Keith Fitz-Gerald

LIBOR Indicates More Credit Troubles on the Horizon

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As U.S. lawmakers tussled over a bailout plan and governments in Europe were forced to intercede to rescue five banks, the cost of one-month bank loans in euros and overnight dollar loans soared to records. That basically means banks are hoarding cash, a reality that raises borrowing costs and causes economies worldwide to slow.

Meanwhile the so-called TED spread -- or the difference between three-month LIBOR and what the U.S. Treasury pays for a three-month loan -- hit an all-time high of 3.93%, before pulling back slightly. The TED spread provides a gauge of how likely banks are to lend to each other, rather than to the federal government.

Under normal conditions, the banks charge each other premiums that are historically not much higher than government Treasuries. The fact that the spread is at all-time highs seemingly confirms that banks don't want anything to do with one another, and would rather deal with the government.

Here's what to do now:

• Make sure you have your cash tucked away in ultra safe T-bills or funds that invest exclusively in short-term Treasury securities.


• Make sure you own at least one of the specialized inverse investments we've recommended throughout this crisis. That way you can turn what will be a monster loss for most into major profit opportunities.


• Make sure you combine downside hedges in your portfolio with choices that don't dismantle your upside potential. This includes hard assets and other inflationary hedges, as well as plain old-fashioned balanced funds and even income-oriented investments.

Keith Fitz-Gerald is the Investment Director for Money Morning/The Money Map Report. For more information on Keith, read his bio here.