Synthetic Systems MidQuarter Update

This is a special midquarter update of Synthetic Systems in light of the recent market activity.  Normally we don’t run updates more frequently than quarterly because they don’t change that much shorter term.  This is also the case with this one … but it’s nevertheless nice to have that reassurance anyway.

It’s first worth recalling that SS’s range of validity is about one quarter year on up to about four years.  Yet in practice it’s still more accurate than not even in shorter time frames.  In this chart we can see the portion of 2022 that has already elapsed and compare with the chart run at the beginning of the year, reproduced immediately below it.

Among other things, we can see the rally in gold has taken place much as forecast.  So has the rally in the dollar (Bills).  Likewise with the decline in longer term Treasuries (Bonds) and the volatility in stocks.

Copper has also behaved much as expected at this early date. Recall however that copper is a proxy for industrial commodities as a class; in practice it’s not practical to allocate much to copper as it would take many pounds of the stuff to be a significant part of most portfolios.  Instead we use a mix of copper futures funds, broader commodity futures funds, energy stocks, mining stocks, and agricultural stocks, and with a light touch as well due to the volatility in this space as well as the difficulty tracking it.  The main significance of the copper plot isn’t as an actionable investment guide, but as an economic indicator of inflation. 

It’s also important to recall that the plots are not denominated in dollars; they must be considered together.  For example the overall Stocks plot is pretty level in this time frame, but the Bills plot is rising, indicating a decline in dollar denominated prices.  Specifically, Stocks have been underperforming Bills, just as forecast by the relatively level Stocks plot against the upward incline of the Bills plot.  It’s also important to remember that Stocks is the entire world market, which has outperformed the US market recently.

The overall outlook of course is what we’re most interested in.  Bonds particularly are in a bear market, despite the forecast of an imminent counter trend rally.  Gold has been strong and the long term outlook remains positive, but there is a risk of a meaningful decline in the near term, especially in dollar terms.  Although stock price declines have been in the news, so far this is mostly a function of rising dollars.  The bigger risk in stocks is forecast near the end of the year, after a likely summer rally.  Of course we’ll have further updates before we get there.

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2 thoughts on “Synthetic Systems MidQuarter Update

  1. jk says:

    thank you for the update. we live in interesting times, so i’m especially appreciative of more information.

  2. Bill Terrell says:

    Just a quick follow up note … we are in fact now seeing the above predicted “imminent counter trend rally” in bonds. Bear in mind it has a limited lease and there appears to be at least one final leg down in bonds before they return to bull market mode.

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