Kass: Sooner or Later, the Piper Must Be Paid

This blog post originally appeared on RealMoney Silver on Aug. 28 at 8:02 a.m. EDT.

The authorities have created a sugar high for speculation, with a Federal Reserve that has maintained interest rates so low that there is no return on savings and with an Administration that promises to provide stimulus until it manufactures economic growth.

Earlier this week, former Merrill Lynch strategist David Rosenberg questioned the meaning of the sharp drop in the yield on the 10-year U.S. Treasury note back toward recent lows (particularly in the face of rising deficit projections by the CBO) and whether, in all likelihood, the rally in stocks was more likely a massive short-covering rally than a reallocation away from bonds into stocks (which would have resulted in a rise in the 10-year yields).

Of course, there is another view that is different than that of David. The more sanguine view is that low yields are being supported by Asian savings flows, tame inflation, a steep yield curve and the growing consensus that the Fed will stay easy for an extended period of time now. And while the forecast 10-year accumulated deficit has been increased by $2 billion, the size of the deficit in 2009-2011 has been lowered, satisfying those market participants with shorter time horizons.

My view is that investors will shortly see through the current sugar high and the better-than-expected earnings cycle and will begin to look over the valley at the chronic and secular issues that have emerged from the past cycle and from policy decisions aimed at returning the domestic economy toward self-sustaining growth.