The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

……..connected to the shin bone…….

12/09/2009

Last week’s trouble in Dubai is connected to this week’s trouble in Greece, whose credit rating was decreased both Monday and Tuesday and that is connected to Spain, whose credit rating was reduced today. This has raised worries for the safety of foreign bonds in general, which sold down, as people ran for safety. Because the dollar is still the safest currency in the short run, they bought dollars, which increased the value of the dollar. And, since an increasing dollar hurts our exports, which are fundamental to the “new normal”, the stock market drops. Got that? Data is never free-standing. It is always connected.

Long time readers know how little I think of bond funds, i.e., mutual funds that invest in bonds. Those mutual funds that invest in long term bonds are the worst. Nonetheless, if you must invest in foreign bonds, I would only do it via a large bond fund that specializes in that. Some analysts believe foreign bonds are a separate asset class because they are not perfectly correlated to any other asset class. Frankly, the only use I have for those funds is to benefit from the depreciating dollar. If you think the dollar will continue to depreciate, one good way is to hold un-hedged foreign bonds, preferably in a bond fund. (Un-hedged means you are exposed to swings in currency values.) I’ve bought more in the last six months than ever before. Don’t forget, you will lose money if the dollar appreciates, as it has done for the last few days.

I’m confident the long term trend of the dollar is down . . . which makes imports inflationary . . . which is connected to the shin bone . . . which is connected to the hip bone . . .

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