Kass: A Risk-On, Risk-Off World

This blog post originally appeared on RealMoney Silver on Aug. 3 at 7:32 a.m. EDT.

As I have written, either risk is on or risk is off these days for Mr. Market.

Algorithms (managed by the high-frequency-trading puppeteers) accentuate the moves up and down.

Some very evident contradictions (heads I win; tails you lose) seem to be emerging, especially among the bulls.

One group of bulls sees the need for a second round of quantitative easing because the economy stinks. The other group of bulls sees an ongoing and healthy domestic economic expansion -- one that believes that a second round of quantitative easing is either unnecessary or is icing on the cake.

Meanwhile, since early July, everyone seems to love the market action on a technical basis, which really doesn't surprise me as investors seem to prefer to buy up, when there is more clarity, and sell down, when there is less clarity.

My guess is that some of these people will be proven wrong -- that's a safe bet -- but I am not sure which ones.

"Domestic inflation reflects domestic monetary policy."

-- Martin Feldstein

What I am relatively certain about is that monetary policy is not the solution to our nation's economic and financial problems. We need to freeze entitlements, lower government spending, establish a value-added tax and increase taxes on the wealthy. For now, only tax increases seem on the legislative docket, and we may well have to wait for another crisis before the other three fiscal constraints and strategies are implemented.

And I am also reasonably certain that the current policy efforts (on the monetary front) are putting us on the road to more and deeper problems, and that will serve as a cap to the market's upside.

Just look at the action in certain commodities (a ripping wheat market, higher oil prices, etc.). They are sending a message to Mr. Market.

A month ago, I made the case that stocks had hit their lows for the year.

As stocks begin to challenge my upside S&P 500 target of 1,150 (in a range between 1,025 and 1,150), I would now reduce stock positions in the belief that shorting the U.S. bond market, via a ProShares UltraShort 20+ Year Treasury (TBT) long, provides a better downside risk/upside reward ratio than owning the S&P now.

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's daily trading diary, please click here.

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