Kass: Investors Have Lost Their Innocence

At the epicenter of the leverage was the housing market, which was confidently embraced by owner non-occupied investors, who stretched housing prices and affordability (home prices divided by household incomes) to unsustainable levels. Expectations of a long, uninterrupted boom in residential real estate became the newest paradigm.

Generally speaking, the availability of cheap credit made the notion of debt more acceptable and institutionalized leverage, serving to enrich a small cabal of originators who sliced and diced housing mortgage products. With the benefit of hindsight, however, it is clear that the mass marketing of debt began to poison the world's financial system.

"All for one! One for all! Every man for himself!"

--The Three Stooges: "Restless Knights" (1935)

That was then and this is now.

Last week, we saw a tsunami of selling, which was in marked contrast to my expectations for some stability.

We now face the aftermath of a bygone credit cycle gone ballistic. The world's financial system is, to some important degree, crippled and in a workout mode now. In all likelihood, the pendulum of credit will swing to an opposite extreme, and availability (the lifeblood of economic growth) will become dear, which is in marked contrast to the freewheeling decade of the past.

Regardless of short-term direction, we continue to be in an investing environment that argues in favor of erring on the side of conservatism. Most should maintain smaller-than-typical investing/trading positions and should keep conviction on the back burner.

The experience of the last 12 months has exacted a toll on investors. The average household net worth has taken a hit from the depreciation in stock and home values, confidence in our politicians and corporations (especially of a financial kind) have rarely been lower, and, importantly, investors' innocence has been lost.

While, at some point (maybe sooner than later), the equity markets will rally from the current oversold readings, an extended period of investor disinterest and apathy seems likely to follow.

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Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.