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Kass: My 'Fast Money' Recap

Stocks in this article: NKEPGCATFINFA

This column originally appeared on Real Money Pro at 7:50 a.m. EDT on July 10.

NEW YORK ( Real Money) -- On Friday I was on the "Fast Money Halftime Report" with Scott Wapner and the gang.

Let's go to the tape!

In today's opening missive I am going to outline and expand on my comments from the "Fast Money Halftime Report" in order to fully explain where I stand today.

I have recently downgraded my previously more optimistic expectations for the U.S. stock market, reflecting the confluence of the following four factors, which form a potentially toxic market cocktail.

  1. Global growth is slowing, and the corporate profit outlook is worsening. The rate of global economic growth is decelerating worse than I had anticipated, and the outlook for corporate profits in 2012-2013 is deteriorating. The U.S. is experiencing its third pause in the subpar recovery that began in 2009, the eurozone is in recession, and economies in important growth countries China and India are slowing down.
  2. Monetary easing is losing its effectiveness. It is increasingly clear that the benefits from monetary easing are waning. Responsible fiscal policy now holds the key to economic success, especially in the face of unique structural headwinds and the continued deleveraging of the consumers' balance sheets.
  3. U.S. and eurozone leaders remain inert and dysfunctional. Unfortunately, our policymakers are inert, dysfunctional and divided. I was hopeful that concessions would be made and partisanship would have been dropped by now in order to implement much-needed pro-growth fiscal policy. This has not happened, and as we move ever closer to the November elections (and the fiscal cliff at year-end), the likelihood of compromise seems more and more remote as election paralysis has set in. European leaders are even less focused on real change than our representatives in Washington, D.C. The recent Brussels summit provided only baby steps, not the bold initiatives needed to resolve the EU's deepening sovereign debt crisis.
  4. A negative feedback loop is hurting confidence and markets. The major risk is that a negative feedback loop, reminiscent of August 2011, has been ignited. Already, consumer and business confidence is suffering, and jobs creation is moderating (and the potential exists for a further downward spiral in the months ahead). This is not a healthy state given the vulnerable domestic economy, which is now experiencing subpar growth of only about +1.5% in real GDP. Bottom line: There is little margin for error, as even a minor external shock or policy mistake could easily trigger recession.

While the upside to the U.S. stock market might be limited by a deceleration in the rate of global economic growth and disappointing corporate profits, so might the downside be limited as valuations are not unreasonable. Investor sentiment is poor, and investor expectations are modest as many classes of investors have de-risked. This could also serve to cushion a more meaningful drop in the U.S. stock market.

I want to briefly expand on the above talking points.

It is becoming increasingly clear that global easing is losing its marginal benefit and is waning in influence and that the onus of future economic and corporate profit growth lies squarely on the shoulders of fiscal policy.

Unfortunately, the likelihood of inaction and the associated policy uncertainty (fiscal, taxes, regulation) are about to weigh down corporate results (possibly for some time to come).

In the U.S., dysfunctional politicians are unable to put their differences on the back burner in order to address the fiscal cliff and to implement thoughtful, creative and impactful pro-growth fiscal initiatives.

In the eurozone, hard-hitting, potentially painful and politically risky fiscal initiatives are being delayed in favor of more band aids (and monetary easing). The overseas markets are starting to see through those temporary patches. Already, the Euro has given up all its gains since the late June economic summit in Brussels. As well, yields on Spanish and Italian bonds are again back up to pre-summit levels.

Before the year began (and up to last month), I was hopeful that this would be different (i.e., that policy would be less uncertain and that economic growth would reaccelerate). But as we move ever closer to the November elections, any movement away from the currently divided and divisive behavior is increasingly unlikely. The behavior and inertia of our leaders in Washington, D.C., has been a downer for business and consumer confidence, and now the earnings picture is quickly eroding in the face of an unsurprising deterioration in confidence and an accelerating negative feedback loop.

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