Domestic Deterioration

This column originally appeared on Real Money Pro at on March 27.

NEW YORK ( Real Money) -- The markets and Ben Bernanke believe that lower interest rates will alleviate a cyclically depressed jobs market. I (and others) believe that the problem with high unemployment is secular and that lower interest rates will not materially improve the outlook for jobs and will likely have adverse economic and investment implications.

Even several members of his own Fed have expressed reservations that low interest rates will have only a modest impact on unemployment.

One only has to look at the moribund housing market in assessing the value of historically low interest rates.

Bernanke is full of contradictions, as he, too, suggested in the last nine months that he overestimated the jobs market's secular headwinds. Now he is of the view that more cowbell will adequately address the combination of factors that have limited job gains, which include technological innovation, globalization, a mismatch between jobs needed and skills/talent, lack of mobility (impacted by the 35% drop in home prices), the use of temporary workers as a more permanent feature in the workplace and the large shadow inventory of foreclosed and soon-to-be-foreclosed properties (that has slowed down any recovery in the key residential real estate market).By keeping interest rates at low levels for an extended period of time, the Fed runs the risk of further debasing the value of the U.S. dollar and of more rapid inflation, which will reduce corporate profits and margins and place more pressure on consumers' real incomes.

The threat of screwflation has taken a turn for the worse with Bernanke's latest commitment to more easing.

Steve Ratner's New York Times op-ed underscores and captures the relative weak state of the middle class as compared to the wealthy class.

Color the Fed's policy as another turn of that screw on those average Joes who have already been pressured by the adverse consequences of monetary policy.

And if one is looking for a sudden inflow into U.S. equity funds by the retail investor or to a revival of personal consumption expenditures (and retail sales), don't hold your breath, as the rising costs of the necessities of life and the absence of much wage growth weigh on real incomes.

Another concern that I recently expressed is that the warm weather in January and February was a several-standard-deviation event that pulled forward economic activity (retail sales, housing, etc.).

I continue to believe that the domestic sales and profit picture has deteriorated, which puts me in a small minority.

These are all growth- and value-deflating factors.

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.

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