The market blasted up today on news of CSCO, as if it mattered.
I posted yesterday that CSCO was irrelevant and while one day proves nothing, I am pleased with the close today.

While everyone had their eye on CSCO, even to the point of gapping up all kinds of totally unrelated total tech garbage, some “real economy” stocks were taking it on the chin.

The real economy is about credit expansion and the willingness of consumers to go deeper in debt. Today’s “Thought of the Day” is called “Tapped Out”.

While everyone was going gaga over CSCO, Professor Succo at Minyanville and myself and probably a small percentage of others were looking at the the “real story” .

Here is the “Real Story” of the day thru the eyes of John Succo at Minyanville:

Succo: Tapped Out

Accredited Home Lenders (LEND) took down this year’s guidance by 40%. This company services and securitizes sub prime mortgages.

Forget about Cisco (CSCO). Capital One (COF), Toll Brothers (TOL), and LEND are telling us that the cash machine the consumer has been using is tapped out. These companies are telling us that the velocity of money is slowing rapidly.

Our thesis seems at this point to be playing out. COF, LEND, TOL, CFC are all telling us that credit is not only getting harder to come by, it is getting harder to shove down the throats of consumers.

It’s all about credit folks. As credit expands, the money supply gets into the system and liquidity rises. Nominal asset prices get bid up with this inflation.

When credit contracts the opposite occurs. Then people really begin to take less risk.

Can credit expand forever? The bulls seem to think so, but my old physics professor taught me otherwise.


Bingo. Is credit infinite? I think not, nor does Succo. Japan found out that at some point people will just will not take on any more debt. I find it interesting to be receiving taunts about inflation just as credit is blowing up and home prices are plunging.

Following is a pulblic reply by “A” in response to my statement “Deflation is a decrease in credit and money supply”.

Here goes, from “A”

Mish, or you are becoming incredibly stupid or you are really running out of excuses…if there is a decrease is supply of ANYTHING, the value of that same thing will RISE…so there is no way that dollar will do what the dollar will do. That is just idiocy.

This had me laughing out loud. What is this, supply side economics to the 1,000 degree? What about the demand side? What if no one wants to go deeper in debt? What happens if people want to save? It is of course the Fed’s worst nightmare. That nightmare is called deflation.

LEND took down guidance by a “mere” 40%. Homebuilders have been cutting guidance for nearly a year. Look at “real stocks” today. LEND, CORS, Home Depot, TOL, CFC, etc, etc. It was a freaking bloodbath. But the market gapped up on news that was totally irrelevant.

Let’s repeat.
Inflation = expansion of money and credit
Deflation = contraction of money and credit

IF (big IF) the Fed can keep people borrowing (credit expands) inflation will go up.
As soon as people would rather save than spend the party is over. I believe we are at that point right now. Look at LEND and look at CFC and look at CORS. Look at any of the homebuilders.

There is nothing the Fed can do about it either.
There is nothing the Fed can do to force wages to rise.
There is nothing the Fed can do to stop global wage arbitrage.
There is nothing the Fed can do to force people to go deeper in debt.
There is nothing better than being taunted right on the cusp of victory by people that do not even understand the argument.

The Fed is Irrelevant.

Mike Shedlock / Mish/