Best of the Week
Most Popular
1.China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015? - Nadeem_Walayat
2.Gold Price Awaiting Outcome of Greece Crisis - Clive_Maund
3.Gold Price Peculiar 6 Month Cycles - Rambus_Chartology
4.Gold Price Just a Little Bit More - Bob_Loukas
5.8 Unprecedented Extremes Indicate a Stock Market Bubble in Trouble - EWI
6.Gold And Silver – Without Either, You Will Be Greeced - Michael_Noonan
7.Lies, Damned Lies and Statistics - James_Quinn
8.China Crash, Greece Crisis Harbingers of Stocks Bear Market? Video - Nadeem_Walayat
9.Gold and Silver Record Shorting - Zeal_LLC
10.Markets Big Deflationary Downwave Quick Reference Guide... - Clive_Maund
Last 5 days
Will Crude Oil Price Decline Continue? -Video - 28th July 15
Gold & Silver Money Has Devolved Into Debt and Plastic - 28th July 15
Buy and "Own Gold Krugerrands" Says Money Expert Jim Grant, Very Bullish on Gold - 28th July 15
How to Protect Yourself from China's Crashing Stock Market - 28th July 15
Quantum Geopolitics - 28th July 15
Gold Mining Stocks to Weather the Storm - 28th July 15
Stock Market Bulls Beware! - 28th July 15
Will Chinese Stock Market Crash Affect the US? - 27th July 15
Crude Oil Price Under $48! - 27th July 15
Are We Seeing a Trend Reversal with U.S. Interest Rates? - 27th July 15
How to Know When the Gold Bear Market is Over - 27th July 15
Gold Bear Market Phase III - 27th July 15
Silver Bull Hammer Buy Signal - 27th July 15
Gold Cracks Support and Plunges to New Lows - How Low Will Price Go? - 27th July 15
Commodity Markets Breakdown Of 2015 Is Now A Fact - 26th July 15
Gold Price at a Five-Year Low: Here’s What to Do - 26th July 15
Stock Market Primary III Inflection Point - 26th July 15
Central Banks and Our Dysfunctional Gold Markets - 25th July 15
Gold And Silver - The US Dollar Does Not Exist, Part II - 25th July 15
How Wall Street Put Apple Stock in Animal House - 25th July 15
How to Trade Markets Using the Stochastic Oscillator - Video - 24th July 15
A Bond Market Crisis Is Coming... Here's What to Do - 24th July 15
Why There's Resistance to the Iran Nuclear Deal - 24th July 15
Absurd Gold Stock Levels - 24th July 15
Gold Mining Stocks Nearing Rebound - 24th July 15
Misperceptions Create Significant Bond Market Value - 24th July 15
Commodities Distressed Investing - 24th July 15
OPEC Shorts Are Driving Down the Crude Oil Price - 24th July 15
USD Index Rebounds - 24th July 15
If You’re Worried About a Tech Bubble, You’re Focusing on the Wrong Thing - 24th July 15
Gold Stocks Bear Market Bottom Buying Opportunity? - Video
The Stealth War on the United States - 23rd July 15
Commodity Prices, Gold and Silver Stocks Next Leg Down - 23rd July 15
The ‘Real’ Reason the Fed Wants to Raise Interest Rates - 23rd July 15
Crude Oil Price Slump is a Once in a Decade Opportunity to Make Money, Guaranteed - 23rd July 15
Gold Price Hits a 5-Year Low: How to Time the Next MAJOR Bottom - 22nd July 15
Silver and the Deflation Thesis - 22nd July 15
Gold Price Crash - Trend Forecast 2015, Gold Stocks Buying Opportunity? - 22nd July 15
The Three Reasons Behind Iran’s Resistance to the Nuclear Deal - 22nd July 15
Winning the Hunger Games - How to Choose Successful Agriculture Investments - 22nd July 15
Are Free Markets The Solution? - 22nd July 15
Gold Hammered “Unprecedented Attack” - 21st July 15
The Turkish Enigma - 21st July 15
Gold and Silver: The Final Capitulation Commences - 21st July 15
Greater Israel Setback from Iranian Nuclear Agreement - 21st July 15
U.S. Housing Market: Is the Roof About to Cave In (Again)? - 21st July 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stock Market Bubble in Trouble

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

Biggest Debt Bomb in History