Kass: Curb Your Joy, Stocks Still Going Down

This blog post originally appeared on RealMoney Silver on Jan. 25 at 7:53 a.m. EST.

The rumor of a $40 billion derivative hit in Europe coupled with the artificial pressures from the unwind of Societe Generale's rogue trader's positions probably established a good market bottom during "the dip of death" at midday on Wednesday.

Indeed, the negativity bubble, driven by the above (and other factors) as well as by a shell-shocked and morose media that loves 'em when they rise and hates 'em when they fall was as full of air as it could get two to three days ago.

Although that Wednesday low will not likely be threatened for a while, investors face an uncertain equity market, and both Cassandras and permabulls will be wrong over the next several months. We are not likely embarking on a new bull market nor are equities going to collapse to new lows. Rather, a trendless, uneven and difficult-to-navigate market appears ahead for equity investors.

Pick stocks not markets.

Bonds

With "normalcy" returning to the markets, the extreme quality flight to bonds seems over. Fixed-income yields could have made their 12-month low, and bond prices might have made their yearly high at midweek.

U.S. Economy

Despite the monetary authorities' response to the market's volatility, there is no change in outlook as an incipient downturn in the U.S. business cycle appears in place. The bursting of two huge asset bubbles upon which the U.S. consumer has drawn support -- namely, the worldwide property and credit markets -- will continue to negatively influence growth in 2008-2009.

World Economy

The U.S. consumer's fall from grace will weigh on the world economies as the notion of decoupling is simply another one of those fallacious and silly new paradigms. Emerging Asia remains heavily dependent on exports as a source of growth; its export dependency is at a record high of 40%, while private consumption share is at a record low. Stated simply, Asia will not be an oasis of prosperity in faltering U.S. and Western European economies.

The Fed

The Bernanke Fed remains the wild card in the investment mosaic as its uninformed rhetoric, inconsistent interest rate moves and questionable timing of interest rate cuts arouses an unusual amount of uncertainty.

Most recently, by acting in a directed and market-friendly manner a week before a regularly scheduled Fed meeting and without the benefit of any additional economic data, the Fed has further undermined its credibility.

Regardless, aggressive monetary easing will not turn dysfunctional credit markets to pre-crisis levels nor will it immediately improve the depressed residential real estate market. The timeworn policy of promoting excess liquidity -- that is, the route currently being taken -- will produce another in a string of destructive asset bubbles. This time it will be inflation. (Just watch the price of gold.)

A year from now, it should be clear that the Fed was probably pushing on the string.

TGIF!