With venerable U.S. financial institutions tumbling like dominoes, the stock market has suffered the defection of fearful investors anticipating economic disaster. But Don Coxe — the 72-year-old global portfolio strategist with Bank of Montreal, chairman of Chicago-based Harris Investment Management Inc. and one of the original commodities bulls — has been watching it unfold with equanimity.
The only ripple in his calm demeanour comes from the thrill of buying more of his favourite companies at bargain prices.
Coxe is the advisor to Coxe Commodity Strategy Fund, which began trading in June and, like most investment funds, has been hurt by swooning stock markets. Although he doubts that the U.S. financial crisis has been contained, he has not lost sight of what he thinks is a bigger, stronger and more durable story. The biggest trend of all, he says, is the growing scarcity (propelled by shrinking supplies) and increasing demand (thanks to growing middle classes in emerging countries such as India and China) for food, energy, gold and base metals.
Rather than getting caught up in doomsday projections, Coxe has recently been taking advantage of the frightening days in the stock market to deploy some of the fund’s remaining cash, buying companies that own energy or mineral reserves in the ground or actual ground in which to grow crops in politically secure areas of the world.
“My view is that commodities prices always revert to supply and demand, and demand is pressing up against any likely source of supply for all key commodities,” Coxe says. “Even if there is a slowdown in world economic growth, eventually the world is going to grow again. Everything that is taken out of the ground or consumed must be replaced. A long-term investor should have long-term exposure to commodities companies that produce the things the world needs.”
Coxe says the increase in global consumption being stimulated by the Indian and Chinese economies is one of the biggest stories the world has ever experienced. In terms of the level of economic activity, he expects it will take three decades for India and China to match the level of production that took North America 150 years to reach. Even if Chinese economic growth slows to 7%-8% a year from a recent pace of 10%-11% a year, he notes that this would still mean huge increases in consumption as the growth became exponential.
“We are experiencing the greatest simultaneous efflorescence of human economic liberty in history,” says Coxe. “The world’s consumer base is expanding as hundreds of millions of peasants and urban poor turn into consumers in the blink of an historical eye. Huge numbers of people are moving to dwellings with indoor plumbing, appliances and electricity, and to motorized transportation from bicycles and donkeys. Instead of eating bowls of rice and living in hovels, these people will be consuming higher-protein diets and using a lot of energy.”
The supply of commodities is constrained by limited reserves in the ground, production facilities and distribution capabilities, he says, with the greatest limitation being reserves.
“Commodities companies produce what we need; they are not just fads,” Coxe adds. “Governments can create endless amounts of money, technology companies can make more tech gear and automobile companies can produce more cars that nobody wants to buy, but the earth cannot produce indefinite quantities of commodities. We are facing a fundamental scarcity and I’m thrilled that we are now able to buy [commodity stocks] far more cheaply than we could before. It’s a great story and it hasn’t changed.”
He is amazed that stocks have sold down as far as they have, given that people will continue to eat and live in homes. But, he says, the extreme sell-off in commodities stocks in recent months was largely a consequence of the efforts of the U.S. government and the Federal Reserve Board to prop up vulnerable U.S. financial institutions and the U.S. dollar. He expects that demand for commodities will soon reassert itself, even as the dominoes continue to fall in financial services and new problems come to light in more places.
“Opacity has never been as bad as it is now,” Coxe says, “and no one knows the condition of some U.S. banks’ balance sheets.”
He believes U.S. treasury secretary Henry Paulson and Fed chairman Ben Bernanke staged a massive intervention in capital markets with the bailout of Fannie May and Freddie Mac, which unleashed a rapid rise in bank stocks on global markets. As bank stocks rose, hedge funds that had been short on banks and long on commodities such as oil and gold suddenly raced to the other side of the ship. Gold and oil prices plummeted and the markets experienced the biggest collapse in commodities stocks since the boom began six years ago.
@page_break@It all looked rosy for the string-pullers behind the strategy, as the collapse in gold, oil and other commodities prices eased inflationary pressures and removed the need to raise interest rates to support the US$, Coxe says. But the relief will be short-lived. Sovereign investment funds and other investors are reluctant to help weak U.S. banks and other financial services companies raise more equity, and as a result, stock prices will face further weakness, he says. Meanwhile, gold and oil stock prices have begun to edge back from lows reached shortly after the Fannie May and Freddie Mac rescues.
Ultimately, the continuing capital injections that the U.S. government is making to shore up wobbling financial institutions will place a burden on the U.S. taxpayer, weaken the US$ and strengthen gold. Coxe believes the stage is being set for inflation down the road. In addition, interest rates on 10-year U.S. treasuries are so low that they are negative in real teams. That, he says, is an antidote to any prolonged economic slowdown.
“History indicates there will not be a serious recession with real interest rates at these levels, and that the economic recovery will have an inflationary backdrop,” he says. “There will be more financial crises, but I can’t see how the U.S. government can keep pulling rabbits out of a hat — and that will be good for gold.”
Coxe’s recommended asset allocation for commodities is 35% agriculture, 29% energy, 25% precious metals and 11% in base metals and steel. IE
Commodities bull says it’s time for bargain-hunting
Don Coxe says long-term investors should have exposure to commodities companies that produce the things the world needs
- By: Jade Hemeon
- October 1, 2008 October 1, 2008
- 09:43