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This commentary originally appeared on Real Money Pro on Dec. 5 at 7:51 a.m. EST.

We live in a world of fear -- and many live in world of hurt.

Most of the economic and investment fears are justified, and I have spent the last five years underscoring the challenges we face and the unsettling, subpar outlook.

As a result, the worldwide economic recovery is not yet self-sustaining -- positive outcomes are importantly dependent upon the role of effective policy (fiscal and monetary) that will buy time to grow out of those problems.

These days, everyone is thinking binary (good or very bad) with risk being on or risk being off.

But, it can increasingly be argued that a lot has been discounted in the massive de-risking (by every investor class) that has reduced the

S&P 500's

P/E multiple by about 3 multiples below its average over the last half century (12x vs. 15x) despite a near 70% lower yield on the 10-year U.S. note (today) and given the low inflation readings and inflationary expectations. And with interest rates near historic lows, risk premiums are now at multi-decade highs. In fact, the earnings yield of stocks less the risk-free cost of capital places stocks cheaper today statistically than at the

generational low

in March 2009.

There is almost no talk of upside as the recognition that "

this time is different

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" in a Reinhart/Rogoff world has been instilled in our economic and investment intellect and consideration. Even the perma-bull strategists have recently downsized their year-end 2011 and 2012 expectations and S&P price targets.

Hedges, low-volatility portfolio management strategies and owning precious metals have replaced the go-go investing of the 1990s, and any sense of generating alpha through individual stock selection (given increasingly correlated assets) has been lost or given up on as ETFs traded funds grow in popularity.

But, imagine if in the eurozone:

  • With its back against the wall and taking a lesson out of the U.S. playbook, Europe's tame and timid policy response to the debt contagion becomes one of shock and awe.
  • The ECB massively intervenes and stabilizes sovereign debt yields.
  • The eurozone's fiscal integration goes smoothly as does the implementation of a massive banking industry recapitalization, as buyers around the world appear.
  • The eurozone experiences only a modest economic dip.

And, imagine if in the U.S:

  • Fourth-quarter GDP exceeds 3%.
  • A resurgence in the popularity of Newt Gingrich (and a coalescence of the Republican Party behind its candidate) causes President Obama to become defensive about the lack of progress made during his past four-year term. The president begins to move to the political center, but it is too late, as it becomes apparent that he will likely be a one-term president.
  • The U.S. stock market rejoices with the expectation of a change in the administration and likely Republican control of both the House and Senate.
  • Further expanding his lead in the polls, candidate Gingrich introduces a six-point economic plan, a business-like agenda of thoughtful, intelligent and radical pro-growth fiscal policies which includes:
    1. engineering a more rapid recovery in the housing markets;
    2. addressing our fiscal policies (including but not restricted to setting a specific limitation on the annual gains in spending to be less than the increase in the consumer price index and mean testing entitlements, freezing entitlement payouts and gradually increasing the social security retirement age to 70 years old);
    3. denting the structural unemployment problem and mismatch of available jobs to talent (through a comprehensive plan to change and upgrade our educational system);
    4. a broad plan for energy self-sufficiency designed to rapidly develop all of our energy resources;
    5. repatriation of overseas corporate profits tied directly to job growth earmarks; and
    6. an overhaul to the U.S. tax system (which includes a flat tax and repatriation of overseas earnings only if earmarked by a commitment to job growth/hirings).
  • With the outlook for top-line growth improving, contained inflation and subdued wage growth serve to sustain profit margins as 2012 S&P earnings expectations rise.
  • Consumer and business confidence rebound dramatically, paving the way for pent-up demand for durable products (e.g., housing and autos) and for capital spending to be unleashed.
  • M&A activity explodes in an unprecedented manner.
  • With a better GDP growth outlook and rising consumer and business confidence, U.S. bond yields rise rapidly, causing a massive reallocation trade out of bonds and into stocks. Underinvested retail investors reverse their disinterest in U.S. equities and begin to reinvest in domestic stock funds, and a de-risked hedge fund community panics and exacerbates a buying stampede.

Doug Kass writes daily for

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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.