A Three-Sigma Bond Market Black Swan Warning To Stocks

The Big Daddy Bond Price Black Swan

Bond market extremes often mark important turning points in the S&P and other markets. The March 2015 peak in T-Bonds is consistent with the crash in crude oil prices, the peak in the US dollar index, and the peak in the S&P 500.  March may be an important turning point in all four markets, in addition to increased trauma relating to Greek debt, war in the Ukraine, war in Yemen, the AIIB (Asian Infrastructure Investment Bank), US credibility, and an acceleration in the use of other (non-dollar) currencies in global trade.  – Gary Christenson, The Deviant Investor

Gary Christenson has published an incredible statistical analysis of the 30-yr U.S. Bond market.   The long bond hit 165 on March 25, marking an all-time high.  More interestingly, it closed up nearly 12% from February’s month-end close.   This was a 3.61 standard deviation change (i.e. a 3.6 sigma event) in terms of the average monthly rate of change over a data series that goes back to 1977 (In 1977 the 30yr bond became part of the Treasuries quarterly refunding operations).

As Gary points out in his article, linked above, a 3.6 sigma move in the bond market is about as rare an event as a major league pitcher throwing a perfect game (27 batters, no hits, no walks).  This has occurred just 23 times in more than 300,000 games played over 135 years.  In economic parlance, the March move in the long bond – aka “the Big Daddy” – is a Black Swan event.

The last time the 30yr bond experienced a 3-sigma move was November 2008, just as the Government was moving $800 billion from the Taxpayers to Wall Street.  This time around the Too Big To Fail banks have their next collapse pre-funded with $2.6 trillion in excess reserves sitting at the Fed collecting interest (this is where most of the QE ended up).

Had the Fed not already pre-planned the next market collapse by insulating the banks with $2.6 trillion of crash insurance, it is likely that the stock market would have already crashed by now.

HOWEVER, we have seen a collapse in the price of oil and a slow-motion collapse since early 2011 in many key commodities (copper, lumber, sugar).  The  Baltic Dry Index recently hit an all-time low and is bouncing along a historical bottom.  Everyone by now knows that the retail sales have entered what appears to be a monthly free-fall (on a relative scale for retail sales) and the labor force participation just hit a low not seen since 1978.   In other words, it would appear that the the U.S. economy is starting to experience a de facto collapse.

The Fed will not be able to keep the stock market propped up like it has forever.  Every day the stock market remains at the current level or moves higher, it becomes further dislocated from economic reality.   While most analysts point to p/e ratios and remark that the current market is not the most overvalued in history, they fail to mention that the comparisons are not valid.  If today’s earnings were adjusted using 1990 accounting standards, the current p/e ratio of the S&P 500 would be, by far, the highest ever on record.

In my opinion, the Big Daddy Bond Price Black Swan which Gary Christenson has eruditely identified, is the warning signal that a serious accident in the stock market is somewhere close by.

4 thoughts on “A Three-Sigma Bond Market Black Swan Warning To Stocks

  1. And yet it continues. Why can’t it? If the Japanese govt says its openly buying ETF’s, I’m sure Fed can and will step in. Hey, its only paper money. I literally face palm myself everyday watching this shit show!!!

  2. Dave,

    I’ve been thinking long and hard about this. What’s to keep the fed from back dooring cash to major corporations and VC’s in Silicon Valley to keep the party going. Back in 2008, they surreptitiously printed and loaned out 8 trillion to banks and corps around the world. I would have love to believe that we had a free market; unfortunately for me, it cost me a lot of money believing that the stock market could not be manipulated. The fed has the printer so they could conceivably buy the whole market if they want. IMHO the best thing to do is enjoy the time you have left on this earth and not worry about the stock market.

  3. http://blogs.wsj.com/moneybeat/2015/04/05/broken-bond-market-complicates-feds-plan-to-raise-rates/?mod=wsj_nview_latest
    The author is still assuming there are quick fixes amidst simplifying the market down to one operating within the rule of law and protected from vested/special interests and free from vast structural deterioration.
    His closing recommendation wouldn’t take long to prove it doesn’t work, by triggering a confused panic at the outset.

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