The New Reality of Wall Street
by Donald Coxe
Jun 2005
The long (long) view
Don Coxe says it took him over a quarter century to develop his triple waterfall theory. In his words, he started out trying to imagine what economic historians would be writing about a hundred years on. Realizing they would focus on the grand sweeping movements (to the exclusion of minor fluctuations), Coxe felt motivated to do the same.
Triple waterfall theory is a variation on a popular asset allocation theme, namely that the ultimate investment strategy only requires one or two major decisions per era. As research house Gavekal puts it, imagine being fully vested in gold and oil through the 1970s, going on vacation, coming back to buy Japan and zero coupon bonds for the 1980s, hitting the beach for ten years more, then scooping up tech stocks and JGBs for the 1990's. (For this decade the smart play has been Asia and commodities, though of course we are only half through.)
It is unsurprising to Coxe, and to students of market history in general, that Wall Street is still fighting the last war. As of this writing, crude is rapidly reapproaching $60 a barrel, copper is pushing multi-decade highs, and gold has aggressively decoupled from the dollar as fiat currency worries deepen. Yet the investment houses continue their conceptual love affair with bedraggled and besotted tech stocks, dismissing inflation as benign and the natural resource resurgence as a flash in the pan.
Coxe's triple waterfall theory is meant to help you avoid making this type of classic mistake. He tours historical events and makes a powerful argument for a disconcerting conclusion: When an asset class goes through a triple waterfall, it doesn't just fall out of favor temporarily. (And if you think the term 'waterfall' is overly dramatic, just pull up a monthly chart of the Philly semiconductor index.) The exile can last for decades, as gold bugs who spent twenty years out in the cold well know.
In addition to warning investors against the danger of hapless old flames, Coxe offers up a "taxonomy of bears," dissecting the rhyme and reason of past bear markets. While his terms are overly cute—teddy bear, baby bear, papa bear etc—the reasoning is sharp and well thought out. He also brushes the dust off a reliable but obscure indicator, the TED spread, and explains why it still has great value during times of international crisis.
One [Amazon] review is pretty harsh on Coxe for his poor mutual fund performance, also nitpicking some demographic predictions and a lack of options coverage. This sounds a lot like sour grapes to me. The purpose of the book is to present ideas and insight based on market history, so what do I care about an offhand view on Latin assimilation... and why would anyone expect an options primer? To me, the book rests squarely on the value of the insights—the big takeaways—and by that measure it's a good read. (A fast one too… I finished it on a coast-to-coast plane trip.)
As I peruse more reviews, I'm realizing that my viewpoint is often at odds with other readers. I truly enjoy market history, original thought, and well written 'big picture' perspectives. Sometimes I get the feeling this is uncommon, and that many are looking for some kind of concrete instructional payoff along the lines of 'do exactly this and this.' If that's what you want, you're barking up the wrong tree (with Coxe's book). In contrast, if you like doing your own thinking and enjoy seasoned perspectives, you'll be pleased.
