We Have Begun the Endgame of Greenspan’s Experiment With History

The Wolfpack Fund is likely to fail. With the $1T Wolfpack Plan, the central banks are “all in” and have no more pieces to shuffle on the board. The wolves can concoct short positions faster than Europe can create money via the magic of synthetic CDSs. When Soros called the Bank of England’s bluff in 1992, he had to play with real money. Now he plays with derivatives.

Wolfpack is the endgame of a series of moves by Greenspan (and Bernanke) since 1987, to flood liquidity against any banking panic: Mexico, Asian Flu, Russia, LTCM, Y2K, dot-com, 9/11, housing, TARP, TALF and QE.

The moves became known as the Greenspan Put, the assumption that he would bail you out of risky deals. It reached its ultimate expression in the period that I call the Greenspan Indian Summer, the bubble from 2002-2007 that staved off Kondratieff Winter for the moment. Greenspan knew he was playing with history.

Greenspan’s Indian Summer ended with the Mother of All Margin Calls, a post of mine on June 15, 2007, predicting the end of the bubble and the top in the market. Where this might lead is to a new global reserve currency, but that is still a ways off.

Right now the Euro is at risk, not yet the Dollar. After a period to sort out the new plan, the Euro should fall and the Dollar should rise. As this next chart shows, the Euro popped over the weekend and faded back down today. The bluff may be called quickly.

Credit Writedowns cites Marc Chandler (the global head of Brown Brother Harriman’s top ranked Currency Strategy Team) for noting that today was still a wait-and-see attitude: the panic is gone but bonds from the “peripheral euro zone” have not returned to normal. Marc believes policymakers are repeating the mistakes of the ’30s.

Behind Wolfpack is the potential for European QE and Eurozone inflation. The plan is supposed to avoid QE via sterilization: when central banks across Europe buy toxic sovereign debt (putting Euros into the bondholders’ accounts), the ECB is supposed to sterilize the issuance by selling quality bonds, likely German Bunds (pulling Euros out of the market). But if the toxic debt is bought at too high a value, the buyers will take a bath that the ECB will try to cover, putting excess Euros into the system. Euro inflation will push it even lower against the Dollar.

What is unclear is how fast this will play out. If markets are back to where they were last Friday by the end of this week, the bluff has been called and the momentary hope will fade. What this means for stocks and bonds I will cover then, but right now note two points from the very interesting STU this evening:

  1. “The world does not have enough revenue to service the debt built up over the past seven decades”
  2. The unfolding crisis will be “too big too bail”

In one of those moments EWI calls Beautiful Pictures, the bounce today retraced almost precisely 61.8% of the drop off the Apr26 high, typical for a wave 2. The alt count of an extended fifth with a zigzag (= sharp) bounce has played out, not the wave 3 down with a fourth wave triangle bounce. The implication is more upside before the next big drop.

A reader (VB) notes in a comment that Neely has found the retracement after an impulse down with an extended fifth often retraces more than 61.8%, in effect bouncing more given the violence of the drop. The next levels after 61.85 (Sp1162) are 2/3, 70.7% and 78.6%, or Sp1170 – 1187. Another way to count this is to end the big drop right before the ‘bots drove it down, or at Sp1090 instead of Sp1065. This gives slightly different endpoints of Sp1177 – 1192.

Will this play out quickly? The STU points to a morning observation from Bianco Research: if you think of today as driven by the Euro TARP, the US TARP days were when it was leaked and then when it was forced down the throats of the banks. The first bounce lasted one day; the second two days. The market declined for six more months.

In the mother of all ironies, traders playing a capitulation low on Thursday may be hoist by their own fat finger: the bullish blather that “this was all a glitch!” may mean the normal capitulation by the bears did not occur. This meme is well explored here and here by Trader’s Narrative, a site with penetrating debunking of popular fancies in the market, which concludes: “according to the McClellan Oscillator, the market will make a significant low later this week.”

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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