The Fear Trade Has Been Demolished

The economy continues to do okay, the stock market is hitting all-time highs every day, real estate is back on the up and up, interest rates remain very low by historical terms, the net worth of Americans is back at all-time highs, we’ve just dragged ourselves out of the worst recession in 80 years, but people are still upset about a lot of things.  I guess that’s to be expected in an environment with 7.6% unemployment.  That’s not exactly a happy number.   But I have a feeling that there’s more to this general unhappiness than meets the eye.  And I think a lot of people are mad because the fear case has totally lost out at this point.

If you’ve been paying attention over the last few years, you probably remember how many people predicted hyperinflation, surging bond yields, soaring gold prices, a cratering US Dollar and a collapsing stock market.  This was the fear trade.  You overweight gold, short US government bonds, short the USD, short equities and laugh all the way to the bank.  Parts of that trade have worked out OKAY (like the gold portion over the years), but on the whole that trade has been a big disaster.  In other words, fear lost out – again.  And I think a lot of people who bought into the fearmongering nonsense are angry.  They’re angry because they backed their political beliefs with their wallet.  They’re angry because they listened to so-called “experts” peddling their political beliefs as an understanding of the monetary system.  They’re angry because they read scary websites that claim to have predicted the crisis, but have gotten almost everything wrong since 2008.  They’re angry because they let their emotions get in the way of sound analysis.

Look, there’s plenty to be upset about.  I am not here to claim that all is well in the economy and in the USA.  In a lot of ways this country feels as disjointed as ever.  But I see a lot of people who seem to be upset for reasons that can be pinpointed to little more than their ideological beliefs.  If I am right then these people have no one to be upset at but themselves for constantly buying into this fearmongering nonsense.  You have to be very careful approaching the monetary system and the economy with an ideological or political bent.  It will lead you astray at times.  I know it has certainly led a lot of people astray in the last 5 years….

The good news is it’s never to late to learn from mistakes.  I’ve made plenty of mistakes over the last 5 years.  But I always try to learn from mistakes.  So the question is, will people actually try to approach the monetary system and the economy objectively, rationally and apolitically?  Or will they continue to expose themselves to the same biases and ideological pitfalls that have led so many people to fall for the fear trade?

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. Well Cullen, You could consider yourself the Edward Snowden of the financial world by at least bringing a controversial issue out into the open and getting people talking about it! lol

    I think you are conflating two different things in your posting that need to be separated to get any kind of clarity about what is going on. The “fear trade” among people who play in and out of the markets is TOTALLY different (to me) than the fear/anger that is felt and that you sense in the general population. I support your “fear trade” is dead (or in my view, delayed) in regards to Peter Schiff, the hyperinflationistas etc. But the “fear trade” that you talk about is pertinent to a very small sub-population of the US.
    I DO think that Johnny Evers had a very good point regarding breaking down the data into WHO is more wealthy. You challenged him, he provided data that I felt was relevant. The fear/anger that you still sense from the 99% has nothing to do with Peter Schiff, but has everything to do with the fact that the banksters and well off seem to be getting the lion’s share of the benefits with little trickling down to the lower quintiles. And, this IS borne out by data. I’m going to fault you on this one because you conflate two separate issues (fear in the general population and Fear Trade) which leads to confusion in we responders…..
    Aside from that, I love it that you raised an issue that gets people engaged! 2-3 years and counting in following your blod, and learning each time…….so, I’m grateful.


    • Right, it’s two totally separate issues though. Johnny changed the topic from a trade to a more general economic malaise and I engaged his initial comment for some reason without pointing out that he had changed the topic entirely so he could knock down his own strawman.

      I fully agree that the general malaise hasn’t been resolved. And I fully agree that the rich are getting richer. But that has nothing to do with the post really. The post was about the failure of the fear trade.

      • yes, but……. this IS your statement, which in my opinion, linked something totally different, back into your headline, and thus confused the picture…. “But I have a feeling that there’s more to this general unhappiness than meets the eye.” The general unhappiness may or may not be linked to the fear trade, and I’ve followed Johnny and you, so I know the history. But, you made a link of “general unhappiness” to Fear Trade that was not well supported. If you REALLY were going to stick to your thesis of “the Fear Trade is Dead” you would not have mentioned “general unhappiness” or you would have subdivided the general unhappiness into….”a part o the general unhappiness among stock market participants may be due to ideological, etc etc..” OK, beating a dead horse here. Your general point is recognized, but in my opinion, sloppily presented…! which…considering all that you post, I can readily make allowances for!

  2. Cullen, I just happened to come across your name here in a Noah Smith article:

    … apparently you (and post-Keyneisans in general) are now counted (by Noah) amongst the “hard money coalition” (HMC)… along with Austrians and conservative traditional monetarists (Cochrane, Phelphs, Bhide, Taylor, Feldstein, Volcker, Meltzer, Rajan, Malpass, Fisher, Melloan, Hatchuel, and the WSJ editorial page).

    Going up against you and the HMC (Noah and others seem to imply) are the ragtag Monetarist Alliance (MA): Smith, DeLong, Krugman, Sumner, Glasner, Rowe, Konczal, Kimball, Beckworth, Christensen, Nunes, etc).


    So Cullen, how does it feel to have “emerged from the woodwork” on this issue?

    Here Noah characterizes the battle lines:

    “This new Macro War is much less of a liberal-vs.-conservative thing than was the fight over stimulus. It’s more about mainstream macro vs. a coalition of non-mainstream groups.”

    Boy I’ll say! Right-wing Sumner has been a LOT more soft on lefty Krugman recently, although he *hates* doing that I think (he’s still “punching hippies” as much as possible… though he’s throwing a few frustrated punches at “conservatives” too recently):

    … and the MA is not w/o other internal strife:

    … but in general the battle lines are set:

    (Lot of good back and forth on that last one in the comments)

    Don’t know if you were aware of that or not… but thought it was interesting. Also, I should say, this is the Krugman piece that led me to Smith’s piece in the first place:

    … of course it’s ridiculous to think that you or any PKers were “driven from the Inflation Hawk line of defense” … but in fairness, I don’t think Smith is asserting that the PKers ever held the “inflation hawk line of defense”… they had perhaps already been at the ramparts that the Inflation Hawks fell back to… (?)… I might be torturing the analogy there a bit…. but then so probably too is Noah!

      • Tom, you’ll have to let me know what you think of this. I created a new site for the Ask Cullen stuff. That way I don’t have to manage the forum through Pragcap which was a big pain. This way is cleaner, simpler and easier to manage. It’s annoying that it’s a different site, but I like the format. Let me know what you think.

        • Took a quick look around… it is a little weird that it works best as another site, but I think anything that works well is OK by me! Looks like it should do the job. Don’t have any questions yet… thanks for putting it up though.

    • It’s funny that no one knows where MRists sit, huh? MMT people call us conservatives. Austrians say we’re liberals. Noah Smith seems to think we’re a mix of the two or something. I guess that’s kind of the goal though. I would hope that MRists would learn MR and come to lots of differing policy opinions and I think that’s what you see here on this site. In other words, the ideology is largely left up to how the reader perceives things as opposed to the authors forcing something on people. :-)

      And yes, I think Noah gets it right. Mainstream econ is being attacked by the emerging groups. Mainly Austrians though PKers are gaining ground through being right about so much. I personally think it’s not so much a battle as it is an attempt to get mainstream economists to accept some rather basic concepts like banking, double entry bookkeeping, sectoral balances and things that aren’t widely used by mainstream economists. Of course, we also attack the ISLM model, the equation of exchange and some pretty core pieces of mainstream econ thought. But I don’t think any of them have to lose face before they embed PK thinking into their work. In fact, I think Krugman is already doing it.

  3. It’s better to call this thread: “The Hyper-Inflation Fear trade has been demolished”. Being short T-bonds, short the USD and long gold are the signs of an Hyper-Inflation Trade.