It’s a new quarter and that means it’s time for a fresh look at the Synthetic Systems outlook for the financial markets. I’ve just run the updates and posted the charts. You’ll find them on the site menu under Market Analysis.
Broadly speaking, SS sees a deflationary cast to the near term environment. Cash, gold and Treasuries are seen to outperform stocks and industrial commodities. This may seem counterintuitive given the recent headline grabbing levels of consumer price inflation and ongoing inflationary policy, but it’s par for the course. Markets are forward looking. Once inflation is making headlines, they begin to anticipate a policy reaction. As we’ve stated many times before, consumer prices and wages are at the tail end of the price effects of inflation. Once it’s obvious there, it’s too late to invest for it. The early bird has already gotten the worm.
Those of us who have been following Synthetic Systems have been those early birds. SS has been forecasting the 2021 inflation since 2017. It’s been looking for a pullback in the fourth quarter of 2021 as well, as you can see from the legacy forecasts that are maintained along with the latest update.
The change in trend, like any other, is far from permanent, however. SS expects this deflationary phase to dominate a mere single quarter before the larger inflationary trend reasserts itself. If in fact the fourth quarter plays out as SS expects, it will provide an opportunity to reload. Bear in mind though that quarterly is around the lower limit of resolution, the market noise floor, and that at higher frequencies forecasts are even more speculative and that SS is at its best with trends longer than quarterly.
As always, in the spirit of a picture is worth a thousand words, we’ll let the charts speak for themselves …
Thanks for these
It’s certainly plausible that there will be a pullback in industrial metals, as presaged in your copper prediction. If bonds are rising I assume the u.s. economy is taking a breather, and the biggest consumer of those goods, the Chinese property sector, will be floundering for a while.
I wish I could hear your opinions about energy-the biggest commodity sector. I established a uranium position before the recent run up and hold a bunch of oil and gas. Politically correct esg mandates and the legacies of fukashima and Chernobyl have killed capital investment in energy other than renewables, and I don’t think renewables can fill the gap. E. G look at Europe lately, where not enough wind has been blowing. Germany decided to kill nuclear, so now they’re burning coal and have enormously high electricity prices. . Natural gas is in short supply but investing in the development of natural gas fields is politically verboten.
The most plausible energy analyses I’ve seen, from thundersaid (A British consultancy), says its most optimistic models see getting to carbon neutrality require renewables at 40 percent.
We’re going to be burning hydrocarbons a lot longer than the esg people want to believe. This will have to be balanced by offsets like creating many acres of mixed forest. But restricting investment in especially natural gas is already causing a lot of suffering
For SS purposes of course copper best represents itself, but it also serves as a rough proxy for industrial commodities as a group. Oil is surprisingly well correlated to copper but a little noisier … fungibility with other energy commodities makes it a little squishy. Copper as an elementary commodity is more of a clean industrial analogue to gold in that it can neither be created nor destroyed (apart from nuclear reactions). It just “works” better in a data sensitive model.
Energy commodities are just further complicated by the transition away from fossil fuels. I completely agree that isn’t going to happen overnight, but even without a concerted effort it’s on its way. Technology is gradually making alternatives more practical and efficient while finite fossil reserves are being depleted. It’s just a question of how fast. Of course I also agree that rushing it, especially with natural gas, is a risky low return proposition since it’s so integrated into the power generation and home heating economy and is by far the cleanest of the fossil fuels. A 4:1 atomic ratio of hydrogen to carbon is pretty favorable. Meanwhile carbon capture strategies can help improve the carbon balance along the way.
But SS is just a medium term tool anyway … for the long term fundamental analysis is still the best we have. And your knowledge of factors peculiar to any industrial commodity can be used as an overlay to the copper plot to make it more applicable … you can view the outlook for any industrial commodity as a combination of the sector outlook and the particulars of the specific commodity.
To put it in perspective, this fourth quarter pullback SS projects would be just a countertrend breather while the prevailing trend in commodity prices remains higher. SS doesn’t foresee a more sustained retreat for another year, by which time further updates could modify its view. Also remember quarterly is about the lower limit of SS resolution, so projections on this short time frame are more speculative. On fundamental grounds, commodity space still looks bullish for most of this decade … the longer view we talked about at the beginning of last year in Outlook for the 2020s is still in effect.