Synthetic Systems Comparison

I had planned to run only the “quick” SS posted in Markets Update, but due to the weighty implications of the current market juncture also ran the others. Much as we prefer to avoid unnecessary complexity, comparing the versions’ forecasts can give us a sense of where the greatest uncertainties lie. So here are all three together, using the same version nomenclature we used in Systems Beta. They’re all run based on the same data available as of the end of last week.

Bear in mind there is never certainty in predicting the future, especially in financial markets, and even the areas of agreement embed uncertainty, but more disagreement does indicate more uncertainty.

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4 thoughts on “Synthetic Systems Comparison

  1. kbird says:

    Thank you for the more detailed update. I have two questions.
    First, I look at your SSS forecast and assume that the gold/oil or gold/industrial commodities ratio will increase to a level even beyond where it was in March 2020. Is that interpretation correct?
    Second, am I correct in assuming that SSS is not recommending an investment in corporate bonds because long-term Treasury yields will decline during an ongoing market crash which is probably not great for corporate credit spreads?

    1. Bill Terrell says:

      Thanks, kbird.

      First question: Yes. The plots are total return, so not generally just price, but since copper and gold pay no dividends it does boil down to just price. A couple of caveats: Although oil correlates to copper fairly well, especially as the time frame rises, it’s imperfect. And SS is not generally as accurate on magnitude as on timing and direction (of course far from perfect on that as well).

      Second question: Well … corporate bonds lie somewhere between Treasury bonds and stocks on the SS plots, depending on credit quality. Gilt-edged corporates would behave closer to Bonds and junkier high yield closer to Stocks. And bear in mind that there’s no need to separately consider price and yield regarding SS plots … since they’re total return that’s all already taken into consideration.

  2. Bill Terrell says:

    A few comments on the forecast … the outlook for Bonds and Gold looks pretty attractive. I’m now overweight both. But there is a highly plausible fundamental scenario backing it up as well.

    I think the bond market especially is underpricing the policy outlook. The Fed has been very vocal about its determination to quell inflation, and there’s a lot of opinion in the financial arena holding that rates will have to rise much more to get the job done. But here at Financology we have not only SS but the FDI as well, and the latter tells us disinflation is in the pipeline. Likely due to the bond market’s already having done so much heavy lifting on the rates front.

    If so bond yields are stretched on the high side and prices on the low side, providing a nice tailwind over the coming months. In addition the belated return to normal rates after years of repression may well unravel some excess leverage and speculation. That could prompt a hasty retreat in rates and a surge in Treasury prices.

    Again I don’t tell SS what to think and don’t even have a way to, so when its opinions and mine come into concord, I feel better about both.

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