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Cullen Roche  

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  • 3 Keys To Navigating A Low Return Environment (Video) [View article]
    No. Not at all. Hussman's main fund costs 1%+ so that alone disqualifies it.

    Further, I would NEVER take a prolonged short biased approach to the financial markets. Do you know how difficult it is to bet against corporate America for a prolonged period of time? I do not at all agree with the approach he has been implementing for the last few years where he's essentially short via options. It's expensive, too short-term and ignores the most powerful macro trend in the world - the human desire to innovate, produce and progress!
    Jul 17, 2015. 04:55 PM | 2 Likes Like |Link to Comment
  • Charts That Make Me Go Hmmm [View article]
    Hi Lynn.

    It looks very confusing, doesn't it? The survey asks managers if they're net protected. So, what we're looking at here is a chart showing that most managers AREN'T net protected. Therefore, a positive reading would mean that most managers are net protected. So, this chart shows that more managers are net protected than they have been. Ie, a lower reading of negative net managers is actually an increase in bearishness.

    I hope that makes sense. I know it's confusing. I did a double take on it while reading the survey and had to think about it for a second.

    Take care.

    Cullen
    Jul 15, 2015. 01:23 PM | Likes Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    Hi David,

    You said:

    "I was saying that the FRB cannot set interest rates that are not supported by the market."

    This is the point that is incorrect though! The Fed determines the quantity of reserves in the interbank market by expanding its balance sheet. It is a monopolist. Monopolists are price setters, BY DEFINITION. The "market" cannot set the price of reserves. Only the Fed can do this. If inflation were 10% and demand for credit was through the roof the Fed could still keep rates at 0-0.25%.

    In fact, we've seen this happen. The demand for credit has risen quite sharply in the last few years. Loans and leases are growing at 7.8% YoY. Despite this, the Fed has kept rates low and the "market" has been unable to lift the overnight rate because they don't have any control over it! The "market" controls the longer end of the curve and the price of instruments they directly issue relative to the demand.

    The key point you're missing is that the demand for Fed Funds is ALWAYS high because the Fed regulates the quantity of reserves by requiring that banks hold reserves. Banks can't, in the aggregate, reduce their demand for reserves. They hold the quantity of issued reserves as set by Fed policy. So, this is all a supply side pricing mechanism as set by the Fed. The "market" has absolutely no power to move rates above what the Fed wants the rate to be if they are paying IOER.

    I think it's quite clear that the data doesn't support your view. And the fact that the market front runs the Fed is widely known and fully expected. The Fed is very transparent about the path of short-term interest rates and banks and traders always try to arb the Fed's next moves. So your data is totally consistent with well established facts about how the Fed's "open mouth policy" sets rates before they even change rates.

    It's very common to assume that the "market" controls short-term interest rates, but this is not true of the price of reserves. It's simple monopolist economics. To deny this fact is to reject econ 101!
    Jul 8, 2015. 01:51 PM | Likes Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David,

    You still don't have this right. Maybe a few references will help. This paper from the NY Fed on excess reserves is very good and explains the dynamics I am discussing:

    http://bit.ly/1HLRWd9

    Some key quotes:

    "The total level of reserves in the banking system is determined almost entirely by the actions of the central bank and is not affected by private banks’ lending decisions. "

    "When banks earn interest on their reserves, they have no incentive to lend at interest rates lower than the rate paid by the central bank. The central bank can, therefore, adjust the interest rate it pays on reserves to steer the market interest rate toward its target level."

    I'd go have a read of that paper. It explains all of this in much more detail.

    I hope that helps.
    Jul 7, 2015. 05:53 PM | Likes Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David, the quantity of reserves in the banking system is determined by the Fed. This is not even a controversial point. If you don't trust it then I don't even know what to say. Why do you think the quantity of reserves has exploded in the last 7 years? Because the banks deemed it so? Of course not.

    The Fed implemented QE which FORCED the banks to hold more reserves.
    Jul 7, 2015. 03:38 PM | Likes Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David,

    If you've read the NY Fed links I am afraid you haven't fully understood them. Let me try to explain again.

    The Fed is a monopolist in the Fed Funds market. That means they are a price SETTER, not a price taker. Prior to 2008 they would influence the Fed Funds Rate by changing the quantity of reserves in the banking system. More reserves would put downward pressure on the overnight rate because the banks try to lend them out to one another. When QE was initiated the Fed had to lift rates off of the 0% floor because the mass quantity of reserves was driving rates to 0% as banks tried to lend them out and couldn't, in the aggregate, get rid of them. So, the Fed obtained Congressional authority to pay IOER. This disincentivizes banks from lending at a rate below the IOER rate. So the Fed set a rate at 0.25% and banks lend mostly at that rate (though the GSE's put some residual downward pressure on rates which is why the FFR is slightly below 0.25%).

    If the Fed wants to set the overnight rate they will just raise the IOER rate and clean up any residual downward pressure via reverse repos. So, if they wanted interest rates to be 2% tomorrow they would just raise the IOER rate and perform reverse repos at 2% with the GSEs. The "market" would have no power over the price that the monopolist sets as they banks would not lend overnight at a rate below that for obvious reasons.

    Best,

    Cullen
    Jul 7, 2015. 03:26 PM | Likes Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David,

    In an environment where the banking system has been flooded with excess reserves the IOER rate becomes the de-facto FFR. The Fed can set the rate at which banks will lend to one another overnight because it has created the excess reserve environment that has pushed rates lower (because banks try to lend out the reserves to one another until the rate goes to 0%). The Fed pushes this rate off the 0% floor by setting the IOER rate. That means the IOER rate is the FFR for all practical purposes.

    I would recommend reading some more on IOER at the link I offered above. It will help clarify much of this. The FFR and EFFR are no longer the proper measures by which we should view the overnight interest rate. When the Fed decides to raise rates they will raise the IOER rate and the market will respond accordingly because no bank would lend at a rate above the IOER. In this sense, "the market" definitely does not set the price of reserves. The Fed, as the reserve monopolist, is the ultimate price setter of its liabilities.

    The fact that the overnight rate has floated between 0-0.25% does not change anything I've stated above. If, somehow, overnight rates surged over 0.25% then you'd be right, but there's simply no way that will happen until the Fed pushes IOER higher.

    I hope that helps.

    Cullen
    Jul 7, 2015. 01:32 AM | 1 Like Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David,

    That's not quite correct. The Fed has set a floor for the Fed Funds Rate by paying interest on excess reserves. What happened after 2008 via QE was that the Fed flooded the banking system with excess reserves. This puts downward pressure on interest rates because the banks all try to lend their reserves to one another in the overnight market. Of course, since it's a closed system they can't do "get rid" of their excess reserves. So, this drives down the overnight rate to 0% necessarily.

    Now if the Fed wants rates above 0% then it must set a floor. It does this by paying interest on excess reserves. Banks won't lend at a rate lower than this for obvious reasons. The tricky part is that the GSE's don't have Fed accounts so they've been driving the rate slightly below the IOER rate. That's what the Reverse Repo facility was implemented for. So the Fed can raise rates cleanly when they must without having the GSE's put undue downward pressure on the overnight rate.

    We should be very clear about this. "The market" absolutely positively does not control the price at which the Fed sets IOER. They also do not control the quantity of reserves in the system. So your statements are not quite right.

    I hope that helps clarify.

    Sources:

    1 - Contacts at the Fed

    2 - http://bit.ly/1M9ekgf
    Jul 6, 2015. 09:15 PM | 4 Likes Like |Link to Comment
  • Should Money Earn Interest? (Very Nerdy) [View article]
    David,

    I am not referring to the credit markets. I am referring specifically to the overnight interest rate, the one set by the Fed. The market does not set this rate and the rate of interest on excess reserves is set explicitly by the Fed. Your comment is a complete misrepresentation or misunderstanding of the point I am making.
    Jul 6, 2015. 06:25 PM | 1 Like Like |Link to Comment
  • Q&A Answers - Interest Rates, Greece And Other Unfun Stuff [View article]
    David,

    I've noticed you claim I am wrong about something on every post I write. But your arguments are always strawman arguments. For instance, in this post I was talking about short-term interest rates and you mention that long rates have already moved higher. Of course that's true. We're talking about two totally different things!

    Additionally, I mentioned that an inverted yield curve is consistent with a slowing economy. In 2006 the yield curve inverted and then the housing market crashed which set off the worst crisis in 80 years. You think that's a coincidence? I sure don't.

    If you're going to take all of my comments out of context then why bother criticizing me? It's neither productive nor fair. You're a smart guy so why try to tear my comments down by taking them out of context? Who is that helping?

    Thanks,

    CR
    Jul 6, 2015. 06:07 PM | 3 Likes Like |Link to Comment
  • Greece: What's Next? [View article]
    Hi Lake,

    I don't think Greece is nearly as worrisome as Lehman. The primary reason being that they're not as interconnected. The European banking system has spent the last 5 years selling its Greek debt to sovereigns. Further, the ECB is likely to backstop the entire banking system if Greece were to actually default. Lastly, Lehman was a side effect of a much bigger problem (falling housing prices that resulted from a consumer credit crisis) and that primary disease doesn't exist here.

    It would be a disaster WITHIN Greece and for a few private creditors, but it would not be remotely close to a Lehman style event.

    Of course, if I end up being wrong you can cite this comment and I will gladly admit how wrong I was. But I do not see this playing out like 2008.....
    Jun 30, 2015. 02:04 PM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    A cash mandate is actually the industry norm. The avg equity fund has a 3.5% cash holding. The avg bond fund holds 7%. The average individual investor holds 24% cash.

    And as I stated elsewhere, the banking system cannot remove its cash at the end of the day. Some bank/broker deal is going to end up with cash at the end of the day where it sweeps into their cash program. This cannot be avoided in the aggregate. So, should we start accusing all bank/broker dealers who don't recommend 100% equities to be nefarious? No, that would be totally absurd. The banking system cannot avoid it. Someone holds the cash at the end of the day.

    Since Schwab is a bank/broker dealer they can rehypothecate your assets anyhow. They simply choose to do so with lower risk assets. WealthFront can't do this because they're not a bank/broker dealer so they complained about it because there's literally no reason for anyone to use their service now that Schwab is doing the exact same thing for free.
    Jun 26, 2015. 10:04 AM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Anyone who deviates from global cap weighting is "active". The robos sell themselves as "passive", but they're actively deviating from global cap weighting.

    This industry has made a mess of the term "passive" investing. Anyone who allocates index funds away from the global cap weighting of 45/55 stocks/bonds is an active investor.

    The robot profiling process is plain crazy. 5 questions and it squirts out a cookie cutter portfolio. How can you know an investor's risk profile with 5 questions and no phone call? You can't. And how did they pick all of their funds? And why does picking various value, growth, emerging market, muni bonds and commodity funds make them "passive"? It doesn't. It makes them low fee asset pickers. And how can they pick assets for you appropriately if they don't even know what your voice sounds like? They can't!
    Jun 26, 2015. 03:46 AM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Hi JS,

    The "cash" is a money market fund comprised mainly of T-Bills. Schwab isn't taking money its investors. They are simply choosing to allocate to cash. Saying cash is a "cost" is like saying that stocks are a "cost" when they go down. Will WealthFront be charging a "cost" during the next bear market? No. They are simply overweight stocks relative to bills. Schwab's program isn't hidden fees.

    Besides, some bank/broker dealer ends up with cash at the end of the day anyhow. In the aggregate this can't be avoided. Should we start accusing them all of nefarious practices? No. That would be ludicrous. The WealthFront attack on Schwab was a blatant misrepresentation of the facts that stemmed from what it now clearly becoming a huge threat.

    I mean, there is literally no reason to use WealthFront now. They're doing the same thing Schwab is doing, but it costs more....
    Jun 26, 2015. 03:38 AM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    "extremely limited" is an understatement. I have shown in the past that all of the major Robos (Schwab's included) can be perfectly replicated using a Vanguard 3 fund approach. The Robos all layer on complexity because it gives the appearance of "earning" their management fee.

    And yes, most advisors don't have a good deal of portfolio management expertise so most of the advisors out there are charging you 1% or so to do some version of static 60/40 stock/bond allocation. Unless they're earning their fee for planning advice they probably aren't adding much value.

    Totally agree on stock picking. Complete waste of time 95% of the time.

    Don't agree on using the Schwab Robo though. I still think the allocations are too static. If you want 60/40 just go buy a few Vanguard funds and save the added fees.
    Jun 25, 2015. 01:31 PM | 1 Like Like |Link to Comment
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