Speculating On The IMF Money Game

Includes: FAS, FAZ, SPXU, UPRO
by: Jack Holland

When I hear IMF and Europe spoken in the same sentence, I reach for my laptop to buy more shares of SPXU.

I am amazed that bankrupt nations are able to lend the IMF money so they can borrow it back to bail themselves out. How does that work? Sounds a bit like money laundering to me. But these are just rhetorical questions.

I am also amazed when I listen to the market news and hear someone as important as World Bank President Robert B. Zoellick state that the IMF will be coming to the rescue of Europe-- as if this is actually breaking news for December 12, 2011. I can assure you it is not. In fact, most of the monetary commitments to the IMF were put in place to bailout Europe back in 2009. According to the Bank of England:

“At the G-20 Summit in April 2009, world leaders pledged to support growth in emerging market and developing countries by boosting the IMF's lending resources to $750 billion. They committed to increase the resources available to the IMF by $250 billion through immediate contributions from some IMF member countries. The G-20 agreed that these bilateral contributions will subsequently be incorporated into an expanded NAB. The G-20's intention is to increase the resources available through a more flexible NAB by up to $500 billion. In addition, the G-20 supported a general allocation of the IMF's Special Drawing Rights equivalent to $250 billion to boost global liquidity.”

One might make the case that “some countries” includes Japan, China, and the United States. Data from each of these nations’ fund position sheets on the IMF website confirms this. Aside from the allocated SDR quota of each nation, the IMF also has special lending facilities available that are provided by the “stronger” nations. Under this facility, Japan has committed $169.5 billion SDRs, the U.S. has committed $69 billion, and the Chinese have committed $31.2 billion. Isn't it interesting how solid Japan is looking these days?

The recent announcement by the ECB that an additional $200 billion will be made available from European nations is interesting, to say the least. Why is it needed if the commitments made by the United States, China, Japan, and others have not yet been put to work? Where will this additional money come from? Will it be a great paper shuffle, or will more money be printed?

Either way, the result will most likely be inflationary, and the rescue trigger will most likely be pulled too late to stop a downward spiral in the European economy.

In my view, many American analysts are over-optimistic in their assessments of the current market, due to a fundamental lack of understanding about European politics and history. Europe is not America, and strong philosophical and ideological differences regarding fiscal responsibility, market discipline, and diplomacy seem to elude U.S. market pundits. Europeans take a longer term view to such trivial things as stock markets. It is not something that is discussed in the normal, everyday course of conversation. Europeans are too busy living.

With the ratings agencies considering a downgrade in European nations' debt, now may prove to be a good time for confident speculators to hedge their portfolios with a position in the SPXU. The banking sector is likely to come under extreme pressure also, thus making the FAZ attractive. But be ready for a quick reversal. Leave some funds available to buy into UPRO and FAS incase irrational market Euphoria follows some earth-shaking "positive" news out of Europe.

A holiday news drought could also spark more market volatility and downward pressure. Caveat-- these funds are not for those unwilling to tolerate heavy losses should the market run against them.

Disclosure: I am long SPXU.