Kass: Investors Have Lost Their Innocence

This blog post originally appeared on RealMoney Silver on June 23 at 7:39 a.m. EDT.

"I used to be Snow White -- but I drifted."

-- Mae West

For over two decades, with the possible exception of the aftermath of the speculative bubble of the late 1990s, equity investors have been comforted by the notion that nearly every dip has been a buying opportunity as the U.S. economy has typically recovered relatively swiftly from economic and credit, geopolitical, systemic and assorted exogenous shocks. And for over two decades, fixed-income investors have been comforted by the tailwind of disinflationary influences, which provided excellent absolute and relative returns in bonds.

Stated simply -- similar to Edith Wharton's brilliant The Age of Innocence, when "being was better than doing" -- stocks and bonds were no-brainers to most. After all, investors' intermediate- to longer-term experiences in the capital markets were universally solid.

The media insisted that investors buy stocks and bonds for the long run as the sky was the limit. Even James Glassman and Kevin Hassett's Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market seemed within reach.

"Here's another fine mess you have gotten me into."

-- Ollie (Laurel and Hardy)

As we entered the New Millennium, the U.S.'s economic moorings became unanchored as unprecedented low levels of interest rates produced a second wave of speculation in housing and daytrading in homes replaced the daytrading in stocks. The generous availability of low-cost capital and debt formed the foundation of an unprecedented boom in consumer borrowing, a massive spending binge and a desperate institutional search for yields.

A shadow banking industry emerged as the helter-skelter move into derivative products (which were unregulated, unwieldy and intentionally seemed to circumvent banking capital requirements) rapidly materialized. And an eager hedge fund community joined the happy hour of leveraging while unquestioning investors seemed to sanction the generation of common returns that were produced by taking uncommon risks.