deposit for a like deposit, basically. So, things like that are interesting, because I think we’ve, especially in mainstream econ, we’ve positioned the central bank as this super, I mean, uber powerful entity that, I think coming out of the financial crisis, we all kind of learned, well, the Fed printed a ton of money coming out of the financial crisis and we still had a really weak recovery.

If you look at Europe, Europe ran quantitative easing, at the same time. They didn’t have the same size deficits, and their economy was abysmal for the whole entirety of the next 10 years, basically. And so you can have these huge programs that people think are highly stimulative. And again, I’m not saying that they’re not stimulative at all, but I think that they’re not the big bazooka that people often think they are. The really interesting thing about COVID and the response from a policy level was that you got all the same stuff, essentially, from the Fed. But the big difference was that the government spent, especially in the United States, the US Treasury, and Congress, they spent a shitload of money. And so there was this huge balance sheet expansion from the Treasury side that was matched by the central bank side.

But I think the big lesson, and we’re seeing that now, seven and a half percent inflation, the big bazooka is when the government spends in deficit. And to me, that was the big lesson of comparing these two experiences, and being able to really compare and contrast them. And so much of what’s going on right now is this weird environment where I think it’s perfectly reasonable to argue that, yeah, there’s this huge distortion going on because the government spent, you know what, $3 trillion in deficit multiple years in a row. And we’re only just getting to the point where it’s kind of looking like a lot of that is being trimmed back.

Adam:00:23:19Right. So, if I were to sort of distill that arc, coming out of 2008, we learned primarily that the power of the central bank in manipulating interest rates in the volume of financial assets, is that they can, to a meaningful degree, manipulate the price of financial assets, and inflate or deflate them literally, by purchasing whatever, between 20 billion and at times $120 billion a month. Not printing but buying between 20 and $120 billion a month of primarily government bonds and at times buying corporate credit, right, at various grades like they did in March 2020. But they don’t really have much of an impact on the real economy, except perhaps through the wealth channel, right? Everybody kind of — or the segment of society that owns assets feels wealthier because they’ve got more collateral against which they can borrow, than they can spend, right, whether it’s extracting equity from the home or companies borrowing against their balance sheets, we can borrow and spend. And I guess the signaling mechanism of low volatility constantly escalating stock market prices, which people sort of perceive as a signal that the economy is in good shape and that they are safe to spend, that they may not need to save as aggressively, right?

And over the last 18 to 24 months, we’ve seen a completely different channel of monetary policy. And that is the expansion of the government balance sheet where those excess funds were deposited directly in peoples’ bank accounts. And so you’ve got this massive increase in private savings as a function, and feel free to correct me here, if I’m not using the right terminology or whatever, but it seemed like it was a massive shock higher in excess savings. And people then we’re looking at how they could spend some of that excess money, that was a positive. At the same time, obviously, for a wide variety of reasons, including the fact that whole countries were shut down due to COVID, and some efforts towards deglobalization, etc., impacted supply chains. So, you had this potential for a major demand shock, and a major supply shock, and a major logistics shock at the same time. And all of those things are still working through the economy. And everyone’s going, I don’t know what the cause/effect is, how large this effect is going to be, or how long it’s going to last.

Cullen:00:26:37Yeah. Well, that’s a great summary, basically, of everything that’s going on. So, to me one of the really interesting things with the deficit is that, and this is one of the things I learned studying the post-Keynesian school after the financial crisis, you learn that government deficits add to corporate profits if households dis-save. So, unless the money gets saved by somebody else in the economy, when the government expanded their balance sheet, all that money ends up basically in corporate coffers. So, I had a million arguments with people back in early 2020, basically saying like, the stock market’s going up and it makes total sense, because all this money is going to end up right on Apple and Amazon’s balance sheet, basically, because, for whatever reason, Americans hate saving, and yeah, the private savings rates spiked, but it does that every time that a crisis happens, and it happened in 08, and it comes right back down.

And Americans save the same amount of their income and the savings rate goes back to whatever the historical average is. It’s actually been on the sharp decline in the last 20 years. But in a weird sort of paradoxical way, everything that the government did most benefited corporations, which indirectly benefits households. But who really owns the corporations? Well, the corporations are mostly owned by wealthy people. So, in a weird, really paradoxical way, this huge stimulus, that was really targeted at helping everybody, it very disproportionately helped the wealthiest people in the country.

Rodrigo:00:28:33It’s been interesting because —

Adam:00:28:33Yeah, so that’s the equation that you’re describing. Right?


Supply, Demand and Inflation

Rodrigo:00:28:37Right, where everything just floats up to the 1% and ultimately ends up with one person, assuming there’s no checks and balances. We can talk about that a little later because there are checks and balances that help not have the Kalecki equation come to full fruition. I think we had Victor Shvets last week talking a little bit about what the government’s going to have to do in order to change how we distribute that wealth as we get to that point of 1% owning everything, in order to minimize inflation and reduce the amount of social unrest that might exist from that wealth inequality.

But you’re certainly — I was listening to what’s this guy’s name? I just had him up here. The president of Flexport, Ryan Petersen was talking about how he’s done a lot of work on the supply chain issue. And the question was what’s going on, why are supply chains broken? And his answer was, we’re up 20% year over year, in terms of demand for goods. And we’re up 20% year over year again, and our ports are broken. We’re not technologically advanced. So, we could only take what we’ve done on average for the last 20, and all of a sudden you get a 20% excess shock. We’re done. That’s what’s happening there. And it’s all because people got money in their pockets. Like you said, the idea would be to start your own business, but maybe you couldn’t do that in COVID. Maybe some people did to create more money out of that money, but the reality is it was purchases of goods that has kind of broken the supply chain. Right? So, I wonder what happens next if we go back to normal purchasing patterns.

Cullen:00:30:15Yeah. I mean, this has been like a really hot topic lately of what’s really causing the inflation? Is it coming from — is it all just supply side stuff, where this is COVID-related? Supply chains that are still broken? Or is it all demand? And obviously, the answer is always a little bit of both. But personally, it’s impossible to break this stuff down and actually understand exactly well, how much of the used car market is due to just demand or just supply, and it’s impossible to really quantify that, but you can at least break down like the categories that we know, in the CPI, for instance, that are mostly COVID-related. And when you strip all this stuff out and you look at really the categories that are not highly COVID-related, the CPI is still really high, even on those levels.

So, even when people joke about how backing out oil, and things like that, that are essential items in the CPI, but are very volatile, and BLS makes a logical argument for stripping these out just to make the data not as variable over time so they can better interpret it. But when you go X housing and X oil and X cars, and you know, all of this stuff that we basically use, the CPI is still high. So, to me, I think that the demand issue has been much more dominant over the course of the last, especially the course of the last year. I’ve said this publicly a bunch of times, I was a big proponent of the stimulus packages in real time. And in retrospect, I think that at a minimum, the last one was a mistake. And I think it’s easy now, in real time, I think you could make arguments, logical arguments for it. A lot of people like Larry Summers and Joe Manchin, they were arguing in real time, for instance, the third stimulus was way too much. I think that was around like the delta wave when things were starting to look really bad again in the middle of 2021. But in retrospect I think there’s a really reasonable argument that we did way too much.

Adam:00:32:44Well, did we do way too much or was it just way too general? Right? And now we’re sort of getting into some of the dimensions of the MMT versus post-Keynesian versus Neo-Keynesian. And I do think it’s useful to point out that much of this stimulus came out under governments that in no way shape or form, were operating under the principles of MMT. Right? MMT is coming to people’s attention now, we’re firmly in the Overton Window, that when these stimulus measures were enacted, 18 months ago, 15 months ago, 12 months ago, etc., no one was enacting them based on principles guided by MMT, right? They were guided by much more traditional monetarist or post-Keynesian type frameworks, right. And those frameworks were guided primarily by blunt tools, right? You want to lower the cost of money, supply side economics, and I think that supply side economics and monetarism have a lot more to answer for in the context of what we’re currently observing than MMT. Right? And I think those who are firmly against MMT as a framework are using the current inflation as a stick to beat MMT with but I think that that’s a misguided cause-effect relationship, that’s being misconstrued. Is that a fair assumption?

Cullen:00:34:33You know, one of the big things is it really — I mean, it’s called MMT, Modern Monetary Theory, because it is really theoretical at this point, because they have a very, very specific set of policies that they would implement. If an MMT economist was in the White House advising or advising all of Congress on what to do, the government would be run very, very differently than it is right now. And so I think a lot of people, they tend to read MMT and they basically just think, oh, this is just government spending writ large. And that’s not really what it is at all. I mean, you don’t even necessarily have to have a lot of government spending under MMT. You probably would because most of the MMT economists tend to be kind of like Stephanie Kelton worked for Bernie Sanders. I mean you’d end up with a lot of government spending.

But it’s not like some essential component of the theoretical framework. And so the big thing about MMT, or backing up just a second, you cannot say that MMT is really right or wrong because it’s really never been implemented anywhere. In the big deficits of the last few years, I mean, maybe they just credit big government Keynesian style, counter cyclical policy to some degree, but they don’t discredit MMT, necessarily. I’ve written recently that some of the stuff that MMT economists have been saying in the last six months is kind of worrisome. Like, Kelton has been saying, basically spend more, more, more all the way up. And at least for someone like me, who was like, whoa, whoa we should have actually pumped the brakes back when Larry Summers was saying, that sort of stuff scares me. Because it seems like, maybe there’s signs there that the theory of inflation that they use, which has essentially been spend more to fix supply chains, I don’t know, I’m really skeptical of stuff like that.

Rodrigo:00:36:39Can I take this opportunity — you just mentioned how MMT, if done as prescribed in the theory, would be very different than what people perceive to be MMT. What are the key aspects of theoretical MMT that would make that different?

Cullen:00:36:52So, the big thing, so to kind of like, back up and explain basically, what MMT is. MMT basically says that the government runs a currency monopoly. And so when they implement a currency, any fiat currency, it causes all sorts of problems in the economy, mainly, that the private sector needs to obtain the currency to pay taxes, and you need to get money to have a job. And so right off the bat, working from a very, very basic first principle perspective of MMT, an MMT economist would say that the second that a government like the United States starts the US dollar, they un-employ everybody. So, everybody is unemployed at the base level and everybody needs to obtain money to be able to pay their taxes.

And so what ends up happening basically, is that if there is some level of unemployment, an MMT economist would say, that’s the government’s fault. The government left these people unemployed, because they’re not giving them the money they need to get to be able to even have an income. And so MMTer’s basically say that unemployment is a sign that the government hasn’t either spent enough, or hasn’t provided people explicitly with jobs. And so this is totally different from mainstream econ. Because mainstream econ basically argues that a level of unemployment that exists is probably optimal. So, in a full employment economy, where inflation is starting to get hot, even if you had two or 3% unemployment; a mainstream economist would say that’s optimal. We’re using all of our resources in the most optimal way at present. And an MMT economist would look at that and say, no, we’re not employing two to 3% of people that could otherwise be employed and being productive. And who knows where inflation will be if those people had a job.

Mike:00:39:04You mentioned a key point there on productivity, like if they could be employed productively. And this is the challenge that I always have with, okay, so that last 3% of people who need to be employed, are there productive employment for those people? Or are we paying them to dig holes and fill them in again? And what are the implications of unproductive …

Cullen:00:39:28It’s never been done before. That’s one of the things that I — when I first encountered MMT and I was having all these discussions with, like the founders of the theory, and I was like, how essential is this job guarantee thing? Because this thing sounds like it’s a big problem, potentially. And they were kind of wishy-washy on it. Back then they didn’t even really know how essential it was. Some of them were like, no, no, no, this is the essential framework that makes MMT MMT. And others were like, like Warren Mosler, we was saying basically, oh, it’s not really essential. Of course we advocate for it, but it’s not essential to have it.

And so since then, my view basically, is that you don’t have MMT without the job guarantee, because the job guarantee, it’s the core policy that does everything interesting inside of an MMT paradigm. It gives everybody a job and they’d argue that because the government is able to set the wage inside of the job guarantee, they argue that it can provide price stability too. But it’s never been done before. So, that’s the thing, the big red herring for me is like looking at things from, or trying to always look at things from an evidence based perspective, I’m always like, well, where’s the evidence that this works? Is there any evidence that this works the way that you think it does? And they can’t really answer that question.

So, that to me is, I mean, it’s pretty worrisome. I mean, personally, I suspect that a job guarantee would work in a country like the United States because the United States is just a hugely wealthy country that I mean, it can support probably big programs like that, and has historically supported similar types of programs. Where this gets really messy, though, like I always theorize, well, what if Italy, what if Italy, got tired of using the euro and being beholden to Germans and said you know what, we’re going to bring the Lira back, and we’re going to bring the Lira back, and we’re going to implement a full MMT style regime, and we’re going to give everybody a job, And oh, yeah, we typically run current account deficits, and so we don’t make as much stuff as the Germans and so we’re not necessarily as productive. And how would that play out? I don’t know. I suspect it would not play out great.

Mike:00:42:00Is that because the economy isn’t big enough. Is it …

Rodrigo:00:42:06You have loans out in US dollars and euros. If you’re not productive, and you can’t pay them, you have less control of what you can do, and it leads to the hyperinflation that Peru …

Cullen:00:42:19Yeah. Or even people don’t realize you don’t even need a hyperinflation. I mean 10 to 20% inflation, it’s awful. It fucks up a lot of people’s lives. And you’re starting to see that, some signs of that, at least in the United States right now, where people, especially people in the middle class and lower middle class, they’re starting to really see this impact them in a meaningful way. And they’re saying this is no bueno. So, consumer sentiment…

Adam:00:42:51Okay. But again, we’re conflating several things. Again, I want to make sure, this is why I’ve stated this really clearly in the beginning, what we’re observing now is not a result of MMT. And if MMT oriented economists were in charge of setting fiscal policy, we would have an extremely different macroeconomic environment than we have right now.

Cullen:00:43:16You’re totally right.

Adam:00:43:18So, let’s not say that MMT is causing this inflation or that we should extrapolate the current inflation and say, MMT would make it worse. Because I feel like we have no evidence of that either.

Cullen:00:43:29I think that’s totally right. But I do think, I think if President Kelton was in office, I do think we would have done all the same stuff, and probably much bigger because she’s on record, for instance, in the last like, three-six months, saying that we should have spent a lot more to fix supply chain. So, there’s no doubt in my mind that, God, we might have passed a Green New Deal in the last six to 12 months, we definitely would have passed Build Back Better.

Adam:00:44:00No, but Cullen, the devil’s in the details, right? Like, just fire hosing money into the economy by creating deposits in individual bank accounts is different than saying we’re going to create a Build Back Better policy, we are going to target the training of teachers and the refurbishment and development of a brand new school system or a brand new education system. We’re going to create an institution that is going to re-envision education for the 21st century in light of current technology, and we’re going to bring people from the technology sector in here and we’re going to find efficiencies in the education system. We’re going to create nursing reserves so that we’re going to have the reserves, we’re going to have the medical reserves or we’re going to have an adjunct to the reserves that’s going to train up nurse practitioners and nursing staff who may not work as nurses but can be called in to work as nurses in the event that we have another pandemic-like experience.

There’s a wide variety of different infrastructure. Like I admit you can’t fire hose a bunch of money into the development of bridges and highways and public transit, etc., without being thoughtful about the pacing, and the type and the location, etc. But it’s not like there aren’t policy objectives that would represent a massive productivity improvement in developed markets. And it’s not like we don’t have a massive amount of unemployed people. Like, what’s the labor participation rate now versus what it was in 2008, or what it was in 2000?

There’s a lot of theories about why we have such a large amount of people who’ve walked away from the labor force. But there are incentives or disincentives that we can use to drive people back into the labor force. Warren Mosler, I just listened to him talk about an initiative to completely eliminate income taxes, because it represents literally 15% of the economy. So, 15% of productivity workers go towards doing people’s taxes, or corporate taxes, or whatever. And it’s a pure drain on the economy. You could take 15% of workers, redeploy them as nurses and doctors, and …

Mike:00:46:56Well, no. These are make work projects. You need those employees in the IRS, you need those employees — this is a wonderful make work project. Let’s have some taxes, let’s make them really complicated.

Adam:00:47:07Sure. So, let’s shift the resources. Currently, they’re unproductive. So, let’s redeploy them to productive areas of the economy, right? Let’s train them up as teachers, nurses, programmers, physio, I don’t know, whatever. There’s productive ways that we can utilize these resources that are not currently being utilized. Like another 25% of the economy is essentially involved in financialization, in the financial sector. This is a completely unproductive sector of society. Let’s retrain them or redeploy them in productive areas of the economy.

Cullen:00:47:42Adam, what are you saying about all of us? Are you saying that we’re all worthless and useless?

Adam:00:47:48I’m dying to go work in a proteomics company on machine learning or something.

Cullen:00:47:52Speak for yourself, sir.

Adam:00:47:56But seriously, what about what I just said? What I just said, I think, is well encapsulated in the MMT doctrine. What about what I just said doesn’t make much sense?

Cullen:00:48:13I think it makes total sense, honestly. I mean, I just don’t — I don’t know, where’s the evidence that this can be implemented in this targeted — like I think people criticize, I think, the way that we kind of just fire hose stuff out like interest rate changes. Interest rate changes are a hugely blunt instrument. But the reason I think the government does these big blunt policies is because the government just isn’t that great at doing very targeted, precise things. And they can’t pick the winners and so they kind of just say, look you get a low interest rate, you get a low interest rate. Everybody gets a low interest rate and how it filters through it, just …

Adam:00:49:03But they have picked the winners, right? They pick the winners to be those with capital.

Cullen:00:49:08Yeah, I mean, all this stuff, ultimately, I think — I mean, I don’t know how — I was having this conversation with somebody yesterday about how do you do all of this stuff in a way that like, if you have a hyper hot economy, that you need to kind of run some sort of like counter cyclical policy against to try to dampen demand, how do you dampen demand without hurting people in the middle class, for instance? The middle class is the — they’re the big consumers, basically. They’re the people with the highest marginal propensity to spend. Implementing a wealth tax for instance, on guys like Bezos and Elon, they don’t like that stuff, but they don’t really give a shit about it because it’s not really going to change their life that much. It might change their multigenerational estate plan or something silly like that. But they’re not going to suddenly, like peel back demand enough that like, it’s going to make a really big meaningful impact on aggregate demand. And so how do you do this stuff in a way where you, you target it, but it doesn’t hurt the people that really like kind of can’t afford to be hurt. And I don’t know, to be honest.

Adam:00:50:24Cullen, who is the middle class? Like, the middle class are the teachers, the doctors, the people that — the factory workers. Like, you’re creating demand for, like infrastructure projects, creates demand for engineers, construction workers, truck drivers. A single payer health care creates massive demand for new nursing staff, new physicians, new orderlies. Like, there’s lots of different ways that you can spend it into the economy. Let me put it a different way. You can invest in the people and infrastructure in an economy that benefits the middle class.

Cullen:00:51:16Yeah. I mean, I totally agree with that. I mean I’ve actually — God, I mean, a lot of people think of me as like a money printing fiend, because for basically, God, almost probably 10 years coming out of the financial crisis, I was like, the deficit is way too small. I mean, that was my big message coming out of the financial crisis was that I basically was saying, QE and this was the lesson from Koo, basically, QE is not going to fix this. All the stuff that monetary policy is doing, not going to fix this. You need to run big deficits. And that to me was like, that was the big lesson from reading the Holy Grail and talking to Koo and all those guys. And so for years, I was like, this is — running a big infrastructure program in the United States, a total no brainer. So, I don’t, I mean…

Adam:00:52:17So, there’s a lot of comments in the …

Mike:00:52:24The other thing, though, is why do you think that the government from a centrally planned location, if given all these powers, is going to select and implement without conflict of interest, all of the programs?

Rodrigo:00:52:38Mike, but they don’t. We have to come at it with eyes wide open, right? If you go to any country, like, I see it in South America, right? Everybody that goes in to do business in South America knows that 50% of the money is going to go to some, two or three politicians and the other 25% is going to go to some corrupt corporate entities, and then 25% gets into the project that was originally envisioned, right? But the other option is continuing to financialize the economy and provide the signaling of incentives for people in high school and university that say, well, I could become an engineer. But why don’t I try to do what Rodrigo’s doing and try to make money on money? Right? And I’m not so sure that that is what we want as a society. I think the signaling leads to the wrong things. That type of policy as a be all/end all leads to financialization rather than even a small move in efficiencies within whether it’s infrastructure or shipping, or nurses or whatever the case may be, right. You’ve got to balance out the levers that the government can pull, and I don’t think we have, right. And MMT at least provides some sort of framework to do that. Right?

Mike:00:53:54I’m not sure that answers my question. So, you’re saying that if the government spends and 75% goes to waste? Don’t we already have that system? I mean…

Adam:00:54:05No, no. Mike, that’s exact– I think what we need to acknowledge is that we are moving toward a political zeitgeist that will mandate further expansion of fiscal balance sheets. Okay. I think my — anyways, the fundamental pretext I’m operating on is we’re already moving in that direction. So, the question is, if we’re already moving in that direction, what is the best way to think about fiscal expansion, at the like, post-Keynesian — So, the other direction, to me, is worse by the way. The other direction is worse.

Cullen:00:54:53That’s a good … though. I have been thinking about this a lot in the last, especially the last few months. Six months or 12 months ago, I would have said, Adam that you’re 100% right that it seems like the Bernie Sanders world is coming to all of us. And I think in the last six months, I think that that train has come to a screeching halt. So, I’m kind of curious what you guys think. How likely is it that that world is actually still coming our way?

Adam:00:55:30Well, it may not be under the Biden administration. In fact, I’m now leaning, and I’m with you. We actually had conversations, I remember conversations on this channel three-six months ago, where I was convinced we were going to get Build Back Better, we were going to get a Green New Deal. All that came to a screeching halt. Now it looks like the Dems are absolutely going to lose their representation in midterms. And we’re now into the gears are just grinding now and we’re not going to make any progress. But whether it happens in this term, or the next term in 2024 or 2028, when AOC is president, let’s be prepared for that, is certainly up for debate. But it’s coming because I think …

Cullen:00:56:23You think it’s coming in the long run no matter what.


Adam:00:56:25We’ve reached the end of the cycle where the median voter now is feeling such a level of Maslovian disappointment with the financialized economy being left behind that we will shift in that direction one way or the other. The question is, do we shift in the direction towards fascism? Or towards communism? And that, I do think that that is an interesting question that we’re going to have to …

Rodrigo:00:56:53Can you at least go socialism? Jesus Christ. Our viewers just went down by 80%. We’re talking to Americans here, Adam. You can’t do that. This is not a Canadian audience.

Adam:00:57:04I don’t wantthose outcomes. I don’t like either of those outcomes. I was saying those are the polls, where we go.

American Socialism

Rodrigo:00:57:11No, I mean, socialism would be probably closer to, given the foundations of the United States of America. I mean, saying that, that that is even a possibility in our lifetime is nonsensical to me, right? Are you going to get a more social economy? It’s already kind of social, they don’t like to say it, right? But Americans have a very strong social system, maybe not as uniform and as robust as other places in the world. But they do help a lot of different areas of social strata. But I think, generally speaking, I agree that we are headed towards something.

We see the labor participation rate growing bigger and bigger, or the lack thereof. And you have — what are those people doing? Somebody needs to look into what their day to day activities; are they living off of the food stamps? Are they living off of the financialized market and crypto and thinking that they can make it that way long term? And when that doesn’t go their way, what’s going to happen to social stability? What is the government going to have to do if there isn’t work back for them because they’ve been out of commission for two or three years? Is that universal basic income? Right? How are we going to deal with the obesity epidemic? How are we going to deal with the drug epidemic in the United States? All these things don’t happen through corporate benevolence, they happen to centralized planning.

And there is going to be support, I think, for some sort of government to be able to facilitate that with some sort of targeted fiscal spending. I see us going in that direction. And I don’t see — automation and all the fun things that we’re dealing with, right? The efficiencies that we’re going to be able to garner when — Victor Shvets had said last week that you have a glut of human labor, human capital that’s bringing our efficiency down. Once we figure out automation in a way to get rid of all those people, we have to put them somewhere, we’re warehousing them, and that’s bringing the productivity down. You have to put them somewhere. So, productivity goes way up, and the human race gets whatever they want, but you need to be able to finance that, and I just think socialism is the way it’s going to go.

Mike:00:59:15And maybe. So, I think there’s an argument for a solid welfare state, whether that’s UBI or some manifestation of that. But we also have the compounding factor of less and less of the workforce actually has the skills to participate in work that’s relevant to the new economy. And so you’re going to have a larger and larger part of the economy or part of the work participants that don’t have relevant skills on top of what’s going on and …

Adam:00:59:47It also …

Rodrigo:00:59:49Correct. But just so that we’re clear, I know this seems dystopia and all that. But there is — I’m super excited the human race’s ability to finally pursue their hobbies and goals and if you want to be the best goddamn ping pong player, you can dedicate your life like 10 hours a day to being a fantastic ping pong player where you feel fulfilled where you’re winning these tournaments. At the end of the day, all of this stuff leads to you being able to have more free time to do whatever the fuck you want, and not a bad thing.

Mike:01:00:22Well, you’re going to be competing with other people who have the same thing. You’re going to be no more successful …

Rodrigo:01:00:26No, but you can compete — you’re competing and failing at the thing you love.

Adam:01:00:33We’re at the … argument here, right?

Cullen:01:00:36Who’s the best ping pong player here? I’m awful.

Rodrigo:01:00:39Oh, God. I chose the wrong sport. It’s Adam, surprisingly. But he did … when he started playing a year ago, he did pull both his calf muscles which I don’t even know how that happens.

Mike:01:00:54But I do — one of the revelations for me, as we’ve been talking, is this idea of MMT and this full employment promise has a productivity caveat to it. You want to have maximum employment, but maximum productive employment. I think you would like to have the productivity of the overall economy improve as you …

MMT and Portfolio Construction

Rodrigo:01:01:19Now you got it. The productivity of the overall economy needs to improve. So, there’s a question of whether we need human beings to do that in the next economy. Right. I just want to ask, so look, this is a very long term view and things are shifting in one way or another. I mean, at the end of the day we’re in the business is managing money, right. So, Cullen, I’m curious, you’ve talked about your Defense Against the Dark Arts, you understand it, it helps you on the behavioral side. But ultimately, you have to put something together that makes sense. How do you think about portfolio construction in this world?

Cullen:01:02:06I mean, I’m not doing the sexy stuff that you guys do. You guys are …

Mike:01:02:12Could I maybe sharpen the pencil on this question? Because I wrote this down earlier, when you said here’s the range of outcomes for the next 12 months. And they are 3% deflation to 15% inflation. And so how do you manifest some sort of portfolio hedge? Or how do you build a portfolio given those outcomes?

Cullen:01:02:33Yeah. I mean, it — God, I mean, so I work primarily with individuals. So, I mean, to me, I mean, so much of this stuff is super personalized. Like God, I mean, starting with the inflation question, it’s like, well, do you own a home or do you not own a home? Because that’s a huge, huge difference in how well hedged against inflation you are right off the bat. And so this question is different for everybody. I mean me, personally, my foundational starting point for any asset allocation is the global market portfolio. So, looking at — I’m not a big adherent of the efficient market hypothesis. But if you wanted to put together something that just was really broadly diversified and pretty hands-off, long term oriented and covered all your bases, well, that’s the portfolio you would buy.

And I think that, that as a starting point, you can then start to customize and tweak and twist it to fit somebody’s personal needs. But for me, that’s kind of always the starting point is that, as a framework, from a macro perspective, you don’t need to get brain damage trying to pick and choose where is the perfect optimal place to be in the market. I mean, I’m a big advocate of all-weather portfolios, where you just kind of — you sling your money around in a lot of different baskets, and you’re pretty well hedged in some way all the time. So, I know that’s kind of a lazy — it’s not a —

Mike:01:04:09It’s very thoughtful. The challenge then becomes the tracking error that you talked about at the very beginning of the investor needs to follow a portfolio that they can follow, not necessarily the most efficient portfolio. And I guess that’s what you’re saying is you’ve got to take those concepts and then make them bespoke for the individual.

Cullen:01:04:28Yeah. Well, that’s the hardest part about asset allocation is that your — and it’s really the essential guiding principle of diversification is that you’re always going to hate something in your portfolio and you should. Like, right now, I see a lot of people, they look at the bond market and they’re like, the bond market is awful, or like holding cash. People are like, how can you hold any cash in a market where the inflation rate is high? And it’s like, well you say that now, but you know who knows? If Vladimir Putin decides to drop a nuclear bomb on Paris in five years, some weird shits going to happen and you’re going to probably feel really good about some of these more defensive, kind of safe haven type assets that looked really awful.

I mean, that’s the other big, big lesson from the pandemic, to me, is that nobody has any fucking idea what is going to come down the pipe that trips you up. I mean, that’s the thing that — I spent so much of my time thinking about macro econ and what are the big risks out there, and you never know about it until it actually lops you upside the head. And it always tricks the vast majority of people. So, it’s not a — I know, it’s not like a super sexy approach or anything. And I could sit here and like, say oh, I think value is coming back and I would prefer to hold gold. And there are things that I would probably tilt towards that I have a preference towards personally versus other things based on my opinion. But in a general sense, I think we all kind of know, at this point that like nobody really knows what the fuck any of this stuff is going to do in the short term.

Mike:01:06:22I think you make a great point, which is what’s your starting place, right? Don’t start with having all the fancy fringe stuff around the edges, that you own the Lithium ETF or this thing or that thing. Start with the idea of let’s get a large well diversified portfolio, whether that be risk parity, all-weather global market portfolio, and then now you can start to inform that portfolio and tilt it to some of what your expectations might be. And like your — Go ahead.

Cullen:01:06:51Like kind of a more sort of core/satellite type of approach, I think, I mean — and you can even — I’ve become a big advocate, I’m so behavioral based, that I have clients sometimes who come to me and they’re like Cullen, you know what, I just want to fuck around with 10% of my money. And I know I shouldn’t and I know, it’s stupid, but it makes me feel better about what I’m doing. And it makes me feel involved and it makes me interested, it makes me watch the news and stay more on top of stuff. And I totally know I shouldn’t be picking these 10 stocks that I found on or whatever. And I’m always like, yeah, that’s stupid, you shouldn’t do that. But if it makes you feel better about the other 90% of your portfolio, and it makes that other 90% perform better than it otherwise would, then great.

Rodrigo:01:07:43Right. No, I think — I’m a big fan of the Hippocratic Oath of portfolio construction, right? First do no harm, right? When people come to me and say, what should I do? I was thinking about these 10 different themes, and whether I should go long and short. I’m like, listen, who are you competing against here? You understand that you have a day job, right? You are going to hurt yourself more than not. And rather than do that, you should start with one all-weather approach that can protect against inflation, deflation, high growth, low growth, the risk parity framework that we always espouse here, and then really assess whether you have an edge. And if you do have an edge, grab that 10 grand or 10% of your portfolio and try it out. See how easy it is, right? Because maybe he’ll be happier ultimately doing it, right.

But most people end up coming back to the Hippocratic Oath of portfolios and being balanced and recognizing that you’re always going to have big winners and big losers. And even today, I was having this conversation with a very thoughtful adviser. I was like, OK, I’m bought in, and I was advocating our strategy for high inflation periods and bear markets, is probably a good bet. But we’re probably going to underperform in a recovery against the S&P or the Toronto Stock Exchange. And he was like, all right. So, what you’re saying is that I should tilt it at the bottom of bear markets towards equities and I should tilt away from it when it’s about to drop. So, then I went, and I showed them a good old fashioned bear market, not the bear markets that this generation knows about but 2000 and 2003. I counted 10 bottoms, right? Where if you’re living it, you would have been like, this is the bottom nope, nope, this is the bottom and it just went down again and again, right.

Cullen:01:09:24That’s my biggest worry right now.

Rodrigo:01:09:25It’s really tough to be a standard investor trying to figure out when the bottom is going to be or when the — I’ve been getting it wrong, the wrong way for the last 10 years, right? I’ve been calling the top… Just look at my Twitter profile every other week, I call the top, right. So, don’t listen to me. It’s an interesting thing.

Cullen:01:09:44You’re the Richard Kiyosaki of this group.

Rodrigo:01:09:47That’s right now.

Home Ownership and Inflation Hedges

Adam:01:09:55What about home prices? You mentioned asking, do you own a home or not as being a key question to ask about your asset allocation. So, walk me through your thinking there, because I think it was mentioned in the context of inflation.

Cullen:01:10:16Oh, just looking at, in terms of inflation hedges, real assets are, at least homes in particular, are a pretty good inflation hedge in the long run. So, for me there’s a big difference between somebody who rents and somebody who owns their house, because if you look at shit, even the last 24 months, the difference between somebody who owns a home in real terms, versus somebody who rents is a huge difference now. So, taking this sort of holistic portfolio approach, and looking at somebody’s — not just their — of course, you want to focus on financial assets, but people’s real assets make up a big, big chunk of the vast majority of, of overall assets in the first place.

So, commodities in the long run, it’s different. They tend to just sort of track the rate of inflation, whereas real estate is a really, really specific type of instrument in that it tends to just be a depreciating block of wood on a very scarce piece of land that we’re not making more of. And so, especially in the United States, kind of going back to our whole policy discussion, some of the dumbest stuff going on in the United States is the shortage of housing. And the number of policy errors that you could look back on in the United States and then complain about in the real estate market, it’s like an endless list.

Adam:01:11:57Well, yeah, mostly driven by NIMBY. But I want to push on this a little bit, because I’ve had a number of discussions with people about this, because my contention is really that homes now because we’ve financialized homes, right, really, like most homes are bought at, like five to 10% down. And so they end up basically being like a long duration bond. Right? So, the question being, if rates go from 2% to 3%, or 3% to 4%, who is the marginal buyer of homes? And what price are they going to be able to pay given the amortization costs of the mortgage that they’re able to secure at three and four or 5% interest rates? Right.

To me, it seems like… And if you go back to the 1970s real estate actually was not such a good asset for inflation hedging, right. If you look at the real estate indices, they didn’t even hold up against inflation, possibly. And the leverage ratios on real estate in the 70s were a fraction of what they are today. Real estate just wasn’t — you weren’t able to get 90% loan-to-value structures for buying homes in the 70s, right.

Cullen:01:13:21To kind of go back to the whole nobody knows nothing thought process, yeah, I think there is, Americans, especially, or anybody in the developed world really has been sort of spoiled by what’s happened with real estate. I saw the craziest chart the other day. I had to do a double/ triple check on the data source, showing Japanese residential real estate for the last 30 years, and it is unbelievable. It basically went up in 1990 and it has just gone like this. And I turned to my wife when I saw it, and I was like, you got to see this chart. This is a fucking unbelievable statistic that I had never seen. And imagine that happening in the United States and what that would be like, if that played out. And so…

Rodrigo:01:14:18Look …

Cullen:01:14:20Yeah, you’re right, maybe real estate will be an awful inflation hedge in the next 20-30 years.

Rodrigo:01:14:27But the biggest one of — the biggest spend on a household is rent or mortgage, right? So, if it ends up being a deflationary item, then that portion of — if you’re a renter, if real estate goes down, and you’re a renter, rents will also go down with that deflation, right? If you own and prices go up, then you’re the same, you own the house, right? Maybe some property prices go up. But if you’re a renter, that’s going up, that’s going to be a big line item cost. So, I see the — if housing inflation is a problem and it’s your biggest expense and absolutely housing can be a big hedge against that big spend, 100%. So, I can see that. But the thing that we have to ask is what is inflation? Right? Is inflation housing prices going up? I mean, it’s just such a complex topic.

Adam:01:15:15… right? The challenge is that it represents this massive debt in peoples’ portfolios, right? They end up with this lever, huge proportion of their wealth invested in this ultra-long duration asset. They’re trying to hedge shelter inflation, which I get, that’s a fair point. But they take on such a massive amount, like the size of the asset on their balance sheet representing that shelter inflation bet is so proportionate, relative to all of the other types of risks that they face.

Cullen:01:15:49And the other thing is a house is a huge pain in the ass. Like, if you applied a real expense ratio to a house, I would argue, it’s got to be the most expensive thing anybody owns. I mean, after you back out taxes, and — I built my house and it was, as much fun as I had, like learning how to do framing and drywall actually, framing was horrible. But a lot of the other stuff was pretty fun. It’s a brutally painful process. And so like, I thought I was like, being all smart, like getting this great deal on a tear down in a good location. And I paid for this house in all sorts of non-quantifiable ways that people, when they buy and sell a home, they typically remember the two numbers that, oh, I bought my house for $500,000 and I sold it for a million.

And so I made $500,000. And you forget that you fixed 20 toilets over the course of 10 years and spent $250,000 in renovations and/or just upkeep. And oh, yeah, you spent another 100 grand on the mortgage along the way, and you paid $100,000 in taxes over all those years. And so you back out all this stuff and the real-real return, isn’t that great? And I would argue if you’re involved in a house that really requires a lot of manual upkeep, it’s an even worse investment because…

Rodrigo:01:17:26This was years ago, but I remember seeing I think it was a Shiller Index. I can’t remember. It was like, what is the actual real return on real estate all in? And it was about the rate of inflation, right? Because that’s …

Cullen:01:17:41I think it’s Thornburg, Thornburg Investments published something that did a really good study on that. Yeah, even, I pull weeds on the weekends and I’m like, I fucking hate this house.

Adam:01:17:53So, because a lot of …, right?

Mike:01:17:54Our homes like, Dave Nadig brings up a good point like demographics are, I think a pretty good …

Adam:01:18:01Yah, I want to argue this. Yeah.

Mike:01:18:04Go ahead.

Adam:01:18:04Yeah. But it’s not just Dave, there’s a lot of people saying there’s no way this is going to go down. The Japanese case is flawed because the birth rates of Japan were very low and they’re anti-immigration, right? They’re very ethnocentric. So, I hear …

Cullen:01:18:21I feel like you just described what the United States has become kind of though.

Adam:01:18:25Yeah, becoming, for sure. Yeah, I agree. And we’ve definitely seen a massive reduction in immigration, and a huge reduction to the birth rate. And I do wonder about the reflexive nature of the fact that you’ve got this whole generation of millennials who are coming of age to the point where they want to start a family looking around at every major urban center with any sort of growth or attractive job characteristics and saying, I can’t fucking afford to live here and I’m not going to be a fucking debt slave in order to live in downtown San Diego, LA, New York, Chicago, etc. And looking at all the technology that’s available to them to provide a job that doesn’t…

Rodrigo:01:19:15We don’t want to hear what you have to say anyway. Can you hear me, Cullen?

Cullen:01:19:21Yeah. We lost Adam.

Rodrigo:01:19:23You’re muted, buddy.

Mike:0:19:26I guess we lost Adam.

Rodrigo:01:19:28Yeah, anyway.

Adam:01:19:28…options that allow them to not have to live — I know, I just kept talking so maybe it recorded. That allow them to not have to live downtown, not be held hostage to the commute, right, which is the major driver of why downtown real estate has been such a massive driver of wealth creation over the last couple of decades. And at the same time, you’ve got potentially interest rates rising so that even if there is still demand, the next generation can’t afford to buy the homes at the prices the boomers need to sell that in order to make good on their mortgage.

And also, what about the potential for the implementation of high density housing, right, where we just complete — What also happened in Japan is that single family homes went the way of the dodo in the mid-1990s. And they built all this high density housing in Tokyo, which is why Tokyo currently houses 50 to 60 million people, right. So, there’s a lot of different things — I can see a lot of different reasons why we could have a very different housing market trajectory over the next 20-30 years that we’ve observed over the last 20-30 years, demographics notwithstanding. And I think the assumption of the demographic trajectory continuing in the same direction is also very small.

Alternative Sleeves

Rodrigo:01:21:10Looks like we’re all in violent agreement. It’s very complex. So, Cullen, here’s a question I have for you, because I don’t know much about — you said you have your global market portfolio. And then depending on the client, you kind of explore. My whole career has been about trying to get advisors to think about an alternative sleeve, right? First of all, do you use alternatives? And why is it do you think that most advisors just simply don’t bother anymore?

Cullen:01:21:40I mean, honestly, I think the narratives around them have become a little bit toxic, probably, in large part guided by the sort of Vanguard type trends that we’ve seen where anything that’s remotely high fee, or chasing alpha is viewed as something that doesn’t add value. So, people have kind of deferred towards this really simplistic asset allocation style that may or may not suit them best in the next 10-20 years. I mean, I think in terms of customization, I mean, I think that everyone can benefit from having certain sleeves of customization that make things improve. I mean using a simple 60/40. I think the vast majority of people, as fine as a 60/40 is, I think the vast majority of people can benefit greatly from deviating from a 60/40 and doing things that within some sort of personalized range of customization is adding value in very specific ways, depending on what their personal needs are. So, I’m totally not against especially —

I’ve become a big advocate of just core and satellite strategies, where your core maybe is this very boring, just broadly diversified component, but then you’re doing all sorts of things on the peripheral components there with the satellites, where you’re sexing it up a little bit, and you’re kind of hedging for what if 60/40 does as badly as a lot of people expect it to do in the next 20 years?

Rodrigo:01:23:39Right. And the Discipline Fund, I don’t know if you can talk about it or not, but I don’t think we’re allowed to talk about anything in this business, is the core, basically is that the idea there?

Adam:01:23:54Global market portfolio.

Cullen:01:23:56Yeah. It’s not a global market portfolio, but it’s what — to be honest, what my whole methodology really does, and the whole concept of what I call counter cyclical rebalancing, or counter cyclical indexing, the whole concept is basically, it’s devised around taking something like a 60/40 and/or a 50/50, depending on whatever your benchmark is, and applying a little bit of like a risk parity type concept to it, where you’re still maintaining this very diversified low-fee, simple portfolio. But you’re not just lazily invested in the 85% volatility of the 60% equity slice.

And so to me, because all of this is so behavioral based, I think that people need or a lot of people should try to control the equity risk in their portfolio more so, especially in crazy times like right now. Because you have so much disproportionate risk inside of that component that you are applying like a risk parity approach, regardless of how sophisticated it is, I mean, there’s very stupid ways to do risk parity, as you guys know. But there’s very sensible ways to do it. And to me, that …

Mike:01:25:20Wait, wait. What does he mean by that? Like, we know all the dumb ways to do risk parity? Thanks, Cullen. Continue.

Cullen:01:25:33No, no, no, I love the way you guys do risk parity. I have very specific firms in mind that I will not mention.

Adam:01:25:41I know who you’re referring to. Yeah.

Mike:01:25:44Well, I think the other thing on the fee thing, on the fee idea is to think about your total portfolio fee. Not to say this is seven basis points, and that’s 2% so I can do zero of 2% if it’s this very unique return stream that actually is non correlated and hedges some of these equity risks that you’re highlighting. No, it’s to say, well, if we add them, what’s the benefit to the total portfolio? And does it outweigh the fee adjusted overall portfolio cost? Right? So, if you’ve got seven basis points on 60, or 70% of the portfolio, and 30% of the portfolio has a higher fee, but it is very complimentary, your overall fee is 60 basis points; that’s compelling.

Cullen:01:26:36100%, yeah. I mean, a lot of people weirdly won’t look at things like that, where they — they’ll kind of just arbitrarily look at like, a tail risk hedging fund, for instance, and say, oh, this costs 100 basis points, I don’t buy stuff that expensive. And it’s like, well, wait a minute that’s not really the way you’re supposed to use that thing. You use the tail risk hedging component as a small sleeve of it that provides you some tail risk protection, but in the aggregate of your portfolio is not adding more than, who knows, five to 10 basis points of actual overall added expense. And I think a lot of people look at stuff and they say — like, I see this with people talking about a lot of ETFs and really creative and innovative new products where people look at it in solitude, and they say, this thing sucks because its fee is too high. And I don’t do that because John Bogle told me that I should only buy things that cost 25 bips or lower.

Rodrigo:01:27:40I think the regulators have done poor messaging on the having to defend your 1% or having to defend why you’re allocating to higher cost products. And advisors feeling like they can’t or they won’t, or they don’t just don’t want the hassle, right. So, it’s certainly — that’s part of it as well, I think. But certainly the zeitgeist, the beta is the only thing because we’ve had 10 years of nothing but upside for US equities and US bonds, right? You can create a portfolio at 15 basis points and feel like — with the Sharpe of what is it, one and a bip for a balanced portfolio in the US and the 99th percentile historical Sharpe ratio and feel like you’re done. Everything you’re showing me everything that’s higher cost …

Cullen:01:28:27You’ve seen the greatest bond bull market ever and it looks like a no brainer.

Mike:01:28:31Yeah. How can they though? How can the individual investor understand with the limited financial knowledge that they might have, the difference in the advisor they’re talking to. So one advisor says, hey, Bogle, seven basis points, 60/40. Here’s the 10 year back test, or here’s the 10 year result, and then look over here, here’s the diversified portfolio. And then you as an advisor, go in and say, well, here’s the portfolio that you should probably look at to hedge these risks in a bespoke way, in a thoughtful way, given your certain circumstances. And you’re competing with an advisor that’s saying, no, no, that’s too high fee and look it underperforms. And so how is the individual investor supposed to be able to work their way through that? I mean, it’s a really tough thing for the individual investor to suss these things out. How do you deal with that or how do you find dealing with that?

Cullen:01:29:37I mean, it’s hard in large part because — and I do try to adhere to the idea that simple is better, just because you can get brain damage making these things so complex. I see a lot of portfolios where people own 20-30 ETFs or something. And I’m like, holy cow, how did you get into this mess? Because, you guys know you can way over do this stuff.

Mike:01:30:11Sure. And any kind of rebalancing premium you might get is harder and harder the more pieces of the puzzle you include. And if you’re in a retail environment, it’s harder and harder to rebalance them in an appropriate way. Yeah.

Cullen:01:30:26Yeah, but it’s one of the things that — it’s actually one of the things that’s exciting, though about the ETF space in particular, is that the costs have come down so much with all of this stuff, that there’s now really this weird sort of gray area between what we used to talk about as active and passive, where now, a lot of the stuff that’s active, is so low-fee and accessible, that it’s really compelling to own, inside of a broader portfolio. So, I don’t know. I mean, I’m pretty excited about everything that I see going on in — I’m a big fan of low-fee stuff and all that.

I’m not a Boglehead by any means. But I think that it’s probably more right than wrong to follow a methodology similar to that. But I’m super excited about a lot of the stuff that’s going on in our industry, because not only is it all becoming so much more democratized, but some of the stuff that’s coming out that, from these ETF firms is really, really useful stuff that is not that expensive. And so it is very Boglehead-like without the sort of legacy cost that we all were used to, from seeing a Merrill Lynch mutual fund, or something like that, or a Fidelity fund or whatever.

Adam:01:31:56Yeah. There’s some neat innovation too in the ETF space that provides a lot more flexibility in terms of the types of portfolios that you could buy, so you can sort of have your cake and eat it too, so you can have that sort of basic 60/40 or kind of global market portfolio. And then you get that 100%, and you can layer some other stuff on top that may provide a little extra bonus in the event that the 60/40 return trajectory plays out, like I think everybody on this call is concerned that it might, right.

So, from that perspective, definitely, that innovation is empowering investors to take control of their own futures which is kind of fun. All right. We’re at 90 minutes. We covered a lot of ground. It was a lot of fun. Next time you got to bring a rum. That’s the rule. The coffee’s not going to cut it because you’re operating at a disadvantage. I don’t know if it’s an advantage or a disadvantage.

Cullen:01:32:5302:30 so I can start drinking, right?

Rodrigo:01:32:56On a Friday, for sure.

Mike:01:32:57Is this the first time that you had a drink at anything later than 02:30? Really?


Mike:01:33:04Good for you.

Cullen:01:33:05Yeah, yes sir.

Mike:01:33:09Yes, officer. Yeah. Before we go, just tell everybody where they can find you, where they can find the Discipline Funds, your research, your Twitter handle, all that stuff?

Cullen:01:33:25Yeah, Twitter’s just CullenRoche, one word, Pragmatic Capitalism is my website, it’s really kind of the place where I just sort of vomit all of my thoughts into the world. And that kind of feeds off into everything that I do, whether it’s Twitter, or my research papers, or my company and stuff. So, that’s probably the best spot. But I love trying to field questions from people and strangers. And I love helping and trying to educate wherever I can. And so much of my work is really very education focused just because there is, I think, I mean, a lot of bad narratives out there. And so even if I can help somebody understand something really mundane, like quantitative easing, I’m enough of a dork that I love, love interacting with people on stuff like that.

Adam:01:34:23Nothing mundane about that, man. Nothing mundane at all. No, that’s awesome. Also, a huge thanks to everybody who chimed in today. Really enjoyed the comments. I read them all. We tried to weave in a lot of the themes that everybody brought up, and some really good questions and comments. So, thanks, everyone, for the engagement. Please, Like and Share so we can get more guests like Cullen on the show for these kinds of chats. So, thanks for showing up and we’ll see you next time.

Mike:01:34:52Yeah. Hit #* into the comments if you learned something.

Rodrigo:01:34:55Pound star, is that a new thing? What’s going on? Okay.

Adam:01:35:01It’s a secret code.

Mike:01:35:03You don’t have to do that. I’m messing around.

Adam:01:35:07All right. Signing off.

Cullen:01:35:08All right, guys. Yeah, thank you so much. All right, great talking to y’all.

Adam:01:35:12Have a great weekend. You too.

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*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.