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 discussed my Barron's Other Voices contribution over the past weekend on the subject of screwflation. I am proud that "The Threat of 'Screwflation'" was my third contribution to the Other Voices section in Barron's 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, " Look Who's Selling," (subscription-based) 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 RealMoney Silver 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 yes and that I am shorting the fixed-income market by purchasing the ProShares UltraShort 20+ Year Treasury ( TBT), the inverse to the iShares Barclays 20+ Year Treasury Bond Fund ( TLT). I said that isolating one's focus on $95 a share for the S&P 500's 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.