If you are a Doug Kass fan, I’d like to point you to an interview over at RealClearMarkets; some of the comments are rehash of what Doug has posted on RealMoney.com or elsewhere but some new nuggets also appear. Doug has been “bearish and wrong” for the past month but he has one of the best longer term records for a “pundit” and further has to put his money where his mouth is, unlike 90% of those who appear in all forms of financial media. He is one of the few popular voices I actually have a strong interest in listening to strategy wise – even if the calls are incorrect at times (no one always gets it right).
At the very end of the interview was a very surprising comment about the long term fate of America. The first time I have heard this from him – while I am sad to hear him agree with my thought process on that issue (since I wish my views on this subject to turn out wrong), I do like seeing logical, pragmatic minds agreeing with my world view. (Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?)
Some excerpts (the link in the first sentence of this post will take you to the full interview)
Hedge fund manager Doug Kass has been called many different names over the course of his storied and successful, nearly forty-year investing career. Names like the “Bear of Boca”; “The Peerless Prognosticator of Palm Beach”; as well as the “Anti-Cramer.” He’s earned them all. As a noted short seller unafraid to swim against the tide of consensus, he seems to relish his self-appointed role bucking Wall Street groupthink and profiting handsomely from betting against the crowd.
RCM: PIMCO’s Bill Gross recently wrote that America’s “Consumer Cuisinart consumption is a relic of the past.” He added that, “Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum.” Do you agree with Gross’s assessment? Is it a done deal that U.S. consumers will save more and consume less for an entire generation?
Kass: I agree with Bill Gross that the strongest economic headwind to growth over the next few years is the consumer. After decades of aspirational spending, the consumer is likely moving back towards the post Depression legacy of trying to maintain their status quo.
Working against the consumer is not only the material erosion in household wealth, but it may be seen in a structural shift towards higher employment – the demographic force of maturing baby boomers will hurt personal consumption spending, individuals are being forced to work more years and corporations will likely retain a tight rein on employment (vs. prior cycles).
Further exacerbating the pressure on the consumer will be the inevitable inflation in commodity prices, higher interest rates and continued wage deflation (owing to globalization). This phenomenon was clear as day in Wednesday’s Philly Fed release, which showed that prices paid was way up and prices received way down.
RCM: In August, you put your bear hat on once again, and began predicting a market pullback. You wrote that, “The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.” And yet the stock market surge has been sustained, while signs of the recession’s end have accumulated. Did you underestimate the power of a very-easy-money Federal Reserve? Or is there something else at play?
Kass: It is important to emphasize that my bullish thesis in March was coupled with the view that a sharp upwards move in stocks, towards the S&P Index level of about 1050, would terminate in the fall as it became evident that a number of nontraditional headwinds would emerge and render a self sustaining economic recovery doubtful. Maybe more than anything, George Soros’s Theory of Reflexivity could help to explain both the extreme low in March, and, arguably the extreme move made recently. Reflexivity is a theory that says moves are excessive in both directions as the behavior of market participants tends to exacerbate those moves to a point where it becomes excessive and ultimately reverts back and regresses towards the mean.
It is clear that the liquidity that grew out of the massive government stimulation and the growth in the monetary base is reaching the equity market and our economy. Surprisingly (at least to me) it has been greeted by almost unnoticeable, brief and shallow pullbacks in stocks — producing a degree of price momentum reminiscent of the “good old days” in 1999. You might say that the fear of “being in” back in March has been replaced by the fear of “being out.”
If value is in the eyes of the beholder, I need glasses — the recent surge in sentiment and in share prices has left me out in the cold. As I said previously, my bearish thesis has been that investors would look through the “statistical” domestic recovery in the improving earnings cycle and in the temporary or artificiality of the numerous stimulus policies (that we’re borrowing from 2010), and look ahead at the nontraditional headwinds that pose a threat or at least a degree of uncertainty in a self-sustaining recovery outcome.
Many market participants appear to be growing increasingly comfortable with the certainty of a self-sustaining recovery. Possible … but in my view we face a broad array of consequences (some good, some not so good!) in 2010-11.
RCM: If President Kass were in the White House, would he spend the remaining stimulus money? If yes, where would he spend it? If no, why?
Kass: I would abandon all stimulus now – before it is too late and the consequences of the massive monetary and fiscal Reflation Experiment of 2009 begin to appear. From here, I would let the economy and the markets do what they will do.
RCM: Time travel 20 years forward to 2029. Where does America stand in the global pecking order? Should Americans today be hopeful or worried? Should my kids learn how to speak Chinese?
Kass: I am reminded of a Chinese Proverb: “A rat who gnaws at a cat’s tail invites destruction.”
Like Blanche DuBois in A Street Car Named Desire, the U.S. has relied on the kindness of strangers to fund our economic growth. As Blanche said, “Oh look, we have created enchantment.”
But for how much longer?
After years of greatness, the U.S. is destined for not so greatness.