There was a house – a shack, really – that appraised for $132,000 and got a mortgage of $103,000. The owner hadn’t worked in 13 years. Upon foreclosure, a neighbor bought the house and paid $18,000 just to tear the thing down.

America, it seems, just went crazy – borrowers, lenders, nearly everybody. These anecdotes and others are told in a new book titled More Mortgage Meltdown by money managers Whitney Tilson and Glenn Tongue.

But what caused the mania and how we got there is less to the point than what happens from here. Even so, the stories are amazing…

“If the problems in the mortgage market were limited to subprime loans, then the carnage would be mostly behind us,” the authors note. Subprime loans were the riskiest mortgage loans. Prime loans. By contrast, were made to borrowers who made a substantial down payment and had good credit history.

The subprime borrowers were the fuirst to fail…but they certainly will not be the last. The nearby chart, which appeared in the May 22, 2009 edition of the Rude Awakening, shows the other mortgage markets, most of which are only now beginning to show signs of distrress.

The first thing to jump out at you is that subprime is only about a $1.5 trillion market – not anywhere near the biggest of the risky loan categories. There are other layers here.

Subprime is only one slice of low-grade bologna. It sits at the bottom. Alt-A is the next riskiest slice of mortgages above subprime. Alt-A are mortgages to people who are better credit risks than subprime, but still not prime. Documentation is still spotty as far as verifying income, and loan-to-value ratios are high. Plus, about a quarter of these mortgages went to non-owner-occupied homes – which were subject to even greater speculation.

The scary thing is that this mortgage market is 150% bigger than subprime. Unlike subprime, Alt-A loans typically have five-year resets – meaning, the interest rates adjust to higher rates. The Alt-A reset surge doesn’t really get started until 2010! It continues through 2012.

You’ll also see something called “option ARMs” on that chart. Even though the option Arm market is much smaller than the subprime market, it is also much riskier. An “option ARM” is a loan that allows the borrower to pay less than the total amount due from month to month. Whatever amount the borrower does not pay is added to the total loan amount…up to a pre-determined limit.

Obviously, loans like these are very easy to satisfy initially, but can become difficult or impossible if the borrower has been making token payments for a long time. What’s worse, these loans usually offered ultra-low teaser rates at inception, then re-set to higher fixed rates later on. The reset surge for these loans only starts in 2010.

You’ll also see something called “jumbo prime.” These are big loans – on average about $750,000. These were common in the most inflated bubble states, such as California and Florida, and were often made to poor credit risks. This is a market of $1-1.5 trillion – about as big as subprime.

Then there are home equity lines, which you’ll see just below jumbo prime. In calendar 2007, Tilson and Tongue explain, home equity lines funded “30% of new car purchases in California and 20% in Florida.” These loans are second loans, behind all the garbage I mentioned above. That means that many home equity loans will be a total loss for the lenders, as housing prices have collapsed and can’t even support the junk loans in first position, much less junior liens like home equity lines.

I won’t go into all of these loan categories, but I think you get the picture. All together, these “other” loan categories total more than $5 trillion – or more than three times sub-prime. Even worse, issuance peaked during the peak bubble years of 2005, 2006 and 2007.

Moreover, the pattern for all of these loans was the same. You see rapid growth in the bubble years, roughly from 2000-2007.

Through March of 2009, banks had taken only $1.1 trillion in write-downs to date. Even the most conservative estimates put total credit losses at $2.2 trillion. Tilson and Tongue make a convincing case that the losses will be far worse than that – more like $3.8 trillion. And these numbers seem only to grow over time. I remember sitting at a Grant’s conference over a year ago when John Paulson, the fund manager who saw all this coming and profited mightily, tossed out $1 trillion as the number for total losses. That number induced gasps at the time.

So I think Tilson and Tongue will be closer to the mark. It may well be even more than that when it is all said and done. The fallout from all of this is that the banks will have to raise a lot more capital. They’ve raised only $1 trillion so far – yes, “only.” Given the high leverage in the banking sector, they may yet need to raise at least another $1 trillion. I don’t see how that is possible in today’s market. Where is the money going to come from?

The margin for error is extremely small.

As banks’ assets got riskier – with subprime, Alt-A and all the rest – the banks actually borrowed more to hold these assets. The typical bank has only 4 cents of tangible equity for every dollar of assets. That means a 4% drop in asset value wipes out the equity – making the bank insolvent. The banking system is vastly undercapitalized. Throughout the 1990s, banks operated on leverage of about 16-to-1. Today, they operate on 25-to-one leverage…or higher!

And this, then, answers the great fundamental question that seems to baffle so many market commentators. Why aren’t the banks lending? People point to the trillions of dollars the government pumped into the economy, including on bank balance sheets.

The answer is that the bankers know they will need the money to cover losses from their toxic loan portfolios. The banks are clearly not lending. Banks are cutting lines of credit to consumers – and to businesses, too. New loans in various business categories are down 60-80% from where they were a year ago.

It is hard to imagine any economic recovery when the banking system has such gaping funding holes it needs to fill. As it is, banks are failing and the losses are severe – on average, the losses amount to more than 40% of assets. The data coming in on foreclosure recoveries are bleak. In California, recovery is often less than 35 cents on the dollar., which means a loss of 65 cents on the dollar. It’s not supposed to happen like this. If this crisis is anything like previous cycles, we’ve got a long way to go on bank failures.

How do we invest in this environment? For starters, continue to avoid banks and leveraged financial institutions in general. And don’t expect the banks to start lending so freely again anytime soon. That means you should also avoid businesses that depend on regular access to credit to grow – such as real estate investment trusts. I would also say that the housing market is not due for any recovery anytime soon. There is still enormous inventory to work through. So homebuilding stocks and related investments also face stiff head winds.

At the right price, I might buy almost anything else. But investing is hard enough without also taking on problems as big as the ones I’ve outlined here. There are plenty of other great places to fish. Continue to avoid the financials.

Source: The Ghost of Housing Past

The most amazing part is that they’ve never had even one customer default on a loan. And that’s thousands of customers over a 20-year period. How can this possibly be true?

A number of reasons…

This bank strictly adheres to one of the most basic principles of solid banking, and one we can all understand: Know your customers well, and only lend money to people you know can afford to pay you back. Sound like a bank you’d like to do business with? It gets even better – the banker goes to the customers, meeting with them right in their homes.

These customers are a dream-come-true for a bank-lending officer: They live well within their means, save a lot, and don’t have credit cards.

If you’re scratching your head about where this bank does business, I’ll give you a hint: It isn’t overseas or in a foreign country. It’s right here in the United States, and there’s a way for you to benefit from these dream customers.

Unique Loans, Unique Customer Loyalty

If you’re from Pennsylvania, you’ve probably guessed by now I’m talking about the Amish. And in the Old Order Amish Community of Lancaster County, the banking system is working just fine.

Hometowne Heritage Bank, a division of National Penn Bank (Nasdaq: NPBC), has offices in the heart of Amish country, and is the biggest lender to the Amish. Even the drive-up lanes have a special lane for horse-drawn buggies only. More on Hometowne in a minute, but here’s a brief history of the Amish for those of you not familiar with them.

The Amish, members of a Christian denomination called Anabaptist, first came to this country in the early 18th century to avoid persecution in their native Switzerland. They refer to themselves as “plain folk.” They’re best known for simple living, plain dress and for shunning modern conveniences, such as automobiles, tractors and electricity.

They are a hardworking people, leading mostly simple farming lives. As of 2008, they number around 227,000 mostly in the United States and Canada. Strict-order Amish seek to limit contact with the outside world. And they’re low maintenance: They never buy insurance and don’t accept any government assistance, such as Social Security or Medicare.

For daily living expenses – including buying the horse-drawn carriages they typically use for transportation – they pay by cash or check. They would never think of buying things like shoes, clothing or food on credit.

The only time they vary from the no credit rule is when they’re buying a farmstead. The problem is that there aren’t any Amish bankers, or Amish-owned banks, so they have to deal with local banks run by “English.”

According to National Public Radio’s David Gilkey, the one that stands out above the rest is Hometowne’s Bill O’Brien. Ninety-five percent of his customers are Amish, and he racks up nearly 1,000 miles a week visiting them.

Bill oversees about $100 million in loans, and he’s used to no credit score, no driver’s license customers who contact him about buying a farm. According to Bill, “I’ll find out who his dad is, and I’m also interested in who his father-in-law is. It takes a team to make a farm go. We’ve never lost any money on an Amish deal.”

Once an Amish man becomes a customer, Bill doesn’t worry about them missing a payment. The Amish feel that missing a payment brings shame… not just on the borrower and his family, but on the entire Amish community.

And unlike a lot of mortgages that are sold or securitized, Amish loans have to remain with the originating bank. An odd quirk in banking law states that mortgages on homes without electricity or commercial insurance can’t be securitized or sold.

As a result, Hometowne services all its loans and the system is obviously working: The company just wrapped up its best year ever. Hometowne’s parent, National Penn Bank, is doing just fine, too.

Its third-quarter income rose 14% over last year, and the company raised its cash dividend for the thirty-first consecutive year. In early 2008, it acquired two smaller regional banks and is now one of the largest regional banking operations in eastern Pennsylvania, with 127 offices available to serve its customers.

In this tumultuous year that’s seen nearly 30 banks fail and may others taken over and sold by the Fed, it’s refreshing to find a place where someone actually knows how to run one. And even more refreshing, happy customers who know how to live within their means.

Source: A Rare Bank Without Defaults

Good day… And a Marvelous Monday to you! And welcome to June! Hey! June is busting out all over, all over the meadow and the field… Buds are busting out of bushes and the rompin’ river pushes every little wheel that wheels beside the mill! (And you thought I was just a rocker!) We are having network problems this morning, as some heavy storms ripped through St. Louis on Saturday night. So, the Techie people need to come in and get stuff re-booted, etc. This may go out late… And it may not… At this point, I at least have my laptop working!

Well… Friday saw little movement in the currencies… As I signed off I had told you that maybe someone had said “enough” with the euro (EUR) selling… As the day went on, it certainly looked like that had happened, given the euro’s rise to 1.5550, after looking up to 1.55 early in the morning.

There’s been a return to risk aversion overnight, as some news from the United Kingdom has reignited the fears that the banks may still be sitting on a ton of bad debt… Of course, as Pfennig readers, you already know this, as I’ve told you over and over again there are many more “risk events” for the markets to digest.

Here’s the skinny on the U.K. news… The United Kingdom’s largest lender of buy-to-let mortgages, Bradford & Bingley, came forward to reveal that they had booked a pre-tax net loss of 8 million pounds (after accounting for reductions in the value of its structured investment assets. They also announced that they were going to restructure, and that TPG, Inc. would invest about 179 million pounds.

Well… There you have it… More melting of the U.K. mortgage meltdown… But, hear me now and listen to me later, this isn’t isolated to the United Kingdom.

This is a Big Central Bank meeting week around the world, with the Reserve Bank of Australia (RBA) meeting Tuesday, the Reserve Bank of New Zealand (RBNZ) meeting Wednesday, the Bank of England (BOE) and European Central Bank (ECB) meeting on Thursday. I don’t expect any of these to move rates one way or another at this time. There’s a tiny light shining on the RBA to raise rates, but I think that will come at a later date.

As always, with an unchanged rate environment, the press conference following the meetings will be the more important of the events. I expect the RBA, and ECB to remain hawkish with their intentions to fight inflation, while the BOE and RBNZ are grasping at straws.

The ECB has to deal with the fastest inflation in its 10-year history… That’s not a good thing folks… Not for a Central Bank, whose mandate is to provide price stability. The economy may be cooling, which I’ll talk about in a minute, but inflation is rising – which means rates remain at current levels, or may even go higher as the summer days get hotter.

With the return to risk aversion overnight, the Japanese yen (JPY) has rebounded along with Swiss francs (CHF). It will be interesting to see if the risk aversion can set its teeth into all the “euphoria” surrounding the U.S. markets these days.

The Eurozone economy seems to be slowing down, which shouldn’t come as a surprise. I’ve said all along to expect a slowing of the economy… But not a complete shut-down/recession, and this “slowing” might just be what’s weighing on the euro these days. There’s an important thing to remember about the euro… It’s the “offset” currency to the dollar. So… Look at the two currencies… The dollar, with all the awful fundamentals, a recession, low yields, a war, etc. and then the euro, with a slowing economy… Eventually, the markets will return to the underlying trend.

But first, we might have to endure some euro weakness. But, remember, the dollar has all the bad fundamentals… Sort of like a gauntlet to get through… And while it’s getting beaten, the offset currency is likely to be in favor.

OK… A reader sent me a note about the one-year auction of Treasury Bills, and said, “This is scary isn’t it?” OK… Here’s the skinny on that… You see U.S. Treasury Secretary Paulson is feeling like he’s been “through the desert on a horse with no name” these days. The Treasury is going to issue one-year T-Bills tomorrow for the first time since 2001. With the expanding budget deficit, they have no other choice. The cheese that binds here is the fact that Paulson is indicating that the Fed Reserve, who in the past, had been a regular purchaser of the debt, may not be willing to do so… You see, the Fed is focusing on taking on all that bad debt from mortgage lenders… (Can you say, “The Fed’s focus is all screwed up?”… I knew you could!)

Want some proof that our deficit situation has become completely out of control… How about this little ditty… In the first five months of 2008, the Treasury sold $1.4 trillion of bills, an increase of 36% from the same period last year. Oh, but don’t let that get in the dollar bulls’ way of buying dollars! Deficits don’t matter, right? HOGWASH! You and I know that! But these guys running the country don’t believe it… And that’s a real shame, or sham… Pick one, either one applies!

OK… I have to spend a minute talking about the announced investigation of the CFTC (Commodities Futures). A lot of people believe the investigation will reveal some bad stuff being done to push up the price of oil… Now, I’m not going to sit here and pretend to believe there’s nothing to that… But come on! If the authorities really thought they were going to find something noteworthy, do you think they would announce to the public they were going to investigate? Wouldn’t you want to sneak around and zip the lips until you had the thieves?

I think that this has more “calm the nerves of the public” to it, than it has “to catch a thief”. I mean, come one, we don’t build refineries; we don’t drill where we KNOW there is oil; we haven’t done a darn thing about alternative fuel, despite knowing that we’ve needed to do something since 1973; and we drive gas guzzling cars… But wouldn’t it be better to “blame” someone else for the fact that gas is $4 a gallon? Let’s go after the commodities guys… There’s got to be something there!

It’s supply and demand folks… We have two large countries with billions of people that now demand oil that never really had a demand before… China and India… Take that supply and demand, and mix in a falling dollar, and you have high oil prices.

OK… Today, the data cupboard will show us the color of the ISM Manufacturing Index. You may recall this index has been holding out below the line in the sand of 50, which indicates contraction or expansion, for the past four months. The experts believe the index will have inched up to 48.5 in May – still below 50 – and that should weigh on the dollar a bit today.

We’ll have some other minor reports as the week goes on, leading into the Friday Jobs Jamboree… But I’ll talk more about the Jobs Jamboree as we get nearer to Friday.

The Aussie dollar (AUD), which has been the belle of the ball lately, showed some pimples this morning, after a report showed that retail sales in Australia had unexpectedly declined. I wouldn’t let my shorts get all bunched up over this. As I always say… One swallow does not make a summer… And this is the first “soft” economic report we’ve seen from the land down under. I don’t think we’ll see the RBA back off the rate hikes either!

Currencies today 6/2/08: A$ .9555, kiwi .7850, C$ 1.0045, euro 1.5550, sterling 1.9625, Swiss .96, ISK 75, rand 7.7175, krone 5.12, SEK 6.0175, forint 155.33, zloty 2.1750, koruna 16.15, yen 104.90, baht 32.58, sing 1.3630, HKD 7.8040, INR 42.35, China 6.9325, pesos 10.33, BRL 1.6240, dollar index 72.97, Oil $125.81, Silver $16.86, and Gold… $892.10

That’s it for today… My long time friend and colleague, Chris Gaffney, traveled to San Diego with his lovely family this past weekend to run in a marathon there. I marvel at his determination to do these marathons. Yesterday was darling daughter Dawn’s husband, Jerry’s birthday. We all celebrated at little buddy Alex’s baseball game! Alex just finished four games in five days… That’s crazy! Congratulations to Alex, as he just finished 6th grade! School’s out for Summer! School’s out for ever! OK, enough Alice Cooper for a Monday morning! Kristin’s back from Cancun today! It will be interesting to get her take of the conference! OK… Enough! Time to go! I hope you have a Marvelous Monday!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Reigniting Fears

Nor is it much of a surprise: Since the subprime crisis broke last year, we’ve repeatedly predicted the fallout would spread to such other markets as credit cards and even auto loans.

Citigroup Inc. (C), the third largest lender to Visa Inc. (V) and MasterCard Inc. (MA), said that the states hit hardest by the subprime fiasco – Arizona, California, Florida, Illinois and Michigan – experienced mushrooming levels of credit card delinquencies and defaults in the fourth quarter. In fact, those states accounted for two-thirds of the nation’s total credit card losses.

Evidence suggests that as adjustable rate mortgages (ARMs) reset to higher interest rates, consumers in these regions – and across the country – are relying more on their credit cards to finance such day-to-day living expenses as groceries and gasoline.

That’s not good.

If you don’t believe us, just ask the U.S. Federal Reserve. On the news that credit-card debt rose by $5.5 billion, or 7.1%, in January to $947.4 billion – dwarfing the 2.9% gain in December – the central bank announced that it’s conducting a formal review of the industry so that it can “better assess the current state of the credit card market.”

Like the subprime mess, as lending standards loosened on the heels of the 2001 mini-recession, consumer credit was extended beyond its viable limits. Credit-card issuers teased would-be clients – with marginal credit histories – with bargain-basement introductory interest rates, only to sock them with a much higher rate a few months later.

And now that the higher rates have kicked-in – and on nice, fat balances, too – people are struggling to keep up with their bills under the strain of an economic downturn.
Analysts widely expect the situation will get worse before it gets better. And they’re likely right. But this credit-card fiasco probably won’t have the cataclysmic, far-reaching effects that defined the subprime debacle. As a result, there are opportunities to profit.

Maxing Out on Credit

The credit crunch was, of course, sparked by high levels of defaults on subprime mortgages extended to people with shaky credit histories. And because banks pool mortgages together and sell them as investment vehicles – called mortgage-backed securities (MBS) – investors were left holding worthless paper (and massive losses) when the mortgages went belly up.

Consequently, the credit markets dried up as financial institutions – reluctant to take on any more mortgage-backed securities – became leery of lending to one another.

The carnage is already well documented, highlighted by the fall of the venerable Wall Street giant The Bear Stearns Cos. Inc. (BSC). Banks already have been forced to write off billions in losses. Now they’re scrambling to bulk up their cash reserves to protect against credit card-related losses.

As of December, Americans had $944 billion in total revolving debt, most of it on credit cards, an annualized increase of 2.7% on a seasonally adjusted basis, The Wall Street Journal reported. That rate was 13.7% in November and 11.1% in October.

The bottom line: Americans have dramatically curtailed their credit card spending.

Now you could blame the consumers’ reluctance to pull out the plastic on the slowdown of the U.S. economy, and you’d be right. But just partly. The other, more ominous reason is the likelihood that many consumers are simply maxed-out on credit.

In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default altogether, according to research by the RiskMetrics Group.

The slowdown in consumer credit could well run through the rest of the year. But let’s not go and sound the alarm bells just yet. Although the lower numbers will have some effect on the bottom lines of both regional banks and Wall Street behemoths, like Citigroup and Bank of America Corp. (BAC), shares have already been pummeled and investor sentiment has likely bottomed out.

What’s more, a key difference exists between mortgage debt and credit card debt that will, in effect, cap the amount of damage credit card defaults can do.

Subprime All Over Again? Not Likely

According to the Fed, credit-card delinquency rates are now up by more than a full percentage point since bottoming out in the fourth quarter of 2005, marking the abrupt slowdown in consumers’ credit-card spending habits.

But the silver lining is that credit card debt is not securitized – pooled – and then sold off by banks as investment securities on any kind of scale that rivals mortgages. And that fact undermines any notion that banks may have subprime-like write-downs in their futures.

Remember, it wasn’t just the loose lending of mortgages by banks that got us into the subprime mess. It was every bit as much the over-speculation on mortgage-related investment securities, too. The latter can’t happen with credit card debt.

In a note to clients, CIBC World Markets Inc. (CM) Economist Meny Grauman wrote that “the good news in all of this is that both corporate and consumer loans are typically not securitized to anywhere near the degree that mortgages are. This means that even though losses on these assets still have the potential to weigh on financial sector earnings, they will not create the same broad systematic risks created by recent troubles in the asset-backed securities market.”

What’s more, a recent report published by the Federal Deposit Insurance Corp. (FDIC) said that 99% of insured institutions were currently well-capitalized at the end of 2007 and close to 90% of those were also profitable, despite the fact that profits at banks ­- thanks to the subprime meltdown – fell to 16-year lows in the fourth quarter last year.

Taking it to the Banks

The recent data from the FDIC clearly demonstrates how well capitalized U.S. banks are and indicates these financial institutions should be able to ride out any approaching storm. Accordingly, we’re reiterating our bullish view on the financial sector.

In an interview with MarketWatch, Andrew Gray, a representative for the FDIC, said that with only 76 banks on the FDIC’s “watch list,” problem banks are at historically low levels, despite the chaos of the last several months.

“Our problem bank list has 76 institutions, low by historical standards,” Gray said. “In 1990, there were close to 1,500 on the list.”

Five banks have failed in the last 12 months: Metropolitan Savings in Pittsburgh; Douglass National Bank in Kansas City, Mo., Miami Valley Bank in Lakeview, Ohio; NetBank in Alpharetta, Ga.; and Hume Bank in Hume, Mo. That’s a low number when you consider that over 800 banks failed during the savings-and-loan (S&L) crisis that occurred between 1990 and 1992.

“The industry as a whole is coming off a golden period of record profits,” FDIC Chairwoman Sheila C. Bair said in the agency’s Quarterly Banking Profile. “Because of this financial strength, the overwhelming majority of banks and thrifts remain well-capitalized and profitable.”

Consequently, many of the big banks are great plays at the current valuations. But rather than locking in on one target, it makes more sense – considering the prevailing market jitters – to buy shares of the Financial Select Sector SPDR (XLF). In this one ETF, you get exposure to the entire financial sector, which protects your investment against the potential for any blow-ups at individual financial institutions.

But if you insist on trying to “catch lightning in a bottle” with a single pick from the group, Goldman Sachs Group Inc. (GS) is a stellar option. Goldman is well run, well capitalized and is very liquid. The company’s return on equity (ROE) in the fourth quarter remained a stout 40%. And in a recent report to analysts, the firm said that its pool of liquidity was $80 billion, compared with an average of $60 billion during the fourth quarter. And one cannot underestimate the value of cash when investing during such an unnerving time.

After all, as the old Wall Street adage holds: “Cash is king.”

[Editor’s Note: Robert Williams, a veteran commodities trader, is the Editorial Director for The Oxford Club, and is a regular contributor to Money Morning. He last wrote about alternative energy investments. For information on an Oxford membership, please click here.]

Good day… And a Tub Thumpin’ Thursday to you! Well… You heard it! Big Ben says that everything is going to be all right! Man, do I feel better about that! Just when I was getting all nervous and out of whack because of the debt situation, the jobs situation, the war situation, the credit situation, the housing situation, and the awful state of financial institutions… Whew! Everybody back in the pool! Big Ben says the water is fine!

Whoa! (In my best John Wayne) Now, just wait a minute there partner… Haven’t we heard these words of euphoria before from Big Ben? Hmmm… Seems to me that last July, he told us that the mortgage meltdown wouldn’t filter out into the rest of the economy… And then he followed that gem up with the August all clear sign that the housing meltdown had bottomed… Now… He expects us to believe him that the economy will be strong again in the second half of this year?

Hmmmm… OK… Before I go on, I had better tell you what happened so you can catch up… I just realized I immediately went into level 4 on Big Ben…

OK, so, yesterday, Big Ben was talking to Congress about the economy… He admitted that the economy would contract (notice the mass media didn’t pick up that ditty) He also said that the there are “downside risks”…  But then he put lipstick on the pig by quickly switching to statements about how the economy would be strong in the second half of this year… Well… You know my old saying folks… You can dress up the pig… You can put lipstick on the pig… But in the end… You still have a PIG!

I want to know and I can’t understand why the lawmakers don’t ask him this stuff… But I want to know where this growth that he’s spouting off about is going to come from? Or, how about this one, triple B… Why don’t you SHARE with us what you feel the downsides risks are? Nah… You wouldn’t want to do that, because it would expose the awful job you and your Fed Heads have done! I feel like Ricky Ricardo… Hey Lucy, you got some ‘xplainin’ to do!

I could go on… But I’ve had it with this guy! He has begun to give me the same kind of rashes Big Al Greenspan gave me!

So… The currencies gyrated all over the place yesterday… First rallying on the Triple B words of a contracting economy, but then seeing the dollar rally on the “recovery” words. At the end of the day, the euro was back to rally mode, moving close to the 1.57 handle once again. Then came a report on Reuters that the Eurozone was going to voice concern at the euro’s gains at the next G-7… That sent the euro back down…

This morning… The euro saw further selling when Eurozone Retail Sales unexpectedly declined in February, thus signaling to the markets that the U.S. recession is spreading to Europe… That news was followed by a German bank announcing a $6.7 Billion write down… So… The euro has taken on some water from the weakening of the economy… But, Hey! We all knew the U.S. recession would spread to other parts of the world… What I kept thinking though was that it would not be as devastating to other parts of the world, especially the Eurozone, as it had in the past…

I know, I know, I dislike the saying, “but this time will be different”… That saying costs people trillions of dollars a few years ago… But my point here is that on of the reasons the Eurozone was created was to buffer the countries from suffering U.S. slowdowns… 80% of all Eurozone trade is among themselves… And lets face it, the exports of BMW’s, Mercedes, and other high end cars shouldn’t see that much of a shift… Rich people don’t suffer recessions!

So… We have the euro trading in the mid 1.55 handle… IT’S NOT A TREND REVERSAL! I said this the other day, but it’s worth repeating… We’ve seen these “flash in the pan” dollar rallies several times over the past 6 years of the weak dollar trend… Nothing, fundamentally, has changed… So, why would the dollar reverse the trend?

OK… Another note on Iceland this morning… Yesterday, there was an OP-ED in the Wall Street Journal titled: Iceland Isn’t Melting… Here’s a snippet…

“But fears of a meltdown in my sub arctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that’s an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity.”

That’s all nice… But it was written by an insider… A board member of the Central Bank of Iceland… I detect a note of “homerism”… But… Soothing words nonetheless, eh?

George Soros, a guy that I personally wouldn’t have over for dinner, called the current financial crisis: “the worst since the Great Depression”… He also noted that the “markets will fall more this year after a brief rebound.”

Well… I may not like the guy, but I agree with him on the second statement… Seems the markets are getting all pumped up on the Kool-Aid Big Ben is serving up… But these are just words folks… We’ll see who’s right and who’s wrong on this… His track record isn’t so good!

The Carry Trade is back on the books after spending the month of March getting unwound… This is good news for Aussie, and kiwi… And should be good news for South Africa and Iceland… But, I think the “once bitten twice shy” campers have had enough of the volatility of these two currencies and are sticking to Aussie and kiwi… So… Aussie and kiwi rallied yesterday, bucking the sell off of euro (EUR), yen (JPY), francs (CHF), and sterling (GBP)…

Remember what they taught you in 6th grade science… A star burns brightest right before it burns out… And I think this can be applied to the Carry Trade… But, we’ll have to wait-n-see, eh?

One of my fave currencies… The Norwegian krone, has held strong during this euro weakness… And this morning, Norway reported that Retail Sales jumped 5.6% in February… Seems that the recent wage increases, the largest in 5 years, spurred consumer spending… Hmmmm…

That would work here too… EXCEPT! Wages haven’t increased in the U.S. in so long, people have forgotten what that looks like! My friend, Bill Bonner, here at The Daily Reckoning had this to say about wages yesterday…

“The part of the economy in worst shape now is the consumer. He’s the one whose salary has not gone up. He’s the one whose house is being foreclosed. And he’s the one who’s got to buy gas and food.”

Here’s another note Bill made that I believe is important to note: “Again, we see the sad evolution of the U.S. of A. since the end of the ’60s. Then, fewer than five million people received food stamps. Now, nearly six times that number are living on them…after, what was supposed to be the biggest boom the world has ever seen.”

But not to worry, Bill… Big Ben, or triple B, and I like to call him, tells us that it will be alright on the night in the second half of this year… I sure hope he’s right! That would certainly make things easier for me and my family!

Currencies today: A$ .9140, kiwi .7865, C$ .9870, euro 1.5550, sterling 1.9825, Swiss .9815, ISK 75.05, rand 7.7980, krone 5.1430, SEK 6, forint 165.40, zloty 2.2410, koruna 16.07, yen 102.70, baht 31.65, sing 1.3870, HKD 7.7910, INR 40, China 7.0175, pesos 10.58, BRL 1.7250, dollar index 72.67, Oil $103.70, Silver $17.16, and Gold… $894.60

That’s it for today… I found out yesterday that I will be doing a joint presentation with my friend Addison Wiggin, at the Agora Vancouver Investment Conference in July… Addison, by the way, has done an update of his best seller, Demise of the Dollar, and it should be available soon… I was honored to write the forward for the book! You’ll need to check that out, when available! So… If you’re interested in the Vancouver Investment Conference check it out here.

Took my little buddy to get fitted for his football gear last night… I sure wish he would get a growth spurt, these other kids are really starting to get big! But he can hold his own… He has the bulldog approach like I did, when I played… So… The Cardinals score 8 runs the night after I freeze watching them scratch out 1 run! UGH! Oh well, at least we won a game! Time to hit the “send” button, as our accountant extraordinaire, Mary Owens just walked in the door… I must be running late! Hope your Thursday is Tub Thumpin’… I get knocked down, but I get up again…

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Editor’s Note: Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .