Doug Kass spoke to Barron’s over the weekend and provided this concise exposition of the bear case:

I’m acutely aware of the risk of saying this, but it is truly different this time. Here are some nontraditional headwinds that we expect to undermine economic growth. First, the credit aftershock is going to continue to haunt the economy. The unregulated shadow-banking industry, which includes numerous consumer-lending companies, is really maligned. The securitization market is still adrift and not operating, and both [sectors] will not fill the role of credit feeders, if you will, as they did a few short years ago. Second, housing has stabilized, but its recovery is going to be muted. And I really don’t see any growth drivers to replace the important role taken by the real-estate markets in the prior upturn. Third, commercial real estate has only begun to enter a cyclical decline. It might not be as deep as many expect, but it won’t provide much of a contribution to growth the way residential real estate did. Fourth — this is really important — municipalities have historically provided economic stability as we came out of economic weakness. But no more. We all recognize that municipalities are broadly in disrepair, as their receipts are out of whack with their revenues. And, finally, it is important to recognize the emergence of a very negative attitude toward wealth in our country and that our fiscal condition as a nation has very negative long-term implications. That’s one of the reasons why I am skeptical about the low yields in the Treasury note and the bond market. We are going to have sales-tax increases, along with local and state and federal tax increases — possibly dramatic ones — in order to fund the deficit and to appease the populist administration.

I understand that high unemployment is mainly a symptom of a weak economy rather than a cause but I’m surprised Doug didn’t bring up the prospect of persistent and prolonged unemployment and it’s potentially deleterious effects on the economy.

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