IN YOU I TRUST

It is intangible but essential. It is essential because it is the glue that holds together our economic system and society. Transactions could not occur; people could not live in peace without suspicion; society would disintegrate if it were not for trust.

Reflecting on what has transpired in the equity and fixed income markets over the past many months and the seeming disconnect between these marketplaces which seem to suggest dire economic straits and the flow of numbers from a variety of government sources which seems to suggest otherwise, I felt that I was missing “something”. As an analyst, one is trained to look at facts and figures and with that information make a determination. For too many months, the facts and figures have not been sufficient, apparently. To state the obvious, this state of affairs has been extremely frustrating. A piece of the puzzle was missing. So I decided that I had to have a new source for guidance.

Psychology or sentiment is an important part of the investment decision making process. So, I called upon a friend who works with a number of extremely wealthy families, whose background is in psychology and who runs quite a substantial not for profit entrepreneurial operation. We sat at breakfast and I asked him for his thoughts as to what was going on in the stock and bond markets and why it was going on. In a nutshell, his reply revolved around trust.

Investors’ trust in “the system” has been damaged. It is not that people do not know that there are bad people in the world — untrustworthy people in the world. But we all believe that there is a balance between those in whom we can have confidence (the vast majority) and those who look out only for themselves. Right now, investors feel as though the balance is “out of whack”. In a relatively short period of time it has been revealed that a number of formerly powerful and illustrious corporate leaders have been dishonest to a shocking extent. No only have the misdeeds of these ten or so corporate chieftains been outlined to the public by the media — but they have been outlined ad nauseum, giving investors a daily diet of egregious behavior, which certainly does not help sentiment.

This sort of extraordinary behavior or personality defect is not new. Throughout history, there have been other instances when people lied and cheated to benefit only themselves and damaged investor trust. After the insult, the systems and investor psychology repaired themselves and then the markets went on to scale new heights, as the economy continued to expand. So what has happened is not unique in historical terms and after we go through another cycle will more than likely be repeated in another guise but with the same effect sometime in the future. Man is really no different from period to period.

During our breakfast my friend and I asked the manager of the restaurant how many times he had been “stuffed” for a meal. Obviously, when people arrive at the restaurant manager’s post and ask to be seated, the restaurant manager implicitly

and explicitly decides to trust that after the patrons have received their meals, they will pay. If that were not to be the case too often — i.e. if the restaurant were to get stuffed too often, the restaurant would go out of business. Or, the restaurant manager would have to insist upon payment before any fork were lifted and this would obviously make it quite difficult to run a restaurant. In very much the same way as we go through our everyday lives a barber will trust that you will pay him for this haircutting efforts; a lawyer will trust that you will pay his bill after he has provided services; a stone mason will expect to be paid for the new patio after it has been laid, etc. By the way, the restaurant manager said that out of the thousands of meals served in a year, he has been “stiffed” perhaps twice a year. Our economy and our society can only function if there is trust between parties that once services or goods are delivered in return there will be payment.

The media delights in reporting bad news, sensational news which seems to be the only news fit to print. The constant descriptions of selfish behavior act like a stick in a open would — not allowing it to heal. The recountings ad nauseum of corporate malfeasance of the same cast of characters should be relegated to a page deep in the interior of newspapers and not on the front page. Enough is enough and let’s get beyond this.

Probably the secret to success of the American economic and societal system is that there is a vibrant, broad and deep middle class and there is always the hope of rising to the top of the pyramid based upon merit and achievement. When people lose that hope of possibility because they feel as though “the deck is stacked against them”, that is when there are severe societal problems. Look at most any country in Latin America, Africa and Asia to find examples too numerous to cite here substantiating the point. In these regions of the world there are constant upheavals. Right now in the United States, there is to some extent a feeling that the deck is stacked against us. This generates a sense of loss of trust, a sense of confusion and a reluctance to take risk. This has obviously got to change before the markets can again move forward.

I walked away from my breakfast with a better understanding of the angst which is being felt by investors. I would encourage people not to lose heart, as our American systems, while dented a bit right now, are still working. They may not be working optimistically or enthusiastically at present, but they are still working. People still go to restaurants and pay their bills; hospitals still take care of sick people and get reimbursed; manufacturers still produce goods and collect heir monies within 60 days. One can only work from the supposition that the vast majority of people in the U.S. are good and honest and will trade fairly with one another. If one did not come from that position, then our society and our economy would break down in anarchy. It has not, nor will it. There are bad people in the world who will be selfish if given the opportunity. From time to time, these selfish people get into positions of great power and influence and unfortunately have the opportunity to derail the systems for a period of time, so that they can achieve their own self centered goals. Nevertheless, the systems do self-correct and we are in that process right now. The absolution can be very painful - but once it is accomplished, our markets will be ready to move forward as they have done in the past so many times.