Two types of market lies
Market lies are a fact of life and there is nothing surprising about it given the number of special interest groups all looking for ways to change ownership of the dollar bill that currently belongs to you. The ways these lies work are numerous enough to provide material for a thousand Ph.D thesises. But in the first crude approximation we can divide them into two categories: lies that are designed to trick you into thinking they are truths, and lies that are designed to affect your decisions even while you know they are lies.
Lies of the first type are simple. A company may be lying about its earnings. Dick Fuld may be hiding Lehman's liabilities in opaque off-balance-sheet investment vehicles. Greece may be lying about its level of debt. John Paulson may be lying about his real opinion about the gold market. These lies are rather innocuous even though they may trick you into drawing the wrong conclusions, which is why they are being told in the first place. You just fall victim of false information.
Lies of the second type are subtle. They are not intended to make you believe in them. The people who make up the lie know that you are too smart to believe them. But they know you are not too smart to act as if you believed them because with all your IQ you are not above the primordial fear of challenging authority. Somewhere deep down you feel that the spinmasters have the right to tell you how to think. The moment you hear the lie, you also hear a little voice telling you "sure, I know it's a lie, but these are the big guys, and I am too insignificant to challenge their statements". So you choose to dismiss the actual facts and base your decisions on what you know to be a lie. You fall victim of your own psychology.
Lies of the second type are very common. How often do we hear that the US gross domestic product is approximately $14 Trillion dollars? Now, most of us know that this number is wrong because the government is counting transactions that never took place. If someone asked us if we believe the government's statistics, we would say no. Furthermore, if he asked us to tell what's wrong with the official number, most of us would correctly point out at least one thing that is wrong. Most of us would also correctly estimate the true number: $12 Trillion. And then what happens next? The next morning we direct the browser to Fool.com, go to "My Caps" and mention casually in a blog that the debt-to-gdp ratio is 90%. We then go on to talk about healthcare as a percentage of GDP, discuss GDP per capita, compare the successful free-market economy of the US vs. the failed command economy of socialist states - all based on that $14 Trillion number. The true number is recognized and not recognized at the same time depending on the context.
We hear that Moody's rates American government debt as AAA. When we blog, we discuss how Moody's decision to keep its rating unchanged is going to reassure investors. But if somebody asked us if we believe Moody's is really independent of government influence, 99% of us would say no. If he then asked us whether we think other investors really believe in the independence of Moody's, again we would say that sure, all but the most naive investors must know that Moody's is very partial to the US government. And as soon as the interviewer leaves, we again start talking about how the market is going to react positively to the news that the government has again given itself the highest rating.
Do we know the Chinese central bank can buy assets other than treasury bonds? When pressed to the wall, people agree that yes, there is no reason not to park trade surpluses in S&P index. The next day, the same people again mention casually that China has no other choice except US Treasuries. After a momentary recognition of truth, they go back to the party line, forgetting what was said the day before.
Do we know the actual CPI inflation numbers? Yes, we all know the rule of thumb (take the official number and add 0.75% to it). But we keep on blogging, discussing TIPS yields and bond yields and dangers of deflation and citing the unadjusted numbers.
Do we know that Europeans count unemployment more conservatively than we do? Again, the answer is yes. But this doesn't stop us from comparing the official unemployment rates and talking about the superiority of our free-market model vs. the "socialist" Europe.
So why not stop this self-hypnosis? After all, we are not stupid, right? Well, we are not exactly stupid, but we may still be gullible. We feel there is a hurdle involved in challenging the lies we hear from authoritative sources, and we often choose to look the other way just as long as they don't stretch the facts too much. And as a result, the spinmasters get the leeway they wanted. The lie has accomplished its objective.