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From the Coxe Files: The real reason commodities are tumbling
JOHN HEINZL

00:00 EDT Wednesday, September 10, 2008

To hear Donald Coxe tell it, the commodity selloff ripping through Canada's stock market isno accident. It is the result of a deliberate, brilliantly executed planhatched at the highest levels of the U.S. Federal Reserve and Treasury.

Mr. Coxe is no paranoid conspiracy theorist. As the chairman and chief strategist of Harris Investment ManagementinChicago, he is one of the most respected investment authorities in NorthAmerica. He also happens to have lost about 10 per cent of his personalwealth in the commodity rout, which came at the worst possible time forhis Coxe Commodity Strategy Fund that started trading in June.

"Thishas done more damage to my personal wealth than anything in the last 20years," he said in an interview yesterday. But he has too much respectfor how the U.S. authorities engineered the collapse in commodities - amove he said was necessary to shore up the global financial system - tobe bitter.

"My attitude is, goddamn it, they're good ... it was brilliant."

To understandwhy commodities are plunging now - the S&P/TSX plummeted another 488points yesterday - you have to go back to mid-July, when the U.S.Federal Reserve and Treasury first announced steps to support mortgagegiants Fannie Mae and Freddie Mac.

The move, which ultimatelyled to the Treasury taking control of Fannie and Freddie this week,touched off a chain-reaction of market events that culminated with thewrenching decline in commodities.

According to Mr. Coxe, theFed's ultimate goal was to trigger a rally in financial stocks, whichwould, in theory, help banks hammered by the credit crisis raise freshcapital and repair their balance sheets. To accomplish this, thedecision to support Fannie and Freddie was deliberately announced on aSunday, which had the effect of maximizing the reaction from thinlytraded financial stocks on overseas markets.

Because many hedge fundswereusing massive leverage to short financials and go long on commodities,when North American markets opened and banks initially rallied, thefunds were forced to cover their short positions.

Atthe sametime, the U.S. dollar was rallying because the risk of holding Fannieand Freddie paper had diminished. The rising dollar, in turn,madecommodities less attractive, giving funds that were already scramblingto cover their financial shorts another reason to dump oil,grains andother commodities.

The losses were swift and dramatic. On theFriday before the July 11 announcement, crude oil closed at $145.18 abarrel. Over the following five days, it plunged 11per cent. "Leveragewas being unwound dramatically," Mr. Coxe said on a conference call last week. "We had a true panic."

As oiland other commodities were tumbling, fears about the slowingglobal economy were mounting, giving resources another push downhill.This was also in keeping with the Fed's wishes, because lower commodityprices would help quell fears about inflation.

Mr. Coxe has noproof that the Fed and Treasury acted in concert to boost financials andsink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. "There's no doubt whatever in my mind" about what happened, he says.

The futureis less certain, however. Now that Freddie and Fannie havebeen nationalized, the credit crisis is still very much alive andfinancial stocks are looking as shaky as ever. As for commodities, oncethe current storm passes, Mr. Coxe is confident they will recover.

© The Globe and Mail