Two weeks ago today in The Sky Is Falling! I commented on the big picture state of the markets, saying “I like cash, gold, cash, copper, cash, industrial commodities, cash, energy … did we mention cash?”. Everything we’ve seen since underscores this. Financial assets in general, stocks and bonds in particular, are in a bear market.
The cause? Inflation is a popular diagnosis among financial practitioners. More generally though, it’s the same as most bear markets. Prices simply went too high. All else is mere catalyst.
For the time being, bonds are taking the lead. It’s global carnage out there. Treasuries, which we follow most closely here at Financology, have been following the Synthetic Systems script quite closely. Stocks have fared a bit worse than SS forecast, and gold a bit better. Copper thus far has been the main miss, while energy has so far taken the lead in the commodity space. It’s appropriate to recall our caution that copper in SS serves as a surrogate for industrial commodities as a class, so this is not altogether unexpected, but even considering that, we’re not running a victory lap around our copper forecast yet. It’s still early in the year though, and so far the time frame is well below Synthetic Systems’ range of validity.
The singular message of the Bills plot, the bull market in the dollar, continues to rule the charts. The declines in stocks are at least partly a phenomenon of an increase in the value of the pricing unit. It bears reemphasizing that the plots are best taken together. Also comments a fortnight ago about the importance of global diversification within the stocks asset class are being validated as US stock have broadly underperformed their non US counterparts. Given the state of sentiment the potential for a short term rally is good, and SS expects the bulk of the downside later in the year, but the bulk of the fundamental risk is to the downside.
Gold has generally defied the strong dollar, perhaps benefiting from the weakness across financial assets. If the spill SS forseees for early 2022 materializes, it could turn out to be nice buying opportunity.
In general, I still like cash, gold, cash, copper, cash, industrial commodities, cash, energy … did we mention cash …