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Unfounded Fears; Lackluster Growth: Best of Kass

The simple fact is you can't live in fear of 1929 or 1987, regardless of what charts someone posts in their similarities. Even if you hate this market, stay flexible to taking some short-term long-side plays while waiting for the bearish catalyst to finally show some teeth and find some footing.

Parsing the Beige Book
Originally published on Wednesday, Oct. 16 at 2:29 p.m. EDT.

In the Fed's Beige Book, the economy was described as expanding "at a modest to moderate pace," which covered the period of September through early October, thus capturing a few weeks of the partial government shutdown.

Here are some relevant comments from the release:
  • Consumer spending continued to increase and activity in the travel and tourism sector expanded in most Districts.
  • Business spending grew modestly in most districts.
  • Employment growth remained modest in September. Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act (Obama care) and fiscal policy more generally.
  • Demand for nonfinancial services rose and manufacturing activity also expanded modestly.
  • Residential construction continued to increase at a moderate pace. By comparison, non-residential construction again expanded at a slower rate.
  • Residential and CRE activity varied across districts, but largely continued to improve.
  • Financial conditions were little changed on balance, with lending activity remaining modest in most Districts.
  • Price and wage pressures were again limited.

The bottom line is that the U.S. economy is growing, but at a still lackluster rate of about +2%. It's becoming more likely that the Fed will wait until January when Federal Reserve Chairman Janet Yellen has full rein to decide what's next with its policy. Assuming this is the case, the Fed will have a $4 trillion balance sheet by then -- up from $3 trillion at the end of 2012 -- with no change in the average rate of job gains and what is still a +2% growth rate.
[Read: <a target="blank" data-add-tracking="true" href=""><em>The Dangers of Complacent Retirement</em></a>]

The Fed members' econometric models will say "keep on going," which they probably will. But practical common sense should call for some "look in the mirror" introspection so they can see that what they are doing isn't working. Not to mention it will likely cause a mess when it's time to reverse (as we saw over the summer with just the mention of it).

In response bond yields are dropping -- ProShares UltraShort 20+ Year Treasury (TBT) is down $1.50-plus.

At the time of original publication, Kass had no positions in the investments mentioned.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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