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Kass: Equities Edge Toward a Top

This blog post originally appeared on RealMoney Silver on Oct. 19 at 9:13 a.m. EDT.

I find myself back to taking the (market) road less traveled once again as investors' unjustified blind faith in the success of QE 2 has increased the U.S. stock market's degree of risk relative to the reward.

Let me start by emphasizing that the precision of stock market forecasts in a market dominated by algorithms, momentum players and even mob psychology is an increasingly difficult exercise, but I will try nonetheless.

In early July 2010, when the S&P 500 was plummeting and closing in on the 1,000 level, I suggested that the scale had tipped to the bullish side and that equities were in the process of making the lows for the year.

Since then, buoyed by the notion that the prospects for an open-ended QE 2, which would be aimed at lowering real interest rates, raising inflation rates and have a strategy that might even be targeted at the S&P 500 in order to elevate the U.S. stock market, equities have leapt forward for weeks in a routine and consistent fashion.

In light of what I expect to be a disappointing economic impact from QE 2 -- I call it quantitative wheezing -- and the negative consequences of that strategy ("screwflation") on the majority of Americans, I now believe that equities are in the process of putting in the highs for the year.

After spending like drunken sailors during the Bush administration, Republican legislators have acknowledged that it will block even the most sensible stimulus programs, and the Democratic administration and its legislators have lost the will to fight their adversaries. As a result, the responsibility for turning around the domestic economy now lies squarely on the shoulders of the Fed.

The implementation of QE 2 during the first week of November is now a virtual certainty. The general belief in its efficacy has vaulted stock markets around the world considerably higher.

The markets believe that unusual, definitive and targeted monetary solutions will solve deep-rooted problems that, in the past, were put on the shoulders of fiscal policy (e.g., a tepid jobs market).

On Wall Street, we too easily extrapolate trends. Whether it's company earnings or industry statistics or economic recoveries, policies and rescue packages, investors want to believe in the more or most favorable outcomes. So, we are told by David Tepper, Wall Street strategists and most long-biased investors that if the liquidity infusion from the first round of quantitative easing worked in the U.S., it has to work in QE 2.
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