This commentary originally appeared on RealMoney Silver on Aug. 15 at 8:45 a.m. EDT.

What we're seeing on the streets in Britain right now is something we may be starting to see here. It hasn't come together in a conflagration, but it is out there, and I think it's growing. And as in Britain, it doesn't have anything to do with political grievances per se.Philadelphia right now is under curfew because of "flash mobs." Young people send out the word on social media, and suddenly dozens or hundreds of them hit a targeted store, steal everything on the shelves, and run, knowing no one will stop them or catch them. It's happened in other cities, too. Sometimes the mobs beat people up on the street and take their money. There are the beat-downs in McDonald's, where the young lose all control and the old fear to intervene. There were the fights and attacks last weekend at the Wisconsin State Fair. You've seen the YouTubes of fights on the subways. You often see links to these stories on Drudge: He headlines them "Les Miserables."Some of these young people come from brokenness, shallowness and terror, and are bringing those things into the world with them. Here are some statistics of what someone last week called a new lost generation. In 2009, the last year for which census data are available, there were 74 million children under 18. Of that number, 20 million live in single-parent families, often with only an overwhelmed mother or a beleaguered grandmother. Over 700,000 children under 18 have been the subject of reports of abuse. More than a quarter million are foster children.These numbers suggest the making -- or the presence -- of a crisis.... After that, what? Britain is about to face that question. We'll likely have to face it, too.-- Peggy Noonan, " Après le Déluge, What?" ( The Wall Street Journal)

The U.S. stock market has rarely experienced such manic and frenzied action as it has over the past two weeks.

We are in a bull market in behavioral economics, and we are in a bear market for regression-based economic forecasting (that relies on historical patterns repeating themselves).

As The Edge has consistently opined, it's different this time.

More than any time that I can remember, today's investment decision making must be entwined with social observations and analysis of investor psychology and the behavior (or, at times, madness) of crowds. As such, market forecasts must be conjoined with the recognition that possible economic and market outcomes are more numerous and clearly not well-defined.

While acknowledging that standard measures of valuation based on interest rates, inflation expectations and consensus corporate profit forecasts (among other variables) suggest equities are inexpensive, for the time being, such traditional analysis could prove disappointing (and even myopic), as extraordinary and unpredictable outside factors (and their effect) can influence, override and possibly upset the current fundamental assumptions that underlie a cheap stock market.

No more important influence today is the negative feedback loop.

No matter how you look at it, a negative feedback loop is intensifying (most recently catalyzed by the wild card presented by the European banking crisis) and, if not stopped, will have even more adverse implications for markets and economies.

The markets have been bombarded by a plethora of negative data:

  • the divisive and partisan circus in Washington, D.C.;
  • the absence of thoughtful and bold pro-growth fiscal strategies;
  • a U.S. debt downgrade;
  • an already fragile recovery has been weakened under the weight of nontraditional structural problems (middle-class screwflation, fiscal imbalances, a weak housing market burdened by a huge shadow inventory of unsold homes, structural unemployment etc.);
  • a sovereign debt contagion and a weakening European banking system; and
  • lower world stock prices and unprecedented market volatility.

Confidence has cratered both here and abroad.

In the U.S., with over 25 million Americans who can't find a job and with an existing workforce whose real incomes have stagnated for years (contrasted against corporate America whose income statement and balance sheet have never been stronger), it is abundantly clear that we live in uncertain times. What makes matters worse is that we don't know how bad it might be (if the negative feedback loop deteriorates further) for both our economy and for our stock market.

Speaking to Reuters late on Tuesday, looters and other local people in east London pointed to the wealth gap as the underlying cause, also blaming what they saw as police prejudice and a host of recent scandals. Spending cuts were now hitting the poorest hardest, they said, and after tales of politicians claiming excessive expenses, alleged police corruption and bankers getting rich it was their turn to take what they wanted. "They set the example," said one youth after riots in the London district of Hackney. "It's time to loot."-- Reuters

In her editorial on Saturday,

The Wall Street Journal's

Peggy Noonan


about the riots in Europe and questions whether the U.S. is next? These riots are

an outgrowth

of the worldwide inequality and schism between the haves and the have-nots. (As I




months ago, average


arguably face no better conditions than their European counterparts who are expressing their disgust violently.)

For the ambitious, I recommend

Niall Ferguson's



The War of the World: Twentieth-Century Conflict and the Descent of the West

, which chronicles that periods of quickly deteriorating economic change often produces mob violence or worse. Some, like my friend/buddy/pal Mike Lewitt have understandably even argued that "in light of our country's racially and socially fragmented makeup, we may not be able to ride out an extended period of financial malaise without violence."

"I don't think the implications of this have been fully thought through or accepted yet," said Pepe Egger, western Europe analyst for London-based consultancy Exclusive Analysis. "What we have here is the result of decades of growing divisions and marginalization, but austerity will almost certainly make it worse. Yes, the police can restore control with massive force but that is not sustainable either in the long term. You have to accept that this may happen again."-- Reuters

The smoldering structural issues of the past cycle, led by the deleveraging of excessive debt loads in both the private and public sectors, weigh like an albatross around the neck of worldwide growth and are now complicated by the impact of future austerity and government spending cuts -- both in the U.S. and in Europe. As well, the current balance sheet recession (unlike the normal income statement recession), which calls upon the world's central bankers and governments to adopt bold (not piecemeal) and unconventional (not traditional) policy, has fallen on deaf, untimely and one-sided partisan ears.

Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyze interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures.-- Jacopo Ponticelli and Hans-Joachim Voth, " Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009" (hat tip to Barry Ritholtz)

Studying instances of austerity and unrest in Europe between 1919 and 2009, Ponticelli and Voth conclude that there is a "clear link between the magnitude of expenditure cutbacks and increases in social unrest. With every additional percentage point of GDP in spending cuts, the risk of unrest increases":-- CNN (another hat tip to Barry Ritholtz)

Expenditure cuts carry a significant risk of increasing the frequency of riots, anti-government demonstrations, general strikes, political assassinations, and attempts at revolutionary overthrow of the established order. While these are low probability events in normal years, they become much more common as austerity measures are implemented.

We already know that the uncertainty and structural problems will likely adversely impact business and consumer confidence, exposing an already tepid domestic growth trajectory. Business capital spending and hiring plans and retail sales and personal consumption expenditures are increasingly vulnerable to the intensification of the negative feedback loop.

The imposition of austerity around the world now has become another serious growth deflator and has led to growing social instability.

As I have warned for months, corporate profit forecasts for 2011-2012 are too high, and the variability of possible outcomes is wide.

We also must recognize other fallout from a negative feedback loop. Whether it's machine-driven or part of the emerging negative feedback loop, volatility is daunting to individual investors and will likely be another dagger that will continue to reduce the retail appetite for stocks (maybe even for years to come).

Will the negative feedback worsen and cause a further blow to economic growth?

Will the negative feedback produce continued volatility in the markets and cause a further blow to stock prices?

We can't know for sure as we are in unfamiliar territory. Anyone who pretends to offer certainty of opinion is lying and, quite frankly, shouldn't be listened to.

The chorus of perma bulls have proven to be wrong and are unworthy of being listened to.

And the chorus of perma bears, who have until recently been proven wrong (and are now chest-thumping), know not of how this all will work out either and will likely continue as Cassandras, regardless of changing conditions.

As I close today's opening missive, I have one final observation that I wanted to express. It is very easy to be bearish on equities today -- perhaps too easy.

For now, it seems the best course of investment action is to graze on the grass somewhere in between the bulls and bears, as emotional reactions to uncommon conditions decrease our ability to predict the future economic and market prospects. The latter point is the essence of the singular expression of uncertainty that populates our markets today.

In summary, while I am of the view that the U.S. stock market has likely


for the year, the wide variety of economic and market outcomes suggest that erring on the side of conservatism remains the most reasonable trading and investment strategy in an uncertain and volatile backdrop.

Doug Kass writes daily for

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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, 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.