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Five Things: Credit is the Lifeblood of the Economy?


Unfortunately, this ridiculous non-sequitur poltical slogan is really catching on.

1) The Age of Self Evidence

These are heady times we are living in. Collectively, our national intoxication runs deep and fierce. From moment to moment no one really knows whether to laugh, cry, or do both at the same time, and so the air on the street is juiced with a mildly psychotic hum. I enjoy it, but not everyone is built to handle this kind of environment. This is, after all, the Age of Self Evidence. Don't even think about attempting to verify the facts behind that assertion. It's as right as rain and as true as a tree stump. It is... self evident.

For example, consider the assertion - made almost daily by politicians and monetary policy figures - that all we need to do to end this economic crisis is "kick start" lending and that credit is the "lifeblood of the economy." These baseless assertions infect news article after news article and are repeated by the vast majority of economists and market pundits over and over again as "self-evident" truths. The Age of Self Evidence.

The reality, however, as noted on Minyanville recently in the article, "Deflation Redux," is that these assertions are non-sequiturs. "Credit is the lifeblood of the economy." This sounds reasonable, which is why it's so easy to value it as self evident."

But think about it for a moment. Lending is actually a function of productivity, and productivity is a function of price. Lending to create productive assets is done by savers who want a decent return. They stopped lending a long time ago, long before this "debt crisis" erupted, because the return for risk wasn't there.

In place of these lenders, however, there was the Federal Reserve, which has the unique ability to make credit available (i.e. print money) whenever they like, and essentially out of thin air. Fed credit availability, unlike the lending normally made available by savers, is not backed by savings. And so this credit made available by the Fed went to create assets such as houses, strip malls and office buildings that aren't productive. The net result of this has been a massive debt buildup that is now being liquidated, or deflated. When will this debt deflation end? When savers, once again, see a reasonable return for the risk. Unfortunately, this requires prices to come down - a lot.

2) On the Agenda: Mark-to-Market

With the market down 25% year-to-date the air of desperation is growing thicker. What will policymakers think of next? Fast forward to March 12 when a meeting will be held in Washington to discuss the potential suspension of mark-to-market accounting practices.

What is mark-to-market accounting? In simple terms, mark-to-market accounting is when a certain value is assigned to a financial instrument (CDS, MBS, Futures contract, etc.) based on its current market price.

Why does it matter?

Well, according to Minyanville Professor Bill Feingold, "In a system built upon credit, the downward spiral mark-to-market accounting can cause may simply not be tolerable." Feingold is careful to add, "that is not to say willful misstatement of market values should be
tolerated," but when there's evidence that selling is begetting selling - and one guy's selling not because he thinks an asset is fully priced but because he knows another guy's about to sell - perhaps some greater thought is needed.

On March 12, we may get some "greater thought." Then again, this meeting is being held in Washington.

3) Guns and Butter... and Guns. Also, Guns!

You packing heat? Well, let's be careful out there because apparently everyone else is. According to data from the FBI's National Instant Criminal Background Check System (NICS), background checks on the sale of firearms jumped 23.3 percent in February compared to a year ago. That's after January's 28 percent increase, December's 24 percent
increase and November's whopping 42 percent jump.

Let's not get into the "Why?" of this just yet. I mean, look around. Things aren't exactly looking so good economically speaking. Instead, let's take a look at "Who,"; namely, Smith & Wesson (SWHC).

Next week, Smith & Wesson will report earnings. Most traders and investors won't be paying attention because, well, when is the last time you checked out SWHC stock? Regardless, whether you join the herd and buy a gun or not, this may be the one stock to help you ride out the ongoing bear market.

4) C out of DJIA

On Thursday Citigroup (C) traded under $1 a share, which means the stock will now only trade on the McDonalds value menu board. "I'll, take the Citi combo and supersize that with a share of General Motors (GM)."

Ok, enough of all that. Citi is a serious situation. But perhaps the most interesting thing about it is why is it still part of the Dow Jones Industrial Average? The Dow is a price-weighted index. That means that the actual dollar amount of the stock matters. For example,
a stock selling at $80 a share has a larger weighted on the Dow then a stock selling at $20.

Going back to McDonalds for a moment that stock sells at $50 a share while Citi sells at around a $1 and change. Citi has virtually no impact on the Dow. It will likely be removed, perhaps within the next few weeks. Minyanville Professor Ryan Krueger has suggested at least one potential candidate to replace either Citigroup or GM: Monsanto (MON).

5) We Should Be More Like China!

From Larry Kudlow's show via Rush Limbaugh - seriously - comes this nugget on taxation (naturally), which also happens to feature Minyanville's own Jeff Macke (sorry Jeff):

RUSH: I want to go to CNBC, audio from last night on the Kudlow Report. This is amazing, by the way. Larry Kudlow is talking with Donald Straszheim of Straszheim Global Advisors and Jeff Macke of Macke Asset Management. Kudlow says, "How is China treating capital?" How are the ChiComs, the Chinese communists treating capital, how are they treating money? "Because I would argue," says Kudlow, "the Obama budget is not treating capital very well. In fact, some people believe, and I'm one of them, that they are waging a war on investors. How is China treating capital gains and corporate taxation? And let's include infrastructure spending, because I think from an emerging country infrastructure spending is pro-capital and pro-growth," and here is what Straszheim and Macke said.

STRASZHEIM: China has treated capital better than we have for a decade. There is no tax on gains held short term or long term --


STRASZHEIM: -- in the Chinese market.


STRASZHEIM: Zero, the tax rate is zero.

KUDLOW: These are communists! These are communists! No capital gains tax from communists!

MACKE: And they like rich guys more than Obama does. It's incredible!

Bottom line: We should become more like China! After all, rich people in China have it so much better than rich people here. Except, of course, we're not rich, which means... oh, wait.

America: Still the best country in the world to be poor in!
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