• 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
  • November 22, 2019
  • Chuck Osborne

On-Again, Off-Again

This is why so many in the administration have tried to assure us that all this tariff business is just negotiating. They believe in free trade; they just want it to be fairer, and they believe these tactics will help make that happen. I have doubts about this strategy, but I’m pulling for them to work because that would be a better world. I don’t understand people who route against their country.


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  • Iron Capital Insights
  • November 4, 2019
  • Chuck Osborne

Recession Avoided?

The slowdown in the economy has been driven by business investment, or the lack thereof, and the slowdown in business investment has been driven by uncertainty in international trade. The stock market seems to understand that, even if many who pontificate about the market do not.


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  • Iron Capital Insights
  • October 3, 2019
  • Chuck Osborne

No Free Lunch

“There is no such thing as a free lunch.” This age-old wisdom used to be common knowledge. Today politicians go around claiming they can make everything free. Charles Schwab announced this week that trading in certain securities is “free.” TD Ameritrade followed suit. Is it true? Of course not! There is no free lunch in trading, and there is no free lunch in a trade war.


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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?

  • Just when we thought we had a deal, it went away. I have talked so much about tariffs in the last year that I am really getting tired of it. We all know, or should know, that tariffs we place on foreign goods hurt us just as much if not more than the foreign country we are trying to penalize. We should all know that we, the consumers, pay for those tariffs. This should be both common sense and common knowledge.

    This is why so many in the administration have tried to assure us that all this tariff business is just negotiating. They believe in free trade; they just want it to be fairer, and they believe these tactics will help make that happen. I believe I have made clear my views on this:  I have doubts about this strategy, but I’m pulling for them to work because that would be a better world. I don’t understand people who route against their country.

    One fear I have had from the beginning of this China trade negotiation is that the tariffs end up being more than a negotiating ploy. A few weeks ago it seemed from reports that all that was left to be done on a “phase one” deal was to schedule the signing ceremony. The market reacted by sailing onto new highs; all was looking good in the world again.

    Then, the Chinese announced that part of the phase one deal was the rolling back of the new tariffs on China. Many took this as a given; after all, the tariffs were supposed to be negotiating tools, right? The president has now clarified that the tariffs will not go away, and Reuters is reporting the deal will now likely be put off until 2020.

    The market is down on this news. Of course it could all change with a tweet, as that is the world we now live in. It is disappointing, but unfortunately not surprising. As the saying goes, we hope for the best but plan for the worst. This on-again/off-again phase one deal will continue to drive the market up and down as the news flows.

    What is a prudent investor to do? One cannot ignore the environment in which she has to invest. Economies are slowing around the world, and there seem to be trade tensions and political tensions everywhere. However, prudent investors invest from the bottom-up. There are bright spots and opportunities.

    Thankfully this is the one time of year when we as Americans tune to gratitude and look for those bright spots. It is Thanksgiving, and we have much for which to be thankful. In keeping with our tradition, here is my list:

    I am thankful…

    ~ That the American consumer is doing very well even in the face of slowing global growth.

    ~ For record-low unemployment and real wage growth in America.

    ~ For my children, who are growing faster every day.

    ~ For my family, immediate and extended, which has both celebrated new arrivals and mourned loss in the last year.

    ~ For all of my friends, near and far.

    ~ Of course, I’m thankful for Mama’s pumpkin cheesecake and my loose-fitting pants, which make enjoyment of said cheesecake possible.

    ~ Finally, I am thankful for you, our clients and friends. Your trust in Iron Capital is our greatest asset and we value it every day of the year.

    Happy Thanksgiving!

    Chuck Osborne, CFA
    Managing Director

    ~On-Again, Off-Again

  • The Federal Reserve’s Open Market Committee met last week and lowered the federal funds interest rate by 0.25 percent. This is the third meeting in a row in which they have lowered the rate, and this time they changed their comments to suggest that this may be it for now.

    Meanwhile, we got a pretty good jobs report telling us that the economy added another 130,000 jobs in September. The unemployment rate is 3.6 percent. We also saw some decent wage increases. So…the economy is all good, right?

    Well…the glass is half full, or is that half empty? The consumer is and has been doing great. The slowdown in the economy has been driven by business investment, or the lack thereof, and the slowdown in business investment has been driven by uncertainty in international trade. The stock market seems to understand that, even if many who pontificate about the market do not.

    When the news from the China trade negotiations goes poorly, as was happening in the beginning of August, the market drops; things get quiet or there is some good news on that front and markets go up, as they did in late August. This same pattern occurred in September; in October the announcement was made that a deal is all but done, and markets rose.

    If this proclamation proves true, we suspect the bull market to continue, but if it proves premature, then down we will go. We seem to have a handle on how the trade war is impacting the stock market, but the unanswered question is, how is it impacting the real economy?

    The fear of the trade war is that the combination of real tariffs and the uncertainty caused by the negotiations would actually put the economy into a recession. The official definition of a recession is two quarters in a row of negative economic growth. Are we close to that actually happening? No we are not, but for years after we were officially out of the last recession, polls suggested most people disagreed with the official definition.

    Things are slowing down. Most companies who still provide guidance have guided for slower levels of growth. However, they are not predicting actual declines, which is what many feared not that very long ago. Maybe we have avoided a recession for now, and that is a good thing for now.

    Recessions used to happen much more frequently. The economic cycle from recession to recovery to boom and back to recession used to be approximately five years. The economic expansion in the 1980’s broke that cycle and was the longest ever. We had a shallow recession in 1992 and then we went on a new expansion that was the longest ever. Then we had the lost decade of the 2000’s marked by a dot-com bust on one end and a financial crisis on the other. Now we are in the longest expansion ever.

    Will it go on forever? No, but it does not appear to be ending now. Many will give the Fed credit for that – “their three rate cuts saved us.” I rather doubt that explanation; low interest rates cannot overcome structural impediments, and tariffs are structural impediments. The key to continuing our expansion is trade. If we get a truce, we can limp along. If we get the improvements we were promised, then we could pick up lost steam. Anything in between would be just fine.

    All the while, we continue to make investment decisions from the bottom-up. That is what prudent investors do.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~Recession Avoided?

  • “There is no such thing as a free lunch.” This age-old wisdom used to be common knowledge. Today politicians go around claiming they can make everything free. College? No problem, free it is. Healthcare? Why would anyone ever need to pay for that?

    Of course, we are not as dense as our elected officials seem to think. There is a big difference between “free” and someone else paying for it. Colleges are expensive to operate. Professors and administrators are human beings like everyone else, and they require these pesky things known as salaries. Most colleges take up a large amount of real estate and that costs money, even if it is just the maintenance. College isn’t free. We could make the same comparisons with healthcare.

    Charles Schwab announced this week that trading in certain securities is “free.” TD Ameritrade followed suit. Is it true? Of course not! There is no free lunch. These firms announced that they would no longer charge commissions. Commission-free trades are not free; the commission is the tip of the cost iceberg. The spread is where most of the cost occurs. There is a difference between the price a broker/dealer, such as Charles Schwab and TD Ameritrade, will pay to buy a security and what price it will accept to sell the same security. That difference is known as the spread.

    The easiest way to think of it is the retailer’s markup. The price of a shirt at Macy’s is more than what Macy’s paid for the shirt – that is how Macy’s makes money. Those transactions do not include an added commission paid by the customer, yet we would not consider them free, would we?

    Commissions made up approximately 7 percent of Charles Schwab’s revenue. They are only cutting a fraction of that 7 percent; this is more marketing than anything else. The truth is that today’s broker/dealers are more like banks than they were before the financial crisis. Their greatest source of revenue is the spread they collect on their customers’ cash. The cash that just sits in your brokerage account is loaned out overnight to other financial institutions that need reserves. The Charles Schwabs of the world collect that interest and pass on little of it, if any. At Iron Capital, this is why we took the step of actively investing our clients’ cash into money market funds so the interest goes back to our clients.

    There is no free lunch in trading and there is no free lunch in a trade war. Early this week we saw manufacturing data which showed that the U.S. manufacturing sector is in actual decline. It was the worst reading in a decade. The European Union has projected that economic growth in Europe is basically zero for the third quarter and expected to be worse in the fourth quarter. The textbook definition of a recession is two negative growth quarters in a row. We are getting close.

    Right now the market is still going nowhere. There are a lot of short-term ups and downs, but over the last 18 months or so we have gone nowhere. There is one reason: Trade. This whole dispute is negotiation and if successful it will lead to a better world, but in the meantime, we have to make investment decisions, and this is the world we actually live in. So, we remain cautious and a little defensive, as that is the prudent thing to do.

    Warm regards,

    Chuck Osborne, CFA
    Managing Director

    ~No Free Lunch

  • 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?