Tuesday, May 25, 2010

World in turmoil and the Flight to "Quality"

With uncertainty rising, and confidence falling around the world, we see world markets in currencies, stocks, gold, and bonds in chaos. Increased tensions in Korea, financial reform bills pending in Congress, environmental disaster in the Gulf, and the European debt situation turning worse by the minute, has led to higher volatility and increased uncertainty in all types of markets.

When uncertainty rises this usually leads to the "flight to quality" syndrome seen in 10 year U.S, notes. The rally in the notes has been impressive, but it is all a question of perceptions and confidence. The U.S. is still viewed positively in the markets. This is ironic, given that the U.S. financial position is no better than many bass-ackwards countries in Europe. Investors still perceive U.S. government debt as "safe." I have my doubts. My concern is what happens when and if world perceptions and confidence change about the U.S. financial position and its securities.

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