Kass: We'll See More Casualties

Updated from 11:59 a.m. EDT

This blog post originally appeared on RealMoney Silver on March 13 at 7:55 a.m. EDT.

Credit is the lifeblood of economic and financial growth. With the benefit of hindsight, a relatively small group of brokerages and banks (which were already ill-positioned to confront an adverse credit cycle from a reserve standpoint) have poisoned the system with what Warren Buffett described as financial weapons of mass destruction. We now face the potential of a "black swan" event, a possible once-in-a-lifetime unknowable risk tied to a generation of credit and debt excesses as well as a dependency on an unregulated and unwieldy eruption in derivatives.

-- Doug Kass, "No Stock Recovery Without Credit Fix"

The issues facing investors today go well beyond the traditional analysis of the business cycle or of profits and interest rates; they extend into a new frontier as systemic risks are being misjudged. How else to explain the failure of the markets, which are already down by 20%, to respond positively on a sustained basis to the Fed's actions? Or why Citigroup C, down from $53 to $21, has no bounce? Or why investors are fleeing into short-term treasuries, pushing yields to historically low levels? Or why the U.S. dollar's trajectory is entering a free fall?

As I wrote yesterday, there is no single policy that will politely eradicate the egregious and out-of-control buildup in debt and the proliferation of unregulated derivatives in our shadow banking system. And as I said on last night's "Kudlow & Company," the natural forces of a business downturn seem the only solution to what ails the equity and credit markets. Piecemeal and oldfangled policy responses to newfangled problems will no longer work and, in many cases, will lead to adverse and unintended consequences.

Stated simply, deleveraging will be a rabid bitch. There will be many more currency, economic and hedge fund casualties. The Federal Reserve can only do so much -- any more could jeopardize the world's view of its creditworthiness, which would serve to put even more pressure on our currency.

Meanwhile, most investors, many hedge funds, some financial institutions, some more mortgage intermediaries and several municipalities are having a series of bad days as the margin clerks have assumed increased relevance to the direction of market prices.

It is for these reasons and many others that I have consistently cautioned that investors should err on the side of conservatism by taking below-average trading/investing positions.

It is different this time. Know What You Own: Citigroup operates in the financial services industry, and some of the other stocks in its field include Goldman Sachs GS, Morgan Stanley MS, Merrill Lynch MER, Bear Stearns BSC, Bank of America BAC and Lehman Brothers LEH. These stocks were recently trading at ($165.25, +1.37%), ($41.51, +1.22%), ($46.15, +2.74%), ($55.67, -9.60%), ($37.12, +0.24%) and ($46.16, +2.69%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.