Happy New Year! We all want to know … what to expect from the financial markets in 2022 and beyond. Just minutes ago I ran the latest Synthetic Systems update, which on the occasion of a new year includes not only fresh quarterly forecasts but a new four year annual outlook.
The latest charts appear on the Market Analysis page, along with an archive of the past four of each. Among other things, this allows us to visually compare sequential charts and see how past forecasts have worked out. In the spirit of a picture is worth a thousand words, the latest charts are also reproduced below. As a reminder, the annual charts are named with whole numbers while the quarterly charts are decimalized.
Synthetic Systems is an original modeling algorithm designed to give a broad picture of the financial markets history and outlook. For this purpose, these markets are represented by four asset classes: US TBills, US TBonds, Equities, and Commodities. US TBills is calculated at a maturity and duration of zero (no principal change with changes in interest rate), and effectively represents Treasury money markets, US dollars and “cash equivalents”. US TBonds is calculated at infinite maturity (interest only, zero coupon duration reciprocal of rate) and effectively represents annuities and the longest maturity Treasury bonds. Copper and gold represent physical commodities. Readers may recall that copper is included not only in its own right but as an indicator of the broad physical commodity complex. Equities includes all stocks, foreign and domestic.
The charts show natural log total return, so that the vertical scale roughly represents percentage changes. This design puts all of the asset classes on the same footing; it doesn’t adopt the confusing media artifice of reporting of some assets in terms of price and others in terms of yield; total returns are directly comparable. One of the more subtle aspects is that returns are not shown in dollars, so that dollars themselves can be plotted as an asset class, effectively identical to short term treasuries at zero interest rates. Instead returns are relative to each other in terms of a weighted mean, so that they are essentially cumulative real returns. The vertical scale is relative; the asset class plots are vertically positioned to fit within the same window. So the essential information is in the slope of the plots. Intuitively, up indicates outperformance and down underperformance.
The annual charts are run at the beginning of each year, and cover the past twelve years and the next four. The quarterly charts are run at the beginning of each quarter, and cover the past twenty four quarters and the next eight. The charts are high resolution so can be liberally zoomed for a closeup look. Be wary though about putting too much emphasis on forecast detail; SS often does get the short term right but is at its best over time frames of a couple quarters and up.
Synthetic Systems charts are designed to be as intuitive, self contained and self explanatory as possible, but they pack a lot of information and their meaning may not be immediately obvious to those unfamiliar with them. You should feel free to reply with any questions on the interpretation of Synthetic Systems charts.
Synthetic Systems 2022
Synthetic Systems 2022.00