This blog post originally appeared on RealMoney Silver on Nov. 2 at 8:02 a.m. EDT.
This morning I was on NBC's Today show, and I made a vigorous argument against the prevailing optimism in the markets.
My point was that we have exited a lengthy period of prosperity (2000 to present) in which we saw an accumulation of petroleum dollars and an unprecedented loosening of monetary policy around the world, which, in part, resulted in growth in almost every asset class -- stocks, bonds, commodities and residential and nonresidential assets.
But this period of surplus cash led to a shortage in common sense in borrowing and lending.
The epicenter of my concerns is in the financial institutions that held, packaged and sold derivative products during the ebullient 2000s -- and in the financial institutions that insure home mortgages, which are now capital-constrained and ill-equipped to "back up" the twisted mortgage products that reside in portfolios around the world.
The situation looks increasingly dire when weighed against the fresh signs of housing weakness from this week's Case-Shiller Index.
Household mortgage debt has risen by over $10 trillion since 1999, and with incomes lagging, mortgage debt as a percentage of disposable income has risen from 64% to 100%. (Add in consumer installment and credit card debt and the ratio goes to 131%.) That increase to 100% is more than the increase over the 45 years leading up to 1999.
Without mortgage equity withdrawals and in light of what appears to be a sustained high price in energy products (and other commodities, for that matter), the consumer appears very vulnerable. This is particularly true in light of the prospects for lower housing prices.
As such, the coming Christmas selling season looks to be a bust.
As I have
, the burden on the nonexport domestic economy now lies squarely on the shoulders of the equity market.
As yesterday indicates, that's a slippery slope.
But one sliver of light for stocks: As one of my old bosses mentioned to me last night, all the problems I have raised must be weighed against a market that trades at only 15 times earnings, which is low historically, and within the context of a 10-year U.S. note that yields just 4.35%, which doesn't offer a very sexy alternative to stocks.
At 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 founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.