“Give me liberty or give me death!” ~ Patrick Henry

One of my aunts used to say we were related to Patrick Henry. I was never sure if she meant our family or my uncle’s family, but as a kid I thought it was cool. Who wouldn’t want to be related to that brave patriot? Liberty is America’s defining virtue, not just Henry’s. Our well-known inalienable rights are life – the essential freedom to live as we wish; liberty – freedom itself; and (in case you didn’t see this coming) the pursuit of happiness – the freedom to pursue our dreams. America is not just a place, it is an idea, the home of the free and the land of the brave. In this way we are all related to Henry.

Freedom, however, is under attack from seemingly all directions today. Voters in New York just selected a socialist in the democratic primary. Vice president JD Vance recently admonished conservatives who he claims, “worship the capital M market.” Milton Friedman famously observed that, “Underlying most arguments against the free market is a lack of belief in freedom itself.” This still holds true, but today there is another element from those who lack understanding of what the term “free market” means.

The confusion is understandable as we are constantly surrounded by references to the stock market. Following the stock market is my job, but even if it were not, one cannot escape daily reminders of what happens in the stock market. Every time there is some scandal or a crisis, people are reminded of the unlikability of Wall Street and all that goes with it. I believe many confuse a “market economy” with the stock market, and they are not completely wrong. The free flow of capital, through a stock market, is certainly an attribute of a market economy, but that is not the complete story.

The term “market” in market economy is just the term that economists use to describe the aggregate of every individual economic decision every individual in a free society makes. When a child sets up a lemonade stand, that is the market. It is free because no one has to buy the lemonade, and no one forced the child to sell lemonade; everyone at the lemonade stand is acting of their own free will. The lemonade stand is the purest form of capitalism. There are no regulations, no taxes, just an innocent child setting up a simple business and thirsty neighbors willing to pay for what is usually some pretty bad lemonade. The neighbors get to quench their thirst and feel good about supporting a young entrepreneur, and the child gets a little financial boost and some great life lessons. This is a win-win situation; there are no losers at the lemonade stand. That is capitalism.

For most of my adult life we all understood this. Any time someone tried to attack capitalism, all one had to do was point to the collapse of the Soviet Union and the success of the Reagan / Thatcher reforms in the U.S. and U.K. One did not have to be an economic scholar to see the obvious contrast: Total collapse versus huge success, this wasn’t nuance. Most people, especially in the investment world in which I live, thought this conversation – which had taken up so much oxygen in the 20th century – was over.

That changed with the financial crisis in 2008: Those bank failures magically resurrected the anti-capitalism crowd. The actual crisis was caused, as all true crises are, by a confluence of simultaneous factors, but the long-lost big government/anti-capitalism crowd had a very simple one-word explanation for the whole thing: greed. Capitalistic greed caused the crisis, they said. That explanation sold because it was simple, and it easily identified a culprit: greedy Wall Street bankers. Of course, the idea that greed explained the crisis was and remains absolutely absurd. We wrote about this at the time. There are so many holes in that argument that one could not possibly count them all, but primarily for this argument to work it would mean that greed was somehow new. People have always been greedy, yet we do not live in a constant state of financial crisis. Milton Friedman said it best when he said, “Of course it is always the other guy who is greedy, we are never greedy.”

Wall Street helped the simpletons’ cause by providing anecdotal stories of incredibly greedy, and frankly often stupid, bankers. I have been in this business a long time, and most people in it do not fit that description, but those who do are ever-present. They contribute to every crisis, but they do not explain a crisis. Let me be clear: this does not excuse the mortgage banking industry or the Wall Street bankers who financed the industry. They certainly deserve their portion of the blame.

However, the crime in that explanation was that it completely exonerated a group that deserves at least an equal portion of the blame: government politicians and regulators. The oft-used quote of the “blame capitalism” crowd was that the crisis was caused by the “unregulated banking industry.” I suppose that I should have known then that the post-modernist idea of truth being whatever you feel it is had taken over our discourse. If there is an industry more regulated than the financial industry, I would like to see it. Yet, I had college-educated people who had purchased multiple homes over the course of their lives look at me in all seriousness and claim that the mortgage industry was unregulated. I would ask them, “Was there a lawyer at your closing? How many disclosures and documents did you have to sign?” That is regulation. The OCC, SEC, FDIC, Federal Reserve, and various state agencies all regulate financial firms and have since at least the 1930s.

Today we hear the line that “the free-market economy is not working for everyday people.” We hear this from both the left and the right. However, every single example they give is, without fail, a place where regulation has replaced the free market. To say that the United States is a capitalistic country is mostly correct, but it is not absolutely correct. In reality, all countries exist on a spectrum. The extremes would be a truly free market with no rules on one end, and a complete command economy with government running every single decision on the other. No country can exist on either one of those extremes, but history has shown us that the closer we get to freedom, the better it is for everyone in a country.

So, what parts of our system are not working for people today? In New York one of the big issues is housing and the lack of affordable options. What caused the lack of housing in New York? Rent controls, for starters. When the there are limits on what can be charged, then there will be limits on how many units can be built. Add to that the high cost of construction. Zoning laws, environmental regulations, safety codes, and labor laws all add cost. This is not to say that some of these items, and maybe all, are not worth it, but there is no free lunch. Everything in life is a tradeoff. Every regulation that goes into the construction of an apartment building adds cost. When all these costs add up, but the price that can be charged is limited, then you will have a shortage. To the extent that property owners are willing, or forced, to rent apartments for less than their cost, then that difference has to be made up for elsewhere. One gets a poor mix of rent control and high-end luxury with nothing in between.

As Ronald Bailey points out in “The End of Doom,” shortages do not occur naturally. Free people find a way to balance supply with demand; this is the essence of economics. Shortages exist only when some outside force, usually government, interferes. Rent controls cause a shortage of affordable apartments. The knee-jerk reaction is more rent control, which will lead to even worst situation, which will lead to even more control, and down the road we go. This is the road to serfdom that Friedrich Hayek mentioned in his book of the same name. What else isn’t working? Healthcare and education costs are often brought up as examples, especially for many young people who are riddled with college loans. These are, of course, two places in our system where we see the highest levels of government intervention. On that spectrum between freedom and command, the closer we get to command, the worse everything gets. Yet, the knee-jerk reaction is always that more control is needed.

Still not convinced? Well, what is working in our society? We have trouble getting healthcare, but even the least fortunate today walk around with an item we refer to as a phone, but in reality it holds more computing power than NASA possessed when they first sent an astronaut to the moon. Technology is probably the freest segment of our society, and the cost continually goes down while access is always improving. Sure, there are issues here as well – privacy concerns, unintended consequences of social media, etc. There is always a balance to strike, but the closer we get to freedom – people freely choosing to do what they will – the better systems work. This may be counterintuitive, but history is crystal clear on this point.

So why do we seem incapable of remembering this lesson? It is in our nature to want to control things. This is a major theme of all religions and every lasting philosophy. Free markets are the best economic path, but there it no perfect path. Sometimes people will fall on hard times.

A free world can be a cruel world, there is no doubt. I wish everyone who claims to support the ideas of economists like Friedman and Hayek actually read their work. Both Friedman and Hayek argue for the necessity of a social safety net provided by government. They also pointed out potential pitfalls and certainly criticized specific programs, but both believed that a safety net was absolutely needed in any civilized society.

Freedom works. Why is this so hard for us to understand? Yet capitalism and its political partner, democracy, will always have their critics. I think Winston Churchill said it best when he said, “Many forms of government have been tried, and will be tried, in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time…”. The same can be said of capitalism. It’s the worst form of economics, except for all those other forms that have been tried from time to time. Behind all the arguments against the free market is a lack of faith in freedom itself.

Patrick Henry was calling his fellow citizens to war. He was willing to fight and die, if necessary, to gain liberty. We have enjoyed that freedom for 249 years. It obviously runs through everything we do as investors, but it is so much larger than that. We need to counter those who argue against it. Freedom needs defending.

Warm regards,

Chuck Osborne, CFA

~In Defense of Freedom

I was 20 miles offshore, sailing north from St. Simons Island, Ga., headed to Charleston, S.C. The forecast was for strong winds so I had already reduced sail before the sun went down, but the forecasted wind had not showed up. I was beginning to question my decision to be so conservative when, at 12:30 a.m. off the coast of Savannah, Ga., the wind came. It seemed as if someone upstairs suddenly remembered they were supposed to turn the wind on, and they flipped the switch. In an instant we went from a light breeze to more than 30 knots of wind, and I quickly realized that I had not reduced sail enough.

The process a sailor goes through to reduce sail is called reefing. Every boat is rigged a little bit differently but the one thing they have in common is that there is a detailed step-by- step process for putting a reef in the sail, which makes the sail smaller and helps control the boat. On this boat the first step is to turn into the wind to reduce the pressure on the sail, then ease off of the various control lines to allow the sail to be lowered to the appropriate point. Once reefed, the control lines must be re-tightened, and then the boat can be turned back on course. Do those steps in order in a controlled manner and within a few short minutes you will have the boat back in control with more comfort and safety; but do any one of those steps out of order and total chaos will ensue. The order of operations matters.

Donald Trump has come back into office with an economic plan that is a three-legged stool. As always, we don’t discuss politics, but we do discuss economic policies that can impact your portfolio, so let’s take a look. One leg of his plan is regulatory reform, trying to make is easier to start and run a business in the U.S. The second leg is tax reform, really making his previous reforms permanent with perhaps a few other areas of tax relief. The third and final leg is his desire to have high tariffs to make it difficult for Americans to buy goods from international companies, which he believes will stimulate more domestic production.

Let’s break those down. The regulatory reform is the one that gets me excited. This is often a tough issue because it is nuanced, and we don’t do nuance well in our modern society. The opponents of deregulation build straw man arguments about there being no rules. No one wants to live in a society with no rules, but there is something called too many rules. One problem we have in America is that we are continually making new rules and seldom (if ever) getting rid of old rules. The labyrinth of red tape makes it very difficult for people to start new businesses.

Over-regulation also leads to what economists call rent seeking. Wealthy corporations can lobby the government to enact rules that benefit them and make it harder for small companies to compete. As Milton Friedman noted in his 1962 classic, “Capitalism and Freedom,” there is a direct correlation between the amount of regulation is a society and the amount of inequality. In my opinion, the economic community unfortunately has not done enough work on regulation, because it is difficult to quantify the impact of rules.

In The Bible, God gave Moses 10 rules. The United States Code of Federal Regulations (CFR) contains more than 186,000 pages of rules. Maybe 10 is too few for our modern world, but certainly there is a number between 10 and 186,000 that would make for a clearer, fairer system.

Tax reform, especially corporate tax reform, was desperately needed when Trump was first elected in 2016. The United States had the highest corporate tax rate in the developed world, which made it hard for smaller companies in particular to compete with large corporations that could lobby for loopholes. That is historically the biggest issue with high tax rates: The rich, who are supposedly the target of high rates, use their connections to get loopholes…so it is the small companies that end up being hit by the high corporate tax, which reduces growth and makes it harder for them to compete. Corporate taxes also are a tax on employees. There have been many studies to show that companies simply reduce wages to pay for corporate taxes; when the tax is reduced, wages rise. This occurred during the first Trump administration when, for the first time since the 1980s and 1990s, the bulk of economic growth actually went to the middle class.

On the personal income tax side, the need for reform was much less when Trump took office in 2016 and his cuts were far less effective. His new ideas of no tax on tips and no tax on social security will certainly benefit specific people, but that is not the best way to structure a tax system. The ideal would be to have a fair system where everyone would “pay their fair share,” no more and no less. That means having a low overall rate with few, if any, loopholes.

This brings us to the third leg: Tariffs. I struggle to understand why Trump believes this is a good idea. It is inconsistent with his other two priorities, which are clearly designed to reduce government’s impact in our daily lives. Tariffs are big government at its worst, protecting favored industries while hurting the masses with higher costs and/or little to no access to desired products or services. We have written about and discussed this subject quite a bit and will continue to do so as necessary. Bottom line for our purpose here is that tariffs are a tax on U.S. consumers and will slow economic growth.

In his first administration, Trump led with tax reform. House Speaker Paul Ryan had already designed a Republican blueprint for tax reform, so it was relatively easy to get passed. This stimulated the economy. Many of America’s largest multi-national corporations had been keeping cash overseas because of the existing corporate tax system, and that influx of capital in particular jump-started great growth.

Next came the regulatory reform. In true Trump fashion he made a theatrical presentation of cutting the red tape. More substantively, the administration came up with a brilliant plan: For every new regulation, the government identified two older regulations that had to be removed. This kind of strategy makes enormous sense. Rules become outdated; we all intuitively understand this. We see examples of local ordinances still on the books regarding where one is allowed to tie up his horses downtown; there are plenty of old rules which could probably go away. I also have firsthand business experience dealing with rules that contradict one another. Modernizing while also streamlining the United States regulatory framework is the best way to cut down on those 186,000 pages while maintaining the rules we still need.

Combined these two initiatives brought us what most remember as “the Trump economy.” Growth went up dramatically, the stock market soared, and all was good in the world. GDP growth went from 1.5 percent to 2.9 percent. Then, Trump declared his war on trade. GDP growth in 2019, before Covid, came back down to 2.3 percent. People forget that initial drop, because Covid hit shortly thereafter and drowned out everything. However, it was clear at the time that Trump’s agenda had led to two big steps forward and one leap back.

This brings us to Trump 2.0. He campaigned largely on a return to his three-legged economic plan. However, this time there was far more emphasis on enacting trade barriers. There were also more targeted political promises. The no tax on tips, for example, will certainly help some, but it is not the well-balanced reform plan that would benefit all. He also unleased DOGE, which helped reduce the size of government, but to benefit the economy that needs to be accompanied by actual regulatory reform to reduce the intrusion of government into our daily lives.

The biggest change, however, is in the size of his ambitions and, more importantly, the order in which he has decided to tackle his priorities. This time he has led with tariffs, including an inconsistent message regarding their purpose. Many in his administration have suggested that this is a negotiation tactic to get better trade deals, yet Trump himself seems to suggest that the tariffs are permanent. He launched them all at once and with amounts much higher than anyone expected based on conversations with the administration.

This has caused turmoil in financial markets and a dramatic slowing of economic growth. The Atlanta Fed’s GDPNow measure is showing a negative growth rate in the 2025 first quarter GDP. The model, as of April 3, is indicating a drop of 2.8 percent. This has been exacerbated by imports of gold that are not in the actual GDP formula, so when adjusting for that, the measure shows a drop of 0.8 percent. Considering that Trump inherited an economy which was growing at 2.8 percent in 2024 that is a lot of damage in a short period of time.

Unlike the two steps forward and one step back of his first administration, this time Trump has started with the step backwards. There are many who believe this is on purpose; they point to the Reagan years, which began with a recession but ended with what was at the time the longest economic expansion in U.S. history. The belief is there will be short-term pain but long-term gain.

This could happen, assuming Trump follows through with his other two economic initiatives. Regulatory and tax reform will help stimulate growth and could come to the rescue. There will also be trade deals done, and it would be very surprising if these tariffs are not challenged in court.

The Constitution gives Congress the power to issue tariffs, not the president. While more and more of the authority of Congress has been transitioned to the executive branch, there are limits which Trump is certainly pushing. In fairness, Biden also pushed the limits with his student debt forgiveness, which the courts stopped.

This leads to another matter. Because all of this is being done by executive order, the next person in the White House could just reverse course. The long success of the United States and our system is largely driven by the slow mechanisms of the balance of power and the need to rule by consensus and get things done in Congress. This has kept us from bouncing back and forth from extremes based solely on who won the last presidential election. If Trump wishes to make a lasting change, then he needs to make Congress do its job and pass laws instead of just writing executive orders.

The order of operations and how things are done matters. Two steps forward and one step back feels much different than starting with one step back. Getting things through Congress as our system is designed may take a long time and require some compromise, but that has actually been the secret of our success as a country.

In the meantime, what are we to do as investors? Well, we must focus on what we can control. We have navigated rough spots before. When at sea it is best to try to avoid storms, but sometimes that is not possible. In those times, we just have to reduce sail and go through the storm. There is always a calm on the other end. We will make it through together.

Warm regards,

Chuck Osborne, CFA

~Order of Operation

We survived yet another election year. I don’t know about you, but I am glad not to see any more political advertisements, at least for a while. Politics is a full- contact sport and not for the faint of heart; mud-slinging both ways comes with the territory. Many sins no longer seem to even raise an eyebrow when in my youth they would have ended a politician’s career, but there is one political sin that still seems to stick: If you are interested in politics, then you best not get caught flip-flopping.

I’m not talking about my personal preference for footwear. I grew up in South Florida; who wants to wear shoes when it is always hot? No, I am talking about flip-flopping of political positions to go along with the preference of the day. The examples are too numerous to count, so much so that the “he was for it until he was against it” phrase is now a political cliché.

Politics is not the only place where flip-flopping takes place. The market has been flip-flopping for a while now, and while most seem not to notice, I am really getting tired of it. If one pays attention only to the S&P 500 index, then it may not seem like there is any inconsistency. This index, which many use as that proxy for the market, just keeps going up quarter after quarter, or at least it has over the last couple years. However, as I have said more times than I can count, it is what happens underneath the surface that really tells an investor what is happening.

After years of only a handful of technology companies accounting for the vast majority of gains, the market finally broadened out in the last quarter of 2023 and continued that trend in the first quarter of 2024. To break this down, let’s look at a better proxy for the entire stock market. Most institutional investors use the Russell indexes as their market proxy. Russell starts with a total market index, which is made up of 3000 of the largest companies whose stock is publicly traded. They break that down into large companies, represented by the largest 1000 of those companies, and small companies, represented by the remaining 2000. These are simply named the Russell 1000 and Russell 2000.

Russell then breaks down these indexes by investing style. There are two broad styles used to select stocks for investment: growth and value. The growth style is about investing in companies that are growing more rapidly than the market average. These investors tend to look for companies that are on the cutting edge and that have compelling stories about how their products will change the world. In theory, these investors will pay any price in order to be part of the cool crowd.

The alternative style would be value. Value investors are bargain shoppers. They have no problem wearing last year’s styles if it saves them a few dollars. They want to buy stocks when they are on sale. They tend to invest in older, more stable companies, and may even purchase shares when there is some bad news for the company that they view as temporary.

Institutional investors find this breakdown useful because we can then focus on large growth and value companies, and small growth and value companies. This helps us understand what parts of the market are working and what is not. In the first quarter of 2024, everything worked. Large growth was the best place to be with an 11.4 percent gain, but large value returned 9 percent and small companies were up nicely as well. We had a broad-based market rally.

Then the market flipped. In the second quarter of 2024, the big technology companies in the large growth category were the only stocks that worked. The S&P 500 index was up 4.28 percent that quarter, but when we broke the market down into size and style, large growth was up 8.3 percent and every other category actually lost money. The returns were once again concentrated all in one area.

Then the market flopped. In the third quarter of 2024, the S&P 500 was up 5.89 percent. When we look at the breakdown, small value stocks were the best place to be up 10.2 percent. Small growth stocks were up 8.4 percent and large value stocks were up 9.4 percent. Large growth stocks were still positive, up 3.2 percent, but they shared the glory with the rest of the market and were actually the worst place to be. Once again, we had a broad-based rally in the market.

Then the market flipped. In the final quarter of 2024, large growth finished up 7.07 percent while large value was down 1.98 percent. Small growth was barely positive, finishing up 1.70 percent, and small value finished down 1.06 percent. Here is where it gets really interesting: It looked nothing like that through the month of November. Through November small companies had been the best place to be while large companies were also up nicely, with growth and value within rounding error of each other. Then December hit and the entire market dropped 7 to 8 percent except for large growth, which was up just under a percent. The market didn’t just flip; it flipped out.

Why? To tell the truth I don’t really know, but I do have a theory. We will call it the double I theory. Investors are irrational idiots… just kidding. Investors fear inflation and interest rates. Through this period the 10-year Treasury rate climbed from 4.19 percent to 4.58 percent, accompanied by speculation about tariffs and deportations both causing inflationary pressures. These arguments suggest that tariffs will simply make prices go up, which is the very definition of inflation. The deportation argument is that deporting immigrants who are here illegally will cause a labor shortage, meaning companies will have to pay higher wages, which will lead to inflation.

Let’s take the tariff argument first. I have said repeatedly over the last several years that I do not know how economics is being taught today. I started that refrain when I read an article suggesting that most schools no longer teach price theory as part of the economics curriculum. If true, this means they are no longer teaching supply and demand, which would be a shame since that is one of the very few economic concepts that actually holds true in real life. Prices are determined by supply and demand. Contrary to popular belief, business owners cannot just raise prices whenever they want. This could be a newsletter unto itself, but for this conversation it suffices to understand that businesses cannot simply pass the tax along to the consumer and expect to sell the

same amount of goods. They will pass on what they can, and then eat the rest. They will then attempt to lower costs, primarily by cutting wages, and finally they will accept lower profits. Lower profits are a disincentive, so they will then produce less, at least for the U.S. market. This will cause both a reduction in demand and a reduction in supply. Consumers will also seek substitutes. We wrote in the past how high-fructose corn syrup became a replacement for sugar largely due to sugar tariffs. Those tariffs, which have been in place for decades, did not cause inflation (well, maybe waistline inflation, but not currency inflation).

Tariffs cause all sorts of economic problems, but the suggestion that they drive inflation is intellectually lazy. Tariffs were a significant contributor to the Great Depression and certainly one of the reasons it was a global event. An economic depression is associated with deflation, not inflation. Tariffs and trade wars cause a reduction in both supply and demand, which leads to deflationary pressures.

The deportation causing inflation idea is a bit of a stretch to begin with. There is very little evidence that wage growth leads to inflation, because wage growth is almost always associated with increased productivity. This argument also assumes that the vast majority of immigrants who are here illegally are gainfully employed in jobs that American citizens and immigrants who are here legally would not do for a similar wage. That is a lot of assumptions.

Time will tell what happens on this front. What we do know is that in prior periods when there has been a crackdown on immigration status, including a large number of deportations, it has not triggered inflation. We can look most recently at the Obama administration and their deportation efforts: We had plenty of economic issues in those years, not the least of which was the financial crisis they inherited, but inflation was nowhere to be found.

If I am correct about the lack of inflation triggers from these policies, then why did longer-term interest rates go up? Because the economy is growing at roughly 3 percent, and the belief is that the future will be even better. This should be a bullish phenomenon, not a scare; and that brings us back to our flip-flopping market.

The past 16 years have programed investors to believe that when the economy is bad, we should invest in large high-growth companies because these companies can grow earnings even if the economy as a whole is suffering. Older, more established companies and smaller companies are more dependent on a strong economy to help them grow. When the market broadens out, it reflects a belief that economic conditions will be good for the foreseeable future.

Will the market flop back to broadening out as we enter 2025? That is what should happen, and it should do so for two reasons. First, the market is expensive, and most of that high cost is reflected in the price of those large growth companies. The rest of the market isn’t exactly cheap, but the other areas are closer to average valuations, which should lead to better relative results. Secondly and probably more importantly, the economy is doing better than Wall Street wants to admit. Next year earnings estimate for the favored large companies is for 15 percent growth, while Wall Street believes that small companies will grow closer to 3 percent. The former may be a bit of a stretch, but the latter seems overly pessimistic.

All these factors point to the market broadening in 2025. Of course, the market can stay irrational for a long time. That is what keeps us on our toes. Regardless, at least we know there won’t be any political ads until 2026, and the only flip-flopping we will have to deal with will be in the markets and on the beach.

Warm regards,

Chuck Osborne, CFA

~Flip-Flop

THE COINCIDENCES IN LIFE ARE AMAZING. I was a young economics student when the Soviet Union began to collapse, and it was fascinating. We had a visiting professor from Moscow teach a class on the economics of communism, which was one of the best classes I took in college. I was so fascinated that I accidently ended up with a minor in international studies. During my last semester I did an independent study on how former Soviet states should transition from the command economy to a free economy. I argued that they should follow the Polish model, which, put simply, was the rip-the-Band-Aid-off approach. My professor did not like my conclusion, but history did, and that explains why I pursued a career in investment management over academia. In my world one gets rewarded for being actually correct, versus politically correct.

In my early career this focus was little more than an interesting talking point. It certainly did not help me get my job at Invesco. Then one day, almost a decade after writing that paper, my boss stormed into my office and told me that I was going to Poland. What are the odds?

I arrived in Warsaw in January. (Even people of Polish decent don’t travel to Warsaw in January.) The manager of the Warsaw office took it upon himself to be my tour guide. He took me to the old part of town, which looks like a lot of old European cities, and explained it was actually a source of embarrassment for many Poles because it was a replica. The Nazis had destroyed Warsaw, and what I saw had been rebuilt.

My tour guide had been a young boy during that period, and we discussed what it was like to be under Nazi occupation. He was defensive about the atrocities which took place in Poland in places like Auschwitz. People today think they could have stood up to the Nazis, but that is much easier to do in the safety of history class; it is a little different when you fear for your own life.

He remembered being liberated by the Soviets. Everyone in Warsaw celebrated at first, but then they transitioned to communist rule. I asked him how the Nazis and Soviets differed, and with tears in his eyes he said, “The only difference was who they chose to murder.” Our modern perception is that the extreme right and the extreme left are opposites, but the truth is they are the same; they were then and they remain so today. We then drank a toast to Lech Walesa and the Solidarity movement that allowed him to be showing his city to his new American friend.

It was refreshing working in Poland. No one appreciates economic freedom more than those who know firsthand what it is like not to have it. They knew full well how fragile freedom could be – a lesson we seem to have lost in modern America.

As with so many subjects which should simply be what they are, economics has become politicized in our modern world. The perception is that people on the right are for capitalism, whatever that means, and people on the left are for socialism. It reminds me of a George Will column in which he made the argument that young people claim to like socialism because they like being social, and that is what they think it means.

I have no idea how they teach economics today, but when I was a student we did not use the terms capitalism or socialism, which I believe is for the best if one really wishes to understand the economic spectrum.

On one end of the spectrum we have a free economy, which is an economy with no government interference; on the other end we have a command economy, which is completely controlled by a governmental central power. This is the spectrum.

In the modern world the closest we have probably gotten to a free economy would have been British-controlled Hong Kong. There were very few rules and regulations, and as a result it became the business center for much of Asia. Nobel Prize-winner Milton Friedman discussed Hong Kong’s success in a book co-authored with his wife, Rose, “Free to Choose.” It was his favorite example of the power of freedom in the economy.

The closest we have come to a true command economy was the Soviet Union. Everything in the Soviet Union was controlled by Moscow. However, even in the days of Stalin, it is nearly impossible for the government to control everything as people will find a way. There was a significant black market in the former Soviet Union.

In reality, most economies exist somewhere along the spectrum between free and command. Our system in the United States has always tilted closer to being free. How free our economy should be – or, put another way, how limited the role of government should be – has been hotly debated throughout our history.

That this debate fits neatly along partisan lines is, however, a myth. The political spectrum, unlike the economic spectrum, is a circle, not a line. Understanding why would take far more space than this newsletter avails, but history tells us this is the case. If one starts with a free economy, it matters not which way she turns politically. She can go right or left, and either way, she will eventually end up in a command economy.

For the first half of America’s history we were pretty close to being a totally free economy. The 19th century was a time of great economic growth and expansion, culminating with the “Gilded Age” as enormous fortunes were gained, and lost. The average annual wage of an industrial worker rose 59 percent in the decade from 1880 to 1890. However, there were also significant recessions. The Panic of 1873 and the Panic of 1893 caused great concern. The financial crisis in 1873 was known as the Great Depression until the crash of 1929 and the decade of the 1930s usurped that title.

While great wealth was produced, the era of the so-called robber barons saw industries monopolized. America started taking steps towards a command economy as antitrust laws sought to break up monopolies and create a more even playing field. In Europe, economies moved even further towards command as the philosophy of Karl Marx and Friedrich Engels became widely adopted. Economists like John Maynard Keynes sought ways to preserve the free economy against the Marxist ideology by trying to smooth freedom’s rough edges.

Governments could use government spending to ease the suffering of recessions. Later economists like Milton Friedman argued that interest rate policy was more effective than government spending. In addition, countries adopted social safety nets to help those in poverty. These things were done with good intent to preserve what was so good about a free economy.

In Europe it mattered little if one was occupied by far-right Nazi Germany or far-left Soviet Union; the outcomes were the same. Over 100 million lives were lost to the two great evils of the 20th century, and the one thing they had in common was the command economy. Is that a coincidence? Friedrich Hayek didn’t think so, and he had some knowledge, having a front-row seat to the rise of fascism. His conclusion that concentrating that much power in government will eventually lead to a tyrant taking power fits both logic and history.

The United States of America went down the path of Keynes and then Friedman, maintaining our free economy while using government policy to smooth the rough edges. We also were the hero of that century; we seem to have forgotten that with all of our flaws, we were still the good guys who helped our Allies defeat the extremism of both the right and the left.

Our challenge is one of nuance, and unfortunately we are not very good at nuance anymore. It was good that we broke up monopolies and helped people with a hand up during time of economic distress. But how far down the road towards the command economy becomes too far?

As in Europe, it matters not if we go to the left or to the right. John F. Kennedy was a man of America’s left, but he believed in the power of a free economy. Ronald Reagan was a man of America’s right, but he too believed in the power of a free economy. Lydon Johnson was a man of the left who believed in the command economy, followed by Richard Nixon, a man of the right who believed in the command economy. Jimmy Carter, a man of the left, started our move back towards freedom.

After Reagan, George H.W. Bush held us steady and so did Bill Clinton – a man of the left who said Reagan was right and, “the days of big government are over.” If only George W Bush had listened. W, a man of the right, moved us well down the path towards command. Barack Obama, a man of the left, campaigned on change, yet the only economic change he made was to push down hard on the gas pedal and get us moving even faster in the direction in which W had first turned us.

Donald Trump, in his first administration, moved us back towards a free economy and got the good economic results that Americans my age expect, but younger Americans didn’t know were possible. Joe Biden reversed all of that, and here we are today. What will the next administration do? Their track records suggest that Kamala Harris will move us even further towards government command of the economy and Donald Trump would do the opposite. However, Harris keeps flip-flopping on all of her positions and Trump is talking more like a big-government command guy than he did eight years ago. It is hard to know.

I can tell you this: It is policy that matters. What do they actually do? It matters little what color jersey they wear. Modern politicians don’t lead, they follow. They do what they think the voters want. Did Bill Clinton really believe in deregulating banks? I have no idea, but in the 1990s that was popular and he did it. Did Trump really believe in Paul Ryan’s tax and regulatory reform plan? I don’t know, but it was popular, and he did it. All the economic success of his pre-Covid term was driven by it. We get the government we demand. It is up to us.

At the margins, all of this simply leads to better or worse economic conditions. However, today there is a lot of talk about extremism on both the left and the right. Much of that is hyperbole, but to the extent that it exists, we should all remember what my Polish friend witnessed: the only difference between the extreme left and the extreme right is who they choose to murder. The 20th century was the era of the command economy. It was also the bloodiest century in human history. We would do well to remember that. The free economy is about a lot more than just maximizing growth. So, no matter if you are of the left or the right, we need to all do our part to keep our respective political sides moving up towards freedom.

Warm regards,

Chuck Osborne,
CFA, Managing Director

Authored October 4, 2024

~How Politics Relates to Economics

Like father, Like son. In May, my son Charlie anchored his high school’s 4×800 relay team during the state championship track meet. When the third runner handed him the baton, they were in sixth place. When he completed his two laps, they were in third. They broke a school record and made the medal podium for the first time in the event. His split time would have won the state championship in the individual race by almost two seconds.

Many who know me well are now wondering what I am talking about with the like-father-like-son stuff? When I ran, my coaches would put away their watches and bring out the sundial…speed is not what my son and I have in common. However, after the race there is a picture of Charlie’s teammates on the podium without him, and if you look really hard you can just make out his image behind the podium, vomiting.

That was an annual ritual when I was in high school. Football camp began each and every year with the running of the 800, and every year I would show up out of shape from having fun all summer and would have to push myself to make the required time for my position group, which I always did… then I would go under the bleachers and puke. My brother has similar stories, and we joke about the Osborne Puking Gene.

In these cases it comes from pushing ourselves right to our limits, which in Charlie’s case was to win a medal. For me, it was because I showed up out of shape. I grew up before the days of “wellness.”

Most employers these days have wellness programs. They started largely to give employees an incentive to stop smoking. By quitting smoking, they could save money on health insurance. They quickly expanded to other healthy habits like diet and exercise, again with the incentive to save some money on insurance.

In the last several years this has spread to financial wellness – trying to get employees to improve their financial health along with their physical and mental health. The idea is fantastic, but unfortunately it falls under the category of, “You can lead a horse to water, but you can’t make him drink.”

Cerulli Associates, a Boston-based financial industry research firm, recently conducted a study on financial wellness programs. Cerulli found that 90 percent of retirement plan providers offer financial wellness programs, and 71 percent of plan sponsors have included these programs in their plans. That is where the good news ends. Fewer than 20 percent of the employees have actually used these programs, and those who have used them do not rate them very well. Only 41 percent say they were helpful, which isn’t very good.

It may be helpful to explain what experts mean by financial wellness. In the same way that physical wellness begins with diet, financial wellness begins with budget. No one likes to talk about these things; it is our nature to just want a pill that allows us to eat whatever we want and still be thin. Likewise, we would like to spend on whatever we want and still be financially sound. Unfortunately, that isn’t how life works. Being physically healthy starts with a good diet and being financially healthy starts with a budget.

When one is young there is often the idea that if I exercise enough I can eat whatever I like, but as we age, we learn the hard way that one cannot out exercise a bad diet. Similarly, we often think we just need to make more money, but many people learn the hard way that one cannot out earn bad spending habits. Just look at professional athletes. These individuals make millions of dollars while playing their sport, and yet there is nothing more common than the broke former athlete.

If one wants to lose weight, then he must burn more calories than he consumes. Similarly, if one wants to gain financial wellbeing, then he must spend less than he makes. There are no short cuts and no magic pills, and unlike dieting there is no magic shot either. That is the bad news.

The good news is that what is needed is a good diet, but not necessarily a perfect diet. Similarly, we need a good budget, but this doesn’t mean the budget has to be perfect. In fact, for the vast majority of us, “perfect” is unattainable and the idea that one must be perfect is what keeps a lot of people from ever trying to be better to begin with. How do we put ourselves on a good budget?

The first step is knowing where the money is going in the first place. I served on a board a few years back with a gentleman who would often say, “If you want to improve something, you must measure it.” There is a great deal of truth in that. The first step is simply figuring out where the money is going in the first place. This can be done, and has been done for centuries, with pencil and paper. It does not have to be fancy; it just has to work for you. Today we have lots of resources at our fingertips, and there are many budgeting apps that can be put right on your phone. However one does it, this step is necessary. For some this needs to be done only for a few months. Once they see the real picture, they can go from there without tracking every dollar. Others need to continue this indefinitely, it just depends on the personality.

Once the spending has been recorded, then we can make a realistic budget. One should be able to see where overspending is occurring and simply correct by becoming more intentional. The goal of a budget is to calculate how much money one can set aside for her future. Depending on where she is beginning, that could mean debt reduction or it could mean savings and investment. Either way, the point is to determine that number, and once she has it, the next step is to pay herself first. That amount should go towards her future before any other expense is paid. This is step one on the road to financial wellness.

Step two is to build an emergency fund. Why? Because stuff happens. Life rarely goes as planned. There is a horrible statistic from Bankrate which says that 56 percent of Americans lack the ability to pay for a $1,000 emergency. It does not take a lot to have an $1,000 emergency, especially if one owns a house or even a car. How much should one have in savings? We would suggest anywhere from three to 12 months of expenses, and the difference would be based on risk tolerance. If one is on the lower end of this scale, then he may have to tap into longer term investments if a serious emergency were to take place, which is why we consider this part of risk tolerance. I would say that less than three months is probably not enough, and when one gets over 12 months, then she is not allocating her funds wisely. In between those numbers there is no one right answer, it will just depend on the individual.

What if there is a lot of debt? Debt is to the budget what sugar is to the diet. It needs to be kept under control. There are those who claim that no one should ever have any debt, but I do not find that very realistic. Mortgage debt is perfectly reasonable as long as one keeps it well within their budget. Using debt to purchase a car is more debatable; some say never do it, and I certainly understand that. However, it may be necessary or a more efficient use of assets depending on interest rates. There are few things that help a budget as much as not having a car payment.

Today we have to discuss education debt. The cost of education today is criminal. I have written about this before, but if the education industry were any other industry, they would be accused of price gouging, but for some reason we as a society have put up with it because it is education. The truth is there are very few academic degrees worth going into debt to earn.

The biggest debt issue is the credit card. It is often the frequent snacking that ruins a diet, it is almost always the credit card spending that ruins a budget. Credit cards should be paid off in their entirety every month. If one lacks the discipline to do this, then he needs to cut those cards up and close those accounts.

Regardless of the form of debt, one has to balance paying off the debt while building savings. There are pundits out there who preach total sacrifice until the debt is paid off. The problem I see with this approach is that there is a risk of the whole endeavor being broken by an emergency. If one has neglected savings entirely in an attempt to get out of debt quickly, then she risks an emergency which she can only handle by using debt, which is a very discouraging setback. I believe one needs to balance the two and focus on making consistent progress as opposed to obsessing on getting completely out of debt as soon as possible. Don’t misunderstand, that is the ultimate goal; However, one did not get into trouble with debt overnight, and one is not going to get out of it overnight.

The next step is to start investing. For most that begins with contributing to their retirement plan at work. If one’s employer matches contributions, then she should contribute at least up to that match. The most common example would be an employer who matches 50 percent up to 6 percent of income. Many get confused by percentages, so I prefer to talk in dollars and cents. This means that for every dollar one contributes into the retirement plan, his employer will give him 50 cents. If he does not contribute the full 6 percent, then he is leaving money on the table.

However, that amount is probably not enough to fully realize one’s retirement goals. Many experts will say that one has to contribute 15 percent of their income in order to fund retirement; I disagree. I would suggest contributing 10 percent of your income. Of course, there is no such thing as too much money to retire, but I have never had a client who saved 10 percent fall short of retirement. I have had many clients have a non-retirement related goal which they cannot fund because they put all of their investments into retirement. Life happens and to be honest, many people find that retirement is not all it is built up to be.

The key in my opinion is balance. If one can save more than 10 percent, then the excess should probably go into a brokerage account. This may not be as tax advantaged as a retirement account, but it provides the one thing that is often missing in financial plans: flexibility. The future is always uncertain, and it is hard to overstate the value of flexibility.

These are the steps to financial wellness. Like physical wellness, they are more of a journey than a destination. In both cases it is an ongoing process, and there will be setbacks. I no longer get sick every time I run. In fact, this Fourth of July I ran in the world’s largest 10K, the Peachtree Road Race. This was my 17th time running. I will freely admit that I was in worse shape this year than I was last year; in fact, I am in the worst shape I have been in years. This past year has been challenging, but that is life. I could beat myself up and just give up, but that is not the best response. Wellness, in all of its forms, is a journey. There will be ups and downs, forward progress and setbacks. When the setbacks happen, we must brush ourselves off and get back on course. I will run the Peachtree for the 18th time next year and I will be better than I was this year. That is what wellness is all about.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Are You Well?