I have seen this movie before. It's an entertaining, feel-good movie that ignores what is happening outside the theater. Investors gathered to watch it in early February, July and October -- only to be disappointed in the weeks that followed.
We look at the present through a rearview mirror, and we march backward into the future. Market participants have embraced an effete and trivial mortgage proposal that could backfire in its goal and purpose. They put their faith in a bogus Bureau of Labor Statistics methodology that creates the illusion of job growth: The net business birth/death model created 36,000 jobs in November a year ago; in this year's weakening economy, the model created a birth/death model that added 51,000 jobs last month.
And market participants welcome a painful drop in consumer and corporate management sentiment and the promise of lower interest rates as the sine qua non to offset years of home speculation, unregulated derivative growth (which has bypassed the banking system) and an even broader accumulation of credit/debt.
Over the weekend, the beat went on.
continued the subprime confessional, writing off $10 billion -- not to worry, because its capital ratios will be shored up by an injection of $11.5 billion from two strategic foreign investors.
was deified in
, with nary a comment over its $78 trillion derivatives book. And of course, the New England Patriots football team remained undefeated.
The media and the talking heads (talking their books), many of whom trade/invest at the altar of price momentum, are almost all giving us the all-clear sign. The phrase, "Jump in 'cause the tapes act well," similar to what we heard in other periods of 2007, has become the mantra to the permabull media and investing cabal as the bears, once again, live through the pain of rising equities.
In a recent
, I highlighted my view that the world's equity markets have not priced in the ramifications of a materially adverse secular change in credit supply and availability -- as well as the growing probability of an economic and profit recession in the U.S.
The transition from debt/credit accumulation to de-accumulation will be painful -- not only in the months ahead but in the years ahead. It will produce a period of lumpy and unpredictable economic and profit growth that will be difficult to navigate.
"What began as a U.S.-specific shock is morphing into a global shock. ... There is a clear risk that some of the hot housing markets in Europe and some emerging markets will cool dramatically." -- Peter Berezin, global economist at Goldman Sachs
For many of the same reasons, the weakness in the domestic economy is now moving over there. Last week, many of the leading investment firms --
-- joined Stephen Roach's
in the belief that
and rejected the general notion of a decoupling of economic growth.
Rather than go with the flow, I would advise market participants to take a moment to acknowledge the truth before putting their money to work.
At time of publication, Kass and/or his funds were short JPMorgan Chase, Merrill Lynch, Lehman Brothers and Morgan Stanley, although holdings can change at any time.
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 Short Offshore Fund, Ltd.