Public Heel...
The question is not how much the street "believes" in a second half recovery, it is how long they will be willing to play the perception that it could happen and thus continue to ride Greenspan's coattails. As long as the idea is semi-plausible, there is some incentive for them to continue the game and go with the "Gambit" because they know that AG will continue to do everything possible to drive the markets ever higher and prevent a meaningful decline in the markets.
Is there a somewhat plausible case for a second half recovery?? With some rose colored glasses, I think there is a chance that the massive amount of liquidity that Greenspan has pumped into the markets (very little has reached the real economy) could have delayed or at least slowed the slide into recession for a quarter or two, entirely because of a rise in consumer and business confidence due to the rise in the stock markets - a partial victory for the "Greenspan Gambit" and one of its goals. The problem, of course, is that such an improvement is almost all ephemeral with little or no substance and would immediately disappear if the markets should turn south again.
Greenspan knows how fragile this situation is and will do everything within his power to keep the markets from falling - the market rally is the key to everything for him. The street knows this and that in itself is some incentive to hold off taking all their bets off the table just yet. The danger is that if downside momentum were to develop despite the best efforts of AG, there could be a serious rush for the exits.
For the moment, I see no signs that AG has lost control of the markets and in truth he has not even been severely tested yet. I do see some signs that he is having trouble keeping the momentum going and some cracks are beginning to show. A test could lie just ahead when the FOMC makes its decision on rates known this coming Wednesday - there are no real good options available for him.
Contrary to my expectations, the $USD has rallied into the FOMC meeting. Whether the rally was by intervention (Japan has certainly been intervening) or just an oversold bounce is unknown, but a rate cut Wednesday will almost certainly put renewed pressure on the $USD, especially after the recent trade deficit and current account deficit data. Personally, I think they would have been better served to have let the $USD slide into the rate cut and then step in with intervention to support it when it was badly oversold technically to give it a "buy on the news" bounce. As it is, I think the dollar has consolidated enough to where it is susceptible to another leg down although they may support it for a short time after the rate cut. One caveat of course is that if there were to be no rate cut the $USD could have a decent rally, but it could also bring selling into both the bond and equities markets. A selloff in the bond and equites markets is much worse than a new leg down in the $USD, so a rate cut of 25 basis points seems the most likely Fed decision (a rate cut of 50 basis points would hit the $USD hard, and could cause selling in the equity markets, so that would seem unlikely).
It is all guesswork in this market, but I look for pretty much sideways action (perhaps even a bit of strength) into Wednesday's Fed meeting and then a more serious test of Greenspan's Gambit. We shall see.
All just my opinion, though, and I am no virgin at being wrong.
mlsoft
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