Coxe sees hot assets for cold turkey market

Kicking a bad habit is always painful. Anyone who has given up smoking knows the challenges. Now imagine quitting a habit that has propped up the global economy: incredibly lax monetary policy.

Think it will be easy? Renowned commodities analyst Don Coxe says it will be like giving up heroin.

Recounting the use of heroin as a battlefield anesthetic in World War II, Coxe says the trick is to remove the supply of heroin while the patient is still in excruciating pain, weaning them onto a less destructive painkiller like morphine. If the anesthesiologist left the patient on heroin for too long, they risked lifelong addiction.

“We’ve had 28 months on financial heroin,” Coxe said, speaking at Introduction Capital’s First Canadian Alternative Investment Forum. “The central bankers have to stop the flow of heroin, and they have to do it at a time when food and fuel prices are going up.”

Coxe questioned the usefulness of inflation reports that factor out volatile items like energy and food. Spikes in the price of durable goods never lead to street riots; the same cannot be said of food and energy cost spikes.

“It’s the equivalent of saying we can count a collapse in traffic accidents, so long as we do it on an adjusted basis, adjusting for alcohol exposure for drivers. If you take out the impaired drivers, we can show that driving cars is really safe. You can’t do that.

The next two or three years will see havoc on financial markets. He says the S&P 500 currently discounts even the chance of an interest rate hike, and seems to envision no chance of another recession. Meanwhile the U.S. and Eurozone show little headway in their struggles with sovereign debt, which he said remains at “crisis” levels.

“What we have in the world’s two largest currency zones is a system that cannot stand further strain, just at the time when we need to raise interest rates, otherwise inflation will get out of control,” he said.

“We know how this story ends and it doesn’t end happily.”

Policymakers appear to be ignoring the lessons of the 1970s, which demonstrated that fuel inflation can kill an economy, and food inflation can topple governments.

The past decade has seen the addition of 2 billion new global consumers of a high-protein diet. With an increased demand for meat, there is an exponential increase in demand for feed—it takes seven units of vegetable protein to produce one unit of beef protein, and even chicken requires a 2:1 input ratio.

“As investors, what we can do is allocate capital to those who can increase the output per hectare around the world. When you do that, not only do you enrich yourself and your investor, but you are right at the core of what needs to be done throughout the world.”

Higher yields

Coxe says the yield on the U.S. 10-year Treasury will double to about 7%. While Canadian benchmark bond yields will also rise, the spread between Canadian debt and U.S. Treasuries will widen dramatically.

The $1.6 trillion deficit that America is expected to incur in 2011 is unprecedented not only in its size, but in its effect on the American psyche. For the first time in its history, Americans are losing faith in their political and economic system. This explains not only the Tea Party Movement, but also an increased appetite for gold as a store of wealth.

“They see the central bank out of control, the government out of control, and they’re asking ‘what’s going to happen to us?’ They are expressing a deep bewilderment and that is new for Americans.”

As a result of this bewilderment, Coxe says investors can expect gold to reach $2,000.

“So many things are going to behave so erratically, that you need to have alternative investments. This is a turning point in history.”

While agriculture and gold will provide some comfort against the withdrawal pains, Coxe says the best risk-adjusted asset will be energy, specifically oil.

“It’s the asset that moves up in price as risk increases,” he said. “As seasoned commodities investors, you can see tremendous opportunity here, where everyone else just sees this as bad news.”