• The difficulty lies not so much in developing new ideas as in escaping from old ones.

    John Maynard Keynes

Iron Capital Insights

Our insights, reflections and musings on the most timely topics relevant to managing your investments.
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  • Iron Capital Insights
  • August 15, 2019
  • Chuck Osborne

Down, Up, Down Up…The Art of Going Nowhere

This up-down nature is sometimes blamed on the Fed and interest rates, and sometimes blamed on the trade war. In our opinion, the latter explanation is the correct one. Our current administration seems to view life as a zero-sum game. That is a very bleak way of looking at life; life is a win-win proposition.


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  • Iron Capital Insights
  • August 2, 2019
  • Chuck Osborne

Cause and Effect?

The first step in solving a problem is figuring out what is causing it. Too often we get so focused on the symptoms that we forget to treat the disease. The market – which has had a fantastic year – is having a tough few days. There are two competing causes:  trade and Fed policy. So, which is it?


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  • Iron Capital Insights
  • June 20, 2019
  • Chuck Osborne

Goldilocks

The Fed has a tough job. We used to understand that. We used to give experts the benefit of the doubt, because we understood that doing things is hard and requires a certain set of knowledge and skills. We understood that because we were a nation of doers, so we naturally understood the difficulty of doing. Today we are increasingly a nation of spectators. Spectating is easy, and whatever it is we are spectating looks a lot easier than it actually is.


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  • Iron Capital Insights
  • May 7, 2019
  • Chuck Osborne

Refusing to Learn

Last fall we had a market sell-off because the groupthink on Wall Street says that we are due for a recession. There was absolutely no sign of a recession in the U.S., but that didn’t matter. The data for the fourth quarter came in and not only are we not in a recession, but the U.S. economy grew at the fastest pace in more than a decade. Did they learn?


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  • Iron Capital Insights
  • March 15, 2019
  • Chuck Osborne

Which Way Do We Go?

The market rally that greeted us in the New Year has hit a speed bump. Now we are down one week and up the next. So is the rally over and another downturn around the corner, or is the rally just getting started? In other words, which way do we go from here?

  • I never had the honor of serving in the Armed Forces, but I did spend four years of my life at a military school and I am very familiar with the cadence of, “Left, left, left right left.” One could modify that to “Down, down, down up down” and be right in step with the market today.

    This up-down nature is sometimes blamed on the Fed and interest rates, and sometimes blamed on the trade war. In our opinion, the latter explanation is the correct one. This brings to mind a newsletter I wrote in the summer of 2010, Ignorance is Bliss. Here’s an excerpt:

    “Now for the anti-foreign bias: there is an inexplicable bias against free trade among other nations and a fear of immigration. People tend to see other nations as competitors instead of partners in a global economy. In his book Pop Internationalism, Paul Krugman states, ‘The growing obsession in the most advanced nations with international competitiveness should be seen not as a well-founded concern, but as a view held in the face of overwhelming contrary evidence. And yet it is clearly a view that people very much want to hold – a desire to believe that is reflected in the remarkable tendency of those who preach the doctrine of competitiveness to support their cases with careless, flawed arithmetic.’ The fact is, free trade is an economic win-win for all nations and legal immigration is desirable, as immigrants usually take jobs that, for whatever reason, native workers do not want. Immigrants also can bring with them skills and knowledge that the native workforce may not posses. No country is a greater example of this power than the United States, yet the majority still believes trade and immigration to be harmful, and populist politicians, mainly on the right, take advantage of this fear. The protectionist actions of the Obama and Bush administrations have led to many unintended consequences, including double-digit unemployment.”

    Our current administration seems to view life as a zero-sum game. For every winner, there must be a loser. That is a very bleak way of looking at life, and in our opinion, it is wrong. Life is a win-win proposition. When we trade with anyone, including China, both sides win. If this was not so, the trade would never take place. The easiest way to think about these issues is to personalize it. When you go to the store and buy something, is there a winner and a loser? If there is, then that would be the last transaction at that store.

    No, when we shop for ourselves we get something we need and/or want and the merchant gets paid. Win-win. I must admit, the benefits of trade are so overwhelmingly obvious to me that I frankly struggle to understand what others see.

    Regardless, we are where we are. We have picked a fight with China, and as a result, the great economic expansion brought on by tax and regulatory reform is being threatened. Most in the administration suggest this is all negotiation. Hopefully they are correct, and Peter Navarro and the President’s Twitter account are not really to be believed. Hopefully this tough talk leads to an even better trade relationship with China.

    However, the bond market is telling us that this is not the outcome most expect. Today bond yields on the 10-year Treasury fell below the yields on the two-year Treasury. This tells us that bond market participants believe we are headed for a recession. I’m not sure what it will take for his advisors to convince Trump that trade is a win-win, but if they fail, then he will learn right along with the rest of us that trade wars are lose-lose.

    What are we to do as investors? Prudent investing over the long term goes back to three things: First, it is bottom-up. We have to analyze each investment in its own right and know what we own. Secondly, it is absolute return-oriented. Decisions need to be made that will lead to a long-term return that will actually achieve one’s goals regardless of what the market or others are doing. Finally, it is risk-averse.

    The market is jumping around but really going nowhere. This is when prudence is needed most. Hope that there is a breakthrough on trade, but plan on it not happening. It is time to play defense.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Down, Up, Down Up…The Art of Going Nowhere

  • The first step in solving a problem is figuring out what is causing it. Too often we get so focused on the symptoms that we forget to treat the disease. The market – which has had a fantastic year – is having a tough few days. There are two competing causes:  trade and Fed policy. So, which is it?

    Last week we had our GDP report. Growth was good at 2.1 percent, but not as good as it has been. When one lifted up the hood to see what led to 2.1 percent growth, he learned that personal consumption (consumers) was up 4.3 percent, while net exports were down 5.2 percent, and business investment was down 5.5 percent. Granted this is still better growth then we have seen for some time in the U.S., but it is beginning to be clear what is good policy and what is bad policy.

    Tax and regulatory reform have helped create the best job market in my lifetime and robust consumer growth, which are now being almost fully offset by the damage of tariffs. I have said it before, but it bears repeating:  administration officials have maintained that tariffs are a negotiating tactic and not a long-term policy. So maybe this works with the Chinese or maybe it doesn’t. In the meantime, real damage is being done to our economy by the tariffs.

    The biggest challenge is not even the tariffs themselves, but the psychological effect of the tariffs on business decision-makers. If one is trying to determine where to put a factory, or whether to build it in the first place, she has to hesitate. She doesn’t know what the rules will be because they seemingly change with a tweet. This seems to be the logical cause for the sudden slowdown in business investment.

    This brings us to the Fed. Jerome Powell has been unfairly beaten up by the idea that Fed policy is what is driving the slowdown in growth. The idea of interest rates being too high is that the cost of borrowing money to build that factory is too great. If the loan payments eat up any potential profit, then the factory will not be built.

    It is possible that the 2.5 percent Fed funds rate (before the cut) was so high as to stop a business project, but it isn’t likely. Cutting it to 2.25 percent, as was done earlier this week, is not very likely to make or break a decision. One would be a pretty poor business person if he was relying on 0.25 percent savings on interest to make a project profitable.

    The rules of trade outweigh loan costs by a large margin. Negotiating is ugly, and the Chinese are tough negotiators. China’s Xi is in office for life and Trump has either one or five more years depending on an election. This gives Xi a huge advantage at the negotiating table.

    In the meantime, the Fed is in an undesirable position. Their primary weapon, lowering interest rates, is not likely to make a difference to the business manager who is waiting for trade rules to settle before making a move. We could end up like Japan, where negative interest rates have failed for years to boost the economy. Meanwhile, there are other effects of low rates that can be damaging in the long term. This is a tough place to be, and I suspect they will be very cautious in their moves. The administration and short-term traders won’t like that, but it is probably the wisest policy.

    Trade is the real culprit. Perhaps the tariff tactics will work and we can get past this quickly and have a better trading environment as a result; that would be great, and we should all be pulling for that outcome. The question is, when will we know that this isn’t working, and what do we do then? I don’t know the answer, but I do know that beating up on Jerome Powell is not it.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Cause and Effect?

  • The Federal Reserve’s Federal Open Market Committee (FOMC) met Tuesday and Wednesday of this week and they did nothing…or did they? The market thinks what they did was just right.

    Let me first say something that should be obvious, but probably isn’t: the Fed has a tough job. We used to understand that. We used to give experts the benefit of the doubt, because we understood that doing things is hard and requires a certain set of knowledge and skills. We understood that because we were a nation of doers, so we naturally understood the difficulty of doing.

    Today we are increasingly a nation of spectators. Spectating is easy, and whatever it is we are spectating looks a lot easier than it actually is. It is not just that we sit there and spectate; we also criticize. The average college football fan, whose own athletic achievement involves a handful of youth participation awards, would, in their mind, be a much better quarterback, coach, and of course athletic director than anyone actually associated with their school’s athletic department. They would have never dropped that pass or thrown that interception or hired that idiot of a coach.

    Spectators areso awesome primarily because they have the benefit of hindsight. Most of their criticism occurs after the fact. Unfortunately, doers do not have this luxury. It matters little what they are doing; anyone who does anything does so in real time and must make decisions without already knowing the outcome. No Fed spectator has ever made an interest rate mistake, and if they did, they wouldn’t admit it and wouldn’t have to because it was just conjecture anyway.

    Jerome Powell and the other members of the FOMC have to actually do something. Increasingly they have become masters at doing something by simply suggesting to the spectators what they might do at some point in the future. Toward the end of last year the Fed, which had been raising rates, added the word “patience” to their statement. The spectators cheered this “pivot,” some even claiming that it was a complete reversal of policy.

    Keep in mind that the Fed made no actual change to actual policy. Markets didn’t care; the “pivot” is now accepted, and don’t tell anyone otherwise. That was six months ago – a blink of the eye in the real world where doers do things, but an eternity for a spectator. The Fed needed to stop being patient and start cutting rates. Come on, we are just watching and watching is boring when the doers are just being patient!

    So the FOMC met with all the spectators, including the President of the United States, pressuring them to do something. What did they do? Nothing. Then when explaining the nothing, they removed the word “patient.” Hallelujah! It was not too hot, nor too cold; it was just right. The Fed also left overnight interest rates right where they were before.

    Was that the right move? Only time will tell. Meanwhile, we do not have the luxury of being spectators; we must make investment decisions. The circus-like atmosphere that surrounds FOMC meetings is all the more reason that prudent investors make investment decisions from the bottom-up. Each investment should be judged on its own merit, and if the decision to invest rests on a 0.25 percent change in interest rates, that is not a very large margin of safety, is it?

    The Fed gets too much attention; we will be talking more about that in our next Quarterly Report newsletter. I guess the spectators have to watch something, but the rest of us have better things to do. Go enjoy your summer!

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Goldilocks

  • As most of our readers know, I coach youth sports. Right now I am coaching my 8-year-old daughter’s soccer team. Two of the fundamentals of soccer are learning how to pass the ball and how to properly kick the ball. We want to control the ball so we teach them to pass with their instep and to kick with the top of their foot. The natural instinct is to kick with the toe. For young players just learning the ball will actually go farther with the toe, but toes are pointy, so the ball seldom goes where you want.

    Just last night during a passing drill one of our best players kicked the ball with her toe instead of passing it properly. It went a long way…in the wrong direction. I asked her what caused that, and she admitted to kicking with the toe instead of passing. She knows what to do, but her desire to see the ball go far makes her not do it. In other words, she is currently refusing to learn. She’ll come around – they all do in their time – but children are not the only ones who refuse to learn.

    Last fall we had a market sell-off because the groupthink on Wall Street says that we are due for a recession. There was absolutely no sign of a recession in the U.S., but that didn’t matter. The data for the fourth quarter came in and not only are we not in a recession, but the U.S. economy grew at the fastest pace in more than a decade. Did they learn?

    Of course not. First quarter was going to be the beginning of slow growth. The initial estimate for GDP as calculated in the Wall Street Journal survey was 1.4 percent growth. Still growth, but less than half of what we averaged in 2018. The actual number came in at 3.2 percent. Did they learn?

    Of course not. Now they say that growth in 2019 was just moved forward to the first quarter. Never mind that for more than twenty years the first-quarter number has almost always been the lowest of the year. We must have slower growth. Why? Good question, but they don’t really have an answer.

    In the interim, the market has flown higher as we have erased last year’s sell-off and then some. The pundits keep trying to talk the market down. There is a saying in Wall Street that the market climbs a wall of worry. Most bull markets are marked by experts claiming doom around the corner. Every time someone tells me about some genius who predicted this or that market crash I respond thusly: Yes, and how many crashes that didn’t happen did he predict?

    This, however, is different. There are a lot of pundits out there who seem to be trying to will us into a recession. One never knows what someone else is really thinking or their motivation, but it seems to me that many who pride themselves on their sophistication have allowed their personal feelings about our president to cloud their professional judgment regarding the economic impact of his policies.

    This week it is once again the China trade negotiations. Trump sent out one of his tough Tweets about tariffs, “If the Chinese don’t finalize this deal by Friday….” For those paying attention, this is extremely familiar territory. This is almost exactly what happened in the trade negotiations with Mexico and Canada. Talks were good, then they slowed down, then Trump made threats and the deal got done.

    Negotiation is often ugly, which is why people liked the idea of not negotiating for their next car. It is why these types of things used to be done in the “smoke-filled room.”  Today we see it all, or almost all anyway. Much of it makes us nervous. I understand not liking the Trump methodology; I don’t care for it myself. However, not liking it is different from not recognizing it. We should have learned by now: this is how he negotiates. It worked with Canada. Will it work with China? I don’t know, but I think we have to give it the benefit of the doubt. Otherwise, we have to ask ourselves, are we learning?

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Refusing to Learn

  • The market rally that greeted us in the New Year has hit a speed bump. Now we are down one week and up the next. So is the rally over and another downturn around the corner, or is the rally just getting started? In other words, which way do we go from here?

    This is always the question, isn’t it? There is an old saying:  put 10 market analysts in a room and you will get 12 opinions. The data can be made to look any way one wishes at the moment, starting with GDP. The fourth quarter of 2018 came in with growth of 2.6 percent. That was higher than expected and gave us the roughly 3 percent annual growth for 2018 that the administration’s economic team promised. They say this proves that the “new normal” of 2 percent growth – which we were told by the previous administration was as good as it gets – was, in fact, not as good as we can do. We can bring America back to its historic growth rates.

    The other guys (there are always other guys) say this is just a sugar high and economic growth will come crashing down now that we are back to reality. The market took the news of 2.6 percent growth positively, for what that is worth; until the unemployment report came out. The unemployment rate dropped to 3.8 percent, but according to the report, the economy created only 20,000 new jobs. That last number is not good at all. The naysayers had a field day with that. Look how bad the employment situation is, we are only creating 20,000 jobs that is horrible. The other side of that is that we have extended the longest period of sub-4 percent unemployment since the 1960s. Wages are also growing faster than inflation; more importantly, in my opinion: wages are growing faster at the lower rungs of the economic ladder. That means inequality is decreasing, but I wouldn’t hold my breath waiting to hear that from the naysaying crowd. The market reacted poorly to the unemployment report, for what that is worth.

    Then we got some better-than-expected news from retailers. Do you see the pattern? Good news, not-so-good news, and news that could be taken either way. It is really in the eye of the beholder. So, where is the market going? To tell you the truth, I don’t have a clue. I hope that doesn’t bother you, but in case it does, let me explain.

    First of all, none of these prognosticators has a clue; I’m just willing to admit that I don’t have a clue. Secondly, and more importantly, this is why we believe so strongly in investing from the bottom-up. I don’t need to know what retail sales numbers will be to know that Amazon is a winner, even if New York doesn’t want them. I don’t need to know the exact future of healthcare to know that United Healthcare is the best of the breed. You see, it is far easier to understand a company’s business and the potential for that business than it is to guess what will happen in the market next week.

    Prudent investing is done from the bottom-up, and from what we can see there are still many attractive opportunities in the marketplace. Based on that knowledge I am optimistic about the future. Here is another thing I know: No matter where the market goes, it will not travel in a straight line. Every day or week the market is down, the financial media will find some pessimist predicting the end of the world as we know it. Every day or week the market is up, the same networks will find an optimist who will say that the market is headed for heights never seen.

    In the meantime, real investors seek out opportunities one by one. Some may find it boring, but it works, and that is what matters to prudent investors. So let the pundits fight it out, we’ll just quietly do our job.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Which Way Do We Go?