Don Coxe Question & Answer Session ~ market folly

Wednesday, April 15, 2009

Don Coxe Question & Answer Session

Recently, Donald Coxe sat down with The Globe and Mail's new section 'Globe Investor' and answered reader submitted questions. Since we've covered some of Coxe's thoughts in the past, we thought it would be prudent to let readers become more acquainted with him.

If you're unfamiliar with Coxe, he is the former global strategist for BMO Financial Group and writes a monthly journal entitled 'Basic Points.' (We recently posted up his March 2009 Basic Points). He likes to invest in stories that are "on Page Sixteen of publications" rather than the front-page story, under the assumption that the story in question could very well become the front-page story, allowing you to ride the wave. Coxe is an agricultural bull and has additionally focused a lot on commodities. In fact, Coxe shares a lot of views with noted investor Jim Rogers (whose portfolio we've also covered on the blog here).

Coxe brought up some interesting insight in his Q&A session:

"Question: Why will printing more money be inflationary in a deflationary environment? In the past year the world has lost an immense amount of wealth, tens of trillions of dollars. If governments print money, to start replacing that which has been lost, why is this inflationary to the currency printed? If there is an enormous hole in the ground, and governments are just starting to fill it up again, why will money lost its value?

Don Coxe: Inflation is primarily a transactional issue, although it usually eventually translates into asset pricing of assets deemed to be hedges against inflation. In the 70s, there was a deep recession, accompanied by high inflation because of excess monetary expansion at a time of soaring food and fuel prices. It could happen again.

Question: With reference to his famous quote “never invest in a page 1 story, invest in a page 16 story” why did he go against his own counsel with an IPO largely based on food/fertilizer stocks in May, 2008 – AT THE TOP OF THE MANIA – when food riot stories were plastered all over page 1?

Don Coxe: Good question. It took us some months to get the prospectus cleared so the timing was clearly suboptimal. That said, because we kept large amounts of cash and only deployed it over 8 months, we’ve got a portfolio that should perform well over the time horizon we chose: five years.

Question: We are getting very diverse opinions lately on the direction of gold, I’m starting to wonder if the opinions are based people’s own self interest. On one hand we hear that gold prices are going down because gold, being a safe haven, as the markets improve investors are pulling their money out of gold and driving down the price. Also as the US markets improve the US dollar will rise and drive down the price of gold even further. On the other hand we hear that because the US government has embarked on a plan of quantitive easing this will eventually result in inflation, devaluing the dollar and rising the price of gold. We hear gold future prices anywhere from $700 to $2000. Can you give us your opinion.

Don Coxe: Gold is buffeted by the economic and demographic deflations on the one hand, rising financial risk and humungous monetary expansions on the other. We see it gradually taking a large role in global monetary policies---which implies significantly higher prices. Its haven aspects show up in day-to-day trading: gold tends to climb when broad stock indices are weakening.

Question: Bond Markets are anticipating severe recessionary conditions. What areas would seem to offer the best opportunities at present?

Don Coxe: Bond markets are sharply divergent from equity markets in recent weeks. Such disjunctions in the past have more often than not validated the bondbuyers’ views. If that isn’t the case this time, it will probably be because of stagflationary conditions.

Question: Today copper inventories at the LME went up 2300 tons, while the price of copper went up .07 cents. How can copper continue to go up in the face of a global recession?. Is this short covering, or real demand for copper from China or elsewhere??

Don Coxe: I am skeptical of copper’s surge at a time that other non-food commodities—notably oil—are so weak. It wasn’t that long ago that Japanese traders tried to corner copper—with disastrous results. That said, China’s stimulus package seems to be working, which means there’s real demand out there. I like the food commodities better.

Question: What is your view on silver bullion vis-a-vis gold bullion? Thanks

Don Coxe: I haven’t been a real bull on silver since we cashed out my son’s hoard of silver coins at the peak of the silver mania. It’s not truly a monetary metal, and it tarnishes, which means it isn’t a pure precious metal—and its main industrial use was photography, which has been rendered obsolete by technology. Gold is the pure play, but it will doubtless drag silver along. I like simple concepts."

As you can see, Coxe continues to be a long-term (5 years) bull on commodities and on agriculture in particular. We've only highlighted a few of the questions from the session, so make sure you check out the entire transcript at Globe Investor.

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