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."

Comments

[betterdays]

Rally back to 1175-1185 and then bombs away to the downside next week

[Thrill]

Why just a trillion? 500 trillion would be better.... hell, we throw around "billion" now like it's lunch money. Nobody's throwing around "gazillion" yet, how about a couple of those? When will an adult (or adults) appear and take away the punch bowl? This is all beyond crazy....... I don't see any way for it to end painlessly - the only explanation for it is everybody thinks they'll know when to get out this time around.

[Rick]

Check out "Behavior Following Fith Wave Extensions" in Elliott Wave Principal.

Fig 2-6 in my copy. Invert for bear market.

If it plays out the current retracement should peak at about 1167.5 the top of wave 2 of the previous extended wave 5 drop last week?

A liitle pop tomorrow would also count out a nice fifth wave C off the low last Friday.

After I saw this mornings futures were up based on the IMF bailout I pulled the stops on my shorts prior to the opening as I believe the rally should be short lived and would reverse after an opening pop today. I assume a lot of others have also lost faith in the central bank nonsense if I have?

[yelnick]

Thrill, funniest part of the $Triliion Euro-rescue is it isn't enough! they really should have considered a bit more ... then when it all fails the Krugman's wont be complaining, "you shoulda done more!" Better to kill this than let it come back and bite us the next time.

[Winning on Wall Street]

I have been reading Martin Zweig's book "Winning on Wall Street" which talks about the ZBT. "Zweig Breadth Thrust" indicator.

To calculate ZBT divide the number of advancing issues by the total number of advancing and declining issues and applying a 10 day exponential moving average. A Bull Thrust is defined as any 10 day period where the indicator moves from below 40% to 61.5%. Since 1945 there have been 15 ZBT buy signals.

Last times the ZBT indicator fired was August 3rd, 1984 (almost 25 years ago) and last year March 18, 2009.

Can't really ignore this ZBT buy signal.

This Bull Market should remain on fire. The Great Bull Markets have always had scary corrections to shake out the weak longs.

[Patrick]

Wolfpack fund, interesting choice of name. previously known as:

"The term wolf pack refers to the mass-attack tactics against convoys used by German U-boats of the Kriegsmarine during the Battle of the Atlantic and submarines of the United States Navy against Japanese shipping in the Pacific Ocean in World War II."

[yelnick]

Rick, very helpful, thanks - the extended fifth tends to retrace into the prior 2nd wave of the fifth, rather than the fourth of the prior third. It makes sense in that an extended fifth is really all one with the third, so after the 2d wave top of the fifth, the market just falls off a cliff (in a down move). The fourth of the prior third and the 2d of the fifth can be thought of as the same in that if the third had extended instead, what is the 2d of the fifth would have been the fourth of the third.

[yelnick]

Patrick, get story on wolfpack. Maybe no surprise the Germans used it over the weekend to describe the situation, but in this case the U-Boats trying to submarine the Euro are the shorts!

[Chuang Tzu]

Carl Futia point and figure chart pointing to SPX 1275

http://carlfutia.blogspot.com/2010/05/breakout.html

Easy on shorts. No one believe this bull market.

[Thrill]

Yelnick, they don't have the money - their mouth is writing a check their butt can't cash. Since when does more debt cure a debt problem? If the "guarantees" become necessary, we will become familiar with derivatives on guarantees and synthetic guarantees! WooHoo! Goldman will probably trade them (with no losing days). I think you're entirely correct in this post, particularly in the question you pose about how long it will take for this to play out. I think it will take a couple years but you seem to be looking at days or weeks.

[Rick]

Yelnick, My count begins the 5th extended wave at 1175 on May 5th. I have wave 2 of the 5th topping at 1167.5 in the morning of May 6th and wave 4 topping at 1160 just before Noon on the 6th prior to the 5th wave blow off and low that afternoon.

So I think I have used the 2nd wave of the fifth as you noted. Just like fig 2-6 (inverted) in my copy of Elliott Wave Principal.

[Wave Rust]

Glitchgate and High Freakgate coming. GS case on back burner with no heat. Communist nominated to be a Supreme goes unnoticed.

Market rallies 400 more points, then dumps 500 points, then rallies 700 points. And, everybody is selling "Oh Woe is me," for the next crash to resume the bear market next week.

Just another week in the casino, boys!

"When will they ever learn, when will they ever learn."

wave rust

When ya wanna fade the Fed, check to see if Niagara Falls has run out of water.

[Sherman McCoy]

I'll go with you on this one, Yelnick. The st trend is down as of Friday, and the bounce provides a great selling opportunity. EUR down at 1.273 in Tokyo, while you're sleeping. Pretty amazing that $1T is only worth 2 big figures.

[nspolar]

Get ready for the shit to hit the fan again. I do not think we hit first bottom until last week of May, earliest.

When Gold goes, by the 17th (I hope), shit will be hitting fan. Gold is the ultimate barometer here. If it goes we know it is all going to run down hill, and a long ways.

BP shit already went through fan, more to come though. These guys have not a clue. They are in deep 'shit'. An embarrassment to the oil industry. I read the US govunment may charge them with 'Malfeasance'. They deserve worse.

Companies today are full of 'whiz kids', you know the types, the great talkers. That system works until it does not, then it all caves in. The recent financial collapse was due by in large to 'whiz kids'. It all looks so good and enticing on paper. And during meetings with the big shots, when all want to chime and look well super, the 'whiz kids' shine. They never tell the boss what he or she should hear, but only what they want to here.

But then when something really needs fixing, the bag gets searched, and out come the old stand bys. The Real McCoys.

Well it appears to me BP has lots of whiz kids, but no Real McCoys. Remember they contract it all. Competence is just another tool ya go pay for, when you need it, at market rate of course. Their big 'BP' box was a no brainer failure from the start. The equilibrium due to pressures was all wrong, but the contractor rammed it up their ass because it all sounded so good. Some cagins made some decent coin, for a piece of junk now resting 5000 ft below sea level.

Yelnick ... did the whiz kid society start in the US of A with the popularity of the ubiquitous (?) MBA Degree?

I am watching 'The Pacific' mini series. Excellent, especially if one is a war history buff. I think it is very well done. Tom Hanks, so have I always thought, is a decent Hollywooder. More than I can say for most of the rest. Seemingly just a good person, and when he does something he seems to want to do a good job.

My Dad was a BAR packer in WWII, in the Pacific theater. I did not realize until a few years ago that my siblings and I were thus lucky to be born. BAR packers were targeted, because they inflicted most of the damage to the enemy.

The WWII vets have long been held in high esteem by me. What many of them went through is something almost impossible to imagine.

Funny thing though, I have often wondered if the WWII vets did a less than stellar job in selecting their successors. I don't know for sure. Maybe.

If anyone is interested in how many companies (my opinion) operate today, read Hackworth's 'About Face'. Probably the overall best book I have ever read. If anyone really wants to understand what it was like for the grunts in 'The Pacific' read 'Through These Portals' by Wayne MacGregor. I can personally vouch for Wayne. I had no idea what some of these WWII vets 'really' went through, until I read his book. Very down to earth descriptive. They literally lived in their own shit for days on end, at times.

Are hard times coming again?

ns

[Account Deleted]

Yelnick ! !

Neely says that the correction to follow a fifth wave extension MUST retrace atleast 61.8 % of THe 5TH WAVE,but must not retrace all of the 5th WAVE if the trend is to remain intact.If the 5th wave doest get completely retraced ,it indicates the extension terminated a larger trend.Here are different ways that can happen :

1. The 5th Extension pattern was a patttern was a part of a larger IMPULSE which was also a 5 th Wave Extension, OR

2.The 5 th Extension was the C wave of a FLAT or a ZIGZAG PATTERN

Regards
VB

[Shanky]

Gonzo post dude. Really terrific. Very insightful. Thanks.

[yelnick]

Rick, you have it right. Note that the wave 2 of 5 target is a guideline not a strict requirement. Read VB's comment as well to add the precision of Neely to this. If we break 1175 than this count may be wrong, since a 5th wave extension itself should not be retraced. Nonetheless, the STU has targets of 1175-1187, showing they are not troubled by this - perhaps because in EWP they note that if not the whole correction, waves A tend to end in the prior 2d of the 5th range.

[yelnick]

ns, I am enjoying The Pacific, which shows that their experience was much more harrowing than the European theater, which was pretty tough, especially Italy.

The original whiz kids were the McNamara and his crew who took over Ford in the '50s. Apparently McNamara was also part of the team that picked firebombing targets in Japan before they dropped the two big ones. Ford need a turnaround after the Edsel. Invented the concept of a platform car that was applied years later to save Chrysler. 

Bad times? Maybe, but I do not see it as bad as the Depression. This debt burden is beyond anyone's imagination, and will be very difficult to work through, so perhaps the bad times are dumped into the '20s and onto our kids. 

I think the GI Generation left us some capable leaders - certainly the crew under Truman was outstanding, and Ike ran the country much better than he is given credit for. After the war, in England the voters quickly went for the welfare state over competitive productivity, and it took until 1979 to begin to reverse. We staved that off for 20 years until the Great Society (1965) and began the reversal in 1981, so it hadn't gotten as bad. But it has crept back, especially in the last two years of Clinton and the decade since. 

Maybe this time around we will see the Keynesian dream crushed early, so we can reverse before the damage is irreversible. I estimate we have until 2020 or so, more than enough time to swallow the red pill and start dealing with reality. 

Case in point is Obama nominating Kagan, as insipid a choice as Bush Sr with Souter - both people with no record to pick on.  At least Souter had been a judge, but was isolated from real life. Kagan has never been a judge - she is a lifelong academic administrator. These are not serious choices by serious people. 

[nspolar]

Another BP post.

http://investorvillage.com/smbd.asp?mb=4288&mn=50172&pt=msg&mid=8979425

"I get the feeling, time, @ $1 MM/day was the cause of shortcuts that cost 11 lives. That or a very faulty BOP, but the need to shear off everyhting should have never occurred."

Was someone trying to look good here?

I will keep posting some updates as I see fit. I immediately had the same feeling (per all previous posts), even though I am not a drilling engineer. I just know too much about the oil patch, equipment (including some drilling equipment), and all that to have immediately doubted that this was some freak accident.

I have since wondered about a few more things. Like why the rig was not immediately shut down on an ESD, due to the presence of gas? Any process environment I have been in would have been shut down. Gas detectors are not new and novell? I would certainly think the Deepwater had gas detectors on board. Were they jumpered? On warning only or something? Seems a bit odd to me.

Supposedly the engines blew, because they inhaled gas. Well they also should have had gas detectors in the inlet plenums. This is the modern world after all.

I in general like what I do in the oilpatch, but will admit I am disgusted with management these days. Too many 'Whiz Kids'. There is no free lunch, I have over the course of my career and life found that to be so true. And especially when one is dealing with the laws of nature. In that case there is no psychology involved. The laws are fairly predictable, but 'The Whiz Kids' have little understanding, or care.

I read an interesting article today about oil company safety. The article basically concluded there was no way for an investor to really know if an oil company has a good safety record, and in the limit one that counts. This imo is so true. What these companies focus on and tout is all about the little shit, like cut fingers, eye injuries, vehicle accidents, yada yada yada. Important? Yes and no, but more no than yes. There is a reason they do this. One it is easy to generate some statistics, mostly meaningless. The press likes statistics. But more importantly it shifts accountability to the poor sop at the bottom of the totem poll, and relieves accountability of management. They can even send a poor sop at the bottom home w/o pay for accidently denting a bumper in a PU. Isn't a bumper there to take some dents? A big spill or a big explosion on the other hand is what really affects investors, and of course those incidents are freakish events (per management). When this happens does the CEO get sent home w/or pay? But in the end the big events are those that account for huge losses, to the stock holders.

ns

[philippine fred]

is it free week at ewi this week?

anyone have the link for the free week?

cheers

[Dsquare]

"Ike ran the country much better than he is given credit for" and warned about the military industrial complex. Too bad no one took his warning to heart. Instead we have this phoney war on terrorism, naked body scanners, and a whole mess of debt.

[brenda]

Phillipine Fred:
its not free week on EWI
if it was the markets would go up up and away and prove them all wrong -again.

it's free week with DOCTOR McHugh - don't call him Mr McHugh he doesn't like it - he must be addressed as DOCTOR McHugh :P
his accuracy seems about as good as EWI, so read the free stuff but don't subscribe Fred. ;)

brenda

[bob m]

When Gold goes... shit will be hitting fan. Gold is the ultimate barometer here. If it goes we know it is all going to run down hill, and a long ways.

Without doubt, gold and stock have been in lock step and I have used that info to trade effectively. BUT isn't that an UNNATURAL union?

I have been waiting for them to resume moving in OPPOSITE directions. For about the last month, they have. And on "Fat-Finger Thurday" gold RALLIED $20+ (I think). At the very least, it did not fall.

I think we are about to see the rise of gold and the fall of stocks - a return to the go old days of true tangible value

[cloudslicer]

I have a general comment concerning all technical indicators. Thursday really skewed these technical indicators since it painted an abnormally high average true range.

The McClellan oscillator for instance was skewed by the artificial drop on Thursday. The super spike was not a wash out since only a few million shares changed hands.

But what I find interesting now is that traders are now using these indicators. In affect thinking like a machine and just blindly following a statistical model without applying common sense.

Unfortunately that puts us in a predicament. What portion of Thursday should count for statistical purposes? And how do you reconstruct the indicators, oscillators ect. to take into account for the anomaly?

More importantly, the algos are using the Thursday down day as if it was real. Being a computer programmer I have some knowledge in this field. Especially is they use technical indicators such as ADX and stochastics. These will be skewed and the machines will trade as if the down day was real. They are, after all, machines.

[Account Deleted]

DG !!

Can u have a look at this chart of one company and give me your view on it.Pictures are here :

http://yfrog.com/86n4rjx

The three pictures are of the company on daily weekly and monthly scales.

Regards
VB

[DG]

VB,

The chart titled n4r.jpg doesn't show up for whatever reason.

Overall, the chart setup is quite similar to the last set of charts we discussed and would argue for the same general outlook (if the chart is in the wave-B of a Zigzag, it shouldn't surpass the 61.8% retrace on a log scale of the decline from the top).

Is that similar to your interpretation or is there some feature of this chart that makes you think it is pointing toward an outcome quite different from the one anticipated for the other stock?

Remember, too, that unless these stocks are very widely owned, wave theory is not going to add a ton of insight into its movements (a point I was making this weekend regarding some of the extreme sell-offs in individual stocks last week).

[yelnick]

ns, WSJ this morning ran a story which sounds like your posts, but I want to make sure: Transoceanic withdraw the drilling mud before putting in the concrete plug, which is an inexplicable change of the standard approach of plug then mud. As the "mud" was replaced with lighter water, the gas blew through it and up the pipe.

[nspolar]

Yelnick, testimony by Transocean before Congress I believe reflects the way it likely was, and should have been.

BP owns the well and is supposed to design the well and make the decisions along the way. Transocean and Hal only supply services, and if those contract crews did what they should have, they might even have BP sign off on the steps taken.

BP as best I know it is liable for all incidents that happen. If they want to counter sue due to negligence or whatever, they then can.

Rumor (from multiple sources) seems to indicate that the BP drilling supervisor and the drilling engineer(s), had a big squabble. One side wanted to remove the mud, one did not. The side that wanted to remove the mud apparently won out. Funny the articles did not say who was on what side, but I would have to suspect the engineers were on the leave it in side.

This reflects part of the atmosphere and set-up I have tried to convey, as I am used to seeing it.

The Yankee oil patch is 'good ole boy' and a bit anti engineer (who needs those geeks), yet they know they can not get along without engineers. The same attitude in a way that made the oil patch what it is, is today part of the their down fall. A bit like the Shuttle incident maybe. Deep Water drilling is so technical and risky (with liability) you want and need clear lines of authority and I believe it technical enough the authority should lie with the technical side. But today it is often not that way, or at best quite diffuse. It leads to issues.

There is likely more to this story here. If the well failed and blew the way I and others suspect the mud probably would not have held it back, but it would have given them a lot more time to see what was coming.

I read a reference yesterday to some seemingly out of the world type of down hole pressures, for this well. Much higher than I suspected. But there is a lot of garbage floating around the net too, so we don't know all yet.

ns

[Account Deleted]

DG !!

Yes u r right.These are stocks are not widely held and I too feel that Wave theory wouldnt be applicable to such stock.This is the feeling even I get.Becos I analysed a number of such stocks thru Wave theory and they have defied and ran up alll the way to their previous highs and infact multiplied manifold.

Sometimes i feel there has to be enuf mass participation in a stock for the elliot wave to eb applied.

But just one query why have u assumed a ZIGZAG in both the stocks we have discussed.It can be a flat too.

Regards
VB

[DG]

But just one query why have u assumed a ZIGZAG in both the stocks we have discussed.It can be a flat too.

The rate at which the B-wave was retracing the A-wave made me think that the ultimate amount of retracement wouldn't be sufficient to be a Flat without the B-wave running out of time. In Flats and Zigzags, wave-B is typically limited to about 4X the time of wave-A.

[Account Deleted]

DG !!

I cant understand this LOG SCALE thing.Can u explain.I read u mentioning that Log scale is in percentages.

So how would u determine the retracements of B incase of Flats or zigzags when the A wave has been so dramatic as in previous two charts u have seen for me.Becos in both the charts the A leg retraced the previous rally by almost 99 %.So how would the calculations fit for B leg if its a ZIGZAG or a FLAT based on logscale charts.Whenever time permits u can u please explain this topic in slight details if possible.An example if u can provide would be immensely helpful.

Thanx in advance
Regards
VB

[DG]

VB,

Taking the decline from the tops in both those charts as the A-waves, the B-waves would need to retrace over 80% of the decline to qualify as a Flat. That is regardless of how much of the prior rally the A-wave retraced. If the A-wave was 500 points, that means the B-wave must be at least 400 points in the upward direction to qualify as a Flat. I made no assumptions about the pattern leading up to the tops in those charts. It could have been an Impulse pattern or an upward stretching Corrective pattern. This is one of the problems with individual stocks as well, which is that they lack a history as enduring as that of a stock index. In fact, one of the conceptual problems of any Elliott Wave count is the question of whether or not the entire history of humanity begins with an Impulse wave. One sort of has to assume it does, otherwise we end up with a scenario in which history begins with a Corrective pattern, but no benchmark to understand what it is correcting. Anyway, that's off-topic.

There is a log function in Excel which you can use. Plug the prices in to the function and it will calculate those prices in log format. You will find that the charts are much more manageable when the numbers are so widely dispersed when you use the log function to create the chart. For example, the log of 1000 is "3" and the log of 10000 is "4". Many charting programs have this same capability. Once you get the charts in that format, you can apply NeoWave rules from Chapter 3 to get a better grasp on the internal structure of the pattern.