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Kass: A Summary of My Bearishness

This blog post originally appeared on RealMoney Silver on Aug. 10 at 7:40 a.m. EDT.

Let me summarize my market thoughts, as expressed on RealMoney Silver over the past two weeks.

As I see it, the bull market argument is that the U.S. is exiting the recession just like the many that preceded the current one. Consequently, corporate profits will exceed consensus forecasts in tandem with:

  • the resumption of revenue growth;
  • the record fiscal and monetary stimulation;
  • an export-led Asian recovery; and
  • the operating leverage associated with productivity gains achieved through draconian cost cuts and influenced by the benefits of wage deflation.
The bulls further argue in favor of Say's Law of Production (i.e., business drives consumer incomes and spending) and that the high-tax health and energy bills introduced by the President have been recently set back (as the Blue Dog Democrats and the liberal leadership are already battling).

The bear market argument that I have now embraced is that we are seeing nothing more than a second derivative recovery and that, owing to a temporary replenishment of inventories, the economy is only getting less worse (or getting better from a depressed level). The ingredients for a durable and self-sustaining recovery are missing as an economic double-dip grows more likely in a climate of corporate cost cuts, elevated jobless rates, wage deflation and continued pressure on personal consumption expenditures. Bears, such as myself, reject Say's Law of Production and view weakening consumer incomes and spending as a poor foundation and as inadequate drivers to improving business activity into 2010.

The economic downturn of 2007-2009 has already been different this time in scope and duration. For example, unlike the other post-depressions/recessions of the last century, we have already witnessed two consecutive quarterly drops in nominal GDP. As well, the 20-month-old recession has resulted in a near 4% drop in real GDP vs. drops of between 2.5% and 3.0% in the mid 1970s and early 1980s recessions. The U.S. economy came out quickly from those prior downturns, with recoveries to new peaks in economic activity taking only three or four quarters.

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