The Smartest Move I Ever Made in the Oil Markets Was Walking Out on These Two Guys…

postcards from the florida republic

An independent and profitable state of mind.

 

Dear Fellow Expatriate,

I wore jeans and an old Jos. A. Bank jacket that evening. The villains wore $3,000 suits.

Their wristwatches - excuse me, “timepieces” - were worth more than my student loan balance. They drank $35 glasses of scotch.

In early 2008, I made, by American standards, a middle-class salary in Manhattan (though, I’ve got to be honest, it felt like minimum wage). We were all the same age, but everyone else at the table earned $800,000 a year…

They told me so. And they flaunted it - well.

When I was asked to join several Wall Street oil traders for drinks, I thought it might be a chance to break into the world of commodity trading. I’d thought the traders from some of Wall Street’s financial institutions were the experts…

It turns out… they were playing an old bait-and-switch game.

And I needed to learn the rules. And believe me, so do you…

Teach Your Kids: It Doesn’t Pay to Be Young and Naïve

I went to the Medill School of Journalism at Northwestern University. My co-graduates now work at The New York Times, CNN, and other mainstream outlets. That’s not a compliment to most.

I remember being 19 years old, listening to old-guard journalism professors. They taught us to respect authority and to build a network of experts for insights. “Trust the experts,” they said.

Of course, at the time, the faculty didn’t. In those years, there was essentially open protest underway against the Bush II administration. When I graduated in 2004, the commencement speaker spent 45 minutes ranting about “weapons of mass destruction” in Iraq and called for the arrest of the Vice President of the United States. Civil times, they were…

I was in my twenties, and I still believed as I’d been instructed. So, by the time I hit Wall Street, I thought of Goldman Sachs and Citigroup as gilded ivory towers for finance.

How could I not? I remember the little white business cards with the light blue “Goldman Sachs” printed. The prestige that came with the investment bank.

Everyone wanted a job there.

Why would they ever lie? Why would they give forecasts that weren’t accurate and unmoored from evidence? If Goldman Sachs analysts took the time to pen a five-page report arguing that oil prices would surge another 50%, clearly, it would happen.

Right? Right?

Then I had drinks with those two energy traders.

From $200 Oil to Under $40… in Less Than Five Minutes

The two energy traders had been friends of a friend for a few years. They had previously worked in derivative sales, but they had come from oil desks in the past.

I thought it’d be great to meet people who’d taken a path I wanted to pursue, to move deeper into the commodity trade.

It was January 2008. If you remember, it was a time of great uncertainty in the markets – similar to where we are today.

The mortgage derivatives markets were on the verge of breaking down. Rumors of Bear Stearns’ collapse would later prove true.

I was picking up on a few clues at the time. Wheat contracts would severely disconnect from the physical market. Oil and natural gas futures were surging, and prices were disconnecting from the fundamentals. But Wall Street still put the veneer of bullishness on the global commodity trade.

Rumors were swirling that Goldman Sachs analyst Arjun Murti was on the verge of projecting that oil was heading to $200 per barrel. He would publish that very forecast later in 2008.

Murti had placed oil prices 12 months at the high end at $135 in September 2007; his forecast generated headlines everywhere.

At the drinks table, the lights were dim. One of the traders was to my left, but I could only see his bleached teeth and his narrow eyes clearly in the dusky overhead light.

I asked the trader about Murti and that seismic $135 oil prediction.

He didn’t even let me finish my question.

He laughed, shook his head, and said that oil was going to $40 per barrel that year.

These two traders were shorting oil. It felt like they were in on a joke that I didn’t quite understand.

Again, one of the prominent energy analysts had predicted a surge in oil prices.

Yet, despite the so-called “Chinese wall” that supposedly divided analysts from trading operations at the big houses, they were betting against the market and the speculators.

It seemed they knew something that I hadn’t yet understood about the financial world in 2008.

I felt like they were laughing at me for being naïve.

“…You Get to Know People in This Town.”

I didn’t say much after that.

These guys were talking about their bonuses and their condos. Our time was ending. They put the tab on a Goldman credit card. We tipped cash. Everyone was talking about their plans for the rest of the evening.

I’ll never forget what came next…

One of the two traders said that they were going to a private party in the company of a famous New York celebrity – Derek Jeter, and his wife, Hailey.

I asked how he found himself a member of the inner circle of this famous person. He leaned in a wry smile, eyes up, proud:

“When you sleep with a lot of models,” he said. “You get to know people in this town.”

Two minutes later, I shook his hand and said goodbye.

Three minutes later, I had my coat.

Four minutes later, I raised my hand and hailed a cab.

Within ten, I reached a dive bar in the West Village where I felt some normalcy, away from the corruption.

I quit my job a month after that conversation and “expatriated” to Florida. It would be the start of my studies of Wall Street, behavioral finance, and my graduate school odyssey.

If I Knew Then… What I Knew Now

We know what happened next. Oil prices cratered to less than $40 per barrel by the end of 2008. These traders had been quite correct, and I’m sure they made their firm a fortune in the process… betting against the very research produced by their firm.

That decade, Goldman also had John Paulson as a client. They sold mortgage-backed securities (knowing the underlying assets were failing) and then allowed Paulson to bet against institutions to whom Goldman was selling such products.

It was the ultimate bait-and-switch.

Even though Goldman later said it doesn’t make money betting against its clients, emails later proved it to be true (Goldman, of course, denied any evidence of these claims.)

There were plenty of other Goldman scandals…

Bonuses paid despite the 2009 financial crash… benefits from the $180 billion bailout of AIG… a $60 million fine for bad loans to the state of Massachusetts (they banked a lot more from that scheme)… stock price manipulation… commodity manipulation… offshore tax havens… multiple insider trading cases… and the 1MDB Malaysian sovereign wealth scandal from years ago.

It's Not Just Goldman Sachs, It’s Everywhere

There’s plenty of filth to go around on Wall Street.

In 2009, after the commodity research company I’d joined had layoffs, I decided to return to graduate school. I attended Johns Hopkins, where I wrote my thesis on the 2008 financial crisis.

I studied its origins, I learned quantitative methods. I worked with professors from the World Bank and multiple presidential administrations - which helped me obtain consulting gigs with agencies across Washington, D.C.

But something funny happened while studying in Washington.

I worked for a lobbying arm that had built a public relations campaign during the drafting of the Dodd-Frank Act. Our job was to help convince people that JPMorgan Chase had no role in the mortgage-backed securities crisis.

At work, my bosses told me, “JPMorgan did nothing wrong.” In my studies… I was diving deep into everything JPMorgan did wrong.

Ever since I’ve remained very skeptical of Wall Street banks and their forecasts. Through multiple degrees and another decade in financial research, I’ve learned how the game works.

So… When Goldman Said $90 Per Barrel in April…

On my 42nd birthday this year, OPEC cut its production for the first time in 2023. In April, it forecast additional weakness in the global oil markets, particularly from Chinese demand.

So, what did Goldman Sachs do? It predicted that oil prices would shoot above $90 later this year.

At the time, I explained that OPEC forecasters are good at what they do. On April 3, I told the exact story about the oil traders in 2008. I said when “I hear Goldman Sachs acting bullish on commodities in the face of economic concerns, I hesitate. And I look at this situation and start to plot my attack.”

Under the headline “Don’t Trust Goldman Sachs,” and during my live broadcast, I made the case that oil prices would go lower, not higher. Even though oil popped that day, it started a retreat and gave back all its OPEC cut gains over the month of April.

In just a few weeks, oil prices pulled back from the high $70s to the high $60s.

Then, in early June, OPEC cut production again… with Saudi Arabia taking a 1 million barrel-per-day cut. Once again, Goldman Sachs forecast that oil would push back into the $90s. This was just 11 days ago in Bloomberg.

Once again, I warned oil prices were heading lower - not higher - in the short term.

And after all of this… what happened last week? Just three days after the new projection, Goldman Sachs cut its year-end oil forecast from $95… to $89… and finally to $81 per barrel.

I’m sure they offered their clients an “out” on their existing oil positions.

It’s been a long journey to get to this point. I’ve worked in oil-and-gas consulting and taken on plenty of academic and career pursuits across the world… but I always return to this lesson about naivety around Wall Street commodity forecasts.

Be very diligent - to a fault. Do your own research. And don’t make a bet just because you read a headline. There’s usually something else lurking behind that forecast. On Wall Street, there’s always an ulterior motive. 

And it’s usually never in the favor of the retail investor.

 

To your wealth,

Garrett Baldwin

Florida Republic Capital (Available on Substack)

 

About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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