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Iron Capital Insights

  • Iron Capital Insights
  • May 24, 2023
  • Chuck Osborne


“Reason’s got nothing to do with it.” ~ Mr. Gibbs, “Pirates of the Caribbean”

Many years ago when I worked at Invesco, I transitioned from the trust company to the retirement division, where I was the director of investments. On one of my first days in my new office, two blocks farther down Peachtree in the Midtown area of Atlanta, the CEO of the retirement division stopped me in the hall and demanded that I explain why the market was down that day. I responded, “Well, Bob, the market is down because more people are selling than buying.” He didn’t like my answer.

If one listens to the financial media pundits, then she would probably believe that there is always some legitimate reason for market behavior and that the market is always logical and correct. Unfortunately, that is nonsense. The market does do a good job over the longer term in valuing various companies, but on any given day, it goes up when there are more buyers and down when there are more sellers, and why those people are buying and/or selling is anyone’s guess. Maybe an investor sells because he knows something about the company, or maybe he needs the money to pay his child’s tuition. There is no way to know.

© ra2studio

Part of the art of investment management is being able to discern when price movement in the market means something from when there is a disconnect between the market and reality. We seem to be in one of those disconnect moments lately, and there are various reasons for it.

For more than a year now we keep hearing from Wall Street that a recession is right around the corner. Oddly, the same pundits who tell us this will also say that the two negative GDP growth quarters we experienced in the first and second quarters of 2022 somehow don’t count. Meanwhile, they keep telling us that the Fed raising rates will cause a recession, and we keep not going into a recession. The initial reading of GDP growth in the first quarter of 2023 was 1.1 percent; the biggest drag was a lack of inventory building. Consumption was closer to 3 percent. The Atlanta Fed’s GDPNow, which is a real-time measure of GDP growth, was 2.9 percent through May 17.

Yet, there are still very few who have been willing to admit they were wrong. Several talking heads have now shifted to claiming that we are in the late phase of the economic cycle – in other words, the business cycle runs from recession to recovery to boom to recession, and we are approaching the end of a cycle where the boom slows and we enter a recession. Cycles historically last five years, although recently they have been lasting longer. The problem with this narrative is that we have had two recessions in the last three years: We had the Covid recession, and then the recession last year that no one wants to call a recession. If anything, we should be at the beginning of a new cycle.

If this weren’t bad enough, the pundits keep screaming the word “crisis” every time a bank is mentioned. We do not have a banking crisis; what we do have is a difficult environment for running a bank, and this environment comes after a prolonged period of arguably the easiest era banks have ever had – they could borrow for free and make almost any loan they wanted and still be okay. They didn’t have to pay anything to depositors to keep them. As interest rates have risen, all of that changed. As the old saying goes, when the tide goes out, we find out who was swimming naked. Two very poorly run banks have gone under. That is not a crisis; that is a return to business as normal. Poorly run businesses are supposed to fail.

Now we have the debt ceiling to worry about. Like all of our politics today, this is mostly theater. Our politicians will play for the camera, telling us how reasonable they are being while the other guys are being careless. In the end, they will raise the limit. They will wait until the last minute because…why wouldn’t they? The drama, while bad for the country, is good for ratings.

While all of this noise is clanging in the background, the reality is that our economy is still growing. Companies reported earnings that were almost 4 percent better than forecast, and well-run banks are actually taking market share from poorly run banks. It is always frustrating when the market disconnects from reality, but this is precisely when opportunities are created.

In times like these, it helps to stay focused on prudent investing and remember the wisdom of Mr. Gibbs, “Reason’s got nothing to do with it.”

Warm regards,

Chuck Osborne, CFA
Managing Director