Having Serious Trust Issues

by Inya Ivkovic, MA

Those who have been around stock markets long enough have learned not to trust company executives too much. Part of their job is to be optimistic about their company’s prospects, regardless of whether that optimism could be substantiated or not. Far too often, many of them have even resorted to issuing misleading and deceptive statements, which is why their words are typically taken with a proverbial, and rather substantial, grain of salt.

I would venture to say that such distrust is normal in a way and denotes the very essence of capitalism. Namely, aside from optimism, justified or not, a bigger part of management’s job is to look out for their company’s interests. No public company is in the market just to look pretty sitting there. But what that means to shareholders and investors is that a healthy dose of skepticism towards much of what is published out there about investments could be just what the doctor ordered.

So, I’m stating the obvious. But I’m only mentioning this because, up until now, if an analyst or market observer couldn’t trust a company’s management, he or she could reasonably rely on what the government had to say. And I’m not talking just about legally binding documents and statements, which must be true and unbiased or else whoever produced them will end up in prison. I’m also talking about government officials issuing statements of any kind. Upping the ante is also the fact that I’m not talking about notoriously unreliable governments, such as China, India, Venezuela or Cuba, but governments that we all have viewed, up until recently, as good and truly democratic — our own Western ones.

Apparently, there has been a scary trend developing in the last few years, resulting in serious trust issues. The corporate promotion of self-interest seems to have spread to governments as well. What makes it a serious trust issue is the fact that no corporation is as dangerous to a person’s finances as his own government.

Playing devil’s advocate, however, I have to say there is a valid reason why Western governments have departed, in various degrees, from their unbiased stance towards promoting self- interest, sometimes rather blatantly. Global financial markets are in disarray and world governments, including Western ones, have been forced recently to talk up their finances in order to prevent flight to perceived safety (for there is nothing truly safe out there anymore, except perhaps gold) and repatriation of domestic capital.

For investors, the implications of such an odd development are two-fold. First, the more desperate a government is, the more likely it is to paint a rosier picture than it really is. Believing everything a government says at face value could cost investors money. For example, saying that the worst is likely over, that signs of recovery are already here, does not mean it is time to go back into the game. At least not just because your government says so. Extensive research and thorough due diligence of your own is what should tell you when to go back, if at all, into any of the currently ailing assets, be it stocks, real estate or commodities.

The second implication is that now may be the time for smart and well-funded risk takers to take on the government and bet against it. A few years back, George Soros, for example, bet against the British government and shorted its pound, making a killing. He shorted it again recently, all because his faith in the current British government is diminishing, to say the least. Of course, most of our readers — and ourselves, too — do not have institutional powerhouses behind us or equivalent capital to pull a “George Soros” on any currency. Scaling this discussion down, however, here’s the one piece of advice I can offer: don’t trust the March rallies of 2009.

Why? It’s simple really. The government’s job right now is to prevent financial systems from collapsing, not your own. The obscene amounts of money being pumped into global financial systems are for their preservation, not your own, and not for billions in private investments already lost. When determining who gets the money, the government will look first to whose failure will hurt it the most. That’s how Lehman Brothers was allowed to crumble and AIG was given one crutch after another, despite insults thrown along the way, such as those notorious bonuses paid to people who got us into this mess in the first place.

Unfortunately, this is the way things are supposed to be. The government knows there will be collateral damage, but there is a bigger picture to consider. And if you’re not careful, you just might end up in the first category.