Soaring LIBOR Foretells Financial Crisis: Investors Beware
This statement may sound very bold, but it’s worth making: we could be on the cusp of another financial crisis. If this is actually the case, investors need to be extra vigilant. We could see massive declines in asset prices across the board.
Why could there be a financial crisis? As it stands, we are seeing stress build up in the banking sector.
Please look at the chart below of the London Interbank Offered Rate (LIBOR) below.
Chart courtesy of Stockcharts.com
What is LIBOR? Think of it as an interest rate for when banks borrow from each other.
As the above chart shows, in 2015, the rate stood at 0.2%. Now it’s at 2.31%. This represents an increase of over 1,000% in a matter of a few years. The chart also shows that, since the beginning of 2018, LIBOR has seen an almost vertical increase.
You see, this interest rate is also considered to be a stress indicator for the financial sector. If it soars, it tells us that stress in the financial sector could be increasing.
Did LIBOR predict the previous financial crisis? Yes.
Just prior to the 2008–2009 financial crisis, we saw LIBOR soar for a while. Between late 2004 and mid-2006, this rate went from around 2.21% to about 5.5%. This increase was in a very vertical manner as well.
What to Look Out for, Going Forward
Dear reader, I completely understand; one could easily say, “LIBOR could be increasing because the Federal Reserve is raising interest rates.”
Yes, if the most basic rates in the economy are increasing, it’s valid to think that. But the pace at which LIBOR is increasing is worth watching, and it’s worrisome too. As I said earlier, the rate has increased by more than 1,000% in the last few years, and it looks like it could soar further.
If LIBOR is correct and there’s a financial crisis brewing, it’s important that investors know the consequences.