Why You Should Keep an Eye on the Credit Markets

Despite what you may hear in the media, the equity markets are the sideshow. It is the credit markets that hold center stage.

The table and chart below show the yields on various instruments and the TED spread (3 month LIBOR versus 3 month US Treasury). When (not if) yields begin to rise in US Treasuries and decline elsewhere (specifically LIBOR), then an unfreezing of the credit markets will signal the beginning of the end of the credit panic.

While being mindful of the real economy and the risks of a deep recession, right now it is the credit markets where the focus needs to be placed.

sources: Yahoo! Finance, Bloomberg.com

Comments

[MarvinMBA:]

Sooner or later the markets will loosen...its going to happen because if the Fed keeps pumping some has to fall into the hands of the consumer sooner or later...water does trickle down...MarvinMBA

2008 Oct 07 01:10 PM

[Socialism c...:]

Humbug!!! Credit markets are dying for good reason -- we never should have taken on so much credit. Neither consumers, nor business. We will all be better off after learning to live *without* credit. And that is the MAJOR mistake of the bailout plan: yes it's also a travesty that we are putting it on the backs of the taxpayer...but the main flaw is its core goal: to grease and reprime the credit markets. Why does it make sense to play the shell game and resituate banks for more lending, when it is precisely TOO MUCH debt that is the problem??

We heard the fear-inducing from the federal government (almost every branch and office) about how vital it was to pass "the plan" so that main street businesses could get the credit flowing again that they needed for day-to-day operations! What? That says to me that many businesses are on life-support!! If they are dependent on credit markets to fund day-to-day operations, as opposed to longer-term debt for expansion, etc., they were operationally unsound BEFORE this mess went down!

In other words...quit propping up failures!! We need to MASSIVELY reduce overall debt, not shift it and reload for more lending!! This means: we need to cut government to the CORE and have DRASTIC tax cuts, the like of which have NEVER been seen, since the American Revolution!! The real problem is hyper-taxation, and the economic overhead that creates -- that is the real barrier to growth and to clawing our way out of this hole...because it is exactly the hole of not having disposable income to buy things (including homes) outright...caused by paying 40%+ to the Feds alone, followed by state, local, property taxes, plus vehicle reg, etc., etc., etc. There's NO WAY to live debt-free unless you manage to bust way out of the middle class, or have never made it that far, and you live on the entitlements.

It's simply gotta stop. Flat tax, never to exceed 10% (that is a tithe after all...and why should "Caesar" get more than God?). The time is NOW!! Say NO at the polls to socialist, big-government candidates!! Email and call your Congressmen and Senators and DEMAND drastic cuts to government and your TAXES. Demand your FREEDOM and MONEY back!!!

2008 Oct 07 01:31 PM

[Dividends A...:]

Its a painful lesson, no doubt. Consumers & investors are going to find out the hard way that we took lending for graned and now are paying the price. While I don't believe in this depression sensationalization, I do think we're going to revert back to the historical mean of what was adequate savings. You'll need a good down payment, proper credit history and stable earnings in order to borrow money. If not, you'll be out of luck and have to do it the oldfashioned way just like all our parents did.

2008 Oct 07 01:54 PM

[DaveMcBlues:]

I'm advising all my business clients to take any "available" advances against their lines of credit (ABL facilities) NOW to ensure that they have cash on hand to handle the next 45 days of cash requirements -- maybe more... whether they need it or not.

The interest cost is far less than the business interruption cost in the case that the banking system freezes and contractual advance provisions are not honored by the banks.

It's not much of a stretch to see that happening in the near term.

If anyone follows my advise, please make sure they also consider diversifying cash funds to make sure they are within protected (FIDC) limits on cash advances.

2008 Oct 08 12:08 AM

[whidbey:]

Watch the CDS, they are about to come stage center with an act from hell. When they fail to honor the calls things really start to come unglued and virtually everyone has CDS exposure if you just poke around a little.
With 50-70 Trillion of the CDS out standing, it is potentially the end of civilization. Warren says "Instruments of Mass Destruction". And, he is rigfht.

2008 Oct 09 01:36 PM