MUST READ: Unpacking Goldman's Supercycle Report for 2023
It’s not our first time at this rodeo…
Contents:
1-Background
2-Report Summary
3-Their Continued Bullish Thesis
4-GS on what happened in 2022
5-What are their Catalysts?
6-Why Do Supercycles Happen?
7-What are their Caveats?
8-The Contingency Plan for Oil and Metals
9-The Bottom Line
10-The Actionable Bottom Line
Background
Goldman is telling clients the supercycle they identified in 2020 is still in play for 2023. This year the driver for their thesis is underinvestment. The lack of investment applies not just to Capex, but simple inventory management.
They have noted correctly for the past few two years that energy inventories have been low which made markets susceptible to supply shocks or demand spikes. This makes them even more bullish fundamentally:
From a fundamental perspective, the setup for most commodities next year is more bullish than it has been at any point since we first highlighted the supercycle in October 2020
Please note they emphasize fundamentals here. Fundamentals have taken a back seat for now. People have less money. The cost of capital has risen while the spectre of protracted recession looms. Translation: Organic demand is dropping and there is less money around for investment in either paper markets or physical business.
The bank explains what is happening ( full report at bottom) and how they think it will end: “Across commodity markets, the rapid rise in the cost of capital lowers the incentive to hold either physical inventories or paper risk, distorting price discovery as financial markets react faster than the real economy, creating markets that are simply unprepared for sequential growth in 2023.”
They think financial markets have gotten ahead of themselves, distorted true price discovery and have left inventories low. This will in turn snap markets that much higher when (they believe) we have sequential growth in 2023. Lets dig in and see what we can find on this.
Report Summary
GS is going to their Supercycle concept again as prepped for readers back in August. We are familiar with this concept at its root from a Yale paper in 2002-ish ( re-attached at bottom). The bank successfully utilized that paper for its trading bias to be long backwardated commodities back then.1
Since then we have watched them closely with interest when they go this route as it has been correct on more than one occasion. Here is our summary of their current salient points from the new report with comments.
Their Continued Bullish Thesis
A failure to restock and low Capex sets the table for problems in 2023
Commodities are the best asset class 2 years in a row, therefore 2023 looks good
COMMENT:
The first driver is predicated on economic resurgence. The second is a product of identifying and running with a secular trend tied to the Anti-Goldilocks and structural stagflation. Short those two happening, their concept is heavily dependent on geopolitical uncertainty and/or regional weather. But their rationale is not wrong.