The Public Trust

In my prior blog post (“The Week That Was”) I noted the occurrence of two seemingly mutually exclusive events within four days of one another this past week:

1)   The confiscation of 30% of funds in Cyprus bank accounts holding a balance exceeding 100,000 Euros, in order to fund a massive bailout of Cyprus banks;

2)   The achievement of a new closing high price (nominal) in the S&P 500 Index on Thursday, March 28 — topping the former record set five and one-half years ago on October 9, 2007.

I pointed out the fact that this tiny Mediterranean island (nestled comfortably south of Turkey and west of Israel) captured the world’s attention all week because, seemingly, the European Union tried an “about face” in debt crisis management by switching from expecting taxpayers to bear the cost of governmental or bank profligacy to extracting a hefty share of bank account deposits in order to pay for the bailout of those very banks.

When governments become even more unpredictable than usual – public trust is eroded; and it is very safe to assume that trust among Cyprus citizens regarding their government and their banks has been severely shaken.

Developments in Cyprus (and the accompanying pubic suspicion of government) is part and parcel of a mounting decline in worldwide trust of governmental authority. At the end of January, the Pew Research Center released its latest research study of trust in the U.S. government.  ( http://www.people-press.org/2013/01/31/majority-says-the-federal-government-threatens-their-personal-rights/ )   The study report’s headline sums up its two most telling findings: 1) “Majority Says the Federal Government Threatens Their Personal Rights”; 2) “Views of Congress: Problem Lies with Members, Not the System”.

U.S. adults have been frustrated with government for decades; that is nothing new. However, this year’s report reveals that, for the first time in the study’s long history, 53% of those polled believe that the federal government threatens their own personal rights and freedoms. That is a watershed development within the diminishment of public trust.

In the Pew survey, 73% of those polled admit that they can trust government only some of the time, if at all.  Only 20% of polled adults reported being “content” with the federal government, while 58% report frustration with government and 19% admit to anger directed at the government.

The United States cannot afford for its people to believe that George Washington was the last “Washington” that could be trusted. The President and Congress must focus together on how to restore the public’s trust! (Photo by cliff 1066, licensed through Creative Commons)

With regard to Congress, as we witness each week in news stories and sound bites, agreement within Congress is very hard to find these days. However, Congress’ obvious dysfunction has managed to unite 68% of U.S. adults in viewing Congress unfavorably!  A paltry 23% cared to offer a favorable opinion of Congress.  Perhaps more startling, when asked “why” Congress is “broken”, an unbelievable consensus among Republicans, Democrats, and Independents emerges! With majorities ranging between 56% and 58%, U.S. adults from all three groups indicate that Congress’ problem is rooted in its “members” rather than “the political system.”

The convergence of this poll with growing unrest in Europe, the Middle East, China, and other nations suggests that our world is likely to face many trying challenges ahead.  If the people within a nation cannot trust government to protect their basic rights – rights that we might identify as including life, liberty of speech, freedom of religion, ownership of property, and equal opportunity, etc. – how long can such government actually continue to govern?

Washington D.C. leaders have framed the bitter federal budget debate with attention getting terminology such as “Fiscal Cliff” and “Sequestration” and have offered dire warnings of the dreadful consequences tied to both. And yet, by the math used outside of Washington D.C., a closer look at the actual budget numbers reveals that $85 billion in supposed budget cuts really means Congress will be spending $15 billion more than in 2012.

We can sympathize with all Cypriots who had part of their savings (an aggregate total estimated at $6 billion) usurped this past week by its government.  But the reality is that the “Zero Interest Rate Policy” (ZIRP) engineered by Ben Bernanke and the Federal Reserve (through its several iterations of “QE” monetary stimulus) has already deprived millions of fixed income senior citizens of a much, much larger amount of interest income that those senior citizens reasonably expected to count upon during their retirement years.  Even more encompassing is the degree to which the Fed’s “QE” policies continue to erode the purchasing power of the U.S. Dollar, diminishing our “real” economic well-being while simultaneously offering the illusion (through the appreciation of assets such as stocks) of economic progress.

One brief glimpse of the “cost” of that “QE” policy is provided within an article written this past week by Rodney Johnson, the president of an investment management firm. Johnson reports that early in 2012, his firm calculated the financial cost of “negative interest” (the difference between interest earned in bank accounts or through Treasury bills, minus the rate of inflation) and arrived at an estimated “financial cost” to you and I of one half a trillion dollars. Obviously, that cost has continued to climb in the past year, so bank account holders in Cyprus are not the only ones deprived of funds through government policy.

The loss of public trust in government in Cyprus, in Greece, in Italy, in the United States, or anywhere, impacts us at all levels – including the investment world. Virtually no investor or options trader who I personally know believes in the full integrity of federal economic reports, nor do they believe Chairman Bernanke when he offers public statements that stretch the truth through feats of verbal legerdemain. One memorable example was his quote on CBS in December of 2010: “One myth that is out there is that we are printing money; we are not printing money.” Strictly speaking, Bernanke was correct; the Federal Reserve does not “mint” currency. However, the essential impact of “QE” is to lower interest rates, monetize the federal debt, and provide a monetary stimulus that impacts stocks, bonds, other currencies, etc. as though it was printing money!

The question with which the Cyprus government must wrestle is how it will restore the public trust. At least we should all hope that “how” is the question, rather than “if”!  We need to hang on to that hope because, as the Pew Research Center’s study demonstrates, our own federal government faces the very same challenge. If our government fails to restore public trust, then (all too soon) you might be joining me in discovering what it is like to own, and regularly rollover, a portfolio of SPY puts!

Submitted by Thomas Petty

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