Kass: The Headwinds Keep Getting Stronger

This post by Doug Kass appeared at 8:50 a.m. today on TheStreet.com's Street Insight.

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The market's advance continues to surprise me because the disconnect between a worsening economic reality and generally rising investment expectations is striking -- and growing.

To date, the U.S. consumer has had only a runny nose, led by the downturn in the residential real estate markets. However, there is evidence that the consumer's cold is worsening. Berkshire Hathaway (BRK.A Quote) Vice Chairman Charles Munger apparently agrees, saying over the weekend at the company's annual meeting that "consumer spending is posed to wilt and potentially will contribute to a slowdown in corporate profits."

• Housing: The housing bubble is in the second year of a downturn that will likely last into 2009. Record-high inventories, an accelerating pattern of foreclosures (and delinquencies) and a slowing domestic economy (with moderating job growth but stubbornly high inflation) will prevent a recovery that many now are forecasting. Homebuilder cancellation rates remain high (in some instances over 30%), and the stretching of home affordability will not be resolved until home prices fall more dramatically.

• Mortgages: Mortgage equity withdrawals (which have financed the consumer's consumption binge) are slowing to a crawl as the subprime mortgage mess takes a toll on credit availability through tightened standards.