The world will come to an end on June 1, 2023, unless the United States raises its debt limit. Okay, maybe that is hyperbole, but it pretty much sums up the press coverage. 

Our regular readers will know by now that I am a big believer in facts. I hold onto the romantic idea that everyone is allowed to have a unique point of view, but that we are not allowed to have our own unique facts. Capital T Truth exists; we may view it from different perspectives, but we cannot deny it. Therefore, it should come as no surprise that the media coverage of the debt ceiling debate is like fingernails on a chalkboard to me. 

“Eighth-Graders’ History, Civics Test Scores Hit Record Low,” reads the headline of a May 3 Wall Street Journal article by Ben Chapman. What does that have to do with the debt ceiling debate? Everything! Everything people of my generation need to know about the debt ceiling debate, we learned Saturday morning between cartoons. “I’m just a bill…And I’m sitting here on Capitol Hill…” – “Schoolhouse Rock” taught us more about civics in that one episode than our current day eighth-graders know. 

This is how our system was designed to work: If legislation is required, which it is to pass an increase in the debt limit, then the House of Representatives must pass a bill. One wouldn’t know it from watching the news, but that has occurred. That bill then goes to the Senate. If the Senate approves of the bill, they can pass it as-is, but if there are disagreements, which there are this time, then the Senate passes its own bill. The two chambers then go into committee to negotiate compromises between the differences on the bills. Once out of committee, both houses vote to finalize the bill and if passed, it goes to the President for approval. The President can sign it into law or veto it and send it back. 

Obviously in real life, the president and his administration have a role in leadership. There is no reason to pass bills that would be vetoed, and the administration can persuade representatives and senators, especially from the same party. However, the power of the president ends there…or it is supposed to. Over the last 20-some years, Congress has ceased to function. There was a day when politicians campaigned at election time and then actually went to work. Today, Congress spends its time in performative art. They video committee meetings so each politician can have a turn delivering a zinger that will get lots of likes on social media from their most partisan supporters. 

Meanwhile, someone has to actually run the government, so in the absence of a functioning Congress, the administration has taken over. One’s opinion of whether this is good may differ based on their perspective, but regardless, it is a fact – it is a fact that this has occurred, and it is a fact that this is not how our system was designed to work. 

The news has reported that President Biden believes President Obama made a mistake by negotiating with Congress in 2011, and this is why he has refused to negotiate now. Let’s pray that this is not accurate and that he and his staff realize that they have no choice but to negotiate. That is the nature of our system. 

The thing about American democracy is that no one ever gets what they want, but everyone gets something they can live with. We are no longer teaching that to our children, and there will be grave consequences if that is not remedied. An educated public, and the ability to compromise and to accept incremental progress, is crucial to the survival of democracy. 

The problem with allowing the administration to run everything is that we now have a winner-take-all back-and-forth in our nation’s policies: We see it in our economy, we see it at the border, and we are seeing it with this debt ceiling craziness. The last administration wanted to reduce regulation while this one cannot regulate fast enough. The last administration wanted to build a wall, and this one wants to have no border. The one thing they have in common: neither wanted to negotiate with Congress. 

Our system of democracy has lasted longer than any other. The reason? Because our system requires stability. A new president means only incremental change, not a wholesale back-and-forth. Zealots of any kind do not like incremental. It is that stability which, while occasionally causing us to act more slowly than history would say we should have, keeps us from going over cliffs. 

We as citizens can make long term plans because we know there is stability. Our foreign allies know they can rely on us, and our adversaries know we will be there regardless of election outcomes. All of this goes away if we continue down this road of administrative rule and a complete flip-flop from one administration to the other. 

To maintain this stability, we need to end politics as a career option. Term limits might help, but in my mind, the solution lies in the Constitution. When our Constitution was ratified in 1788, our founders included a minimum age requirement of 25 for a representative in Congress. At that time in history, the few who went to college did so when they were as young as 13; by age 25, they likely would have been married with children and several years into a career. The Baby Boom generation is the first in American history to have the teenage-to-college experience that we now think of as normal. That age requirement should be amended to be an experience requirement. No one should be allowed to go into politics until after they have had a career doing something else. They should be adults who understand the art of persuasion and compromise. 

Meanwhile, the house has passed a bill. The senate needs to act. Show today’s eighth-graders how our system is supposed to work. That won’t happen; we will go right down to the wire while all parties pose for the cameras, then something will get done to kick the can down the road. However, our world would be just a little bit better if it worked the way it should. At least that is my perspective. 

Warm regards,

Chuck Osborne

~How Is This Supposed to Work?

When I was starting out in my career, I remember distinctly the first time a mentor told me that perception was greater than reality. I bristled at the concept; reality should matter more than mere perception. Unfortunately, that isn’t how the world works. 

A few years after that, I remember the first time I heard the word “branding.” It came from the marketing department of my employer at the time, Aetna Retirement, which is now part of Voya. We were being trained on how to project the correct corporate image and being schooled in how the company wanted others to see it. It literally made me sick to my stomach. 

That is not hyperbole; overt branding exercises make my skin crawl. Why do I have such a reaction? Have you seen the movie “Knives Out?” If not, I highly recommend it. The heroine in the movie cannot tell a lie. Every time she lies, she vomits. I can relate. Since I was young, I have always had an innate difficulty with dishonesty. I am not saying that to brag, as there are times when this has not been a good thing. One of the most consistent pieces of negative feedback I receive is that I lack tack. That is the downside of always being honest. 

At best marketing is about telling only the positive side; at worst it is about projecting image over substance, or even flat-out lying. My marketing friends will disagree with that statement, and fair enough. I do have many friends in the marketing field, and I should be clear that I do not think of them as being dishonest. Some of it is perception – is the glass half full, or half empty? Marketers will always go for half full, and frankly I do, too, most of the time. 

Most of us recognize this and have become somewhat immune to marketing’s charm when it comes to commercial goods. However, in the age of social media, we have all become marketers. Previously reserved for corporate executives and public figures, personal branding has become pervasive. What image do we want to present to the world? Our society has become so occupied with branding that we no longer believe that perception is greater than reality; we now seem to believe that perception is reality. Some even argue that reality does not exist. 

We see it everywhere in our culture and it is coming to a head. There is an anxiety crisis in our society today, which many experts blame on our reaction to the pandemic. A Boston University School of Public Health study suggests that the rates of depression in the U.S. went from 9 percent to 29 percent during the early months of the pandemic and continued to climb to 33 percent. 

Obviously I’m not a psychologist, but it does seem that when perception is no longer anchored in reality, then it isn’t anchored at all. That means one has become adrift. One example today is the proposed regulation by Environmental Protection Agency (EPA), which will essentially mandate conversion to electric cars. This regulation is all about perception with no anchor in reality. 

There is a great deal of focus about the fact that our electric grid simply cannot handle the added load of a mass conversion to electric vehicles. That is an excellent point, but to me, the problem is in the branding. Electric cars have been branded as “clean,” which means that nonelectric cars have been branded as dirty. This makes for a simple decision between “clean” and “dirty,” when the truth is far more complex.  

Are electric cars actually a net benefit to the environment? I honestly do not know the answer to that question, but I know it needs to be explored, and I have yet to hear anyone do so. I also know that electric cars are not clean, because batteries are not clean. What’s involved in battery manufacturing? What about the mining of the minerals involved? The power in those batteries is only as clean as the grid from which it was pulled. 

The truth is, there is no such thing as “clean” energy. That is branding talk, not reality. This is why it is so important to fight back against the idea that reality does not actually exist: Our environmental problems are real, which means that this is too important to be a marketing campaign. They should not be exaggerated, nor should they be downplayed, or politicized. The solutions need to be explored honestly and thoroughly. Will the cure be worse than the disease?

Perception may always be greater than reality, but we need it to be anchored in reality. If we are going to actually face the challenges of our society, then we need less branding and more honest, grown-up conversations aimed at real solutions, not sides. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA 
Managing Director 

~Perception vs. Reality

In the 1992 movie “Sneakers,” Robert Redford and Ben Kingsley play old college buddies who have not seen each other since Redford’s character, Bishop, narrowly escaped arrest for hacking into a computer system while Kingsley’s character, Cosmo, got caught and ended up in jail. Bishop went on to build a company that is hired to break into banks to test banks’ security systems. Cosmo went on to fake his death in prison and escape to become an underworld boss.

The two former friends meet twenty years later, this time as enemies. Cosmo launches into a monologue, as bad guys usually do in movies, about imagining a sound bank, then spreading a rumor of instability that causes actual instability. It is a good scene in a good movie, and another Hollywood example of understanding that runs on banks have more to do with group psychology than with finance.

Silicon Valley Bank (SVB) was such a bank. It was and would have continued to be just fine, if its commercial clients had not decided to withdraw all their money at once. Their clients were fledgling technology companies – alleged entrepreneurs who should have a degree of business acumen. Yet, they panicked and caused the collapse of the bank that had helped them get started.

Why would they do that? Everyone knows that the Federal Deposit Insurance Corporation guarantees deposits all the way up to $250,000 per depositor. However, it is estimated that more than 85 percent of the deposits at SVB were not insured. That means these “startup” businesses had, on average, approximately $1.7 million sitting in a bank account. No worries for them, however; the Fed has agreed to bail out the depositors and guarantee all assets, even the 85 percent that were above the insurance limit.

This is a lot of things, but one thing it is not is capitalism. There are no bailouts in a capitalist society. To be clear, I am not making a judgment as to whether the Fed took the correct action at the time, I am simply pointing out that what they did would not have happened in a purely capitalistic economy. In fact, in my opinion, the Fed doesn’t really have a choice but to guarantee all depositors because whether they admit it or not (that will be a not), they are at least partially if not entirely to blame for this mess.

The Fed is to blame on two fronts. First, they are the regulator. SVB got into trouble because its liabilities were the customer deposits that could be withdrawn at any time, while its assets have been primarily reported to be five-year Treasury bonds. This creates an asset-liability mismatch: the assets would mature in five years, while the liabilities are day-to-day. This may be confusing to the layperson, but this is bank regulation 101. The regulators, post-Great Financial Crisis, have focused on what the assets are, and in this case they are Treasuries, the “safest” investment one can make. They did not focus on the timing mismatch causing a lack of liquidity. There has been plenty of noise about relaxed regulations for the smaller banks being to blame, but that is just factually wrong. Barney Frank, who co-authored the regulation in question, has even said this. If there is a murder spree in your community, we don’t need to make murder more illegal than it is already; we need to hold politicians and government officials responsible for enforcing the laws and regulations that already exist, and for catching the bad guys.

Secondly, the Fed is to blame for creating this entire environment. Why in the world would a corporation or any individual hold such a high balance in a plain deposit account at the bank? There is a position in larger corporations within the finance department for cash management. This is the money market. Most investors participate through money market mutual funds they have in a brokerage account. Why leave cash sitting in the bank when one could invest in the money market, giving very short-term loans to the government or to high-quality corporations? One can loan as short as overnight. In fact, it is the overnight rate that the Fed actually controls. In the case of Treasury money markets, the funds are guaranteed by the Treasury. This way, even the largest corporations can minimize their exposure to banking risk. The bank account should be nothing more than a pass-through account where money comes in right before going out, and the remaining balance should be at least much closer to the insured amount. So why weren’t these companies doing this? Because the Fed had lowered those rates to zero, no longer making it worth the effort.

It appears that the founders of these technology startups were raising millions of dollars before even having a product, and then just leaving all that money in the bank. That is not entrepreneurial. Steve Jobs started Apple in his garage. Bill Gates had to sell his software to his first customers to have the money to build it. There is nothing capitalistic about companies that have not done anything yet and already have large payrolls and millions of dollars in the bank.

Everyone wants the return, but no one wants to take any risk. There is a segment of our population that starts companies, goes bankrupt, and then posts pictures of their wonderful vacations on the French Riviera. They have no actual skin in the game. They take risks with other people’s money, cause outsized societal damage when it all goes wrong, and float away on their golden parachutes.

If I was a young person today who has not been taught actual economics and has no real understanding of history and this is what I saw in our supposedly capitalistic society, I’d hate capitalism too. However, I am not a young person and I do know better. This isn’t capitalism. The reason, in my opinion, that so many people today look at “the one percent” with disgust is that they no longer believe, as Americans have in the past, that those people have earned their status. It isn’t that they did not work long hours or deliver desired products and services, it is that deep down we all know that, unlike the entrepreneurs of the past, they took no real risk.

If Apple had failed Steve Jobs likely would have been homeless, but the tech “startups” of today have millions of other people’s money just sitting in uninsured bank accounts while they go to dinners and introduce themselves as CEOs. And why not? They know when the stuff hits the fan, the government will not let them suffer.

Milton Friedman said it best when he said, “Underlying most arguments against the free market is a lack of belief in freedom itself….” There is no freedom without responsibility, and one cannot be truly free if she is not free to fail as well as to succeed. This is a mess, but it isn’t capitalism. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Where Have all the Capitalists Gone?

My first car was a stick shift – or more correctly, it had a standard transmission. Our son will turn 16 this November, and we have already warned him that his first car will be a stick shift as well. Yes, they still make them; in fact, they are still in the majority in Europe and should be here. According to The Wall Street Journal, they’re enjoying a resurgence among younger driving enthusiasts.

Our son loves cars and is looking forward to the experience. He has already asked if we can purchase some ramps so he can change his own oil. I might consider it, although part of me thinks I should just let him get on his back and slither under the car…if we are going old-school, we might as well go all the way.

So why are we insisting his first car be a stick shift? Because driving a standard transmission car requires focus. All four limbs are engaged, leaving no ability whatsoever to text or surf social media. None of his friends will know how to operate the vehicle, so no worries about someone else driving his car without our permission. When he is driving, he will have to focus on driving. When was the last time you did that? Be honest.

We increasingly live in a world where everything is easier, yet people seem to be getting more anxious and depressed. Is there a connection?

I was telling a friend about my grand plan for my son, and he mentioned a friend of his who had a completely different idea. His friend had done the math and determined that it would be less expensive for his son to Uber everywhere than for him to drive a car. Obviously, there is the expense of the car itself, but for a teenager, it is the insurance that really gets you.

This is our collective mindset. What is faster, easier, cheaper, and more efficient? My friend’s friend is probably correct – it probably would be cheaper and more efficient for us to tell our son to Uber instead of driving. But is that really what I want for my son? In our effort to be more efficient, we sometimes forget that when it comes to relationships and well-being in life, what we really want is to be effective. I don’t mean to offend, but if either of my children ever sends me a selfie of them doing their own laundry (or any other simple life task) with #adulting attached to it, I will break down in tears knowing that I utterly failed them as a parent.

Self-respect and self-confidence come from actually being able to do things…real things. Talk to anyone who still does their own yard work, and they will tell you that there is this sense of accomplishment that comes from this simple task. It is strangely rewarding. I think it is because it takes focus. As simple as it may seem, there is a degree of attention required, and in the end, you have accomplished something you can see.

Today we seem busier than ever, yet nothing requires focus. Or maybe we are so busy that we can’t focus. We have taken all the work out of our work, and we wonder why we are anxious. It is like watching your kids play sports – it is far harder than playing yourself. When one is in the game she has no time to be nervous or anxious, but sitting in the stands – that’s where anxiety takes hold.

We keep making it easier to do things without effort and attention, and there have never been so many books about mindfulness…

Iron Capital recently looked into upgrading our accounting software. The vendor we use has gone to an online cloud version that is fully integrated with the bank. They excitedly told us that we would no longer have to input any transactions, it would all just feed from the bank. They seemed shocked when I asked:  If we stop bookkeeping ourselves and just take what the bank says, then how will we know when the bank has made a mistake? In an effort to remove all the effort they didn’t make the job easier, they unthinkingly stopped doing their job.

We need to ask these questions. What should be the limits of technology? Are we really making our life better by increasingly becoming spectators as opposed to being in there doing the work? That is for each of us to answer. In the meantime, nothing you read from Iron Capital will be coming from ChatGPT, and our son (and in a few years, his sister) will be driving stick-shift cars. It may be more work, but that keeps us focused on the task at hand. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Driving With a Standard Transmission

“Scrooge was better than his word. He did it all, and infinitely more; and to Tiny Tim, who did not die, he was a second father. He became as good a friend, as good a master, and as good a man, as the old city knew…. And it was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge.” ~ “A Christmas Carol,” by Charles Dickens

This excerpt is from the end of Dickens’ “A Christmas Carol,” but as I am sure we all know, that is not how the story started. No, the story started with Scrooge referring to Christmas as a “humbug.” He was a grouchy, greedy, lonely, miserable man. The three spirits of Christmas changed him.

Maybe the spirit of Christmas can do the same for us. Two stories that came across my desk this week have given me a bit of a humbug feeling this Christmas. The first was from ESPN. Army has one of the best linebackers in the country: Andre Carter II. He is not only an All-American but also projected to be a high draft pick in the NFL. Traditionally, those who attended a service academy are required to then serve in the military immediately, but in 2019 the Trump administration passed an exception for cadets who are drafted to play professional sports. These select few are allowed to defer their service so they can play their sport professionally while still young enough to do so. Evidently, there was already an exception for Olympic athletes.

Congress has proposed repealing this change and once again forcing cadets to go straight to military service. Obviously, Carter was very upset. He wants to serve his country, but he also wanted to play in the NFL. For the last three years the rules have said he could do both, and now as his college football career is ending, the rug is being pulled out from under him. ESPN did not comment on the congressional motivation to change this rule, but they did include a comment from Carter’s mother, who said it shouldn’t matter who signed a law, that we should just do the right thing – the suggestion being that Congress is changing the rules for this All-American football player just because it was Donald Trump who made the rule.

Speaking of All-Americans, The Wall Street Journal reports on Stanford University’s “Elimination of Harmful Language Initiative.” American is one such harmful word; we are to say US Citizen. We are no longer to say that the market is going “gangbusters,” because that glorifies law enforcement; nor are scientists allowed to conduct a “blind study,” because that “unintentionally perpetuates that disability is somehow abnormal or negative, furthering an ableist culture.” I would say that Stanford has mastered the art of being absurd, but I am no longer allowed to use the word master (except when quoting Dickens, of course).

On the other coast, Wake Forest (who just beat Duke! Go Deacs!) has two UK citizens playing on their basketball team. Not sure it will happen, but should they qualify for the list previously known as All-American, will they now be on the “All-US Citizen” list, even though they are not citizens? Isn’t busting up gangs a good thing?

My father once described my youngest sister as being an incredibly positive person, but not delusional. His explained that if it was raining outside, she would still be smiling and saying something like, “We can still have fun.” She would not claim that it wasn’t raining. Likewise, it seems to me that there is a huge difference between having a positive attitude towards people with a disability and suggesting that their disability is not actually out of the norm or difficult to overcome. Many reading this may be traveling over the Christmas holiday; if so, I’m sure they will be glad to fly with an airline that promotes an “ableist culture” when hiring pilots.

How does the administration at a university as highly regarded as Stanford have time to police words? Well, there are 15,750 of them and they only have to supervise 2,288 actual professors who teach the 16,937 students. If one took math at Stanford, then she could tell you that faculty and staff outnumber the students by 1,101, at least until next year when they launch “The Elimination of Harmful Math Facts Initiative.” I’m sure pointing out where those tuition dollars go would be harmful. It might even unintentionally promote an ableist culture in which a small fraction of the current number of administrators might do a better job running the university due to being competent. I didn’t look it up, but I’ll assume the word competent is banned as well.

Changing rules out of dislike for the person who made the rule? Policing language in a way that would shock Orwell himself? Raising the cost of education to the point where employees outnumber the customers? Humbug! It is easy to look at what is happening in our society and become a Scrooge.

Except: This is Christmas, a time of hope. We celebrate Christmas at the winter solstice because it is literally the time of year in the northern hemisphere when light starts to come back into our days. We live in a society obsessed with punishing and silencing those with whom we disagree, yet Christmas celebrates the birth of a child who was destined to be tortured and crucified, and upon that cross prayed that his perpetrators be forgiven.

The spirit of Christmas has already visited Congress – they reversed course, and Andre Carter can now play professional football. It may take more to warm the heart of the word police, but publicizing the incredible bloat of higher education may be the first step in reversing this destructive course. At this time of the year, above all others, perhaps we can find the grace to listen to our fellow man instead of silencing him. Meanwhile, regardless of your beliefs or background, I truly hope that you are well and happy on December 25. Therefore, even though I’m sure it is against the Stanford language code, I wish you all a very Merry Christmas! In the words of Tiny Tim, “God Bless Us, Every One!”

Merry Christmas!

Chuck Osborne, CFA
Managing Director

~The Christmas Spirit