Friday, June 5, 2015

The TED Spread.....ANOTHER PESKY FACT!

The TED Spread

There is a complete disregard of all fundamental, technical, macro and quant analysis by the majority of the Street who worship at the alter of the Fed, a notion that we live in a world of little risk.

Over long cycles, it is not faith in the Fed that builds wealth, but rather respect for risk and minimizing portfolio downside during periods of heightened volatility. It is easy for people to forget the math of losses when in an environment like the last few years. Oh, how easy it is to believe that the small sample of time we live in is representative of the way markets work, when in fact, living in the outlier is not normal.

Something is severely off between the narrative and the reality, and those looking purely at a stock chart are missing it. Take a look below at the TED Spread which is at a multi-year high. The TED Spread is the difference between three-month LIBOR and three-month Treasury bills. LIBOR represents the interbank-lending rate. When it rises relative to risk-free Treasury bills, the implication is that perceived credit risk is increasing among counterparties. Historically, a rising (followed by spiking) TED Spread preceded major liquidity events in financial markets.

Why is this happening now when every talking head keeps pushing the idea that stocks will continue to go up purely because of central-bank actions? The fact that perceived credit risk and distrust is rising as evidenced in the chart below and is completely at odds with the narrative of the strength in the economy and robustness of credit. No one seems to be talking about this underlying trend which unequivocally is negative. NO ONE ON WALL STREET WANTS TO TALK ABOUT IT BECAUSE IT MEANS THEY WILL SOON MAKE LESS MONEY.

To ignore every and all leading indicators of risk because of Fed leadership can be damaging to one's wealth and health. 

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