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 SVB got into trouble because its liabilities were the customer deposits that could be withdrawn at any time, while its assets have been primarily reported to be five-year Treasury bonds.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

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