This blog post originally appeared on RealMoney Silver on June 14 at 7:56 a.m. EDT.
In the 1970s, when growth was stagnant and inflation was high, economists spoke of "stagflation." Four decades later, there's another threat to a sustainable trajectory of economic and corporate profit growth. It's "screwflation," which combines inflation with the screwing of the struggling middle class. Like stagflation, screwflation also threatens the general health and valuation of the U.S. stock market.While the U.S. economy, in real terms, has more than doubled in the past 30 years and corporate profits will soon attain a new peak, median real wages have made little recent progress, and surging food and energy prices (among other cost pressures) now eat up middle-class incomes. Moreover, the lost decade of flat stock prices and an unprecedented four years of declining home prices have further weakened the confidence and purchasing power of the middle-class screwees.The structural weakness in the labor market also makes this cycle unusual, and far worse for many, long-term, than the downturns of the 1970s. Unemployment has exacerbated screwflation's impact on all but the wealthiest Americans.-- Doug Kass, " The Threat of 'Screwflation'," Barron's: June 11, 2011 (Note: Barron's is a subscription-based website)
Last night on Fast Money, I
Other Voices contribution over the past weekend on the subject of
I am proud that "The Threat of 'Screwflation'" was my third contribution to the Other Voices section in
over the last 15 years.
My first editorial, "Kids Today" (published in the late 1990s) warned of the consequences of heightened stock market speculation in technology and Internet stocks.
My second contribution in late 2006, "
suggested that the sale of Sam Zell's Equity Office Properties marked a seminal point and peaking of the non-residential real estate cycle and was symptomatic of a bubble in credit availability the likes of something we hadn't seen since the Milken Junk Bond era. (This was a subject I had been writing about for months on The Edge, my
trading diary, and discussing both as guest host on CNBC's "Squawk Box" and several times on "Kudlow & Company.") I argued that credit was being irresponsibly doled out and that this egregious use of debt would have adverse economic consequences.
In my opening remarks, on "Fast Money," I examined the screwflation problem and its likely negative impact on economic growth.
My buddy/friend/pal and technical maven, Steve Grasso, asked me how to play the screwflation theme. I replied that the average investor should err on the side of conservatism and have above-average cash reserves in the anticipation of disappointing economic growth (in general) and a turndown in personal consumption expenditures (in particular). The more facile trader/investor can be short retail stocks.
Joe Terranova asked me if bonds are a screaming sale. I responded with an emphatic
and that I am shorting the fixed-income market by purchasing the
ProShares UltraShort 20+ Year Treasury
, the inverse to the
iShares Barclays 20+ Year Treasury Bond Fund
I said that isolating one's focus on $95 a share for the
2011 profits fails to recognize the weakening foundation for growth caused by screwflation, which threatens a smooth and self-sustaining economy, and would be similar to the mistake of omitting the dangers of credit abuse (low- and no-documented mortgage loans) and the proliferation of derivatives in the last cycle.
I went on to say that the U.S. economy needs a definitive and focused jobs program and a Marshall Plan for housing.
While I am a money manager, not a policy maker, I did try to offer up some solutions to the screwflation problem.
On housing, I suggested that the Obama administration should reach out and make telephone calls to the most knowledgeable and smartest guys in the residential real estate markets such as Eli Broad and Bob Toll. I would have them meet in a locked room with Ben Bernanke and Treasury Secretary Geithner and iron out that Marshall Plan for housing.
Karen Finerman asked me for a possible remedy to the jobs problem. I said that some quick policy moves that would help would be the extension of the Obama administration's payroll tax cut coupled with an offer to allow tax-free repatriation of foreign corporate profits if those monies were earmarked for hiring.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long TBT, although holdings can change at any time.
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.