Don Coxe Talk

Don Coxe Talk

Went to BMO Capital luncheon today to listen to Don Coxe, their Global Equities Strategist, talk about multiple crisis that is upon us.

Fascinating talk, although I usually denounce this kind of stuff, everything other than his future projections were extremely intriguing and informative to listen to - and got me interested in history of the whole system. A little like learning history of computer as a computer engineer.

Anyways, I digress.

Although this was held in Canada (not famous enough to fly out to US yet), it was about what SuperBen is doing. After quoting SuperAlan as "the most overrated fed chairman in the history of mankind," he continued to explain this fact about the feds and the future market.

1) the thing that fed is the most afraid of isn't inflation, but increase in price because of people expecting higher inflation. Under that assumption, high inflation is fine as long as the people are not expecting it to go higher (this may explain why they have been so up in arms about playing Michelangelo with the inflation numbers as if it were the Sistine Chapel).

2) the way they measure this "expectation of inflation increase" is by looking at the futures market. If the futures prices are higher than spot prices (known as contagon) then it means people are expecting higher prices in the future. If contagon happens and the rate of increase in future prices is higher as it goes further out into future, that's when you realize that you may be stuck in the theatre watching the latest Indiana Jones - stuck in a pile of shit.

Incidentally, the last time this kind of inflation happened and contagon appeared, was in the 70's, when the inflation rate in the U.S was taller than Yao Ming. People expected higher inflation rate, and higher inflation rate happened.

3) Financial system is in the heart of everything - all the trades, all the transactions - this is why Bernanke will not let financials go down, inventing more methods than Thomas Edison did to save the markets. Here is the result.

Feds Balance Sheet assets - 800billion to 500 billion
Fed Interest rate - 3.25% cut, hung very nicely and low.
Rescued Bear Stearns
Accepting shady issues that require 700,000 calculations to value PER issue.

4) Right now, this futures curve is backwardation (opposite of contagon) which is fine because people think the inflation can't last, but once you add in the screwed up measure of inflation that has been changing over time? That's when you get very interesting.

5) His whole point was that once backwardation starts turning into contagon, we'll be pretty much done for.

small side note: He talked about how the speculators in the US were getting crushed. He said that these are the people who are putting the curve in backwardation mode, thus actually HELPING - short term prices are higher than long term prices because of these people.
This doesn't make sense though - 1st of all, if the curve is showing backwardation, then that's a distorted curve, hence if you measure it the way you did in the 1970s, the curve WILL look like a contagon. I forget my 2nd point.

6) Incidentally, on a brighter side, we won't see inflation like the one in Zimbabwe at the moment. Here is one such instances of "inflation".

Anyways, very interesting talk - it might be worth it to peruse the futures market idea - and seeing what exactly it means.