Iron Capital Insights

  • Iron Capital Insights
  • June 17, 2015
  • Chuck Osborne

Change

The only constant in life is change. Then again, the more things change, the more they stay the same. But wait, sometimes what is old is new again? These cliché’s can be so confusing.

If you don’t believe me then consider the NBA championship series between Golden State and Cleveland. It could be called the new versus the old. Cleveland represents the old NBA – rough and tough defense sometimes boarding on dirty play, and offense best described as “give the ball to LeBron James.” (In fairness, Cleveland has been forced to play this way due to injuries.) Golden State represents the new-style NBA – they do this crazy new thing called passing the ball. All five players seem to move at once and while Steph Curry is certainly their star, they all seem to have permission to score when open. The millennial-aged writers at places like ESPN are beside themselves with this new type of game they are calling “motion offense.” To them it is something completely new. Of course those basketball fans who are a little older can remember when motion offense was the norm, not some new thing. To us it is basketball and it is about time they have started playing it again at the professional level.

Real life is no different. I recall a conversation I overheard in the spring of 2009 as I was walking to lunch and overheard two men behind me discussing what came to be known as the Great Recession. One said, “I hope I never have to live through another recession.” I looked back – I couldn’t help myself – and the man appeared to be in his late thirties. I did not know him so I did not say anything, but my thought was, “He must not have a long life expectancy, I hope I see a lots of recessions.” Not that I enjoy them but I know that recessions happen to occur approximately every five years; it is what we call the business cycle. I hope to see lots of them before I’m done.

This brings me to today. I have been looking for something to write about as the market seems stuck and the oil story has gotten old, and then someone asked me what is going to happen if Greece actually does default. As I was pondering that question I looked at this week’s Economist magazine. On the cover they make a bold statement, “The world is not ready for the next recession.”

Before I go further let me reassure you that we do not see any signs of recession at the moment, but the headline does make one think. After all it has been seven years since that dreadful summer and fall of 2008. While this is the first year since then that the IMF is estimating that every economy in the developed world will indeed grow, the U.S. has been growing since 2009. That growth has been painfully slow, but it has been growth none the less. We have also been in a bull market for stocks since the bottom in the spring of 2009. That is a long time, and eventually a recession will happen.

During the financial crisis I began writing these newsletters in an effort to calm nerves. The theme of almost every one of them was, “this too shall pass.” Now we have been at or around new market highs for almost two years and the economy has kept moving forward. I hate to say it, but eventually this too shall pass.

Will Greece be the trigger that kills our tranquility and takes us back into a downturn? I doubt it, I really do. Greece is a lot smaller, and with all due respect to the salad and the gyro (both of which are delicious), less important than Lehman Brothers. This also has been coming for five years now, not a shock over a weekend. Having said that, the truth is that I don’t know, and by the way neither does anyone else.

This is why prudent investing is always done from the bottom-up. Will Europe go back into crisis and U.S. into recession? I don’t know, but I know you can follow it on your iPhone. Apple will likely survive, as will every other company in which our clients are invested. Might stock prices drop a bit? If so, there are lots of companies we would like to invest in at better prices. Will interest rates spike? I don’t know, but it is unlikely to hurt our fixed income portfolio.

Will it be another 2008? That I can comfortably say is extremely unlikely. Life is a cycle. Summer leads to fall, which leads to winter, which brings us spring. But no two years are exactly the same. Today’s NBA motion offense is not an exact copy of the motion offenses of the 1970’s. The next recession will not look like the last one. The cycle will continue and this too shall pass, but prudence never goes out of style. The more things change the more they stay the same, and we will continue to invest from the bottom-up for absolute returns in all environments while always being risk-averse.

Chuck Osborne, CFA
Managing Director