Lower Libor Another Indicator of a Real Rally

Since the credit crisis began in August 2007, experts have agreed that there is no magic bullet solution. The general view is that world economies will eventually recover but the healing process will take time. Along those lines, here is REAL data that represents REAL steps in the right direction.

Here are two recent examples:

• Global credit markets continue to thaw as government cash injections and interest rate cuts kick in. Last Friday, the London interbank offered rate (Libor) - the interest rate banks charge each other for loans - fell the most in eight weeks to 0.85% for three-month U.S. dollar loans. Libor, which determines rates on everything from car loans to mortgages, peaked at 4.82% at the height of the financial crisis last October. Last Friday’s fall in three-month Libor was the 33rd consecutive day of declines - the longest stretch dating back to January 2008.
• Last Friday also marked the 10th consecutive day of gains for the Baltic Dry Index, which tracks ocean shipping rates for commodities. This was the longest advance in three months and the index hadn’t been that high since last October. The index is followed by economists since it can provide insight into the level of demand for raw materials in global markets.

Whether it’s banks starting to lend again, demand for raw materials picking up around the world, improved housing affordability in the US or the fact that the stock market rally since March 9th is now the largest and second-longest rally in the past 18 months, it seems step by step the pieces required for recovery are falling into place (albeit baby steps).

That said, the recovery path could still look like “one step forward, two steps back” for a while as we were reminded last week by weaker than expected April retail sales in the US and soft Q1 manufacturing sales data in Canada.

However, we can see that the LIBOR rate, the key indicator for credit movement, has decreased drastically. By all economic measures, this is a great sign for business and as such, a good sign for investors!

Comments

[Heaven, Hel...:]

Agreed but it will be even better once LIBOR and the banking sector can stand on its own w/o any gov't backstops, i.e., the training wheels must come off again.

May 20 11:57 AM

[LilBob:]

I agree with you that seeing Libor that low does bode well in terms of spurring business, but it also brings with it the possibility of significant inflation when money is that cheap. If there were some way to ensure that salaries would keep pace with inflation I'd be all for it, but as high unemployment right now virtually guarantees that won't happen a rate this low actually concerns me. Then again, a rate that low also reduces the real cost of an employees-provided banks offer competitive pricing; if you are able to borrow the money to help you cover payrolls more cheaply then you are effectively receiving a discount on your employment costs. Hopefully this low rate contributes to reduced unemployment over the course of the next few months.

The increase in raw materials shipments is something that's been expected for some time now. Orders to retail jobbers are up too as stores try to restock after cutting inventories to the bone this past spring.

Retail will continue to be weak for some time. Lately I've been doing my own personal, informal observations of retail environments. Second hand goods dealers such as Salvation Army and Thrifty Shopper are seeing a lot of heavy traffic lately-indicating Americans are still shoppers they just don't want to pay full retail for cheap plastic crap that's made overseas. I've also been noticing a lot of "Buy American," sentiment right now so I wouldn't be surprised if consumers are purchasing a higher percentage of American made goods and shunning Mexican and Chinese imports.

May 20 12:07 PM

[conceptwizard:]

The banks might be lendng to one another but their not lending to anyone else. No money for mergers, exploration, their cutting back on credit lines and unused credit cards. Companies are finding it hard to flip debt still and find new money. They are getting ready for massive defaults.

May 20 12:18 PM

[The Geoffster:]

I think Libor is just telling us the central banks have unfrozen the credit markets and the worst of the crisis is behind us.

May 20 03:53 PM

[whidbey:]

Your excitement is misplaced.

Libor is just settled in a market where the transactions level is low, and not going anywhere soon. We must not confused a new low level equilibrium with a recovery; it is desperation to lend in a market flooded with liquidity.

May 20 05:01 PM