I am sure you have heard of the term “urban legends”, or at least seen the movie based upon superstition and coincidence. Urban legends go something like this, “If you put alka-seltzer in your bird seed and a bird eats it, his stomach will explode” or “If you go past the graveyard on the night that so and so died, the light will flicker 3 times”. Fear and the “unexplainable” factor make for a juicy urban legend. Since our investment decisions are driven by either fear (running for safety) or greed (joining the bull run), lets take a look at some of the urban legends on the Street today.

1. China and other foreign buyers will stop buying US dominated government bonds, hence sending us into The Next Great Depression. (Play spooky music here). The funny part here is that China increased its purchases of U.S. Treasuries last year by 46 percent to $696.2 billion. Guess what? We are stuck with each other now. The biggest net exporter in the history of the world is married to the biggest consumer nation in the history of the world. China would be cutting off its nose despite its face if they stopped supporting US government debt. That is why Fang Shangpu, deputy director at the State Administration for Foreign Exchange, told a press conference in Beijing today. “We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis. They should work to maintain economic and financial stability, and protect the interests and confidence of investors.” This is basically screaming “Holy Smokes, we are in deep here, you scratch my back and I will scratch your back. You cover us for what we already own and we won’t pull the rug out on you.” This is a classic win-win situation or lose-lose situation, and neither party wants the lose-lose outcome.

The other part is the fear monger factor. If the end of the world is just around the corner, and you had to bet on one country surviving and someday prospering, what country would it be? When push comes to shove, and you need to make sure you at least get your money back so that you can live to fight another day, US government debt is what the world will buy with the thinking being “If the US government goes under, I think we have bigger problems then our investments”. If the end of the world happens, do you want to be long the Euro? How about government bonds from Vietnam or Brazil? If safety is of the utmost importance, as it will be if the Dow hits 5000, the world will still turn to the US government as safest play since they will be the last man standing if we turn into Planet of the Apes, enormous debt and all. You will see Charlton Heston gazing at a buried Statue of Liberty, kneeling in wet sand screaming, “Damn you apes, what have you done!! And by the way, what is the 30 year trading at!!???”

2. The US financial systems, and the financial systems the world, are insolvent. The interesting part of this one is the sentence that is never said after this sentence. “What does that mean, I mean, in real life?” Do we wake up one day and all the banks are closed or bankrupt? All our money on deposit is gone or only insured up to $100,000? Do people go from millionaires to hundred-thousandaires?

Even if we get clobbered on real estate and deleveraging for years, there will always be banks. Just like there will always be a police force. Banks and police are part of keeping law and order, just in different terms. Governments will take on massive debt and deal with inflation before they allow the world wide banking system to go belly up. Is it fair to the taxpayer? No. Will some rich bankers make a killing? Yes. Are the consequences of not bailing out banks far greater than the alternative? Yes! Call it the IOU bank, the World Bad Bank, the Badass Bank of the Word, we will create it, we will fund it, and life will go on.

How do we know this is a headline urban legend? Google is trading at $351 and Apple, without Steve Jobs, is trading at $95. Really? So we are about to experience the world-wide financial meltdown to end all meltdowns, and two tech companies that are completely non-essential to human survival are finding buyers to drive them up. One company makes high-end, non-essential, although very nice, gadgets, and they are up almost 20% since their November lows? The other, the advertiser of last resort, caught in the biggest consumer and retail pullback of 5 generations, is up 40% since its November lows? How can we be in the biggest consumer driven recession and the biggest advertising network in the world is up 40% in 90 odd days? Which begs the question, are people using their IPHONES to search Google for the best deals on rifles, bread, and clean water, as they prepare for the end of the world?

3. Times are horrific, this is the next Great Depression. Do you know how this is an urban legend? Check out every story about unemployment, contracting GDP, or any other bad news out there and you will see a common theme. They all either go back to 1981 or 1970. “This is the worst report since 1981” or “This is the lowest level for this since the 1970s!” Really? The country was founded in 1776, and we have to go back a whooping 20 or 30 years to find when times were this bad? I am not saying things are good, or aren’t going to get worse, but does a generational changing recession only go back to 1970? I checked and every Super Bowl and World Series was played in the 1970s. I even found out Disney World was open everyday it was suppose to be open in the 1970s. I don’t remember the world ending then. I remember gas lines, license plates, stagflation, and tough times, but no shot guns and food riots. The only thing I can find that tells me we are pricing in for the next Great Depression is the corporate bond default rate. I guess that is why everyone is piling into corporate bonds now, getting ready for some deflation and stagflation.

In conclusion, don’t get carried away by headlines and urban legends. They are made to sell newspapers, get you to click your mouse, or open an email. Check out Bob Doll, vice president of Blackrock, and his cautiously optimistic views. Check out Warren Buffett loading up on fixed income type convertibles of US companies. No gold or US treasuries in his latest Berkshire snapshot, no end of the world prognostication from the Oracle of Omaha. As Jamie Dimon said recently, “This country has had big problems before. This is not the first,” he said. “If we face them head-on and look at the full set of problems that were made and created, we have real solutions and policies for them, we will reform like we have in the past and we will move on like we have in the past. Hopefully that will be this year, later this year, as opposed to sometime in 2010, but we don’t know.”