Doug Kass Explains "Screwflation"

Screwflation, like its first cousin stagflation, is an expression of a period of slow and uneven economic growth, but, its potential inflationary consequences have an outsized impact on a specific group. The emergence of screwflation hurts just the group that you want to protect — namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices. Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes — both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn’t benefit from QE 2.

Doug Kas

Doug Kass' Thoughts on Current Strategy

this encapsulates my thinking fairly well:

As I have written, either risk is on or risk is off these days for Mr. Market.
Algorithms (managed by the high-frequency-trading puppeteers) accentuate the moves up and down.
Some very evident contradictions (heads I win; tails you lose) seem to be emerging, especially among the bulls.
One group of bulls sees the need for a second round of quantitative easing because the economy stinks. The other group of bulls sees an ongoing and healthy domestic economic expansion -- one that believes that a second round of quantitative easing is either unnecessary or is icing on the cake.
Meanwhile, since early July, everyone seems to love the market action on a technical basis, which really doesn't surprise me as investors seem to prefer to buy up, when there is more clarity, and sell down, when there is less clarity.
My guess is that some of these people will be proven wrong -- that's a safe bet -- but I am not sure which ones.

"Domestic inflation reflects domestic monetary policy." -- Martin Feldstein

What I am relatively certain about is that monetary policy is not the solution to our nation's economic and financial problems. We need to freeze entitlements, lower government spending, establish a value-added tax and increase taxes on the wealthy. For now, only tax increases seem on the legislative docket, and we may well have to wait for another crisis before the other three fiscal constraints and strategies are implemented. And I am also reasonably certain that the current policy efforts (on the monetary front) are putting us on the road to more and deeper problems, and that will serve as a cap to the market's upside.
Just look at the action in certain commodities (a ripping wheat market, higher oil prices, etc.). They are sending a message to Mr. Market.
A month ago, I made the case that stocks had hit their lows for the year.
As stocks begin to challenge my upside S&P 500 target of 1,150 (in a range between 1,025 and 1,150), I would now reduce stock positions in the belief that shorting the U.S. bond market, via a ProShares UltraShort 20+ Year Treasury (TBT) long, provides a better downside risk/upside reward ratio than owning the S&P now.

Doug Kass Says Gold Is Overbought

"The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." -- John Maynard Keynes

I wrote last week that one of the mysteries is the markets' continued and inexplicable optimism surrounding the monetary and fiscal policy, which has contributed to rising gold prices and a plunging U.S. dollar. Apparently, some in China might agree and appear to be growing concerned about the speculative frenzy in gold prices. Gold is now clearly overbought now and is trading at nearly 35% above its 350-day moving average ($916 per ounce), but, as I have remarked, shorting everyone's favorite long is a dangerous proposition considering the commodity's remarkable price momentum
According to the lynx-eyed Bill King, the price of gold failed after rising 40% above its 350-day moving average in May 2006 and again in March 2008. After hitting the 40% gap in 2006, gold fell from $720 per ounce to $542 per ounce in only four weeks, and it fell from $1,032 per ounce to $682 per ounce within seven months of advancing 40% above its moving average two years later. By comparison, Bill writes that the Nasdaq peaked at 75% above its one-year moving average in 2000 and oil peaked at 60% above its moving average in 2008.
It is possible that the gains in the price of gold will fall imminently or that history could repeat itself and the price of gold will fall as the price approaches the 40% gap above its one-year moving average. Maybe gold prices could even advance in a continued parabolic manner, ultimately resembling the chart of Cisco Systems' (CSCO Quote) shares in 2000 (when they peaked at over $80 a share) or that of Pulte Homes' (PHM Quote) shares in 2005 (when its shares topped out at almost $50).

"We stand today at a crossroads: One path leads to despair and utter hopelessness; the other leads to total extinction. Let us hope we have the wisdom to make the right choice." -- Woody Allen

Again, reread financial history. What it shows is that if you owe your bank a hundred dollars, you have a problem. But if you owe your bank a million dollars, the bank has problems.
 The same can be said for our country.
Contrary to growing belief embraced by some in the trading community (many of whom couldn't define purchasing power parity and others who couldn't tell the difference between a Norwegian krone and a Nigerian naira) that a lower U.S. dollar is healthy, a plunging currency is not stock-market-friendly in the long run. It does not sow the seeds of a sustainable market and economic advance -- for if our country owes central banks trillions of dollars, everyone has a problem.

Somewhere, over the rainbow, bluebirds fly.
Birds fly over the rainbow.
Why then, oh, why can't I?
If happy little bluebirds fly beyond the rainbow,
Why, oh, why can't I? -- "Somewhere Over the Rainbow," The Wizard of Oz

Like the other two or three people in the investment world, I have missed the move in gold. While the yellow brick road is today paved with gold, there may not be a rainbow at the end of the road, just a man behind the curtain.

Doug Kass: "A Bubble in Quant Funds"

by Doug Kass:

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." -- Chuck Prince, former chairman and CEO of Citigroup (told to the Financial Times on July 10, 2007).

These words resonate to me in the current investment setting as many investors and traders are assuming the most benign of economic outcomes and have begun to dance and party like it's 1999. The media's talking heads are doing their best to fuel the celebration, just as they were at DJIA 14,000 before the market crashed last year. It is also the same group of cheerleaders that was mired in depression eight short months ago. Some, like myself, have been cautionary (and wrong) over the past few months, expressing concerns over emerging short- and intermediate-term headwinds that threaten a self-sustaining economic cycle, including the effect of the withdrawal of monetary and fiscal stimulus. Countering those concerns has been one overriding factor -- namely, the Fed's zero rate policy and curse on cash, which has already produced its desired effect of causing investors to "look over the valley" and to buy longer-dated assets (equities, bonds, commodities).
Here is the full article.

"market participants often rationalize the irrational" - Doug Kass

Doug Kass: "The Economy Stinks" -- 20 Reasons Why

"We are rapidly approaching a pivot point," says Doug Kass, a general partner of Seabreeze Partners, "when all the stimulus factors -- such as abnormally low interest rates and government bailouts -- will be withdrawn, and investors will begin to discount that." Kass, who has grown more bearish recently, thinks that a continued weak consumer, an end to the cost-cutting that's fueled corporate-profit growth, and higher taxes, among other things, will mean self-sustaining earnings growth is "far less certain" than the market expects. -- Barron's (Nov. 2, 2009)

Over the weekend, I was interviewed in Barron's Streetwise column by Vito Racanelli.
As mentioned in Barron's and last Monday night on CNBC's "Fast Money," we are now approaching the point of maximum fiscal and monetary stimulus.
That means that, statistically, we are moving ever closer to tightening.
Moreover, I have recently argued that not only did much of the fiscal stimulus merely have a temporary affect, less than one multiplier and borrowed from future sales (e.g., "Cash for Clunkers"), but that the underlying strength of the economy was fragile and that the consequences of massive fiscal and monetary stimulation had consequences (e.g., currency debasement and higher marginal taxes) that would serve as a brake on growth and profits in 2010-2011.
So, without further ado, Dave Letterman-style, here are the top 20 signs how bad the economy is!

20. The economy is so bad that Barack Obama changed his slogan to "Maybe We Can!" 

19. The economy is so bad that Sarah Palin is only shooting moose for food, not for fun.  

18. The economy is so bad that when Bill and Hillary travel together, they now have to share a room. 

17. The economy is so bad that instead of a coin toss at the beginning of the Super Bowl in February, they will play "Rock, Paper, Scissors." 

16. The economy is so bad that Angelina Jolie had to adopt a highway. 

15. The economy is so bad that my niece told me she wants to dress up as a 401(k) for Halloween so that she can turn invisible. 

14. The economy is so bad that I ordered a burger at McDonald's (MCD Quote) and the kid behind the counter asked, "Can you afford fries with that?"  

13. The economy is so bad that I saw four CEOs over the weekend playing miniature golf. 

12. The economy is so bad I saw the CEO of Wal-Mart (WMT Quote) shopping at Wal-Mart. 

11. The economy is so bad that Bill Gates had to switch to dial up. 

10. The economy is so bad that rapper 50 Cent had to change his name to 10 Cent.  

9. The economy is so bad that they Pequot tribe built a reservation on the site of one of their casinos.  

8. The economy is so bad that the Treasure Island casino in Las Vegas is now managed by Somali pirates. 

7. The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them. 

6. The economy is so bad that I bought a toaster oven and my free gift with the purchase was a bank.  

5. The economy is so bad that the only company hiring this week is the one that sends people to scrape bankers off of Wall Street sidewalks. 

4. The economy is so bad that I went to my bank to get a loan, and they said, "What a coincidence! That's just what we were going to ask you!" 

3. The economy is so bad that a picture is now only worth 200 words. 

2. The economy is so bad that Hot Wheels stock is trading higher than GM.(This is literally true!)

And the No. 1 sign how bad the economy is...
1. The economy is so bad that the guy who made $50 billion disappear (Madoff) is being investigated by the people who made over $1 trillion disappear (our policymakers)!

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.