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Kass: Cautiously Opportunistic

This blog post originally appeared on RealMoney Silver on March 16 at 8:22 a.m. EDT.

Since mid-2010, I have incorrectly maintained a cautious market outlook.

As mentioned in my "Mea Culpa," my concerns have been consistently dismissed in the marketplace as equities have marched higher.

In support of my cautious investment view, I had offered a series of arguments on why numerous secular headwinds would produce nontraditional challenges to the notion of a smooth and self-sustaining economic recovery that was the foundation of the bullish cabal's baseline case.

Among my chief concerns have been:

  • an increase in structural unemployment;
  • rapidly advancing food and other input prices which raised the specter of lower corporate profit margins and disappointing (and more volatile) corporate profit growth;
  • fiscal imbalances (and the austerity that ensues) at the local and state levels;
  • an apparent unwillingness of either political party to address the federal budget deficit;
  • a still-moribund housing market plagued by a large shadow inventory of unsold homes;
  • a eurozone that has only temporarily deferred its sovereign debt problems;
  • rising instability in the Middle East and the resulting sharp increase in energy prices;
  • slowing growth in China; and
  • unknown tail risks of the previous economic and credit cycle.
As well, I have been concerned about the screwflation of and pressures on the middle class and the ultimate adverse impact on economic growth and corporate profitability.

I recently wrote, that , similar to Janus, the mythological Roman god depicted as having two heads facing opposite directions, the U.S. economy is two-headed.

  • One head is strong -- namely, the healthy and largest U.S. corporations.
  • The other head stares in the opposite the direction -- namely, the wobbly head of the U.S. consumer.
While corporations are flush with cash, running at a near-six-decade peak in operating margins and are within two quarters of eclipsing the previous peak in corporate profits, the economic crisis of 2007-2009 still haunts the average American.

According to the Bureau of Labor Statistics, 16% of the labor force, or over 25 million Americans, are out of work (14 million unemployed and 11 million underemployed). Mega trends of globalization, technological advances and the growing presence of temporary hirings as a permanent feature of the workplace form the basis of a secular rise in structural unemployment. Further depressing job creation is the fact that there are few growth engines to replace residential real estate, a sector that was such a prominent contributor to GDP and labor in the last cycle.

As I mentioned in a recent Alan Abelson Barron's column, every month brings more people who want jobs but who are leaving the workforce.

The plight of the middle class seems to be deteriorating further. The early-March jobs report disclosed that the average workweek declined by 0.1 hours, and there was no change in average hourly earnings. The employment participation, back down to 27-year lows, casts a long shadow on the domestic economy, which, despite normal population growth, currently employs only the same number of people as in 2003. Meanwhile, the cost of necessities (most notably of an energy kind) continues an uninterrupted rise, serving to obviously pressure not only the unemployed but the average Joe that has a job.

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