Everybody's Lying to You

Maybe not everyone's lying to you, but it sure does seem that way.

You don't have to go far to catch an earful of big fish stories and half-baked forecasts coming out of Wall Street, Washington, and the boob tube. Can you really believe it when Citigroup (NYSE: C  ) claims to be " ... one of the better capitalized banks in the world?" Or should you listen when someone like Steve Forbes blames the entire economic crisis on mark-to-market accounting?

Everyone has some vested interest coloring his or her version of the truth. Whether it's padding their pockets, protecting their reputations, or making headlines, everyone has a motive. The trick is to separate motives from facts. While aligning your interests with the truth doesn't guarantee success, it surely beats chasing down a pack of lies.

Here are three economic fibs that you should disregard.

Lie No. 1 -- Consumer spending will solve our problems.
While the National Retail Federation may love articles like Newsweek's, "Stop Saving Now," such commentaries are reckless attempts to reflate the consumer credit bubble and inflate readership. In this particular essay, the author goes as far as to label savers as "hoarders" and encourage businesses "to roll the dice."

On the contrary, consumers and businesses need to spend prudently, save frequently, and invest intelligently. Luckily, consumers have started to show restraint and begun to embrace the low-price mantra of retailers like Wal-Mart (NYSE: WMT  ) . In contrast, "aspiration brands" such as Nordstrom (NYSE: JWN  ) are taking it on the chin. If anything, consumers have put down credit cards and taken up new ways to make money.

The consumer-tracking firm Trendwatching.com has even identified the "recession-induced need for cash" as the "Sellsumer" trend. Expect consumers to spend more time spring-cleaning and selling their excess stuff on eBay (Nasdaq: EBAY  ) and Amazon.com (Nasdaq: AMZN  ) . Consumption is out and production is in.

Lie No. 2 -- Housing will bounce back.
Real estate doesn't bounce. Not only is appreciation dead for now, it may never have existed. Dennis Cauchon makes that point in the USA Today report "Why home values may take decades to recover." His data show that "the average annual investment return from 1950-2000 was less than one-half of 1% per year, after adjusting for inflation."

Housing has two major purposes, for income and for living. When you buy a home to live in, your goal is to acquire a dwelling that brings you pleasure and carries a cost of ownership that is competitive with what you would otherwise pay in rent.

If you buy for investment purposes, you need to perform a discounted cash flow analysis based on the estimated rental cash flows. Either way, appreciation should not be part of the equation.

So, with unemployment on the rise, and housing inventories still sky high, you need to think twice before jumping into any homebuilding stock. (Ironically, with rock-bottom interest rates, one-time tax credits, and falling prices, there's never been a better time to buy your first home.)

Lie No. 3 -- (Insert name here) is too big to fail.
Don't believe the hype; there are no companies too big to fail. Even nations are not too big to fail, as demonstrated by the fall of Rome and the decline of the British Empire. What do exist are institutions so globally intertwined that their failures would cause side effects that would be simply unpalatable to business leaders and elected officials alike. Thus, there's a difference between being too big to fail, and being too important.

Would Americans accept losing their life savings above the FDIC threshold? Could the country stomach endless lines of irate customers demanding their deposits from national banks like Bank of America (NYSE: BAC  ) ?

There is no doubt we could have survived it, but politicians tend to dislike civil unrest and business owners aren't fond of riots. The "too big to fail" travesty seems like an avoidable consequence of bank centralization. Keep in mind that between 1984 and 2003, the size of our banking system declined by almost 48% as 15,084 entities consolidated into 7,842.

That's why superstar analyst Meredith Whitney's idea to supercharge regional banks, instead of feeding the national lenders, appears to be an intelligent first step. Innovative banks like Umpqua (Nasdaq: UMPQ  ) could use the capital to pick up the slack of megabank zombies.

Believe your lying eyes
Tall tales are common when it comes to matters of money, but don't let the hot air take you off course. The key is to not debate opinions, but to explore facts. No one can predict the economy, so focus on great businesses that execute and management teams that don't lie to you.

Our stock experts, David and Tom Gardner, avoid fish tales. These are two straight shooters who take their big catches in stride and don't lament the ones that got away.

And as the advisors of our Stock Advisor newsletter, they are dedicated to discovering great businesses and exposing the market's dirty little secrets. They aren't afraid to throw the stinkers overboard. These two are the truth, doling out picks that have handily outperformed the S&P 500 since their newsletter service's inception in 2002.

So, can you handle the truth? Click here to see which companies passed the test in Stock Advisor. A trial is free for 30 days and gives you full privileges to the service. Here's more information.

Fool contributor Andy Louis-Charles owns a tiny, fractional interest in Bank of America through an old synthetic DRIP account, giving the term "it's cheaper to keep her" a whole new meaning. Andy is an avid real estate investor and loves running DCFs on income properties. Want to know how? Shoot him an email -- he loves to talk shop.

Amazon.com, eBay, and Umpqua Holdings are Motley Fool Stock Advisor recommendations. eBay and Wal-Mart Stores are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.  


Read/Post Comments (23) | Recommend This Article (97)

Comments from our Foolish Readers

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  • Report this Comment On May 18, 2009, at 3:55 PM, megabuc wrote:

    Citibank is the biggest joke on Wall Street. Citibank will keep a lie in place until the Fed closes them down and cans the CEO'S for a long long time.

  • Report this Comment On May 18, 2009, at 4:02 PM, TMFHousel wrote:

    Good article.

  • Report this Comment On May 18, 2009, at 4:09 PM, madmilker wrote:

    People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

    quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

    Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

    People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

    50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

    quote*"Considering that there are over 30,000 ships at sea this morning," writes James Carlton, director of the Williams College-Mystic Seaport Maritime Studies Program, in an e-mail, "the total number of organisms and species in this global 'bioflow' on the morning your readers read your piece could be staggering - billions of individuals, and thousands of species."

    Indeed, scientists have long considered ballast water the primary way invasive aquatic organisms are introduced. From the zebra mussel's arrival in the Great Lakes, to an American jellyfish severely disrupting Black Sea fisheries, the potential costs of accidental introduction of a species to new homes can be tremendous. Aquatic invasives cost the US $9 billion yearly, according to estimates by David Pimentel, professor emeritus of ecology and evolutionary biology at Cornell University in Ithaca, N.Y. Zebra and quagga mussels (a cousin to the zebra) alone cost the $1 billion annually.*end quote!

    tat is $9 billion a year in hidden taxes to all Americans...

    cheap ain't chic and it cost America............jobs!

  • Report this Comment On May 18, 2009, at 4:36 PM, ilovesum wrote:

    Buffets "buy American I am" peice in October which he has only bought recently is a joke.

    Or Buffets claim if I had a million dollars I could earn 50% returns . So why not get a team of these guys and do it ? He has rarely bought small caps and not to any depth of his portfolio.

    I guess if everyone buys large caps thats more competition for him. We don't want that.

    I guess I was supposed to buy US stocks to prop up his stocks.

    Why didn't any of these "smart" investors predict or warn the market was gonna crash in 2007? Buffet was sitting on 40 billion of cash , guess he was saying one thing and doing another. I knew there was something wrong.

    Why did he donate his fortune just before the crash?

    Why didn't he say Wells Fargo at $9 was a good buy in January or February? OOO hhhh wait , he said it was a good buy AFTER he bought it. Woulda helped to know that BEFORE but then he might not have filled his pockets.

    How bout Bernake and Paulson saying the US economy was in good shape in June 2007?

    Are they that stupid or are they just liars?

    Should we believe these " green shoots" now ?

    Hey its spring , they call it grass , it will grow in a recession.

    99.999999 % of these guys will not help you , don't listen to them.

  • Report this Comment On May 18, 2009, at 4:42 PM, ilovesum wrote:

    The financial community and the govt suckered people into believing they were wealthier than they really are . Use your house as an atm. No wonder people are staying out of stocks and real estate .

    Spending got us into trouble , saving will get us out.

  • Report this Comment On May 18, 2009, at 4:52 PM, booyahh wrote:

    Wow, this author is a paranoid freak ! You can whine all you want about how slippery the govt and the financial firms are. Not me. I've bought BAC and C, watched them double, and keep buying on the dips, and they just keep going up and up. How can you go bankrupt if the govt won't let you? It's really not that complicated.

  • Report this Comment On May 18, 2009, at 5:02 PM, steveherb wrote:

    Totally agree, but have you really looked over your purchases from Walmart. Not trying to promote objection, I used to be jazzed about the savings but learned over time about the quality. A lot of that stuff falls apart after a year or so.

  • Report this Comment On May 18, 2009, at 6:31 PM, catoismymotor wrote:

    I knew they were lying to me. I could tell because none of them would look me in the eye while trying to steal my wallet.

  • Report this Comment On May 18, 2009, at 7:13 PM, horseseven wrote:

    This entire "RALLY" is due the largest PONZI scheme ever derived.(ie. government money out .....not enough coming in!) The STREET plays right along purposely understating earnings (eg. LOWES today>>> one half the earnings down from a year ago.....yet, beat the street estimates of 25 cents.) UNREAL AND WILL NOT LAST ONCE THE MARKET WISES UP!

  • Report this Comment On May 18, 2009, at 7:14 PM, xetn wrote:

    This is one of the best articles I have read on Fool. However, as far as housing goes, over time a house deteriorates and should therefore lose value, structure wise, while increasing value based on the land it sits on. That is the reason that over long periods of time, the "value" goes up slowly. There are cases when the demand for a certain piece of land may become very valuable because of its location, but that has nothing to do with the average long-term rise in housing.

    Next, "madmilker" discussing currency is a complete joke. The dollar is declining not because of trade but because the Fed and fractional-reserve banks have been inflating the AMOUNT of currency in circulation for many years. The number of bills in circulation reduces the value (purchasing power). One of the only things that has helped maintain some value is the foreign countries purchasing our debt, otherwise, the Fed in all of its wisdom would have to monetize that debt by; you guessed it, printing more money out of thin air. The Fed is the cause of most of the financial crisis, not trade.

    As for jobs being shipped overseas (exported out of the US) is because of government intervention in the form of regulations (over 80000 pages of regulation as contained in the federal register) and taxes. If you consider how much it costs the average company in the US to just meet compliance requirements, and on top of this added cost (which is all non-productive expenditures) and pay taxes on top of this added burden, you might start to understand the reason for the flight out of the country. And everyone wonders why the US can not compete.

    If you are really interested in having growth in the US economy, we need to get rid of all government intervention in business, end the Fed and reduce taxes and government spending. We could make a big reduction in spending by ending the wars in Iraq and Afghanistan, close all of out foreign military bases and stop paying almost every foreign country to "be our friend" by stopping foreign aid. Just those things would reduce the federal budget by at least a trillion per year.

  • Report this Comment On May 18, 2009, at 7:48 PM, stan8331 wrote:

    Excellent article. One of the most egregious failures of the financial media is their inability or unwillingness to discuss the vested interests of folks they cover and interview. I mean, it shouldn't require a rocket scientist to add an explanation when a Pimco exec comes on and says "stocks will underperform bonds for the foreseeable future".

    The best long-term outcome for the economy will be if housing prices stabilize in the range they now inhabit. Reinflating the bubble would be incredibly stupid...

  • Report this Comment On May 18, 2009, at 8:38 PM, dividendgrowth wrote:

    Buffett bought lots of convertible preferred stocks since his "buy American" call.

    "Buy American" doesn't mean you have to buy only common stocks.

  • Report this Comment On May 18, 2009, at 8:52 PM, Clint35 wrote:

    Hey Madmilker, You're the one that needs to wake up. It's simple economics. When things made in China cost less than stuff made here in the states that's what people buy. Even those of us who would love to "Buy American" can't always do it because we can't afford to. Just going around saying buy American all the time isn't gonna fix anything. Besides foreign competition is just one economic problem we have, there's plenty others.

  • Report this Comment On May 18, 2009, at 11:18 PM, jesse2159 wrote:

    I believe we let a great opportunity to slip through our fingers last fall when we didn't let the weak companies and banks to fail. The bailout funds simply postponed financial Judgement Day. Commercial loans are set to fail, Alt-A's are resetting this year and unemployment will reach 12% before slowly receeding. We are in deep trouble and happy face nonsense will do more harm than good. Reality bites, but it's really necessary to cull the herd. Only the nimble and agile survive; it's just the way it is.

  • Report this Comment On May 18, 2009, at 11:43 PM, okiepaperboy wrote:

    My Father said, "Always pay cash." He was a millionaire by the time he died at age 90 plus.

  • Report this Comment On May 19, 2009, at 12:11 AM, catoismymotor wrote:

    Okie,

    I believe that millions of us have just learned that lesson the hard way. Your father was a wise man.

    Cato

  • Report this Comment On May 19, 2009, at 5:16 AM, Kate1240 wrote:

    Wall Street uses Main Street to get rich..

  • Report this Comment On May 19, 2009, at 9:11 AM, ziq wrote:

    Silly statement: "Housing has two major purposes, for income and for living."

    Housing is for living in. If you can make money providing it or investing in it, great, but that doesn't make it a primary purpose.

  • Report this Comment On May 19, 2009, at 9:17 AM, ziq wrote:

    (What you meant, of course, is that people buy housing either to live in or as an investment, or sometimes both).

  • Report this Comment On May 19, 2009, at 3:05 PM, miteycasey wrote:

    One of the most egregious failures of the financial media is their inability or unwillingness to discuss the vested interests of folks they cover and interview. I mean, it shouldn't require a rocket scientist to add an explanation when a Pimco exec comes on and says "stocks will underperform bonds for the foreseeable future".

    truer words were never spoken.

  • Report this Comment On May 20, 2009, at 2:00 PM, BMFPitt wrote:

    LIE 2A: There's never been a better time to buy your first home.

  • Report this Comment On May 22, 2009, at 2:03 PM, TxTom wrote:

    Anyone that believes Citigroup is going down the tubes hasn't been paying attention. They aren't going anywhere but "up" from here. Enjoy getting into this stock while it is still under $4. You won't see C at this price level ever again during this lifetime.

    I don't know how many of you saw the article posted just today by Morgan Stanley, but they aren't basing this projection on thin air. Banks WILL continue to profit. That's what they do, especially when backstopped by the federal government. You can disagree, but read what the experts have to say:

    NEW YORK (Dow Jones)--Large bank stocks are set to rise over the next year or two as the pace of economic decline begins to slow, Morgan Stanley analysts said Friday.

    The firm raised its price target on the 16 large bank stocks it covers by an average of 33% and said that most would be able to repay TARP money by the fourth quarter; it raised its price target for Bank of America Corp. (BAC) 28% to $32, Citigroup Inc. (C) 50% to $6, JPMorgan Chase & Co. (JPM) 33% to $60 and Wells Fargo & Co. (WFC) 33% to $44.

    Happy trading everyone....

  • Report this Comment On May 24, 2009, at 11:31 PM, alexxlea wrote:

    Yeah ziq, I agree with you on that point.

    That's like saying that just because you can sell food means that one of its main two purposes is revenue.

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