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Cowley: US Looks Like 80x Leveraged Hedge Fund

MIC 2011: Old Mutual's Head of Fixed Income says the US cannot continue to be an unapologetic spending addict

Holly Cook 11 May, 2011 | 5:57PM
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Stewart Cowley is known for his strong views and, some might say, doomsday outlook, but his presentation at the Morningstar Investment Conference starts in a jovial mood, with the Old Mutual Asset Management Head of Fixed Income showing the audience photos from his youth. This isn’t just a family album moment; Cowley is drawing similarities between his own life, born in 1960, and the history of the UK economy: Humble working class origins, to middle class education, first job in manufacturing (steel industry), to further education in science and employment as a physicist, to the stock market. “And every step of the way paid for,” Cowley says, “this is why it’s me and my type who’ve ruined the world—our expectations that our lives will continue to be paid for.”

Addressing global imbalances, Cowley said the US cannot continue to be an unapologetic spending addict. The US now looks like an "80 times leveraged hedge fund," he added. Looking further afield, he said that, over time, every country is going to want to go to the “healthy, wealthy place” and this place is going to get awfully crowded. “The fundamental trend for health and wealth means a war for global resources has started.”

Think of cars, he said, China actually outstripped the US as sellers of cars in 2008. Think about the Internet, access 20 years ago was nothing, now it’s 75% in the US, 68% in Europe, and only 24% globally—there’s plenty more growth to come, especially given that China is currently on only 8%. Cowley invested the conference delegates to imagine the energy needed to power this, and the server farms that will be needed to host the information.

Turning to the price of gold, Cowley said that 1 oz of gold is equivalent in price to 15 barrels of oil. If we believe that the oil price will systematically go through parabolic movements over time into $150 (as OMAM does) then this implies that the price of gold will go to $2,250/oz. “Just imagine the impact on South African rand,” he says..

Another factor to consider would be calorie intake and income—the former increases in line with the latter. So not only will we be competing for energy but also for food, fighting for our basic resources, Cowley adds.

All this means that going forward we’re probably going to have to live with higher inflation, he concludes. The Bank of England is essentially saying our current situation isn’t going to be a blip. With negative real yields in government bonds right now, investors just can’t get compensation for risk in the bond market.

Cowley reeled off his strategic conclusions: the global trend towards health and wealth is having a profound effects on the global economy; we should embrace commodity currencies; inflation is coming; embrace deficit producers and avoid deficit creators; and embrace companies at pinch points in the supply chain.

We face some very large challenges going forward, he concluded, and protecting investor’s money is going to be of utmost importance—we need all the tools we can muster to manage our way through it, he added.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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