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Sunday, October 30, 2016

Book Review: Pragmatic Capitalism

Pragmatic Capitalism: What Every Investor Needs to Know about Money and Finance was first published in 2014 by Cullen Roche (publisher of It is an interesting blend of discussions of personal finance and financial market behaviour, integrated with top down macro views. On the macro side, he introduces what he calls "Monetary Realism."

Book Description

The book was first published in 2014 by Palgrave Macmillan. It is 223 pages (excluding the end matter). Chapters include:

  1. What is Money?
  2. Why the New Macroeconomy Matters More Than Ever
  3. Are You an Investor, Saver, or Both?
  4. Market Myths That Persist
  5. How the New Macroeconomy Is Changing Portfolio Construction
  6. The Importance of Understanding Behavioral Finance
  7.  Understanding the Modern Monetary System
  8. Economic and Monetary Myths that Persist
  9. Essential Principles of Pragmatic Capitalism
  10. Putting It All Together
  11. We Never Stop Learning
Cullen Roche is the founder of the Orcam Group, a financial consulting firm.

From my perspective, there are three areas of interest within the book.
  1. The discussion of personal finance.
  2. Financial market and portfolio construction insights.
  3. Monetary Realism.
The chapter on behavioral finance is well written to the area. However, as my long-time readers might guess, I am skeptical about that academic field. Since I have already reached my quota of academia bashing for 2016, and my views have nothing to do with what Cullen Roche wrote, I will not pursue that discussion.

Personal Finance

The book focuses on the dangers posed by various myths about finance and the economy to the readers personal finances. I do have some quibbles with what he writes, as I discuss below, but I would generally agree with the overall message.

One myth he discusses was one that I always found annoying: the belief that Warren Buffet got where he is solely based on an ability to pick winning stocks. (Which has the corollary that if you study his annual letters intensely, you can pick stocks just like Buffet too!) In reality, he is running an operating business that has ample free cash flow that is deployed into the financial markets, and his business is built around leveraging that operating business.

The name "Pragmatic Capitalism" is not just a marketing slogan, Cullen Roche puts a great emphasis on entrepreneurial capitalism. He divides non-consumption spending into two: "savings" which flow into financial markets, and "investment" that is flowing into increasing your "productive capacity." (Roche evangelises capitalism, and how it marshals resources for production.) His argument is that your "savings" (investment portfolio) needs to be deployed relatively conservatively; it is your "investment" in yourself that will make you rich.

This bias could be questioned. "Investing in yourself" is a perky can-do slogan that makes dour cynics such as myself roll my eyes. If educational spending has a high odds of success, student loans would be inherently self-liquidating. In the real world, we see many people struggling with student debt. Starting your own business or pursuing extra studies can be the right move, but you also need to understand what your odds of success are before undertaking them. A belief that such "investments" always offer a higher return than buying financial assets can easily lead to costly errors.

I would also question whether there is much a trade-off between investing and saving as Roche defines them. The trade-off is not purely monetary; the real cost of training or starting your own business (or undertaking training courses) is the time commitment. It is typically impossible to hold down a full time job and run your own business. (It should be noted that this varies amongst professions.)

It may have been buried somewhere in the text, but he also spends almost no time discussing the rather critical question of how much you save. He argues that the belief that "the stock market will make you rich" is a myth in Chapter 4, when in fact that is exactly what happened to a lot of high saving individuals. As Stanley and Danko documented in The Millionaire Next Door (my review), teachers are over-represented in the numbers of millionaires because they were able to avoid the social pressure for conspicuous consumption that high-paying professions like lawyers and doctors face. Those teachers achieved their wealth by having a high saving rate, and steady long-term investing in public markets over decades.


The book does not contain any magical formulae for making money, rather it discusses how we should set our expectations. The discussion is useful, but it contains a lot of different insights. For example, the chapter "How the New Macroeconomy Is Changing Portfolio Construction" ends with a list of 10 rules.

Given the breadth of the topics he covers, I find it hard to summarise them, other than his argument that the macroeconomy matters more than micro issues (which I discuss in the  next section). My attempt to do so is to say that he argues that we should not look at our personal portfolios in the same way that the financial industry attempts to do. Chasing after benchmarks is a waste of time.

Roche also writes about passive portfolios, arguing that there is no such thing as a purely "passive" portfolio. Any asset allocation is implicitly incorporates some view about long-term investment returns. That said, I would note that a 50:50 stock/bond portfolio is taking an extremely minimal position about future returns: we do not know whether stocks will outperform bonds, but we believe that both asset classes earn a risk premium over cash (which is why the cash weighting is 0%). That is about as close to a non-forecast about macro trends as one can get.

Monetary Realism

Roche argues that macro trends drive asset markets, and he offers "Monetary Realism" as a way to understand macro trends. (This discussion is of the most interest to myself.) It is based on looking at the operations of the modern monetary system, and discusses the following myths in Chapter 8.
  1. The United States is going bankrupt.
  2. Quantitative Easing is debt monetisation and will cause hyperinflation.
  3. Central banks exist solely to enrich the bankers.
  4. A credit-based monetary system is unsustainable.
  5. The free market can solve all of our problems.
  6. Consumers matter more than producers.
  7. Saving finances investment.
  8. The IS/LM model can properly explain the economy.
  9. Growth of money equals inflation.
  10. Hyperinflation is caused by printing money.
  11. Economists have all the economic answers.
An astute reader of the book would notice a great deal of similarity between Monetary Realism and Modern Monetary Theory (MMT). However, Cullen Roche had a falling out with members of the Modern Monetary Theory community, and he created Monetary Realism as a variant which fixes the (alleged) defects of MMT. The book papers this schism over by completely ignoring the existence of Modern Monetary Theory.

If Pragmatic Capitalism were an academic text, such a stance should raise eyebrows. However, for a popular work, it seems reasonable. I do not think the book would be improved by Cullen Roche describing Modern Monetary Theory, and then listing his criticisms of it. A newcomer to macroeconomics could easily ask: who cares? I am in that camp myself, as I discuss next.

Since I am in the Modern Monetary Theory camp, I tried very hard to read between the lines to understand his criticism. My reading of the situation is that Cullen Roche interprets MMT differently than I (and other MMT writers) do. Getting into a debate with someone about how he interprets a theory is fundamentally a waste of time, so I will not bother pursuing that discussion. I leave interested readers to draw their own conclusions.

From the MMT perspective, the lesson to be learned is that if the theory aims to replace mainstream economics, it needs to be palatable across the political spectrum (within limits; I doubt that the anarcho-libertarians will come around any time soon). This seems to be understood by many of the original developers of MMT, but it is perhaps not clear in practice.

Private Equity: Rah, Rah.

One complaint I have with his analysis is that his enthusiasm for capitalism clouds his discussion of private equity. He lumps private equity under "investment," and pretty well all else financial activity as "savings." As someone who worked as an institutional investor in fixed income, this distinction is sounds like marketing materials from the private equity industry.

The modus operandi of a lot of "private equity" generally consists of buying a company in the public markets, loading up the target with debt, and quite often driving once-viable businesses into the ground. This activity has nothing to do with adding productive capacity to the economy.

The rise of "private equity" has coincided with the financialisation of the developed world, and declining real economic growth rates. There is a lot of other factors in play, but a cynic could argue that the growth of the private equity industry coincides with lower economic growth. The private equity industry could disappear off the face of the earth, and we would have a hard time discerning any impact on aggregate economic activity.

Meanwhile, as the Financial Crisis showed, if the secondary debt markets (which Roche argues are just a place where "savers reallocate their savings by exchanging financial assets") seize up for just one weekend, a huge hole is going to be blown in the macro aggregates. Although industrial capitalism does need capitalists, modern economies are driven by debt finance. And in the debt markets, we cannot draw an artificial distinction between primary and secondary markets: if an issuer's securities cannot be traded in the secondary market, it will be shut out of the primary market, and this will rapidly cause the demise of any entity that needs to roll short-term paper.

Concluding Remarks

Pragmatic Capitalism provides an interesting introduction to personal finance, and macro-oriented investing. Monetary Realism provides a variant of Modern Monetary Theory that may be more congenial to readers with pro-market sympathies.
(c) Brian Romanchuk 2016


  1. Good review but your comments on private equity at the end were way too harsh and grossly misleading. You need to be a little more careful as you're a fixed income expert, not a PE expert. Still, thanks for reviewing Cullen Roche's book, not sure I'm going to buy it.

    1. My comments about PE were deliberately harsh; I doubt that any of the fans of PE will care about my opinion.

      Sure, PE does invest in new companies (venture capital, etc.). However, the money invested is small relative to the various leveraged buyouts of existing companies. Whether or not they run those target companies into the ground is a debatable question, one that I admittedly do not really care too much about. The number of PE companies that has ended up bankrupting is rather impressive; even if they have a few success stories.

  2. Brian,

    I read this book a while ago and I think your review is probably fair. I'm somewhat of a layperson when it comes to economics, so I found it pitched at about the right level and in general thought the information contained was for the most part useful.

    Your criticism of his advice to invest in yourself certainly rings true to me. I spent a fair amount of time and effort studying exploration geophysics, not too long before the recent oil price collapse. I hardly consider that an investment that paid off.

    1. Sorry to hear about that. When I was studying electrical engineering, at least one of my classmates was a refugee from the collapse of the energy sector in the 1980s.

      However, the way you phrased it matched my point about the trade-off: your cost included time and effort, and not just a financial. You can buy a 60:40 portfolio of index funds, and the only setup cost is taking the time to create an investment account, and pick out plausible funds. I guess I should not be too cynical about self-improvement or running a business, but the options are very much different than financial investment. (Unless you are rich enough to hire someone to run your business for you.)


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