Financial Update

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www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

Donald Coxe: 'I Have Seen Economy Worse' Wisdom Series David Pett, Financial Post
Donald Coxe is a 35-year veteran of the Canadian investment community with experience as an advisor, strategist and money manager.

Mr. Coxe announced this month that he will step down as global portfolio strategist of BMO Financial Group to establish his own independent firm, Coxe Advisors LLC. He maintains his role as portfolio consultant to BMO's Coxe Commodity Strategy Fund and will continue to publish his portfolio strategy journal, Basic Points.

A true "renaissance man," Mr. Coxe is also an historian and lawyer, who has served as an associate editor of National Review magazine in New York, and general counsel for the Canadian Federation of Agriculture.

He has been chief executive of a Canadian investment-counselling firm, a strategist on Wall Street and CEO of Harris Investment Management Inc.

Earlier this year, he received the National Post/StarMine lifetime achievement award for excellence in investment research. He spoke with Financial Post reporter David Pett.
Q Have you ever seen the global economy in worse shape?

AYes, I have seen the economy in worse shape. I got into this business in 1972 and I can tell you that the economy was in worse shape in 1974 and 1975. The early '80s, when [former U.S.

Federal Reserve governor] Paul Volcker had to end the inflation spiral and interest rates got to 20%, was also a very bad time. Those were two scary times, and I am a survivor of both. These days I find myself spending a great deal of time dealing with people who, coming into the business much later than I did, think the only comparison now is with the Great Depression.

Q How is this crisis different from other economic crises in the past?

A One of the reasons it is different is demographics. Back in '74-'75, we had millions of young people coming out of high schools, colleges and universities in the OECD countries looking for jobs and there simply were none. The crisis today is partly because we don't have young people coming out now. Starting in 1971, the birth rate collapsed across the OECD countries and so now we are faced with our first downturn that resembles a Japanese-style situation. Japan had that idiot run-up of real-estate prices in the '80s, and it was bound to be a big collapse because by the mid-'80s they were producing more morticians than obstetricians. That is the state that the OECD finds itself in. Each new generation is 60% the size of the previous generation, so we are not going to get enough new young workers and enough family formations. The idea that real-estate prices will continue to go up is unmitigated idiocy.

Q And the crisis in the early 1980s?

A During the 1981-'82 cycle, interest rates were 20% compared to now where they are zero.

Obviously that's a dramatic difference.

Q How did we get here?

A We got here through the worst betrayal of capitalist principles by people with economic power in the history of capitalism. It was a very few people, all men on Wall Street and in London, who stopped being bankers to become promoters of structured products, which were based on bad mathematics. They thought they could sell them to greater fools without an impact to the greater economy. In doing so, they created a financial crisis that was entirely unnecessary. I'm not saying they committed crimes, but as far as I'm concerned, people like Stanley O'Neal, [former CEO of Mer-rill Lynch] and Jimmy Cayne, [former CEO] of Bear Stearns, should not be allowed to have memberships in good clubs hereafter and society should indicate to them that they are pariahs.

Q Is there any silver lining to the current crisis?

A One positive is that it might get rid of the shadow banking system, which worked with these Wall Street malefactors to come up with unrealistic prices for these "Jurassic Park" products that have attacked the whole global financial system.

Q Is the policy response to date the right one to get us back on track?

A This has achieved the impossible. The governments and central banks of the OECD countries are implementing the strategies recommended by the two greatest economists of the 20th century, both of whom didn't agree on anything. What you have are the monetary policies of Milton Friedman blended with budget deficits and pump-priming strategies of John Maynard Keynes. Everything being offered by the great economists is being tried at the same time, therefore, you have to assume we are going to get out of this mess. However, the fact that these two economists disagreed with each other, largely because of the implication of their theories on inflation, leads me to believe that when we get out of this current mess, we are going to be faced with another severe inflation challenge two or three years from now. Of course, we have to get out of this mess first. If you are running away from a bear but potentially running into the path of tigers, you must keep running away from the bear. That said, we are probably going to see some tigers.

Q If you were running the country what would you do?

AI commend the Canadian government on holding back on doing anything drastic because Canada was for a time avoiding the worst of this. But now it appears the real-estate cycle has moved into Canada, bringing with it a meaningful risk to the market. Central Canada is also faced with the possible bankruptcy of the Big Three auto-makers, so government will need to correlate their efforts with the U.S. government. One thing I would not do is assume the commodity industries in Canada are going to be in a recessionary condition forever. They are still the national treasures and if bids are made to take out the oil sands companies while they are depressed on US$40 oil, the government should not let them go because of the knock-down price. There are only a limited number of large world-class assets left in Canada.

Q What's been your leadership role as a well-respected member of the investment community?

A I think it's important for me to help investors keep their perspective. At some point, we switched from saying this is a downturn to the belief that things are worse now than at anytime since the Great Depression. That's a great leap, and I reject the analogy. For example, we had 40% unemployment in the Great Depression. Now it's 7%. So it is neither reasonable, nor sensible to tell people during a downturn like this that it could be the worst thing since the Great Depression. I do believe that it is important to use history, not abuse it.

Q Once the dust settles on the economic crisis, what other challenges lie ahead for us?

A I believe the next big challenge we have to face is the global food crisis. I'm working with the University of Guelph right now and in the spring we are organizing a colloquium, where we bring together scientists and investors to talk about solutions to the food shortage.