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Today's Market WrapUp 09.24.2007 Mon Tue Wed Thu Fri Kirby Archive A
Reversion to the Mean How many of you have heard the saying or explanation by a technical analyst that a given market movement was nothing more than, “a reversion to the mean?” Let's examine just what that means, shall we: Mean reversion is a tendency for a stochastic process to remain near, or tend to return over time to a long-run average value. For example, interest rates and implied volatilities tend to exhibit mean reversion. Exchange rates and stock prices tend not to. Stock market returns, however, do tend to exhibit mean reversion. Exhibit 1 provides an intuitive illustration of the difference between mean reverting and non-mean reverting behavior.
From the simple chart above we can clearly see that line A-B is ‘non-reverting’ while line C-D is described as ‘mean reverting.’ But now, let’s give a better explanation of the graph above and add a couple of variables like time and scale:
We can now clearly see that line A-B was only a minute section – displayed in the black box - of line C-D. So now ask yourself, is line A-B truly non-mean reverting? The answer to this question depends on what length of time you are conducting your measurement. So generally, a truer picture of events emerges when we expand the time periods over which we are making measurements. Few would argue with that. Now, I’d like to apply the principle of reversion-to-the-mean to LONG TERM wages and the price of silver. One thing that Roman History has taught anyone who wants to pay attention – maintaining an empire with far flung standing armies in the field with a “DISENTIGRATING CURRENCY” [or one that is quickly turning into confetti] – is quite a trick. If one simply google's ‘collapse of the Roman Empire and currency debasement’ – you will find copious amounts of background reading from credible sources explaining this fact. While soldiers of most countries are patriots – history would suggest they perhaps lose a bit of their ‘fight’ if, and when they aren’t being compensated properly. With all of that being said – I wonder how many folks realize that an annual wage for the highest paid soldier in the Roman Imperial Army [a job of high standing in the day] paid the equivalent of 88 ounces of silver per year. Lesser enlisted soldiers made closer to 40 ounces of silver per year. See below: 3.8 grams x 720 Denarius / 31.1 [grams per troy ounce] = 88 ounces per year AUGUSTAN CURRENCY SYSTEM
WAGES
AND PRICES IN THE ROMAN WORLD WAGES. Roman soldiers received top pay for coveted full time employment. The legionary from 46 B.C. to 84 A.D. received a daily wage of 10 asses or 225 denarii per year; Praetorian guardsmen received 2 denarii per day or 720 denarii per year. Domitian raised legionary annual pay by one-third to 300 denarii. Septimius Severus in 195 and Caracalla in 215 raised the annual pay to 400 and 600 denarii respectively. Pompeian laborers in 50 B.C.-79 A.D. earned daily wages of 5 to 16 asses, but employment was seasonal. In the second century A.D. skilled miners in Dacia earned 6 to 10 asses per day plus room and board when hired on 6 or 8 month contracts. So, if we take the highest Denarius wage of 720 per year [which only military elites made] at 3.80 grams per Denarius – we arrive at an annual wage of 88 ounces of silver or, 88 x 13.50 = 1,188.00 per year But currently - soldiers are paid [conservative assumption], say, 50,000 per year – so; 50,000.00 / 88.0 ounces per year = 568.00 / per ounce of silver in constant terms Another observation from the table of Roman weights and measures above: The gold coin of Roman times [Aureus] contained 7.8 grams of virtually pure gold. One Aureus was equivalent to 25 Denari [each weighting 3.8 grams of virtually pure silver] implying a gold / silver ratio of roughly 12.2 : 1. Now, take a look at what the gold / silver ratio is today:
For those who choose to refute this thesis with the claim that precious metal is no longer money – they should not only READ THE CONSTITUTION [sec. 10] but explain why EVERY CENTRAL BANK in the world has GOLD BULLION listed as an official reserve asset. Central banks and supranational organizations hold around one fifth of global above-ground stocks of gold as a reserve asset, a figure that is decreasing steadily over time. So perhaps 568.00 [in current dollars] is really what an ounce of silver is worth – along with a 12.2 : 1 gold-silver ratio giving us a fair market value of gold at approximately 6,929 per ounce!! If [and I would suggest when] we get there – it will only be a reversion to the mean. Today’s Market In Japan, markets were closed on Monday. North American markets began the week on a sour note with the DOW off 61.1 to 13,759.10, the NASDAQ off 3.27 to 2,667.95 and the S & P slipping by 8.00 to 1,517.75. NYMEX crude oil futures lost 1.05 to 80.57 per barrel. On foreign exchange markets – the U.S. Dollar Index lost .03 to end the day at 78.45. Interest rates were basically unchanged with the benchmark 5 yr. bond ending the day a basis point easier at 4.29% and the 10 yr. bond finishing unchanged at 4.62%. The precious metals complex ended the day mixed with COMEX gold futures ahead by .10 to 732.60 while COMEX silver futures fell .01 to 13.53. The XAU Index lost 1.18 to 170.37 and HUI Index dropped 4.31 to 395.42. On tap for tomorrow, at 10:00 a.m. Sept. Consumer Confidence data is due – expected 105.5 vs. prior 105.0. Also at 10:00 a.m. August Existing Home Sales data is due – expected 5.60 M vs. prior 5.75 M. Wishing you all a pleasant evening and prosperous investing! Rob Kirby Copyright © 2007 All rights reserved. Contact
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