Stay Ahead of the Downturn…Get to Know TED.
The financial crisis continues to worsen despite small signs that the “recovery” has begun. Since the beginning of the subprime mortgage crisis that lead the economy down in late 2007, worsening credit conditions have been the crux of all the problems. However, the good news is, the downturn that lies ahead is extremely predictable.
Over the last 15 months since the bottom in the US stock market (to be determined if this was the real bottom) credit conditions have improved to pre crisis levels. Investors have felt more comfortable taking on risk, banks have begun lending (lightly) and the future has looked more rosy.
However, I’m sorry to say this is all drawing to an end very shortly. Beginning with the debt crisis in Greece, stress is reappearing in the credit markets. As investors begin to feel threatened by the risk of default by their borrowers, they tighten up, liquidity vanishes, asset prices fall and the economy tumbles again. Your adjustable rate loan on your home or business debt will increase, you default, the problems credit crisis cause are endless.
One thing to look at to know this crisis is coming is called the “TED Spread.” The TED Spread is the difference between the three-month T-bill interest rate (risk free) and three-month LIBOR (London Inter Bank Offer Rate). In English, this measures investors perceived difference between lending “risk free” and lending to those who carry the risk of defaulting. In times of economic growth this spread is very narrow, during times of crisis this spread widens. Preceding the 2007 subprime mortgage crisis this spread began creeping upwards and then spiralled out of control before the market started crashing. Well, this is happening again.
If you have an adjustable rate mortgage or if you are carrying any business debt that can be converted into a fixed rate…DO IT! NOW! If you have recovered your losses in your retirement accounts as the stock market has recovered…consider moving it all to cash. Prepare to downsize your business, as revenue will decline again in the months ahead. Use this indicator to stay ahead of the downturn.
