This blog post originally appeared on RealMoney Silver on Sept. 4 at 8:05 a.m. EDT.
After some short-term weakness, my friend/buddy/pal, Rich Bernstein, called for an optimistic intermediate-term equity view on
"Squawk Box" just now. In making his case, he cited that stocks have performed in a substandard fashion over the past 10 years, even in the face of trailing 12-month corporate profits being much higher in 2009 than in 1999.
Sure, stocks are flat for a decade (at best), and earnings are higher than in 1999, but look at what fueled corporate profits and earnings in the interim interval (1999 to present); it was an orgy of debt at every sector in the economy (private and public).
In the last cycle, the hocus-pocus borrowing/lending and 35-1 leverage resulted in the failure of
American International Group
and also in a historic depression in residential housing. There were real failures of real financial institutions, and many jobs were lost, even outside the financial industry, in an enormously deep recession.
The might of the public sector and the enormity of the monetary and fiscal stimulation speak volumes to the magnitude of our economic woes and to where we might have been headed without government intervention.
By contrast, in 1999-2001, we faced merely the challenge of an era of ludicrous stock speculation. Its subsequent effect was muted on the economy and resulted in a shallow (and technology-weakening) recession.
A consumption binge of unprecedented proportions followed the 2001-2002 downturn, and it took aggregate economic activity back to peak levels.
So, under normal conditions, yes, Rich is right: investors might be more optimistic, as the last decade of stock performance was weak. But this time, following the uniqueness of the last cycle, it was different, as the effect on the real economy has been and will continue to be more pronounced in its effect and duration.
Stated simply, the fuel of leverage will no longer catalyze growth (especially of a housing kind) and the benefits of that leverage will be hard to replace in a world where banks are reluctant to lend, the securitization markets are broken and the shadow banking system is nearly extinct.
, the fuel of leverage will no longer catalyze growth (especially of a housing kind), and the benefits of that leverage will be hard to replace in a world where banks are reluctant to lend, the securitization markets are broken and the shadow banking system is nearly extinct.
Today the only institution that is running at 35-1 leverage (or more) is Uncle Sam! And with that, comes challenges anew over the next decade.
At the time of publication, Kass and/or his funds were short AIG, although holdings can change at any time.
Doug Kass writes daily for
, a premium bundle service from TheStreet.com. For a free trial to
and exclusive access to Mr. Kass's daily trading diary, please click here.
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.