Keep an eye on LIBOR – if you’ve read my blather for the past year, when the London Inter Bank Offer Rate starts back up, we could quickly be back at September 2008 again very fast. Genius Boy Geithner and Bernanke laid the foundation for round two. By making short term money virtually free, that has encouraged borrowers to refinance their long term debt using the “free” variable rate short term loans backed by interest rate swaps to limit the risk of the LIBOR zooming up suddenly. But that protection is only as good as the issuer (think AIG and CDS insurance). If an issuer of interest rate swaps fails, everyone holding loans based on LIBOR will panic – and even more so those without interest rate protection – further driving up rates. The smart companies used this lull to lock in long term bond rates. It looks stupid in the short term, but they’ll be the ones still around in five years.
To confuse things even more, the LIBOR rate is fixed in multiple currencies – the US Dollar, the Euro, and the British Pound. The 90 day LIBOR rate will then reflect also people’s expectations about the future direction of the 3 currencies. The US Dollar has gained about 5% against the Euro in the past week because of the issue with Greece.
Another indicator to watch is the VIX.
This measures the volatility of the stock market, and the market is said to predict the business environment ahead of time by 6 months. What’s important to note about the VIX going high is this is highly correlated to a “correction”, which is usually not good.
Protect your retirement investments!