Why it all went wrong

Donald Coxe put his money on commodities just as they went bust. Now, he's betting on inflation, China and India

By DEREK DECLOET
Globe Investor Magazine online, February 19, 2009

Donald Coxe, 73 years old and unbowed, offers no apologies for getting it wrong on commodities in 2008. Instead, by way of explaining why he'll be proved right in the end, he offers an amazing story about Margaret Thatcher.

The tale takes place more than 30 years ago. Through pure chance, Coxe, then an obscure pension fund manager, found himself at a private dinner with Thatcher, then still the untested leader of the Opposition British Conservative party, at the home of E.P. Taylor, the legendary business tycoon.

At one point, Coxe wound up next to the woman who was about to become the first female Prime Minister of the United Kingdom. She was forecasting the future. And he was entranced. Thatcher told him she would win the next election (which she did the following year, 1979). She also told him that in 1980, Ronald Reagan would become the next U.S. president.

The two would attack the scourge of inflation with tough interest-rate policies, and both she and Reagan would survive the resulting recessions to win re-election. Thatcher, as Coxe tells the story, then predicted that by the late 1980s, "'We'll have defeated inflation, we'll have the West respecting itself and believing in free markets again.' And then she smiled and she looked at me and said, 'Mr. Coxe, perhaps also by then we'll have won the Cold War.'"

It's apparent by the enthusiasm with which he tells it that Coxe never tires of this anecdote. He is, after all, one of the few prominent Bay Street figures whose love for the markets is matched by a passion for history and politics, especially conservative politics. But as he speaks on this early winter day from his office on LaSalle Street in Chicago, Coxe is not merely reminiscing. He also has a serious point. Well, two.

The first is to let the listener know that he has been around for a long time, and seen more than a little bit of history- financial and otherwise. This is not some 36-year-old economics graduate who was still a university student when the early 1990s recession hit. Coxe doesn't hesitate to remind people that he entered the world of Bay Street in 1972, and thus has lived through the horrific bear market of 1973 and 1974-an event that had him convinced, by the dawn of 1975, that "I'd probably come into the wrong business."

But his second point is about the importance of leaders and leadership in tough times. Thatcher had a plan, and it pulled Britain out of stagnation, inflation and economic decline. Reagan's policies had a similar effect in the United States. Deng Xiaoping, who placed China on the road to a market economy, changed the world. So did Manmohan Singh, the current Prime Minister of India and the Finance Minister in 1991, who used a financial crisis to shake that country out of its decades-long embrace of socialism. "I'm not a believer in the idea that we're caught up in forces beyond our control," says Coxe. The right policies, combined with political will, matter. "So once I'm satisfied that we've got the smart people in there who are prepared to do whatever is necessary to prevent a collapse, I assume it will be done."

All of which serves to explain why Coxe-who in December left his post as Bank of Montreal's global portfolio strategist, to start Coxe Advisors LLC- believes that history will vindicate him and prove that his difficult 2008 was an aberration. While Coxe wasn't shocked to see a market meltdown last fall, he was caught badly off guard by the way the concomitant financial crisis destroyed prices for the commodities and commodity stocks that he has for years touted as the fastest way for investors to increase their wealth. Oil, after peaking at just short of $150 (U.S.) a barrel in July, fell to $45 (U.S.) by year-end. Corn, from a summertime high of roughly $8 a bushel, plunged to $4; copper went from about $4 a pound, to $1.40.

Few resource companies were spared, except for gold stocks. The shares of many junior mining companies lost most of their value. In the oil patch, even a blue chip like Suncor Energy Inc., a Coxe favourite, was down 56% in 2008. As for Coxe himself, he called the recession correctly, but stumbled on how to play it. "Stay overinvested in commodity stocks whose earnings and performance are tied to stronger economies in the Third World," he advised his readers in one of his "Basic Points" reports. The date was July 3, 2008. As it turned out, that was the best time not to buy commodities, but to sell them. The Reuters/ Jeffries CRB commodity price index peaked on July 2. Over the next six months, it plummeted by half.

Worse still, the market now had a simple way to track his mistakes. The $300-million Coxe Commodity Strategy Fund, after debuting to a warm reception from investors in June, was down 55% by mid- October. For Coxe, there's little escaping responsibility; even the ticker symbol, COX.un, makes it clear who is driving the fund.

The turning point was July 13, the Sunday that the U.S. government made its first steps toward what would soon become the nationalization of Freddie Mac and Fannie Mae, two giant mortgage guarantors in the U.S. That event, a precursor to the bankruptcy of Lehman Brothers Holdings two months later, moved the credit crisis to a new phase. Commodities began to sell off viciously. Coxe says that at one point during the downdraft, he had lost $2 million, or 40% of his personal equity portfolio. "From July 14 until, I would say, roughly last week, has been the most stressful [period] of my recent working life," he said in an interview shortly before Christmas. "You're talking to me at a time when I'm feeling somewhat beaten up."

So he's bruised. But wrong? Coxe doesn't think the word applies. "When the market seems to have gone to hell, you say, 'Well, aren't you realizing in the middle of the night that you were all wrong?' No!" He believes in the impact of strong leaders, and therefore believes the world-because of the efforts of Barack Obama, Ben Bernanke and the leaders of China and India and Europe, among others-will avoid spiralling into a 1930s-style depression. Not only will their policies breathe new life into the economy, Coxe predicts, they'll do it so quickly that Bernanke, the chairman of the U.S. Federal Reserve, will be worried about inflation by the end of this year.

Forget about the gloomy headlines: "I'm more and more of the view that we're going to find out that the surprise will be how strong we come out on the other side of this," he says. "It won't be long before inflationary pressures will show up. And, of course, they will show up first in the commodities." It's a forecast fit for an optimist, and one that few economists share in the winter of 2009.

The question is, after last year's debacle, how many other investors will buy the sunny outlook Coxe is selling?

At his stage in life, Coxe has little need to worry about his reputation. He insists that he left BMO on his own terms, and indeed, he's signed a deal to continue writing research and doing conference calls for investment advisers at BMO Nesbitt Burns, the bank's retail brokerage. He remains one of Canada's mostwatched market gurus. One rough year is not going to cause his loyal followers to stray. "For my money, he's the best in Canada," says Seymour Schulich, the billionaire investor and philanthropist. "Some of these guys, you look at and you think they're from Mars.... You know what I like about him is, he's got a real grasp of financial history."

Besides, as Schulich points out, plenty of smart people failed to foresee how awful 2008 would turn out to be. Jeffrey Rubin, the highly regarded economist from CIBC World Markets, originally forecast the S&P/TSX composite would rise to 16,200 on the back of constantly rising oil and metal prices (it ended at 8,987). The mutual funds managed by Eric Sprott and his team at Sprott Asset Management, arguably the best resource investors in the country, were ravaged, and the firm's stock fell as much as 77% below the price of its initial public offering in May.

But if Coxe was hardly the sole exponent of commodity bullishness in Canada, he is one of the most persistent, and certainly the most articulate. His speeches and writing are unlike that of any other investment strategist in the country. How many analysts would dare use a word like "rhadamanthine"

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