This blog post originally appeared on RealMoney Silver on Aug. 3 at 7:59 a.m. EDT.
"The balance of financial terror ... is a situation where we in the U.S. rely on the cost to others of not financing our current account deficit as assurance that financing will continue." -- Lawrence Summers
A burgeoning fiscal deficit and the financial instability of our state and local municipalities are among two of the most significant of a number of
that consumers, corporations and investors face in the future. Though the bulls generally agree with these intermediate-term challenges (especially the spiraling deficit and a nervous U.S. dollar stalemate), they generally dismiss them both over the short term, favoring the belief that the current upside surprises in earnings will dominate the market landscape in influence.
I would argue that the aforementioned challenges are ever more predictable in consequence and will serve as a governor to further gains in market valuations. Not only are they inhibiting but they are also potentially oppressive influences that have been too readily put on the back burner in the face of a relentless market advance over the last five months.
An avalanche of spending by the public sector is now following an avalanche of spending by the private sector. In essence, we are (perhaps necessarily) fighting the slowdown with the same sort of incendiary kerosene that put us into the mess.
Profligate spending comes at a cost, a cost that we will experience sooner than later.
It is only a matter of time before policy makers address the financing of this accumulated debt and "
" by raising taxes significantly. Over the weekend, we have already begun to witness the start of what is likely to become an avalanche of changing tax policy.
On Saturday, New York City
its first sales tax increase in 35 years, rising from 8.375% to 8.875%, and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors' sales of liquor and wine, which is sure to be passed on to the consumer.
In Oakland, Calif., even the "high" life is being taxed as the city has recently
, and the state of California
to following Oakland's example.
This is just the start of a nascent and broad trend toward much higher taxes, a growth-impeding and P/E-diminishing secular development.
The market optimism that we are now experiencing in the expectation of a clean handoff of the baton of stimulation from the consumer (2000-2006) to the government (2008-????) might be more short-lived than many in the bullish cabal now believe, as the price of stimulation, regardless of whether its source is the private or public sector, holds the promise of being more of a growth retardant.
With the debt super-cycle continuing apace (but in a public sector context), the fragility and inherently unstable "balance of financial terror" argues, to this observer, for a not-so-benign and extremely volatile stock market future.
My friend/buddy/pal, Sir Larry Kudlow,
that we have entered a new bull market because a capitalist business cycle is pushing back against Obama-nomics. By contrast, my feet are squarely in the
camp, as I am of the view that the markets will falter within the context of an economy that is severely challenged, both currently and prospectively.
I would further argue that we are in an extended stock market trading range for several years to come and that, more than likely, we are now at the upper end of that trading range.
Though Sir Larry and apparently most market participants apparently don't agree with my assessment, the market's recent advance has likely served to reduce, not increase, the margin of safety.
Doug Kass writes daily for
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At the time of publication, Kass had no positions in the stocks mentioned.
Know what you own: Some of the most active stock at midday on Monday include Citigroup (C) - Get Report, Bank of America (BAC) - Get Report, Ford (F) - Get Report, the SPDRs (SPY) - Get Report, Financial Select Sector SPDR (XLF) - Get Report, General Electric (GE) - Get Report and PowerShares QQQ (QQQQ) .
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Long/Short LP.