The Motley Fool Previous Page

Everybody's Lying to You

Andy Louis-Charles
May 18, 2009

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 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 (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: