Confidence as an intangible asset

One of the trickiest intangible assets for a person, a company or a nation to manage is reputation and confidence. Confidence and trust are like an egg — strong in one direction and incredibly vulnerable in another. Confidence can also be difficult to assess and predict. It can be built up or erode slowly over time. Or it can be turned on or off quickly.
Two case in points are being played out in the press. The first is the popularity of President Obama after the death of Osama bin Laden. The New York Times/CBS News poll taken immediately after the announcement shows the President’s approval rating jumping from 46% to 57%. Political pundits are proclaiming how the President has gone from looking weak on national security to looking strong. [As an aside, I will also echo comments the President’s and Defense Secretary Gates’ poker-faced performance at the White House Correspondents Dinner as they sat laughing at jokes Saturday night about bin Laden knowing what was going to happen hours later.] So, if the polls are to be believed, Obama has gone from a one-termer to unbeatable with one act. Now, that is not necessarily the case (for either the one-term or the unbeatable parts) — but it does illustration how quickly the intangible asset of confidence can change.
The second case is Wall Street’s reaction to the debt ceiling. As a recent story on NPR (Debt Ceiling: Investors Aren’t Worried) notes, investors are still buying US bonds at historically low yields. Here is a case again when confidence isn’t necessarily eroded over time, but turned off like a light switch. I was writing for a financial newsletter the last time this happened in the 1990’s. A similar scenario is happening now. Bond investors don’t really believe that the Congress will go over the cliff and default. They believe that some sort of deal that reigns in government spending will be cut at the last minute. Some in Congress are apparently taking the bond market’s indifference as a sign that the debt ceiling doesn’t really matter. But in this case, it is likely that investors confidence will respond in an all or nothing fashion. And investor confidence, once lost, will be hard to restore.
For years, one of the US economy’s important intangible asset was the market’s confidence in the “full faith and credit” of the US government. Just like the President needs the confidence of the American people to govern effectively, the economy needed confidence that the government’s credit is good. How those two confidence are managed over the next few months will determine a lot about the future direction of America.

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One thought on “Confidence as an intangible asset”

  1. Political ratings wax and wan rapidly. This week, Obama is up. Next week, voters will be wondering what he’s done for them lately. The political memory of the public is short. Successful military adventures usually boost presidential ratings, but later failures destroy the good mood. An easy example is George Bush, Sr., after the Gulf War. His few months of high ratings did not capture the 1992 election for him. George W. Bush enjoyed brief highs after our initial successes in Afghanistan and Iraq, only to see his popularity erode as the wars persisted.
    The bond market is presumably better informed than the general public about economic matters (at least, one hopes so), so it may be less affected by the symbolism of the debt ceiling than by more objective measures of the nation’s fiscal health. Within the last two weeks, Standard & Poor’s issued a credit warning on US debt; the Bank of China said it will reduce its US Dollar reserves from $3T to $1T; the International Monetary Fund said it expects China’s economy to exceed that of the US within 5 years. Coupled with soaring deficits and historically low interest rates, this news paints an ugly picture of the US Dollar and US Treasury debt. What seems to be happening is a “soft default” – the Treasury will pay its debts, but with inflated/printed dollars
    Still, as you say, people continue to buy US bonds. This is truly a demonstration of perception beating reality. Intangibles are indeed powerful.

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