My Turn (cont.)

This phenomenon is not directly related to the financial crisis, but it sure has impacted the aftermath. Barely one year from the apex of this crisis and revisionist histories are already being written. The problem is that the true causes of this crisis are very complicated, and our modern media doesn’t do complicated. They do pundits and polls.

One of the issues coming out of this era of the uninformed strongly held opinion is that pundits don’t just pick their point of view; they actually get to pick the facts. I have read several articles that will have a sentence beginning something this one from a recent issue of The Wall Street Journal: “The fact that our current troubles are the consequence of government’s withdrawal from the economy…” This is not, in fact, a fact. The person who wrote this obviously has never worked in our economy. Government is everywhere in our economy. The author may believe we have too little regulation, and he is certainly entitled to that point of view, but that is his opinion, it is not a fact. This is, in my opinion, the primary reason our politics have become so hateful: people with differing points of view can intelligently debate each other and remain respectful, but people who choose to make up facts cannot be reasoned with.

Unfortunately, this particular fiction is fast becoming consensus in government circles. The danger of this avoidance of the truth is that we will end up not addressing the actual causes of the financial crisis. If we don’t address all the causes we will be doomed to repeat this chapter of our history. It won’t be exactly the same, but we’ll face these issues again. To paraphrase Mark Twain, history doesn’t exactly repeat itself, but it sure does rhyme.

One year after the apex of this crisis, not only has government gotten off clean in the media consensus view, but the real attack is on capitalism itself. Michael Moore has a new movie out entitled “Capitalism: A Love Story”. I have not seen the movie but I have read interviews with Moore about it. In one interview Moore states, “Capitalism is evil and you can’t regulate evil.”

He goes on to argue that capitalism is a big scam that was devised by the rich to convince the regular folks that if they worked hard, they too could be rich one day. Moore says this is a big fat lie. I’m curious how Moore, the child of a secretary and a factory worker who has become a multi-millionaire movie producer, explains his own life story under this “big fat lie” theory.

Ayn Rand once said, “The hardest thing to explain is the glaringly evident which everybody had decided not to see.” The overwhelming superiority of capitalism over every other economic system is so glaringly evident that it is indeed difficult to explain. Yet people like Michael Moore condemn the very system that makes their material existence possible. Moore is a poster child for capitalism, yet he condemns it.

Perhaps the best way to explain it is to go to the dictionary and define it. Dictionary.com defines it as follows: an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth. In other words, capitalism is simply a system of private property. When we think of property we tend to think in big wealthy terms, but property begins with a much smaller radius. It begins with your ownership of yourself. Capitalism is freedom, and to call it evil is the mother of all uninformed strongly-held opinions.

In The Seven Habits of Highly Effective People, Steven Covey points out that effective people focus on what they can control. In this article I have taken my turn to vent about what I think is wrong, however I have no control over the media, or public perception, or the overall direction of our nation. I and the rest of the staff at Iron Capital can control only how we react to these forces and how we allocate our clients’ money. The current attacks on capitalism and the resulting growth of government will have the same negative impact it has always had. In the 1930s and the 1970s, these same forces brought us economic stagnation, high unemployment and markets that were volatile but went nowhere. On the bright side, these decades also gave us investment greats like Benjamin Graham and Warren Buffett. There will be positive investment opportunities and we will find them for our clients. That is my pledge to you. This too shall pass, and the pendulum will swing back. Truth has a way of coming out in the end. We may be heading into a dark chapter, but the American story isn’t over yet.

Charles E. Osborne, CFA, Managing Director

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Market Forecast

WITH THE S&P 500 UP 19.26% YEAR TO DATE, our 9% forecast looks as conservative now as it looked optimistic in February and March. It is hard to see how this market can continue its meteoric rise. However, it is also difficult to see any meaningful pull back. We think we will be range bound from here, but we are increasingly cautious.

Emerging markets and domestic small caps seem the best opportunities for continued growth. International continues to surprise on the upside but it is hard to believe this is sustainable. Currently corporate earnings are being helped by a rebuilding of inventories which had been drawn down during the height of the downturn. The question remains, where will growth come from when that is done? Until that question is answered broader markets will not do much of anything.

We still believe the opportunities in bonds are in the corporate and high-yield bond market, but for different reasons. Treasuries, usually the safe haven, continue to look dangerous. The record spending spree raises the fear of inflation. The dollar continues to drop like a rock. China and Russia are pushing for an alternative to the dollar as the default international currency. These trends do not bode well for treasuries.