Book Review - The 86 Biggest Lies on Wall Street by John R. Talbott
I love books that take conventional wisdom, the things "everyone knows to be true", and puts them under the microscope for renewed examination. John R. Talbott does this to Wall Street and investing in his book The 86 Biggest Lies on Wall Street. You may not agree with all of his conclusions, and a number of them might make you financially uncomfortable. But in any case, it's worth having your assumptions challenged to see if there might be a better path out there.
Lies About What Caused This Mess; Lies About How to End the Crisis; Investment Strategy Lies; Stock Investing Lies; Bond Investing Lies; Lies About Other Investments; Lies in Economics; Lies in Finance; Lies About the Global Economy; Lies About Hedge Funds and the Derivatives Market; Lies About Government and Regulation; The Real Reform Needed on Wall Street; Index
The format here is pretty simple. You have "Lie #nn: " followed by the statement that tends to be spouted as a truth that everyone accepts. And then Talbott proceeds to smash it based on his observations and experience from a lifetime of working in Wall Street. Given his track record in calling the mortgage crisis and banking crisis, he does bear some attention. For instance, he starts out with a heavy hitter, and that is that the American economy was the strongest and most resilient in the world heading into the current crisis. When he digs below the stats usually cited to "prove" this, you see why he disagrees. He sees GDP growing due to population growth, not due to a strengthening economy. There's also the matter of illegal aliens hiding the true growth of the population. Borrowing has driven the increased consumption, which means that in addition to "growth" you have debt. Total debt outstanding in the US has gone from $25 trillion to $60 trillion in the last 10 years, and he doesn't even bring in the unfunded liabilities of Social Security and Medicare. Family income has also increased due to spouses joining the workforce, as opposed to real income per individual worker increasing. When you add all this up along with other observations he has, you realize that this economy was far from healthy and robust.
Talbott also has harsh words for the Troubled Asset Relief Program that Hank Paulson deemed critical to getting the markets unfrozen. In fact, lie #17 is "everything that Hank Paulson ever said about the Troubled Asset Relief Program". Can't get much more inclusive than that. He shows how the initial target of the plan was immediately dropped after the legislation was passed, and money was instead given to banks who were in good standing with Paulson. Talbott also shows how, if banks had really sold their bad properties to TARP, there would have been even worse financial ramifications, as it would then be possible to value the bad debt and banks would be forced to revalue their balance sheets (for the worst), leading to even more solvency issues due to being over-leveraged.
I felt the part that I struggled with most was on stock investing, as we've been told certain things for so long. Talbott takes on the low P/E recommendation, companies that should be able to weather any crisis, and how EBITDA is more reliable than net income in assessing a company's earning potential. He does have alternative recommendations for all of these situations that are worth considering. You may not agree, and you'll certainly get pushback from the industry "experts", but given how things have gone of late, their expertise may not be all it's been cracked up to be...
86 Lies is recommended reading if for nothing else to get an alternative view of how the economy is really functioning. You can then choose to agree or ignore, but at least you'll do so with a more complete picture of reality.