Over the last few months I’ve noted repeatedly that THE key issue for the financial markets is the ongoing tension building between the Fed’s pro-inflation policy and China’s anti-inflation policy.

That tension just kicked it up a notch.

Over the weekend China hiked interest rates 0.25%. This was the second interest rate hike in three months (the first was on October 19, 2010). And it sends a clear message that China is taking action to cool its monetary system after consumer prices rose 5.1% in November.

China’s not the only one. Both Russia and Brazil have recently entered into the “anti-inflation fray” as the below stories attest:

Russia, worried by inflation, hikes deposit rates

Russia's central bank raised interest rates on its deposit operations on Friday to contain surging inflation, its first step away from the loose policy implemented after the financial crisis hammered the Russian economy.

The bank lifted its deposit rates by 25 basis points but left the cost of lending operations -- including the benchmark refinancing rate -- unchanged, saying a narrower corridor between the cost of various instruments would increase the effectiveness of its interest rate policy.

Brazil Bank Signals Rate Rise Is Near

Brazil's central bank caught markets somewhat by surprise Wednesday with an unusually clear commitment to raise interest rates soon, as the outlook for inflation has become "far less favorable" than it had previously thought.

Brazil joins other emerging countries, including China, that are taking steps to cool their economies, for fear of overheating. Earlier this month, China said it will shift to a "prudent" monetary policy next year, amid growing concern in Beijing about inflation and excessive liquidity fueled partly by loose monetary policies in other countries.

In plain terms, our esteemed Fed Chairman Ben Bernanke is about to find his policies running face first into a BRIC wall. He’s been exporting inflation abroad to the emerging markets all the while claiming it doesn’t exist. With growing civil unrest due to soaring food and energy prices the emerging markets are now fighting back.
On that note, China and Russia have already cut their US Treasury holdings by 3% and 9% respectively year over year.

	Oct-09	Oct-10
China	$938 billion	$906 billion
Russia	$145 billion	$131 billion

These may not seem like a HUGE drop, but when you consider that both countries are aggressively loading up on Gold and other natural resources at the same time, and we may be at the beginning of a potential seismic shift away from US debt for foreign central banks.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. If you’re getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

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Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2010 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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