Kass' Best: How the Market Will Unravel

This post originally appeared in Doug Kass' blog on RealMoney Silver on Sept. 24 at 9:40 a.m. EDT.

The bearish case for stocks is predicated on the notion that the massive creation and accumulation of debt -- particularly the consumer sector -- contributed to a large portion of the domestic economic (and stock market) gains experienced since 2000.

This added liquidity from nontraditional lenders dulled the effect of the Fed and served to buoy the low credit markets, allowing companies that should have failed to have access to large sums of equity and bonds. This created the feeling that all was well with the business world as stock markets rallied around the world and corporate default rates hit all-time lows by early 2007.

But that was an illusion.

Today, the nontraditional (and creative) credit originators are in intensive care and will not fuel growth anywhere near the degree to which they have in the past. The binge of mindless mortgage (and other forms of) borrowing abetted by generous strangers and central bankers abroad, by legions of unscrupulous mortgage lenders in the U.S. who fed the machine of packagers of credit on Wall Street and, most importantly, by a too easy Federal Reserve -- is now being reversed. The credit unwind in the upcoming years can be expected to have a profoundly negative impact in the current down cycle of economic activity -- possibly for years to come.