Interpreting Synthetic Systems

In a perfect world, Synthetic Systems charts should need no interpretation guidance, because they’re designed to be as intuitive and self explanatory as possible.  But there are some subtleties that have prompted questions both on and off the site.

One is that the vertical axis does not represent dollar values.  Instead, the Bills (short term Treasuries) plot (because rates are near zero) is essentially the dollar itself.  If the charts were denominated in dollars, it would be a flat line.  Despite some past experiments with dollar denominated Systems versions, I’m convinced that they’re misleading.  Dollars themselves are not constant in value and to speak as if they are is one of the most common errors in finance.  The dollar is an asset like any other, and our convention of using it as our unit of account confuses more than it enlightens.  Its apparent constancy is nothing more than an artifact of using it to measure itself, revealed to be an illusion whenever we consider inflation or deflation.

So what?  One example is in the most recent SS update.  The quarterly Stocks plot at first glance implies a roughly stable value of stocks over the next couple of quarters.  And that’s what it means.  But it does not mean stable dollar prices.  This is only apparent on considering both the Stocks and Bills plots together.  While the Stocks plot is roughly level, the Bills plot is gently rising, indicating dollars outperforming stocks.  This means – in dollar terms  – a trend of gently declining stock prices.

Another is that the Stocks plot is just that … stocks as an asset class.  It’s not the Dow Jones Industrial Average, the NASDAQ, the S&P 500, the total US market, or any other subset of the asset class that’s often carelessly labeled just “stocks”.  It’s the whole thing, the entire world market.  While these subsets are pretty well correlated with the whole, those who read more into the word “Stocks” than it says are solely responsible for the consequences!

Another is the Copper plot.  But I’ll take the blame for this one.  Copper is copper, yes, but its status as an asset class on the SS charts is due to its power in representing physical industrial commodities in general.  While on a day to day or even week to week basis the correlation between commodity prices is nearly random, by the time you get out to quarterly and yearly time frames, the correlations rise.  As the time frame lengthens, oil, lead, tin, etcetera all come to increasingly resemble copper.  Over the very long term, even gold does.  But within the range of validity of Synthetic Systems, gold and copper may as well be all there is.

We see an example of this in recent market action.  Copper itself, over the very short time since the last SS update on January 1, hasn’t done much but gyrate around.  Instead, oil prices, and those of stocks which follow them, have done what copper was supposed to do and soared.  No one knows for sure what happens next, but history suggests this divergence will revert.  That is, either oil prices will moderate or copper will soar, or some mix of the two.  We can only say with reasonable confidence that over the course of a quarter, a year, or more, that they will more strongly correlate than they have over the past couple of weeks, and together more likely than not to follow the SS forecast.  But since that couple week time frame is well below the SS range of validity, it does no good to try and trade it based on the SS outlook.  In practice, I apply the SS Copper outlook to both the industrial commodity complex and copper itself.

Silver?  Glad you asked.  As an elementary commodity with both monetary and industrial properties, its Synthetic Systems representation is a combination of the Gold and Copper plots.

I’ve selected the five asset classes followed by Synthetic Systems very purposefully.  Virtually every asset of use to investors, especially American investors, is in some way closely represented or at least implied by Synthetic Systems.  If you have in mind a widely used investment and it’s not apparent what Synthetic Systems has to say about it, please ask.

Synthetic Systems 2022.00