Kass: Stocks Won't Save Us From a Recession

Already, the two states at the epicenter of home speculation (Florida and California) are entering (or are in) a recession. (In my home state, Florida, retail sales have been negative for several months, and Dr. Laffer agreed that the same fate may face California.)

I then told Larry and Dr. Laffer that ample academic evidence suggests that changes in home prices have an outsized impact of wealth vis-à-vis stock price changes. I cited a Fed study performed by Drs. Christoper Carroll, Misuzu Otsuka and Jirka Slacalek -- highlighted in The Economist magazine a year ago -- that concluded a $100 increase in housing wealth in the U.S. eventually boosts spending by $9 but that a similar increase in stock market wealth would produce only about a $4 increase in spending.

In the second segment, former Treasury Secretary and Harvard President Larry Summers seemed to support my case that it was only a matter of time until the real economy is affected by the depression in housing. Moreover, he alluded to a political sea change that could result in the politics of trade protectionism and higher corporate and individual tax rates -- headwinds that I have addressed recently. Larry Kudlow continued to use the record level of stock prices as an argument against a recession, but I pointed out that there was ample evidence that a recession can and will start coincident with high stock prices. I cited the recessions that began:

• January 1980 -- stocks ripped by nearly 8% that month just as the economy was entering recession; and
• June 1990 -- stocks ramped by 3.5% that month as we also entered recession then.

Moreover, the early 2000 stock market high was achieved as the recession of 2001-2002 was incubating.

I ended by saying that there is clear evidence of slowing growth, which is being obscured by rising stock prices. The signs can be found not only in the dismal housing numbers but in an awful durable goods report, weak jobs releases, a reduction in consensus earnings estimates and the nascent retail sales weakness.

All of these factors are being confirmed by Merrill's Rosenberg's internal Data Diffusion Index -- it hit a "low watermark for the year" recently -- and the fact that "over 90% of the economic data have come in below expectations in the last month."

The recent market gains, I said, were nothing more than a "sugar rush of liquidity" provided by the Fed and that the logic of taking "bad news as good news and good news as even better news" might be misplaced.

In summary, relying on continued stock market gains while ignoring substantive weakness in the U.S. economy is a slippery slope to future economic growth.