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

Earlier this week I read an interesting article in The Wall Street Journal, “Higher Education’s Enemy Within,” written by Jose Cabranes. Judge Cabranes serves on the Second U.S. Circuit Court of Appeals. He was the first general counsel at Yale and later served as a trustee of Yale. He was writing about the current state of higher education and referred to Yale’s mission statement, which was altered in 2016.

The previous mission was, according to Judge Cabranes, “To create, preserve, and disseminate knowledge.” The new mission says nothing of knowledge. Instead, Yale is now “committed to improving the world.” It goes on to say that Yale educates “aspiring leaders” through research but also through “practice.” The quotes belong to Judge Cabranes, not to me. He goes on to make some great points about how administrators throughout higher education have usurped the power once given to professors and, as a result, we have fewer scholars and far more protesters. It is an interesting article and I would recommend it.

The current condition of our educational system is a pet subject of mine, which is why I read the article in the first place, but it was the reference to knowledge – once foundational and now completely missing – which got me. At Iron Capital, one of our guiding principals is that all employees are to strive for wisdom. We define wisdom as “the combination of knowledge and experience,” and we use the phrase “strive for” because enough wisdom can never really be attained. Of course, we are speaking of a particular type of wisdom – wisdom in investment decisions – but knowledge is the key here. Knowledge is the first step; one must actually know what one is talking about.

The good Judge is pointing out that we have lost this understanding at our most prestigious of universities. If it has happened there, one can only imagine what has happened elsewhere.

Senator Elizabeth Warren has made a name for herself recently by proposing a wealth tax. She has found a few young left-leaning economics professors to give it some credence. Forget the knowledge that of the 12 countries that have already tried it, nine have dropped it…given that the idea has been around for only a handful of years, that is a pretty miserable track record. No worries, Warren’s scheme is polling well, so what other knowledge would she need?

Americans are rightly concerned with inequality. The strange omission in all of this is the lack of curiosity about what causes inequality. We all know that treating a symptom will never cure a disease, and in many ways only makes things worse over time. Yet no one seems interested in the root cause of inequality; all they talk about is taking from one group and giving to another. This would help with the symptoms of inequality, and actually already does, as the rich do pay most of the taxes while approximately half of Americans gain from government programs. There have been several articles written about how both taxes and government benefits are not included in most inequality measures. I suppose that is helpful to politicians who are more interested in having something to run on than actually fixing anything.

In the history of the world no one has ever been lifted up by tearing someone else down, yet all anyone seems to talk about is how we can tax the wealthy more. There really isn’t even any talk about what the extra tax revenue will do to help the poor and lift inequality. There is talk of Medicare for all, but that is for “all,” not for the poor or those who cannot afford their own coverage. That doesn’t move the needle on inequality.

I’m picking on Senator Warren and her plan, but I could just as easily talk about tariffs or several other current issues. It seems today that everyone cares deeply, but not so deeply that we want to actually know anything. We no longer even ask the questions.

Inequality is a serious issue and it deserves a much more serious discussion. Not about how we can tear down the rich, but how can we actually solve the problem? The first step on the road to knowledge is admitting that you don’t know. That may be the problem in this social media age where everyone feels pressure to put forward a good image.

At least that is my perspective.

Chuck Osborne

~Knowledge

Several years ago I was interviewing a prospective new employee. The gentleman was currently employed by one of the financial institutions where our clients custody their portfolios. I told him about Iron Capital’s code of ethics and how we have zero tolerance for violations of our code. Put simply, we expect our employees to behave with integrity. He told me that this was music to his ears. He was “Mr. Integrity.” (He really said that.)

The next week we had not made a decision on the position yet, but we needed the same gentleman’s help with his current employer. They wanted us to commit to bringing more assets to their firm. We don’t do that. It is up to our clients to make those decisions. We may guide them, but we never force them to use a particular custodian. He told me that he understood and suggested that we should just lie. He explained that they ask for these commitments but they don’t enforce them, so no worries, just tell them what they want to hear. So much for Mr. Integrity.

It is easy to have integrity in theory; it is a little harder when we demand it in practice. Of course, most would laugh at the idea of discussing integrity and politics in the same post, but here I go. Everything seems to be political today, and that especially goes for the policy of the Federal Reserve (Fed). Jerome Powell, the current chair of the Fed, is getting political pressure from all sides. Recently the pressure came from a former Fed member.

William Dudley, the former president of the Federal Reserve Bank of New York, wrote, in essence, that the Fed should not lower interest rates in response to a slowdown in the economy caused by the Trump administration’s trade war. This, Dudley hoped, would bring on a recession and cost Trump the election. He later tried to walk back his remarks, but not that far back. Mr. Dudley obviously does not like President Trump.

One of the many problems with our politics today is that it has become all about what side are you on, not about the substance of what anyone actually believes. There is no intellectual honesty today. If a politician we don’t like supports a policy we do like, we change our mind on policy. If he is for it, I’m against it, no matter what “it” is.

Enter Larry Summers. Mr. Summers served in the Clinton administration. He has had a long and distinguished career as a liberal economist. Mr. Summers is no fan of President Trump. However, he believes in the old-fashioned idea of institutional integrity. The Fed is supposed to be, and frankly does a surprisingly good job of being, an apolitical organization.

Last week Larry Summers read William Dudley the riot act on CNBC. It is simply irresponsible for a former Fed member to publicly imply that the Fed should ever ignore its mandate because they don’t like either the policy or the person who happens to be in elected office, he said. It is wrong, period. Having the opinion that the current president is a bad guy does not change that.

I congratulate Mr. Summers for having the integrity to stand up for behaving like professional adults. My father always told me that when dealing with others, I was not responsible for their behavior, but I was responsible for my own.

We could all learn a lesson from that. If we are honest with ourselves and maintain intellectual integrity, then we will sometimes agree with someone we do not like. We will disagree with someone we do like. We will understand that someone else behaving badly does not condone our doing the same.

Who knows, if we all lived that way, we might even start getting along. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director, Iron Capital

~Integrity