The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Tea Leaves . . .


Because the bond market is so much bigger than the stock market, it has long been the accepted-wisdom that you could “read” the bond market for a reliable understanding of change in the financial markets.  For example, one could learn a great deal about risk appetite and about inflation expectations.  That is no longer true.  Because of massive quantitative easing (official) and yield curve control (unofficial), the bond market information has become less clear and less useful.

Fortunately, you can still read a lot of tea leaves in the currency market.  While the dollar has lost 3.1% YTD, the euro has gained 5.1%.  In the auction place of currencies, there is a greater need for euros than dollars.  Why?  European leaders have risen to the occasion and contained their Covid problem so much better than the United States — demonstrating their preference for science over bluster.  While we fight over face masks, they have established the muscular new European recovery fund.  In addition, they have approved long-sought pan-European bonds, which makes the wealthy northern European countries responsible for the poorer southern countries, considerably reducing financial risk in Europe.  Anxiety about England’s withdrawal from the euro-zone has also wasted away.  Europe looks a lot more economically-attractive than the United States . . . which I hate to admit.

Gold is up 34% this year, leading some to foresee the return of inflation.  I see it as reluctance to own dollars.  Selling dollars to buy gold — drives the dollar down and gold up.

A cheaper dollar is not all bad, unless you’re an international traveler.  More importantly, a cheaper dollar makes our exports cheaper for foreigners to buy, which is a good thing.

How long will the dollar continue to fall?  I don’t expect any recovery before the election at the earliest.

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