• October 19, 2022
  • Chuck Osborne


For those who pay attention to financial pundits, the word “pivot” is becoming very familiar. These sources of pseudo-wisdom keep saying that the stock market cannot maintain a rally until the Federal Reserve pivots from a policy of raising interest rates to a policy of lowering interest rates. They are, as usual, wrong, but there is something bigger afoot here.

Before I get into that, I do wish to defend the word “pivot.” I coached basketball for years and believe, as legendary coach Tex Winters did, that to pivot is arguably the most important fundamental skill in basketball. To pivot is the proper movement of a player’s feet to avoid traveling. To be able to pivot in basketball is to know how to use one’s feet to protect the ball and beat one’s defender. The lack of emphasis on proper footwork is evident in the poor quality of today’s college game.

© MichaelSvoboda

The pivot is also the engine of the golf swing. In golf, the pivot describes the proper movement of the body during the swing. Depending on the school of thought of your pro, the pivot is a proper reaction to the movement of your hand and arms, or it is the engine that actually moves your arms and by extension your hands. I prefer the description by instructor Pete Cowen who says the body is the engine, the shoulders the transmission, and the hands are the steering wheel. But we digress.

The problem is not the use of the word pivot; it is this modern idea that we have to be on one extreme or the other. In this case, the Fed must be either raising interest rates to fight inflation or lowering interest rates to fight a recession. This is absurd. The Fed can just hold steady, maybe provide some stability.

The Fed has undue influence on financial markets, but it is not clear to me at all that they have power over the actual economy. As I have mentioned before, I believe that the Fed, and central banks in general, are overrated. If monetary policy controls the fate of an economy, then explain Japan. They have been trying to stimulate their economy with monetary policy for three decades with no success.

Economists like to focus on monetary policy because they want to be seen as scientific, and the key to that is the use, often misuse, of math. Interest rates are numbers, and numbers can go into sophisticated formulas. Similarly, tax rates and government spending are numbers, and they can also be input into formulas.

Regulation, on the other hand, is not easily turned into a number. When we were fighting inflation in the 1970s and early 1980s, one little-noticed action was the breaking up of “Ma Bell” and the deregulation of the phone system. This one act allowed phone lines to be used as a world wide web of sorts (see what I did there?). No central planner, fed governor, or economic pundit could have ever dreamed of the world that this change created.

Without that one act of deregulation, there would be no Amazon, no Google, no Netflix. Apple would still be a computer company. Almost 40 years of productivity gains would be wiped out. Iron Capital wouldn’t exist. That may be less obvious because we are not an internet company, but the internet allowed the world of equity analysis to be powered by a personal computer, when previously a firm needed loads of office space for annual report storage and teams of analysts to physically go through each company’s reports.

Today we are fighting high gasoline prices, and one of the main reasons is a lack of refining capacity. Today it would be next to impossible to open a new refinery. The Fed can raise rates forever, but that will not refine a single gallon of gasoline.

The Fed is overrated, and the role of regulation is grossly underappreciated. Of course, just like with the pivot, many will read this and accuse me of wanting to live in a world with no rules. It is one extreme or the other. That is absurd and we should call it what it is. The problem with regulation is that we never update, we only keep adding. Obviously we need rules, but the rules need to make sense. There is a middle ground, and most of the time it is the best path forward. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director