Trust is an interesting concept. How does one “trust” someone? What if they break that trust – should we trust them again? This has weighed especially heavy on me in recent months as continuously it seems that we are called to trust that politicians have our best interests in mind when they draft policy and spend taxpayer dollars. And it wasn’t until I was reminded of the broken promises our leaders have made, that I turned to the words of a poet, “trust everybody to be themselves”.

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It's brilliantly simple – mostly what we struggle with is trusting that others will do what they say they will do, or commit to what they said they would commit to, or fulfill some expectation that we had for them – but there is a different distinction available to us. By trusting others to be themselves, we are eliminating our needs and expectations and instead, refocusing on the actions of the other person. Depending on them to do what they have always done. And if they surprise us? Great! Nothing wrong with that. But in the meantime, we will trust them to be themselves and take actions consistent with who they are.

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Trusting the Fed and the Treasury (currently led by the former Fed Chairman):

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It would be amazing if the Federal Reserve board of governors could be trusted to maintain a stable money supply and employment level within the economy. That is after all, their mandate and our expectation. We also know that by measuring something, we inherently change the nature of it. And we also know that in the face of choosing between stable money supply and employment, historically, the Fed has chosen employment. We also know that the Federal Reserve’s job is to manage its communication to the public – never being too transparent as the anticipation of outcomes could potentially accelerate or exacerbate an economic outcome. So who is it that we can trust the Fed to be? We can trust them to (1) not fully or truthfully disclose the state of the economy and money supply, (2) to have an agenda that may be different than what is publicly apparent, and (3) that by trying not to influence politics with their policy, they inherently are able to influence politics with their policy.

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Examples:

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• Janet Yellen doesn’t think 0% interest rates will be a problem or cause misallocations on balance sheets

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• Powell says inflation is transitory

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• Yellen says raising interest rates is good for the economy

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Result:

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• Banks load up on long-term US treasuries at 0% interest rates

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• Inflation is not transitory

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• Raising the interest rates causes those banks who held long-term treasuries to struggle and in the case of Silicon Valley Bank and First Republic, fail.

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Trusting our Politicians:

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As much rhetoric as we’ve seen in the last few years, it’s no surprise that politics is always at the forefront of our news and our conversations about how policy will impact the economy. And while we turn on our information-access-points (phones for most of us) to watch these politicians tell us what they are going to do, we have a simultaneous thought – “these politicians are all the same, they can’t be trusted”. So how do we manage what we perceive to be the gutless bane of society against our expectations that they will fulfill the promises they made? Simple – we trust them to be who they’ve always been. We can trust them to lie, we can trust them to take credit, we can trust them to leverage morality and identity to sway public opinion. We can trust that they will do whatever it takes to maintain their grip on power. We can trust that is most dangerous and apparent in a declining society.

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• So given that’s who they are, how does that inform our actions?

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• Power corrupts – so power must be limited and separated

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• There are many things we will disagree on – politicians will use that to divide us into groups

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• The purpose of our society was to protect the individual from the group – consider that if we protect the rights of every individual, then collectively we will all be protected. When we divide into groups, we create factions, and factions have created war and revolution when currencies collapse.

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But that’s not necessarily helpful from an economic perspective, so allow me to expand:

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[chart of US debt/money supply]

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If we removed the years from the bottom of the chart, would you be able to tell me what political party was in power? Would you be able to tell me what lies the politicians were telling? Would you be able to tell me who the “good” and “bad” guys are? They’re all the same, the charts move up, and to the right. So we can trust that they will continue to do so. And that is the key – as we move right, we want the charts to move down. And until we see that consistently, we know that the word of our politicians cannot be trusted.

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NOTE: these are not charts of stock prices. These are total numbers. Consider the correlation between the decline of the dollar and the increase in stock prices over the same time frame. This is a reminder to not conflate growth with inflation.

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This hypothetical is not intended to suggest a particular course of action or represent the performance of any particular financial product or security. 

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Trusting ourselves:

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Take a deep breath. It’s not that serious. I want us to be aware of how we normally behave. Not how we think we “should” behave, but when push comes to shove – how have things been in the past? Do you typically sell everything when you anticipate a crash? Or do you hold on, knowing that you have the right amount of risk and are comfortable keeping capital invested [diamond hands]? Do you buy more? Do you watch the news or do you turn it off? Do you log in to check your account multiple times a day, or have you forgotten your password to your online access? Imagine opening a statement and seeing everything you own in your portfolio down 5%….10%?……40%?. Imagine the actual number you would see…now, trust your feelings. I don’t mean trust how you feel, but trust that you will feel that way, and as a result, you will behave and react a certain way. There’s nothing wrong with that – just acknowledge what can we trust ourselves to do?.

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We can trust ourselves to be ourselves – and as such, we will want to put systems in place to support the behavior we want to see, instead of the reaction.

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Systems to review, consider, implement and SHARE:

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Cash flow:

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Consider that you may not be tracking spending closely. This is not the same environment of 5 or 10 years ago. Wages will not keep pace with inflation, and we should expect managing cash flow to have a larger financial impact than in years past when we could rely on market returns or future wages.

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Money moves in 3 ways: inflows, outflows, and capital to be allocated. We have a cash flow structure that can help you to manage this.

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Diversification beyond stocks and bonds:

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• If you’ve been reading my newsletter for long, you already know how I feel about the bond market. And while I think stock balancing is appropriate (rotation from growth to value, from domestic to international) the amounts and predictability is uncertain. We would expect this asset class to be one of our favorites over the long term, we can never predict the future. If you know that a downturn of 10-40% would cause you to panic, then you’ll want to consider rotating out of the market. Alternatives are our favorite asset class in this environment as we believe they can provide stability that will allow for more aggressive positioning with other assets.

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• We want to own assets that are non-correlated to the stock market. The right private capital deals can provide this, often with the trade-off of liquidity. For those who need more liquid capital, consider ETF alternatives such as physical gold, commodities or managed futures.

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Proactively shifting/hedging against perceived risks.

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• At the end of the day, we are placing bets when we enter the market. The future is never known, it’s only a possibility/probability. Some of those probabilities have a more attractive number than others.

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• When we have large, concentrated positions we want to hedge (buy options contracts to protect value). We can automate this – please discuss with us directly.

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• When we are over concentrated in paper-assets, we want to buy real-assets. This includes (not limited to), select value stocks, real estate, land, solar panels, gold, silver, guns, ammo, cows, chickens, etc. You need to decide where you stopped reading that last sentence to determine how concerned you are about future risks in this regard. I would encourage you to read history of inflationary/hyperinflationary societies responsibly. This can be very scary, and, you could make the argument things looked just as bad (if not worse) in the 40’s and the 70’s. A big difference is our ability to produce and manufacture goods as a society.

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Short-term is not Long-term:

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• Consider that the next move from the Fed may be a rate cut. We can’t be certain if markets or the Fed will cut first. Anticipate that if the Fed does cut rates, the short-term reaction from markets may be positive, and may remain so until inflation data (or real-life prices) shows inflation on the rise again. While we may want to position for short-term market movements, consider that you will also want to position some assets in anticipation of the next round of potential rate hikes, should inflation appear again. Keep in mind the Fed has had to bail out banks before inflation reached it’s 2% target. We don’t anticipate we’re out of the inflation woods yet.

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SHARE:

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• Consider that you are part of a small group that receives communications like these. If you found this valuable, our conversations valuable and our services valuable – then please share this article with your friends, family, and anyone who is finding themselves uncertain in the current environment.

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Michael Olivia, William Combs & Jacob Campbell are Registered Representatives and Financial Advisors of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representatives of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WestPac Wealth Partners LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. | Olivia CA Insurance License #0E57168, AR Insurance License #2343024 | Combs CA Insurance License #0I49903 | Campbell CA Insurance License #0K27963 | 7010088.1 Exp. 09/26

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Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Past performance is not a guarantee of future results. Indices are unmanaged and one cannot invest directly in an index. Diversification does not guarantee profit or protect against market loss. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.

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