To paraphrase a popular expression: A crisis does not create character, it reveals it. The beginning of the Covid19 crisis reminded many of the days immediately after September 11. Those days were marked by a sense that we are all in this together and we need to set aside our differences and come together.

That didn’t last too long. A few weeks back the top headline on CNN’s website was, “Can you believe what Georgia’s governor just said?” It caught my attention for two reasons: First I live in Georgia, and second, we are in the middle of a national crisis, who cares what someone said?

It turns out that Governor Kemp had commented on a CDC study which was published that very day stating that data had shown that people infected by the coronavirus are contagious before they are symptomatic. CNN argued this proved that Kemp is an idiot because “everyone” already knew this. Actually, most experts suspected this was the case, but it can’t be known until the data confirms it. Either way, what possible public good comes from publishing a story based on a partial quote taken completely out of context for the purpose of ridiculing of someone?

It was then that I knew our “we are in this together spirit” was gone. Now it has become a political litmus test whether you think we should reopen the economy. That is shameful. In my daily life, I wonder where this division comes from. I don’t see it in my personal interactions. I believe that most of this fallacy is media-driven. We have no news in our world today, only propaganda.

The biggest piece of propaganda is my new pet peeve: people saying this is “unprecedented.” Pandemics are not unprecedented. They may very well be the most precedented thing in human history. Smallpox killed more Colonial soldiers than British bullets. It has been only in the last few generations that infectious disease has not been the number-one cause of death for human beings. Modern medicine has cured most of them and they will beat this virus as well. Nothing like this has happened in most of our lifetimes, and that is the secret to propaganda. Propaganda has to have an ounce of truth for it to work.

For example, President Trump never suggested ingesting Lysol. During one of the recent press conferences he was discussing using disinfectants like Lysol to clean surfaces and then turned and asked his experts if that could be a cure. He later claimed that comment was a joke. It was a reporter who asked if he was suggesting ingesting Lysol and the answer was a dismissive no. The propaganda is that Trump suggested drinking Lysol. It isn’t true, but when one reads and hears over and over again that he did it, then people who did not actually watch the press conference believe it. The Washington Post reporters who were there did not even mention the comment in their re-cap, but later pounced on the story to capitalize on popular interest.

As Covid19 data comes in from around the world, it is also twisted. Sweden never closed down, while New Zealand reportedly has had the strictest lockdown rules in the world. CNN published an article praising New Zealand and damning Sweden. New Zealand used “good science” while Sweden acted stupidly. The same day, The Wall Street Journal published an article saying the exact opposite. Both articles were guilty of cherry picking data. Sweden actually has had a better results mortality-wise than the average European country, but CNN compared them only to some neighbors whose data was better. New Zealand has had an effective response, but no more than Australia, who did far less damage to their economy.

This is actual data being twisted, yet it is even worse with models and projections. Does anyone still remember the model that said 2.2 million Americans would die from Covid19? Similar models for Sweden suggested that 40,000 would die by May 1 and 100,000 by June if they did not lock down. They did not lock down, and according to The Spectator in an article published earlier this week, there have been 2,680 deaths thus far while the daily number peaked two weeks ago. I said this early on and I will repeat it, the “academics” who make such predictions should be held accountable when they are that far off. They should lose their jobs, yet media outlets gladly publish these models as if they are facts…

Unless they don’t like the facts. Last week CNBC published the results from their survey of economists. The consensus of all the economists they surveyed is that we will see 16 percent growth in the third quarter as we bounce back sharply. The story they are pressing, however, is that the recovery will be slow. So, after mentioning the survey results, they highlighted the one economist who saw third quarter still being negative and interviewed her on-air. She is an outlier, but her view fit the story so she got the airtime.

So what are we to do? Simple:  Don’t believe everything you read. Exercise critical thinking. No matter what source you read, look for data, for facts, and ask: Is that the whole story? Don’t be quick to believe things just because they sound good. Look for the bias and you will get closer to the truth. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Don’t Believe Everything You Read

It is amazing how often we end up being afraid of the wrong things. During our COVID-19 television viewing we stumbled across a TED Talk by a gentleman named Gever Tulley. Mr. Tulley is an author and educator and the title of his talk was, “5 Dangerous Things You Should Let Your Kids Do.” According to his research, the top-five fears of parents are as follows:

1) Kidnapping, 2) School Snipers, 3) Terrorists, 4) Dangerous Strangers, 5) Drugs

The actual five top dangers to kids are:

1) Car Accidents, 2) Homicide (familiar), 3) Abuse, 4) Suicide, 5) Drowning

Kidnapping by a non-family member, the number-one fear of parents, does not rank in the top 5,000 risks to children. The problem is, buckling the seatbelt, family interventions, and swimming lessons are not going to move the needle on the evening news TV ratings, but a good kidnapping story will win Pulitzers.

We see the same thing in my business. Investors fear stock market volatility, when the biggest risk to their future is the low yield on bonds. Many who claim to be avoiding risk are actually risking the most by investing in a way that almost guarantees they will not have enough…not to mention the numerous products and schemes which lure investors by playing upon their fears, only to lock them into costly traps.

So often we are afraid of the wrong things, because our sense of fear comes from media distortions. This crisis is a case in point:  Anecdotally I have heard many neighbors and friends who are terrified of getting the coronavirus. They are under the impression that it is a death sentence. I get it, the media spends all day every day counting the bodies, and that has an impact. Perhaps some perspective will help.

As of my writing, Worldometer.com reports 129,843 deaths from the COVID-19 globally. On March 23 the Brookings Institute published a paper on global causes of death. As of March 22, there had been 12 million deaths globally from causes other than COVID-19. Before the pandemic was known, people who study such things (and you think your job is morbid) estimated that there would be 60 million deaths in 2020, with 18 million people dying from heart disease, 10 million from cancer, 6.5 million from respiratory disease, 1.6 million from diarrhea, 1.5 million from car accidents, 1 million from HIV/AIDS, and 800,000 from suicides.

It is hard to know at this point how much COVID-19 will impact the total number, but understandably this new disease is getting far more attention than, say, diarrhea. Can you imagine the fear created if every case of diarrhea was followed in the same fashion? People would be storming emergency rooms every time they had a somewhat loose bowel movement.

The truth is, for the vast majority, COVID-19 is not a death sentence. If the most aggressive estimates are correct (and they do not appear to be), 97 percent of the people who get the disease will survive, and 84 percent will have mild symptoms that keep them at home. In Germany, where they have done some mass testing, those numbers are 99.6 percent survive and 96 percent have mild symptoms, with more than half having no symptoms at all.

So why are we all being told to isolate? I have said this numerous times during this crisis and will say it again, I am not a medical expert, but I do understand crunching numbers. I suspect I have spent far more time with statistical curves than the average medical doctor. “Flattening the curve” does not reduce the amount of data under the curve. The danger of COVID-19 is not the mortality rate, it is the incubation rate. It spreads so quickly that even though those with severe symptoms are a small minority, they are enough to overwhelm our medical system. Yes, flattening the curve will save lives, but only because not flattening the curve would cause some severe cases to not be able to obtain treatment. It does not save lives because fewer people get the virus. That would be creating an entirely different curve with far fewer cases. No medical official has ever suggested this even being a possibility. It saves lives by slowing the spread to a pace our hospitals can handle.

I am simply repeating what we have been told by the medical experts, but this is not how the media has spun social distancing. This may be splitting hairs, but it is an important hair to split, because at some point we have to come out of our holes. There has to be an end game, and that end game will not happen if people fear for their lives should they be exposed.

Thus far, the U.S. has actually done well in flattening the curve. I know we keep getting compared to countries like Spain and Italy, but a much more realistic comparison is the European Union. As of this writing, we have had slightly more than 26,000 deaths versus almost 80,000 for E.U. countries. Once the curve is flattened, we will have to get back to work. To do this we will need more testing, and everything else people have been calling for, but most importantly, we need a far more realistic assessment of the risk. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Afraid of All the Wrong Things

There are many modern day subjects about which I know very little; infectious diseases would be one of those subjects. When I was a student at Wake Forest University, I was required to take a science even though I was an economics major. Wake Forest, correctly in my opinion, believed that to be educated meant to have a well-rounded base of knowledge in many different fields. I chose to take biology…and I chose poorly. If it were not for lab and my future-doctor fraternity brothers, I would have never made it out alive.

Similarly, I could not fill a thimble with what I know about the climate. Weather is not a huge concern of mine. If I want to know what the weather is, then I stick my head outside. This morning it was more brisk than I expected; I’ll find out about tomorrow when I wake up in the morning.

I say that to let you know my qualification, or lack thereof, when it comes to climate change or COVID-19 predictions. I don’t know a thing about the subject matter. What do I know? I know how to crunch numbers. Today it does not seem to matter what the topic, everyone believes they know how to do what I do – crunch numbers. It does not matter if it is the climate, professional sports, or our current crisis. People are crunching numbers.

My profession has been number crunching for a long time, and those of us who have been around as long as I have understand both the value and the problems with mathematical prediction models. The first thing to realize with models is that whatever answer they give, it is guaranteed to be wrong. This is a given. Real life never follows the model exactly, so being absolutely correct is not even a question. The question is, how wrong is the model? The more one uses mathematical models, the more she thinks in ranges of possibilities and not absolutes.

When we use models to help make decisions at Iron Capital, people’s wellbeing is at stake. If our model is way off, then clients lose money. I don’t mean experience down markets like we have right now, I mean permanent loss. There are consequences in my business to being glaringly wrong. We have built in accountability, yet many others do not seem to have any.

The NBA season is on hold, but several years ago Philadelphia’s team went through a “process” all governed by “analytics” and they started by losing on purpose to get better draft picks. They now have a very talented team mired in a culture of losing. Where is the accountability?

Of course, that is just basketball. The climate is far more important. In 2009, politician John Kerry somewhat famously said that the North Pole would be ice-free in the summer of 2013. I doubt he just made that up, so while I couldn’t find an actual study which predicted this, I’ll give the former senator the benefit of the doubt. If you Google the ice cap, people are now wondering if this will be the year. If the climate keeps changing we may indeed see ice-free summers in the North Pole, but in my business, the word for being wrong by a decade or more is called being unemployed. Where is the accountability?

This leads us to our current crisis. The real coronavirus health crisis, which has led to an economic crisis. This economic crisis, which has been caused by the choice to take the threat of this virus extremely seriously, was led largely by predictions of more than two million people dead globally. Just this past weekend the CDC guidelines for social distancing were extended until the end of April as experts have told the President that as many as 250,000 Americans could die of this virus.

Today, according to Worldometer, there have been 5,145 deaths in the U.S. and 49,249 deaths globally. To get from here to where these experts are projecting, two things have to happen: Far more people must have the virus than is actually being reported, and the mortality rate must stay the same as it is when calculated using just the known cases.

Again, I don’t know very much about this disease, but I do recognize two data assumptions that are in direct opposition to one another. If far more people have the disease than have been counted, this means the mortality rate is lower than has been reported. Last week two Stanford professors estimated that it could be as low as 0.01 percent. If that is even close, then we will not be reaching the 250,000 number.

If the virus is as deadly as the current mortality rates suggest, then we must have a pretty good handle on the numbers of infected…in which case, we are not reaching the 250,000 number. One of these two things can be true but both cannot, and you do not need to be a doctor to understand that.

The so-called Murry model, published by the University of Washington, predicts a range of 38,242 to 162,106 deaths in the United States. I believe that large of a range illustrates how little anyone really knows about what the future holds. What we do know is that we are undertaking a lot of pain, more than 9.8 million newly unemployed in the past two weeks alone, because of these predictions.

If they prove to be wrong, the people and organizations that made them need to be held accountable. At least that is my perspective.

Stay well and stay safe,

Chuck Osborne, CFA

Managing Director

~Figures Lie and Liars Figure

There are so many things happening at once and there are so many messages to share that this Perspective may bounce around a bit. With that warning out of the way, let me go to my first thought…

With yet another potentially record-breaking day of pain at hand, there is a small comfort. The end of bear markets are marked by capitulation – a sudden wash of irrational selling. Last Thursday and today appear to be just that, and this should mean we are close to the end. Of course, this situation is unique in that it has been brought about by a health crisis and not any underlying economic issue, but nonetheless, we appear to be forming a bottom.

The speed of the rebound is usually similar to the speed of the downturn. Obviously there are no guarantees when trying to predict the future, but historically that has held true, and it certainly makes sense in this case as the underlying economy was strong heading into the Covid-19 crisis.

This crisis is causing a great deal of pain in the markets, but it exists outside the market, and this led to my second thought. Over the last two weeks, I have heard many pundits talk about a lack of leadership out of Washington. As with most political talk it has been colored by the source’s political leanings. I’m not going to get into that swamp; we can all make our feelings known soon enough this November. No, there was something more that I noticed in the midst of all this talk:  most of America has voluntarily taken action.

It reminded me of a story about Hendrick Kraemer, a Dutch missionary. He was in his home of Holland as World War II broke out. The Gestapo was rounding up Jews and sending them off to concentration camps. Late one night, a group from his community came to Hendrick for advice on how they should react. He told them, “I am not going to tell you what to do, but I will tell you who you are. If you know who you are, then you will know what to do.” That night, the Dutch Resistance was born.

Well, we are America, and perhaps no one has ever described us better than Alexis de Tocqueville in his work, Democracy in America. “Americans of all ages, all conditions, all minds constantly unite.” He went on to say, “Americans use associations to give fetes, to found seminaries, to build inns, to raise churches, to distribute books…in this manner they create hospitals, prisons, schools….Everywhere that, at the head of a new undertaking, you see government in France and a great lord in England, count on it you will perceive an association in the United States.”

Almost 200 years after Tocqueville wrote about the miracle that is the United States of America, the NCAA did not need “leadership” to decide to cancel their number-one source of revenue. The NBA did not have to be commanded to suspend their season, countless businesses and associations did not wait to be told to postpone or cancel their gatherings. If you know who you are then you know what to do, and we are America. While this time may be scary for numerous reasons, it is also a reflection of who we are. One of my colleagues from a board I serve on said it best last week, “We are all coming together by staying six feet apart.”

Having said that, my next thought does go to the government reaction, namely the Federal Reserve, who over the weekend lowered the Fed funds rate by a full percent and announced the beginning of a new round of quantitative easing. The market reaction was negative, to say the least. This is not leadership; this smacks of panic, and that is exactly what the market sensed.

This leads me to my final thought. Humankind always seems to make its biggest messes when we try to defy nature. This whole crisis is a reminder that it isn’t natural to live free of diseases. It begs the question:  by trying to eradicate every threat, are we actually creating stronger threats? I’m not a doctor so I have no idea, but it does seem like this is true with economics. It is not natural to live without periodic recession, and it seems that by doing all in its power to avoid the inevitable, the Fed may be causing stronger downturns.

Cutting rates won’t help solve a medical crisis. All the Fed is likely to have done is plant the seeds for some unintended consequences a decade from now. I hope I’m wrong, but sometimes the best way to lead is to just get out of the way. After all, this is America, the land of the free and the home of the brave. With freedom comes responsibility, which we have seen from the private sector. We will bravely face this crisis like every crisis that came before. We know who we are, and we know what to do; at least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~If you know who you are…

“If you can keep your head when all about you / Are losing theirs…”
~Rudyard Kipling 

Rudyard Kipling’s poem “If” is one of my all-time favorites. It certainly was appropriate last week as the market dropped amid coronavirus fears, and may still be needed yet. I hope the Insight we sent out last week helped calm our clients. I know we received few client calls last week, and the ones we did field were not panicked in the least. I believe that is a good thing, and I hope we play at least some role in that confidence.

For my part, the confidence comes from experience. As Mark Twain supposedly said, “History does not repeat itself, but it often rhymes.” We have been through this before; not only myself, but the entire Iron Capital team. Experience matters.

As most of our regular readers know, I coach youth basketball. This past season I had an inexperienced team. The third game of the season we met a team that pressed full-court. For the non-basketball readers, that means they extended their defense all the way up the court and tried to double-team the player with the ball. It is risky because the defense was leaving one of our players open, but it can cause confusion and panic, which is exactly what it did that game.

The next week we played game number four against yet another pressing defense. Our boys kept their poise and handled the press beautifully. We won in a blowout. One of the parents came up to me after the game and asked what the difference was? I responded with one word: experience. They realized that is was not the press that had beaten them the week before, it was their panic that had beaten them.

Sports teach such great life lessons. In life, it isn’t what happens to us that matters nearly as much as how we choose to react to what happens to us. Later in his poem, Kipling tells us, “If you can meet with Triumph and Disaster / And treat those two imposters just the same….” We live in a world of over-reaction, hyperbole, sensationalism, or whatever one wishes to call it. A team wins a championship and they are immediately called the greatest ever. We get a blip on the economic landscape and we are heading for recession. This is human nature, and as Kipling so wonderfully put it, these exaggerations are “imposters.”

Corrections in the stock market are painful but necessary. The unfortunate fact that they seem to happen at the speed of light these days does not change the long-term truth. One of the ways of dealing with these unfortunate events is to not let any value become anchored in your mind. This is one of the classic psychological traps investors fall into: They pick a value for their portfolio and that is the value. Gains and losses are measured from that point. If that point was the all-time high we hit just a few weeks ago, then a stock portfolio is down close to 13 percent. If that value was a year ago, then stocks are still up considerably. One has to understand that those random days are imposters. The value will change and keep on changing.

Over the long haul, that change is upward, but it never grows in a straight line. All one can do is to make prudent decisions and then have some faith. No matter the crisis, keep one’s head. Understand that both triumph and disaster are but fleeting moments, and finally follow Kipling’s last instruction.

“If you can fill the unforgiving minute / With sixty seconds’ worth of distance run, / Yours is the Earth and everything that’s in it, / And – which is more – you’ll be an Adult, my child!” Okay, I degendered that last line, but how much better would our world be if we had a few more adults today?  At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~If