APR 17, 2018
While LIBOR’s reputation has been dragged through the financial mud due to its rampant manipulation by unscrupulous bankers (are there any other kind?), the fact remains that it has heralded market trouble in the past.
It may be replaced by the new SOFR rate over time, but for now, it bears watching as a risk metric that exists outside of the meddling sphere of the Fed.
LIBOR, or the London Interbank Offered Rate, was the most important acronym most investors never heard of before 2008. However, it quickly became the most critical variable in markets leading up to the Great Recession.
What has now become clear is that we haven’t learned any lessons from the financial crisis except how to accumulate more debt and to artificially control markets more extensively. And, to conveniently try to sweep under the rug the very same warning signs that forebode the day of reckoning just over a decade ago.
LIBOR performs two major purposes for today’s markets. First, it serves as a reference rate used to establish the terms of financial instruments such as short-term floating rate financial contracts like swaps and futures. It also serves as a benchmark rate--a comparative performance measure used for investment returns.
LIBOR has once again started to rise. During the last two and a half years it increased from 0.3%, to 2.36%; and the pace of that increase has recently picked up steam. It jumped nearly a full percentage point in the last six months--outpacing the moves of the Federal Reserve. One reason is the deluge of short-term Treasury offerings displacing demand for short-term commercial paper, forcing companies to offer higher rates for their short-duration financing.
The truth is governments have complete disdain for markets and are seeking to replace them with increasing alacrity. Governments and Central Banks are nearly always on the wrong side of the economy because they choose to ignore the signals that can be derived from whatever is left from the free market.
This is why the Fed kept interest rates at near 0% for eight years when the economy was no longer on life support and is now raising rates while LIBOR is foreboding an economic slowdown. And this adds to the reasons why the next and even Greater Recession lies just around the corner.