WBD445 Audio Transcription

Do We Really Understand Inflation? with Cullen Roche

Interview date: Tuesday 4th January

Note: the following is a transcription of my interview with Cullen Roche. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

In this interview, I talk to investment strategist and founder of the educational website Pragmatic Capitalism, Cullen Roche. We discuss the drivers for inflation, the role of government, investment strategies during uncertain times, and the place for Bitcoin in asset portfolios.

“If you could pick one variable in the whole world that you had to understand that would be your go to indicator, inflation would be the thing to me; you tell me what the rate of inflation is in twenty years, I’ll tell you pretty much what most financial assets have done, whether it’s bitcoin, bonds, stocks, whatever.”

— Cullen Roche

Interview Transcription

Peter McCormack: Good morning, Cullen.

Cullen Roche: Good morning, how are you?

Peter McCormack: I'm good, man, how are you?

Cullen Roche: Awesome.  New York.

Peter McCormack: Yeah, man.  Well, thank you for coming in for this.

Cullen Roche: Yeah, for sure.  You too.  You probably came further than I did.

Peter McCormack: Yeah, but I've got a whole bunch of interviews.  Thank you for our gift.

Cullen Roche: Yeah, we're double Peter Schiffing today.  I want the audience to know that my Schiff is bigger than Peter's Schiff!

Peter McCormack: I think that's going to start a meme now.  I can imagine in about a year, I'm going to be travelling with a fucking case of Peter Schiff photos all up over the wall!  I'm so glad to talk to you, I really wanted to talk to you.  I like to have a range of people on the show, people who support Bitcoin to people who are anti-Bitcoin, and people who understand different forms of economics and I want to learn from everyone. 

I was trying to understand a little bit more about Austrian Economics and as I told you, I did a search for critics of Austrian Economics, and I found an article that you put together.  In fairness, it was back in 2013, but it brought up some interesting points, so I reached out to you and here we are.  But I want to talk to you about a few things.  So, I want to talk to you about inflation for sure, I do want to talk to you about Austrian Econ, I want to talk to you about the economy at the moment, because we're in a fucking wild place, man.  So, yeah, where shall we start?

Cullen Roche: Let's start with inflation.  I feel like it's the topic of the day, right?

Peter McCormack: Yeah, so I listened to a show you did on Preston Pysh's network discussing inflation, and it was super useful to me, because I feel like sometimes bitcoiners are very quick to jump on inflation, sometimes almost in a celebratory kind of way, even though it's shit for people; but as in, "We were right!"  But your key point is that not all inflation is down just to the money printing, right?

Cullen Roche: Yeah.  Well, I mean, that's almost one of my most frightening discoveries of the last 10 to 15 years.  And I focus on inflation so much in my career, so for people who don't know, I'm a financial manager, so manage people's portfolios.  And to me, understanding inflation, if you could pick one variable in the whole world that you had to understand that would be your go-to indicator, inflation would be the thing to me, because I mean you tell me what the rate of inflation is in 20 years, I'll tell you pretty much what most financial assets have done, whether it's Bitcoin, bonds, stocks, whatever.

So, I'm hyper-focused on inflation and I think a lot of people approach inflation from a very politicised perspective.  They'll argue that, "Inflation is going to do this", because for the most part, people are either pro-government or anti-government, and so they kind of take a hard-line stance.  And I've spent most of my life trying to find the nuance there.  And the really jarring discovery for me is that nobody really understands what causes inflation.

The really simple theory, obviously, is more money, same amount of goods, you're going to get higher prices.  But the reality is that it's a fuck load more complex than that, and we see that, especially in developed world countries like Japan in the last 20 years, where you have a lot of weird things going on in the Japanese economy that, despite the fact that they've created an economy now that has 300%, 400% debt-to-GDP, they seem to have printed just incredible amounts of money, and they still have virtually 0% inflation.

So, I think the conclusion that a lot of people have come to is, "Well, it's a lot more complex than just the money printing aspect of it, and there's all these other things that come into play, like demographics and inequality, and all these other somewhat subjective measures that make it really hard to measure inflation and understand what's going to cause it".

But to your point, I talked to Pomp in April 2020, and the bitcoiners were right that the government response to everything that happened during COVID was going to cause inflation.  So, looking at the price of Bitcoin today, I'm still shocked at the rate of change that has occurred.  But the fact that it's gone up a lot is not super shocking.  I would say, God, the rate of change in virtually everything has been somewhat shocking, even the stock market, etc. 

But yeah, the bitcoiners were right, I think because in this specific instance, it was the government response, and this was something that I was saying at the time; the government response was so big and it was so different.  I mean, I cut my teeth in the inflation world and really trying to apply all this during the Financial Crisis.  And a lot of my understandings of this come out of the Financial Crisis and the government's response.  My basic conclusion, coming out of the Financial Crisis was, "The Fed's doing a lot of weird stuff, but really the Treasury's not doing a lot of stuff", and to me, the money printing that occurs in the economy is very different between those two types of entities.

In my opinion, it's the Treasury that really has the money printer.  And coming out of the Financial Crisis, you didn't have a huge Treasury response.  This time around, it was totally different.  So, I think that's a big part of why we've gotten the rate of inflation that we have.  So, it's a weird thing.  Inflation is different in everyone's personal instance; it's different in every country's instance.  So, the way that a big government policy or inflation dynamics would affect the United States are totally different than if Zimbabwe printed trillions of dollars like the United States.  It would have a totally, totally different impact, because their economy's totally different.

It's another variable that just makes understanding inflation so difficult; and predicting it, virtually impossible, which from a government policy perspective, is sort of frightening, because you can get into situations where you have people that are dictating policy and doing things that could cause things that they literally cannot predict, and are just potentially a lot more catastrophic than people think.

Peter McCormack: Right, okay, I think it would be really useful to try and look at the formula for inflation, even though we can't define which factors come together to affect it the most; but to understand the things that would go into the formula, the different things that could do it.  I think we should start even simpler though.  If somebody said to you, "What is inflation?" how do you define that?

Cullen Roche: Well, from a really textbook definition, the definition of inflation is the rate of change of a basket of goods and services.  I mean, that's really vague, to some degree.  But I've studied the Bureau of Labor Statistics' approach to CPI and stuff, and for background, when I graduated, I actually was a pretty hardcore Austrian Econ guy, and I'm still obviously a -- I wrote a book called Pragmatic Capitalism, so I'm obviously a hyper-capitalist.

But I also started studying a lot of this stuff, because if you want to understand inflation, you've got to understand the way the BLS measures it; because places like bond traders, all these guys trading bonds down here, they don't give a shit about the shadow stats measure of inflation, they don't care about the Chapwood Index or your alternative index, they care about the CPI, because the CPI is the index that the government dictates all their policy off of, it's the indicator that the Fed dictates all their policies off of.  So, you have to understand the way that they measure it.  Measuring inflation through a basket of goods is really messy.

Peter McCormack: Well, this is why I asked you, because as you said before, inflation's really subjective to you as the individual.  Just my sense, in the UK, it's not hitting us as hard as it's hitting in the US.  So, even between trips, I'm noticing things getting massively more expensive.  So, I suspect there's different things at play.  So for example, my flights are super expensive right now coming over.  My flight to Miami was probably double what I paid earlier in the year, but I don't think that's inflation, I think that's the industry responding to coming out of COVID and trying to fill their planes, but not filling up their routes.  But I have noticed, it doesn't matter where I go for dinner or lunch, buying a sandwich and a coffee seems super expensive. 

Cullen Roche: Yeah, it's way more.

Peter McCormack: I'm trying to buy a house at the moment; that feels super expensive.  So, this 6.2% rate we're seeing, I do not believe, for me, it's 6.2%.  I think here in the US when I'm spending money, I think it's 15% to 20% year on year.

Cullen Roche: Well, I mean to somebody who's trying to buy a home right now, or if you're renting, it probably even feels higher, because for a lot of people, you're waiting in shelter.  For instance, the BLS rates that the shelter weighting in the CPI is something like 32% or something.  That's obviously not true for everybody.  For a lot of people, it's probably a lot higher than that.  If you live in New York City, I bet it's a hell of a lot higher than that; so, it's super personal.

But also, in the United States, I live in California, where it's virtually impossible to build a house, because the regulatory system is so jacked up, and Californians are consistently complaining about, "House prices are too high, what do we do?"  The obvious answer is, "Build more houses, let builders build more houses", and it's really hard to build a house in California, because it's expensive and the regulations are crazy and there are endless hurdles to jump through.  So, you have this really unique supply constraint problem inside of California, where there's literally not enough houses.

So, the inflation in California real estate is different than the real estate inflation in, say, Arizona, which is right next door.  I know builders, friends of mine, who have left the state of California to go move their businesses to Arizona just to be able to build houses, because they can walk into the building department, show the guy a piece of paper, and the guy will put a stamp on it, and they'll walk out and go build a house.  Whereas, in California, it's this big back and forth.  So, you get all these weird, unique aspects of inflation like that that are really unique to not just locations, but people and things like that.

Peter McCormack: Right, okay, so let's talk through the different elements then.  Let's talk about the money printer itself, the growth in the money supply.  The MMT people would say, we've talked about those before, "Growing the money supply's fine as long as you keep inflation under control".  My expectation of that, as somebody who doesn't understand economics, is that a gradual increase in the money supply is okay.  We've seen a huge increase in the money supply over the last year, maybe two years, and all the bitcoiners and Austrian Economists predicted inflation would come and inflation is hitting.

So, whilst sometimes it's hard to predict and it's nuanced, is there a certain amount of expanding the money supply that would almost certainly lead to inflation, or is it combined with something else?  Is it combined with coming out of COVID, and there's a sudden demand shock?

Cullen Roche: Yeah, I mean COVID's unique, because there definitely are, I think, a lot of liberal economists right now that would argue that this is mostly a supply constraint thing.  I'd argue it's mostly a fiscal policy thing, that we printed a lot of money, we created a lot of demand.  And, yeah, there's weird stuff happening with, like, the LA ports.  But if the demand wasn't so high, you wouldn't have problems in the LA ports; the LA ports would be empty, or at half capacity.  So, the two are interconnected, to some degree.

But it's interesting.  Using the word "money" to me, it's a weird thing to talk about, because I think in the last 15 years, the definition of money has become somewhat subjective, because coming out of the Financial Crisis, for instance, this was a point I made really repetitively almost to the point where I wanted to blow my own brains out.  But the Fed technically, they create something we call money, reserves, okay.  So, when they do QE, Quantitative Easing, they create money and they essentially swap a bond for reserves. 

So, keeping things really simple, the Fed expands their balance sheet, and they go out into the market and they buy existing government bonds, and they literally are swapping the balance sheets.  So, something that I tried to emphasise coming out of the Financial Crisis was, if the treasury isn't doing anything, if the Treasury isn't expanding their balance sheet and spending more, then there's an outstanding balance of bonds.  So, when the Fed comes in and expands their balance sheet and swaps those two assets, what happens?  From a technical perspective, you have fewer bonds in the private sector and you have more money.  Do you have more financial assets though?

It's a weird thing, because the Fed takes these bonds out of the economy.  The Fed's balance sheet, for practical purposes, is like a black hole, it might as well not exist.  Theoretically, the Fed has hundreds of gazillions of dollars on their balance sheet, in theory; but in reality, the way that the Fed mostly operates is, they expand their balance sheet and then they do these asset swaps.  There's lots of debate about how impactful those asset swaps are; do they cause asset inflation; do they make people chase riskier assets, things like that, which is a totally valid debate?

But from a really technical perspective of the way that we define things like money, all they've done is they've swapped what is in reality, a chequing account, with a savings account, and it's one of these things where, think about it from your own perspective.  When you swap a chequing account for a savings account in your own financial life, $100 for $100, do you think of yourself as having more money?  So, you get into these silly debates about, what is money?  Are government bonds money-like?

So, you get caught up in these debates where, for me, it's much more useful to look at money as existing on this scale of money-ness.  So, I like to think of money as, there's things like bank deposits and reserves, or physical cash.  These things are hyper money-like.  I mean, you can walk into virtually any store in the world with a dollar and use a deposit or physical cash to buy something.  A Treasury Bill, it's a little further up on the spectrum, where it's more difficult to use a Treasury Bill to buy things, but for instance, the guys who are all around us on Wall Street, they use Treasury Bills and Treasury Bonds to buy other stuff, collateralise and buy other stuff all the time.  So, you have this weird market where you can use T-Bills in a very money-like sense in other financial markets. 

Bitcoin, is Bitcoin money?  Where would it fit on a scale of money-ness.  Increasingly, it's becoming a lot more money-like, because it's becoming more widely accepted as a medium of exchange in places.  So, it's money-ness is increasing over time.  But it still doesn't have, I would argue, the same level of money-ness that a physical dollar does.  But you get into all these debates about the level of money-ness of something, or the scale of money-ness of something, and it's weird; in some environments, some things have more money-ness than others, like Treasury Bonds become hyper money-like when the shit hits the fan.

So typically, when things go really badly in the economy, the demand for Treasury Bonds increases, because people want to hold that thing that is basically a really safe savings account basically, relative to other financial assets in the world.

Peter McCormack: As long as the US doesn't default.

Cullen Roche: Right, yeah, assuming.  But I mean, in today's world, the Treasury Bond market is, just by default, mainly because all the other bond markets are shit, it's by default the dominant bond market, just because on a relative basis, what's going to compete with it?  There are no euro bonds really.  Chinese bonds?  Who the hell would trust government issued Chinese bonds, to the same degree that Treasury Bonds would?  Yen and Japanese Government Bonds?  Close, but still not nearly the same size and quality.

One of the interesting points I like to make about Treasury Bonds is I think sometimes people think Treasury Bonds and things like that have value, because they're backed by the government or the military, and I think that's silly.  No, it's literally because the US Government just happens to be the entity that can tax the most output in the world.  So, it's a function of the productivity and the gross output of the capitalist system of the United States that makes Treasury Bonds valuable.  It makes the dollar valuable really.  It's not the other way around.

The dollar isn't valuable because the government is great, and because the government has a great big military, it's the opposite way around.  The dollar is valuable specifically because the people that use the dollar to invest and build things have created a lot of value that has created a lot of demand for the dollar.

Peter McCormack: So, how do we measure the growth in money supply?  It sounds like you can't, really.

Cullen Roche: It's hard.  Coming out of the Financial Crisis, or even COVID, I think you can look at the way that the government is responding to things like that, and you can measure to some degree the rate of change of these things.  So for instance, in 2008, 2009, the government as a whole, meaning the Treasury and the Fed combined, their policies weren't nearly as big as I think a lot of people thought they were.  They were big, but nothing compared to the COVID response.

So, the Treasury's recovery package was $800 billion in 2008, which was by size in that time, seemed like a big number.

Peter McCormack: Not now!

Cullen Roche: We're in deficits of $7 trillion over the last two years.  These are huge, huge numbers.  So, measuring it is really imprecise, because you get all these -- like M1 went up a lot a year ago, and part of that was just literally the Fed changing part of the definitions of the way they defined savings deposits.  So, you had this numerical increase in M1, that for practical purposes, was literally changing a chequing account and a savings account, the way that they defined it.

But looking at things like M2 is at least a somewhat useful measure, because when you look at the government in totality and you understand, "Okay, well the US Treasury really did print $7 trillion of new financial assets", that's real.  It's almost cleaner to look at Treasury Bonds as money, because then you can look at the size of the deficit in government debt, and you can say, in a pretty clean model, let's say that the Fed didn't come in and monetise the bonds, and let's just say that the Fed wasn't a thing, the Treasury comes in and literally finances their spending by printing actual money; the literal money printer's actually in the US Treasury, the Bureau of Engraving, the Mint.  That's where the actual money printing is done.

The Fed's kind of this back actor, who gets a lot of airplay, but to me, the Treasury's the one.  They're the real bazooka holder.  And if you look at government spending and deficits and government debt through the lens of viewing government bonds as basically money, there's no measure through which you can argue that we didn't print a ton of financial assets, or print a ton of money in the last two years.

Peter McCormack: Do the Fed and the Treasury work closely together, or are they completely separate entities with separate remits?

Cullen Roche: Super close.  So, I mean technically, the Fed is part of the Treasury, from a legal perspective.  A lot of their actions are coordinated, and a lot of it, in a weird way, a lot of it is kind of weird hocus-pocus to some degree, because the Treasury will run a huge deficit in year one, and the Fed will come in and legally, because we define the Fed as this independent entity, they're not technically supposed to be able to buy the bonds.  They can't finance the government's debt directly, but the Treasury will run an auction and the primary dealers, who all work for the Fed, will buy the bonds, and then the Fed will buy the bonds from the primary dealers.

Have we just created this weird legal distinction of the Fed being independent, where if you look at it from a really nuanced operational perspective, yeah, they look independent, but really they're not?  And if you actually consolidated them and combined them, you can see that a lot of their actions are really cohesive.

Peter McCormack: How much does economic growth play into inflation?  So, if we were in a period where, say, there wasn't a massive increase in the money supply, can economic growth itself drive inflation?  It feels like it should, because it's supply and demand, right?

Cullen Roche: Yeah, I mean, they correlate.  This is a point I often make to mainly Bitcoin maximalists, who argue about the deflationary aspects of Bitcoin.  To me, money is actually mostly credit.  So, in the United States, the money supply is mostly controlled by banks.  So, I could walk into a bank down the road and I can take out a loan.  And when that loan is created, that loan creates a deposit.  And I can take that deposit, which was literally just created out of thin air by this bank, and I can go and buy whatever I want with it.

That's the dominant way in which money is created in the United States, so I wouldn't call it a decentralised system, but it's fragmented in a way that the private sector banking system has a certain amount of control on the money supply that, in my opinion, is a pretty good way of managing things, relative to the alternative, which is having the Federal Reserve being the only bank in the country.  So, you would literally go to a bureaucrat to get a loan if you wanted, and that becomes a really messy process, because obviously it's highly politicised.

Whereas, when you walk into JP Morgan, as shitty a bank as JP Morgan might be, the guy on the other side of the loan-processing desk there, he's looking at it from a pure money-making perspective.  It's a very market based, money creating type of system, the loan creation process.

But the kicker with your question is that, the majority of economic growth is a function of credit growth.  So, in the United States, the majority of money that exists is really just real estate based.  People take out mortgages to buy homes, to build homes.  I mean, there's this really weird strong argument that the US economy in a lot of ways is basically just a big real estate market.  And when the real estate market goes to shit, the whole economy goes to shit.

Peter McCormack: Which we saw.

Cullen Roche: Yeah, but the kicker with that is that when it's combined with the way the credit markets work, the majority of what's happening with the money supply and credit is mostly just people borrowing to buy and build homes.  So, the money supply, in a sense, is kind of always expanding, because credit's always expanding.

One of the nice things about having an elastic money supply, elastic meaning that it can grow and contract, is that if Peter's got all the money in the world and I have none, but I want to build a house and I'm pretty good at building houses, I can go to a bank and maybe I can convince the banker to give me a loan, which will create money which will allow me to build and finance this house.  And, when we're all done, I'll have a loan that I need to pay back over time, but I'll have a real financial asset that I've just built.  We have this house in the economy that is a totally endogenous asset that provides real value to the economy and is something that is a real asset that is generating real demand for money, and backing the supply of money that exists.

So, it's one of these things where, in my example there, the money supply has technically increased, because the supply of loans and deposits has increased, but is that necessarily going to be inflationary?  Again, it's a weird question, because we've created real assets that support the money, but we've also created a system where the new loan has created demand for things like lumber and concrete and building materials that otherwise didn't exist.  It depends. 

In the long run, my argument would be, a credit-based system like this doesn't need to be inflationary.  It doesn't need to be, but it is predominantly because the process of building that home is a messy one.  The supply constraints are messy, and in the long run you've got an expanding money supply that will result in more demand than we would have otherwise had.  I think a lower, moderate rate of inflation in an economy is not necessarily a sign of dysfunction to me, especially in a credit-based system like we have.

The thing where you can get a dangerous situation is when the government, as a huge credit creator, they can get involved in a way that could collapse the whole system if they tried hard enough.  That's the other thing.  The government isn't competitive in the same sense that you and I are.  When I go out and I build that house, I'm hypersensitive about the cost of things and the productive way in which I'm going about that whole process.  Whereas the government, in a lot of cases, they'll say, "California needs more homes, so why don't we just print $1 trillion and send it to California and let people go crazy with the money?"  That's a totally different process than a competitive bidding process, and that's where a lot of this gets really messy, and governments are big and obviously very involved in the economy in a lot of ways.

Peter McCormack: So, do we get a crash, because we end up with too much credit in the system, and essentially we have a blow-off top, too much credit, not enough's being paid back; and has the economy suffered from the fact that it feels like the government doesn't want to allow crashes to happen?  That's the feeling I get, they constantly want to kick the can down the road, because there's no political capital in the bust part of a boom-and-bust cycle.  And it feels like we're not allowing the bust to happen.

Whereas, the credit expansion feels like that's the boom.  It takes me back to the Ray Dalio video, How the Economic Machine Works.  We have credit and we have debt, but the debt never seems to have to be paid back.

Cullen Roche: It's weird.  I always like to point out, liabilities are just the other side of assets, balance sheets balance.  And in the long run, what you hope will happen is that, I'll build that house, the asset side increases, I still have the liability, I have the mortgage, or whatever, the loan that I took out.  So, from a balance sheet perspective, my balance sheet should balance; but you would hope over time that the value of my home increases, so that we end up with net worth basically or, who knows, maybe I pay down some of the loan over time, and we end up with some residual net worth because of that, or something.

But what can happen a lot of the times, and this is, I think, a valid argument in an environment like this, especially when the government is so involved, you create a lot of the demand for the value, or even the excessive borrowing of things, where people then bid up things in a sense, where in the long run, the value of homes is very, very likely to increase, and frankly the balance sheets are likely to increase in the long run, because that's just the way the economy works.  I mean, look at any long enough time horizon of assets and liabilities; they both increase.

People are always saying to me, "There's going to be a credit crash, because private sector liabilities are so huge", and it's like, "Look at the other side of the balance sheet.  The assets are also really huge", so that's just a function of the basics of double-entry bookkeeping, that the assets and liabilities will grow.  The worrisome thing is when you get environments like today, where the asset side grows a lot, at a rate that is unsustainable, and you get into an environment where there are valid arguments that, "What if the price of real estate falls by 20%?"  Well, everything financed inside of the last 18 months potentially goes under water, all of a sudden, because we're financing a lot this based on valuations of today.

So yeah, you get these -- in the long run the trend is likely to look like this, but in the short term, you can get these hyper volatile environments where you see price increases, like the run up to the Financial Crisis, or increasingly it looks like there's a lot of valid arguments that real estate, stocks, there's a lot of weird shit going on today, where things feel weird, things feel mispriced, to some degree.  I don't know by how much, I have no idea, but it feels like that.

Peter McCormack: Certainly in the S&P; it's a straight line up, with a couple of dips.

Cullen Roche: Well, a lot of weird shit.  When you start peeling back the layers of that, it's funny, I was sitting at dinner last night with a client of mine, and I was talking about GameStop, and it's like, "Pull up a chart of GameStop and look at it".  This chart is flat and then it goes just straight up, 400% or 500% or something, then it just sits there.  It's one of the most incredible charts in the market today, because in an efficient market hypothesis world, that should not happen.  That's almost impossible in an efficient market world. 

But this has been going on for like a year, and there's a lot of stuff like that, where just things went up in value and just sort of stayed there, where it almost feels like the cartoon of Wile E Coyote, where he's run off the cliff and his legs are spinning and it's like, "Is he going to fall?"

Peter McCormack: Well, do P/E ratios even matter anymore?

Cullen Roche: I don't know.  You're getting into stock market valuations.  Getting into the valuation of any asset class, like do bond valuations make sense today, in a world where interest rates are, what, 1.5% on a 30-year bond and inflation is 6%; does that make sense?  Does the stock market trading at levels that, by a lot of measures, are close to the 2000 ratio, does that make sense?  Bitcoin's one of the most interesting things to try and value in my view, because how the fuck do you value something that doesn't have cashflow?  Coming from a traditional finance perspective, for me, my head kind of explodes when I try to build valuation models for Bitcoin, because I don't know.  I don't know, where do you even start with that?

Peter McCormack: We're going to come to Bitcoin, because I really want to know your position on it, but I'm going to guess it -- well, I've got a theory on your Bitcoin position.  But I've lived through a few crashes in my life.  We've had the 2008 Financial Crisis, which was something I lived through.  I bought a house, I think, two months before the crash happened.  I lived through the dotcom crash, and I vaguely remember Black Monday; was that late 1980s or 1990s, I can't remember?

Cullen Roche: 1987, I think.

Peter McCormack: These things happen.  But if we get a crash in the next year, or five years, whatever; if we get one, I'm not going to be surprised, I don't think anyone's going to be surprised.  It's going to happen, "Well, of course it was going to happen, because of all the weird shit happening", but how much are you worrying about a crash, and do you think we're on the verge of one?  Or, do you think we're in such a weird position now, with the Fed, the Treasury and the government, that they're doing everything they possibly can to prevent any crash?

One more thing to throw in there: I almost think there's a game of chicken happening between the US and China at the moment, because everything around Evergrande itself is weird, everything there.  How much of the Chinese market is now propped up by overinflated house prices is also weird.  And it feels like there is a game of chicken, like who's going to crash first?  There's a lot in that!

Cullen Roche: Crashes.  I mean, predicting those sorts of outlier events to me, it's such a crapshoot.  From an asset management perspective, I'm actually a really boring guy.  I default to the view that, okay, look at the outstanding quantity of world financial assets, and that gives you a rough approximation of what your personal allocation should be to stuff.  So right now, if you look at stocks and bonds and real estate, it's roughly a third, a third, a third.

Peter McCormack: Stocks and bonds, real estate and…?

Cullen Roche: Stocks, bonds, and real estate.

Peter McCormack: Oh, okay.

Cullen Roche: So, a third, a third, a third, which to me, if you look at all the outstanding assets in the world, that kind of covers all your bases.  If you own a home, you have a bunch of safe, liquid cash in bonds, and then you've got some stocks, that covers a lot of your bases there, and I'm starting from a very traditional finance --

Peter McCormack: I was going to say, what about, and I would stick Bitcoin and gold together for the sake of this argument; what about hard assets like that?

Cullen Roche: Yeah, so I would put those in the real estate bucket.  So, all the real stuff, and that would roughly work out to a third.  So, I'm being a little loose with all this, but my point is that from a diversification perspective, the more diversified you are, the more all-weather your portfolio is, meaning that you don't have to worry about, "Is the market going to crash next year?" because you've got buckets for each of these things, the types of environments that will potentially protect you from an inflation, a deflation, a recession, or just a slow growth period.

Peter McCormack: So, my 95% Bitcoin is slightly --

Cullen Roche: I mean, I don't know!  I mean, from a very personalised position, I don't know.  I mean, maybe you've got some stuff going on that totally justifies that, I have no idea --

Peter McCormack: Got to have skin in the game!

Cullen Roche: -- probably not!

Peter McCormack: I'm a terrible investor.

Cullen Roche: For me, I'm not a maximalist of anything.  That's my default, which I know some people are going to be, "Oh, that's so boring".

Peter McCormack: Yeah, but you're managing people's money.

Cullen Roche: Right, I'm a fiduciary, I'm responsible for other people's money.  So, when somebody comes to me and is like, "Should I put 95% of my money in Bitcoin?"  I'm like, "Well, if Bitcoin fell by 80% in the next three years, how would you feel?"  For the vast majority of people -- you might have a totally different situation, where you can live through that.  And depending on your personal finances, that might be a totally sustainable drawdown for you, and it obviously has been at some point, right?  I mean, you've gone through and benefitted from big declines.

Peter McCormack: Well, actually, I was at 95%.  What happens is, the market's done a 6X --

Cullen Roche: Well, yeah, you get into a whole other debate about --

Peter McCormack: So that's changed my -- but I hold no stocks and no bonds.  So, I hold real estate and Bitcoin.

Cullen Roche: Well, that's a really interesting discussion with everything that's happened in Bitcoin in the last couple of years, because you get this -- for somebody that has a really boring risk profile, and I'd start from a financial planning base perspective when I work with people, and if you build even a relatively boring asset allocation in Bitcoin of, say, 10% two or three years ago, what's that position now relative to all your other stuff?  It's probably way over 50%. 

So, you've got this portfolio skew because of the outperformance of Bitcoin in your portfolio that, depending on who you are, maybe that's totally fine.  I have friends who that has literally happened to, and they're totally fine with that obviously, they're super happy.  But if you're 65 years old and you're retired and you were living on a fixed income, and let's say maybe you've got some health issues or something like that, you need some balance in your portfolio and you need things to be somewhat stable, all of a sudden, you've got this 50% allocation in a portfolio that fucks a lot of things up potentially.

Peter McCormack: It could do!  I like the rollercoaster.

Cullen Roche: Which is, for certain people, I say for people under the age of -- the lazy rule in traditional finance is, "Put your age in bonds".  I've always been like, "That's stupid".  If you're under the age of 55, it probably makes no sense to own any bonds, because you just don't have the need for that amount of insulation.  To me, bonds are basically protection from deflation mostly.  So, bonds typically do well in a deflationary environment.  So, I don't know if you're familiar with the Harry Browne Portfolio?

Peter McCormack: No.

Cullen Roche: He was famous for building this really simply, all-weather portfolio, where it was basically four quadrants where you owned cash, Treasury Bonds, gold and stocks, and those were your four quadrants.  You put them in 25% allocations, set it and forget it, and it protected you from all different weather environments basically.

Cash was there for a recession basically; bonds were there for deflation; your gold is there for inflation; and your stocks are there for growth periods, so you covered all your bases with this really simple, boring portfolio.  I'd argue that increasingly, the gold quadrant should be replaced with something like Bitcoin, but using that sort of simple methodology, you've got all of your bases covered across different environments, where you don't have to get brain damage thinking about what your different allocations are.  Depending on who you are, you can rebalance back to that allocation every year, just keep things super clean, and you can reduce that risk of portfolio skew, where you get these outsized changes in a certain asset creating excessive amounts of volatility in your portfolio all the time.

Peter McCormack: So, let's talk about your thoughts on Bitcoin, because I went onto Twitter, I did a search for Cullen Roche and looked up the word "Bitcoin" and it feels to me that it's a gradual warming.

Cullen Roche: Yeah.

Peter McCormack: You don't hate it, you don't love it, and I'm more interested on your view on Bitcoin than 90% of the people I interview, because if I say it to them, they're like, "Yeah, I'm all in Bitcoin, I've sold everything, I've sold my fucking house, I've sold my car, all my money's in Bitcoin".  I'm similar to that, and we've all got this kind of moonshot, but we all understand the economics of Bitcoin, we understand the ups and downs.  But we're all the fucking same, we're all degenerates and have taken a huge moonshot!  But I'm interested in yours, because you are an asset manager, so you have a fiduciary responsibility. 

Cullen Roche: You laugh, but you've been so right, and this is the thing.  You've been so right that, I've never been anti-Bitcoin or anti-crypto or anything really.  Just like I'm not a maximalist, I'm not anti-anything either.  And in fact, this is a little bit of a tangent, but to me, one of the beauties of Bitcoin and everything that's happening in the crypto space right now is that it validates a theory of money that I've always thought was a lot more accurate than some of the more statist views of money, where a lot of people will argue that money has value because governments have guns and armies, and they basically lock us up in this system and they construct it in a way that forces you to use it.  Then they point the guns at you and they say, "Pay us taxes", and that's it.

Whereas, there's a famous economist from UCLA, named Hal Varian, whose theory of money basically was that -- he wrote an article 25 years ago asking, "Why does that piece of paper in your wallet have any value?"  He was questioning this theory that a lot of people say that money has value, because it says, "Debt of the Federal Reserve" on it, or something.  His theory was that it was all about a network effect, that basically a group of people, they get together and they agree, whatever this thing is, it's money.  And when enough people agree that that thing is money, it becomes money.

Peter McCormack: Like cigarettes in a prison.

Cullen Roche: Totally.  So, ten years ago, working from that theory, I would have looked, and I did look at Bitcoin and I would have said, "This thing has a really low level of money-ness.  The network effect just isn't that strong".  Today, you can't deny it.  You cannot deny that that network effect is huge and powerful.

Peter McCormack: And passionate.

Cullen Roche: Well, it's been right.  Coming from a really strict market-based perspective, you cannot deny that this thing that did not exist 15 years ago has now become a multi-trillion-dollar market; you can't ignore that thing.  But from a theoretical money perspective, to me it's just so much more interesting; because to me, in a lot of ways, Bitcoin debunks a lot of the statist theories of money, where people like the MMT people argue that taxes drive money, that basically there's demand for money, because people have to pay their taxes, which is probably true, I guess to some degree.

There's a function of a network effect in the sense that when enough people agree to build a rules-based system around a currency like the dollar, I mean yeah, people are going to use that thing because they trust it.  I know that if I borrow money from you and you fuck me over, I know I can take you to court.  That's pretty powerful.  That gives me trust in using that money, and that's, I guess, government-based to some degree.  But to me, the network effect theory is so much more interesting and to me, valid, because it's so much more free market based.

Peter McCormack: Well, Bitcoin has something similar, but it's different.  You say you can give me money, if I fuck you over, you can take me to court.  You have that protection of that structure.  Bitcoin's protection is more mathematical.  The thing I like about it is, it's a different set of rules, the rules of consensus.  I know there will be 21 million and I know I can secure it myself and I know my wealth is now mobile.  I can take my Bitcoin to anywhere in the world and get liquidity.  So, it's just a different set of rules I get to play by, but the network effect is based on the people who also agree that those rules are good for Bitcoin.

Cullen Roche: Well, that's part of it, is that the government can't come in with Bitcoin and change the rules in the thing.  So, the last couple of years, I feel like a lot of people think the rules got changed in the dollar system, and they did.  The rules got totally shifted, which is, I don't know; another tangent of mine is that I've always, being more of a free market guy, I understand there's a need for government and it makes practical sense.  Someone's got to be there to put out the fires and someone's got to be there to fight the wars at times.  A lot of this makes sense.  The purely free market system, it's just not a reality.  That system doesn't exist anywhere.  Governments exist, I think, for more practical purposes than not.

Peter McCormack: Yeah, I think there is another reason.  There are the practical reasons.  I also think it's a natural evolution of how humans organise themselves, and we end up with one or two versions.  We either end up with a dictator, or we end up with some form of a democracy.  But I think it's just humans need ways to organise themselves.  I talk about the libertarian red button.  If you could press that button and you could switch off government and it was gone and everybody was then free to do as they choose, they would end up organising themselves again, and we would probably end up with something very similar to what we have now.

Cullen Roche: So, what's interesting now is that, and you see this increasingly in the United States, I would have argued 10, 15 years ago that one of the beauties of the reason the US system has worked as well as it has is because it's actually a pretty fragmented system, it's a pretty decentralised system in terms of power structures.  Donald Trump can't come in and take over the whole government, no matter how hard he tries.

Peter McCormack: And he tried.

Cullen Roche: And he tried!  But it's interesting, because you have real checks and balances in a government like the United States, which is good.  It's also increasingly weird, because you see periods when this power consolidates and big, big things happen.  I was really critical of Obama in 2008, when he passed the Affordable Care Act, mainly because I said, "There were a lot of things we could have done for the economy", that instead of doing things for the economy, they came in and basically passed the Affordable Care Act, which was kind of his big idea, and which -- I'm not a healthcare professional.  Maybe that's a great idea in the long run, I have no idea. 

But at the time, to me that seemed like a power grab, and you get instances of this where all three houses consolidate to one party, and then you get this big power grab and you get a big move that pisses off the other 50% and you get this really unproductive pendulum swing that seems to be going on, where you've got power grabs increasingly and big policies coming from that side, that it kind of, in a lot of ways…

The Founding Fathers of the United States, they wanted us to disagree so that we'd have to come to agreements, and you see that happening less and less now, which is obviously one of the weaknesses of having a system where people are hyper-involved in a really discretionary way.  I wish that, especially with things like Federal Reserve policy and fiscal policy, that things were just more automated.  And this is one of the beauties of the crypto-based system and the Bitcoin system, that things are just automated, they just are what they are, and you can't really mess with that too much. 

There's no discretion involved in the monetary policy of Bitcoin.  Whereas, the monetary policy of the dollar is basically like Jerome Powell coming out and holding a finger up and being, "Well, I think inflation is going to be 4% next year, so this is what we're going to do".  That's a bullshit approach, to a large degree.

Peter McCormack: I'll tell you what I wish.  I wish in the UK, we were a republic.  This big push for states' rights recently, I think is a really interesting part of what you have here in the US.  There's a lot I disagree with, of course, but this ability just to move, to get up and move and move to a new state.  I know it's not easy for everyone, but the fact that you can, because there's different rules.  But I like that, so that is one of your strengths as well, where we don't have that.  I think your federal government has got too big.

Cullen Roche: Yeah, I totally agree.  And a lot of that is that function of this discretion that we have over the ability to change the size of the government at any given time, and I think there's a really strong argument that the amount of discretion that we have, especially in periods of turmoil, is just way too much.  Here's the other thing.  Policy in the US is automated to some degree.  One of the things that a lot of people, who aren't directly in understanding economics and fiscal policy, is that when for instance, a recession happens, what happens basically is really simple.

The government runs a policy where they provide unemployment benefits.  And the demand for unemployment benefits increases during a recession, and tax receipts to clients.  So by definition, the government's deficit is likely to increase, because these automatic spending policies, we call them "automatic stabilisers" in economics, they automatically increase.

Peter McCormack: What do you do if that situation happens for you at home?

Cullen Roche: For what?

Peter McCormack: If you're running a business or running a home, what happens in that situation?  You have to tighten your belts; maybe, if you run a company, you have to let people go.  It seems like government never shrinks, even in times of economic difficulty, which is, I think, one of the major problems of government.  They don't have to keep to a budget like you do, Jeremy does, I do, my company does, and that is one of the biggest problems.

Cullen Roche: Yeah, and I don't know how you fix that.

Peter McCormack: No.  I think you need more libertarians in politics, and they hate politics!

Cullen Roche: I saw it really on the ground when I was -- I built a home two years ago and when I was going through the permitting process, I saw the way that the incentive structure's designed inside the local government, where there's no incentive to ever shrink this thing.  The only incentive is to increase this thing, and in a lot of ways, it's counterproductive to actually being able to build, because as you expand this thing and it becomes more and more complex, obviously the rules get more complex and little things that should actually be really simple involved in building something as simple as a house, become really, really complex, and then you get these great big problems, like housing shortages in California, where people can now barely even afford to live in the state and you have huge homeless problems, and all these knock-on effects that come off of these things.

It's weird, I don't know how you fix that.

Peter McCormack: Fuck knows!

Cullen Roche: It's one of the things.  I hate thinking about politics, in part because I don't have good answers for how to fix this stuff.  Would just blowing the whole thing up and trying to start from scratch, would that be the right answer?  I don't know, I mean, or would that just cause all these other problems?

Peter McCormack: Well, this goes back to the bitcoiners, what the bitcoiners think, is that they've just found a way to route around the government now, "Okay, we can't control you, we can't control your size, we can't control what you're going to do with the money, we can't control the influence that you have on us".  Voting doesn't make a huge difference in a number of places, especially in the US.  In some ways, it does in the UK, because the power switches from one to the other every four to ten years, whatever.  In the US, some places you live, it's always going to be red or it's always going to be blue, so your vote actually has no meaning.

But the bitcoiners, "We're just going to route around you, we're going to create our own financial system, our own economy, and we're going to do this with Bitcoin", which is again coming back to why I'm interested to talk to you about it.  But I think a good question for you would be, you are somebody who manages other people's financial assets.  How much are you being asked about Bitcoin now, and can you even talk about the advice you give with regards to Bitcoin, because I did notice in one of your tweets, I'd see one tweet, there you are arguing with Pierre Rochard; and the next one, you're saying, "If you want to protect your wealth", you had a list of things of which Bitcoin was one of them.  So, you obviously believe in Bitcoin?

Cullen Roche: Yeah, I mean it's hard.  I work with individuals and we have products that are publicly listed, so I don't know, at a very personalised level, I approach it the same way that I would talk about inflation with people.  I mean, this stuff is highly, highly personalised.  Nobody's financial situation is the same.  A 25-year-old who's single with a high income has a totally different financial picture than a 65-year-old, who's retired with health problems living on a fixed income.

Those two people's financial assets are going to be totally customised in very different ways, so it's hard to generalise about this stuff.  I like approaching it from this sort of very efficient market view, or using something even as simply as the Harry Browne approach, because it just creates nice, clean buckets to asset allocation, where you're not hyper-exposed to anything.  I think that's just where I tend to get worried, because I spend my time worrying about other people's money and the volatility of other people's money.

I approach financial management from a very behavioural finance perspective.  To me, most people want all the upside, and they don't think about the trauma of the downside and the risks of the downside.  I mean, even just owning too much of the Nasdaq can be a huge, huge problem for somebody, because people don't fully understand that when the shit hits the fan in the tech market, things can go really, really bad.  The Nasdaq can fall, I mean, what did it fall in 2000?  85% or something? 

If you've got all your financial assets there, those are huge, traumatic declines, that even if they're just temporary events for somebody, behaviourally they expose you to huge amounts of financial risk that for me, I just don't think most people need that amount of risk.  You could build a really diversified portfolio that holds things like Bitcoin and these other really volatile assets that don't overexpose you to the amount of volatility.

Peter McCormack: I've been through a 90% drawdown.  It's rough.

Cullen Roche: Yeah, and I mean you're lucky, because if you're somebody that can go through that and weather it and know that this isn't ruining me financially --

Peter McCormack: It nearly did.  I was two weeks from losing my house.  I've been through it.  I'm okay now, but I've been through it.  Yeah, I'm a big Bitcoin believer.  And I might be overexposed, but I can handle another 90% drawdown, because I have a solid business.  But I do worry about people overexposing themselves to Bitcoin who aren't in that position.

For example, during this bull market, I took out a loan.  Bit of fun when the price dumped to $17,000, I took out what was the biggest loan I could get at that moment from the bank to buy Bitcoin, and I did.  I bought another 2.5 Bitcoin.  That was a great decision.  Other people have come to me to say, "Should I do the same?"  But I don't think they're in the same financial position, and it's super risky.

Cullen Roche: I mean that's the thing.  If you're someone, say you're a college student who, let's say you have no income.  Maybe you have student loans and you're borrowing money to speculate on, whether you're GameStop or Bitcoin, it doesn't matter.  To me, excessive amount of volatility in a portfolio creates not just the portfolio skew that we were talking about in your overall asset allocation, it creates a hyper amount, for certain people, it just creates a hyper amount of behavioural risk.

The biggest risk is, do you find yourself in a situation like the 2018 drawdown, where things are getting pretty hairy, and let's say this is what happened in the Financial Crisis.  A lot of the times, when stuff like that's happening, there's a lot of other fucked-up stuff happening, people are losing their job.  So, in 2008, 2009, when people were losing their homes, they weren't just losing their homes, their stock market valuations were also falling, so their overall portfolio was falling, and they're losing their job.

In a real recession, you get this compounding effect from all of the stuff that's going on, where the worst thing that can happen to somebody is being forced into liquidation of an asset, especially an asset that they believe in in the long run.  So, if you had been forced into a liquidating your Bitcoin position, imagine the real long-term loss in that, and that could be a function of just being overleveraged.  It could be a function of just your own behaviour, where a lot of people, they get into a big drawdown like that, and they just psychologically reach a breaking point, where they don't know what their max pain point is.  That's one of the questions that I try to work with people on, "What is your max pain point?"

For most people, their max pain point is much, much lower than they probably really think.  Most people could not really sustain seeing their overall financial assets go down 50% for a sustained three- to five-year period.  They'd reach a breaking point in there at some point where they'd say, "This isn't worth it.  My personal life is a mess, my wife is screaming at me every day about the portfolio value, and I'm going to cut it loose just to make the pain go away".  That's the psychology that happens to a lot of people inside of big, big drawdowns.

I'm not a critic of Bitcoin, as much as I would say that I can be critical of being overexposed, of being just overexposed to any financial asset.  Bitcoin just happens to be a really volatile asset that I think you just have to be careful with.  That's my default view with it.

Peter McCormack: What do you think of Bitcoin as an asset though, and a little bit more than that actually, what do you think of the Bitcoin community?  Because, I've watched you in discussions and it seems like you are trying to offer pragmatic advice, and getting trolled back sometimes.  What do you think we have wrong?

Cullen Roche: You know, I think that there are so many good arguments for Bitcoin, I mean a ton, and I've made them on my website for years and years.  There are also, I think, really bad ones.

Peter McCormack: But this is why I really want to talk to you, because I think you're more practical.

Cullen Roche: I think that the Jack Dorsey thing, I thought that was a bad showing.

Peter McCormack: The hyperinflation call?

Cullen Roche: The hyperinflation prediction.  Maybe if we lived in Zimbabwe, or something like that.  To me, in the United States, the odds of actually getting hyperinflation in the United States, I think they're astronomically low.  I wouldn't be shocked if people looked back in five years and are saying that was an all-time bad prediction.

So, there are times where I see arguments like that, and I think sometimes a lot of the Bitcoin people pushed back on me, because I basically wrote a big research piece coming after that, that basically said the odds of continued high-ish inflation are relatively high.  I think we're going to see 6% CPI well into next year, and then I think it's going to start to moderate.  It's not going to fall as much as the Fed thinks, but I don't think we're in this escape velocity environment, where inflation's going to be 6% and then go crazy.

Peter McCormack: 10%, 20%, yeah.

Cullen Roche: So, I don't know, I could end up being the one who's totally full of shit, but I don't think that tends to be one of the best arguments for Bitcoin, at least bitcoiners in the developed world.  Alex Gladstein and I interact a lot, and he's always making the argument, which is arguably one of the strongest use cases for Bitcoin, that if you don't live in the United States or a developed world country, you almost need to own this thing.

Peter McCormack: But his arguments evolve to that and he also talks a lot about Tether as well, because I think Tether give you stability for short term, and Bitcoin gives you something to hold long term.

Cullen Roche: It's funny, so this client I was having dinner with last night, he's from Istanbul, and his whole family lives in Istanbul.  He lives in the States, he's lived in the States for a long time and he does very well, and his family is lucky because he's been basically giving them financial advice to hold dollars and to hold crypto-related assets, to some degree.  But it's a fucked-up situation, because even though his family is financially insulated, everybody around him is getting nuked, and it's a horrific situation, and this is mostly government driven.

Peter McCormack: Dictator's going to dictate.

Cullen Roche: Yeah.  So, being in a situation like that, if Jack Dorsey were running Twitter based in Istanbul, I probably would be a lot more sympathetic to the view.  Whereas here, in the United States, to me, the high inflation argument as a Bitcoin hedge in the United States is not nearly as strong as it would be if I were somebody who was holding assets in another currency, especially a government that was a dictatorship, or a place where somebody could really come in and unilaterally decimate the economy with a bunch of bad decisions, which is essentially what Erdoğan has done in Turkey.

Peter McCormack: That Turkey situation's desperate.  I was talking about it, maybe even yesterday, saying that there is a chance, I mean I could be completely wrong, but there's a chance places like Turkey become dollarised, but bottom-up, from people just converting their lira into Tethers or other digital dollars.  I mean, you've got to be looking for an escape valve there right now.

Cullen Roche: The rise of Bitcoin and stablecoins is really interesting in the perspective of all these emerging market economies, because to some degree, it makes me wonder if the rise of those markets is accelerating the decline of a lot of those currencies in some ways --

Peter McCormack: I can understand that.

Cullen Roche: -- because you've provided a viable alternative that -- it will be really interesting to see what happens politically and economically in a lot of these economies in the next 10, 20 years, because in a way, Bitcoin is sort of forcing a more free market onto these emerging markets, that frankly they need it.  They need to evolve into a more free market system, or a more democratic type of government, that at least to some degree relative to the way they are now, it decentralises the power across it, so that you can't just have some crazy guy come in and blow everything up, because he's got some special fetish with certain economic policies.

Peter McCormack: Yeah, I was with Matt Stoller in DC, do you know Matt Stoller?

Cullen Roche: Yeah.

Peter McCormack: Yeah, and a really interesting conversation.  I like Matt, I like to listen to him talk about his anti-monopoly position.  But my point to him was -- because he thinks Bitcoin should be banned; he thinks that's not the way to fix democracy, with something like Bitcoin.  He thinks it's a threat to Bitcoin.  But I said to him, that's also a monopoly position, because actually allowing for Bitcoin allows for a free market for money, and it's another check and balance on government, in that if economic policy, as it is in Turkey, is being nuked right now, if the currency's being nuked, you have that escape valve; and, isn't that a great thing for people to have?

Cullen Roche: Yeah, totally.  And Nic Carter touched on this the other day, when you guys did your interview, that in a weird way, banning it makes it stronger in a lot of ways.

Peter McCormack: Well, China.  I mean, what a mistake.

Cullen Roche: Who'd have thought?

Peter McCormack: I fully expect China to reverse that policy at some point, somehow, fully, because they've just nuked Bitcoin within China.  People are still using it.  They've nuked it within China, but the rest of the world is carrying on.

Cullen Roche: It's weird.  I thought that it looked like, in the early 2000s and after the Financial Crisis, that they were making more of a push towards open economies.  I don't know, China's one of those outlier things where there's a lot of weird stuff going on in China where, shit, people think that supply chains are messed up now.  Imagine what's going to happen to supply chains if China starts dropping bombs in Taiwan, and you've got the entire Pacific Ocean there becomes closed off?  That would be, in terms of thinking of outlier inflation risks and stuff, to me that's one that really worries me.

But just a lot of the trends in China in general are worrisome, because you see them kind of…  To me, the development of the Bitcoin world in China was good thing.

Peter McCormack: Of course, yeah.

Cullen Roche: And so, seeing them ban it, I don't know what's going to happen, but they seem to be back-peddling in a lot of ways that are counterproductive.

Peter McCormack: Yeah, I mean I think it depends on what Xi does.  I think, isn't his term up for renewal soon?  I mean, I don't really understand Chinese politics.

Cullen Roche: I don't really know.

Peter McCormack: I think it is, and he's standing on the precipice with the Chinese economy now.  Does he want to stamp his period in time and have his statues around China, or does he want to hand this fucked economy over to somebody else?  I don't know.  I know they're pulling back on their Belt and Road Initiative, because they don't have the money now to lend out.  It's a whole other discussion!

Cullen Roche: Literally.  Talk to somebody who's an actual expert about China!

Peter McCormack: Well, we've got Lyn Alden in tomorrow, and she's an expert on everything, so I'll be asking her.  So, just a final question just to round this all off.  I think it is a weird time, you are a pragmatic capitalist.  If you were advising people now, people listening to the show, thinking about the economy and inflation, what's the best advice you give to people right now?

Cullen Roche: Times like this, I think with all the uncertainty, it makes a lot of sense to be really broadly diversified across things, because I mean I would argue that the range of possible outcomes right now are more uncertain than maybe they've ever been.  You could have, on the one end of the spectrum, I could be totally wrong about my inflation prediction that maybe we are in this period of escape velocity, where you get 6% CPI going into Q2 next year and then all of a sudden, it just starts to tick higher and higher and higher.  That could totally happen.  I wouldn't put high probabilities on it, but I wouldn't say it's 0% certainly.

Could the market crash; could the real estate market fall completely apart in the next couple of years?  Wouldn't surprise me.  So, there's periods in the economy where I think you can look at things, like in 2015, a period like that you can look at and say, outside of a pandemic or something that's just a total blind shot over your shoulder or something, that looked pretty boring.  There was nothing crazy going on with government policy, the economy was just kind of chugging along.  So, for a lot of the period of 2010 to 2020, I was like, "We're just in a muddle-through period.  That's just the way things are going to be.  People are going to get up and go to work and build things, and nothing's going to be spectacular, but it's not going to fall apart".

Whereas, right now, you could look at things and you could make valid arguments in any direction.  I could see things muddling along for a little bit, I could also see things hyperinflating, I could see things deflating.  So, just using that range of probable outcomes, to me it leaves me being --

Peter McCormack: Fucking anything could happen!

Cullen Roche: -- I don't know, I have no idea what's going to happen.  The range of outcomes is so wide that for me personally, I want to own a little bit of everything, and that's the way that I would approach the world over the next five to ten years, and that way you kind of insulate yourself from all these ranges of outcomes, whether it's something that ends up being hyper-extreme in one direction or the other; you're pretty all-weathered from all these things.

Peter McCormack: Awesome.  All right, tell people where they can follow you, where they can buy your book.

Cullen Roche: Twitter @cullenroche, and then my website is Pragmatic Capitalism, it's pragcap.com.  That's where I write most of my weekly musings and bullshit narratives about what I think is going on.  But those are probably the two best places.

Peter McCormack: Well, listen, I appreciate you coming on.  Maybe we'll do this in another six months to a year and we can reflect and go, "Oh, this is what happened!"

Cullen Roche: Yeah.  Well, when you're in California, you should come through and I'll show you the North San Diego area, it's pretty awesome.

Peter McCormack: Well, I love the whole stretch of California, each bit for different reasons.  I mean, I haven't been to San Francisco much recently, but I'm a big fan of LA, I love San Diego, I love Orange County.

Cullen Roche: If you like LA, you'll love San Diego, because San Diego is a smaller, just a lot more laid-back version of LA basically.

Peter McCormack: I like the food down there.  Brilliant, well listen, thanks for coming in, man, take care.

Cullen Roche: Awesome, thanks for having me on.