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The Fed & Monetary Policy
- 07/13/2012
- with Cullen Roche
Pragmatic Capitalism founder Cullen Roche shares his ideas on Modern Monetary Realism.
Cullen Roche, Founder & Editor-In-Chief of Pragmatic Capitalism and contributor at Monetary Realism, discusses monetary theory and a few macro investment tips.
Aaron Brabham: Welcome to another episode of Stansberry Radio. Porter, it's Friday. It's a couple days later than we usually start.
Porter Stansberry: Well, we were on the boat.
Aaron Brabham: But we were on the boat. We were on the Two Suns.
Porter Stansberry: Two Suns, yeah. I haven't heard the radio into yet. That sounds pretty slick.
Aaron Brabham: Yeah, what do you think man? We're trying to step it up a little bit. We're actually introducing something called production into the show.
Porter Stansberry: Production, wow. What's Arbitron gonna think?
Aaron Brabham: Oh man. They might actually allow us to get one or two more users 'cause they are the gate.
Porter Stansberry: They're the gate. Well, I think that they – last time I checked, we had 13 listeners.
Aaron Brabham: With the 13.
Porter Stansberry: Thirteen. Let's – hey, think about percentage growth from four.
Aaron Brabham: That's good man.
Porter Stansberry: We're off to the races.
Aaron Brabham: We're off to the races. Well, today we have –
Porter Stansberry: Kings of all media.
Aaron Brabham: Kings of all media, too loud for radio.
Porter Stansberry: Too loud for radio.
Aaron Brabham: Today our guest is Cullen Roche. Cullen is the editor and chief of Pragmatic Capitalism. It's one of the most popular economic sites on the web, with an emphasis on monetary theory and policy, plus he likes the people be crazy camp.
Porter Stansberry: People be crazy is a school of behavioral finance. It says that nothing really matters except for the irrational expectations of the crowd. And I'm looking forward to speaking to him 'cause I've never read his – I haven't read his blog before.
And I have to tell you, reading his bio, I literally don't understand any of it. And I don't know everything, I don't. But I've – 20 years of finance under my belt, seems like I should be able to comprehend a fellow finance guy's bio, but none of it makes any sense to me. So I can't wait to ask him some basic questions. But what does that mean?
Aaron Brabham: It's almost written by some kinda slick person that –
Porter Stansberry: What does it mean?
Aaron Brabham: – made it real fancy.
Porter Stansberry: Well, I can only tell you this. When I'm reading a company and the basic description about what the company does doesn't make any sense to me, not a good sign.
Aaron Brabham: Yeah, it's a little confusion. So we'll hash that out. We've been receiving a lot of feedback from our listeners, some comes in at feedback@stansberryradio.com. The others, the 1-800 number's been hot lately. It's our hotline, 855-SARadio. That's 855 727 2346. Twitter handle at Stansberry Radio, we're actually getting a lot of love on that and we get some hate too, of course. But, hey, if you're not getting emotions, then you're not doing something right.
Porter Stansberry: Yeah. But before we get on the show, though, I want to talk about this book you're reading. This book –
Aaron Brabham: Oh no. I don't want to talk about this.
Porter Stansberry: [Laughter]. This book you're reading, it's called what? What is it called? Something about flinch.
Aaron Brabham: It's The Flinch.
Porter Stansberry: It's called The Flinch.
Aaron Brabham: The Flinch. And it's a free download.
Porter Stansberry: It's free.
Aaron Brabham: Free on Amazon.com.
Porter Stansberry: Hmm, hmm, hmm. Let's see. Free equals high quality, good ideas?
Aaron Brabham: I gotta tell you. I read the book, probably – it's a quick read. But two and a-half, three times skimming it and highlighting it a lot.
Porter Stansberry: How's that impacting your life so far?
Aaron Brabham: I'll tell you it's not working out that great. [Laughter]. Well, there's a couple things. So, first of all, you know I'm not the best swimmer.
Porter Stansberry: That's true.
Aaron Brabham: There's a fact there. So we were at Conception.
Porter Stansberry: Middle of nowhere in the Bahamas.
Aaron Brabham: Gorgeous man, over some cool heads. You were trying to spear fish.
Porter Stansberry: I was.
Aaron Brabham: You got your knuckle taken out by –
Porter Stansberry: Actually –
Aaron Brabham: – a Parrot Fish.
Porter Stansberry: I was attacked by a Parrot Fish. It's true.
Aaron Brabham: And I was looking at the shore. And how far were we? I mean it wasn’t that far. About –
Porter Stansberry: A couple hundred yards.
Aaron Brabham: – a couple hundred yards.
Porter Stansberry: You're in about ten feet of water.
Aaron Brabham: I'm short so ten feet scares me in water. I did have fins and I had a mask and a snorkel. And I'm like, "You know what, don't flinch. You gotta do it. You gotta embrace the part of you that says don't."
Porter Stansberry: You guys also have to understand that Aaron went to a high school in Central Florida that had the best swim team in the entire country. And growing up in Florida, we're swimming all the time, surfing, swimming, skiing all the time. And the guy literally is terrified of the water. He won't get in it.
Aaron Brabham: Not terrified. I like it. I just –
Porter Stansberry: No, you're terrified.
Aaron Brabham: I like to stay close to the boat just in case.
Porter Stansberry: He makes my captain put out a rope so that he can –
Aaron Brabham: Oh come on.
Porter Stansberry: – hang on the rope. And he told me he was gonna put on a life vest to go snorkeling.
Aaron Brabham: All right, so anyway.
Porter Stansberry: He doesn't swim at all.
Aaron Brabham: Anyways, I –
Porter Stansberry: But he thinks he's gonna swim 200 yards to the beach, no problem.
Aaron Brabham: I did it.
Porter Stansberry: Yeah, he got it. Anyway he –
Aaron Brabham: I did it. But halfway there, the snorkel started – it broke and I started inhaling mad amounts of water.
Porter Stansberry: He almost drowned and our maid had to save his life.
Aaron Brabham: Yeah, it was bad. So then –
Porter Stansberry: But that was only Step One in reading the book. So I don't swim. I'm terrified of it. I'm gonna jump off a boat in the middle of the ocean and swim a couple hundred yards to the beach. What could go wrong?
Aaron Brabham: What could go wrong? Yeah, what's the best outcome there?
Porter Stansberry: So then, we're at another little small island that had some bikes that you could borrow to get around the island.
Aaron Brabham: Cat Island.
Porter Stansberry: There's no cars or anything like that. It's a place called – what was it? Hawk's –
Aaron Brabham: Hawk's Nest.
Porter Stansberry: Hawk's Nest, yeah. So we're riding from the boat over to the clubhouse for dinner one night. And there were some bikes, and there was one little tiny kid bike. And Aaron is a small guy. He's like what – I don't know, 5'9"?
Aaron Brabham: I wish. 5'7" at best.
Porter Stansberry: 5'7", so then he gets on the kid bike, of course. Small guy, small bike. So we're riding around – it's a little BMX bike, a little Mongoose.
Aaron Brabham: I like those. I used to BMX race when I was 10 to 14, so it's only been 24 years.
Porter Stansberry: It's all rusted out. It looks like it's about to fall off.
Aaron Brabham: It was horrible.
Porter Stansberry: The wheels are gonna spin. It's gonna be terrible.
Aaron Brabham: The brakes don't work.
Porter Stansberry: No, right. But then he read this book. This made a profound impact on his life. He doesn't flinch anymore. What Aaron thinks not flinching means is anytime you have a wild impulse in your mind you just go for it full speed. So he sees a speed bump right in front of the runway. There's no gates or anything. This is the Bahamas. Just a runway out there, and we're crossing the runway to get to the clubhouse and there's a speed bump. And he literally says, "Hey, guys. Watch this."
Aaron Brabham: And I start to peddle as fast and as hard as I can. And I hear Porter, who's behind me, go, "Oh no."
Porter Stansberry: Oh no.
Aaron Brabham: And I was like, "Ooh, maybe I should listen to that."
Porter Stansberry: So he pops that bike up in the air, I'm gonna say, a good four or five feet. I mean he soars on this thing, and he completely overcooks it. He pulls the handlebars way too far back, the back end of the bike spits out from underneath him. He slams down on the rear time and then keels over the front tire.
Aaron Brabham: End does it. Superman.
Porter Stansberry: Bam.
Aaron Brabham: Superman.
Porter Stansberry: Chest into the handlebars, hands off the bike, feet off the bike, right ankle right into the ground. Saw the foot snap back, face plant, hand in the asphalt. Oh God. And I – first thing I thought was he's broken his leg 'cause that foot hit so hard.
Aaron Brabham: Well, at least I had flip flops on. That's the good news.
Porter Stansberry: Anyway, poor guy. He brought – you know you're not supposed to bring back any kind of soil from outside the country.
Aaron Brabham: That's right. You have to mark that on – when you come back in.
Porter Stansberry: Here he is showing the entire palm – which no longer exists 'cause it's black asphalt – to the customs guy, saying, "I think there might be some soil in this."
Aaron Brabham: "Does this count as soil? Should I mark this as yes or no because I don't want to lie to you right now?" So, yeah, okay. So that's one lesson learned and I'm gonna have to monitor The Flinch. 'Cause your dad gave me some great advice one time.
Porter Stansberry: Yeah. This is what – my rule about flinching is before you do something that has any kinda risk, ask yourself, "What's the best possible thing that could happen? If everything goes right, what's gonna happen here?" And if the answer is nothing, then don't do it.
So you're riding a bike in the Bahamas. You're eight hours from medical care. You're on a rusty, broken-down bike. If I do a four-foot ollie on this bike, what's the best thing that's gonna happen? Nothing. The best thing that could happen is the bike doesn't fall apart and the handlebars don't go through my chest.
Aaron Brabham: It's definitely not gonna impress you or the other guy because it's a tiny, little BMX bike. What's to impress? I'm just glad you didn't get video of that. But it would have been a YouTube sensation. I would have made it on ridiculousness, and I would have made it on Tosh.0, no doubt.
Porter Stansberry: Yes. Well, then there's also me deciding that it would be a great idea in the middle of the night to jump in the shark – in the middle of shark waters, to jump in the water and swim out in the darkness.
Aaron Brabham: With the bait in your hand to get it to the edge.
Porter Stansberry: With the bait in my hand, yeah.
Aaron Brabham: So that was a good idea.
Porter Stansberry: I was a human bobber.
Aaron Brabham: That was a bad idea. But yeah, yeah, you're a good swimmer. You figured what the heck.
Porter Stansberry: Well, the best that could happen was we would catch a 250-pound Lemon Shark, which is what we did.
Aaron Brabham: We did.
Porter Stansberry: Yeah, it's great.
Aaron Brabham: The worst that could've happened is they would have caught it when it was – your hand was there out in that shark.
Porter Stansberry: Also, on this trip, I got my very first Blue Marlin.
Aaron Brabham: You did. Congratulations there. I know it's not the size you wanted. It was the end of the season and it was the first day. It was a pretty good fight though, 125, 140 pounds, gorgeous fish.
Porter Stansberry: Nice fish.
Aaron Brabham: And we do have the video of that. And look, the crew was amazing.
Porter Stansberry: Great crew.
Aaron Brabham: They always take care of you.
Porter Stansberry: Great boat, good food –
Aaron Brabham: I can't give –
Porter Stansberry: – good times.
Aaron Brabham: Yeah. I can't give enough love to the trip. Thank you very much.
Porter Stansberry: Yeah. It was a good time. Well, let's do something useful for the listeners instead of just self-congratulatory.
Aaron Brabham: Okay. Sounds good to me. So we have Cullen joining us shortly. And while we're waiting for him, let's go ahead and jump into our National Scumbag Registry 'cause we like to point out people that are scumbags, plain and simple. We're gonna nominate this week Janet Napolitano. So we have one of our listeners that follow us in our Tweets.
He tweeted us the story that secretary of homeland security announced that effective immediately, certain young people – certain – who were brought to the United States as young children do not present a risk to national security or public safety. Those who demonstrate that they meet the criteria will be eligible to receive deferred action for a period of two years, subject to renewal, and will be eligible to apply for work authorization. I don't even know what this means.
Porter Stansberry: I think it means that it's not gonna be deported. What I wonder is what's the political angle of this. Do these people end up voting or do the represent voters? Is it an election-year strategy. I remember there was one Democratic guy from Iowa or somewhere that passed a law allowing felons in that state to vote because he wanted to win the election. So he was gonna give the vote back to felons.
I wonder if this is a vote ploy. I express ignorance here. I don't know the details of all this. You know it's so depressing to follow politics. When I see and hear this stuff, I just shut it out. I don't want to know.
Aaron Brabham: We've had a few recommendations from listeners that are like, "You know, the Scumbag Registry, it's too negative. Why don't you find somebody weekly that's into politics that's positive that we think that we should promote."
Porter Stansberry: I don't know. And why don't we have Santa Clause come in the studio? Why don't we do that?
Aaron Brabham: That's exactly what I said. I said, "If you find me five politicians out there that you think are worthy of us promoting, you let me know because I don't even think you could find five."
Porter Stansberry: I saw Buffett and the two politicians, Bowles, Simpson and – Erskine Bowles and somebody Simpson, Alan Simpson maybe. And I was very impressed with those guys. I think they – you know, like prostitutes, if you survive long enough in politics then you become a celebrated figure, right. You can gain respect just through longevity, right. If you're a 20-year courtesan, then you're a madam and everybody – you're friends with everybody and everybody likes you like that woman in Hollywood.
Aaron Brabham: Heidi Fleiss.
Porter Stansberry: Heidi Fleiss, right. Same thing in politics. If you survive long enough then you become a statesman. And so I think these guys have already paid off all their backers 20 years ago, so now they can actually try to do something good for the country.
Aaron Brabham: They're giving good will now.
Porter Stansberry: Right. I don't know all the intricate details of their plan, but at least they’ve put something on the table that involves raising revenues by broadening the tax base – big important point – and then, of course, cutting spending. And no one wants their spending to be cut. But I looked – I was watching CNCB the other morning.
I thought it was really entertaining, actually, because Erskine was saying, "Yeah, we're asking retirees 40 years from now to accept a one-year increase in the retirement age, from 67 to 68, and AARP was threatening to hang every politician from the highest rafter who would agree to this."
And AARP is a bunch of socialist pricks – pardon my French – and they're gonna completely destroy our country to benefit one particular interest group. And what Erskine was saying is, "Are there any patriots here? Like is the country you're talking about. You're really gonna bankrupt your grandchildren and your grandchildren's grandchildren so you can retire at 67 instead of 68. Is it really that important to you?"
Aaron Brabham: Yeah. We're making a lot of sense and it gives me a little bit of hope. However, I think you're right. I think they're just beyond that point of actually needing the votes anymore. It's just good will. But, unfortunately, we have a lot of politicians that are younger that will do anything to keep these votes.
Porter Stansberry: Look. I wrote the book, The End of America. I know a little bit about the country's fiscal problems. And I'm optimistic, but I don't think anything is gonna happen until there is a crisis. So I think that the current – the entire current crop of politicians is gonna fail miserably.
There's gonna be a massive crisis. And then, and only then, will Americans make the tough decisions. It's just the way democracy works. Look at Europe, look at Greece. Look at any other history of democracy. As soon as the people start voting themselves the treasury, it never changes until there's a crisis.
Aaron Brabham: People learn through pain. That's the bottom line.
Porter Stansberry: Yeah, I was writing in the digest about that today. And I was saying, "You'll be the same person you are today, except for the people you meet, the places you go, the books you read. And I was thinking about that because last week, when we were on the boat, we met such interesting people.
And I was reading a great book, The Quest by Daniel Yergin, which is a phenomenal book. If you haven't read it yet, you have to pick it up. You have to read it. It's the only really lucid explanation I've ever seen of what's happening in the oil and gas energy markets around the world. And if you want to understand that, it's only the biggest business in the world. If you want to understand it you have to read this book, The Quest by Daniel Yergin.
Anyway, I was thinking about that and then there's a corollary I put on there, which is you'll be the same person you are today except for the places you go, the people you meet and the books you read. And then the fourth thing is – and the money you lose. Because you don't actually learn lessons about investing unless you suffer.
Aaron Brabham: Which is why it's the worst thing – we always tell people, you go out with call options and you hit big the first time, you'll lose your entire portfolio. Same thing with junior resources.
Porter Stansberry: Yeah, it's like the casino. The worst thing that can happen is a big profit early.
Aaron Brabham: Absolutely.
Porter Stansberry: And then you think you're a genius and then you're gonna really hurt yourself. But you learn those lessons painfully. And then once you've learned them, now you got it. And one of things we try to do is I would rather you just learn them, right.
Aaron Brabham: Right. Which is why you write Friday Digest, to teach. But you understand it's not teaching, it's only learning.
Porter Stansberry: Right. And sometimes learning is painful.
Aaron Brabham: Now the only – all right now, here's the one issue where – let me get to the book, The Flinch 'cause this is where I have the weird struggle here. So if you learn pain – so let's say people, investors come in and they don't have luck with trying some different strategies. Let's say they try bonds, but they pick the bond that goes down. Let's say they try a put sell that goes bad on whatever. If they get instant pain, sometimes they'll just abandon it, and then they just say, "Well, mutual funds is the best thing 'cause I just give up."
Porter Stansberry: Okay, so pain and suffering is no guarantee of knowledge or learning. It's not.
Aaron Brabham: You gotta stick with it. You gotta try the right thing.
Porter Stansberry: So the fact of the matter is the number one thing that most individual investors do wrong is allocation, period, simple. They put way too much of their portfolio in one or two or three or four ideas, and you cannot get them to – you cannot explain to them the importance of diversification. There's no way you should have less than 12 positions in your portfolio, no way.
Aaron Brabham: No way. As a matter of fact, usually I think we lean towards what, 3 to 4 percent max position.
Porter Stansberry: Yeah. But some of you've got some case reserve. You'd have up to, say 5 percent, you've got 12 stocks, you're 60 percent allocated in stocks. That's about as aggressive in stocks as you should ever be. And I'd be willing to bet that 90 percent of our readers or our listeners are more aggressive continually, that they have more than 60 percent in stocks and they have fewer than 12 positions.
Aaron Brabham: I can pretty much guarantee that's a fact.
Porter Stansberry: And then when they experience the pain, then they actually don't learn the lesson because they think, "I just picked the wrong ones."
Aaron Brabham: All right, guys. Well, Porter, it's time for our guest. Cullen, welcome to the show.
Cullen Roche: Good morning.
Porter Stansberry: Cullen, tell us a little bit about your business now. You're one of the most popular writers on finance on the web. How'd you get into that and what do you write about?
Cullen Roche: Well, I actually – I have been running a hedge fund for the last seven years or so. And I kind of – I've been writing these monthly newsletters to my clients, and I got into the writing, sort of an online journal, during the middle of the financial crisis when things were kind of really starting to get out of control. Just sort of start writing more publicly and kind of put my ideas out there.
So I started this website called Pragmatic Capitalism, and over time it just continued to garner more and more attention and just, at this point, has kind of become something than I actually ever expected it to be. But So I kind of got into it sort of randomly, almost be accident, the fact that the website has become as large as it has and as popular as it has.
But I've actually since started to transfer my hedge fund from a private fund into – I'm actually reorganizing it now into a fee-only RIA, so I'm in the process of doing that now. So I'm actually ching my entire investment advisor's business, in large part, due to the influence of interacting with people and meeting different people through the website. So it's been kind of a crazy change in my life.
Porter Stansberry: What's your core strategy?
Cullen Roche: Well, we kind of do a big – it's really a huge macro top-down approach. So I sort of – I don't know how familiar you are with it, but I do a lot of monetary system stuff, a lot of the understanding really how the monetary system works, understanding how the institutional structures of the relationships between treasuries and central banks and the banking system, and how this all sorta filters down and works through the monetary system to influence everything.
So I kinda think of it as sort of like a funnel. To me, understanding how the whole system works is all about understanding how the institutional design of the monetary system works. Sort of understanding what Ray Dalio calls the machine basically and breaking that down into how the machine influences facets of our world, the financial world for instance.
And you have to break that understanding down into an understanding of the investment world. And once you understand how the macro is influencing the financial world, you have to break that down into a specific actionable approach. So I like to sorta think of it as a funnel, and it all kind of leads to this one sort of concise approach.
It depends on, obviously, all the different macro variables. So it's been kind of a crazy time because the macro environment is totally dominating all of the headlines now, especially with the – ever since the banking crisis and especially with Europe in the headlines every day.
Porter Stansberry: Well, so what's your take then on the rounds of quantitative easing? Is it working? Is it having the desired impact? Can it work? Will it fail or will it succeed?
Cullen Roche: Well, I think quantitative easing is a funny thing because what it really is is – quantitative easing is, in the way that they’ve been enacting it, is really just monetary policy at a different part of the yield curve than the fed normally will work. So most people seem to attach some sort of special power to quantitative easing. A lot of people refer to it as money printing or something like that. And it's not really any – all that different than the way that they set the overnight interest rate, which is standard monetary policy.
So the fed set the overnight interest rate essentially by altering the amount of reserves in the banking system. And all they're really doing, when they go out and they buy these tenure bonds is, instead of trying to slash the set funds rate, for instance, by keeping the amount of reserves in the banking system, all they're doing through quantitative easing is really swapping. They're swapping cash, basically, for treasury bonds.
So I've been really critical of the policy because the big thing to me that it doesn't do is it doesn't directly target rate because the fed, the way that they set the overnight rate is by actually naming the rate. They say the fed funds rate is X percent and we're going to defend that rate. And the fed can always defend its rate because it's the supplier of reserve.
So banks can't beat the fed in terms of competing for a price because they don't have the reserve. The Central Bank has an unlimited amount of reserve so they can always set the price of the overnight rate. But what they're doing through quantitative easing is they're setting the quantity. So it's a totally different approach and it doesn't really have a precise influence on the exact price of the yield.
So I don't think it's having a huge impact on the lending side. So we're not seeing banks end up lending more because the demands for loans isn't really increasing because the fed isn't having a precise impact on the price of debt. But, more importantly, what QE doesn't do is it doesn't change the amount of actual money that the private sector has. Because all it does is it swaps a treasury bond for cash.
So the banks actually end up with, essentially, the same net financial position, except now they own reserves instead of T Bonds. So the thing that I don't really get or the thing that I think is overstated is, really, the transmission mechanism for making QE work.
And that's why I think that, even though they’ve implemented this policy now, really, twice – Operation Twist was really a different form of operation – and it's just I don't think it's really done much. Because I don't think that it really has a transmission mechanism through which it can work, primarily because right now the demand for credit is so low.
And in an environment where the demand for credit is low, monetary policy just becomes a very blunt instrument because monetary policy always works through the credit market. So if the credit markets are seized up because the demand for debt is low, it's hard for monetary policy to have a huge impact.
Porter Stansberry: I would definitely argue a few of the points that you made, and I would like to know if you've ever heard of a company called Annaly Capital Management.
Cullen Roche: Yeah.
Porter Stansberry: All right, so you know Annaly. You know what they do, I'm supposing.
Cullen Roche: Right.
Porter Stansberry: For the benefit of our listeners, Annaly is a company that deals in the credit markets. They deal exclusively in government-backed credit markets. So in a way they are – well, we call them a virtual bank because they only really exist to perform arbitrage and government-backed credit securities – mortgages and treasuries. But I think they end up dealing exclusively in mortgages because of the yield preference. So, Cullen, do you have any idea employees Annaly has?
Cullen Roche: I actually don't. I'm not super familiar with …
Porter Stansberry: They’ve got about a hundred employees. You have any idea how much money they make each quarter?
Cullen Roche: I assume a ton. I know they're a pretty profitable company, right.
Porter Stansberry: Yeah. They make about $400 million a quarter. You got any idea where that money comes from?
Cullen Roche: No. You tell me.
Porter Stansberry: All right. Well, the money comes from the government. It comes from the Federal Reserve in particular. A hundred people can't earn $400 million a quarter in any legitimate way. I don't know if that's occurred to you or not, but that's an incredible sum of money for a hundred people to earn. It's never been done before in the history of capitalism actually. So how do they do it?
Well, they do it because they lever a portfolio of government-protected securities, about 8 to 1, and they have like $80 billion under management right now. And the only way a hundred people could ever, ever own $80 billion in credit instruments is 'cause they're all guaranteed by the government. And who actually provides that guarantee? Any idea, Cullen.
Cullen Roche: Well, technically, it's – right now, it's really the fed.
Porter Stansberry: Exactly. And how do they do that? They do that with a printing press, do they not?
Cullen Roche: Essentially, yeah.
Porter Stansberry: So there's no other way, reasonable, any other person could explain how a hundred people make $400 million a quarter. But they do, and they do it by managing $80 billion, which also a hundred people could never ever do.
And they do it all because they have the de facto guarantee of the Federal Reserve, which previously was the de facto guarantee of the U.S. Treasury, which previously was a actual guarantee from Fannie and Freddie, which, of course, are now bankrupt entities in conservatorship. And the whole reason why all of this exists is because the feds can do the things that you say don't work.
Cullen Roche: Well, I mean the fed essentially guarantees everything. You know this has kinda been one of the big things that is now kinda coming out in the media that people have been really kinda, I think, surprised to learn, is through the Libor scandal, the fed is essentially in the business of making sure that the payment system in the U.S. banking system always works.
The Bank of England is really in the same business over in London. The role of the Central Bank, really, is to manipulate things in such a way that the payment system is always working. So they're always trying to manipulate interest rates.
Porter Stansberry: Which is another way –
Cullen Roche: So they're trying to –
Porter Stansberry: It's another way of saying that they don't want their banking system to fail. Because what happened is all of these people –
Cullen Roche: Exactly.
Porter Stansberry: – all these sheeples, they put their money into the banks. The banks have lost almost all of that money, and the only way they're gonna ever get it back is by printing it. And, sooner or later, that's gonna have some really negative consequences.
The first consequence we're seeing is a complete loss of business confidence because every knows that what they're doing is a charade. The fed, last year, purchased something on the order of – I want to say 60 percent of all the ten-year treasuries that were issued. Does that sound like a real market to you?
Cullen Roche: Well, I mean this is one of the things that I kinda have an issue, though, with is that fed is buying all of this debt on the secondary market. I don't think that – I mean the treasury market is one of the most liquid, largest markets in the world. I think the fact that the fed is buying 60 percent of it on the secondary market is a lot like saying that Goldman Sachs is the market maker for 60 percent of Apple at the New York Stock Exchange or something like that.
It's just sort of a – I mean we're talking about a market that's so huge, so liquid that – you look at all the data, you look at where yields are, you look at where prices are. If you look at the bond option data, we just had the highest bid to cover the other day in a ten-year treasury option in a long time.
Porter Stansberry: Yeah, and it's –
Cullen Roche: And the demand for this stuff is through the roof.
Porter Stansberry: Right, I know. And it makes no sense.
Cullen Roche: It's – literally, it's been a lot like Apple trading at the Exchange. I mean the demand for this thing is crazy high.
Porter Stansberry: People do crazy –
Cullen Roche: So fact that –
Porter Stansberry: I compared it to – the other day, I compared people buying ten-year treasuries to folks who would get on a helicopter, fly out to the Titanic and have a free drink and listen to the band. It might work, but it's not gonna work for very long.
Cullen Roche: Do they get a ride home?
Porter Stansberry: No, they don't. They get wiped out. And look at the history of any – look at the entire history of any paper money system, ever, were the Central Bank begins to finance the government credit at this extent. And what's the outcome in every single case?
Cullen Roche: Well, see I think that's one of the things I think I'd take issue with there is that I don't think it's quite accurate to describe what they're doing as monetizing the debt. Because what they're doing, they're not buying it on the primary market. They're not buying the bonds directly from the Treasury. They're buying them on the secondary market. And you can see, for instance, in the bond option data for the last few days, that the demand for this stuff is crazy high.
So I think to say that – the term, debt monetization, implies that there's not enough demand there for the Treasury to be able to sell this stuff and that the fed has to come in and do it for them. And I just don't buy that because I see the demand for this paper is just – it's through the roof. People can't get enough of ten-year treasuries. And it looks completely irrational –
Porter Stansberry: All right. Yeah, yeah, yeah. I'm with you.
Cullen Roche: – but I think it is what it is, you know.
Porter Stansberry: But what about – but what happened in '08 and '09, when the fed bought all that paper from Bear and from AIG and from Lord knows who else. So what was the total buy and guarantee, something like $11 trillion?
Cullen Roche: Yeah. It was …
Porter Stansberry: It was enormous. And, yes, some of it has since, of course, left the building. But at one point, they were underwriting all of GE Capital, I mean alone. It was crazy. So, anyway, I think that what you're seeing, in large part in the collapse of the treasury market today, is the repercussions from the fact that they didn't let any of those zombies die, and all that bad debt is still out there.
But it's just been – it's extend and pretend. And that's what's killing the economic growth and that's what's making everyone fearful of any of the corporate debt that's out there, especially the yield spread has come in so much.
Cullen Roche: Yeah, what –
Porter Stansberry: They just create a situation where it's dynamite everywhere. And the least danger of complete destruction happens to be in the government paper.
Cullen Roche: Yeah, I think we would definitely agree that the fed should have let a lot more institutions go under in '08. I think that the credit markets would be a lot healthier today if we had taken an alternative approach and let a lot more of sort of the natural selection of the market take hold and let some of these companies get wiped out. I think the whole system would be a lot healthier today.
Porter Stansberry: And I'd be a lot richer 'cause I had a lot of cash, and I was gonna buy up a lot of distressed assets. In fact, I made a lot of in M&G and bonds, but just barely. I didn't expect all of the different rigmarole that went on. But, Cullen, I want to wrap up this interview. It's been great to talk with you. And I wonder if you could leave our audience with just one investment idea.
Imagine you're talking to your mom or your mother-in-law. I don't know if you're married. But what would you tell the average 60 year old-plus retiree to do with their money over the next 12 months that's gonna be safe, but also give them a chance to earn a reasonable return, say 8 to 12 percent.
Cullen Roche: Oh man. I mean that's such a tough question. It's hard to understand any single person's – and sort of ease them on.
Porter Stansberry: Well, I know. This is an imaginary person though. This is a – the group collective.
Cullen Roche: I mean a 60-year-old person, I think that just as sort of a big, broad approach, I'm sort of a big fan for the average investor of implementing, really, one of these low-fee diversified – not a 60/40 approach, but something similar sorta depending on your various needs and wants. And not – when I say 60/40, I mean not just U.S. stock and U.S. Bonds. I mean a truly globally diversified portfolio that really touches on a lot of different things.
So that's sort of the – that's, really, the biggest, the big, big picture, sort of a – it's almost like an ivy league approach, the way these big endowments invest in cash, putting money in a lot of different pools of assets and investing across a huge spectrum of assets and, really, creating a portfolio that is dynamically hedged is, I think, really the broadest way to sort of approach all this stuff without getting into really specific strategies.
Porter Stansberry: Or you could buy Intel, which has 60 percent of their business in all the worlds foreign markets and has a very sophisticated currency hedging program, has a very good product and pays a 4 percent dividend.
Cullen Roche: Yeah. I don't do – I don't really do a lot of micro stuff, so I'm not really a stock picker. So I kinda take more of a boring role of macro approach. It's not as sexy as picking stocks and stuff and almost guaranteed not to give you returns like Apple or something like that, or whatever. But I think it's a more prudent, low-fee, sort of the slow and steady approach rather than what everyone seems to want, which is the get-rich-quick ideas.
Porter Stansberry: All right. Well, Cullen, thanks for joining us. I hope you come back some day and talk with us.
Cullen Roche: Great.
Porter Stansberry: We'll compare the Ivy League to Intel and we'll see how it does.
Cullen Roche: Alrighty.
Aaron Brabham: All right, thanks a lot.
Cullen Roche: Thanks for having me on, Porter.
Porter Stansberry: All right, bye-bye.
Cullen Roche: All right, bye.
Aaron Brabham: To learn more about him, you can go to pragcap.com. Porter, it's time for the mailbag. Tim, you've got some voice mails. Fire them up.
Caller 1: Hello. My name is Brian, and I just want to encourage you guys to keep up the religious discussions 'cause you're not gonna hear much of this on the mainstream media unless it's tied to some extreme act of some sort. I consider myself a rational empiricist, but I'm also a committed Christian. And my point to you guys is simply this.
True religious freedom can only be argued out in the marketplace of ideas. You look at the pros and the cons of each view and you make your choice. And if that choice is to follow no religion at all, well, it's still a choice. Agnosticism, on the other hand, is just postponing the inevitable. Either God exists or he doesn't, and the choice still has to be made. Thanks. Keep up the great work.
Porter Stansberry: Wow. That was a pretty reasonable guy.
Aaron Brabham: The most rational person we've had. I mean thank you.
Porter Stansberry: I'm speechless.
Aaron Brabham: Thank you very much. I appreciate you being rational.
Porter Stansberry: I wonder if that was the 10th or the 11th listener?
Aaron Brabham: It almost sounds like it was fake and cut through together.
Porter Stansberry: I know. I was like, "Is that Brian Hunt?"
Aaron Brabham: Yeah. It almost seemed like it was an insider calling to make us feel good.
Porter Stansberry: But then he said he was a committed Christian, so I was like, "It's not – it's definitely not Brian Hunt."
Aaron Brabham: Definitely not, no. All right, next.
Caller 2: Hi, this is Phil Anderson. I'm a Wealth Alliance member and I really do appreciate all the stuff I've been getting from you guys. In relation to your religion discussion, I think you'd really enjoy a website called TheChurchofReality – that's all one word – .org. I'd be happy to hear about what you think of that someday on your radio.
Porter Stansberry: Okay, we'll check it out.
Aaron Brabham: All right. Next, Tim.
Caller 3: Regarding your conversations with a gentlemen about oil price, oil, in general –
Porter Stansberry: Ooh, here we go.
Caller 3: – I would suggest that maybe you go read a book by James Norman, who is with Platts. He was the original guy who was fighting Enron, the ________. Irregardless, he is the whole following of the oil trading enterprise since the '80s. It's a huge revelation. Read the book, The Oil Card, by James Norman. It will really point you to the direction of what really causes oil prices to be where they are, in particular '03 to '08.
The other thing you might want to look up is a thing called The Abiotic Theory, A B I O T I C, and it's from Schultz Fischer, Germans, but basically the premise is that oil is a hydrocarbon park, a continuous supply, constantly being created by the upper mantle of our planet by its rotation, as pressure and high heat are basically creating hydrocarbons indefinitely.
So it is a perpetual, oil-making, creating machine, our planet. You should take a look at that because it really opens your mind up and possibly that really oil is – and all energy is infinite.
Porter Stansberry: Well, I think what's funny about – I hadn't heard of the first book, the Oil Card. I have heard a lot about the second book.
Aaron Brabham: The Abiotic.
Porter Stansberry: Which I think is very unsound science. But I wrote an April Fools' Day digest about it several years ago where it was called Gusher. And you can find it on our website, April 1st, probably 2006, 2007. Anyway, I wrote about how all the oil fields in the Permian Basin in West Texas were refilling with oil because of all this nonsense that – there's a Russian scientist, who's also very involved in it.
And it's – unfortunately, it doesn't make much sense given the realities of the geology. But I wrote a really funny April Fools' Day e mail about it. And so the way to play it was buying the Texas Pacific Land Trust, which owns all the mineral rights across West Texas.
Well, the irony is that that stock has probably gone up tenfold in the last six months. Well, maybe not that much. It's gone from 30 to 70 or something like that. It's gone way up because of the horizontal drilling that's opening up the shale plays that are all underlying those fields. So, no, the oil fields didn't refill, but our ability to get to the oil that was beneath them has increased.
And, as a result, the stock idea turned out to be true, even though I wrote it completely tongue in cheek as a farce. But that's so strange because I've written several of these farces and it's not the only one that has actually ended up coming to pass, that sometimes life is stranger than fiction.
Aaron Brabham: Yeah. You're the Nostradamus of farces.
Porter Stansberry: Maybe. I think one of my favorite farces was – and it probably will happen – is that I wrote about how Seattle biotech entrepreneur had genetically engineered bacteria to separate gold from seawater. And, lo and behold, a couple of years later we're recommending a stock that's actually mining for gold beneath the sea floor. Not exactly the same thing –
Aaron Brabham: No, not the exact same thing, but –
Porter Stansberry: Very, very –
Aaron Brabham: – you see where we're going with it.
Porter Stansberry: Anyway, just funny the way that that happens.
Aaron Brabham: And, by the way, Jim Norman will actually be on Frank Curzio's S&A Investor Podcast in September. So if you guys want to hear the book that he first mentioned.
Porter Stansberry: The China Card.
Aaron Brabham: Yes. He's actually gonna –
Porter Stansberry: Yeah. Not the China Card, The Oil Card.
Aaron Brabham: Oil Card. He's actually gonna be on Frank's show. So I'll –
Porter Stansberry: Yeah. I gotta read that book. I haven't read it.
Aaron Brabham: I'm gonna listen to that. All right, and I think we have one more, Tim.
Caller 4: Porter and Aaron, I've been thinking about making this phone call for over a week, did decide to sign up. I guess that makes me a paid-up subscriber and, apparently, listener number five, I'm not sure. I was listener number nine, it seemed like at one day. I think the number sounds like it's going down.
Porter Stansberry: It probably is.
Caller 4: [Crosstalk] by the digest today and am wishing you peace, as you go through the whole death of a friend. But going off to the Bahamas is a great way to recover, I must say.
Porter Stansberry: It worked for me.
Caller 4: I'm a fan of Marsh Harbour and Hope Town, especially. Oh my gosh. Anyway, so I know you'll have a great time. A couple of things. You were worried about SARadio and some sort of Germanic Nazi connotation. You need to think of it with a Mexican or South of the border at least, accent, as in Hey, S.A. [Inaudible due to laughter] –
Porter Stansberry: Is she singing in a large band.
Caller 4: I could be wrong. It could be something completely crazy. But that's –
Porter Stansberry: Is she calling me Hevay?
Aaron Brabham: Hey, S.A. you heavy.
Caller 4: Looking forward to meeting you guys. You're great. I really enjoy the radio program. Please continue to talk about religion, for God's sake.
Aaron Brabham: We tried that.
Porter Stansberry: No, we can't. We can't do that. It's too destructive.
Aaron Brabham: It's way too destructive.
Caller 4: – but all the atheists, the 18 thousand of us, probably, in the world will sign up immediately. All right. Well, carry on.
Aaron Brabham: Hey, first female caller, and she was great. I liked that, enjoyed it.
Porter Stansberry: I like Marsh Harbour too.
Aaron Brabham: I don't think I've been to Marsh.
Porter Stansberry: Abacos.
Aaron Brabham: Abacos, yeah. Marsh Harbour's great. All right, guys. Well, that's our show for today. The guest next week will be Ed Feulner. Ed is the president –
Porter Stansberry: Ed.
Aaron Brabham: Ed.
Porter Stansberry: Ed Feulner.
Aaron Brabham: He's the president of the Heritage Foundation, one of the most prominent –
Porter Stansberry: Wow.
Aaron Brabham: – think tanks in the world.
Porter Stansberry: He must not know who we are.
Aaron Brabham: Yeah, why would he agree to do this?
Porter Stansberry: I don't know. The director pulled a fast one there.
Aaron Brabham: He did. We appreciate you listening today on Stansberry Radio. We want to thank Cullen Roche again for joining the show. Visit us online at StansberryRadio.com. Tweet at us. Call our 1 800 number, 855-SARadio, and head up our YouTube channel under Stansberry Media.
Porter Stansberry: And thanks very much to the callers and, particularly, the last caller with the kind words. I very much appreciate it. And please keep listening. Buy some newsletters when you get a chance. Thanks.
[End of Audio]
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This Episode's Guest
Cullen Roche
Cullen Roche is the founder of Pragmatic Capitalism. He is also the founder and CEO of an investment partnership. His primary areas of expertise include global macro portfolio construction, quantitative risk management and behavioral finance. Prior to establishing his own business, Roche worked at Merrill Lynch Global Wealth Management, where he helped oversee $500MM+ in assets under management. He is a Georgetown University alumnus, growing up in the DC area and now living in Southern California.
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