Pain in the Money Markets Continues

The spread between overnight central bank rates and three month libor hit 77.5 in the US and 95.45 in the UK yesterday, getting dangerously close to levels seen when the crazy rumors about Bear's imminent bankruptcy were flying around. As it turns out, those crazy rumors were true, so banks are expecting something unexpected to hit. They may not know what it will be, but it's going to be really bad. They don't want to lend to each other. Again, the implications of this, if it continues, are far and wide. The less lending banks do to each other, the less avenues banks have to finance their inventory, leaving them unable to make new loans or buy new securities. An inability to obtain loans by consumers through mortgages, home equity loans, credit cards or auto loans puts a big damper on consumer spending. Consumer spending is 70% of GDP. The preliminary reports from the retailers this morning aren't looking too hot. Other than Walmart and Costco, other retailers reported sharper declines than expected in March. Everyone shopping at Walmart and Costco instead of the Gap and Limited? I think that's because you can't find bags of rice for hoarding at the Gap. If I were the Gap, I'd look into maybe supplementing my clothing line with a rice aisle. You know how Williams Sonoma puts the $40 bottle of olive oil next to its beautiful salad bowls to try to trick you into forgetting that you can get a bottle of olive oil for $5 from Walmart? It would be like that.