This blog post originally appeared on RealMoney Silver on April 29 at 9:01 a.m. EDT.
last night on "Fast Money" with Melissa and the gang was an unpopular one to raise cash and to expand my short book.
I made five major points as to why I am taking the investment road less traveled:
The Fed may not be so friendly as many expect.
The assessment of the economy is too optimistic.
Secular headwinds are emerging; they are numerous but are being dismissed.
We are approaching several economic tipping points -- for example, in food prices, gasoline costs and in a sharp decline in our currency -- that in the past have led to economic and market contraction.
Even the most ardent bears are capitulating.
Let's go over these point by point now.
Relying on the Fed
There is now an almost universal view that the fed has given the green light to risk, but i am less certain.
It should be clear to the Fed that consumption and housing are continuing problems. In part, as an outgrowth of monetary policy, we have seen a rising stock market, which has made the rich richer, while raising the costs of necessities such as food and gasoline, which has made the poor poorer.
As Dr. Bobby Marcin has written, whereas food and energy are investment vehicles for the investor class, they are expenses for the American consumer. Zero-interest-rate policy and a lower dollar have not assisted innovation, have not resulted in the creation of new businesses and certainly have not materially reduced employment. As Bobby points out, these elements might even have served to hurt the jobs market, as there is industry consolidation as well as higher input costs, which require labor cost reductions in order to preserve margins.
In listening to some of the Fed governors and Ben Bernanke's reference to the words "several meetings" before a tightening is considered, they all appear to have begun to recognize this, and a more hawkish turn by the Fed is increasingly possible in order to combat the unintended consequences of easy money. There is no chance for QE3 to follow QE2.
The majority of strategists are gushing over the economic statistics of the last two quarters and incorporating them into the bullish view of a smooth and self-sustaining domestic recovery. But all the data being dissected have been achieved under the umbrella of QE2, under zero-interest-rate policy, with a FICA cut, with the Recovery Act and with 100% depreciation benefit on capital expenditures.
When these influences fall by the wayside -- and they will -- the U.S. is left with an indebted consumer and a deteriorating currency. Look at housing as an example of underlying weakness: It's now double-dipping despite favorable affordability ratios and an unprecedented 30%-plus drop in home prices.
At best, we don't know if the recovery is self-sustaining, and quite frankly, I don't know anybody who can judge otherwise. I have long projected on "Fast Money" and on
a lumpy and uneven recovery, not a smooth and self-sustaining one, and I am sticking to that forecast.
As to stocks, they are somewhere between fairly priced and overpriced.
Numerous Secular Headwinds Being Dismissed
The political winds are forcing major cuts in government spending. Our local, state and federal fiscal imbalances translate into higher marginal tax rates and austerity measures. We continue to be plagued by structural unemployment, and we again saw a jump in jobless claims Thursday morning. Today, the City of Philadelphia, in response to a $1.1 billion reduction in the state's education budget, eliminated 4,000 teachers and school workers. This is happening all across the country and will continue in the year ahead.
I know that most investors recognize these issues, but everyone seems to think they are smart enough to get out before the proverbial door closes.
Strategists and investors are like Scarlett O'Hara in
Gone with The Wind
who said, "Oh, I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.... After all, tomorrow is another day."
But I think tomorrow is coming sooner than most expect.
Tipping Points Aplenty
When gasoline as a percentage of GDP gets to the levels it is at today, with one exception, the U.S. economy has always fallen into contraction. Maybe it's different this time, but I don't think so. On top of a 30%-plus decline in home prices, the market is also ignoring other tipping points such as rising food costs and a sharp currency depreciation, which I might add was one of the forces behind the October 1987 crash. A weakening U.S. dollar also buoyed exports and contributed to great profit growth in 2007, which eventually trapped investors. On "Fast Money," I noted that the current U.S. dollar/euro relationship is similar to that in late 2007.
The Capitulation of the Bears
Even uber bear David Rosenberg threw in the towel this week. Enough said?
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.