• The difficulty lies not so much in developing new ideas as in escaping from old ones.

    John Maynard Keynes

Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
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  • Iron Capital Insights
  • August 9, 2018
  • Chuck Osborne

An Evening at the Fed

The big question for our economy is: How much of the good done by tax reform and regulatory relief is being undone by tariffs?


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  • Iron Capital Insights
  • July 26, 2018
  • Chuck Osborne

It’s All Connected

Different people see the world differently, and until you learn that, it can be difficult to communicate with someone who simply does not see what is so plain to see from your perspective. For me, it is connections. I see connections almost everywhere and sometimes I can grow impatient with people who don’t see it….


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  • Iron Capital Insights
  • June 22, 2018
  • Chuck Osborne

Ugly Negotiations

This market is becoming more and more fixated on trade and it is getting ahead of itself. The market, after all, does not reflect the present; it reflects the consensus of what the future will look like. When the trade talk started it reflected winners and losers; now in the past few days it has seemingly shifted to predicting that everyone will lose.


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  • Iron Capital Insights
  • May 25, 2018
  • Chuck Osborne

All About Trade

Thus far the trade reality is much less dire than the trade banter coming from the White House. However, that banter can have a very negative impact. Economics in the real world is not the cold social science many academics make it out to be. Psychology plays a very big role.


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  • Iron Capital Insights
  • May 1, 2018
  • Chuck Osborne

Nothing Lasts Forever

“If something cannot go on forever, it will stop.”  – Herbert Stein’s Law

Herbert Stein was an American economist and a senior fellow at the American Enterprise Institute. There are not a lot of economists who get laws named after them, but Stein did. It may seem obvious when one simply reads it, but the idea that something which cannot go on forever will stop is not that obvious when one lives it.

  • I don’t speak often about the size of Iron Capital because to me we are a small, close-knit team and I like it that way. The world, however, judges investment firms by assets under management, not headcount or office space, so Iron Capital is consistently listed as one of the larger firms in the Southeast. That achievement and five dollars gets me a coffee at Starbucks. But, while that is usually much ado about nothing, every once in a while it can be helpful.

    For instance, I get the occasional invitation to visit the Federal Reserve Bank of Atlanta (Fed). The last time was about two weeks ago, when I went to hear a presentation from Steven Durlauf, economist and public policy professor at the University of Chicago. He was speaking on inequality. I was interested because I’m not sure if there is a more important subject for the long-term viability of the American experiment in self-government. I found his talk disappointing because he offered no real policy solutions. Oh well.

    Even when the speaker disappoints, these evenings are worthwhile because one often gets to talk directly to some of the economists at the Fed. I love talking to the people who actually do the work. That is true when I visit our corporate clients, and it is true at the Fed. Talking to the rank and file is how you find out the truth.

    In this case, we spoke about what the Fed was hearing from the front line. For those who are not familiar, the Fed is mostly known for controlling short-term interest rates. Lots of analysis goes into these decisions, and they have teams of economists whose primary job is to collect data. Mostly, they talk to business owners and corporate managers and ask them how things are going. The conversations of late were all surrounding trade.

    The big question for our economy is: How much of the good done by tax reform and regulatory relief is being undone by tariffs? From what I heard, quite a bit. It is important to understand that the goal of the tax reform was to stimulate corporate investment. In other words, make it more attractive for companies to expand their businesses through new facilities or even just new, updated equipment. This corporate investment leads to growth in productivity, which leads to wage growth. These are precisely the elements that have been missing from our economy since the dot-com bust.

    All the data show that tax reform was beginning to show signs of working. One example I learned of that night was a company headquartered out of New Orleans that was about to break ground on a brand-new factory. They were putting their tax savings to work, just like the policymakers had hoped. Then came the talk of tariffs; construction cost for the factory rose with the tariffs on steel and aluminum. The company in question was a chemical company which, although small, sells most of its goods overseas. They are now concerned about retaliatory tariffs on their products. The factory is back on hold.

    That means lost jobs and lost wages to their employees. This is the real-world impact of trade wars. The huge multinationals have locations everywhere and can work their way around almost any web of trade barriers; it is the small, locally owned and operated companies who will not be able to compete. The companies that can’t afford the rise in steel prices and the ones that can’t just shift production from one plant to another. These are the companies that really spur growth, the ones who finally thought they saw a light in the end of the tunnel with the first market-friendly policy shift in almost twenty years. Then the rug was pulled right from under their feet.

    The Trump administration assures us that these are just negotiating tactics and that we may have to live with short-term pain to achieve long-term gains. Perhaps they are right; we certainly hope they are. In the meantime, second-quarter GDP growth came in at 4.1 percent, which is actually very good, but almost a full percent lower than what many had been predicting. A percent may not sound like a lot, but in an economy the size of the U.S., that is a lot of growth to leave on the table.

    What does this mean for our investments? It means uncertainty and volatility. Hopefully, as long-term investors we can take advantage of this, but the second half of this year is likely to be a bumpy ride. We still think it will be mostly up, but it certainly won’t be smooth. We remain vigilant, as always.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~An Evening at the Fed

  • Different people see the world differently, and until you learn that, it can be difficult to communicate with someone who simply does not see what is so plain to see from your perspective. For me, it is connections. I see connections almost everywhere and sometimes I can grow impatient with people who don’t see it.

    We currently have two connected things happening that I am not sure many people see. The administration is negotiating trade with the European Union. There is a threat of adding a 25 percent tariff on auto imports from Europe. Let’s ignore for a second that European car companies currently export more cars from their plants here in the United States than they import. There is a reason the new football and soccer stadium in Atlanta is named Mercedes-Benz Stadium, and most BMWs one might see on American roads were built in South Carolina. But we are going to pretend that German vehicles are actually all made in Germany. Even in this fictional world, does the tariff threat make sense?

    The idea of tariffs on foreign cars is to protect our car companies from unfair competition. By adding 25 percent to the cost of foreign cars, our car makers can afford to sell their cars at a higher price and still be competitive. There is just one problem: We also put tariffs on aluminum and steel. This may seem like a totally unrelated issue, but they are connected.

    Wednesday morning General Motors (GM) reported earnings. They actually did ok for the past quarter, but they reduced their full-year guidance. For those who don’t spend their lives analyzing the stocks of companies, managers of companies whose stock is publicly traded usually share with investors what they believe their short-term business results will look like. We call this guidance. In the case of GM, how many cars do they think they will sell and how much money will they make on each car.

    GM told us today that they will make less money on each car because the cost of aluminum and steel has increased exponentially. Stock of General Motors is, as of this writing, down more than 7 percent. A 25 percent tariff on European automobiles will not overcome the increase in steel and aluminum cost. GM and Ford will still lose. I am guessing that Chrysler will end up having to pay the tariff since they were given to Fiat and are therefore European. Even if I’m wrong about that, they still lose.

    Of course, the biggest loser in tariffs is the consumer, or to be more clear, you. Cars are about to become more expensive, and when this happens, many people will be out blaming it on capitalism. They will all but forget about the tariffs that started this painful cycle. They just don’t see the connections.

    The administration says that all of this tariff business is part of negotiating. They say they would actually like to see no tariffs. This is just the “art of the deal.” In this regard we all should be pulling for them, because if this all works then it will lead to a better world. I have my doubts about this working, but there is no doubt that in the meantime GM’s stock is down 7 percent and the markets as a whole are just stuck and going nowhere. They are going nowhere in spite of a currently growing economy. They go nowhere because the threat of tariffs loom. You see, it is all connected.

    Warm regards,

    Chuck Osborne, CFA

    ~It’s All Connected

  • Negotiating is almost always ugly. In my family we learned to negotiate as soon as my oldest sister could drive. My sister’s new license meant that Dad didn’t have to go with us to pick out our Christmas tree. He gave us about half the amount of money we actually needed and told us to go get a tree. Somehow, we always did. I remember my brother showing the tree salesperson all the needles falling off the tree. The man asked, “What do you expect this close to Christmas?” To which my brother responded, “I expect a bargain.” Those were the days.

    This skill came in handy when my college girlfriend needed help buying a car. At the last second, the dealer added one of those not-previously disclosed fees. If I recall correctly it totaled about $1,000. I stood up, helped my friend up, said thank you anyway and started walking for the door. By the time we got to the door, the fee had disappeared. We turned around and completed the purchase. This is why car dealerships are now “no-haggle.” Now everyone just pays more, but we’re happy about it.

    Well, this administration haggles and so do the Chinese. The markets, let’s face it, are dominated by young professionals (or the computers those youngsters program) who never had to bargain for anything. I learned this the hard way a few years ago when my wife and I sold our old house. A young couple made an offer, we countered, and they disappeared. They are probably still crying in a real estate agent’s office somewhere.  They don’t like negotiating, and they sure don’t like doing it the way this administration does it.

    This market is becoming more and more fixated on trade and it is getting ahead of itself. The market, after all, does not reflect the present; it reflects the consensus of what the future will look like. When the trade talk started it reflected winners and losers; now in the past few days it has seemingly shifted to predicting that everyone will lose. The market is telling us that the trade disputes with China will offset the economic benefits of tax and regulatory reform and plunge us back to the new normal. This means people are selling everything except the high-growth FANG stocks. It is 2016 all over again. For a week anyway.

    The market is not always right, and at the very least it would seem that it is early. The real economy doesn’t change that quickly. It is also possible that Trump could win this. The market isn’t giving him much of a chance, and I readily admit that I have my doubts.

    When my brother got us that Christmas tree bargain, the owner of that tree lot knew that once Christmas had come and gone those trees would be almost worthless. When I helped my friend get her car, that dealer had to make room on his lot. China, on the other hand, doesn’t have to do anything. Trump is guaranteed just two more years in office, and if he were to win re-election that would be six years. Since Trump, Peter Navarro, and Wilbur Ross are the only three people in the free world who don’t seem to understand that trade is good for America, it is doubtful – regardless of party affiliation – that the next President will be as aggressive with China. Long term to the Chinese is more than one generation. They have just given their leader a lifetime term. Six years is nothing. Time is on their side, and time matters when one is trying to perform the art of the deal.

    I could be wrong. The Chinese may cave to administration demands, and supposedly if that happens, then free trade here we come. I doubt it, and so does the market.

    The question for us now is, how much damage will really be done? Presidents of both parties have done economically stupid things since the beginning of our nation and we have survived. The economy is good now and has been getting better. I suspect the market is overreacting to how bad this will really be. Which, of course, is unknowable.

    That is why we don’t really try to guess the impact on the entire economy. We invest from the bottom-up. It is much clearer how this does or does not impact individual companies. We will be focused on what actually happens to sales and earnings at the companies we own. That is prudent investing.

    Negotiating is ugly. Sometimes it is better not to look.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Ugly Negotiations

  • The market is stuck in a big trading range. Volatility is strong but we seem stalled. There are lots of minor issues but the one recurring theme is trade. The administration announces tariffs on steel and aluminum, and the market crashes; the actual tariffs are much less than expected, and the market rallies.

    The administration declares a trade war against China, the market crashes; the China negotiations appear to be going much better than expected, and the market rallies. So, Trump says he isn’t happy with his negotiators, the market crashes; now they are talking about tariffs on cars, and you guessed it: the market crashes. There is certainly a pattern.

    Thus far the trade reality is much less dire than the trade banter coming from the White House. However, that banter can have a very negative impact. Economics in the real world is not the cold social science many academics make it out to be. Psychology plays a very big role.

    In the 1992 movie “Sneakers,” Robert Redford and Ben Kingsley play college friends now fighting each other over control of a device that can break any and all encryption. With it they can hack into any computer and potentially do anything. In one scene Kingsley’s character discusses the fragile nature of our system. The example he uses is a bank, a conservatively run, financially strong bank. Simply start a rumor that the bank is not financially strong and then people will begin to withdraw their money from the bank. Soon the bank actually is on the brink of failure. Trust keeps banks in business. No financial institution can survive a run on the bank, and runs on banks are almost always caused by emotion, not anything “real.”

    The truth is, all people make decisions based on emotion and then, to varying degrees, try to support their decisions based on facts. Business leaders are not immune. If Trump gets what he claims he wants in terms of tariffs, it will have a negative impact on economic growth. I have my doubts as to whether what Trump tweets and what he really wants are the same thing, but it may not matter.

    If business leaders in companies small and large are planning for the future and they believe tariffs are coming, then they will be less willing to invest in their businesses. If they are less willing to invest in their businesses, then business will slow. So much of what happens in economics is a constant cycle of self-fulfilling prophesy. If we believe the economy is good, then we will spend and invest and the economy will be good. If we believe it is bad, then we will delay spending and investment and the economy will be bad.

    Thus far all this trade talk has done is stall the market. Trump tweets and down we go; the facts come out and back up we go. The end result is a bumpy ride to nowhere. This will end, and when it does, the market will choose a direction. That direction will depend on what people believe about the future prospects of our economy. That fate is now resting on the outcome of trade negotiations, and what the president decides to tweet about them.

    Either way, we will be ready to act. Stay tuned.

    Warm Regards,

    Chuck Osborne, CFA
    Managing Director

    ~All About Trade

  • “If something cannot go on forever, it will stop.”  – Herbert Stein’s Law

    Herbert Stein was an American economist and a senior fellow at the American Enterprise Institute. There are not a lot of economists who get laws named after them, but Stein did. It may seem obvious when one simply reads it, but the idea that something which cannot go on forever will stop is not that obvious when one lives it.

    Take, for example, the incredible explosion in the cost of college education. I have used this example many times but it still warrants repeating:  My senior year at Wake Forest University, the cost of attendance was approximately $12,000. Upon graduation I purchased a Toyota Camry for $16,000. Today a similar Camry costs $24,000, while the cost of Wake Forest University is $72,000.

    During the last twenty years the overall inflation rate has been quite low, but the cost of college tuition and the cost of healthcare have gone through the roof. There are several reasons why. Specifically for college, we had a combination of the millennials being a very large generation, especially compared with Gen-X, which means more people going to college. This was magnified by the fact that a higher percentage of the population started going to college. On top of that, people started borrowing money to go to college. All of these trends came together to accelerate the rise in college tuition costs.

    If something cannot go on forever, it will stop. No product or service can have price increases which outpace the overall rate of inflation forever, so it must stop. According to The Wall Street Journal, that process is under way. Tuition discount rates at private colleges have increased to 49.9 percent for full-time freshman students. According to the National Association of College and University Business Officers (NACUBO), the per-student net tuition (the amount colleges actually get after all the discounts) fell 0.1 percent this year. That is not a huge drop, but it is an actual drop.

    For our young family clients who are concerned about saving enough for college education this is great news. It is not the news most expect. We are hard-wired to see what is happening today and project that into the future. We do it with everything. The NBA playoffs are going on and many believe it is a foregone conclusion that the Golden State Warriors will win it all once again. They might, but just like the Celtics, Lakers and Bulls of the past, the Warriors’ run will eventually stop…sooner than we probably think.

    For many of our clients, college education costs are a thing of the past. They are approaching retirement and concerned about the cost of healthcare. If something cannot go on forever, it will stop. Healthcare is no different. The rapid increase in cost is unsustainable and it will reverse itself. I know many doubt those words, even if they are comforting. People doubted that college costs would ever slow, but now they are doing exactly that.

    Take heart is Stein’s law. Your kids will be able to go to college. You will be able to afford healthcare. Their rise cannot go on forever, it will stop; and it may be stopping even now.

    Warm Regards,

    Chuck Osborne, CFA
    Managing Director

    ~Nothing Lasts Forever