Just heard a great interview on NPR’s Planet Money with trader Vinny Catalano that shed some light on current our economic woes. Apparently we shouldn’t be watching the DOW average, we should keep our eyes on the credit market.

The credit markets, specifically the commercial paper markets, are frozen and that’s effecting business’s ability to operate. This disruption of day to day operation is lowering investor confidence in business which in turn is causing the DOW drop.

As long as the credit market is frozen the DOW will continue to drop.

There are two indicators to watch to see if the credit market is thawing out. One is the US Treasury Bill 3 month yield rate. As this rate goes up that means less money is being hidden in the giant government “mattress” and is again available for lending. The other factor is something called the TED Spread which tracks the LIBOR less the 3 month Treasury Bill. As this number goes down that means that banks are beginning to lend to each other and the credit market is thawing.

So keep an eye on the 3 month T-Bill, as that rate goes up and the Ted spread goes down then we know capital and credit are flowing again. At this point the Stock market should rebound and we should be out of the woods. Make money make money makemoneymonay!

Listen to the Planet Money show here.

Read Catalano’s Blog about this here.

Track the TED Spread here.

Track the 13 week treasury bills here.