“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

It is often said that people do not listen to understand; they listen with the intent to reply. I’m not sure they even do that anymore. Instead, they seem to listen for a word or a phrase they can take out of context and use for whatever happens to be their purpose.  

As I write this, Fed Chairman Jerome Powell is speaking. He is saying what he has been saying for some time now – that the Fed is serious about bringing inflation down, and that they believe (incorrectly in my view) that this can be done only by causing Americans to lose their jobs. In the course of this speech on the coming pain in our economy, he mentioned that the pace of rate increases will likely slow, perhaps as soon as the December meeting. That was the only thing the market heard; up we went.

I certainly don’t mind equity markets going up, but this trend in selective listening unfortunately manifests in more nefarious ways. The Wall Street Journal recently published an op-ed by Robin Keller, former head of the U.S. business restructuring and insolvency practice at the law firm of Hogan Lovells (translation – she is a bankruptcy lawyer). Ms. Keller lost her job after participating in a conference call for female employees when the Supreme Court issued its Dobbs decision overturning Roe v. Wade.

Ms. Keller’s view on the decision differed from that of most of the participants who were willing to speak. From there it got ugly, and according to her account, she was suspended later that day. Ultimately, she was fired and supposedly black-balled from the industry. Not surprisingly to me, she says that several on the call privately supported her right to express her views, yet they would not do so publicly because they feared the mob.

When listening to others we should follow the advice of Ted Lasso and try to be curious and not judgmental. Being curious means asking questions. Like, what really happened? And/or, what was actually said on that call? In the WSJ article we get only one point of view. That doesn’t mean we should question Ms. Keller’s honesty, but we should recognize that we are hearing only her side of the story. 

If you are like me, you are willing to believe her story because we have seen so many like it over the last few years. Shortly after reading this article, I listened to an interview with Reed Hastings, the co-CEO of Netflix. He was asked about the “controversial” Dave Chappelle special. For those who don’t know, Chappelle is a comedian who was accused of being anti-transgender because of some of his jokes. I was curious at the time, so I watched the special. I am at a loss for how anyone could watch that entire special and come away thinking that Dave Chappelle is in any way hateful. Not as funny as he once was? That I would understand, but hateful? No. To their credit, Netflix has not canceled the special as the mob has suggested.

People hear what they want to hear. They take one word or line and immediately judge, then others hear that judgement and believe it without question. It is easy to assume this is what happened to Ms. Keller. Unlike a comedy special, the intrafirm conference call can’t be listened to in its entirely, so we will never really know.

I suspect that Ms. Keller will be just fine. I know Mr. Chappelle will be, and I don’t blame investors for not listening to Mr. Powell. None of these stories in isolation is that important, but the fact that all three came across my desk in an hour shows how prevalent our lack of listening has become.

In his classic “The 7 Habits of Effective People,” Stephen Covey says that habit number five is to seek first to understand, then to be understood. In other words: be curious, not judgmental. The world would be a better place if we all took that advice, at least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Listen

Once upon a time, there was an empire ruled by a very vain emperor. The emperor took immense pride in his wardrobe. One day, two con men came to the kingdom and decided to take advantage of the emperor’s vanity. They told him they were weavers and that they could weave the finest cloth every made. It was so fine that only the most sophisticated of people could see it….Have you heard this one before? 

“The Emperor’s New Clothes” is a folktale recorded by Hans Christian Andersen. Of course, like most of his tales, this was a story that had been told long before Andersen committed it to writing in 1837. The emperor sends his most educated advisers to inspect the work of the weavers, and one after the other lies about seeing the cloth that wasn’t there because they were so afraid of being exposed for being unsophisticated. Finally, the emperor himself was shocked to not be able to see the clothes. He carried the lie so far as to parade in front of his subjects wearing nothing at all. It took a young girl who knew nothing of sophistication to finally tell the truth: The emperor wasn’t wearing any clothes. 

This folktale is the parable of our time. Stories like this were taught to children not only to entertain, but also to teach lessons. The lesson – which is as old as time – is that people who think of themselves as sophisticated can believe some ridiculous things. In fact, the truth is usually simple, and the simplest explanation is usually the truth. This is why children are sometimes wiser than the adults. 

I first thought of the connection of this story to our current age about three years ago. My daughter was in third grade and the Atlanta school system conducted a childhood safety seminar. The goal was to empower the children to report any form of abuse that they may experience. They started with a question: Are you a boy, girl, or other? The third graders laughed and shouted, “There is no other.” The emperor is naked. 

When I first thought about writing this blog, I came up with this tagline: One must be incredibly intelligent to believe something so stupid. I thought I was being original, but I guess I was really the one being stupid, as I found lots of similar quotes. Gorge Orwell put it this way, “One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

Orwell wasn’t being original either. Supposedly Cicero said, “There has never been any so outrageous and insane balderdash which some philosopher had not represented as an absolute truth.” That goes back approximately 2000 years. Turns out really intelligent people have been believing really stupid stuff for a long time. 

The list of things in this category today is too numerous to count. Like the con men in our parable, the believers of these various ideas simply say, “…if you don’t believe, then you lack sophistication.” In my world, one such stupidity is Modern Monetary Theory (MMT). It states that the government can (and should) spend whatever amount it wants because they print the money. They can do so without harming the economy or causing inflation. 

This theory has been adopted by several politicians who were instrumental in creating the spending spree that triggered the inflation we see today. One can see the attraction; they want to spend and spend, and now some economist says they can. In truth, people believe what they want to believe. The reason intelligent people take this to such ludicrous extremes is because they are mentally capable of twisting some stream of logic to explain away all of the inconvenient facts. 

When they can’t do so, they resort to bullying. They claim their intellectual superiority and then refuse to engage in a conversation. Those who disagree are spreading mis- or disinformation. They just aren’t sophisticated like the emperor and his advisers; they must at least be ignored, and at worst, be canceled. 

Who are these intelligent people who believe such stupid things? They are us. I have a liberal friend who does not hesitate to ridicule the “2020 Election Deniers,” but Russia colluding with Trump? Oh, that happened – in my friend’s mind. I have conservative friends who are the exact opposite. It sure is easy to see the silliness of others, yet it becomes harder when looking into a mirror. 

In this election week we are reminded of the polarization of our society. Everyone I know bemoans it, then points the other way and says, “It’s their fault.” Most wish our leaders would do something about it. The problem is, we are the leaders. The ones who claim to lead? They are actually our servants. That is how our system is designed to work. If we want the polarization to stop, then we need to be like that young girl and be willing to admit when our emperor is naked. Maybe we can move on to a better parable, like the one about removing the log in our eye before removing the spec in our brother’s. That would make for a better world, at least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~The Parable of Our Time

For those who pay attention to financial pundits, the word “pivot” is becoming very familiar. These sources of pseudo-wisdom keep saying that the stock market cannot maintain a rally until the Federal Reserve pivots from a policy of raising interest rates to a policy of lowering interest rates. They are, as usual, wrong, but there is something bigger afoot here.

Before I get into that, I do wish to defend the word “pivot.” I coached basketball for years and believe, as legendary coach Tex Winters did, that to pivot is arguably the most important fundamental skill in basketball. To pivot is the proper movement of a player’s feet to avoid traveling. To be able to pivot in basketball is to know how to use one’s feet to protect the ball and beat one’s defender. The lack of emphasis on proper footwork is evident in the poor quality of today’s college game.

The pivot is also the engine of the golf swing. In golf, the pivot describes the proper movement of the body during the swing. Depending on the school of thought of your pro, the pivot is a proper reaction to the movement of your hand and arms, or it is the engine that actually moves your arms and by extension your hands. I prefer the description by instructor Pete Cowen who says the body is the engine, the shoulders the transmission, and the hands are the steering wheel. But we digress.

The problem is not the use of the word pivot; it is this modern idea that we have to be on one extreme or the other. In this case, the Fed must be either raising interest rates to fight inflation or lowering interest rates to fight a recession. This is absurd. The Fed can just hold steady, maybe provide some stability.

The Fed has undue influence on financial markets, but it is not clear to me at all that they have power over the actual economy. As I have mentioned before, I believe that the Fed, and central banks in general, are overrated. If monetary policy controls the fate of an economy, then explain Japan. They have been trying to stimulate their economy with monetary policy for three decades with no success.

Economists like to focus on monetary policy because they want to be seen as scientific, and the key to that is the use, often misuse, of math. Interest rates are numbers, and numbers can go into sophisticated formulas. Similarly, tax rates and government spending are numbers, and they can also be input into formulas.

Regulation, on the other hand, is not easily turned into a number. When we were fighting inflation in the 1970s and early 1980s, one little-noticed action was the breaking up of “Ma Bell” and the deregulation of the phone system. This one act allowed phone lines to be used as a world wide web of sorts (see what I did there?). No central planner, fed governor, or economic pundit could have ever dreamed of the world that this change created.

Without that one act of deregulation, there would be no Amazon, no Google, no Netflix. Apple would still be a computer company. Almost 40 years of productivity gains would be wiped out. Iron Capital wouldn’t exist. That may be less obvious because we are not an internet company, but the internet allowed the world of equity analysis to be powered by a personal computer, when previously a firm needed loads of office space for annual report storage and teams of analysts to physically go through each company’s reports.

Today we are fighting high gasoline prices, and one of the main reasons is a lack of refining capacity. Today it would be next to impossible to open a new refinery. The Fed can raise rates forever, but that will not refine a single gallon of gasoline.

The Fed is overrated, and the role of regulation is grossly underappreciated. Of course, just like with the pivot, many will read this and accuse me of wanting to live in a world with no rules. It is one extreme or the other. That is absurd and we should call it what it is. The problem with regulation is that we never update, we only keep adding. Obviously we need rules, but the rules need to make sense. There is a middle ground, and most of the time it is the best path forward. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Pivot

“You never really understand a person until you consider things from his point of view…until you climb into his skin and walk around in it.”  ~ Atticus Finch, “To Kill a Mockingbird” 

The first self-help book I ever read was Stephen Covey’s “7 Habits of Highly Effective People.” I use his weekly organizing technique to this day. Habit 5 is to seek first to understand, then to be understood. While I often fall short, this has been something I have strived to do for most of my adult life. It is one of those universal lessons. 

One can find it in literature, like this quote from Harper Lee’s “To Kill a Mockingbird.” One can find it in sales conferences, where “the client doesn’t care how much you know until they know how much you care” has been a cliché for years. One will find it in prayers such as The Prayer of Saint Francis, “O Divine Master, grant that I may not so much seek…to be understood as to understand.” It is the major theme of the Dale Carnegie classic, “How to Win Friends and Influence People.” 

Human beings are social creatures. We were made to be in fellowship with one another, and that requires the ability to empathize, otherwise society breaks down into violence. We have been losing this thread for some time now, and the reaction to the COVID pandemic has made it worse. It began in the most unlikely of places – universities – with the political correctness movement. What started out as a reminder to use good manners quickly morphed into a way of prohibiting any point of view that ran counter to the consensus. 

A few years ago, I wrote about the problem with straw man arguments. A straw man argument is when one distorts the actual argument another person is making, then responds to the distortion they created instead of the actual argument of the other person. This happens in politics all the time. A politician will promote a healthcare program as an example. Her opponent may argue that her proposal has unintended consequences that will actually make healthcare worse, not better. The politician responds by claiming her opponent is against people having healthcare. That is a straw man: the opponent isn’t against healthcare at all, but truly believes this plan will make things worse. She ignores the actual argument and runs ad after ad saying her opponent doesn’t want you to have healthcare. 

Straw man arguments have been around forever, but the difference today seems to be that we have begun to believe that the straw man is actually our opponent’s argument. This happens because our society increasingly is no longer concerned with actually trying to understand. 

We have been dealing with multiple fund families in what we have named the Mutual Fund Scandal 2.0. One fund family has sent written correspondence to multiple retirement plan sponsors, an ERISA attorney representing a plan sponsor, and us. The first paragraph of each of these states that we don’t understand what they are doing. They then go on to describe what they are doing verbatim to our description. 

One of our plan sponsor clients stated that she was taken aback by how little understanding of the plan sponsor’s point of view the fund company showed. Likewise, they have shown a misunderstanding of the investment adviser’s role and point of view, which is astonishing; plan sponsors are their end-clients. Almost all plan sponsors work with advisers who deal directly with the various fund families. How could they not understand? Even worse, how could they start a conversation by accusing their clients of not understanding? Even if that was correct, an effective person always seeks first to understand, then to be understood. 

This particular fund family is one who historically has a reputation of client service excellence, which makes this whole episode all the more puzzling. What has changed? I believe it’s long COVID-19.

This particular firm is still not back in the office full time. For two and a half years, they haven’t actually seen clients in person. They haven’t even seen each other. Sure, they can still do all the administrative tasks they need to do remotely. The job gets done, but that isn’t good enough. When dealing with human beings one needs to be effective, not efficient. Efficiency in human interactions comes across as rudeness. Working remotely and not interacting with actual human beings for two and a half years may not have reduced efficiency all that much, but it has destroyed effectiveness. 

To be understanding, one has to be in relationship. We have lost a great deal of that relationship-building over the last two and a half years. Our reaction to COVID may very well end up doing more harm to our society than the virus itself. That isn’t to say that there will not be benefits to the technology that has allowed the professional world to keep moving forward, but there must be balance. Human interaction is of utmost importance. To truly understand others, one has to follow Atticus Finch’s advice to put yourself in their skin and walk around in it. That is a hard thing to do normally; It is impossible if one never leaves the house. At least that is my perspective. 

Warm regards,

Chuck Osborne, CFA
Managing Director

~Long COVID?