Inflation gets real – time to adjust

The Green Line
Hermione Davies
Investment Director

Suddenly people are talking about inflation again. 

Not many of us are regular buyers of patio heaters and trampolines, so may not have realised that the prices of these lockdown enhancers are in many cases up over 50% in a year.1 But a recent study of the prices of 750 ‘essential’ items sold on Amazon, showed that by December last year the prices of 409 were up by over 20% from pre-pandemic levels, while 136 had more than doubled.2

More significantly, many companies have been reporting cost pressures as the picks and shovels of global supply chains, transport and energy costs, have rebounded sharply. The chart shows that container shipping rates have recovered much faster than in the last two recessions. And, as production interruptions in the west have increased reliance on the east, the cost of shipping containers from Asia to northern Europe has increased even more sharply, from about $2,000 in November to more than $9,000 in January, according to importers.3 Meanwhile oil and gas prices have more than doubled from their lows,4 copper is up 70% to an eight year high5 and corn prices are rocketing.6

Our view is that rising prices in some of these traditional industries are signalling that the recovery, when it comes, will look very different and be much more inflationary than anything we have seen for 30 years.

This matters. Central bankers may believe they have the measure of inflation and so can afford to run the economy ‘hot’ to support the post-covid economy. But our view is the benign conditions we have enjoyed over the last 30 years of rapid global growth, low inflation and high returns on capital are not thanks to central bankers. They are largely the result of some very helpful social, political and technological developments which are now going into reverse. Most importantly, China cannot join the world economy twice.

And after a ‘nobody’s fault’ crisis, governments are likely to keep on spending. So, just as the pandemic-driven recession has been historically unprecedented, the rebound in both growth and inflation could be much more powerful than many expect. And in that case, we run the risk of policies which will turn out to be dangerously inappropriate to the new regime we are entering.

This has direct consequences for investors because for thirty years they have benefitted from the combination of falling interest rates and a negative stock-bond correlation, which meant that a portfolio combining bonds and equities gave you both good returns and protection from the full impact of equity market falls. But this ideal combination rested upon low and falling inflation. Financial markets may initially enjoy the warm glow of rapid real growth. But signs of a return of inflation could be profoundly damaging to bonds and growth equities.

So how to position portfolios? Our equities are concentrated in financials and also real economy companies, which are well positioned for this environment. They have taken advantage of the pandemic to cut operating costs, often helped by new technology, and yet reduced competition will give them pricing power when economies reopen. And, since wartime levels of government debt mean that central banks will resist raising interest rates, we hold inflation-linked bonds and gold. Finally, since this shift to a more volatile and inflationary macro environment could be a profound shock to the certainties of the last thirty years, we hold powerful unconventional protections.

2020 Q4 Investment Review
January 2021: A changing of the guard is also the way of the world – and on its way. We are preparing for a time when high taxes – on capital gains, wealth, and income – effectively constrain capital accumulation.
The 60/40 portfolio
This has been the allocation of choice for traditional balanced portfolios and has served investors well for the past 50 years. Is this all about to change and should investors be looking for something different?
A view from the bridge
January 2021: 2020 will loom large on financial markets for many years to come. As we cautiously make our way out of the crisis, Duncan MacInnes and Fiona Ker review the more startling developments of the last year, share their insights into the ongoing recovery and look ahead to some of key challenges facing investors in 2021.
  1. US PIRG Education Fund report, Jan 2021
  2. Ibid
  3. Freightos Baltic Index, via 19 Jan 2021
  4. FactSet, 10 Feb 2021
  5. London Metal Exchange, 10 Feb 2021
  6. US front month corn futures, via Macro Strategy Partnership, 29 Jan 2021

Chart source: HARPEX, peak of US output = 100

Past performance is not a guide to future performance. The value of investments and the income derived therefrom can decrease as well as increase and you may not get back the full amount originally invested. Ruffer performance is shown after deduction of all fees and management charges, and on the basis of income being reinvested. The value of overseas investments will be influenced by the rate of exchange.

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

our thinking
Investment Review
July 2021: We have been talking of inflation for well over a decade – which is not the same thing as calling its timing. An impasse was created by the failure of the economy to grow after the 2008 crisis – all the risks (as we patiently explained) were deflationary, and in vain did the central banks and governments try to force an inflationary impulse into a sluggish world.
Audio icon
Bitcoin – the future arrived early
July 2021: The best investments are often the least comfortable ones. This is certainly the case with our decision to add bitcoin exposure to our portfolios in November last year.
Responsible Investment Report
In our latest quarterly report, Investment Manager Rory Goodman examines the global significance of US President Joe Biden's new emission reduction targets announced at the Earth Day summit, and we share our stewardship and engagement activities during the second quarter of 2021.
Navigating information
It’s easy to be overwhelmed by the volume of information aimed at us. Inundated by a daily torrent of headlines, images, messages and data, we can be left feeling unable to process it to a satisfying degree. For investors, navigating information is central to being effective. Insights from information theory and gauge theory can help.
80 Victoria Street
London SW1E 5JL
31 Charlotte Square
Edinburgh EH2 4ET
103 boulevard Haussmann
75008 Paris, France