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Kass: Where I Stand

It remains my view that the 2013 real GDP in the U.S. will be (at best) +1.5%. This compares to the Congressional Budget Office's recently issued a forecast of +1.4%. To me there appears to be accumulating downside risks to economic growth in the form of the fiscal drag of policy and given that quantitative easing is losing its effectiveness.

With inflation running low, sales and profits will be challenged. Business pricing power is limited, but costs are likely to trend higher (raw materials, interest rates, etc.). Meanwhile, productivity is starting to decline -- it was down -2% in the fourth quarter of 2012 -- and unit labor costs are rising. This spells a threat to today's unprecedented and high profit margins, which are not likely to be as stable (as many prognosticators expect) but are more likely to mean revert over the next two years.

Not only are fourth-quarter 2012 S&P profits disappointing but forward guidance is poor.

In January, about 56 companies in the S&P 500 issued first-quarter 2013 earnings guidance: 45 were negative, and 11 were positive. That rate of negative guidance (80%) is the worst since FactSet started to keep these numbers (in 2006) and above the previous high established in last year's third quarter (74%).

Against the above backdrop of economic/ profit storms and continuing/unattended budget deficits, the only solution being offered appears to be global money printing.

It is a near universally accepted truth that the world's stock markets will continue to perform well as long as the global easing continues. And for now, the only thing that seems to matter is a continuation of that expansionary monetary policy.

Dialing up free money masks the secular problems temporarily, and, if done dramatically, and for an extended period of time (as is now the case), the consequences can be negative and the ability to dial back down more problematic.

Market optimism has lifted hedge funds to their highest net long exposure in 18 months and has resulted in a reversal from outflows to inflows into domestic equity funds and in a massive swing into extremely bullish territory in nearly every market survey of sentiment (and in the market's volatility indices).

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Chart of I:DJI
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