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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
  • 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.


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  • Iron Capital Insights
  • March 29, 2018
  • Chuck Osborne

How Not to Win Friends and Influence People

Just when we thought all was safe in the markets, the White House brought out Wilbur Ross. Wilbur is the current commerce secretary and the man behind the threats of a trade war. It’s no surprise that Wilbur’s calming words on CNBC this week about “not a depression” and “not the end of the world” did not calm the markets.


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  • Iron Capital Insights
  • March 9, 2018
  • Chuck Osborne

Real Steel

Protectionism was one of the main causes of the Great Depression and helped to create an international environment that eventually led to World War II. The lesson we supposedly learned from this is that trade promotes both prosperity and peace. So, what are these tariffs really going to accomplish and how will they impact our investments?


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  • Iron Capital Insights
  • February 23, 2018
  • Chuck Osborne

Invest in What Is Real

The market is back. It has certainly been a crazy ride thus far this year. In the aftermath of the recent downturn we have learned more about what caused it, or at least what made it as sharp and quick of a downturn.

  • 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

  • Just when we thought all was safe in the markets, the White House brought out Wilbur Ross. Wilbur is the current commerce secretary and the man behind the threats of a trade war. After the President himself scared everyone with tariffs on steel and aluminum, an idea that originated with Wilbur, he started suggesting other trade-restricting moves and the market reacted negatively. So, Wilbur went on TV to calm the nerves.

    During his interview on CNBC he said things like, “This will not be the end of the world.” For context, here is a short list of things that were “not the end of the world:” the plague, the dark ages, colonialism, many wars between the French and the English, War World I, World War II…need I go on? He also said it will not drive us into an economic depression. Considering that the financial crisis and the 40 percent drop in the stock market that followed was also not a depression, I guess we are supposed to take this as good news.

    I must confess, I have less than zero respect for Wilbur. Wilbur is a former attorney who made one lucky private equity deal and then created a reputation for himself by claiming that his firm’s assets represented his actual net worth. Once Forbes magazine bought that deception (they have since apologized), he used his reputation as a “billionaire investor” to make several million dollars. How that fraud did not eliminate him from serving in an administration is beyond belief. But, I digress.

    It’s no surprise that Wilbur’s calming words about “not a depression” and “not the end of the world” did not calm the markets. He did say something that seems to have been missed:  he said there will be a negotiation. I will not admit to fully understanding our current President, but one thing I do believe about the real estate developer is that everything to him is a negotiation. Hence, the outlandish statements. I’m guessing that Donald Trump has had a lifetime of success at the negotiating table by always starting with an outrageous position. When the other side talked him off the cliff he ends up walking away with what he was really after and perhaps even more. The trade reality is likely to be less concerning than the trade banter.

    While this was going on, a British news channel has uncovered an astonishing fact: social media sites sell your data, and a lot of the stuff that is out there is fake. (Stop the presses!) My favorite part is when the executive from the “marketing” firm explained on hidden camera how they could get some Ukrainian models to pretend to be leaving a politician’s house. They would film it and post it to people who they have identified as having a poor view of the politician to begin with. The art of fake news.

    So now Facebook primarily and others secondarily are in trouble for what is essentially their entire business plan. There are many analysts who have wondered when people would wake up to what these companies actually do to make money. It appears that has happened, at least temporarily. The longer-term damage of social media is likely the second part of that story:  how individuals self-select the feedback loop they wish to be involved in so that only their beliefs are ever confirmed, and we become ever more polarized. For now, we seem more upset that all those tailored stories and advertisements that we clicked on were put there by people who purchased our “data.”

    This brings on another issue altogether and that is our increasing habit of arguing in huge generalities. What “data” specifically? Do they know I’m bald, or do they know my social security number and bank account information? All “data” is not equal. This is a rabbit hole for another conversation.

    Meanwhile, the real economy is clicking along. GDP growth just got revised up to 2.9 percent. These are the things that actually matter to investors. This volatility will pass and the bull market ride will continue. Nothing goes up in a straight line. In the meantime, let’s agree to choose more carefully what we put out in the public domain, and for Pete’s sake keep that microphone away from Wilbur.

    Warm Regards,

    Chuck Osborne, CFA
    Managing Director

    ~How Not to Win Friends and Influence People

  • “We are bigger than U.S. Steel,” said Hyman Roth to Michael Corleone in the classic film, “The Godfather Part II.” That scene was placed in a Cuban hotel shortly before the conclusion of the Cuban Revolution in 1959. The irony being that both the mob and U.S. Steel had begun to decline in importance by the time the movie came out in 1974. Those trends have continued to this day.

    Who knows, in 1959 steel production might very well have been an issue of national security, but I’m not sure how important domestic steel is in a world where our greatest threats come from terrorists and cyber-attacks while all that foreign steel comes from our arch nemesis…Canada. This I do know. Protectionism was one of the main causes of the Great Depression and helped to create an international environment that eventually led to World War II. The lesson we supposedly learned from this is that trade promotes both prosperity and peace. After all, we should want to “keep our friends close and our enemies closer,” as advised by Michael Corleone also in “The Godfather Part II.”

    So, what are these tariffs really going to accomplish and how will they impact our investments? Now that they have been announced, not much. With Canada and Mexico being exempt this really becomes more political theatre than anything else. It does, however, bring to mind something that goes with the mindset of the tariff supporters. Those who back such policies tend to see commerce as a zero-sum game. In other words, they see day-to-day transactions as having one winner and one loser. This is how most sports work, after all, and we tend to use lots of sporting analogies. Next week we will begin March Madness, one of the best times of the year for college sports lovers. At the end of each game, one team will go home and one team will move forward.

    That, however, is not how commerce works. When I go buy a new suit, it is not a zero-sum game. The store where I go wins when they sell me a suit, and I win when I have a new suit to wear and enjoy. Commerce is by nature win-win. Good business people understand that they only win over the long term if their customers win. Good customers also understand that if they want to have good service and enjoy quality products, then the companies they choose to do business with must want to have their business. It is relational, not transactional.

    This is one of the many reasons tariffs are so disastrous. It just sends the wrong message, and eventually it does not work as companies find alternatives and workarounds. When I was in college many years ago we learned about the foolishness of sugar tariffs and how Americans paid far more for sugar than most people around the world. Those tariffs protected sugar beet farmers but hurt food companies. Now Americans enjoy high fructose corn syrup.

    If tariffs raise the cost of steel for large manufacturers like Ford, or Boeing, they will simply ship the steel to a plant somewhere outside the U.S. and then make whatever they were going to make there. One would think an administration which just reformed the corporate tax system would understand this.

    This is not the first time economic realities which have been proven over time have been ignored by politicians. George W. Bush slapped a tariff on steel, before removing it. The Obama administration used price-fixing in their healthcare law, another proven economic loser. We don’t seem to learn, do we?

    This folly is yet another reminder of how important it is to invest from the bottom-up. Know what you own and why you own it. These exemption-filled tariffs should not be a factor.

    Warm Regards,

    Chuck Osborne, CFA

    Managing Director

    ~Real Steel

  • The market is back. It has certainly been a crazy ride thus far this year. We start up more than 8 percent, then drop 10 percent, and now we are riding back up. A 10 percent correction is normal in long bull markets, but how this one happened was not.

    In the aftermath of the recent downturn we have learned more about what caused it, or at least what made it as sharp and quick of a downturn. Many hedge funds that are primarily being run by computers were borrowing money to purchase so-called inverse exchange traded products tracking the VIX, a volatility index sponsored by the Chicago Board Options Exchange (CBOE). These products supposedly produce the inverse, or opposite, return of the index. So if the VIX is up 10 percent, then these products go down 10 percent. Several of these products are leveraged, meaning they will track two or more times the index return. So if the VIX is up 10 percent, these products will be down 20 percent or more.

    There are so many things wrong with this it is hard to know where to start. The first issue is the issue of ETF investing in the first place. The first ETFs were based on the S&P 500 index; they are basically index funds, which can be bought and sold any time during the day, as opposed to index mutual funds that can only be bought and sold at market close. Their original purpose was to give institutional investors a place to temporarily park money while transitioning a portfolio from one money manager to another.

    Wall Street quickly learned other uses, and like almost every financial crisis in history will prove, bad things happen when Wall Street starts using products for uses other than for what they were originally intended. All kinds of investors started using ETFs, and of course Wall Street started filling that demand with every imaginable flavor. The problem is, most of these products don’t actually work. It is pretty easy to track an index like the S&P 500 – just buy the 500 stocks represented. These are among the largest companies in the world and the market for their stocks is robust so they are easily bought and sold at a moment’s notice.

    The further one wanders away from the S&P 500, however, the less true that becomes. Smaller companies’ stocks do not always trade frequently, and it may be hard to buy or sell on demand. The funds that try to track these indexes may not be able to buy all the stocks in the index the moment an investor wishes to buy the ETF. Likewise they may not be able to sell. The problem gets worse for fixed income or bond-related products. Remember, bonds are just loans. A company or a government that needs to borrow money will issue bonds. They only issue the number of bonds they actually need. ETFs and other products tracking bond indexes are often not able to buy the actual bonds, so they buy so-called derivative securities that will hopefully track the index.

    The VIX is another problem altogether, because it isn’t real. There is nothing to buy. It is an arbitrary measure of options activity, which the CBOE claims is a good approximation of overall market volatility. Investors buy options to protect against losses in underlying securities. If more people are buying options, then the logic states that they are more worried about loss and therefore experiencing more volatility. In other words, the VIX is more akin to placing a bet on the over/under of a sporting event than it is to an investment. Gamblers – which I’m going to call them, because that is what they really are – develop wagers in the form of derivative products that track the VIX. The ETFs then “invest” in these derivatives. If that makes no sense to you, then welcome to the club.

    The final problem with all the ETF-type products is perhaps easier to understand. Index investing is supposed to be passive: just buy the entire market and hold it for a long time. That is the entire theory. However, that is not how people are using these products. A passive investor has no reason to be able to trade whenever he or she wishes because he or she is, by definition, not a trader. These products are being used to trade into and out of stocks faster than ever before in history. The ripple effects mean that prices move more than ever, even when the VIX says volatility is low.
    The first fundamental rule of prudent investing is that it is done from the bottom-up. Stock is simply ownership in a company. Investors are investing in companies, not trading pieces of paper. Companies are real; they have real products and services and real revenues and earnings. They have value, and that value adds safety to your investment.

    There once was a day when the investment advisory industry was a professional service, helping clients invest for their future. It still is that way at Iron Capital. We will let others buy products, exchange-traded and otherwise. We will stick to investing in things that are real.

    Warm Regards,


    Chuck Osborne, CFA
    Managing Director

    ~Invest in What Is Real