Goldman Sach's Copper Report Under the Microscope
Yesterday, Goldman Sachs released its outlook for Copper in 2017. We take a cursory look at the meta-message in it first. Then a cynical if not honest view on how we digest "reports" in general. Finally Dr. Copper is placed alongside Gold, Bonds, and Stocks for the coming 1970's Inflation redux -vbl
- Copper is up 20.85% this year, second only to palladium in US futures metals trading.
- Goldman Sachs is taking a bullish view for 2017 in sharp contrast to their admittedly "bearish expectations" for 2016
- They hesitate to "blame speculators" on why they were wrong in 2016- hesitate, but not assuaged
- Speculators are now cited as the soothsayers who saw "fundamental underpinnings" before the Bank did.
Here is the Cover Page on GS's Copper Report
Goldman is Now Bullish Copper
The fundamentals are bullish and GS is now able to be assertive in its own bullishness. Commodity research reports almost always site fundamentals as the rationale of their opinions, and rightly so. However, markets discount the future. If one were to follow the script with this in mind, one could induce the following thought process in the researcher's mind: footnotes in italics
- We were bearish on Copper in 2016 for fundamental reasons
- Speculators drove prices up, but we did not see a change in fundamentals to support this- Stick to their guns
- No end in sight to the rally now- we can raise our bearish targets or cop to being bullish- for whatever the real reason, clients are not privy
- We hesitate to blame speculators for the market making us wrong in 2016- but.... they kind of are to blame right?
- Now we see that the speculators were speculating that the fundamentals were turning bullish, and they were right.- lucky, not good!
- Based on the changing fundamentals which obviously underpinned this speculative demand in 2016, we see the market staying strong on fundamentals now- for 6 months, which we think is not a "fundamental" time frame
Got it? In one report, the speculators are both blamed (hesitantly), and simultaneously cited as prognosticators in seeing changes in fundamentals.
interactive chart here
How to Read Any Research Report
This is how to read a research report. First, strip the rhetoric by lining up the facts or opinions chronologically in bullet form. Look to then insert words like: because ,or why, or despite to link statements. Then determine if correlation is indeed causation in your links. Then agree or disagree with the report. Obvious example:
GOLD RALLIED AS TESLA WENT BROKE
- gold rallied
- tesla went broke
Because?.. NO! Despite?... NO! Gold is why?.. NO! Tesla is why?.. NO!
Conclusion. The word "AS" is a ubiquitous link word used to cram search engine words in headlines. Is it possible that Elon Musk was financing his company through a gold short carry trade? YES. Did he? Not from what we see.
'Copper rallies as speculators front run fundamentals" is a good headline we think for the GS report
[EDIT:consumed, not comsummed!!]
Nobody is 100% Objective
Keep in mind that the overriding and possibly unconscious goal of every analyst is job security. That makes every report you read (including this one) not entirely objective. The key to understanding what lies between the lines is not in facts or objective evidence. All reports contain those. If reports were just facts, then they would be commodities themselves and void of difference from firm to firm. The difference is in the Quality.
Questions in Search of Quality Analytics
Does the analyst allow for his own subjective biases? Does he admit he is not 100% objective all the time? This would show up in statements that consider what would make his opinion wrong BEFORE it is wrong.
Does the firm give insights that have value or quality? Does the report show under what circumstances the analyst would rethink his thesis? Is he married to his ideas when he is wrong? Does he use "estimate creep" by raising his target slowly when he is bearish and wrong? Does he omit entire quarters in his revised statement?
It is in reading between the lines using empathy to understand the author's biases, even if he does not, that the facts can be separated from that bias.
The Goldman Report- Reading the Analyst's Mind
- Fundamentals were bearish in 2016
- Market rallied anyway on "speculation"
- "Speculation" is used when you don't know or can't say why they speculated.-Specs are dumb or smart, not evil.
- Revised fundamentals prove the speculators were right, but not given credit for their foresight- what changed in fundamentals?
- Bullish 2017 opinion for 1st half is:
- a pull-back in analyst confidence or
- a comment that fundamentals aren't really behind the next leg up if it happens or
- because flows from the Bank continue to be allocated into copper, or
- begrudgingly done because the analyst is still actually bearish
Any combination of the above and/or other bias drivers unknown should be allowed for. This is subjective probability and analysis in practical form. Narrative evolution using multiple reports is more important that single statements. For this post, we haven't even read the rest of the report yet, and must admit the author may address the things we list. So take it for what it is worth. The tools are valid, but our "autopsy" is itself incomplete for public consumption. But our "soundbite" of their summary asumes you won't buy after 2 sentences.
What to Look for in Future Reports
Trade Recommendations- Reports are Chum
If GS says buy copper with a stop. Be wary. When clients receive research reports well, the reports are often used as a marketing tool.
- Prop desks may position themselves long with client limit orders as stop outs.
- Client market orders put prop positions in the money.
- When prop desk sees buy-side flow drying up, those client orders are filled by the prop desk selling its own positions out to them.
If the Bullish Call is Right
Not much to say except use the method to dissect a report outlined above
If the Bullish Call is Wrong
Axioms like the following will be trotted out:
- The cure for high prices were high prices, we knew it!
- We guess the Speculators got ahead of themselves
- Fundamentals are still bullish, this is a healthy pullback as weak longs are shaken out
- This is why we were bullish only for the first half of 2017. Seems our timing was a bit off, and the bear trend resumed earlier than expected
The analyst will then either go back to being bearish with some justification in his next report after that. Or he will be less bullish in a slow drift away from his opinion.
What Fundamental Analysis Misses
Markets discount the future. Fundamentals are often observable in Technicals. When fundamentals are being ignored, technicals will tell you to rethink. Witness the Stock market bull run of the last 5 years. Can anyone say that was fundamental? Either the market is now discounting inflationary pricing and is ahead of itself, or we are in advance of a full Goldilocks economic recovery. Or the market is just a tool of the Government used to manage the public's expectations. Which brings us to the question of how the copper rally fits into the scheme of things.
So far markets are telegraphing a return to old fashioned inflation. What follows is our soundbite on copper's rally and how it fits in the scheme of things.
Inflation is the End Game
We think the copper and stock market rallies are in anticipation of the end game, and the organic economic recovery will eventually happen. We also think that when the good numbers start to really come in, the stock market will go sideways to lower. A multi-year buy the rumor, sell the news thing, if you will. But we are not married to our idea.
FTA: Trump Makes Debt Great Again
Governments Only Care About Themselves
The US Government has expanded its balance sheet to buy bonds. Next it will buy stocks we feel. Finally it will (if it isn’t already) buy things. Things like Oil and Gold. Of course the Government won’t announce they are buying Gold or Wheat, or Oil. But they will directly or through subsidized proxies. Expect CPI to get adjusted even more. Government books are cooked all around. We're just getting started on that concept here, and hope to show more in the months ahead.
The People Will Bear the Burden
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money. Life is to be entered upon with courage. Americans are so enamored of equality that they would rather be equal in slavery than unequal in freedom.”
Will the public be invested in the things the Government buys? Doubtful. But the public will be the ones paying higher prices for finished products in the end. You will bear the burden of our government unloading its debt indirectly but with much pain. The Chinese method of de-dollarizing has already shown us the template for the US government puking its own inflation risk onto its populace when the time comes. In the end, the masses will bear the burden of the machinations of Fed fantasy. So, Gold is never a sale as long as you are paid in dollars and have stock market exposure.
Bonds First, Gold Last to the Inflation Party?
You have to be nuts to sell Gold as a part of your portfolio. If you have the proper allocation of Gold to stocks, then last week should have been a good week for you. Speculation is a different story. But when stocks go up and Gold goes down, be happy. Bonds? In a normative market, Bonds predict, Stocks predict less so, industrial commodities react in real time, and Gold lags.
Bonds are discounting 2 years down the road again. That is because the government is not going to be manipulating them with QE we feel. That is your compass to know that gold will do well in the future. The key for you as an investor is to keep rebalancing your portfolio as stocks rise and Gold drops.
Emerging Markets Will Hold the Bag Again- Then Get Your Gold On!
Right now we see a 1970's style inflation coming. Stocks and industrial commodities up. Bonds down. And at the end, after the rest of the world has gotten long(er) USD and the U.S. and China have divested, the greenback will then circle the drain. Gold will start to rally in an orderly fashion somewhere in there. And when the dollar starts to circle the drain, Gold will then go geometric. The entropy of currencies will increase as the circle shrinks on the way down. The seeming overnight collapse of the USD will have been 5 years in the making. Stocks will then underperform, having already discounted inflation.
China and The US are Co-dependent
The Fed is enjoying the fruits of a global USD short-squeeze, if they didn't orchestrate it themselves. For now, the West needs to get out of its debt. And weaker currencies are a slow default. That is how it ends. The path to that end may vary, but it must end that way. And the West must protect its biggest creditor, China. Right now we are enabling our creditor's exit strategy. China's inability to transform its own economy into a consumer one on schedule ahs made our involvemnt in protecting them that much more important. If China were to be a consumer economy overnight, you can be sure, the USD would be weaker.
But we could be wrong., and will revise that opinion as data comes in.
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