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TED Spread Remains Elevated

One indicator that has me worried is the TED Spread. The TED Spread is an indication of the difference in rates between 3-month treasury bills and 3-month LIBOR. It is important because it indicates risk in the financial system – the banking system borrows within itself through LIBOR.

The normal difference is around 0.75% (or in other words banks generally borrow from each other at 0.75% above the rate of the 3-month treasury bill). When it increases above that, it is an indication that there is stress in the financial system. It currently stands at 3.19%.

The TED Spread has only been above 3% twice in its history: immediately prior to the 1987 stock market crash and again last Thursday when the credit markets froze up.

Caution is the name of the game – we've used rallies to reduce equity positions or to take short-term profits on positions that we bought at severely depressed levels. Until we know that our financial system will have adequate liquidity and capital, the risks are pretty high.

Mark