The perma-bears may be right soon.
I don't particularly like perma-bears. I find that they say that there will be a market crash for 7-8 years, totally ignoring the fact that boom and bust has occurred for as long as markets have existed, and having an 'I told you so' attitude after the crash.
However, over the last 6 or so months, there has been one measure that I have been watching that keeps causing me to pause and rethink my bullishness.
The following chart identifies a measure known as the TED Spread. This is a measure of the difference between 3-Month LIBOR (London Interbank Overnight Rate - a measure used by banks to lend to each other) and the yield on 3-month US Treasuries. The equation for this is Libor3 - UST3 = TEDRate. In blue is the S&P 500.
The TEDRate is important as it shows the creditworthiness of global banking institutions. It uses the 3-month US Treasury yield as a benchmark as this is usually the risk free rate (US Treasuries are a very safe bet to get a return on as the default risk is pretty non-existent).
What we can see from the chart is the following:
1. A rising TEDRate is always proceeded by a liquidity event/market crash.
2. We are currently above the 50MA at 0.51%, where below 0.5% is the level at which there is 0 cause for concern.
3. The volatility of the move in Q4 2016 was extremely fast.
One caveat is that the rising LIBOR rate could be due to regulatory reasons where banks and interdealer brokers have been prosecuted after the scandal that occurred where the increase in pre- and post-trade transparency and requirement of more stringent reporting of OTC swaps may have been a cause of the rise of
