Kass: Getting a Grip on the New Reality

My best guess is that the market will fluctuate within a very broad trading range of plus- or minus-10% to 15% in either direction from today's S&P 500 level -- but, then again, a 10% move is only the average of three days trading! -- making very little progress over the next several months. In this environment, investors may only deliver superior performance by being opportunistic and by processing ideas quickly and intelligently. I'll say it again: It is an exquisite trading market, not an exquisite investing market to which most investors are accustomed.

The Intermediate Term

The intermediate term is the tricky issue for me. Typically, economic and financial problems do work out, and markets tend to recover from shocks. From my perch, however, the intermediate term is still murky, clouded by the uncertainty of the magnitude of the financial, stock market and economic shocks over the past 12 months. The threats, ramifications and challenges of the long tail of the credit mess, the dysfunctional financial intermediaries that finance economic growth, the broadening weakness in the consumer and the impact of the breakdown in stock and home prices (on the consumer, our universities, municipalities and other institutions) remain in doubt.

As I wrote in "Welcome to Dystopia" last week, the outlook for the next three to five years has been jarred. Our social, economic and political future has materially changed, owing to the deep and muddy financial ditch in which we are now squarely stuck. Moreover, the scope and duration of the financial meltdown has placed our economy well past the tipping point, and it will have an enduring and negative intermediate-term effect. Consider that U.S. home prices have dropped by over $5 trillion in the last one and a half years and that, during the month of October alone, nearly $10 trillion has been lost in the global equity markets. Quite frankly, that ditch is so deep right now that we are in big trouble if our policymakers get it wrong over the next 12 months. My concern is that we might even be in trouble for a long period of time if they get it right.