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Kass: Mr. Market's Road to Perdition

This column originally appeared on Real Money Pro at 8:37 a.m. EDT on Oct. 15.

NEW YORK ( Real Money) --

"Logical consequences are the scarecrows of fools and the beacons of wise men."

-- Aldous Huxley
I remain cautious and plan to stay conservatively positioned over the near term.

While I recognize that being right about the direction of markets and being logical and sound of analysis may not always be a perfect marriage, today we face an unhealthy combination of a widening disconnect between elevated market valuations and current and prospective weakening fundamentals.

Over the last few months, central bankers have reinflated the wedge that separates weak fundamentals from high market prices.

Whether it is the Fed's open-ended QE3 and extended forward interest rate guidance, or the European Central Bank's unlimited securities purchase program, robust asset markets are an integral part of policy attempts to counter tail risks and deliver economic growth and jobs.

By artificially inflating asset prices above levels justified by sluggish fundamentals, these two central banks hope to calm market concerns, ignite animal spirits and trigger the wealth effect. And their actions are contagious....

[I]nvestors should not get too carried away.

There is a limit to how far and how long prices can deviate from fundamentals. This is particularly the case when central banks, acting without the support of other government entities, do not have sufficiently-refined tools to secure good and sustainable economic outcomes....

[I]nvestors' romance with the "central bank put" should not be unconditional or everlasting....

Central banks should be respected. And they can certainly counter air pockets, but not forever.

-- Mohamed El-Erian, column

As relayed in the above comments by El-Erian, at its core, the bullish view is based on a Soma-induced lunar eternity in which investors worship at the altar (and effectiveness) of more easing and the ever easy money provided by central bankers coupled with the downside protection afforded by a global monetary easing put.

While the potential exists for resolution of the many issues highlighted in this column by early 2013, risk (particularly relative to reward) has been unusually heightened over the near term and through the balance of 2012.

O, wonder!
How many goodly creatures are there here!
How beauteous mankind is! O brave new world,
That has such people in't!

-- William Shakespeare, The Tempest

Similar to the character of the ultimate outsider, "John" in Huxley's seminal work, Brave New World, I am finding it hard to fit in with the generally optimistic and bullish World State these days.

"'A gramme is better than a damn,' said Lenina mechanically from behind her hands. 'I wish I had my soma!'"

-- Aldous Huxley, Brave New World

Investors face the risk of a non-Soma reality in the months ahead.

Recent indicators of business confidence highlight that the policies of our leaders (in both parties) in Washington, D.C., are inhibiting employment growth. In turn, the domestic economic recovery remains subpar. This has produced a serious challenge to corporate profit growth in this year's second half and potentially for 2013.

Until recently, market participants have been looking through the global economic and earnings lethargy and have relied on the global monetary policy put to give fuel to the upside and to provide investors with the confidence that the downside was protected.

During the last few weeks, however, the market's uptrend has appeared to reverse, and the S&P 500 now threatens to break previous support levels.

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Chart of I:DJI
DOW 17,651.26 -99.65 -0.56%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

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