"What is trust in these times?"
2 King Henry IV
Trust bridges gaps between perception and reality. It has a part to play in virtually every human endeavour. The engineer trusts that the raw metal he works is pure and matches specifications. The aircraft manufacturer trusts that the wing’s stress tolerance is sufficiently accurately defined by the engineer. Passengers board the plane on trust that the manufacturer’s checking process is thorough, the risks adequately quantified. Trust plays a crucial part throughout the decision process. The decision to board the flight is not the product of blind assumption. It is justified in the light of past customer experience, reputation, and a record of accident-free flying.
Across the Atlantic where resides the planet’s most powerful, innovative and prosperous nation, trust is in short supply. One might wonder whether some Americans would ever board the plane. Such is the scale of mistrust that now blights their society.
A moment’s thought makes clear that trust lies at the heart of any liberal society wherever choices can be freely and rationally made. Without trust the very coherence of civil society breaks down. It had almost done so in America.
Of course, despite sensible precaution, decisions made on trust frequently turn out to have been misjudged. This is not so much a matter of any link in the decision chain falling short of expectation. More likely it will be attributable to the intrusion of some extraneous factor hitherto unrecognised or ignored. An energy crisis brought about by war is a topical example. So is disruption inflicted by a pandemic. The problem for decision makers is that the number of out of the blue surprises – Black Swans economists call them - is virtually infinite.
Financial forecasters including economic pundits, political leaders and, dare one say, investment managers dislike indefinable or infinite factors. They obstruct the pathway of assurance and predictability that leads to settled conclusions.
To avoid this outcome forecasters tend to colour their message with unjustifiable assumptions scant of supporting evidence. Disappointing outcomes drain trust from any future relationship between the parties.
Many in the UK recall with horror the recent “mini” budget. Infinite presumption sowed the seeds of its own rejection. By ignoring the crippling implications of the programme’s borrowing cost the statement left a gaping hole in the whole budget calculation. No bridge or any other means of connection was offered to span the gap between cost and funding. Investors were left to anticipate the worst from a prodigal splurge leading possibly to the country’s ruin. Trust in Truss vanished in an afternoon. Economic adventurism met an early demise.
When it comes to investment managers and their customary offering, the sheer infinity of unknowable potential risk and reward factors presents a familiar difficulty. To bypass these limiting factors financial market forecasts tend to be cast in a series of stereotypical economic presumptions. These usually rehearse comfortable suppositions already shared by the mass of investors and discounted in current prices. Understandably much less if any emphasis is placed on the potential for the unexpected. If as a result disappointing outcomes become habitual, trust between client and manager is likely to suffer.
Investment managers can sidestep the infinity of unknown factors in a different way. They can inspect the existing investor consensus and search for presumptions that look vulnerable to challenge. The aim is to recognise unrealistic expectations. Through challenge the manager can hope to unearth potential anomalies of undervaluation as much as the potential for price falls. Take a recent example. The presumption that many US digital technology companies would achieve the growth rates implied by market consensus was patently flawed. It now turns out there was indeed a limit to the appetite of the world’s consumers for digital communications products and their capacity to acquire them. Rosy presumption had displaced common sense.
In thus acknowledging the limitations of conventional investment forecasting, one hopes to strengthen a relationship of trust between investor and manager. Trust is the dividend earned by reasoned expectation.
If trust matters in the financial sector, it does so immeasurably more in UK politics. Count the times one hears chatterati venting deep distaste for the conduct of MPs and the whole apparatus of government. Part of the backlash stems from a perceived withholding or cloaking of the truth. Mistrust is a parasite which feeds voraciously on the failure of political interviewees to answer simple questions. Lack of candour leaves trust to wither under the laser light of truth.
Loss of trust in Westminster (and in devolved assemblies) has discredited UK politics in the eyes of global observers – and this at a time of maximum uncertainty. Some loss of confidence among our overseas partners is already reflected in the relatively low valuation of the UK equity and bond markets. There are many imponderable reasons for this weakness. What is sure is the blow to investors’ confidence delivered by Westminster’s disdain for our partners overseas.
Britain has long been a desirable international partner as a big trading nation. It possesses world-leading competences and is a massive provider of financial services. Hitherto the British government’s bizarre antics have been partly indulged by the goodwill of domestic and offshore investing institutions. They recognised value in the stability of the nation’s institutional arrangements. Until recently, that is, when one globe-spanning ratings agency further reduced its estimate of the UK’s credit worthiness. Our standing overseas has been materially diminished.
Trust is one of those qualities like good health whose value can go unappreciated until it is lost. Since the 2008-9 crash outsiders have, not surprisingly, viewed those involved in the financial sector with a degree of cynicism. Mistrust domestically has since widened to other sectors, for instance water companies, in the wake of specific failings. Few corporate giants have escaped criticism.
Growth of mistrust is not confined to the UK. Since the 2019 American election, mistrust of the political establishment in Washington has widened political schism across the breadth of the continent. Only a sanity-restoring midterm election result relieved America of the prospect of all-out civil conflict.
Here in the UK, mistrust has not yet pushed us to the point of irrecoverable divide. Things may improve and at least we have acquired apparently sensible people to occupy the two main offices of state in Westminster. One can only hope they recognise the inestimable value of the trust being lost across our society. They must also recognise that mistrust in the UK is being exploited and inflamed by nationalistic assault. Many of the pillars supporting our democratic society are under attack – the judiciary, the BBC, the Treasury and other Civil Service departments. All have been savagely traduced by Westminster polemicists supported by pliant press sympathisers. Truth is left to perish. Unless these threats are directly confronted, Britain may begin to acquire an unaccustomed status – that of a failing state.
Jeremy Hunt’s recent budget supplied a douche of painful reality. It goes a small way towards rebuilding the trust essential to any healthy society. Even in the darkness of mid November the American midterm election result, Ukraine’s courageous stand for democracy, and an honest UK budget are revealing the buds of a new spring. Trust can surely flower again in a new season. Recently rising financial markets seem to believe so.
30th November 2022