Possible blueprint to easing global worries, ECB/IMF theory

(Posted on Wednesday, 3am)

Original post in black. Latest update in blue


Briefly, the US GDP data came in at 2% vs the previous month estimate of 2.5%. This estimate is worrying. First weak data for a long time from the US since mid October.

HSBC Chinese Flash PMI sinks Asian market. 'Flash' is a preliminary PMI before the actual data which is normally release at the end of month or 1st week next month. The data sank to 48 from above 50 which shows contraction. As a result, consumer sentiment weakens sending the Aussie dollar and Asian markets lower.


For the record, the previous month HSBC flash estimates was lower than the actual data released. In addition, the real data from the Chinese was much lower than the HSBS data. But this is how the market trend - relying on fundamentals as well as how the investor interpret the data.  Bookmark here for updates!

IF (a big if) this is a knee jerk reaction, it would be a good time to go bargain hunting. The flash estimates would ease worries of China over heating and hence a possible easing in China's monetary policy - easing of RRR rather than on interest rates!

1. Italian bond yield has been rising. Yesterday, the 2 year yields were at 7.05% as compared to the 10 year yields at 6.87%. In other words, short term bonds are paying more than long term bonds indicating there’s an inverted yield curve in Italy.

What does this mean? Bad for Italy. Let’s hope the ECB and/or the IMF would come to the rescue. Read IMF new announcement.

2. IMF new announcement – IMF announces stepping up a new credit facility. The facility allows IMF members up to

·         Five times the member’s quota for six months.

·         Ten times the member’s quota for 12-24 months loan

Let’s hope this timeframe is sufficient for the member to regain its creditability. What a timely event for Europe members to tap on this facility.

3. There is also a rumor that the two largest economies in Europe will soon announce treaty changes. This is economic convergence!

With the above news circulating, US major indices with triple digit losses recovered and tested the flat line!

As you probably know the European Central Bank (ECB) is the last lender of resort to financial institutions and not for the sovereign members, while the IMF comes in to ‘bail out’ sovereign debts.

Would the Europeans debt crisis ease if the ECB were to lend to the IMF who would then ‘bail out’ the European sovereign debt countries? This may overcome the ECB’s current obstacle. While this may be in the pipeline it would possibly mean that the sovereign debt countries may be able to tap on this facility, to buy time and regain the markets confidence.

When would helicopter Ben come to the rescue? Price stability and employment! I think QE3 may be launched sooner than later (possibility Q1 or Q2, 2012). But would Ben wait for the next market slump before releasing QE3? In other words, the global situation needs to be worst off before QE3 is released.

That’s my blueprint out of this global debt situation for Europe and US and possibly global financial worries. Time is just the solution to end all pain and worries!

Notes: (An inverted yield curve has predicted every US recession since the 1950s and has only once sent a false signal (a recession narrowly avoided in 1967).

Read more on inverted yield curves posted 10 June 2011. Since then, Brazil had cut rates twice leading the yield curve to be normal. However, the inflation in China had just managed to improve. The curve is flattening. But the inflation in India is still on the high side which explains why the stock market has not picked up as compared to the BRIC countries!)

If you find the post beneficial, join as followers with Google friend connect, facebook or twitter for timely updates. If you find the post beneficial to your friends, siblings, loved ones, please feel free to forward such that it could reach out to a wider audience.