Kass: A Market on the Brink

This blog post originally appeared on RealMoney Silver on Dec. 17 at 8:52 a.m. EST.

"You don't play against opponents; you play against the game of basketball."
-- Bobby Knight, head basketball coach at Texas Tech

In 1986, John Feinstein wrote the bestselling sports book of all time, A Season on the Brink: A Year With Bob Knight and the Indiana Hoosiers, which detailed the audacious and often mercurial coaching techniques of Bobby Knight during the 1985-86 Indiana University basketball season. The season followed an atypical losing season in 1984-85, which was highlighted when Coach Knight, famous for his outbursts, threw a chair across the half-court stripe.

The equity market, similar to the 1986 Indiana University basketball team, is now on the brink, as rising inflationary pressures and slowing economic growth (as confirmed again by numerous economic releases over the past two weeks) have increased the possibility of stagflation -- a condition that has historically led to a contraction in P/E ratios and poor equity returns.

The core of my concerns remains the U.S. housing market (which is why I have spent so much time in the last two and a half years discussing the worrisome mortgage market and its role in a prospective consumer-led slowdown), the future of which is inexorably linked to the current credit bubble's piercing.

Economic bulls have thought that the housing market's problems would be ring-fenced. After all, residential housing activity accounts for only about 6% of GDP -- somewhat less than the 12% to GDP role of business fixed investment, which was responsible for a shallow recession five years ago.