Prieur's Podcast: What is the LIBOR rate telling us?

http://www.screenr.com/pMLs and
http://www.investmentpostcards.com/2011/11/17/prieurs-podcast-what-is-libor-r...

TRANSCRIPT:

What is the LIBOR rate telling us?

Good morning. This is Prieur du Plessis coming to you all the way from my office Cape Town, South Africa.

Using voice is a first for me on the Investment Postcards site, but I'm doing it for two specific reasons:

Firstly, I hope it will add some variety to the written posts.

And secondly, I need to get some voice training as I will be hosting a brand-new Internet money show starting in January. It's been more than 10 years since I last hosted a radio program so I need to get a feel again for using voice as the medium for getting my message across.

I will obviously let you have more details about the radio show in due course.
On to today's business. I thought it appropriate to discuss the LIBOR interest rate, and specifically the increase in the rate since July this year. LIBOR, of course, is an interbank rate, in other words the rate banks charge each other. An increase in the rate is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. On the other hand, when the risk of bank defaults is considered to be decreasing, the rate narrows.
After having peaked at 4.82% on October 10, 2008 the three-month dollar LIBOR rate showed a broad decline down to about 25 basis points in June this year. However, one should be aware of the fact that since the beginning of 2009 the rate has increased markedly on three occasions: early 2009, during April and May 2010, and then also since the beginning of July. Importantly, on each of these occasions we also witnessed stock market corrections, as we saw most recently during July and August.

When considering this lack of confidence among banks, what is the message for investors? Taken together with equity ratings that have of late become too rich compared with the underlying economy, the message is simply that one should approach stock markets with caution at this juncture. At this stage I don't envisage a particularly deep pullback, but time will tell. You can read more about the equity outlook in my post of a few days ago, entitled "US stocks: Anticipating too much too soon."

I hope to be checking in again soon. In the meantime, that's the way it looks from sunny Cape Town.

Category:

People & Blogs

Tags:

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• Investment
• Money
• Markets
• Economy
• Stocks
• Wall Street
• Interest Rates

[membersince1950]

Pleasure to hear your voice after reading your blog all these years.