The Lost Decade Has Passed Us, New Decade Is Here

Doug Kass TheStreet September 3, 2010

This blog post originally appeared on RealMoney Silver on Sept. 2 at 8:02 a.m. EDT.

-- Robert Frost, "The Road Not Taken" Bull markets are born out of distress -- witness March 2009. Bear markets are born out of prosperity -- witness 2007. Liquidating/de-risking out of equities and acquiring/re-risking into fixed income has been the mantra of most individual and institutional investors over the course of the last three years. Since early 2008, retail investors have sold over $200 billion of domestic equity funds, while purchasing nearly $600 billion in fixed-income products. That gap of over $800 billion is unprecedented as is last decade's spread in performance of bonds vs. stocks the largest in history. But history tells us that the S&P 500 performs famously in the following decade and ultimately moves contra to a peak in flows. I continue to believe, as expressed recently in "The Scale Tips to the Bullish Side," that it has once again become time to take the road less traveled and to raise net long exposure at precisely the time when such a strategy is most unpopular. In many ways, the sentiment toward equities today is as bad as the extreme experienced at the generational low 18 months ago. Indeed, at Tuesday's close, the market zeitgeist was eerily reminiscent of 1979 in which Business Week published its "Death of Equities" cover. Frankly, it was that bad. And if you don't believe me, just peruse some of Jim Cramer's downbeat and gut-wrenching columns on RealMoney prior to yesterday's ramp. His verbiage quite accurately described the dour sentiment permeating the hedge fund community. Mr. Market simply got to Jim, in the same manner it got to many others. He wrote about it while most felt it. The fact is that most classes of investors now view U.S. stocks with distrust. And, as I have previously asked, who is left to sell, especially if the concerns regarding a double-dip prove unjustified? I continue to view the double-dippers as on the wrong page. There are multiple reasons for this view. Consider that the cyclical components of GDP, such as autos and housing, now contribute so little to aggregate GDP that the year-over-year impact in late 2010/early 2011 can only modestly impact output. Moreover, with inventories-to-sales so low and with auto and residential investments so far from their longer-term trendline relationship to GDP -- ergo, demand is pent-up! -- a double-dip seems an unlikely event. Even the spent-up consumer's debt-service ratio is at its lowest level since 2000, and, owing to a generational low in mortgage rates, a refi boom is inuring further to the consumers' state. 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