Kass: Harder Than the Average Bear

This blog post originally appeared on RealMoney Silver on Dec. 2 at 7:43 a.m. EST.

The natural rhythm of the markets has been disrupted since, sometime in September 2008, investors came to the realization that the current economic downturn was not going to be of a garden variety.

It was at that point in time that the decline in equities gained speed in the face of the failure of Lehman Brothers, along with growing recognition of an abrupt deterioration in business activity around the world. As a result of Lehman's demise and the accelerating economic downturn, credit eroded, junk bond spreads widened further, and the price of bank loans plummeted.

The magnitude of policy relief that has been heaped on our current condition in order to re-inflate the domestic economy underscores how different it was this time as we attempted to deflate out of the previous credit binge.

In the old days, recessions were anticipated by the stock market. But in late 2008, as George Soros related in The Alchemy of Finance, market participants seem to be shaping the slope of economic activity as the decline in equities is serving to deepen the downturn. Indeed, the swift drop in stock prices on top (and into a continuation) of lower nationwide home prices has recently fed a negative feedback loop as the acceleration has had a materially adverse impact on consumer and business confidence. As a result, the outlook for personal consumption expenditures and business fixed equipment has dimmed over the balance of 2008 and into next year.

Though share prices seemingly discount anything short of a Great Recession, visibility remains ever more clouded and a wide range of S&P 500 profit outcomes from 2009 to 2011 seems, to this observer, to be an important contributor to an unprecedented degree of volatility not seen in our professional careers. And that volatility is being exaggerated by a trigger-happy and rapidly consolidating hedge fund community that seems to accentuate both upside and downside market movements.