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“The measure of a master is his success in bringing all men around to his opinion twenty years later. “

 Ralph Waldo Emerson

Commentary & Analysis

 I recently succinctly summarized my view of stocks with the Wily Coyote analogy.  I got one very good succinct comment, and I am paraphrasing; I agree with you Jack but you have missed a lot of profit along the way. I can’t argue with that.  Neither technically nor fundamentally did I expect stocks to break above intermediate-term highs, measured by the S&P 500 cash index at 1292 back on October 27, 2011.  But we sure have. 

In retrospect, there is always reasons one is wrong.  But if one is right, there is an assumption of being right for the right reasons–many a career are made based on that.  However, any trader will take being right no mater the so-called reasons–ephemeral as they are.  My retrospective rationale (a dangerous thing the art of rationalization) for being wrong (so far) was undrestimating the buy in by the market on the not so stealth European Central Bank (ECB) quantitative easing and on the idea of yet another backstop for the Eurozone as the IMF gets into the act. 

But, when you evaluate the degree of leverage already in the system, the question I think we need to ask is: Who backstopst the backstop?

The two institutions tyring to keep hope alive are massively overextended–it would seem.  (Granted, they can print till the cows come home and Lehman couldn’t, but there has to be some logical limit here?)  The leverage ration for the ECB is around 430 now, as measured by Assets divided by Paid-In Capital.  Remember, Lehman Brothers went belly up when its ratio was only around 50.  The US Fed’s ratio is a whopping 109; that looks almost tame compared to the ECB largess.

If the global economy doesn’t respond, and I don’t believe it will because I do agree with Lacey Hunt at Hoisingtonwho expects a US recession during 2012, there will be blood.  I am fairly confident of that.  But as always, that nagging little question of “when” is a problem.  And the lost profits in between do hurt.