Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Impending Stock Market Top - Trend Forecast Summer 2015 - 26th Apr 15
Desperate Stock Market Bubble Thinking Takes Hold on Wall Street - 26th Apr 15
Stock Market Back into The Bear Suits - 26th Apr 15
One Stock Market Where You Haven't Missed the Bull Market Boom Yet - 26th Apr 15
Migrant Crisis - Europe Has Completely Lost It - 26th Apr 15
What Obama's First-Ever Energy Review Missed - 26th Apr 15
Sheffield Hallam Election Battle 2015, School Places Crisis, Can Nick Clegg Win? - 26th Apr 15
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

Credit Crisis Warning Signs Surging to Market Panic Levels Again

Stock-Markets / Credit Crisis 2010 May 28, 2010 - 08:19 AM GMT

By: Mike_Larson

Stock-Markets

Best Financial Markets Analysis ArticleHeads up people. Something very big is happening in the global credit markets — something you darn well better pay attention to.

The very same “Credit Crisis” indicators that were flashing red before the stock market meltdown of 2007-2008 — the ones Martin and I used to get our subscribers out of almost all stocks, and “short” the market via inverse ETFs — are flashing red again.


Pay attention and you might save your portfolio. Ignore them and you could get slaughtered.

What the heck is happening? Why is the market in so much peril? Because governments worldwide did exactly what we warned them not to do!

By bailing out, backstopping, and propping up countless lousy institutions and assets during the private credit crisis … rather than allowing a quicker, more painful, but ultimately cleansing collapse … they turned a Wall Street debt crisis into a sovereign debt crisis.

They temporarily postponed the day of reckoning, while failing to solve the underlying problems.

They tried to paper over a private credit crisis brought on by too much bad debt by creating a huge new pile of public sovereign debt.

And now, the markets have had enough. They’re rebelling around the world.

Here Are the Warning Signs — Please Heed Them!

Where’s the evidence of this? All around me …

Swap spreads blowing out as credit rish rises!

First, look at this chart of the two-year swap spread.

This is the cost to swap fixed-rate payments for payments based on floating rates in the derivatives market. It’s expressed as a spread, in basis points, over yields on underlying Treasuries.

I know it sounds complicated. But you can think of this as a crisis indicator that rises when banks are more leery of doing business with each other. They charge higher premiums at times when they’re worried about counterparty credit quality and extreme volatility.

You can see the spread was a paltry 9.6 basis points in March. It has since EXPLODED to as much as 64 basis points — almost a seven-fold increase. That’s also a 13-month high!

Second, check out LIBOR, the London Interbank Offered Rate. LIBOR is the rate banks charge each other to borrow money for short periods of time.

Swap spreads blowing out as credit rish rises!

When credit markets are functioning normally, short-term LIBOR tends to move in lock step with the federal funds rate. But when they start going haywire, LIBOR costs rise as banks price in the risk that the guys they’re lending to won’t be able to pay them back.

Lo and behold, as you can see in the chart to the left of 3-month, dollar-based LIBOR, those borrowing costs are rising sharply. That rate has more than doubled to 54 basis points from 25 points in December.

That’s still low on an absolute basis. But it’s the highest level in almost a year — and it’s coming at a time when both the Federal Reserve and the European Central Bank wouldn’t choose to raise interest rates on their own.

Third, there’s the credit default swap market. That’s where financial players buy and sell insurance against credit risk. When times are good, insurance is cheap. When the credit markets go nuts, the cost goes up … and right now, it’s surging!

An investor would have to spend about $131,000 per year now to insure a benchmark portfolio of $10 million of investment grade corporate bonds against default. That’s up dramatically from $76,000 in January.

What You Need to Consider Doing …

My paying subscribers have already received actionable recommendations designed to protect themselves — and profit — from the chaos in the markets. Naturally I can’t share the same advice here (Though you can join Safe Money Report and get that kind of valuable information for only 24 cents a day. Just click here.).

I will say this, however: We’re already seeing the stock market begin to crack. But the declines so far could be just a walk in the park compared to what lies ahead.

Or in plain English, we’ve had a “bought and paid for” stock market and economic recovery since March 2009. It was financed almost entirely by massive government borrowing and spending. That was designed to paper over the underlying causes of the credit crisis rather than confront them head on.

Now the markets are taking away the credit card for sovereign nations around the world, which could kneecap the recovery.

So if you haven’t already prepared yourself for that possibility by paring back your stock, corporate bond and junk bond exposure, do it now. Yes, now.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014