Kass: Dry Your Tears With Cold Hard Cash

The bulls argue that it's not different this time. After all, the conditions that typically presage a recession are not present -- for instance, inventories and capital spending are not high relative to sales, the Fed is loosening, interest rates are declining (not rising), and corporate default rates are quiescent.

Those observers would also emphasize that, despite a weak U.S. economy, non-U.S. growth will be incrementally positive. So, they calculate that, with 2008 S&P earnings rising by 2% to 3% just from export strength, a nominal U.S. GDP growth rate of 4% to 5% will add another 4% to 4.5%, producing aggregate profit growth of 6% to 8% this year (though well below the 13% bottom-up earnings estimates by analysts).

Bears, such as myself, argue that it is different this time. We argue that tepid top-line growth coupled with margin erosion is a toxic combination that will produce reverse operating leverage.

Moreover, the egregious expansion in debt and credit over the last decade and its role in creating the mortgage delinquency mess significantly added to domestic growth in the past and will begin subtracting from it in the future, particularly with corporate profit margins at a 52-year high, as job losses and a mean regression in credit experience are reasonable expectations in the fullness of time.

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