Iron Capital Insights

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

Refusing to Learn

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