Over the past several days we have been treated to the spectacle of an unsavory phone hacking scandal that has metastasized into a full-blown politico-media scandal shaking the upper-crust branches of the British governing class, forcing a reluctant humility on the pashas of an arrogant media empire and making threatening growls from the recesses of that empire’s US stomping grounds as well. Now, what Rupert Murdoch, News Corp, UK Prime Minister David Cameron or any other personage or organization are or are not guilty of is not the point of this post. And as far as I can tell there is no obvious connection between this scandal and the other spectacle of the week – the playground theatrics of the US Congress whose members taunt each other with a rhetorical “Are Too! Am Not!” level of sophistication.
But these two stories are simply different faces – each ugly in its own distinctive way – of a larger and seemingly unshakeable presence in our lives today. That is a chronic, all-pervasive mistrust of institutions on the part of just about everybody who is paying even a modicum of attention. Mistrust begets uncertainty, and uncertainty is what investment markets hate more than anything else in the world. In this light it is not surprising that the dominant paradigm in the markets today is a bipolar, trigger-finger “risk on / risk off” pattern of behavior. One day the world is about to fall apart and everybody wants to do nothing other than hoard gold behind fortified ramparts. The next day investors look at the same news, see the glass as half-full or at whatever level is necessary for hope to spring eternal, and rush out to buy primary shares in some technology 2.0 IPO with a dicey revenue model. And so it goes, back and forth, day in and day out.
This is not rational behavior, in the sense that it is far removed from the “Rational Man” theorems that have filled economics and finance textbooks for decades. But in a way it is an understandable response to the world of mistrust that permeates the modern mind-set. We begin to just assume that massive conflicts of interest exist at every nexus of money and power everywhere in the world. We assume that the ones who actually get caught with their hands in the cookie jar are a small percentage of all the double-dealing and clever scams being hatched and executed – and we further assume that in most cases no one will actually pay the price even if they are caught. We hear the accused and their lawyers dissemble about what they did, what they didn’t do, how they managed to thread the needle through the conflicts of interest and the attendant multiple temptations without coming up on the wrong side of the law. We start to believe that words don’t really matter anymore.
Our better angels say no – that is not how people invested with the public trust behave, and they must know that in a capitalist economy public trust is our single most important currency. But our daily experience nags at these better angels, and with every new empirical data point we think, no, this is not the exception, it is the rule. Am I feeling lucky today? Hello, Wingandprayer.com IPO. Had enough? Time to haul those gold bars over the moat and into my cellar. Maybe tomorrow will be different.