Kass: A Market on the Brink

As I mentioned in my synopsis of my Thursday night appearance on "Kudlow & Company," many talking heads in the media and several economists still have visions of Goldilocks despite what appears to be ample growth and inflationary evidence pointing to the conclusion that we lie at recession's door.

The Goldilocks believers complain of the lack of rigor, or Cassandra-like shouts, of the permabears in predicting slowing growth. The economic polemic is not an argument between the permabulls and permabears, however; it is an argument between reality and fantasy.

Notably, Morgan Stanley (MS Quote) and Merrill Lynch (MER Quote) are now calling for a recession.

Those of us who reside outside of the press box and in the investing field fully recognize that, if indeed the slowdown/recession is soon upon us, by the time the National Bureau of Economic Research, Ben Stein, Don Luskin and Larry Kudlow admit to it, equities will likely be much lower, having discounted the event.

I will touch on only some of the factors that indicate a move toward recessionary conditions.

Growth Concerns

1. The current credit crunch is unlike anything we have seen in modern financial history. The availability of credit will be markedly reduced in the years ahead.

2. Fourth-quarter credit writedowns at the world's major financial institutions remain elevated, and the prospects look no better into early 2008. This permanent loss of shareholders' equity will have negative lending repercussions, and the infusion of high-cost equity at these institutions will do little to encourage the banks to lend more.

3. According to Merrill Lynch, the slope of the yield curve and the value of credit spreads point to a 100% chance of a recession.

4. Last week's trade report indicates that the rate of increase in imports is declining and now stands at the lowest level in over five years.

5. Housing's outlook remains clouded despite the government's patchwork attempt to deal with the reset problems. Publicly held homebuilder cancellation rates are almost 50%, and the inventory of unsold homes is at multidecade levels -- and it's growing, not stabilizing. A 2010 industry recovery could now be in jeopardy.

6. Leading indicators -- such as durable goods and shipping rates (Baltic Dry Index) -- point to a domestic economy that might be moving in a southerly route posthaste.

7. Inventory growth is at a standstill, which is an early warning signal that a drop in business fixed investment is the next shoe to drop.

8. Adjusting last week's retail sales figure for the calendar year and food and gasoline inflation produces a lukewarm picture of retail, despite the permabulls' cheerleading. Same-store comparisons have now been relatively weak for six months, especially at the malls. Target (TGT Quote)), Sears Holdings (SHLD Quote) and others have recently exhibited disappointing guidance. Just look at a chart of the Retail HOLDRs (RTH Quote) if you need a harbinger of continued poor retail news. Last night, SpendingPulse provided a decidedly weak outlook for apparel sales during this holiday period.

9. Job growth is punk vs. one year, two years or three years ago.

10. A Democratic presidential victory, indicated almost universally by the current polls, means higher corporate and individual tax rates, which will provide an unneeded break on business capital expenditures and personal consumption.

Inflation Concerns

1. Even the greatest works of fiction -- that is, the Bureau of Labor Statistics' chronicling of headline CPI and PPI rates -- are signaling inflation levels not witnessed in several years.

2. Inflation implied in the five-year TIPS market has moved up to close to 2.30%, a gain of 0.15% in only a week.

3. Some Fed governors and former Fed Chairman Greenspan are beginning to look at food and energy price inflation as recurring. (I am still looking for a "core" consumer.)

4. Crude's stubborn rise has resumed as the price of a barrel increased to over $92 last week.

5. The CRB Index rose to within 3% of its all-time high on Friday, as the growth in emerging economies continues to place pressure on commodity prices despite a weakening domestic non-export economy.