When one sits around all day reading Wall Street research, patterns emerge. One is that professional managers very obviously read one another’s stuff and copy it. Another is that Wall Street likes to find a kernel of truth in some market, blow it out of all proportion, and inflate a bubble so it can front-run with big client money before dumping it at the top on smaller and less valuable retail losers.
None of this is new. It was described by John Kenneth Galbraith in The Great Crash of 1929. It was described again by Ross Garnaut and myself in our ambitious sequel, The Great Crash of 2008.
Yet the one piece that stands out for me today, the one must read as it were, is by a journalist. It is Matt Taibii’s The Great American Bubble Machine at Rolling Stone. It is the story that captures the epicentre of the process, otherwise known as Goldman Sachs:
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The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.
Goldman is the intellectual leader of Wall Street. Other banks copy its research but it sets the agenda. Its business is neither truth nor equilibrium. It is bubble blowing par excellence.
Today’s example is the shiny and new commodities bubble that has inflated over the last six months. It was nurtured by Goldman. Blown to maturity by it. Now it is being carefully curated to a vast size. While beneath this bulging sack of offal is this, via RBC:
The price narrative for commodities has certainly been the dominant driver year to date, with price effects far outweighing underlying flows when it comes to notional AUM in the commodity investor universe that we analyze in our Commodity Surveyor series. This year has seen its stumbles and recoveries (gold stands out as an example here), and while we have relied on prices so far in 2021for our anticipated“strong cycle,” in most corners of the analysis we still await improved underlying interest in 2021.
Waiting on Underlying Interest: Year-to-date positive price effects have essentially doubled thenet underlying outflows in terms of absolute value in 2021 (i.e.,nearly $60bln versus $33bln in underlying outflows). This goes to show just how much the AUM gains in 2021 are attributable to the commodity-positive price narrative that has continued so far this year as the world begins to recover from COVID’s economic lows (in certain places at least), but underlying interest has yet to keep up. In fact, in AUM terms, the year-to-date average of every commodity subsector (precious metals, energy, base metals, and agriculture) is notionally higher than the full 2020 average and the same can be said for both index AUM and ETP AUM. Over the course of May, gold’s returning strength helped to push AUM up by more than everything else combined on a net basis, but energy, base metals, and “others” also helped to drive AUM higher, mostly because of prices.
The Food, Energy, and Commodity Story: The commodity price strength story has continued with energy, agriculture, and metals all playing their role. While gold has gotten its feet under itself again (after Q1 weakness) amid the ongoing inflation narrative that has been pursued as commodity-positive by investors, we think the broader appeal of commodities may have more to do with food and energy for the balance of this year. While commodities have a mixed history with CPI, the food and energy component, which is a key part of the supply chain driven narratives that have dominated market headlines, is where the commodity linkage materializes. Isolating its contribution is intuitive, particularly amid the recovery from the COVD-driven economic depths, and it is where any likely increases in commodity beta allocations will stem from if they do indeed materialize—most of the index gains to date have instead been due to prices.
Don’t get me wrong. There are real supply-side inflation frictions post-COVID. However, some large slice of the price inflation emanating from the global recovery is now derived from those profiteering from it via a commodities bubble.
Be warned. The Goldman’s blood funnel can only jam markets so full as the underlying conditions worsen. China is going to slow sharply, the US as well, and the global inventory supercycle will unwind.
Then this latest in a countless line of bubbles is also going to burst and spray blood everywhere.