To hear Donald Coxe tell it, the commodity selloffripping through Canada's stock market is no accident. It is the result of adeliberate, brilliantly executed plan hatched at the highest levels of the U.S.Federal Reserve and Treasury.
Mr. Coxe is no paranoid conspiracy theorist. As thechairman and chief strategist of Harris Investment Management in Chicago, he isone of the most respected investment authorities in North America. He alsohappens to have lost about 10 per cent of his personal wealth in the commodityrout, which came at the worst possible time for his Coxe Commodity Strategy Fundthat started trading in June.
“This has done more damage to my personal wealth thananything in the last 20 years,” he said in an interview yesterday. But he hastoo much respect for how the U.S. authorities engineered the collapse incommodities – a move he said was necessary to shore up the global financialsystem – to be bitter.
“My attitude is, goddamn it, they're good … it wasbrilliant.”
To understand why commodities are plunging now – theS&P/TSX plummeted another 488 points yesterday – you have to go back tomid-July, when the U.S. Federal Reserve and Treasury first announced steps tosupport mortgage giants Fannie Mae and Freddie Mac.
The move, which ultimately led to the Treasury takingcontrol of Fannie and Freddie this week, touched off a chain-reaction of marketevents that culminated with the wrenching decline in commodities.
According to Mr. Coxe, the Fed's ultimate goal was totrigger a rally in financial stocks, which would, in theory, help banks hammeredby the credit crisis raise fresh capital and repair their balance sheets. Toaccomplish this, the decision to support Fannie and Freddie was deliberatelyannounced on a Sunday, which had the effect of maximizing the reaction fromthinly traded financial stocks on overseas markets.
Because many hedge funds were using massive leverage toshort financials and go long on commodities, when North American markets openedand banks initially rallied, the funds were forced to cover their shortpositions.
At the same time, the U.S. dollar was rallying becausethe risk of holding Fannie and Freddie paper had diminished. The rising dollar,in turn, made commodities less attractive, giving funds that were alreadyscrambling to cover their financial shorts another reason to dump oil, grainsand other commodities.
The losses were swift and dramatic. On the Friday beforethe July 11 announcement, crude oil closed at $145.18 a barrel. Over thefollowing five days, it plunged 11 per cent. “Leverage was being unwounddramatically,” Mr. Coxe said on a conference call last week. “We had a truepanic.”
As oil and other commodities were tumbling, fears aboutthe slowing global economy were mounting, giving resources another pushdownhill. This was also in keeping with the Fed's wishes, because lowercommodity prices would help quell fears about inflation.
Mr. Coxe has no proof that the Fed and Treasury acted inconcert to boost financials and sink commodities. He is basing his assertions onconversations with hedge fund managers and on years of watching financialmarkets. “There's no doubt whatever in my mind” about what happened, hesays.
The future is less certain, however. Now that Freddieand Fannie have been nationalized, the credit crisis is still very much aliveand financial stocks are looking as shaky as ever. As for commodities, once thecurrent storm passes, Mr. Coxe is confident they will recover"