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What Deadly Summers, Sandy Koufax And Lucky Golfers Can Tell Us About Bonds
Submitted by Michael Lebowitz of 720 Global
What deadly summers, Sandy Koufax and lucky golfers can tell us about bonds
In 1918 and 1930, Washington D.C. set daily record high temperatures with readings of a sizzling 106 degrees. The observed temperatures on those two days are statistically defined as 3 standard deviation (sigma) events. Now imagine the nation’s capital enduring a 119 degree day, because that is what a 5 sigma event would entail. That is a lot of hot air even from the seat of our federal government. (Data from NOAA)
Since 1900 there have been over 185,000 major league baseball games played yet amazingly only 21 perfect games pitched – 27 batters up, 27 batters down, no walks, no batters hit by a pitch and not a single player reaching first base. The odds of a perfect game being thrown are approximately 1 in 18,000 or .005%. (Keep in mind there are two pitchers so there are two chances per game). Pitching a perfect game is approximately a 4 sigma feat. To be labeled a 5 sigma phenomena a perfect game would only occur once every 400+ years! (Data from baseballreference. com)
Lastly for all of you golfers, according to Golf Digest, there are an estimated 150,000 holes in one per year out of an estimated 490 million rounds of golf. While a hole in one is rare event indeed, it merely measures as a 3 sigma achievement. If a hole in one were a 5 sigma event there would only be 290 per year.
As you can see in the examples above, a five sigma event signifies extreme conditions, or an extremely rare occurrence. To bring this discussion from sports and weather to the financial world, we can relate a 5 sigma event to the stock market. Since 1975 the largest annual S&P 500 gain and loss were 34% and -38% respectively. A 5 sigma move would equate to an annual gain or loss of 91%.
With a grasp of the rarity of a 5 sigma occurrence, let us now consider the yield spread, or difference, in bond yields between Germany and The United States. As shown in graph #1 below German ten year bunds yield 0.19% (19 one-hundredths of one percent) and the U.S. ten year note yields 1.92%, resulting in a 1.73% yield spread. This is the widest that spread has been in 30 years.
Graph #1: German and U.S. Ten Year Yields
To put this spread into its proper perspective due to the various levels of interest rates over time, it is appropriate to normalize the yield spread. For instance, a 1.75% spread at 7.00% nominal yields is very different in magnitude than the same spread at 2.00% yields. To normalize the differential we calculate a ratio dividing the yield spread by the nominal U.S. yield. Currently, the resulting ratio is 0.90 (1.73%/1.92%) while the historical average since 1990 is 0.08. Statistically the normalized spread is nearly a five sigma deviation as shown on graph #2 below.
Graph #2: Normalized Ten Year Yield Spread in Standard Deviation Terms
The media, economists and other market professionals are leaning on two rationales to explain this differential; inflation rates and European Central Bank (ECB) Quantitative Easing (QE). We do not put much stock in either.
The preferred methodology to compare interest rates is on a real basis and not a nominal one. By adjusting for inflation, the real basis provides a measure of the true cost of borrowing and true return on lending. At first glance inflation rates partially explain the abnormally wide spread as the difference in the year over year core CPI between Germany and the U.S. is over 1%. To expose the inadequacy in this theory we stand on the shoulders of Albert Edwards of Societe Generale. According to Edwards, when U.S. consumer price inflation is calculated using the same inputs and weightings as the Eurozone, U.S. inflation figures are nearly identical to those in Europe. His graph below provides a compelling illustration.
The second justification, to explain abnormally wide spreads between U.S. and German government debt are the actions of the ECB. The ECB recently announced a 19 month QE program in which they will purchase €1.14 trillion of European bonds. Embedded in this amount are an estimated €214 billion or 31% of all German bunds outstanding. As a consequence, dealers and traders are front running the ECB and forcing bund prices higher (yields lower). This is one of the oldest tricks in the book and it seems reasonable that some of the recent spread widening is a result. However, what’s left out of the conversation is the Federal Reserve (Fed) and its QE programs. As a result of their policies the Fed owns almost 20% of the stock of outstanding U.S. Treasury bonds. The ECB just started QE and it will take them at least a year to buy as large a percentage of German bunds as the Fed already owns of U.S. Treasuries. So while we agree that ECB actions explain some of the spread, we don’t think it accounts for anywhere near the current amount.
We believe the biggest reason for the massive yield differential is that Europe is in the grips of “Japanification”. In other words, they are suffering from a combination of very low economic growth, deleveraging, demographic headwinds and resulting deflationary pressures. Japan’s economy has been gripped in this same dynamic for over 20 years. Similar to Japan’s experience, European yields are pushing towards zero percent and in some cases below zero. Adding to the immense pressures pushing yields lower is what is known as a “flight to quality”. When investors are risk averse they tend to buy assets that provide safety. European investors are anxious about Greece as well as the aforementioned European economic situation and some are likely flocking to the safety of the debt of the Eurozone’s strongest constituent, Germany.
Mean reversion in financial markets is like gravity to physics, a fundamental law. We have no doubt this law will re-assert itself and the German-U.S. yield spread will revert to the long-term trend. The question, of course, is how the spread corrects. Will durable economic growth and inflation emerge in Europe causing German rates to rise or will the U.S. remain in a secular economic stagnation causing U.S. rates to converge lower with those currently seen in Europe and Japan? Our view is that there are a multitude of forces that will drive rates lower in the U.S. thereby collapsing the spread.
It is generally taken as a statement of fact that interest rates in the U.S. have been manipulated lower purely by the Fed’s zero interest rate policy and the various QE measures they have undertaken. On one hand, we do not argue with that assertion as the effects on the short end of the yield curve are self-evident. On the other hand, QE3 “taper” began at the end of 2013 and was completed in October 2014. Although the Fed continues to buy securities in order to maintain the current size of their balance sheet, there are no longer expansionary purchases taking place. Counter-intuitively interest rates have fallen dramatically since the beginning of the Fed’s “taper”. We argue that disinflation and deflationary forces in play around the globe are the primary factor driving U.S. longer-term interest rates down. These forces dwarf the policy actions being taken by the Fed and other global central banks.
Listed below are the main factors we believe will keep economic growth stagnant, fuel disinflationary pressures and ultimately drive U.S. yields lower:
- Deleveraging of financial institutions globally is on-going through declining shadow banking systems (securitizations and repos) and rising capital requirements which reduce profitability and lending
- Deleveraging of consumers (increased savings rates and debt reduction) reduces consumption and impairs U.S. GDP growth
- Increased government regulation and interference in the U.S. economy raises uncertainty and reduces businesses willingness to invest in the future
- U.S. federal spending and current account deficits are declining, reducing the amount of U.S. dollars in circulation
- Commodity prices have been falling since early 2011, reflective of slowing global demand and rising inventories
- Protectionism in the form of competitive currency devaluations is disrupting foreign trade and further damaging global economic growth
- The ratio of working age people to total population is falling in every major country (except India) which creates a major demographic headwind for global economic growth
Deflationary forces around the globe are legion. Despite the battalion of seemingly gargantuan efforts by central bankers to prop up inflation and restart growth, those stated objectives remain elusively out of reach. Ignoring the truth of these circumstances will not diminish their impact on U.S. yields.
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Koufax?
Never heard of him.
Was he the guy in that sport where you play 162 games for a chance to get to the world series, and when his team got there, he refused to pitch because, well, he was a selfish cunt who didn't give a fuck about all the work everyone else on his team had done?
Oh yeah.
But you can't criticize that decision because he wasn't Catholic or Muslim or some religion where you could criticize a guy for fucking his team when they were counting on him most.
Major cheap shot from a ZH anti-semite. And a newbie too, only here 8 weeks.
He refused to pitch game 1 of the 1965 World Series since it fell on Yom Kippur.
He then pitched games 2, 5 & 7, (the final game), winning game 5 & 7 with complete game shutouts.
You make it sound like he took the whole series off with your deceptive post.
You disgust me. And no, I'm not Jewish.
If you hate koufax you hate america. Not the federal govt, america.
Par for the course on what was a groundbreaking alternative financial website.
Honestly, I think a lot of the Jew haters are paid trolls, here to pollute the place.
Big words from one of the sites resident anti arab racists.
Double standards,much?
And I dont hate him, he was just a cunt for not pitching that game.
And hed be the same kind of cunt were it some other religion.
What you fucking idiots dont grasp is your tacit double standard is itself racist.
His selfishness and disrespect for his team isnt suddenly beyond criticism metely because he was a Jew.
The point is somehow, were not supposed to criticize it becausr, and only because, he was a jew.
All this predictable rhetoric from people who will say the most nakedly ravist and ignorant things about Arabs or Muslims, BUTTHEN CRY ANTISEMITE WHEN ISRAELI WARCRIMES OR SPYING OR WARMONGERING is broached, or when it is pointed out the Torah is replete with hate and racism.
Freedom is the ability to say 2+2=4. You sophomoric twats perpetually argue that sometimes, it is wrong to do so, mostly out of a conditioned response more than any actual thinking.
Stupid cunts, theres a lesson to be learned here, but you spit it out.
Bad taste, but good medicine.
And I dont hate him, he was just a cunt for not pitching that game.
And hed be the same kind of cunt were it some other religion.
Personally I find no fault whatsoever.
He has the FREEDOM and the LIBERTY to voluntarily work when he so chooses.
I do not care if he was Muslim, Jew, Christian, Buddhist, a Hindu, an atheist, or even a Luciferian Satanist.
He is also just as free to choose his religion. I do not believe in enslavement.
Of course you are free to call Koufax a cunt if you so choose. I just disagree.
On the other hand...
Of course I will also protest war and crimes against humanity and especially against defenseless children.
I REFUSE TO support the slaughter of innocents. I cannot care less about the belligerant's, or the victims', race or religion.
So I will have to agree with you on this point.
There are far too many here who will declare that someone is an "anti semite" if thay are to criticize the unjust killings of Muslim children at the hands of the USA or Israel.
I have suffered the very same label...unjustly. It is a smear used by people seekig to justify the murder of children or which there is no valid or acceptable excuse.
AS AN EXAMPLE which demonstrates my understanding of your point... I did not even know Sandy Koufax was a Jew until after reading this dialouge. I do not follow Professional Baseball. Even if I had followed Pro Baseball they'd had not ever brought that up. I have never heard of a Pro Football player's religion being mentioned when I used to follow that sport. I do know he played for the NY Yankees. But I could not even have told you his field position before reading this.
What is even stranger is that you were not the one who brought up that he was a Jew. You just mentioned unspecified religious reasons and then these others piped in with their defense of Jews...Strange. Why?!? It makes no sense. Sandy Koufax does not amount to anything in the Grand Scheme. He was iust a professional Baseball Player.
Anyway these people will answer to Christ Jesus for that support, both moral support and material support, of the Government Sanctioned Murder of children. They will find out, in judgment before Christ Almighty, and do their wickedness in delusion, beliving themselves justified, rather than understanding that they exhibit the fruits of those who will not inherit the Kingdom of Heaven.
And as Christ said, it would have been better that they were not ever born or that they had drowned themselves in the ocean than to harm a child. Hellfire is their destiny as they are so deluded into believeing that they are protecting what the believe to be God's chosen but are acting as the evil agents of Lucifer.
Now perhaps you do not believe in the God of the Holy Bible.
But I do.
And I also have that freedom and liberty to do that as well.
http://m.bizjournals.com/stlouis/news/2015/03/26/jewish-group-contacted-...
Point is had he taken off a catholic holiday and people criticized it, no one would dispense exactly the kind of trite, predictable shit you just did.
Go fuck yourself.
Its people like you that also pretend to be for free speech and academic freedom, yet look the other way when jewish groups use their special clout, and the conditioning you just displayed, to shut down exposure of Israeli war crimes.
Really, fuck you.
And fuck anyone who only gets offended if and when its Israel or Jews on the receiving end OF WHAT WOULD OTHERWISE BE ACCEPTED AS FAIR CRITICISM.
you are an intellectual midget and moral simpleton.
no you're the new francis sawyer. you might even be him with a pseudonym.
there are many like you on zh, pretending not to be nazi's and saying the usual crap about fuck people who defend jews right to exist in america as american citizens because they are all bankers and all zionazi whatevers.
then you anti-semites as usual pull the reverse baiting of saying anyone who cries anti-semitism when discussion of israel is up is using a fake smearing tactic.
go fuck yourself you anti-semite. tyler will hopefully ban you like sawyer . the best thing about zh has really been the comment boards. and the tylers have been pretty decent about keeping people like yourself off them.
funny thread. i had to look up "Sandy Koufax, 1965 World Series" only to discover he was the series MVP. if nothing else, disingenous trolls force you to search for the facts yourself. it's the very reason I will ocassionally watch CNN and Fox News.
i'm not a religious person, but baiting ZHers with rants abt 50 yr old 'panem et circenses' events related to a particular religion stinks of desperation. next time he should start with an event that is actually as dispicable as he makes it out to be.
But you can't criticize that decision because he wasn't Catholic or Muslim or some religion where you could criticize a guy for fucking his team when they were counting on him most.
Where in that original statement, from his first post, is the word Jew?
And then you write, "... baiting ZHers with rants abt 50 yr old 'panem et circenses' events related to a particular religion stinks of desperation"???
No particular religion WAS SPECIFIED...until the responses.
WHO IS BAITING WHO? Is it not you that seem desperate?
Franklin Delano Roosevelt was a traitor. So was Woodrow Wilson a traitor.
Now what they did were as much "panem et circensus" as Professional Baseball players on the Field of Dreams. John D. Rockefeller, Andrew Carnegie, and other Oligarchs were behind the scenes and making decisions JUST LIKE TODAY. And they happened much more than 50 years ago.
Is it politically correct to criticize that?
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://goo.gl/9YqZBb
Dude, you're a spammer, but at least you're not a fucking Nazi troll.
Green arrow for you today!
(Then go away, please.)
When you have Don Drysdale and Mudcap Grant in the wings it really doesn't matter if you start Koufax. And it didn't in this case, since Minnesota outscored both in games 1 and 2. That's baseball (nothing more).
you can't criticize that decision because he wasn't Catholic or Muslim or some religion where you could criticize a guy...
Sure you can. It just won't get much press because, well, you know... Seriously though, could you imagine having to put a starting pitcher's inability to pitch on a Saturday into the mix when determining the rotation? It's a game for Pete's sake! Surely he could've found a rabbi to provide a note to excuse him, Christians have. "And he said unto them, The sabbath was made for man, and not man for the sabbath:..." Mark 2:26
It woulda been kinda amusing though to see Mohammad Ali have to stop in the middle of a fight to get his prayer rug out though.
Fed can only target short rates. The ONLY Fed action that directly targets long-term rates was Operation Twist, which involved adjusting the term structure of the Fed's bond holdings.
If you look at what happened to Bonds at start/end of QE1, QE2, and QE3, bonds sold off at start and rallied after the end. The reason was asset shifts into equities/risk assets at start of QE and move back out of risk assets at end of QE.
Rates in LONG end are where they are IN SPITE of the fed, and NOT BECAUSE of the Fed.
FWIW if you really believe Deflation is coming, FFH Fairfax might be interesting. They hold US$100 Billion in 7-year Deflation Puts. Half are US and half are EU. Not sure what happens to EU contracts if EU dissolves...
Ridiculous. Buying by the Fed, the Bank of Japan, and the EU have driven out all other buyers of bonds. No one touches that shit unless he, she, or it has no choice. In the process, they have destroyed price discovery in nearly all asset classes.
I'd like to see the cold, hard, unbiased Evidence of this phenomenon before I take (yet another one of these suppositions) at face value.
And that was the exact sentence that put all other facts into "don't trust" category.
We are not "deleveraging" nor are we "saving."
"We" are freaking broke and growing more so each day.
Ponzi on you blood sucking bastards, everyone pays in the next life, some more than others.
For the benefit of the innocent yutes, that .19% spread, is proof if any were needed, that the Fed has lost control because of the idiocy of ZIRP. They are just along for the ride, but too arrogant and ignorant to admit it.
OK, I'm a simple man here, so I gotta ask the dumbass question.
What do it mean?
Basically it means that humanity is going to win the Lottery ... in reverse.
Ahhhhhhhh!
Everyday starts a new calculation of standard deveation ...red or black?
Green please. Make it double zero.
Mean reversion in financial markets is like gravity to physics, a fundamental law... BULLSHIT
Physics isn't doing too well either, buzz. There is not one string theory, but 10 to the 500th power of such theories.
About 80% of Doctorates in physics in recent decades were granted for some hair ball tangent on string theory.
Oops.
helicopters are the answer. people will spend money if they have it because they have been conditioned not to save it. i can't believe the banksters have waited so long to take advantage of the very thing that got us here. moar money!
My problem with this argument is that, in a market saturated with debt and unfunded liabilities, continual deflation eventually begins to threaten the debtor's abiity to repay the principal. The unyielding bids of the central banks have so far masked that effect, but at some point, either the debtor will be unable to meet a principal repayment, or he will have to overtly print new currency to do so. I suspect the five sigma event you will see will be a repricing of debt when a sovereign is finally forced into one of those choices.
Overtly print new currency? What do you think QE is?
Usury is fiction as a porn novel is fiction. Politicians love fiction. Get Real Now.
I read that the melt value of nickels is almost more than 5 cents... I'm rich!
the melt value of nickels is almost more than 5 cents...
Try closer to .07frn current melt value, each. That's 40% return. But hey, it's not the stupidest thing the US treasury department has done, is it?
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCoQ...
Insulting Islam = freedom of speech.
Criticism of judaism = hate speech undeserving of legal protection.
Thus sayeth the dumb, the dishonest, and the warmongers.
Koufax played for the Dodgers.