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“Success produces confidence; confidence relaxes industry, and negligence ruins the reputation which accuracy had raised.”
                                          Ben Jonson

Commentary & Analysis
Questions on Goldman’s Commodities Call

I was thinking how nice it would be to have an investment position distribution machine as powerful as Goldman Sachs. Besides the fact they see many of the positions of other traders in so many different markets thanks to their lofty perch, they can also rely on Bloomberg, CNBC, and The Wall Street Journal to help them unload and/or drive up the value of their inventory. Is there anyone that didn’t hear the other day that Goldman was getting bullish again on commodities? Doubtful!

The question is: If global growth is slowing, as it seems based on the weaker than expected data out of the US, Germany, and China, how is it that commodities get another big fill up? I mean, other than because Goldman says so.

Is the linkage below irrelevant?

If the simple linkages defined above are still relevant, why is Goldman so bullish on stuff?

  • Maybe the slowdown will be only a temporary blip? Possible!
  • Maybe Goldman knows QE3 is on the way, based on the price action in the US dollar last night–it got hammered hard? Unlikely!
  • Or maybe Goldman knows there will also be a resolution to the Greek problem and systemic risk and contagion will be avoided? Possible, but…
  • Maybe the inflation threat has passed and China will gun it again? Possible!
  • Maybe inflation is the problem and hard assets will be the place to hide in a US economic stagflation world? Possible, but not my bet.
  • Maybe Jeremy Grantham is right and we are all Malthusians now and growth doesn’t matter–population does. Doubt it!
  • Maybe Goldman has a whole lot of inventory to distribute and was caught a bit flat-footed on the prior break in commodities? I want to go with this one of course because it is Goldman and I don’t trust a damn thing they say…but that’s a personal problem…
  • And about a hundred different reasons I didn’t list…

US$ Index, Commodities Index (CRB), and S&P 500 Index futures Daily:

Can we discern anything from the chart above? Well…I see some things…you may see others…

  1. The dollar is funding the move in risk assets (stocks and commodities)
  2. Stocks seem to be running ahead of commodities, i.e. a bit of divergence
  3. Commodities have been more tightly correlated with the dollar lately
  4. The dollar has bounced hard off its low

It makes sense then to watch stocks and the dollar price action to help us confirm Goldman’s call. If you don’t have time to do that, don’t worry, Goldman’s distribution machine will tell you what to do.

Happy Friday.