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Kass: Buy the Mystery, Sell the History

At What Cost?

The cost of the Washington fiasco is likely higher than many think. Our leaders and fiscal policy are growth-deflating. Using the debt ceiling as a negotiating tactic has run the risk of a more permanent and long-lasting damage to our country's reputation and hastens the day when the U.S. dollar is no longer the world's reserve currency. (Note this morning's U.S. dollar weakness after Chinese agency Dagong downgraded the U.S. credit rating.) If that damage occurs, the financing of our debt will grow more expensive, confidence will drop, and economic growth will be diminished.

Visibility Is Diminished

With more confusion ahead in a fiscal sense, the path of economic/profit growth is unclear as business and consumer confidence has been dented. Markets dislike uncertainty. To me, it is a leap of faith to expect the 0.6% shaved off from GDP (due to the government shutdown) to be made up in the period ahead.

The End of a Strong Profit Cycle

Last night, we saw two high-profile and likely not isolated profit disappointments -- eBay (EBAY - Get Report) saw "a dramatic deceleration in U.S. e-commerce growth" and IBM (IBM - Get Report) was also weak -- and more might lie ahead. Most notably, top-line misses have become commonplace -- even Goldman Sachs (GS - Get Report) missed by $700 million this morning. Profit margins (which are 70% above the five-decade mean) are vulnerable to mean-reversion, and monetary policy has lost its effectiveness. I remain skeptical of the consensus view that the domestic economy will move into escape velocity and toward a self-sustaining cycle this year or next.

Quantitative Easing Has Lost Its Effectiveness

The role of stimulating growth has been squarely on the shoulders of monetary policy since 2009 as our leaders in Washington, D.C. have abrogated their fiscal responsibility. With the Fed's tools now clearly more blunt in their effectiveness, organic growth must take over. With retail (shopping center data has weakened) and housing activity already clearly eroding prior to the mess over the past few weeks, I don't see a catalyst to that organic growth. Moreover, the longer the Fed continues its current policy the more difficult it will be to extricate itself and the more likely that the market tightens (with higher bond yields ahead even if the economy remains lackluster).

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