Spin and the Economy

One reason I am glad not to have cable TV (there are plenty of reasons I would like to have it, too, but that's another story) is the popular approach to "news" and "finance" that the all day gabfest channels put out. People who prove that they are good at talking and will say something catchy, provocative, or seductive, get to comment on whatever is happening. Why do they say what they say?

In economic comments, a good place to start in your analysis is to look for wishful thinking. The finance news channels have found that people want to be told that something good is about to happen. If a commentator can tie that pipe dream to her or his own interest, then the words spin at double speed. It can be so disgusting to listen to the popping off on those shows. Too much information, most of it empty-headed, is worse than not enough information.

I guess I prefer economists that try to unmask the interests and myths of economic reporting. I realize that these points of view are also subject to spin. Oh, well. Here is one I thought was pretty good. I found it at the Motley Fool.

Everybody's Lying to You
By 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 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.