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Economic Review

11/15/2010

Last Friday’s activity in the US Treasury market was a bit scary, as despite the first round of QE2 buying by the Fed, Treasury prices plummeted.  Was it the technical glitch that occurred during the session or is there other trouble in the pipeline….where that trouble is labeled GLOBALIZATION ?

The early news during the trading day last Friday was that due to technical difficulties the Fed’s first round of QE2 Treasury purchases had to be delayed. Prices responded by backing up significantly as Yields in the 10 year sector shot up some 5 basis points.  The somewhat un-nerving issue however was not the technical difficulty that helped push rates higher during the session but that 10 Year Treasury Yields settled near their highs on the day, over 10 basis points higher then the previous session’s settlement.

Other news released last Friday that was more noteworthy however and which rocked the spectrum of financial markets, was the comments regarding potential rate hikes by the Chinese to curb inflation.  The result was the first noteworthy sell-off in US Equities, a pummeling of Treasury prices and a slaughtering of precious metals. What this scenario highlights is yet another negative of systematic process of globalization for US residents.  As the US relies more and more on foreign purchasing of their assets (e.g. China) to fund its deficit, it remains highly exposed to financial policies of those participants.  Yes, China is having trouble with inflation in its economy given increased speculation in real estate and simply the growth of a potential massive middle class and their demand for resources.  The troubling issue here is that despite the QE2 activities of the Fed, the markets responded much more vigorously to China policy, as 10 Year Yields surged higher.  Is globalization good?  Keep an eye on China inflation….if it begins to be a problem for the Chinese economy the ramifications could be dire for the US economy. 

Hey, but at least we’re getting cheap sneakers….so we got that going for us, which is nice.

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