Well, if you were waiting on signs that Goldman is on the verge of turning things around in its struggling commodities unit, you might have to wait a little longer because Bloomberg just reported that according to “people familiar with the matter”, commodities revenues for 2017 plunged 75% to the lowest on record.
jesus. *GOLDMAN COMMODITY REVENUE SAID TO DROP 75% TO LOWEST ON RECORD
— Heisenberg Report (@heisenbergrpt) January 16, 2018
That’s some rough shit right there, and it underscores just how dire the situation had become when the bank embarked on an effort to turn things around after an abysmal Q2 performance.
Back in July, on the Q2 call, CFO Marty Chavez said the following about FICC performance:
We are a market leader in commodities, but it was a challenging environment on multiple fronts.
[…]
Commodities was also significantly lower and was our worst quarter on record.
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Not surprisingly given the results, it was a difficult quarter on all fronts. The market backdrop was challenged. Client activity remained light and we didn’t navigate the market as well as we aspire to or as well as we have in the past. Nevertheless, the firm remains committed in every way to help our clients manage their commodity risk.
Asked by UBS’ Brennan Hawken to explain that further, Chavez said this:
So, I would just observe that out of the 73 quarters that we’ve been a public company, it was the worst quarter for the commodities business and we don’t break out further – the contribution of the individual product lines.
There is a lot of reasons for that but really, we just think of it as a business that serves the clients holistically across a number of different products. And that’s where I’ll leave it.
So that’s “where he left it” – until October when Goldman’s Q3 results showed a 26% drop in FICC trading revenue (which was actually better than expected). Commenting on the Q3 call, Chavez weighed in as follows, responding to a question during the analyst Q&A:
So for commodities business, even though it was an improvement from the second quarter, which I’ll remember, was our worst commodities quarter in our history as a public company of 73 quarters. Now it’s 74 quarters as a public company, as I mentioned, the third quarter commodity performance was bottom decile of those 74 quarters. And it’s on track to have the worst full year performance since the IPO.
As you can see, Tuesday’s Bloomberg story isn’t really a “surprise” per se, but it’s certainly notable. While the bank doesn’t break out the results individually, Bloomberg estimates that the bank’s net revenues in commodities in 2017 fell to something on the order of $300 million, less than half of what Morgan generated.
“While the contribution of commodities to the banks’ overall results these days is small, the asset class was once a significant driver of profits,” Bloomberg notes, recalling the halcyon days, before reminding you that “in the mid-2000s, Goldman enjoyed net revenues that peaked at $3.4 billion in 2009 thanks to volatile markets, rising interest from investors and little competition from other banks.”
Note the “volatile markets” bit. As we recently documented in detail over at DealBreaker, commodity traders are now flocking to Bitcoin and other cryptocurrencies in an effort to escape the throes of the low vol. regime. To wit:
More than a few folks — myself included — have suggested that given the prevailing market conditions, it might be time for the pros to take the plunge into Bitcoin in an effort to find some volatility. As Barclays wrote last week ahead of the Cboe’s Bitcoin futures launch, “Bitcoin is 15-25x as volatile as the S&P 500, 20x-40x as volatile as gold, and even 5x-11x as volatile as oil as measured by the coefficient of variation.” Here’s the chart on that:
In the same vein, WSJ ran a piece last month called “In Bitcoin, Commodity Traders Try To Revive Heady Days,” detailing what certainly sounds like a frantic scramble by discouraged traders to grab a volatility lifeline in the crypto space. To wit:
With volatility and interest in commodities dwindling, some traders say they can’t afford to lose out on the bitcoin frenzy, even if the nascent market is rife with risks. With a finite number of bitcoins that can be created through “mining,” bitcoin isn’t exotic to commodities traders used to parsing supply and demand.
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Typhon Capital Management, a hedge fund that invests in commodities, plans to launch several funds dedicated to cryptocurrencies in January. The funds, with strategies like passive investing, algorithmic trading and arbitraging price differences, will be led by George Michalopoulos, who managed the oil volatility portfolio at Citadel Investment Group until 2011.
“The interest has been staggering,” said James Koutoulas, chief executive of Typhon, citing inquiries from endowments, foundations, and family offices in the Middle East and Asia. “These are investors that won’t return calls for our excellent commodity-trading strategies. For crypto, they’re calling us.”
Well as you know, Goldman is reportedly moving quickly to get a cryptocurrency trading desk up and running. Here’s how we put it in a separate post for DealBreaker:
Yes, “if not earlier.” Because make no mistake, this is an opportunity. You’ve got everyone in the world screaming “just get me in,” you’ve got huge spreads, you’ve got massive volatility, and if you’re Goldman, you’ve got an opportunity to be the first “established” player to get into the game. This is the rough equivalent of being the first major cartel to move into the distribution of a new drug that heretofore was only available through upstart dealers with no track record. It’s a veritable goldmine.
So to the extent Goldman can classify Bitcoin as a “commodity”, maybe they can rescue the unit with a little magic crypto dust because as we saw on Tuesday morning, there’s still no shortage of volatility in that space.
Still, they’ll need to be careful because I’m not sure past performance in traditional commodities is a guarantee of future results in Bitcoin. If these swashbucklers thought commodities were exciting, just wait until they find themselves trading against someone’s Dewar’s-guzzling, chain-smoking grandma who’s placing orders on Coinbase while shrieking “hit me” to the blackjack dealer. Or against a Millennial who’s literally gambling his student loan disbursements on GDAX at 3 in the morning while doing a keg stand.
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