With the global economy taking off without us and foreign interest rates already on the rise, the Fed is desperate to look bullish while acting bearish.

Anybody that has ever tried to prove the existence of Santa Clause or the Tooth Fairy to a six year old knows what Bernanke is trying to do. At this point, he’ll do anything to change the subject and focus the attention on something else.

With all of this talk about an increasingly deadly carry trade bubble, it is beyond obvious that American interest rates need to rise. If it doesn’t happen, soon enough all of America’s money will be invested in some high rise in China’s Guandong province… or Saudi oil.

But we all know Bernanke would commit career suicide by lifting a headliner like short-term rates even by a quarter of a percent. The blame for any upcoming financial downturn will be squarely on his shoulders.

For the youngsters in the room, he’ll be blamed for outing Santa Clause.

So what’s the guy to do? He’s already doing it.

The Fed is unraveling its plans to buy a whopping $1.25 trillion worth of mortgage-backed securities and $200 billion worth of other mortgage-related notes.

By March, the Fed’s massive buying spree will be over, once again letting the markets deal with a massive amount of very “un-transparent” securities. The same lion that brought the bull down is once again about to be un-caged, hungrier than ever.

If you thought the market had a hard time swallowing so many mortgage defaults, wait until $1.45 trillion dollars runs straight into 10% unemployment and a real estate market worth a fraction of what it was even a year ago.

And here’s the kicker, just by refraining from hitting the “buy” button, Bernanke effectively raises mortgage rates by as much as 100 basis points.

Let’s see… 10% unemployment, a weakened currency, deflating home prices and inflating borrowing costs. It’s a recipe for disaster.

At least Bernanke gets to keep his job and he gets the keen realization that he would not be in this bind if he never would have meddled with the markets in the first place.

We all knew the day would come when the Fed had to clean up its mess. That day has come.

***As if the markets have not shown enough contempt for government intervention, Uncle Sam is once again trying to throw sand into the gears and cogs of American business.

This time they want us to pay workers for not showing up to the job.

Thanks to a representative from California (there’s a surprise), legislation is working its way through Capitol Hill that would force employers to pay an employee for up to five days worth of sick leave if the worker is diagnosed with ANY infectious disease.

The rational side of my brain says there is absolutely no way this is going to make it the White House. The harm it would do to production is simply too immense to deny, even by politicians.

But the irrational side of me can already imagine the last-minute phone calls. “Sorry boss. I can’t flip burgers today. Got herpes. See you on Friday to get paid.”

Gotta love where we are headed.

We have the Bank of England (BOE) and the European Central Bank (ECB) meeting today. Look for rate cuts from both of them, as recessions are deepening in both camps. The BOE doesn’t have many arrows in their quiver, while the ECB has held some in reserve. I doubt the ECB would go for a “huge honkin’” rate cut today, as they are normally more stick in the mud thinking… The BOE will probably move rates nearer to zero…

The currencies all had a day to bounce yesterday, more on that in a minute… But the day on the trampoline had to end, and as the day turned to night, the overnight market participants took a look at the rate cut meetings and decided to sell… So, last night when I went to bed, the euro was 1.2645… And right now it’s 1.2585… Not a huge change, but one that’s going the wrong way for euro holders.

OK, back to yesterday… All my troubles seemed so far away… Now it looks as though they’re here to stay, oh I believe in yesterday… Suddenly… NO WAIT! My fingers were going to continue that tangent! UGH! Any way… Yesterday, the currencies all rallied on the news that China was going to introduce a new stimulus package and their leader Wen Jaibao said he believed there would be a return to 8% growth for the Chinese economy. This news got commodities rolling, and risk takers dipping their toes back into the water. But then… Stephen Green, head of China research at Standard Chartered Bank in Shanghai has this to say in rebuttal of Wen… “Every day the world economy gets worse and they’ve probably got two years of very slow global growth to get through.”

So… Either Wen was saying what he truly believed was going to happen… OR… He has taken a page out of the Bernanke / Paulson, un-dynamic duo’s book on how to deceive the public as to how bad things are… Oh, I know the un-dynamic duo eventually came around to say things were bad… But, all you have to do is go back to the last part of 2007, and the first part of 2008, to find all the quotes you need to fill your bag, from these two regarding how things weren’t that bad… It wasn’t a recession… And subprime won’t filter out into the economy…

What I believe is taking place in China is a move away from a dependence of U.S. consumers… Which won’t happen overnight… But, if I’m correct in this thinking, it would eventually lead to a HUGE problem for the U.S. For, if China can make this move, they won’t need to keep buying U.S. Treasuries… Uh-Oh!

There was other news that goosed the risk takers yesterday, and that came from the U.S. as reported by Reuters… “A U.S. House Financial Services subcommittee is expected to hold a hearing on mark- to-market accounting rules, which have been blamed for forcing banks to record billions of dollars in write downs, a source briefed on the matter told Reuters.

The congressional subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.  The U.S. Securities and Exchange Commission’s chief accountant and the chairman of accounting rule maker, the Financial Accounting Standards Board, will be asked to testify, the source said.”

So, recall about 10 days or so ago, I told you there was a rumor going around, that someone’s underground, and she will rock you in the, NO WAIT! Darn it! I’m really going off on song lyrics today, because it’s a Tub Thumpin’ Thursday! Any way, I told you about the rumor that was going around about how the dropping of the mark-to-market was being considered… Well, I said then, that I smelled smoke… And when there’s smoke there’s a fire… And here’s the proof in the pudding folks… They congressional subcommittee will talk about this next week!

I can’t believe that they will go through the effort of talking about his, dragging everyone up to Capitol Hill to testify, without suspending the mark-to-market… Now… Talk about unlocking the credit crisis! All those reserves being held to cover the mark-to-markets, could be released on the economy!

But wait! With over 500K being placed on the unemployment rosters every month these days, and most likely a number of 600K being placed on the roster last month, who in their right mind would make loans to consumers in an economy like that? Well, that will be the next hurdle, but don’t tell the markets now, as stocks really liked this news about the mark-to-market, and rallied on the day!

So… Commodities had a day in the sun, much like I will be doing in about a week from now! Or, should I say “hope there’s sun?” Doesn’t matter much to me, as I’ll be in the ball-park next Saturday watching my beloved St. Louis Cardinals with my family at my side… It doesn’t get any better than that my friends! Oh! I was talking about commodities… Well, the commodities that rallied didn’t include Gold, as the shiny metal has seen better days this past week after hitting $1,002… I would have to think that $900 or $890 is a level it will hold. Consider, if you will, the fact that there’s so much uncertainty in the world today… And… Surrounding that uncertainty is the fact that so many Central Banks are near zero with their rates, and have announced quantitative easing as their next move… Recall, I told you a day or two ago that the Bank of Canada has joined the ranks of those employing the quantitative easing measures… The list is getting longer all the time, and now includes the Fed, the BOE, the Bank of Japan, and Bank of Canada… There’ll be more, as we go along… What else can a Central Bank do, after they’ve cut rates to the bone?

So… As I said the other day… I truly believe that Gold is trading at a discount right now… But, that’s just my opinion, not that of EverBank’s, and I could be wrong… I certainly was wrong about the Obama bounce, eh? I wasn’t wrong about calling the end of the Great Unwinding of the Carry Trade, though! Nailed that one to the wall!

Speaking of the end of the unwinding of the Carry Trade (let’s see how would my friend, the Mogambo shorten that… EOTUOTCT!) Japanese yen continues to weaken, after being the best performing currency of 2008, it is now the worst performing currency of 2009! And there doesn’t seem to be any change in that selling patter for yen… In fact, there was a story yesterday on Bloomberg that caught my eye… “Scottish Widows Investment Partnership, which oversees 42 billion pounds ($59 billion) in bonds and currencies, cut its yen-denominated holdings by a fifth because of Japan’s worsening economic situation.”

Before I head to the Big Finish, I wanted to mention the Richard Russell Tribute Dinner that is going to take place in one of my fave cities, San Diego, on April 4… My friend, John Mauldin, is putting this all together, so if your interested in attending, here’s a link to click for more information…. https://www.johnmauldin.com/russell-tribute.html

Currencies today 3/5/09: A$.6425, kiwi .5010, C$ .78, euro 1.2565, sterling 1.4245, Swiss .8510, rand 10.5250, krone 7.1150, SEK 9.1325, forint 247.55, zloty 3.7675, koruna 21.9925, yen 99.40, sing 1.5540, HKD 7.7580, INR 51.70, China 6.8405, pesos 15.30, BRL 2.3680, dollar index 88.98, Oil $44.41, Silver $13.09, and Gold… $916.60

Source: China Announces A Stimulus Plan

Free money for everyone… forever.

The Fed’s 75-point cut yesterday makes history on two counts. At a “range” of 0-0.25%, the Fed’s rate hasn’t been this low in half a century — and they have never set a range to their target lending rates.

But that wasn’t all. In a monetary version of “shock and awe” policymaking, the Fed threw “all available tools” at the crisis. Other groundbreaking details include:

• An assurance that the nearly nonexistent rate will stay low “for some time”
• Confirmation that the Fed’s $600 billion mortgage-backed security and agency debt repurchase program will roll out “over the next few quarters”
• A hint at the FOMC’s interest in purchasing longer-term Treasury securities
• Promises that the Fed “will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

“This announcement,” Dan Amoss wrote to his readers, “convinced the markets that the Fed will inflate as much as necessary to stave off deflation. I expect the Fed to work even closer with the Treasury Dept. under the Obama administration. This may include a major mortgage refinancing initiative in 2009. A hint of such an initiative could spark an extension of the stock market rally that began in late November.

“This radical new dollar debasement will not come without consequences; expect further gains in the price of precious metals.”

In anticipation of this “shock and awe” rate decision, Dan helped his Strategic Short Report readers take 245% profits just hours before the Fed’s announcement yesterday. How about you? Learn more here.

Nearly all stocks soared after the Fed’s press release. Expecting a 50-point cut and far less aggressive policy implementation, traders went all in. The Dow rose 4.2%. The Nasdaq and S&P 500 jumped even higher.

Banks, of all freaking things, led the way… now that they can get their money for nothing and their chicks for free. If Greenspan’s 1% rates following the tech bust begat a bubble the size and scale of the housing mess — just imagine what mayhem a few quarters of 0-0.25% rates will do. Oy.

At least… that’s what we suspect the Fed was thinking.

This morning, it looks like the rate cut buzz has already worn off… the Dow opened down 80 points.

“The Federal Reserve wants us to believe,” opines GoldMoney’s James Turk , “that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in one of solvency. Most banks and many consumers and companies are overextended, and their precarious financial position cannot be put right with newly created dollars.

“Many loans were made recklessly and imprudently, and the borrowers as well as the lenders are suffering the consequences. Low interest rates and easy money will not make economic those houses built on speculation, those shopping malls built unnecessarily and those companies whose business models rested upon ill-founded assumptions about the health of the U.S. economy. The debts of imprudent borrowers cannot be repaid in a timely way because they own assets acquired in the boom that with the benefit of hindsight are uneconomic even with zero interest rates.

“What’s needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today’s America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.

“History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed’s actions will debase the dollar, perhaps irreparably so.”

The U.S. dollar has been falling all week. After a big step down Monday, the dollar got slammed again yesterday following the Fed’s cut. Roll the videotape:

The dollar index has fallen about 1 point every day over the past five… huge moves for the typically sluggish index. This morning, the index is once again battling with 80.

The euro soared after the Fed’s announcement, up a full 5 cents, to $1.41. The pound rose 2 cents, to $1.54.

And the yen found itself a new 13-year high at 88. And why not? Now that lending rates in I.O.U.S.A. are essentially the same as in Japan, what’s to stop the dollar from becoming the new carry trade currency of choice?

(BTW, we’re working on another way for you to profit from the falling dollar… we’ll fill you in Friday.)

But the good news… gold. Our favorite metal is up again today, to around $850.

Oil didn’t get much of a kick from the dollar’s fall yesterday. The front-month crude contract stayed put at $44. Even after OPEC announced they would cut back production twice as much as expected this morning, oil fell. It’s around $41 as we write.

Still, it looks like the bottom may be in for gas prices. The national average price at the pump has been inching up all week, to now $1.66.

50% of American companies are currently planning on reducing labor costs, says a recent survey by human resources firm Hewitt Associates. Companies that tell Hewitt they will be cutting back say the average pay raise for 2009 will be less than 3%… the lowest average hike in the study’s 32-year history. Of all industries, auto-related workers can expect the worst raises — about 1.4%, the survey said. Those in construction and engineering will do best, averaging a 4.5% bump.

So how can you come out on top? Hewitt reports that business will be probably focus on performance-based rewards next year. 69% of companies polled offer incentive-based pay, while 24% say they’ll add such plans next year.

Facing a $15 billion budget gap, New York Gov. David Patterson called for 88 new fees and taxes in his newly revised state budget. Included in this reform are new taxes on movie tickets, taxis, soda, beer, wine, massages and cigars. All kinds of motor vehicle licensing, registration and ticketing fees will rise… there’s even an “iTunes tax” that will nickel and dime “digitally delivered entertainment services.”

“We’ve made too many promises and asked for too few sacrifices,” said Patterson. “We’re going to have to change our culture as we know it.”

Whoa, David… you want to tone it down a bit? This is America. Home of the brave. Land of the free (and easy credit).

So the former chairman of Nasdaq bilked investors of $50 billion dollars… what’s the big deal?

The sum pales in comparison to the unfunded liabilities of the government. And at the very least, “investors” had a choice whether to give him their money or not.

Uh-oh… keep this off Capitol Hill, too: According to a USA Today survey, 67% of potential car buyers would consider buying GM, even if it entered bankruptcy. The newspaper’s poll (in conjunction with Gallup) flies in the face of the data we hear touted by congressional Democrats almost daily… 80% of their respondents said they wouldn’t buy from a bankrupt auto biz.

“I don’t think,” writes a reader, “the results we have seen so far in this downturn are anywhere near as bad as they are going to get. My partner and I have been traveling quite a bit recently, including three weeks in India, and we have found Fortune 100 companies for the most part all acting the same way worldwide. No new hires. No raises. No bonuses, no parties, no kickoffs. Basically, battening down the hatches. This is going to have a huge impact on all the service- and support-related industries — conventions, party planning, hotels, advertising, etc. And once the fallout from the bad retail Q4 sales kicks in, bankruptcies, etc., commercial real estate bubble will be caving in.

“There really isn’t going to be anywhere to hide. All the industries that have been fueled by the easy-credit binge are going to be seriously effected, and quite a few will go by the wayside. It is the companies that have strong balance sheets and CASH that are willing to invest in themselves and keep their heads down and grind out their particular value that will survive and, once we come out the other side — and we will — flourish. Innovation and value are the keys to survival.”

“Thanks for the snapshot,” writes another, “of the govt. income statement and balance sheet . Love the quirky accounting. I would suggest, however, that all is not as bad as it seems. I am a commercial banker by trade and enjoy the ‘hidden value’ analysis often used by Chris Mayer when making his recommendations.

“Although it in no way excuses the ridiculous spending spree our government has undertaken, I would venture to say that the asset side of our balance sheet is seriously understated. There is probably enough ‘hidden equity’ in the good ole USA to offset the negative equity position shown. Again, not trying to justify what is happening, but instead of being ‘really ugly,’ it’s just ‘ugly.’”

The 5: We’d like to agree with you, but wonder what — and whose — assets you might be referring to. Who is “our” in your assertion?

The quirky accounting, by the way, comes compliments of the U.S. Treasury.

“This CBS News 60 Minutes segment ,” writes a reader, “does a really good job of explaining some of the mortgage problems that wait for us in our very near future. You guys should include a link to this in The 5 Min. Forecast. They state that the worst has yet to come, but still contend stocks are a great buy right now. I would be interested to hear your comments on this.

The 5’s comment: They’ve got 60 whole minutes to forecast, and that’s the best they can do? We commented on this Credit Suisse data in May and again in June.

Source: Fed “Shock & Awe,” What 0% Means, 2008 Pay Raises, Controversial Auto Survey and More!

And I’m certain you’ve read about this trade here in the A-Letter – the infamous currency play, known as the “carry trade.”

But still with all this publicity, carry trades remain a mystery to most mainstream investors. Even the carry trade basics – including what it is and the mechanics of placing this trade – elude most investors.

So let me take just a moment to explain what a carry trade is – and why this one trade has been behind some of the most explosive trends in the currency markets for years. Also, I’ll explain why this one trade is about to come undone this year and create some explosive profit opportunities if you’re positioned correctly.

It’s Really So Easy: Borrow, Convert, Reinvest

Though commentators can make this sound complicated, it’s not. Think of it as a simple three-step process and I think you will have the mechanics of a carry trade nailed.

Three-step process that defines a carry trade:

1. Borrow the low cost currency i.e. low interest rate currency
2. Convert the borrowed currency into currency of your choice
3. Reinvest into:

• Deposits of other high yielding currencies
• Stocks
• Bonds
• Commodities
• Real Estate
• Derivatives
• You Name It…

The currency you borrow in step one is often called your “carry trade currency” or your “funding currency.” That’s because this borrowed currency gives you the funds to reinvest as defined in step three. So keep in mind that “carry” and “funding” currency is often used interchangeably in financial literature.

Okay. The process looks easy enough, but why is it, or why was it, so popular? The reason is because it was profitable. It’s very enticing to be able to borrow inexpensively, reinvest and immediately achieve a much higher return. There’s lots of money to be made on the spread…

Spread = Return on Investment in Higher Yielding Assets – Borrowing Cost

…or at least that’s the theory.

For example, say you borrow at 1% then turn around and reinvest the proceeds at 6%. You’ve just earned yourself a quick 5% return without much work. This of course assumes the asset yielding 6% in this example holds its value. If the asset you buy with the carry proceeds falls in value, you have a capital loss. Thus it eats away at the spread that once looked so enticing.

In fact, this is where the problem comes in with the carry trade – it’s based on simplistic assumptions. But incredibly, these simple assumptions didn’t stop fund managers and institutions across the globe from borrowing trillions of dollars to reinvest those assets. And they add massive leverage to boot.

Three Things a Carry Trade Needs to Grow and Thrive

You need to have three major criteria (which are assumptions when projected into the future) for the carry trade to be of any significance:

1. Low borrowing rates from a major central bank – as highlighted above, it comes down to perceived profitability of borrowing cheap and buying or lending at higher rates to achieve the spread. But for a global carry trade to take wing and fly there must be a major global central bank behind the trade (Bank of England, European Central Bank, The Fed, Bank of Japan, etc.). For example, if the central Bank of Zimbabwe were offering 0.5% interest rates, they could not realistically produce enough loans to make it significant. Not to mention they have absolutely no credibility when it comes to monetary policy and a stable currency.

2. Low volatility or weakness in funding currency – if the currency you borrow weakens, or at least remains stable, then your risk is limited to the return available where you invested the proceeds. If the currency you borrow begins to appreciate in value relative to the investment you purchased, then profits begin to fall.

3. Low volatility or strength in invested asset class – As long as the asset class you bought e.g. other currencies, stocks, bonds, etc. with the borrowed proceeds increase in value faster than the underlying borrowed currency, the trade is profitable. But if the assets you bought start to decline in value on a relative basis, your losses can mount quickly.

So there you have it. It’s a straightforward process. And if the funds and institutions didn’t bet so much money on such simplistic assumptions, the carry trade would be relatively innocuous. Unfortunately, not only did they bet big by borrowing trillions, but they turned around and “leveraged it up” many times over. In other words, they used margin to supercharge their carry trade borrowings so they could buy more stuff. After all, it was working for a long time so why change?

Back When All Assets Were Soaring…

From 2001 through most of 2007 almost all asset classes were moving higher and higher in virtual lockstep. Not only that, the volatility of the move was extremely low.

Stocks, gold, and crude oil all moved up together through June of 2007. Thus, we had a happy credit induced bubble ridding merrily higher.

But the game changed come July 2007 – dramatically. The markets bit back, proving what Milton Friedman told us many years ago, “There is no such thing as a free lunch.”

Stay tuned…I’ll give you the full story on how the game has changed tomorrow.

JACK CROOKS, Editor of The Money Trader and World Currency Options

P.S. Tomorrow I’ll tell you why the carry trade currencies rocketed higher and why the new era of the great unwind could change the game for a long time to come and set the stage for some excellent long-term currency trading opportunities. Or you can read my FREE report right now to get all the details on this explosive new trend.

Yes, I know the government circus has come to Wall Street Wall-Street-Layoffs . Hank and Ben are performing their tightrope act, and the clowns of Washington are piling out of their not-so-tiny black SUV.

But now that Congress is getting involved, we should see some decisive action, a clear and easy solution to eliminate the financial collapse now knocking on our doors… and if you believe that, I’ve got these great banking shares to sell you.

— John Browne wrote some great commentary on Henry Paulson’s plan, which, he says, effectively puts the American public on the hook for all current and future screw-ups of Wall Street speculators. U.S. hyperinflation here we come, even faster than before.

— Laura Cadden discussed the strength of the U.S. dollar with currency expert Jack Crooks and found out some worrisome things about our current situation. According to Jack, America is staring down the barrel of a Western sequel to the Asian currency crisis in 1998. And it could be just as bad. Jack explains why in this week’s Smart Trading Action Alert.

The dollar is heading toward ruin and Bernanke and Co. are doing their best to refill the liquidity swimming pool with taxpayers’ hard-earned cash. So how do you know when the worst is over? And when should you get back into the markets?

— Krista Das asked those exact questions of Money Map advisor Martin Hutchinson. He tells her three signals that Wall Street is safe again. And you may be surprised to find out that one of those signs is the firing of Ben Bernanke Bernanke-Changed-Course Nov-07 . Martin is serious about that. He believes Bernanke’s days are numbered, and you can find out why in this week’s Smart Investing Market Insights.

— But while Bernanke takes one step closer to his own demise this week, the kids in the TFN camp were sniggering over our April Fool’s Day joke on our boss J. Christoph Amberger.

On Tuesday, April 1, we released a very special Amberger’s Smackdown, just like I promised you last week. And how, exactly, was it special? Well, for starters, it was a SmackUp featuring “Christoph” expounding on the virtues of the Democratic party.

If you’ve ever seen one of Christoph’s Smackdowns, you know that our fearless leader enjoys nothing better than stomping all over liberal philosophy, Democratic candidates and what he calls their proto-Communist economic policy.

So unbeknownst to our boss and with the help of a little high-tech trickery, Christoph became a democrat, if only for the day. And surprisingly, he didn’t fire any of us for it, when it showed up on the TFN Web site on Tuesday.

— Speaking of proto-Communism, Mexico’s president Felipe Calderon is trying to push his country farther away from it’s remnants of nationalization. Mexico’s government-controlled oil company Pemex, which holds a monopoly on the country’s oil industry, is floundering, but will Calderon convince his people and his congress that they would make more money and have a stronger economy by following the lead of Brazil’s Petrobras?

— While oil has fallen from its peak, to the chagrin of oil companies worldwide, Dominic Frisby of Money Week thinks it could reach as high as $160 per barrel as soon as next week. And he has a pretty convincing argument to back up his claim.

So where do you put your money in this market? How do you find a company that isn’t going to suffer from the current crisis? We have two answers for you this week.

— Lynn Carpenter will show you how to predict performance using stock charts. She gives easy instruction for technical traders in her series on Stock Chart Smarts in our Investment Strategies section.

— And Andrew Snyder has discovered what he calls a Diamond in the Mud for value investors in this week’s Hot Stock Pick. Andrew explains his three criteria for finding a good value investment in today’s volatile market, and he gives you a company that has the potential to bring in nearly 60 times its current revenue in coming years.

Make sure you select TFN as your homepage or sign up for our newsfeed to ensure you don’t miss a single video or article, because in today’s markets that one piece of news could cost, or make, you a fortune. And sign up for our FREE daily email, which comes to you at about 7:20 a.m. every morning. So you can start your day informed and prepared.

Visit the Today’s Financial News Web site now and become a member today. Once you register, you can join our forums to discuss your investment ideas with other members and with our financial experts here at TFN.

I admit it, that’s a juicy figure. But I’m wary of it, and here’s why: For years we’ve had the yen carry trade – investors borrowing in Japan at zero or near-zero interest rates and investing abroad where the yield is much higher. A lot of this money found its way to Iceland.

Now people are starting to talk, only half-jokingly, about a dollar carry trade. The greenback’s in a tailspin, so is it a good idea to borrow in the US, where the Fed have cut rates to 2.25%, and stick your money in Iceland?

“No!” says Garry White. “Their economy is crumbling.” Indeed, writing in yesterday’s Telegraph, Ambrose Evans-Pritchard likened Iceland to a “Nordic hedge fund masquerading as a country”. But he warned that there was more to it than that – its economy is in deficit, and as the yen carry trade unwinds Iceland is suffering as investors take their money out.

Add in the fact that the asset base of the Icelandic banking system is now a world record eight times GDP, and there are serious question marks over the country’s investment potential.

“Is the Icelandic government – which presides over an economy the size of Bristol – big enough to underpin its encephalitic banks if push ever comes to shove?” asks a sceptical Evans-Pritchard.

So while there may appear a good case for Icelandic bonds – a currency which has depreciated recently, high rates which, if they come down, spell a nice capital gain – we urge caution.

The Icelandic krona is very volatile, so any gains could by wiped out by currency fluctuations. And we prefer our investments to be underpinned by strong economic fundamentals, something sorely lacking from this story. Of course, you could make a fortune in Iceland… but you could say the same about playing roulette.

From Ben Traynor of Fleet Street Daily