Banks still aren’t lending, says Eric Roseman in The Sovereign Society.

The LIBOR lending rate between banks is 81 basis points above the Federal Fund’s target rate of 2%.

This means even prime borrowers are struggling to raise capital, and it signals that the credit crisis has a ways to run yet.

Further tightening of credit also spells trouble for stocks. Eric advises investors to stay parked in cash, alternative investments and reverse ETFs…

Despite holding U.S. equities and several investment-grade corporate debt instruments, I’m still bracing for another round of credit related woes. Credit market indices continue to deteriorate this summer. A host of developments are revealing a fractured market that simply won’t stabilize.Credit spreads can tell a whole story. This matrix compares interest rates on riskier debt instruments vis-à-vis Treasury bonds. That picture here has been deteriorating since late May, with high yield, investment grade, mortgage-backed and emerging market debt spreads all rising to their highest levels since the credit squeeze emerged.

What really irks me is that despite massive central bank liquidity injections into the financial systems since last December, interbank lending rates remain elevated. LIBOR, or overnight lending rates, are still too high. Right now, they’re 81 basis points above the Federal Funds target 2% rate.

It’s the same story in Europe. Banks aren’t lending.

And the credit squeeze is not just affecting subprime or troubled borrowers. It’s also affecting prime borrowers.

On Monday night I had dinner with one of the most successful real estate investors in Montreal. Despite his AAA-track record and bulging portfolio of income producing properties in Canada, this gentleman can’t secure financing to buy distressed assets in the United States. Even hedge funds - which traditionally have been surrogate lenders to speculators - won’t pony up the cash.

This tells me that we’ve got serious problems. If a prime borrower can’t get funds to secure a bargain-basement real estate deal, then you’ve got to believe credit is tight. And tight credit is deflationary.

There’s no doubt this has been a tough year for investors - the toughest I’ve had to navigate since 1998. Every time you think it’s safe to put your toes back into the water, you get whipsawed by another panicked sell-off. Unless you’ve been over-weighted Treasury bonds and oil futures since mid-2007 the odds are pretty high you’re losing money.

The market has not bottomed. Until signs of credit stress are finally alleviated investors should remain heavily parked in cash, alternative investments and reverse index funds. Another big shoe has yet to drop.

Source: Fasten Your Seatbelts: We’re in for a Bumpy Ride!