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Kass: Thrown for a Loop

This commentary originally appeared on RealMoney Silver on Aug. 15 at 8:45 a.m. EDT.

What we're seeing on the streets in Britain right now is something we may be starting to see here. It hasn't come together in a conflagration, but it is out there, and I think it's growing. And as in Britain, it doesn't have anything to do with political grievances per se.

Philadelphia right now is under curfew because of "flash mobs." Young people send out the word on social media, and suddenly dozens or hundreds of them hit a targeted store, steal everything on the shelves, and run, knowing no one will stop them or catch them. It's happened in other cities, too. Sometimes the mobs beat people up on the street and take their money. There are the beat-downs in McDonald's, where the young lose all control and the old fear to intervene. There were the fights and attacks last weekend at the Wisconsin State Fair. You've seen the YouTubes of fights on the subways. You often see links to these stories on Drudge: He headlines them "Les Miserables."

Some of these young people come from brokenness, shallowness and terror, and are bringing those things into the world with them. Here are some statistics of what someone last week called a new lost generation. In 2009, the last year for which census data are available, there were 74 million children under 18. Of that number, 20 million live in single-parent families, often with only an overwhelmed mother or a beleaguered grandmother. Over 700,000 children under 18 have been the subject of reports of abuse. More than a quarter million are foster children.

These numbers suggest the making -- or the presence -- of a crisis....

After that, what? Britain is about to face that question. We'll likely have to face it, too.

-- Peggy Noonan, "Après le Déluge, What?" (The Wall Street Journal)

The U.S. stock market has rarely experienced such manic and frenzied action as it has over the past two weeks.

We are in a bull market in behavioral economics, and we are in a bear market for regression-based economic forecasting (that relies on historical patterns repeating themselves).

As The Edge has consistently opined, it's different this time.

More than any time that I can remember, today's investment decision making must be entwined with social observations and analysis of investor psychology and the behavior (or, at times, madness) of crowds. As such, market forecasts must be conjoined with the recognition that possible economic and market outcomes are more numerous and clearly not well-defined.

While acknowledging that standard measures of valuation based on interest rates, inflation expectations and consensus corporate profit forecasts (among other variables) suggest equities are inexpensive, for the time being, such traditional analysis could prove disappointing (and even myopic), as extraordinary and unpredictable outside factors (and their effect) can influence, override and possibly upset the current fundamental assumptions that underlie a cheap stock market.

No more important influence today is the negative feedback loop.

No matter how you look at it, a negative feedback loop is intensifying (most recently catalyzed by the wild card presented by the European banking crisis) and, if not stopped, will have even more adverse implications for markets and economies.

The markets have been bombarded by a plethora of negative data:

  • the divisive and partisan circus in Washington, D.C.;
  • the absence of thoughtful and bold pro-growth fiscal strategies;
  • a U.S. debt downgrade;
  • an already fragile recovery has been weakened under the weight of nontraditional structural problems (middle-class screwflation, fiscal imbalances, a weak housing market burdened by a huge shadow inventory of unsold homes, structural unemployment etc.);
  • a sovereign debt contagion and a weakening European banking system; and
  • lower world stock prices and unprecedented market volatility.
Confidence has cratered both here and abroad.

In the U.S., with over 25 million Americans who can't find a job and with an existing workforce whose real incomes have stagnated for years (contrasted against corporate America whose income statement and balance sheet have never been stronger), it is abundantly clear that we live in uncertain times. What makes matters worse is that we don't know how bad it might be (if the negative feedback loop deteriorates further) for both our economy and for our stock market.

Speaking to Reuters late on Tuesday, looters and other local people in east London pointed to the wealth gap as the underlying cause, also blaming what they saw as police prejudice and a host of recent scandals. Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted. "They set the example," said one youth after riots in the London district of Hackney. "It's time to loot."

-- Reuters

In her editorial on Saturday, The Wall Street Journal's Peggy Noonan writes about the riots in Europe and questions whether the U.S. is next? These riots are an outgrowth of the worldwide inequality and schism between the haves and the have-nots. (As I wrote in Barron's months ago, average Americans arguably face no better conditions than their European counterparts who are expressing their disgust violently.)

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