Kass: Squawking About the Headwinds - TheStreet

This blog post originally appeared on RealMoney Silver on Dec. 30 at 7:53 a.m. EST.

On Monday morning I appeared as guest host on

CNBC

's "Squawk Box," marking the sixth year I have guest-hosted the morning show. With Becky Quick on vacation, it was the three amigos: Carl Quintinilla, Joe Kernen and myself.

Here is

a synopsis of some of my remarks

, a

summary of my surprises for 2010

and some of my

other comments from the show

.

Already, this week, one of my

Surprises

seems to have occurred. Surprise No. 16 was that one of the largest and most successful hedge funds would be troubled by legal issues. Indeed, yesterday

The Wall Street Journal

reported that hedge fund Harbinger Capital Partners has been accused of

receiving inside information

in a takeover bid several years ago.

Back to the markets.

The Steady Advance in Worldwide Equities Continues

This week the risk trade remained on, despite protests from some quarters (e.g., The Edge). The equity markets continued their ascent this week, marking six consecutive days of improving share prices. (We have to go all the way back to April 2007 to have seen a seven-day skein.) And assuming stability over the next two trading days, the

Nasdaq's

December rise will likely be the best since the bubble days of December 1999!

N's (Nasdaq) continue to trump S's (

S&P 500 Index

), as the Four Horsemen of the Nasdaq picked up some additional Wall Street endorsements. Henry Blodgett-like price target raises for

Google

(GOOG) and

Amazon

(AMZN) are starting to make it look a lot like Christmas 1999 (!) as those shares continue to be buoyed by the sponsorship of momentum players (and other long-term believers).

Pay Heed to Gilda

"It's always something."
-- Rosanne Rosanna Danna ( Gilda Radner), Saturday Night Live

Meanwhile, crude prices are challenging $80 a barrel.

Fixed income has been pressured (and so has the U.S. dollar this week), while the yield on the 10-year U.S. note rose to a cycle peak of nearly 3.85% on Tuesday. With the future cost of servicing public policy moving ever higher, this represents a developing headwind to confidence and economic growth and, in the fullness of time, maybe even corporate profits. But, as lynx-eyed Jason Trennert of

Strategas Research Partners

noted on "Squawk," investors for now are ignoring the accumulating due bills.

Another New Paradigm?

As I opined on Monday's "Squawk Box," disbelief and doubt have been suspended and driven from Wall Street as the clustered consensus forecast of 2010 corporate profit growth of 25%+, GDP growth of 4%, tame inflation and contained interest rates have supported the bullish view of a self-sustaining economic recovery (even capable of an historically normal 40+ months' lifespan), and that view has gained more adherents.

While it is fortunate that equities as a class are not stretched in valuation to the degree of past cycles (e.g., 1999-2000) or like other asset classes (e.g., private equity, commodities and residential and nonresidential realty prices), the developing bullish view of uninterrupted growth has a tinge of another new paradigm to it.

I continue to believe that the consensus outlook remains among the more likely economic outcomes next year -- perhaps even the most probable outcome. But where I stray is that 1) there exists (owing to cyclical, secular and nontraditional influences) a number of less benign outcomes that have a reasonable chance of occurring and 2) markets might have materially moved to discount consensus and optimistic expectations.

The Short Tail of Cyclical Headwinds

While most already recognize that the 2010 economic recovery will be shallow by historic standards, consensus economic and corporate profit forecasts are on the ascent and growing ever more optimistic, perhaps following the rise in worldwide stock prices. A still-challenged consumer, structural joblessness, the prospects for potentially higher interest rates (and cost of capital) associated with the difficulty in engineering a smooth transition in fiscal and monetary policy, a large phantom inventory of unsold homes, the still-hesitant lending activity at our leading banks (which have faced a decimation in their capital bases) and the costs of new regulatory burdens (e.g., health care) remain among the many shorter-term threats to the consensus' benign forecast.

The Long Tail of Populism

Importantly, as I underscored on "Squawk Box," there is an angry subtext -- the average American resents some of our largest institutions (especially of a financial kind), our politicians (Republicans and Democrats alike) and the wealthy. We face, as a result, a tidal wave of populism, which will become a major investment theme into 2010-11.

The attitude toward big business and the wealthy has rarely been this bad. When the policies of populism (higher taxes and more costly regulation) are mixed with a number of other nontraditional headwinds (municipalities' disarray, a still-wounded lending mechanism, etc.), the trajectory of economic growth will almost certainly be stunted. These two factors -- public policy that grows from populism, nontraditional headwinds -- form a potentially toxic cocktail, especially within the context of the size of the market rally of the last eight months.

A Keynesian Hangover Lies Ahead

"As we move into 2010, no doubt the horns will be blowing for the long-awaited U-shaped recovery. I suspect it won't be long before we realize we've drunk too much, and that the second dip of a W-shaped recession awaits us."
-- Benn Steil, Wall Street JournalOp-Ed

Regardless of the logic surrounding my many concerns and my increasingly minority view that a Keynesian hangover lies ahead, the crowd continues to appear to outsmart the remnants, and there appears for now to be no place for a variant and negative view. (Unlike

Gary "The Count" Dvorchak

, I am steadfast in the notion that

it is different this time

.) With such a euphoric backdrop, warning signs and potential threats are dismissed as

de minimis

to the bigger picture (e.g., more tentative economic signals, still-sluggish residential real estate markets, rising interest rates, moribund consumer confidence, emerging geopolitical tension, etc.)

In summary, the worldwide bull market (which, as Dennis Gartman so clearly cites in his commentary, produces a stock market chart line that moves rather convincingly from the lower left to the upper right!) remains intact while skepticism remains in its own well-defined downtrend and bear market.

But, baby, it's cold outside ... and for me, tactically, on my trading desk,

inside

as well! But as Scarlett O'Hara (Vivien Leigh) reminded us many years ago in

Gone With the Wind

, "After all ...

tomorrow is another day

."

My Grandma Koufax used to put extended stock market rallies into perspective (and in even more vivid prose!) when she said to me, "Dougie, it's getting too easy. Watch your tush!"

Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.