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

Amazon is no longer welcome in the Concrete Jungle of New York City. I’m sure you have all heard by now that Amazon has canceled its plans to build a headquarters in the Long Island City neighborhood of the Queens borough in New York City due to political opposition led by local politicians, most notably Rep. Alexandria Ocasio-Cortez. 

Ocasio-Cortez first became famous for winning an election last year as an open socialist. It makes sense that she was against this deal from the start, but it was her immediate reaction after the fact that really got my attention. 

The “problem” with the Amazon HQ2, as they were calling it, was $3 billion in various tax incentives and grants that Amazon was receiving from New York. This amount got people up in arms, which in my opinion is understandable. Why does Amazon deserve a $3 billion break? I’ll get back to that; however, when Amazon’s decision to pull out was made public the news cameras found Ocasio-Cortez in the halls of Congress. They asked for her reaction and she was in a celebratory mood. She claimed victory for the people and then said something extremely revealing: she said that New York can now spend that $3 billion on teachers and other such beneficial things. 

This goes into the category of You Just Can’t Make This Stuff Up. Let me explain. The estimates for the tax revenue generated by Amazon were $27 billion over the next decade. I have seen more modest estimates from $10 billion to $17 billion, so I’ll use the $17 billion number for a nice round number. If that number were correct, then it would mean that Amazon would have actually been responsible for $20 billion in taxes of one form or another, but because of their deal, New York would agree to take only $17 billion. That is the source of the $3 billion. 

Let’s put it another way. Let’s say one goes shopping and a store says that if you buy $100 worth of stuff, we will give you a 25 percent discount. Does the store lose $25 or gain $75? Obviously the store is collecting $75 from the customer. If the customer shops somewhere else because protesters call them names for receiving a discount, then the store does not save $25, it loses $75. When Ocasio-Cortez chases that discount shopper away, the store does not magically now have $25 that it can give its employees. 

I understand how common people who probably are not giving this story a lot of attention may be confused when the media keeps repeating that New York was “giving” Amazon $3 billion. I get how this can be misleading. What is disturbing, though, is that at least one person currently serving in Congress evidently thought the same thing. Peggy Noonan of The Wall Street Journal gave Ocasio-Cortez the benefit of the doubt and suggested that she was being purposefully misleading. I was once advised that if my only choice was to work with someone who was unethical or someone who was incompetent, then I should choose unethical; but it sure seems like we should have better choices. 

Should cities like New York give tax breaks to companies like Amazon? That is a completely different question and, in my opinion, the answer is no, they should not. Every company, just like every individual, should play by the same rules. From my perspective the real solution would be for cities like New York to reform their tax system so that companies like Amazon would want to be there. When the enemies of capitalism point to deals like Amazon’s as an example of what is wrong today they are half right. The problem is that they don’t seem to understand it is the high tax policies that they support that lead to deals like this being made. They blame it on capitalism, but there is nothing capitalistic about different companies having different rules; no, that is what happens under the system that Ocasio-Cortez says would be better. You just can’t make this stuff up. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Concrete Jungle Not Rain Forest