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Kass: Too Much Confidence

This column originally appeared on Real Money Pro at 8:51 a.m. EDT on Sept. 23.

NEW YORK ( Real Money) -- There is a growing and consensus view that there are no meaningful risks to the U.S. stock market and that the conspicuous P/E multiple expansion (from under 14x to over 16x) seen thus far in 2013 may have room to further expand.

This optimistic view permeates the business media and has been embraced by most Wall Street strategists, by retail investors and by many hedge funds and other institutions.

We are, it seems, in a bull market in confidence as well a bull market in complacency.

Indeed, several weeks ago CNBC's Simon Hobbs asked his guests whether there was any argument whatsoever against a continuing bull market. (Note: I have no idea whether Simon was serious or facetious in his questioning.)

To me, the only certainty is the lack of certainty. (My guide is the history of the ups and downs of markets.) Those that hold to certainty of belief (whether it be bullish or bearish) should be hidden in a closet away from children and from money managers that behave like children.

Today's opening missive will question the unwavering bullish self-confidence that always seems to appear at or near the end of a maturing bull market as well as the rising belief that there is no downside risk to the U.S. stock market.

Stability Itself Is Destabilizing

The emerging view of limited/no downside risk almost presages an upcoming "Minsky moment." For those who don't know the term, the Minsky moment was coined by Pimco's Paul McCulley in describing the Russian financial crisis in 1998 and was named after economist Dr. Hyman Minsky. A Minsky moment is a sudden major collapse of asset values that is part of the credit cycle or business cycles. Minksy moments occur because of long periods of prosperity and increasing asset values typically fueled by borrowed money. It starts with a major selloff, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity and a severe demand for cash. Some say the financial crisis of 2007-2009 was a Minsky moment. ( Here is a crash course on Minksy's theory and Krugman on after the Minsky moment.)

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