Kass: Payback's a Glitch

This blog post originally appeared on RealMoney Silver on March 26 at 7:22 a.m. EDT.

"Under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."

-- Paul A. Volcker, Washington Post

Another strong headwind against the equity market and corporate profits is about to emerge.

A number of factors are conspiring to suggest that the heavily indebted (and deficit-spending) U.S. middle class, which has already received a disproportionately smaller share from the 2002-2007 economic recovery, could put political pressure (and could increasingly find support in the Democratic party) toward its initiatives to raise taxes on the corporate sector.

A populist reaction to industry (especially of an oil kind), in general, and to the brokerage/money center banks that have polluted our world's financial system with toxic credit paper seems a reasonable baseline expectation, as scapegoats are crowned and responsibility surrounding the current credit mess is found.

This all comes at a time when the consumer, as contrasted to the balance-sheet-strong corporate sector, is being hurt by rising inflation, weakening disposable incomes, the reduced availability of credit, a moribund housing market (featured by plummeting prices) and lower stock prices.

There are other influences that suggest broader tax increases are in the offing -- such as an (unfunded and unbridled) entitlement program growth, an elevated defense budget (especially of an Iraq kind) and the ever-expanding series of government bailouts, which have resulted in record external deficits, an exposed and depreciating currency and a legacy of future IOUs.

In summary, a painful payback in the form of higher corporate taxes and greater financial regulation seems likely to be a popular political clarion call from the Democratic Party (and its supporters) in the months ahead.

That payback will be another strong headwind against the economy and stock market in late 2008-2009.

Reflecting the sharp advance in equities over the last week and the likelihood of a broad increase in corporate tax rates discussed above, I am getting more bearish on both the short-term and intermediate-term prospects of the market.

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