Ruffer Radio

Investment Review

Tue, 01 Jul 2025 23:00:00 GMT

This review explores what we can (and can’t) infer from today’s facts about tomorrow’s markets. Our aim is to get a bit further than Pierpont Morgan: when asked to predict where the markets were heading, he replied, “They will fluctuate.” At Ruffer, we claim to be all-weather investors. In recent years, we let the side down by being overconfident of an approaching handbasket from hell. We dropped our guard; the market went up, and we went down – a mistake we seek not to repeat. The latest quarter’s out-turn should be a double encouragement to those who wonder whether we have learnt our lesson. Predictably, perhaps, we were strong in the poor markets earlier in the year – but, when the markets recovered in Q2, we continued to drive forwards. It might of course be a Swallow, but we trust it’s an Amazon.

Common sense suggests the market should be subdued. Wars and rumours of wars are not good for GDP growth. Taxes on trading activity such as tariffs reduce, in absolute terms, the amount of goods traded worldwide, and redirect money from the optimal trade channels into the brackish canals of fiscal spending. Towering over these man-made dangers is the accumulation of debt, which for years and even decades threatens a ghastliness, until, to everyone’s amazement, one day, it actually becomes one. I had a friend who was on a small boat returning from Dunkirk in 1940, pursued by an unfriendly aircraft which sprayed the craft with machine gun fire. I asked him what he was thinking about when all this happened. His answer: a determination to stay alive so he could invest in Marks & Spencer, on the basis that, if the war was lost, the investment was the least of his problems, and if it was won, it was a great entry point. Not having a Bloomberg screen, he didn’t of course know at what level it was trading – but he rightly divined it would be cheap. The point today is that, despite all the uncertainties and bad news, the market’s valuation matrices are banging on pretty much all-time highs – we live in strange times. When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?”

I think to establish an answer, a different approach is required. Rather than assessing the world’s health through the discounting mechanism of the market (which ‘knows’ everything), perhaps there is a dynamic at work which is independent of that discounting mechanism. The investment universe has democratised. When I started as a stockbroker in 1972, it was the man from the Prudential and Mrs Tufton-Bufton who drove the markets; one professional, one sentimental. The federated Stock Exchange – not consolidated until 1973 – ensured local companies were supported by local families, and it was a patriotic duty to lose money by investing in War Loan. Today, there are new forces of dominance: the clever clogs who run hedge funds, the purveyors of private equity and now, since constipation has set in with PE, private credit. Wealth managers have replaced private client stockbrokers. None of these have fundamentally changed the way markets operate, except they mostly seek to derive returns from anything other than traditional equity markets and in so doing foreshadow a world where equity returns may turn out to be persistently weak. That phenomenon, when it becomes evident, will be regarded as an event which predates, not postdates, today.

When prices are at Looney Tune levels, the question is: “Is it me that’s crazy?”

On top of this, a disconnect has grown up between different generations in the West. The shorthand to this is highlighted by the segmentation, by age, into Boomers, Generation X, millennials and kiddos. It is a commonplace that the Boomers may not actually be bandits but they have made out as if they are. They pride themselves on being born before 1964. The generation behind them – the vanguard now well into middle age – are dismayed at being unable to buy the sort of houses their parents own; the cream of everything from Picassos to places in the sun seems to belong not to them, but to an older generation.

Here’s my take on it. There is plenty of wealth within the younger generations – but not nearly massive enough to emulate the generation which came before them. Many have money to invest, for sure, but it has to work quickly – successful investment demands the uplands to be sunny, and constantly benign. Those who think like this are the cadre who hold the Magnificent 7, and they trade recherché instruments which can, with a following wind, bring those who own them into Boomerland. Thus five years of making 40% a year starting with £200,000 gets you to over £1 million – and then you can throttle back a bit (even if in practice you don’t).

How will it end? Suddenly. When? Next question please.

Does this way of investing look foolish? If the cliché about pudding and eating is valid, then it’s not at all foolish. Investors have had more than a decade of this class of investment, winners experiencing enough thrills and spills to remind us that true belief is rewarded, cowardice punished, inactivity guaranteed to be a wasted opportunity. And they have firepower: retail investors put in $4.7 billion the day after President Trump announced Liberation Day this April – a day of market turmoil, which indeed proved to be a great opportunity to make money – and they took it. The US market rose by over 20% in subsequent weeks. ‘Wise’ investors see in them only the ‘the madness of crowds’. But it is wisdom which has been trampled. In a generation’s time, the score card might vindicate the wise – but you can’t eat score cards.

How will it end? Suddenly. When? Next question please. But ‘suddenly’ is a helpful roadmap: there will be no warning, so one has to leave early, as we have, and the mind which has ridden the wave is trained to avoid any such equivocation. It has always interested me that the story of America’s Great Depression in the 1930s begins with the Wall Street Crash of October 1929, when it was estimated there was record participation in the stock market. What is typically forgotten is that by April 1930, the US market had recovered quite close to 1929’s all-time high, before it re-started its precipitous fall – some of the participants had to learn their lesson twice over. The point being that there is a lesson to learn, either ahead of time, or not. ‘All-weather’ in our book is about the duality of constructing a portfolio protected against crises but looking to keep that protection embedded in a portfolio that can offer satisfactory returns in the meantime.

One of the insights of Nassim Taleb (of Black Swan fame), is that the best insurance against heart-stopping hiccoughs is what he calls ‘antifragile’ assets – investments which do well when everything is going badly. They are non-plussingly difficult to find. Lenny Lauder spotted that even in a terrible economy people still treat themselves to little luxuries like lipstick, and he thereby continued the success of Estée Lauder for another generation. The cinema chains in the 1930s prospered for the same reason, cigarette manufacturers too. But there are not many such assets, and the identification of new candidates needs a dose of contrariness even to imagine that they might exist. It is in the derivative markets that antifragility can be most clearly identified, and priced. Put options on the markets, instruments that are long of volatility, derivatives anticipating a higher yield spread on the brands of top notch businesses – all find their way into our portfolios. In the past, it was rather different – one could select cheap companies to play this role. Dairy Crest, for its cheese mountain, Thames Water for its safety (!), Howard Shuttering for its name. New conditions need new skills, and my job is to imagine a wisdom to sit alongside the other insights which combine to create market knowledge.

One last thought, on inflation. All the inflation watchers I see in action would benefit from the information set out in tomorrow’s newspaper. Some think inflation far from dead, others that we might be looking at deflation (prices going down). I’m not very interested in all of that, because it depends on guessing the unknowables: what will happen to workforce numbers, to interest rates, to currency movements, to food prices. I am more interested in what is unseeable, over the hill. Wages as a percentage of corporate costs in the US and Europe are at generational lows and, if immigration proves restrictive, that could change hard and fast. More certain, the balkanisation of traditional industries will create profitless price rises. Put simply, globalisation lowered prices and thereby lowered inflation, and a return to local production reverses that dynamic.

We began with the waves of markets: the waves of inflation are longer, slower, and more inexorable. We may yet see a brief dalliance with deflation if markets fall, but it would be misleading: I have great confidence in the eventual inflationary outcome. The deleterious impact on asset prices of being right about that will be significant, so protecting against it commands attention in our minds and in the Ruffer portfolio, distant as it may still be. To reiterate: all-weather means combining shock-resistance with satisfactory returns in the good times. We hope to continue to evidence the good behaviour shown so far in 2025.

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Investment Review

Mon, 31 Mar 2025 23:00:00 GMT

He climbs onto a water barrel to elevate his harangue. In mid-peroration, the wooden struts at the top of the barrel give way, and he ends up head and shoulders sticking out of the water. Everybody laughs and jeers. Then a shot is fired off screen, and he slumps lifeless in the barrel. It is a great scene, illustrating, theatrically, a time when everything changes – in that moment, there’s regime change.

My colleague Matt Smith used more colourful language to describe today: “Everything has been smashed up” – the 1941 Atlantic Charter (progenitor of NATO), the Washington Consensus, the pax Americana. The world we have known is changed. And, like the giraffe I de-stuffed at the age of four, the stuffing is not going to be restored to its old order.

We sort of know that – but we don’t yet sense it. Sir Niall Ferguson, one of Britain’s great historians, made his name in the financial world by tracking stock markets from the assassination of Archduke Franz Ferdinand on 28 June 1914 to the start of the First World War – 1 August for Germany and Russia, 4 August for the British. He observed that it was not until the end of July that markets really perceived the existential threat to the world (and, ergo, the world economy). The implication he drew from that was that markets were pretty cloth-eared as to the risks which were on show. I rather think it should be exactly the other way around. Investors took comfort, throughout those weeks, that there was no market collapse, so the common knowledge was that these extraordinary events, plain for all to see, were ‘priced in’ to the market. And, as things quickly became worse, there grew to be a belief that the fundamentals of the economies of the world must be prodigiously strong to hold up in the face of this deterioration. This 1914 view was shared by the Bank of England, which granted ‘accepting house’ status to my family’s bank, A. Rüffer. So, the following week, when A. Rüffer (with all its assets in Germany and all its liabilities in London) went bust, His Majesty’s Government had to underwrite the losses of £1 million. (The National Debt was then £709 million – it was an expensive mistake.)

The same could well be happening today. The danger of a financialised marketplace is that risk is interlinked, so that trouble in one place is instantaneously trouble in a series of other places. If the sea level rises, one can anticipate obvious trouble in East Anglia and Venice. But, when great inland lakes appear, the sheer unexpectedness adds meaningfully to the sense of nervous uncertainty. A startling statistic was published a few months ago by the American Association of Individual Investors, which showed that 64% of American citizens owned US equities. It is a chilling echo of one of the features in 1929, when public engagement in the equity market (much lower in percentage terms, of course) was a contributing factor to the malaise of the depressionary 1930s.

That two-thirds of the American people have investments in the prosperity of their homeland is a sign of confidence – confidence which is the engine fuel of prosperity. Such optimism is, however, compromised by the overlay of intergenerational tensions in the Western world. My generation (I was born in 1951) bought houses at prices that were affordable; our children and grandchildren have no opportunity to do the same. With every year that passes, the ranks of those excluded from the property-owning classes grow. This social problem is a scandal, of course, and scandals have a habit of creating eructations in unlikely places. The mood I sense is that often the only hope of those disposed to make money is to play the markets while the sun is still shining: no time to be owning Colgate, the toothpaste manufacturer – better to take risks on high-growth businesses which, if successful, will generate high rewards.

Financial markets have a remarkable habit of turning good companies into bad investments”

When it comes to predicting future returns from an investment, I believe securing a margin of safety in the valuation that one pays for a company’s stock is a much more important factor than whether investors are correctly assessing the future growth prospects of the underlying business. Put another way: financial markets have a remarkable habit of turning good companies into bad investments. In my last Investment Review, I compared two previous manias – the Nifty Fifty and the dot.com bubble. The Nifty Fifty is an almost perfect example of this truth. The question, all those years ago, was: which are the best companies in the world? The answer Wall Street gave was pretty much spot-on – a generation later, those businesses were strikingly the ones which had continued to be world-beaters. The problem was that purchasers paid what was in retrospect the wrong prices for them.

We live, of course, in a world where the best franchises can be compromised by technological change. It is a hallmark of all super-profitable companies that either innovation or competition will compromise those profits eventually. One must be aware of this – and look for opportunities amongst the new predators. But we are nervous of their valuations, and, anyway, hope is a tricky commodity to price. It is a hesitation which applies equally to traditional investments. Back in the 1970s, it could be assumed that technological breakthroughs would remain in the same corporate hands, as automobiles and electrical appliances largely did. Today it’s wiser, perhaps, to assume that one must be agnostic as to who the beneficiary will be. The market is full of future winners and losers, so I judge expensiveness less by the eye-popping valuations of the AI stocks than by the valuation of the market as a whole. I am particularly interested in the price to sales ratio of the market, because the valuation of a corporation can’t be fudged; nor can the sales figure. A high price-to-sales ratio is justified by today’s investors as the natural state for companies with terrifically high margins, but in that margin assumption lies an equal amount of the danger. In the days of my innocent youth, a price-to-sales ratio of more than 1x was an amber light. Today’s US equity market briefly moved through 3x in late 2021 and again late last year. Who knows what colour a light that is, but for our money it’s certainly not green.

If I return to the world that is broken, it is not always the case that nemesis follows swiftly. Did the Second World War start in September 1939? Or in May 1940, when western Europe was overrun in six startling weeks? The gas masks which had been issued to the children of London at the outbreak of war did not face the bombers for another year – and, in the event, they turned out to be the wrong sort of protection.

Many investors hope for a setback, even a biggish one, because they feel they have a secret weapon – ‘buy the dip’! The best investment strategy is, of course, one that is not shared by a large number of other people. But, that aside, there is another reason to think hard about a strategy which first worked in 1987 and has worked every single time since. The enemy to this way of thinking is not contrariness of thought; buy the dip is after all a mechanical exercise. The danger is that in every iteration more people do it, and eventually they forget what the reasoning was in the first place. Success breeds complacency: the strategy becomes obsolete simply from the dynamics within it. What’s the evidence? The world has become increasingly, excessively, leveraged. Governments have higher debt to GDP ratios than ever; Germany, a rare exception, has just given itself permission to join the party. Investors, too, are extended; the latest hedge fund data shows their gross exposure to be in the 100th percentile – in plain English, highly indebted. This compromises their ability to buy the dip; after all, what’s the use in spotting a gap in the enemy lines if you’ve already committed all of your troops elsewhere?

To top things off, there is in this cycle a crucial dynamic at play, one where falling markets create the recession. Conventional wisdom regards the stock markets as a leading indicator – predictive of future events. Markets are not always right, of course, as evidenced by the economist Paul Samuelson’s famous quip that the stock market has predicted nine out of the last five recessions. Forecasting requires of its analysts a series of predictions – often fan-shaped, to reflect a multitude of different outcomes only one (at most!) of which will, in the event, occur. It is a flawed model: analysts know that surprises routinely upend their peacock tails. What is not properly considered is that the course of events in the real world are often determined by severe dislocations in the financial markets which have already occurred. This calls not for a gradient ‘fan’ of outcomes, but a binary model: the US economy can continue to grow at 2.5% if there is no dislocation; but it will contract, and sharply, if in a crisis the current high indebtedness compromises all its players. This is why the commentators who write about the Depression in the 1930s start with the story of the Wall Street Crash in 1929. There have been plenty of crises before and afterwards, but only the Panic of 1873 seems to have shared the 1929 characteristic of not only foretelling but actually being a major contributor to the hard times to come.

The world we are left with today is one that features equities at maximum valuations, investors at peak investedness and now a new feature: a perceived but not yet digested regime change. As markets begin to sense the impossibility of the first two co-existing with the third, they will fall, and where they go, the economy will follow.

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Investment Review

Fri, 02 Jan 2026 00:00:00 GMT

It was a forward-looking review, which is unsurprising, given that Ruffer at the time had no history – we were a business trundling slowly down the runway in a light plane on a long journey. As I approach retirement, this will be my last formal review – the pen may be silent, but the thought processes will continue. I shall continue to meet with my former colleagues, and will thereby find myself ensconced in the happiest of circumstances, having the power of articulation, but without any responsibilities.

The history and theory of investing is as old as the history of warfare, and one might reasonably think that all that could be said of each of them has been already articulated. The greatest ‘insight’ to become a reality in the 1980s was Jack Bogle’s. It was a simple one: if you are happy with average performance, then why not enjoy an above-average performance by investing in a low-cost index-hugging mutual fund? This simple idea – which transcended any insight as to the nature of an investment – has changed the face of the investing community. It has conquered the world by its monopoly, shielded from greedy competitors by its negligible price.

In modesty, I have to concede that an idea which now controls some 40% of the world’s equity and fixed interest markets is better than my contribution to the efficacy of investing. Ruffer Investment Management’s first glossy brochure stated that our investment strategy consisted of running risk portfolios which were designed not to lose money in any calendar year. Even accountants know that risk amplifies risk as well as reward, thus only riskless assets can claim to be free of the poison of capital reduction. And here was Ruffer, with no track record, saying you can have your cake and eat it.

The universal response: Jonathan Ruffer’s a lovely guy (I can only agree with that assessment), and what he’s offering, if achieved, would be wonderful. But something that is too good to be true is, er, well…not true. That was in 1994. In the event, it took until 2018 for our first failure to meet our objectives, although some years effectively produced nothing. The going has been more volatile since, with 2023 falling far short, but our long-term track record still puts to shame the riskless alternative of cash in the bank.

We don’t know ahead of time which opportunities are going to be the actual winners, and which the losers – the gold and the fool’s gold are intertwined in an inextricable embrace.

In 2023, we found ourselves accused of not doing what we claimed to do – almost as if ‘cake and eat it’ was something that could be achieved faultlessly. Despite the head wound I felt from letting clients down that year, it was hard to escape the feeling that this way of investing has come of age. When I began, our investment disciplines were as much intuitive as rigorous. Today, they are incomparably better – so much so that I find myself (against all the evidence) lost for words. It has been a pleasure to report meeting our objectives strongly in 2025, a year which has increased the long-term track record of Ruffer.

How risky is the strategy? At one level, we concede that our aim not to lose money in any given year is a parallel claim to most professional investors’ ambition to ‘beat the indices’. That ambition is accepted as an aspiration, and even the very best will achieve it only intermittently. The ‘beat the indices’ target has a defect in that, in the ebb and flow of performance, at certain intervals the bad investment professional will look rather good, and (of course) vice versa. So, for an investor adequately to gauge whether their decision to hire a manager was a good one or not requires a commitment of an unnervingly long duration. Ours is by contrast an absolute target, judged annually. We can safely be sacked much sooner than our index-related competitors.

What, then, are the characteristics of what we do? The only reason it works is because investments routinely, regularly, become either too cheap or too expensive. Whilst only riskless commitments guarantee no loss, all of us can see that the imperfections of a real-live market allow for an imbalance of risk and reward, some favourable, some unfavourable, in specific investment opportunities. There is, of course, always an elephant in the room. We don’t know ahead of time which opportunities are going to be the actual winners, and which the losers – the gold and the fool’s gold are intertwined in an inextricable embrace. While each individual opportunity might not give up its secrets as to future performance, it is often possible to juxtapose two (or maybe more), which removes the unknowable risks and offers each-way upside. The ideal might, for instance, be a set of investments which do well if the oil price goes up, and a different set which will create outperformance if it goes down. In this simple example, the result is to create a different risk (eg political risk), which must then be considered separately. As a result, an investor in the Ruffer strategy is diversified away from market risk, and left with the risk attached to our judgements of juxtaposing assets and portfolio construction. That is the skill we employ. While the strategy is simple, the execution is often complex.

What we took for wisdom 18 months ago has turned out to be so comprehensively wrong that my generation really don’t know what to think, and hum the tune from ‘My Fair Lady’, ‘Just you wait, ’enry ’iggins, just you wait!’

Today we see a world where the thoughtless control the show and are making hay. A world where there is a generational battle going on, where the greybeards look at that world with incredulity. What we took for wisdom 18 months ago has turned out to be so comprehensively wrong that my generation really don’t know what to think, and hum the tune from ‘My Fair Lady’, ‘Just you wait, ’enry ’iggins, just you wait!’ Unlike my daughter, who is an academic neuroscientist, I haven’t quite got to understand how the brain works. But I find one quirk of the brain vividly fascinating: when humans think that some futurity is absolutely certain to happen, that thought cannot be disconnected from a second one – that the future event will happen very soon.

It is well understood that the generation now known as Boomers – those born before 1965 – have a larger share of the asset gravy than the generations which have followed. Today, to be in the top 1% of UK earners by income, your take-home pay would be around £90,000 per year; to be in the top 1% by assets, you need to own nearly £4 million, a sum which would take the 1% incomer over 44 years to accumulate if they spent not a penny in the meantime. This means that, for the first time since Magna Carta, people are not as well off as their parents, especially in the realm of housing. A successful professional, mid-forties, can see that the capital sum required to buy the house they grew up in is multiples more than they can afford, whether in cash or by borrowing. Suppose such a person has capital of £400,000, and the house they want is £1.8 million. There is no point going to a conventional fund manager who is pleased with a double-digit gain. What good is £440,000 when the purchase of a family house is required? But, if one is prepared to make an educated and well-informed foray into crypto, or AI, and achieve 25% a year, then it will have tripled in five years – and many of their contemporaries seem to have been doing this successfully for ten years or more. The only golden rule in this approach to investment: ‘Never look down!’ There will be sickening crashes and, if you try to analyse why, you will of course be strongly tempted to lose your nerve, and cash in. A lot of people made that ‘mistake’ in 2018, quite a lot in 2020, rather fewer on Liberation Day (6 April 2025), and today the warriors, as a cadre, will not make that ‘mistake’ again. This market will go on incredulifying the greybeards until it doesn’t. There’s a great line in JK Galbraith’s book on the 1929 crash, when he describes an eminent economist as ‘standing his ground’ before adding ‘but unfortunately the ground gave way under him.’

This moment is inevitable, but it need not be at all soon. If it is long delayed, it will represent salvation to those who put the motorised engine onto their monetary barge and achieved what was necessary. The question in my mind is what is its aftermath? If the uncertainties and dislocations can be managed, then, yes, there will be losers, many of them, and there will be many winners, too. But, if it undermines the very fabric of the financial system, as was the case in 1873 and 1929, then the catalyst can be a mere water pistol and not the true weapon of war. In that case, the participants – the economy, the families going about their business, the high hopes of the young, the conservatism of the old – will find that the ground on which they depend gives way. The longer animal spirits control the market, the greater the ultimate confusion.

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Investment Review

Thu, 02 Jan 2025 00:00:00 GMT

If I put myself in the other person’s shoes – the client’s – what would I be thinking? And that, of course, should be a routine transposition. What the servant thinks is neither here nor there – what matters is to see it through the master’s eyes. If, then, I were the client, I would want to make a judgement on the following three things.

First, are the people at the helm the same people who have been there for ages, or am I being looked after by a bright button who is learning that investment is not as easy as it looks? That’s an easy one to answer. Henry Maxey still leads the investment process – he joined me in 1998; from 2003 we acted in concert, he becoming de facto the lead investor in the course of the 2008 crisis, and he has been at the apex these last 16 years.

Second, has this period tested the character of the decision makers beyond endurance? Have they lost their nerve? Are they looking for ways of appearing to continue their set strategy, but actually doing something else? Reading my past Investment Reviews, it is clear (as it always is) that the world is playing out in a continuum, and the portfolios will necessarily change as we respond to the changes inherent in an unfolding world. That continuum is one where the uncertainties and, even more than the uncertainties, the distortions have not gone away – they have grown both more diverse and more acute. So the character of the portfolios has remained the same, but they currently reflect acute, rather than merely chronic, danger. Which leads to the third and more difficult question.

Third, are Ruffer living in a world where they shake their fist (with other people’s money) at a market clearly less astute, less thoughtful, less exquisitely brilliant than themselves? I wish I can say that we are as sharp, flexible and humble as we need to be to succeed; of course, we are not. Some mistakes stem simply from having to take views on the unknowable – every investor suffers from these infelicities constantly. But, when our investment stance requires protection, and protection is readily available in conventional assets and yet we fail to take advantage of them, then I judge us to be culpable.

The prime example over the last two years was our failure to buy Japanese exporters, when we had in the portfolio a large position to benefit from a strengthening yen. The yen continued down and the exporters went up. Had we put, say, 4% of the portfolio into these equity offsets, we could have regularly harvested solid gains, and retained our 4% holding for that full period – I estimate that it would have returned the equivalent of one year’s worth of interest on sterling cash; we didn’t do it, because we were particularly concerned about the danger of equities as an asset class. The omission of that single error would not, single-handed, have rescued our performance as regards cash-plus returns, but it would have helped considerably.

My takeaway, then, is that hindsight makes fools of an underperforming fund manager, but given this situation, it is important that we have lost neither the reef nor our nerve. It is not by accident that we still have a portfolio which can take full advantage of a system shock of some magnitude. Why can one say that, without arrogance? It relates in three words to the price level of the main American equity market: the S&P at 6,000.

We were positioned for a dislocation when the S&P was rather lower: that was wrong, but not perverse – the nature of bubble valuations is that they somehow offer subliminal validation on the journey towards the moon. The US equity market is the outstanding outlier on valuation, largely as a result of the new generation tech stocks. Overall, the S&P is standing on a forward multiple of 23 – close to the highest in its history, matching the rating it was on in 2000, and that did not end happily. Were the market to trade at 15 times forward earnings (ie S&P at 4,000), and the earnings themselves were to drop by 20%, the market would halve. Why should earnings drop in an economy which seems strong? Sure, the economy could hit an air pocket, but a more cogent reason is that margins have been high – much higher than economic growth. Margins can drop for several reasons – but the effect on the market if those of the ‘Magnificent Seven’ did so would be remarkable, as those stocks account for a third of the market value of the S&P. Their inroads into the traditional sectors might reverse, but, just as the de-rating of ‘old America’ has not stopped the inexorable rise of the S&P, a bounce back of earnings from the victims of AI would not compensate from the earnings drop and consequent derating of the AI Angels, nor would it make those mega-cap Angels cheap enough to buy on valuations generally seen in the last 100 years of stock market trading.

To my mind it is instructive to compare and contrast two separate bear markets, since they give a clear view on what to look at in assessing today’s overvaluations. The first of those concerned the fall from grace of the US ‘Nifty Fifty’ stocks, which led a charmed, and highly rated, existence through the first half of the great bear market of the 1970s. The second was the break in the dot.com boom, a break which began on 29 February 2000. Each of those saw investors get one thing right, and one thing wrong. It turned out in both instances that the wrong comfortably outweighed the right.

Overall, the S&P is standing on a forward multiple of 23 – close to the highest in its history, matching the rating it was on in 2000, and that did not end happily.

The Nifty Fifty found its justification from the world of boxing, where, it was said, ‘a good big’un beats a good littl’un’. The fifty were nothing if not big – they represented the great names of corporate America; over the life of the phenomenon, their ranks were almost unchanged. What went right for investors? The fifty that were identified truly were great companies. Only Kodak and Polaroid proved unsatisfactory – the others deserved, retrospectively, their pedestals. So what went wrong with the 48? It was, quite simply, that the stocks had been bid up to unsustainable valuation multiples. The recession didn’t do their earnings any good, either. One, Bristol Myers, came in with earnings which actually beat market estimates – but even its share price didn’t reflect this nuance, and fell with the rest of them: down 55% between 1973 and 1974.

The dot.com boom was exactly the reverse. What investors saw clearly was that technology was going to up-end traditional ways of doing business: the talk was of online communication, and even the more rambunctious claims for this new way of living proved scarcely to be exaggerations. In short, the markets got the significance of the technological revolution right. But what the market didn’t get right was how to play this phenomenon, investing in young businesses which were as short of cash as they were of management expertise and customers. Connoisseurs of pond life will know that tadpoles in a jam jar show a high mortality rate, and pretty quickly – tadpoles need to be frogs to be competent at surviving. The same turned out, as usual, to be true of companies. Sometimes, the winners come from within the ranks of the previous monopolists. AT&T, the great American corporation, was, in its full name, American Telegraph & Telephone Company. The telegraph was obliterated by the more flexible later technology of the telephone – and that was replicated across the information transmission industry of the late 19th century. The telegraph businesses were both the victims and the beneficiaries of the advent of the telephone. An example of the reverse: not a single stagecoach business became a railroad monopoly, although George Hudson did sell all his stagecoach business to invest in the York railway in the 1830s.

Which of these two great mischiefs will catch out today’s markets? Will the Magnificent Seven be like the losers of the dot.com bust, companies with the right idea but the wrong execution? Unlikely. They are enormously well-capitalised, which is the single biggest area of danger to a capital-hungry business model, benefiting from great change. Could the Herculean task of running these modern behemoths prove too much for a class of executives who have already proven themselves astute enough to be in a position to take advantage of their brilliance? Again, the curmudgeon could have waited in vain to see the real winners of the dot.com phenomenon fall on their faces. Not one to bet on. So I think those who expect a repeat of the 1999-2000 boom and crash will find they have dug their elephant traps in the wrong place.

It is the other mischief which we see as the danger. It’s the fall of the Nifty Fifty – now over 50 years ago – of which we need to take cognisance. Pay too much for quality, and you’ve made a bad investment. If the fall is not a matter of private grief, but an unanticipated electric shock to an over-leveraged system (something we see as particularly possible), then the extreme likelihood is these great businesses – possibly aided over the long term by their ability to consolidate yet further their commercial advantage in bad times – will see earnings fall short of the expectations of the consensus.

Such instability was routine in the world I grew up in; it is something that will, some day, return. These words could have been written two years ago – but not, I think, four or ten years ago. There is a certain danger on one hand. There is, on the other, a pyrrhic victory of waiting an inexorably long time for a fear to coincide with an eventually present reality. We continue to skirmish on the bull tack; those assets that we pick feel like they have good days accompanied by bad weeks. Why are we – how can we be – so confident that now is the moment for safety first? Three words, already stated: S&P at 6,000.

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Investment Review

Tue, 30 Sep 2025 23:00:00 GMT

When I was a student, I gave my worldly wealth of £200 or so to an ignoramus stockbroker in the City who specialised in hot stocks. He didn’t do well, but he didn’t do that badly either. I undertook some basic analysis as to what was going on (perhaps I would have been better-advised to have done that before engaging him); what I discovered is that he was so slow on the uptake that he bought into investment ‘certainties’ as the excitement was subsiding, providing him with a better entry point than his sharper colleagues.

This point of detail came to me while wrestling with the relationship of knowledge with investment success. Why, for instance, are the cleverest economists not the richest? I think the answer is twofold. The correct answers to the most interesting questions are educated guesswork, and where it is possible for an expert to have a precise grasp of the likelihood of a particular outcome, the right answer isn’t significant enough to lead to a major investment opportunity. And because most investment decisions are binary, there is a 50:50 chance of being accidentally right in the short to medium term – perhaps an 18 month timescale. So bypassing the absolutism of true knowledge isn’t a showstopper. Many analysts in the City are the successors of the wizards in the royal court, employed to ascertain whether the royal birth would result in an heir. The answer was always yes, and half the time, it was right.

It’s possible to be right more than 50% of the time, since the most likely thing to happen in the stock market is a repeat of what has just happened – it’s called the momentum trade. Although the blade of this way of investing is double-edged – it can make markets spiral downwards as well as grind upwards – it is universally understood to be a bullish phenomenon today, since the market has gone up in pretty much a straight line from January 1975: half a century. Bear markets have been sidelined. Instead, the relentless climb of Wall Street and the rest have been punctuated by crashes, which have – in nearly every case involving the major markets – bounced back again in short order. But the racing certainty is that, at the true inflection point, the market is much more likely to fall chaotically (at first), rise back up briefly, and then decline again relentlessly. Hence our preoccupation with the flak jacket to sit alongside the parasol.

Let’s spell that out. To the current generation of investors, taking risk pays off – buy to the sound of gunfire! It is hard, though, to buck human nature, and the crevasses are visceral events – they are, like King Lear’s threats, the ‘terrors of the earth’. Every crash takes out some fools, but not the foolhardy – they have learnt to close their ears to the ‘fundamentals’, which are as fugitive as the Siren songs from the beautiful enchantresses who would seduce Odysseus. Thus the first thing to avoid is being the coward when the jingle says, ‘Buy! Buy to the sound of gunfire!’ But the jingle has a second part to it – ‘Sell to the sound of the violins!’ That is as hard as purchasing in adversity, and – most importantly – for 50 years it has also been wrong to do so. So the violins are held in the pending tray, and investors try not to mourn their mistakes – selling Microsoft in the late 1980s (at least I owned it…), thinking that the bull run was over in 1987, 1998, 2007 – and so on.

What a bleak picture this paints, inviting the fund management industry to dwell on the design fault human beings endure – that we cannot predict the future. And yet we have nothing but fraudulence to offer our clients if we believe that we have no value to add, being merely the wizards in the court of the king who wants to know what kind of heir is to be born in the months or weeks to come.

It is debt which kills off empires. The bigger the empire, the longer it takes, and the more money is thereby lost by the faithful

What can we bring to the table which will show up in performance that more than pays for its keep? We have guiding principles which, while on occasion difficult to keep to, are nevertheless worth having as companions. Among them is the idea that the valuation given to an investment is more important than the attractiveness of its fundamentals. This is the opposite of an investment strategy born of momentum, which ignores valuation, and puts all the emphasis on the story. It is nearly always the case that high valuations cluster around things unknown – two examples of that are the Magnificent Seven tech companies, and gold shares. The former we own in tiny size; the gold mining stocks by contrast are a key part of our Praetorian guard. We eschew the tech stocks almost entirely because of their valuations, subjective as they are – not because the outlook for the fundamentals of those businesses is poor. In the gold miners, we have substantial positions (recently reduced) because the gold price is a mysterious beastie, but it is a store of value at a time when currencies may not be as roseate as they have been in the past.

On top of these guiding principles are what we consider to be areas of significant interest. First and foremost is the unsustainable level of government borrowing. Almost no Western country has escaped the nettles of over-indebtedness, except Germany, who is busy making up for lost time by doubling its debt burden. The supposed policemen of inappropriate debt levels are the rating agencies, who spectacularly failed to spot the problems in the mortgage-backed security markets in 2008 and are making precisely the same mistake again. Fitch has three countries rated at A+, but you have to be a village in the canton of Debt-Ratingen to have the first clue whether this is high or low; whether it is of interest or ‘for enthusiasts only’ – the code word for terrifyingly awful historical renditions of classical music. France has just been demoted from AA-, and Italy and Spain promoted from A (a jolly prime minister in Italy, Buggins’ turn in Spain).

It is debt which kills off empires. The bigger the empire, the longer it takes, and the more money is thereby lost by the faithful – 17th century Spain comes to mind, and Britain in the 1960s, whose former Commonwealth countries were encouraged to deposit their capital in London – capital which was then subject to the consistent haircut of devaluation. Quite a good test as to what has happened to Britain over the last 60 years is to compare the metal coins of Switzerland and Britain. The Swiss five franc piece (worth about £4.65 today) is, give or take, the same size and look as the 1965 Churchill crown (five shillings or 25 pence). In 1965 they looked the same because they were worth the same, yet sterling has declined by 91% against the Swiss currency in the time since; one wanted to own the five franc piece, not the Churchill crown! The least interesting way of getting frightened about this is to take the figures themselves; rather it’s that the devaluation has been invisibly yet relentlessly painful for the holder. That the surge in money supply in covid and its aftermath hasn’t yet resulted in greater problems is simply testimony to the fact that there are no roadmaps in uncharted territory.

Fifty years is a long time for a market to go up, from once-in-a-lifetime cheap to the exact opposite

What else interests us? The West has been living off the workforces of poorer countries who will do jobs those with a more precious sense of their worth choose not to do. Now this golden stream of goodwill is regarded as an existential danger and must be repatriated. To the seasoned market watcher, this translates, before long, into a change in the nature of th workforce; it will be locals in Britain who do the crop-picking, the bed-turning and the bus-driving. Here’s a question: do you think they will do it for less remuneration, anxious as they are to do their bit for their country? Or do you think that, having the fruit farmer, the NHS and the transport system over a barrel, they might want a tiny bit more?

Tariffs also interest us, because historically they acted as a handbrake on activity. To us, they are an accelerator of a phenomenon which has been around for some years – the end of the optimised ‘just in time’ supply chain, which kept costs to a minimum, but fragility to a maximum. Add a third element, the onward advance of technology, notably AI, which is a really big deal. Add a fourth to that, the crusade against fossil fuels, which means that the automobile industry doesn’t know whether it was a mistake to replace petrol with a different pollutant in diesel, or whether electric cars (which may or may not be self-driven) are the future. All this undermines the traditional manufacturers, and allows China to pick and choose which Western enterprises to torpedo. If this feels fanciful, it is exactly what happened to Britain in the second half of the 19th century. Overtaken in pretty much every industry, it was able to hang on to its financial pre-eminence for another 50 years but by 1945 the game was up, and the direction of travel for the UK was down.

Fifty years is a long time for a market to go up, from once-in-a-lifetime cheap to the exact opposite. It’s a mug’s game trying to balance out the relative advantages of the following wind of momentum with the knowledge that, one day, there will be a reckoning of no little magnitude. Indeed, if we call the timing of that reckoning right, we are most likely doing things wrong, since our job is to hold both possibilities in tension, and to make consistent positive returns, whatever the weather.

As part of Ruffer’s long term succession plans, our chairman Jonathan Ruffer has announced his plans to retire in December 2025. This marks the final step in a phased transition that began in 2010. Henry Maxey will become Chairman of Ruffer in January 2026 and will continue in his role as co Chief Investment Officer (CIO). Responsibility for investment decision making at Ruffer is unchanged. Read more

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In conversation with Alexander Chartres

Tue, 17 Mar 2026 00:00:00 GMT

Fund Manager Alexander Chartres sits down with Investment Specialist Gemma Cairns-Smith to discuss the challenges facing investors in a more fractured global landscape.

They cover the journey to this more multipolar and harder‑edged world order, its new power dynamics, and the renewed importance of real assets. They also discuss the skills investors need to survive in this hard new world.

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In conversation with Michael Biggs

Mon, 16 Mar 2026 00:00:00 GMT

What really drives the economic cycle? It’s not the total amount of debt – it’s the rate of change of new borrowing. Investment Specialist Gemma Cairns-Smith sits down with Ruffer’s Head of Macro Strategy Michael Biggs to explore his research into the credit impulse — the change in new borrowing that drives economic activity.

Mike explains why this signal is widely misunderstood, what it reveals about the UK’s shifting interest‑rate backdrop, and where the biggest opportunities and risks lie as credit conditions turn.

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In conversation with Chris Bacon

Sun, 15 Mar 2026 00:00:00 GMT

In this thought‑provoking conversation, Ruffer Chief Executive Chris Bacon discusses the idea of Risk backwards: that comfort, conformity and ‘blanding’ can create the illusion of safety while increasing vulnerability.

Chris shares lessons drawn from different decades of life, explaining why disruption can be an advantage, how to cultivate independent thinking, and how Ruffer’s philosophy embeds these ideas in both culture and investment practice.

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Investment Review

Wed, 10 Jul 2024 23:00:00 GMT

But the sentries at the investment gate are not best occupied in taking opportunities to be photographed – eternal vigilance is the uncomfortable adjunct to those responsible for other people’s money. As I write this, I am aware that we have fallen well short of our investment objectives over the last eighteen months. The days of delivering on our investment aims – and some – in 2022, when the market fell 18%, are a faraway country.

Our investment strategy is based on a simple premise: we take genuine risk, and we seek, on a one year rolling basis, not to lose money. In our near three decade existence we have delivered solidly on the aims we strive for, and our clients expect. For a year and a half, the risks we have taken have cost clients money, so that raises two questions, interlinked: have we got it wrong, and have we lost the plot? It goes without saying that the arithmetic shows we did get it wrong, so perhaps the more acute question is: is Ruffer as a house right to persist in seeing gremlins in the woodshed, when there are so many easy ways of benefitting from the opportunities presented in risk markets?

Uncomfortable as it is, we are holding steady with the views we have. My personal view is, of course, only a singleton’s, but to my mind the probability of a setback – a really decent one – is likely, and likely not too distant either. The trouble, of course, being that ‘not distant’ is not like the moment when the boiled egg stops being runny. It’s more like an Iceland volcano erupting – a wait of two years for such an event is as a ship in the night to mother nature. To get absolutely right the timing of these cataclysms is to get lucky; if one is going to play for the volcano (as one absolutely must, if it’s a likelihood), one has to be early. If early, there is a real possibility of being uncomfortably early, and for many ‘uncomfortable’ and ‘unacceptable’ are too closely intertwined for comfort. Many investors, sympathetic to the idea that the markets have become unanchored, will nevertheless keep one straw in the punchbowl so as not to look ‘absolutely’ wrong, and the equivocation of ‘not yet’ looks like prudence until it isn’t, in the way that being uninsured gives you more cash in the pocket, until the Gainsborough is nicked.

Our core assets are the key to this philosophy. Events in Japan hold a big clue to future outcomes. The yen is the school chump who is always good for a tease. Tokyo’s bond yields, although moving higher, are still below Western yields, which have also been firming as the possibility of falling interest rates there recedes. Meanwhile, to quote Molesworth, ‘any fule kno’ that if you borrow in yen, you get to pay a low interest rate, and when you come to close off the deal, you’ve made a tidy profit on a yen that is even weaker than when you bought it. As I write this, the yen-dollar rate is 161: where might it go? When the Molesworths are crowded on one side of the ship, there’s a strong possibility, confirmed in the present case by the fundamentals, that the market will turn.

For a long while, the Japanese enjoyed, rather than endured, the fall in their currency. But they don’t like the inflation it brings, nor the excess of tourists. The newspapers proclaim in banner headlines the yen-dollar rate: ‘what a fine mess you’ve got us into here’ is the moan at government inaction. The key to the investment opportunity in anticipating a stronger yen is that there are two groups of investors short of it who appear not to have perceived the embedded risk to their assets. One is Japanese institutional investors, long of US and European government bonds, who hold them in dollars and euros, and the other is non-Japanese borrowers in yen, yen which is sold to fund the carry trade. This currency trade should move explosively when it goes, as there will then be a big number of forced buyers of the yen. In investment terms, that means the Japanese currency can appreciate far, far above reasonable value. Finger in air, it might move by exactly double that – the overshoot being the same as today’s undershoot. We anticipate that the portfolio would more than make up for prior disappointment in such an instance. Is this a prediction? Directionally, yes it is. I know I want to be long of the yen.

We could say the same for credit spreads, which have concertinaed into a tight premium over government bonds. Why has this happened? It’s because, now interest rates are high and inflation is still acting like a half-trained puppy, no extravagant yield premium over government bonds is necessary. That will change – pretty much for sure – but high fixed interest yields make it very expensive for bears to trade on the short side, since ‘short investment-grade bonds’ means having to pay a high rate of interest on the borrowed bonds acquired for shorting. Timing costs money, as well as taxing patience. There is a similar story for volatility trades. But their attraction – aaah, their attraction! – the more the market falls, the better they do.

In the old days, we had bull markets, and bear markets – the fluctuations were like the waves of the sea, causing the water level to rise a bit at the top of the bull wave, and then fall a bit, as the impulse gave way to a bear phase. Will it be like that this time round? I doubt it. We have had a 40 year bull market, during which there have been only the briefest of conventional bear phases – 1990-1992, 2000-2002, 2008-2009, 2022 – all too short for ennui to set in. Instead there have been stock market crashes – crevasses which, in a jiffy, do immense damage to investment returns. Indeed, the identification of these has been the single biggest contributor to our track record. In each and every one, we were too early – in 2000, it was 14 months, in 2008, it was a full two years, in 2020, it was at least two years, and this time it is 18 months at a minimum. In each case, we had correctly identified the nature of the oncoming crisis, and were able to concentrate investments into the appropriate asset class.

Many investors, sympathetic to the idea that the markets have become unanchored, will nevertheless keep one straw in the punchbowl so as not to look ‘absolutely’ wrong, and the equivocation of ‘not yet’ looks like prudence until it isn’t, in the way that being uninsured gives you more cash in the pocket, until the Gainsborough is nicked.

What might the stock market index do in such an eventuality? Henry Maxey’s insight is an interesting one – the question most of us ask is ‘how far could it drop?’ Henry goes to another question, ‘how fast would it drop?’ The answer is, he believes, found in the first of the recent big crashes, that of 1987, which came out of a blue sky – the market in its fifth year of a new generational bull market, and three years away from the next recession. Small stocks had enjoyed a spectacular bull market; when the fall came, it followed a queasy Friday, with the UK market half-closed because of the great storm. On the Monday, the market was marked very sharply down, and held eerily steady until about 11am, when it began to tick down again. By the close it had dropped by 23%. The reason – again, I use Henry’s word – was mechanical, not emotional, although I well remember how much emotion was generated. The flying buttress of protection, portfolio insurance, collapsed almost instantaneously, having turned out to be ineffective, and those with leveraged positions in their portfolios were forced to do whatever they could to cover those trades. That is the situation today: each area of the markets, from the hedge funds trading small differentials with high leverage to staid old Wall Street favourites, hollowed out by the replacement of equity with debt, has no reserve armies to defend losses on the central battlefield. It will happen so quickly that a response from central banks (notably the Federal Reserve, but this is the domain of every central bank from Peru to Portugal) will be powerless to come to the market’s aid in the moment of its crisis. In this environment, we would be disappointed not to make a gain which decently restores the portfolio to where our clients expect returns to be.

That, in a nutshell, is where we are. One or two things we can promise clients. We will not lose our nerve. Secondly, if the facts change, we will change our mind. Thirdly, we will continue to remember that we are not engaging in an intellectual game; we are the custodians of other people’s money.

One last thought. Since I took on the Chair of Ruffer in 2010, there has been a regular enquiry as to when I will hang up my boots. At the risk of causing disappointment, the answer is that I intend to stay at Ruffer until I am a chocolate fireguard.

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Could 2025 challenge market optimism?

Thu, 16 Jan 2025 00:00:00 GMT

Fund Manager, Steve Russell discusses the investment risks we see in 2025 – overvalued US markets, Trumps return to office, rising bond yields.

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Investment Review

Mon, 08 Apr 2024 23:00:00 GMT

We can now see that, when we began, markets had enjoyed the first decade of an unprecedented 40 year bull market, during which there were, for sure, opportunities to lose money, but nothing which can be described as a conventional bear market. Although it did not feel like it (for it suffered crevasse-like setbacks), it was a perpetually rising market – an equatorial climate of everlasting sunshine. How wonderful it must have been, we might think, not to have to endure the depressing cold, dark days of winter! But one has only to look at equatorial climates to see what a distorted world nature delivers when there is no winter. Either nothing grows, or – as in the Amazon – everything grows.

This absence of a cycle, the forest without fire, contrasts with the great economic leaps forward in history, which have always been cyclical in character. Kitchin, Juglar and Kondratieff recognised this truth a long time ago: the readily detectable Great Waves of human progress and prosperity.

The alarming conclusion we draw from the natural world is that the markets face, sooner or later, something unpleasant. The economist Hyman Minsky made this exact point about chaos, likening it to the sand which passes through the narrow point of an egg timer, creating mounds which collapse as more sand falls onto them. He observed that every now and again the collapse would be long-delayed, pointing perhaps to a powerful prior equilibrium – but that, when the collapse did come, it was more than usually powerful. In the 440 or so years of stock market history, we have seen every condition under the sun – except today’s decades-long stability.

Why should stability end this way? Here is a single example of a wonderful idea, beneficently conceived, which is as toxic as Sir Noël Coward’s chocolate-covered hand grenade. John Bogle launched his first index-tracking fund in the mid-1970s, right at the bottom of the bear market. It promised effortlessly average performance: the investor would never come first or last, but would always come forty-somethingth out of a hundred investors, as the fund delivered index returns minus (ever-shrinking) fees. Over a long period, as individual manager genius waxed and waned, the end result would be distinctly creditable. So powerful was this idea, and so effective were the equity markets in making money, that the index fund tail now wags the dog, and the dog is no longer dog-shaped. The top performers – the Magnificent Seven – now attract waves of investment simply because they represent such a high percentage of the market. Conceived as a free ride on the combined skills of the analysts and asset-allocators, so-called passive investments have become more than 40% of the market – the tipping point at which investor flows exert a greater influence on stock prices than the underlying investment fundamentals. Here is the law of unintended consequences writ large: a great idea – democratising investment – has become a force for potential destabilisation.

I remember a young investor who was on a winning streak, giving me a tip how to optimise returns: ‘Don’t buy the equity – buy the warrants!’ What might be regarded as a classic beginner’s mistake is alive and thriving today: use borrowing to maximise returns! To be fair, its general application is that it allows effective investment in anomalies which give too small a positive return to be worth trading. A single whitebait doesn’t fill the stomach, but catch a shoal of them, and you have a family meal. A chance of a 1.5% gain, leveraged up five times, gives 7.5%; if you are sure of the gain, it becomes an opportunity. In yesteryears, leverage was the means by which the less well-off became rich; once rich, you de-levered, and future generations could live off the income. It didn’t always work out like that, but it acknowledged a basic truth: that leveraging is inherently dangerous. To put it into the language which has relevance in this debate: leverage is an amplifier and thus destabilising. The shape of the equity market has deteriorated; after a generation of companies issuing bonds to buy back their own stock, the granite solidness of equity has been replaced with debt. This creates two dynamics – it makes the holders of the equity in a successful business much more valuable, but it sinks a struggling business much more quickly. That alone should give pause for thought. But, to us, the public equity markets are no longer the riskiest part of financial markets. Sure, the derivative and options market are priced off them, but that doesn’t necessarily make them important, any more than Greenwich is the centre of the geographical world because it is the situs for Greenwich Mean Time. The baton has passed to the private markets – for a generation led by the private equity markets, and now giving way to private credit, more properly called private debt.

The commercial opportunities for private debt arise from a deep understanding of the pathology of each unquoted business, and the knowledge that the banks, once dominant in corporate lending, are so tied up in the Sargasso Sea of legislative constraints, that this newcoming lender, unfettered, can control the debt market. The private debt operators lend at punitive rates, feasting on the high coupons, but increasingly they now end up with equity ownership, as businesses are driven to default by those same interest payments. There is nothing new in this – it is a reversion to the days before the quoted exchanges became the ‘market’; in the 19th century, businesses were owned by the controlling family, who used the exchanges in the same rodeo fashion in which the off-exchange markets operate today.

The effect of these various initiatives is that a great deal of debt is now layered into the investment universe – and, where there is debt, there is not just risk, but amplified risk.

The unbroken upward trend of the markets reveals that there hasn’t been as much risk around as the facts would suggest. The reason for this is that central banks have always been there to bail out the system, time and again medicating the wounds caused by speculation. Whatever the weather – be it pandemonium or pandemic – the Federal Reserve (Fed) has piped on. The mood of many in the market is: we rather agree with this Ruffer chap’s worrisome analysis; but while the music continues, we’ll make money in the momentum and, when it stops, we’ll hold our nerve, and the Fed will bail us out.

The market is dominated by quantitative trading, grabbing pennies in front of the steamroller.

Our co-CIO Henry Maxey has identified two flies which will likely make the Fed’s ointment ineffective. The first is that the conditions are there for a liquidity crisis. Liquidity is the upmarket word for not having enough ready cash to meet a commitment on a due day – quite different from a solvency problem, where you haven’t the resources to do so. In many situations, illiquidity is an inconvenience, but when it is systemic, it can act like a forest fire and spread its flames throughout a financial system. But surely (will ask Socrates’ friend), the Fed is alert to the danger, and will provide emergency funds? It has done so again and again in the last 40 years which, parenthetically, is a good part of the reason why the United States has been the best-performing market, and is also the reason it is the epicentre of the leverage danger.

The second fly is that in such a swift crisis, the Fed will not be able to provide the funds in time. Markets are driven by algorithms, which recognise opportunities through patterns – the speed of dealing is, in effect, instantaneous. Once those patterns signal a reversing dynamic, they will be activated, and that will trigger margin calls: borrowers will have to stump up more collateral immediately to keep their borrowing in place. Easier said than done, of course – Christopher Fildes once described an emerging market as one from which it is difficult to emerge in an emergency. It might just be that this is the fate, too, of the traditional markets. Is this outlook unprecedented? No – it’s what happened in 1987, when the crash was both unstoppable and speedy; back then it happened in a fairly valued market, in a bull phase, because the portfolio insurance protections in place didn’t work, at a point when they were absolutely required to.

‘Will it happen soon?’ Well, if the markets were a taxicab, I wouldn’t want to get into it, even if it was raining. A computer-driven market is passionless, and rapid. Trouble becomes chaos in a jiffy – five minutes before the hurricane, the market can give every appearance of calm. That adds up to a ‘when’, rather than an ‘if’. If we thought it a mere possibility, we would hold a different portfolio. We already believe that we must have a portfolio which can benefit from an extended period of tranquillity. That gives us an each way bet – but the market’s current supreme confidence in untrammelled upside means the most powerful portfolio returns will come from the onset of the storm.

In conclusion, the market is dominated by quantitative trading, grabbing pennies in front of the steamroller. This is now the dynamic driving the market, and so long as it continues, it will make money. We are invested with the steamroller, preparing for the substantial gain which will accompany the rupture of this dynamic. This is reflected in our core assets: the yen, credit default swaps, volatility plays and the inflation-linking of the portfolio’s bonds. The fragility in these core assets can be encapsulated in a single word: when?

I qualified as a stockbroker over 50 years ago, and I have spent my career peering into the future. I have found it rather easy to see the next big thing over the horizon, and the collapse of the predicated alliance between the central authorities and investors is merely the most recent of them. If the tooth fairy were to grant a second gift, it would be knowledge of the ‘when?’ Ruffer’s investment strategy has always been to claim indifference as to market direction. I would put that differently in today’s extreme tensions. We are – we need to be – indifferent to the ‘when?’. I am confident enough to believe the asymmetry of risk in our core holdings will serve us as well as in previous crevasses in the market. Our offsets – those investments held to play the current Weltanschauung – have to play their part until the core assets come alive. I cannot say we achieved that nirvana in 2023: it was our own winter. But, as in nature, nothing is forever and today’s portfolio shows greater fluency and balance. Now, it is the market’s endless summer that is to be tested.

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Investment Review

Mon, 30 Sep 2024 23:00:00 GMT

It’s an important question, and I address it because not only do I have an answer, but I believe it, too; it’s why I set the business up 30 years ago. We opened for business on 8 December 1994, and this Investment Review sets out, again, what we are trying to achieve. It’s fair to say that we are more concerned with preservation of money, so the market indices are not the primary competition – but the return on cash has to be beaten, relentlessly, constantly, and by a proper margin.

Because of this cautious aspiration, we are sometimes regarded as ‘perma-bears’, and our claim to be all-weather investors is treated like the chippy who howls in the wind about his chips being ‘world class’. If we were indeed bearish all the time, the bull market which has played out over our entire existence would surely have polished us off; but it hasn’t, and indeed we’ve thrived through it.

This brings me back to the ‘why bother?’. What’s the argument for holding Ruffer, just to have received a cash-like return? The answer is that, over the last eight months, clients have had a similar experience to the risk-free rate which is our true competitor, plus the possibility of solid returns from a dislocative market – conditions which conventional wisdom always regards as highly unlikely, but which nevertheless keep happening.

Indeed, these dislocative episodes are the concomitant of a complete absence (since 1982) of any conventional bear market where prices drift consistently lower, with some rallies and sharper sell-offs. They have been displaced by markets which have gone up nearly all the time, collapsing periodically – only to recover again. Historically, we have preserved client capital in each of the collapses, deployed it in the ensuing panic, and therefore been well-placed to benefit from the recovery. My verdict? Great in the chicanes, but invariably underpowered on the straights. But now, we see fewer straights ahead of us…

Every chef likes the smell of his own cooking, and the following observations talk our (cook)book – but we have the same skin in the game as our clients do. We see markets that are expensive, driven by powerful forces which want to turn a 40 year bull market into the first ever 50 year one. That trend is not one to embrace, but it’s dangerous to stand in its way. So we have half the portfolio’s assets in near-cash, and that allows more adventure in the other half. The conditions today feel similar to two earlier booms. One was the dot.com boom of 1999 where it was the extrapolation of good news, not the good news itself, which proved investors’ undoing: wrong valuations on often great opportunities. The earlier one was the 1987 crash, which was essentially (like today) a maelstrom of soaring markets colliding head-on with protections which, in the event, turned out to be more gun-pointed-at-foot than trusty gun dog. In today’s markets, we sense a lot of leverage, and very few Labradors.

Those who follow markets closely will be aware of the sharp setback which occurred throughout the world on 5 August. That brought the naysayers onto the street in big numbers – but, by the time their placards were unfolded (‘We told you so!’, ‘The end of the world is nigh!’), the markets had recovered, and made up for lost ground. It was a very instructive time, and fascinating for us to see its pathology in the light of our dispositions. That summer storm showed how the water cascaded down from the high ground. At its centre was the sudden reversal of the yen from uncontrollable weakness to coiled-spring strength – strength which has been maintained ever since. Two of the last three investment reviews set out in extenso why we thought yen strength was a certainty, and why that self-same strength may undermine the health of the investment outlook throughout the world. It also transformed the other protections we had: the market volatility indicators tripled, more than seemed reasonable; credit spreads went up by 25%, less than seemed likely. If 5 August was, as we strongly believe, a dress rehearsal, then our portfolios have learnt their lines.

The rest of this review takes a look at that second of our defensive investments – credit spreads – and explains what they are, and why they are essential ingredients in the stew. The central disadvantage in holding them is that – unlike most assets – there is an ongoing cost to doing so, and of course the more it costs to hold them, the more pressure there is to be right quickly. Set against that is one of the tenets of our investment philosophy: the more sure you are that a dynamic will occur, the less you need to worry about when it will come about. Nevertheless, we (and doubtless our investors) would like our credit spread investments to come right pretty quickly.

So what are they? As an investment, credit spreads don’t pass the ‘does it do what it says on the tin’ test. Credit is the generic term for corporate fixed interest stocks, which might loosely be defined as instruments which give the holder an interest rate return on the money invested, rather than an equity (ie ownership) interest. Until the 1950s, all serious investment was about the evaluation of the safety of the borrower – the flakier the borrower, the higher the interest rate. When Schroders (fly-by-night bankers in the 1860s) engineered at that time the first Japanese loan, the interest coupon was 7%, a rate even higher than the reward for investing in the known volatility of South America and, I think, of every other national entity. ‘Spread’ is the articulation of that difference – the extra yield one receives for taking on extra risk. The spread is established when a bond is first issued, but market forces will, constantly reassessing the risk of the bond over time, move it to trade more expensively or cheaply against other securities regarded as having similar characteristics within the food chain.

We see markets that are expensive, driven by powerful forces which want to turn a 40 year bull market into the first-ever 50 year one.

From the 1950s onwards, as equities came to dominate markets, the centrality of this dynamic passed, and fixed interest joined the radio and the railways in the ranks of the Titans of yesteryear. But to us they are important once again: increasing leverage (aka borrowings) in financial markets has made these spreads, arcane to the rest of the world but pivotal within that village, a key driver of financial system stability. Most important of all is ‘investment grade’ credit – another gobble in this gobbledegook market. In the hierarchy of safety, investment grade bonds offer a higher interest rate than Government, but a lower rate than ‘high yield’ (formerly known as junk bonds!).

Why do investors own investment grade credit? Because it provides a higher yield than the equivalent government bond, with an almost imperceptible increase in risk. Indeed one could happily argue that Microsoft (‘AAA’ rated, like the United States itself) has a much better balance sheet than the government. This sense of ‘something for nothing’ is endlessly tempting for investors: if I have spare cash to invest in government debt, why would I not put it in investment grade debt instead, and scoop the (slightly) higher coupon?

What we own in portfolios is the spread – the differential in the yield between investment grade bonds and government bonds. Today the difference is about 0.5% or 50 basis points (bps); that’s a low level when the world is happy in its handbasket, but in a rumpus, it can triple, and trade as high as 150 bps over government. Why should the spread widen in a moment of market volatility? Because in a crash everything feels less safe: when confronted with uncertainty, investors invariably try to disengage from longer-term commitments in favour of safety and liquidity. And repeated historical crises have shown that US treasuries are safer and more liquid than even investment grade credit.

So the level of credit spreads is currently at the low end, despite the over-borrowings in the world, and despite their inherent volatility suggesting that pricing them cheaply is dangerous. The investment grade credit spread asset class is in an index form, and the lower-quality end of its constituents are not (in our view) of investment grade at all. If there is a seize-up in markets, and the credit spread indexes move to reflect a higher spread – towards the top end of the range quoted above – these holdings alone would be expected to make well over a year’s return on the whole of a balanced portfolio at current rates.

To be able to run these positions costs money – a precious resource, which looks like wasted money when the protection these instruments offer goes unneeded. Provided we are right that the events will play out as forecast – as they have each time in the past, with not one of them missed – then a dullish performance, matching cash, is an excellent risk-reward while we wait.

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Investment Review

Tue, 09 Jan 2024 00:00:00 GMT

The unfortunate villagers who lived on top of it had been evacuated; but what was expected to erupt within hours was then demoted to ‘within weeks’. I remember a vulcanologist telling me that a call within 80 years of the actual event was regarded in that milieu as being ‘right’. I therefore look on them with respect, but also a certain envy, since we investment gurus are given no such leeway.

I am writing this after a ‘down’ year; we resist the strong inclination to blame the investments themselves, rather than our choice of them. Why did it happen? Too many of the things which were meant to go down went up, and a few – only a few – of the things that were meant to go up went down. It is worth reminding both clients and ourselves what our performance aspirations are: never to have a down year, and to make sufficient to justify the opportunity cost. With interest rates at 5%, to say nothing of inflation, there’s quite a shortfall at Ruffer over the last 12 months. This pains us, but our long-term performance remains good, and competitive with much riskier assets such as equities which have, over the 30 years since we started, been the best major asset class as regards total return.

If all the markets were a stage, and all the players in it were supermen and women, then there would be no opportunity to make money by trying to garner a return from wrong odds offered in the marketplace. An all-knowing mind would remove all opportunities. But luckily, the actual players are mere men and women (and now machines), and that creates opportunities. A single example will suffice: our dominant thought at the beginning of the year was – and remains – that inflation will ultimately prove to be a semi-permanent condition in the Western world. We therefore retained our long-dated inflation-linked bonds, which are a double-numbered domino: as well as having an inflation protection (which we wanted), they are also a conventional bond with many years’ maturity (which we didn’t really want). We therefore juxtaposed the linkers with short positions on the stock of companies with strong growth prospects – companies which, incidentally, we often admired.

Of all the horsemen of the apocalypse, the least predictable is liquidity, because a liquidity crisis is one that can be cured – for a while, anyway – by the foresight of central banks and governments.

There is risk in this approach, of course. The sharp rise in interest rates makes the future earnings of growth stocks less valuable. The key is that it does so mechanically – future earnings become less valuable (not merely arguably less valuable) when they are discounted at the higher rate of interest; the company’s worth becomes actually, actuarially, less than it was. Prices, and therefore performance, however, are not determined by what something is mechanically worth, but by the prices established by mere men and women (and now machines). Our judgement was that whether interest rates were higher or less high than expected, having money on both these red and black plays on the roulette wheel would have elicited a positive return. I have spent a lifetime looking for the opportunities created by juxtaposing investments which benefit and those which suffer from the same impulse. It has served clients well in the past, and it will continue to do so in the future – of that I am confident. In 2023, though, it caught us out: the ‘actuarial values’ were not always the same as the market value – and that’s the judgement seat of investment performance.

Were the mortals and the algorithms acting perversely, thereby excusing our judgement in making a wrong call? Alas, no. We entered the year concerned there was going to be a liquidity crisis. There wasn’t – in fact there was a floodtide of it. Of all the horsemen of the apocalypse, the least predictable is liquidity, because a liquidity crisis is one that can be cured – for a while, anyway – by the foresight of central banks and governments. Foresight is exactly what the US Treasury had this year, switching from the issuance of long-term Treasury bonds to short-term bills, which did the trick. The cynical view that one can rely on central bankers and governments to get it wrong is often correct, but not in 2023.

What of markets today? The central elephant roaming the carpet is the optimism with which the market greeted the relentless fall in interest rates, beginning on 10 August 1982, the day I got engaged, and continuing these last 40 years. The bull market in bonds probably died in November 2021 when interest rates reversed their decline and headed upwards, but in its death throes it is still kicking. We are in the treacherous open sea where the waters of two oceans meet: the rules learnt, polished and ossified over 40 years of ‘more of the same’ meet the examiner’s addendum question, ‘Would your answer be different if…?’ Markets may be wrong, but they are rarely perverse.

As we look forward to 2024, we see a world which is curiously unfit for investment purpose. The extraordinarily long bull market in equities has not prepared investors for the two-way battles ahead. Equities are pretty universally regarded as the premier investment – something which has been true for less than my lifetime, which began in 1951. Before that, equities were commensurate with ownership – if you wanted or needed control of a business, then of course the equity mattered. But a minority holding of a company controlled by others made you the rabbit – someone else’s lunch. This unfortunate truth has been masked by the fact that the true controllers of a corporation – its senior management – have learnt the trick of monetising that power by creating stock options. Existing shareholders, who would otherwise resent this dilution of wealth, are placated by the arithmetic advantages of leveraging the business, not least by buying back shares which erode the core capital of the business but increase its per-share earning power. An all-seeing market evaluation might applaud the increase in earnings per share, but it would also deplore their quality, and attribute a lower valuation multiple to those earnings.

There’s another worrisome trend. Most interesting newcomers no longer seek a public quotation – they go to the more informal, less regulated private equity and private debt markets. The indices themselves have become, especially in the United States, unrepresentative of the generality of quoted investments, being dominated there by the ‘magnificent seven’, which are in parallel to an earlier iteration of the magnificent seven (those Seven Sisters happened to be oil companies). Where is the accident waiting to happen here? The answer is the many holders of ETFs, who are unaware that the outperformance of the S&P is the direct result of such purchases made with the explicit intention of being indifferent to the underlying structure of their investment. Defending the investment management industry requires almost the same pirouette as being kind about central bankers. But when time is up for the magnificent seven, the ragbag of the rest of the quoted sector will outperform the tech-dominated indices – and the causation of that phenomenon will be as removed from their innate talent as its previous underperformance.

The question of debt levels is an area of concern, too, in the balance sheets of national accounts. It is an old truth that ordinary people are immediately punished for non-payment of small sums of money, whereas those with more substance can go for longer, eventually succumbing to a more egregious indebtedness. The levels of debt in government balance sheets are very high – unprecedentedly so outside wartime, a time when draconian laws ensure universal cooperation. The longest delay between the taking on of unsustainable debts and the eventual effective bankruptcy probably belonged to the Spanish Habsburgs, where disaster was delayed for around 125 years. A similar revulsion today – a very different thing from the US politicising of the debt ceiling – would appear as a most unexpected shock. But the seeds of such a crisis are already sown; it is a when, not an if.

Whilst our style of investment is therefore to have as our prime view that surprises will come on the downside, it emphatically does not mean that if markets remain firm, the investment stance of our portfolios will, ipso facto, be compromised. But we do require our offsets to be more robust than they were in 2023.

So I am coming to the conclusion that I am not as envious as I thought of those vulcanologists, with their 80 year horizons, uninterruptible as they may be by the chorus of “Why did you call it wrong?” We did indeed get it wrong last year, but it has made us look afresh at what we are doing, and it has reminded us, too, as to why we are doing it. This is not an intellectual exercise, it’s a battleground, and we fight these enemies of uncertainty on behalf of our clients – that’s what it is to work in a service industry.

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Election 2024

Mon, 09 Sep 2024 23:00:00 GMT

As the US presidential race enters its final straight, Dr Tim Smith and Alexander Chartres join Rory McIvor to discuss how investors are weighing up the prospects of a new administration.

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Investment Review

Thu, 06 Jul 2023 23:00:00 GMT

There are two reasons for this. First, that we have experienced similar results in the past; in each case they have heralded a major correction in the market. Second, the macroeconomic outlook points firmly to specific troubles ahead – troubles against which we have particularly guarded.

Being right about the markets necessarily means being different from the markets. Our settled aspiration is avoiding the market crevasses, and in this we have been successful in every case going back to 1987 – that preceding the start of Ruffer in 1994. My experience suggests there is almost an inevitability of underperformance in the run-up to a market setback. What’s fascinating (to me, anyway) is that the nature of the underlying underperformance was different each time, and yet the investments causing the pain proved – each time – to be the key to the successful management of the crisis itself.

In the dot.com boom of 1999, we failed to make any money at all in what was, in retrospect, the easiest time for investment managers in my 50 year career. In fact, the boom completely passed by the ‘any other leading brands’ – 70% of the market fell; investors learnt about dispersion.

In the run-up to the global financial crisis, we were heavily invested in the Swiss franc and the yen. Both traded relentlessly lower throughout the final months of the bull market.
In 2018, the market was selling volatility very cheaply, and we took out options that would perform powerfully on a sharp fall in the market. For a long while, these options sequentially expired worthless.

Each of these particular protections were in place for a coming storm, and large enough to neutralise the market fall – in each case a drop of 30%. It will be clear from this brief backwards look that it was not enough to sense the coming trouble; one also needed to divine the nature of that trouble, since each of the protections employed had specific characteristics, characteristics which provided the antidote for the particular problems that manifested when the weather changed. They turned out to be the reculer before the mieux sauter.

We have adopted today two of those strategies which previously helped us perform well in a crisis, but were wrong in the run-up to it. The first is linked to equities; the second to currencies. In 1999, our equities were outside the charmed circle of technology growth – the wide dispersion of performance meant equities outside these bull market darlings went somewhere between nowhere and down. In 2023, our allocation to equities has been extremely low, while a handful of technology names have driven the market higher. On currencies, this time around, we’ve missed losing money on the Swiss franc, but we have built positions in the yen; this time as last, the yen has been the currency of choice for those wanting to pay as small a borrowing cost as possible, and who are content to take a currency mismatch risk instead. That currency mismatch is making money for them (in addition to the small interest charge they pay) – their contentment has turned to happiness. You don’t have to be a genius to see that, in a crisis, everyone will de-risk; that will include neutralising currency mismatches, and end the happiness. In a crisis, we expect to see a strong upward move in the yen: in 2008, it went from 170 to 110 versus the dollar.

Our preoccupation with fear makes us the gazelles of the investment market, always alert to dangers. But we are not pathologically fearful. Fear may keep you from losing your money, but it also stops you making it – it therefore has no place in the pantheon of qualities needed for the job. A good test to differentiate the two temperaments might be called the ‘Chicken Licken’ test. If it’s a generalised, inchoate sense of unease, we rate that as part of life’s tapestry. If it is based around a specific and identifiable risk, we take note. Our present nervousness can be encapsulated in a single word: liquidity.

The macroeconomic outlook points firmly to specific troubles ahead – troubles against which we have particularly guarded.

What is liquidity? It’s having enough ready cash to meet commitments as and when they arrive. Today’s world is full of debt, so there’s a need to distinguish between solvency and liquidity. If your net worth is not enough to pay down the debt in due time, that’s insolvency. If you have 5,000 acres and a Leonardo, the arrival of an interest demand for immediate settlement is unlikely to compromise your solvency – but neither the Leonardo nor the fields are capable of meeting the demand for money payment. It needs money, and a liquidity crisis results in a liquidation crisis; when there is a concentration of selling to raise liquidity, and no buyers, it creates powerfully volatile market conditions.

This is exactly what happened last September when a portion of the UK pension fund market – the defined benefit section – found itself in a liquidity trap. The causes were embedded in the distant past – legislation that required the pension funds to invest in gilts which, while they matched the duration of their commitments, were so stolid and so distant in maturity that the funds could not be expected both to hold them and to grow sufficiently. Schemes were devised whereby pension funds borrowed against these rock-safe gilts to invest more speculatively; for a long while, it worked, and the industry regarded it as one of the uncontroversial certainties of pension fund management. But it wasn’t. When the Truss/Kwarteng government unsettled the gilt market, lenders demanded more collateral from these pension funds, which could only raise it by selling the self-same gilts which were the cause of the problem. A Lusitanian cry of grief emerged from the pension fund trustees, not least because most of those managing their investments were unable to supply liquidity in short order.

To the crux of this Investment Review – why have we inconvenienced ourselves and others by clambering onto the high ground to avoid a tsunami? Put differently: ‘You’ve been waiting at the bus-stop (with our money) for a fair while; perhaps no bus will come…’

In our view, it would already have happened but for two unrelated phenomena which provided providential liquidity. The first was a wave of animal-spirited confidence in the old favourites of yesteryear (the FAANGs) joined by a new cadre of the jam factories of tomorrow, namely the beneficiaries of artificial intelligence. There was – is – nothing unreal about this dynamic; it is, however, temporary – a spate river filling up with a violent thunderstorm’s offering during a period of chronic drought.

The other reason was a change of direction by the Federal Reserve, reversing its decision to take money out of the system. This was the reasonable – arguably essential – response to a regional banking crisis in the US. Right or wrong, it has kept liquidity in the system at a time when the run of play is in the other direction.

This is what we see. The Fed – having been caught out by the onset of inflation, which has been exacerbated by continuing strength in the US economy – cannot afford to allow more liquidity into the system while also maintaining its credibility. Indeed, it is trying to remove liquidity through quantitative tightening. The banks may be well financed, but they are hit by high short-term interest rates – when longer-term rates are lower, they can’t get deposits. Moreover, the central bank has become an unwitting competitor of the banks, by offering a reverse repo service – a fancy name for taking in lender’s money at rates banks do not want to match unless they are forced to. Again this competitive element was not intended; government-only money market funds have to invest in government-quality assets (a result of some previous crisis), and a service intended for institutional use is now available to all. As money is increasingly attracted by safety, it will go there, and stay there, starving the banks of life blood. Unexpectedly high interest rates mean there will be borrowers who had worked out their cash flow on near-zero yields, and cannot afford the higher servicing charge. This is the latest burst of the financial covid to come.

Certainly, behavioural research shows investors have less appetite for risk when interest rates are high (a case of ‘monkeys prefer bananas to apples’, in my view). The interesting element is that most investors’ portfolios are still shaped for a zero interest rate world – and the latest burst of animal spirits has taken the needle yet further away from safety.

We are conscious that, however attractive our investment dispositions may be for the future, right now they are in sniper’s alley. We reflect that, and the nature of the outlook as we see it, by holding as small an allocation to those protections as we dare. Our time is spent in the war room, preparing for what is to come.

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Leaving the pack

Sun, 14 Jul 2024 23:00:00 GMT

Investors are herding into a narrow market and propelling stocks to new highs. Fund Manager Jasmine Yeo joins Rory McIvor to explain why this is a market well worth insuring against.

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Ugly ducklings

Tue, 16 Apr 2024 23:00:00 GMT

Duncan MacInnes joins Rory McIvor to reflect on Q1 performance and discuss some of the portfolio’s key positions including gold and silver, derivative protections and the yen.

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Investment Review

Fri, 06 Oct 2023 23:00:00 GMT

He asked, “What’s your attitude to the poor performance we’re putting in during 2023?” A good question deserves a good answer, and it got one. Its substance was – when things are tough, two questions need to be satisfactorily answered. The first is: why did it happen? The second is: why are you confident that the portfolio is rightly positioned for effective performance from here? So those are the two questions I shall address in this Investment Review.

We have a big position in the yen, which has dropped this year against all major currencies. The yen has been moving lower for a long while. With currencies, it is always dangerous to try to anticipate a change of direction, even when the fundamentals cry out for it, and our performance has suffered accordingly. We believe the yen is oversold for technical reasons and that, when these dissipate, it is likely to move sharply higher. Moreover, when it does, it is likely to be concertinaed into a brisk uncontrollable move upwards. This happened, to our advantage, in 2008, and we believe that today’s backcloth will cause a repetition of that dynamic. Our confidence comes from the observation that there will be forced sellers of foreign currencies into the yen and, simultaneously, forced buyers of yen, which will combine as a catalyst in turning its direction. If these events occur in the course of a market dislocation, the exchange rate could move as violently as it did in 2008 (up by 50% against sterling in short order).

The compulsion to buy yen will come from two diametrically opposite sources – one domestic, one international. Local demand for yen will come about in the aftermath of Bank of Japan Governor Ueda’s increasing isolation in trying to hold the yields of the government bonds well below the international rate. The most likely way out of this impasse is for the authorities to compel domestic institutions to acquire such bonds at their current (anomalously expensive) prices. To do this, those institutions will have to sell down big holdings of foreign government bonds, denominated, of course, in foreign currencies. Many of those holdings have already been hedged into yen, but much of it will still be held in local currencies, with the conversion into yen telescoped into a short time window.

The international constituency of forced sellers are those foreigners who have borrowed in yen to enjoy a lower interest rate regime than the one in which the assets are purchased. That constituency is more aware of the double advantage of a low interest rate and a steadily diminishing value of their borrowings than they are of the dangers of a currency mismatch which, at the key moment, moves sharply against them.

This investment strategy has almost nothing to do with the fact that the yen, on a purchasing power parity basis, is very cheap. That reason for holding the currency for a capital gain is, by itself, a poor one: in general, weak currencies go on getting weaker. Rather, we are looking for coming dislocations striking at assets or currencies which are wrongly priced. In my experience, it is unusual to find two separate constituencies of forced buyers – to find a single one is enough. It is the strong possibility of an extraordinary upward move in the Japanese currency which provides us with the stamina to withstand the general day-to-day attrition of the yen. If the net result produces merely a satisfactory ultimate return, we will be disappointed.

We’ve seen this all before, and we know how it ends, but that doesn’t mean the journey won’t be bumpy along the way.

The other impediment to an effective performance in the first three quarters of 2023 has been a breakdown in the relative movements of asset classes. An important tenet of our portfolio construction has always been the juxtaposition of offsetting assets. So far this year, they haven’t obliged; cast iron relationships have proved unreliable, and as a result the portfolio has looked imperfectly balanced.

One extended example, which has cost the portfolio heavily, will suffice. We began the year believing, as we have done for some time, that long-duration fixed interest assets would very probably be a bad place to invest. In the event, that call was correct. Representative investments of this asset class are US Treasury bonds maturing in the late 2040s, and the UK gilt equivalent, where maturities stretch out to over 50 years. In the ordinary way, our view can be factored into the portfolios very simply – we don’t own any of them. Unfortunately, one of the key assets that we do own (the UK index-linked bond), in what we see as a vital protection against future inflation, is a first cousin of the conventional UK gilt. We own it because of its second, valuable characteristic, of giving protection against rising prices. But it is still a bond, whose return will be at least partly determined by the price of conventional bonds. To repeat, the index-linked prices are determined by two things: their unparalleled protection against inflation, and their consanguinity with conventional bonds, which are themselves likely to be dismayed by that very inflation proving to be a long-term problem.

Rather than regretfully avoiding the index-linked because of this connection to conventional bonds, our natural response is to take an offsetting position in another set of assets which offer a mirror image of long-dated conventionals. Thus we can retain in the portfolio the desirable component of the bonds (their inflation protection) whilst neutralising their weakness (the interest rate linkage). To our mind this argued for a continuation of investing against the equity of highly rated growth companies in the stock market, which had worked so well in 2022. The officious bystander might point out that an investment against the Teslas of this world is scarcely a mirror image of a long-dated conventional bond, but what is counter-intuitive is not necessarily wrong. Rising interest rates play havoc with the discounted valuations of future earnings, and the present valuation of growth stocks is heavily dependent on the contribution of those future earnings. The earnings of a company growing at a slowly fading 15% a year will have a net present value of x if discounted at 3%, but only 0.3x if discounted at 5%. Same company, same outlook, same stock – but applying the change in long-term bond yields should price it lower by 70%. That repricing is what hasn’t happened for technology stocks this year, and as a result the portfolio’s vulnerability to rising interest rates hasn’t been offset.

This shows why we are confident in our current positioning. At the heart of our investment strategy is the belief that 2023 has seen fundamental truths – with their gravitational pulls on valuations – momentarily overwhelmed by market forces. These forces can, in the short term, be very much stronger than a mere ‘gravitational pull’, but in the long term gravity always beats a good party.

Thus far, we have done no more than hold out justifications for continuing to hold what hasn’t worked. We need, I think, to show cogent reasons that, far from the world being a safer place economically and politically today, it is in fact more dangerous. It should be clear from the first part of this review that, if the markets prove hostile to investors, the positions held will not merely be defensive (although they will), their shield will become a sword.

It is our firm conviction that inflation is in an inexorable up-cycle. We do not put timings on it, but two factors will prove more powerful at stoking rising prices than the single force pulling the other way – the impact of central bank tightening. The first is the increased balkanisation of economic activity – the extraordinary growth of China, funded by two decades of free American money, gave the developed world a holiday from inflation. That has ended. The middle-aged investor class were the unambiguous beneficiaries, the younger workforce the opposite.

This inequality has led to the second key driver of inflation: a reversing of the Marxian battle between capital and labour, something that always happens at extreme points, typically reached every half century or so. The bottoming of interest rates in late 2021 was the nadir of labour, and the onset of strikes by organised labour will be a feature for the next couple of decades, and probably longer. I am involved in County Durham, and the position there – a low pay economy – is that a working family struggling to escape poverty has to compete with a double digit rise in state handouts for the unemployed, the increasing cadre of elderly protected by the upward-only pension ratchet, and the price of staple goods rising more sharply than wages, which have shown three decades of real decline. Just released is the average year-on-year wage increases: 7.8%. That’s not enough when the worker has the wind in his face – but it’s considerably too much for a healthy economy and a 2% inflation rate. Wherever one looks for the old certainties, one sees liquescence. Some is old behaviour, newly spotlighted; more is a failure of leadership, where nothing surprises, since no virtue is expected.

In summary, the world has more than a tinge of aurora borealis. It is a dystopian world where everyone is a victim, the central authorities in the West buy off every dissatisfaction with money they haven’t got, and a new order awaits its time, still to come. If you know where to look, there are eternal truths that are observable by eternal pieces of evidence. In the field, it is rheumatism in the knee which heralds the change from father to son; in the West, it’s the day that the cost of paying the interest on a nation’s borrowings overtakes the (sharply rising) defence budget. Just as with the yen, we’ve seen this all before, and we know how it ends, but that doesn’t mean the journey won’t be bumpy along the way.

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Survival at 5?

Wed, 10 Jan 2024 00:00:00 GMT

Can the economy and markets survive interest rates at 5%? Not for long, suggests fund manager Matt Smith – either interest rates must come down or asset prices do.

In this quarter’s episode, we reflect on portfolio performance in 2023 and discuss what’s changed in outlook, and investor sentiment, compared to this time last year.

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Investment Review

Sun, 02 Apr 2023 23:00:00 GMT

There has been a savage sirocco wind blowing into the banking industry, an industry which has become much safer since its near-death experience in 2008. Banks have been regulated to within an inch of their corporate lives, and a battery of consumer protections ensure that cash deposits are not lost. Credit Suisse – an archduke among them, dating from 1856 – imploded last month, having spent the past 15 years hopscotching into every cowpat and puddle in its path. Bank depositors have found the going uncomfortable, especially the smaller ones; the regional banks in the US have lost deposits, some to the majors, where their money is safe, some to money market funds, where the yield is high, and the safety feels absolute.

Injecting public money into a shortfall has worked well enough since 1998, when Long Term Capital Management was bailed out after one of the grenades they were juggling exploded. The bailouts have continued relentlessly since. But they won’t go on for ever.

Central banks, the executive arms of government in terms of maintaining the currency, are most effective when their own balance sheets are strong. The question remains whether they can afford what they are doing. There has been as yet no questioning, no nervousness, about whether governments are good for the promises they are making through their central banks. Except once: last autumn – a time the British, and Ruffer LLP, will long remember. A misjudged pirouette from a recently elected prime minister and her chancellor spooked the markets and caused a run on the UK government bond market. Leveraged pension funds were forced to put up more collateral to support the borrowings they had made against their gilt holdings – and those gilts proved unsellable. It happened that a separate proportion of their pension funds had investments with Ruffer. They needed money from anywhere; we returned substantial sums, and quickly – able to do so because we’d been alert to the dangers of a liquidity crisis.

So far, this has been the only occasion when such a crisis has been visited upon a grown-up country. The Bank of England stabilised the situation, and now the waters are again as calm in the fishponds of the pension fund industry. But will it stay that way? Every time there is a bailout, an integral element is the implicit acceptance by the market that the central bank is good for the debt. Over the long course of financial history, there has always come a moment when the lender says ‘No more!’ Note that he doesn’t say ‘no more’ to start with – he demands more compensation; the rate of interest the borrower pays increases.

It is ironic that the demon of illiquidity should have located a pocket of weakness in the banking citadels of the financial world, when it is the asset managers who are the weaklings of the herd, not the banks as a class. The mischief will be centred on investment portfolios. To survive, one will have to be careful in the sorts of assets one owns. There is usually a sharp changing of the guard in markets after an event which involves illiquidity – when the refreshing waters return, it is not always to the old favourites. In the emergency, though, the jewels and the paste are all jettisoned together, and real money can be made by having the firepower to buy assets from distressed investors. This requires a strong ammunition cart of cash, or cash-equivalent: the latter has to be regularly checked to confirm that there is a genuine equivalence. I am a bit queasy writing this, in case the crisis happens… and we find ourselves locked into our ‘safe’ investments.

What are, to Ruffer’s mind, the key building blocks which will build the high walls of the future? The first and the most important element is the reversal of interest rates. They have fallen relentlessly from the high teens 40 years ago, to negative by the end of 2021. The next most important, but closely linked to it, is the return of inflation. Inflation can be seen as another disease in the economic body politic. It is the marketplace’s way of disguising a reality, one always aligned to insolvency. In the days of metallic money, it took the form of debasement – the shiny golden veneer hid the copper beneath. Paper is more easily compromised. Paper money in Ming China – with its jolly message to its holders: ‘Forgers will be decapitated’ – was the first of a hundred million sister currencies which saw the value of their paper disappear. We have in our London office a Ming banknote, and an example, too, of one denominated in the least valuable currency which has ever existed: a 1946 Hungarian note with a stated value of 600 billion pengo.

Short-term movements can be extreme, in either direction. On a longer timescale, though, the idea that inflation will turn out to be a flat line 2% a year is vanishingly unlikely. We live in a world of money instability, which can very easily express itself as depression, as money proves to be too valuable for a society, and hibernates. More likely, perhaps, is a world in which money loses value quickly, creating winners and losers, with the consequent social cost. The consensus today is that inflation will be tamed; but two of its key drivers – a newly powerful workforce worldwide, and de-globalisation – make that a likely wrong call. If inflation is here to stay, markets have a great deal of de-rating to suffer.

Our way of investing is to analyse how events may play out, while being intensely curious but indifferent as to the speed and sequence of the onset of the events. We then prepare for what we believe is likely to happen, but is not presumed to happen in any particular timescale. The art is to build into the investment mix a tolerance to much-delayed timescales; we fight to keep the beneficiaries of likely future outcomes in the portfolio by holding offsetting assets, so that we are not having to time an entry point. Last year, in that bout of illiquidity, we were heavily invested in long-duration index-linked gilts, which performed terribly, dropping by more than three quarters at one point – but we had swaptions which accreted value from the self-same dynamic, and we were therefore able to keep these important assets, without the penalty of the performance whipsaw as interest rates went up.

In making these judgements, we put great emphasis on past circumstances. Here’s an example, set out in the form of a question. Which circumstance was worse for the long-term investor – putting money into Wall Street at the beginning of October 1929, or doing so in the UK market at the end of 1936? Wall Street didn’t see a return of the original investment in real terms until 1954 – that’s a quarter of a century. The money-back date for the UK 1936 investor was 1985: half a century. The 1929 crash was a theatrical warning, maybe even the part-creator, of the Great Depression, which changed the character of the United States, and afflicted the whole world. By contrast, the 1936 debacle was not about the underlying investments; it was about the valuation rating which underpinned the pricing of them. Britain had largely escaped the Depression (outside its traditional smokestack industries). It did so by reducing interest rates to unprecedentedly low levels – in 1933 the government issued a Treasury 1% 1935/42. As this policy of ultra-low interest rates played out, there was a frenzy for income, and the sophisticated and hierarchic fixed interest market in the UK saw yield differentials contract. Thus Indian securities (traditionally considered as safe as gilts, but not actually guaranteed by the British government) traded on a narrower discount to them. Debentures closed in on Indian; in their wake came various issuances of unsecured loan stocks – sometimes as many as five, each having its place in the pecking order; next came the cascade of preference shares. Last of all was the equity market, which in those days was seen as a yield-bearing appendage of the fixed interest market – the tail end Charlie, who got what was left over.

When the mania for income subsided, each of these assets re-priced on their traditional spreads, resulting in a capital loss for each ratcheting up of yield. Indian stocks had a single consequent downgrade, but the equity market had to contend with each of those less secure holdings repricing downwards. Herein lies a clue, which can serve as an investment yardstick for today. As each of those yield differentials widened from 1937 onwards, it created a bear market in credit spreads. The comparative performances of 1929 America and 1936 Britain gives eloquent testimony to the idea that a social economic disaster is less destructive of value than a serial de-rating – if one is invested in the risk end of the spectrum. Add to that the possible pricing-in of the risk of sovereign default in countries thought to be safe from default.

‘Knowledge is power’ – a financial truth as much as a political. The known unknowns point to an extreme correction in all asset markets, at a time when society has loaded up on debt – the poor to get on the ladder, the rich to leap up it. It is the cornerstone risk – a cornerstone reflected, as always, in our investment policy. Our emphasis is on never losing money, so that we can use the consequent stability to produce returns. It has worked for nearly 30 years; fingers crossed for the next 30.

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Investment Review

Mon, 09 Jan 2023 00:00:00 GMT

When the country went decimal in February 1971, a letter from a girl named Ambrosiana was published in The Times. It read: “I am seven. When I am old, will the money still be called new pence?”. Shortly afterwards, another letter appeared. “I am seventy-seven. When Ambrosiana is my age, it will be called nuppence”. In my own life, the value of money, measured in sterling, has dropped by around 96%.

In an inflation, prices go up – it is not best understood as a currency diseased, since there is no simple pathology to explain its decrepitude. It is shorthand for a world where one of the ol’ reliables, the cost of stuff, becomes unreliable. I believe its seeds were sown in the aftermath of the great financial crash of 2008; in the first Investment Review which followed it (January 2009), I wrote, “…the shape of the struggle to come has become clearer. In essence, it is a battle as to the future value of money – are we facing a deflation, exemplified by the Great Depression of the 1930s, or an inflation, as governments and central banks man the printing presses to combat this deflation?”

The answer, of course, was sequential – first the deflation, then the inflation. I reached for the analogy – the car on the cliff top road runs over an oil slick. The previous stability becomes instability; in that moment, it is anyone’s guess whether the car lurches left or right. But the totemic and constant fear has been the possibility of deflation: the driver will correct – and, inevitably, overcorrect – by turning the steering wheel in the inflationary direction. The exchange of monetary stability for instability was as clear as Claribel; the ultimate ‘victory’ of inflation equally so. For setting the compass, this showed the whereabouts of true north.

If something happens which you are expecting, it helps you to see what is coming next. A cold realisation that inflation’s onset is finally upon us is an easier place from which to make decisions than dumb astonishment. Where there’s shock at the change of impetus, some things that are obvious will be missed; other features, of only momentary note, will appear transformational.

The reason for much wrong-headedness is that stark problems feel as though they can be solved with stark answers. My own judgement is that there have been three different root causes of inflation over the centuries – and there is perhaps also a fourth, a variant of two of the others.

The first of those is the balance between supply and demand. When people are poorer, there’s less demand for steaks, bungalows and new Ford Fiestas, so there’s an assumption that recessions cause, at the very least, an abatement of inflation (and possibly, if untethered, a deflation). This truth puts the ‘central’ into the central banker. Demand is not a bad test, but it didn’t work in the 1970s, when recession and inflation combined to spawn a Scrabble special: stagflation.

The second root cause is the amount of money around. This was irrelevant in nineteenth century Britain, when much economic theory was created, since gold was settled in quantity, and gold acted as money in the international financial system. All the paper-based securities had to be convertible back – and back on due date – into gold. In those days, a series of interlocking financial agents responded to changes in interest rate levels, set by the Bank of England, and, lo and behold, for some decades the system could control the amount of money around, thereby controlling the volume of business, which, by extension, allowed supply and demand to dictate the price level. It is today a lot more complicated than that, and even the monetarists are routinely at a loss to demonstrate whether or not money is being created at dangerous velocity. The fact that money’s growth cannot easily be measured, however, does not compromise an underlying truth: its power creates higher prices when it is growing more quickly than productivity allows.

The third is the bargaining power of labour, in the never-ending encounter between workers and investors. This is a marathon, one that has ebbed and flowed between the two contestants for the greater share of prosperity. Crucially, it swings between extremes – each has its period in the sun, then the shade. Over the past forty years, we have completed a cycle of dominance by the investing dynamic. And the pendulum is now swinging back, to the workers’ advantage. It will keep swinging back, if history is any guide, for a generation or so.

If that happens, the complaisant assumption that inflation will go back to sleep again might look justified – but it will be a false dawn.

The pattern is always the same – when inflation comes, to begin with, wages lag the value of money. Then real wages are forged in the anvil of inflation. Real wages do well – historically – in inflationary times. Here is a description, written in 1928, of events at the end of the First World War. “The steady falling away of the dollar exchange rate [after 1918] is important as a measure of the degree of inflation [with its] vast growth of banking credit in London, and the consequent growth of paper currency. The inflation gave rise to a quite unhealthy trade boom of a purely artificial character. The upward trend of wages, as always during a time of inflation, lagged behind the cost of living, and strikes became frequent and menacing, as in the case of the railway strike of 1921”.

The fourth root cause of inflation – the variant often forgotten by countries with a stable economy – is that it is the reciprocal of the value of a currency. In a death spiral, inflation and currency lock arms; markets can destroy what they already judge to be valueless. These things usually remain theoretical in advanced economies. But in the UK last autumn we saw a brief, clumsy and painful attempt at something unorthodox – the eager beavers of the Conservative party trying to spend a lot of money they would need to borrow – and a market snarl followed. Perhaps the rarity of this fourth root cause owes more to general prudence on the part of the authorities, rather than somnolence in the markets.

These are the pieces on the chessboard; how does the game play out? The most telling factor is wages – they will keep going up, as the generational pendulum swings in workers’ favour. This forms part of a broader political economy – it’s now labelled a ‘cost of living crisis’ more than an ‘inflation problem’. The pendulum swinging means the rich, rather than the poor, will be bearing more of the cost of higher inflation. And orthodox fiscal policy may turn out to be another of those ol’ reliables that becomes unreliable.

The next most important factor is supply and demand, with the demise of ‘just in time’ and the international supply chain. A balkanisation of production is underway, favouring supply which is more firmly rooted. More reliable supply is almost always more expensive.

Last year, supply disruption, the Ukraine war, and uncertainties over the political impasse with China caused prices of goods and commodities to surge. Some of the most extreme moves in prices are now falling back, sometimes almost back to where they started; in other sectors, second-order events are causing prices to continue to rise. On balance, this is likely to cause a fall in the rate of inflation in the short-to-medium term – think inflation volatility, rather than inflation on a permanently high plateau.

It is perfectly possible that, year-on-year, some inflationary measures fall back through zero, and prices actually deflate in an odd month. If that happens, the complaisant assumption that inflation will go back to sleep again might look justified – but it will be a false dawn. The chorus of central bank optimism may be reassuring, and yet one is reminded of Mandy Rice-Davies, starlet of the Profumo scandal, remarking on a suspect who denied all wrongdoing, “Well he would say that, wouldn’t he?”

The markets of late have been treacherous, often appearing calm, but subject to powerful contraflows. I was once told not to go swimming off the coast south of Cape Town, as it was the meeting place of the waters of two oceans. In 2022, the elemental bullishness of 40 years of ‘up’, met the ‘down’ of a series of fundamentals, partly in economic conditions, but mostly in a revised valuation regime, reflecting the initial shock caused by the move to a world of higher interest rates. No one investment allocation has sufficed. Success has followed from a series of short-term positions, regularly reversed. This is a hard way to run money in the long-term, but the restlessness has been necessary to keep long-term money safe in the short term. Looking ahead, investment fundamentals and valuation now matter a lot more than they did a year ago, and we expect to see a greater divergence in returns across assets, regions and currencies. While we don’t like the look of the ocean whose water we expect to prevail, our job as fund managers is to swim, not to sit it out on the beach.

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From the Chairman

Mon, 09 Oct 2023 00:00:00 GMT

In this quarter’s episode of Ruffer Radio, Chairman Jonathan Ruffer shares his perspectives on the evolution of Ruffer’s all-weather investment approach since founding the firm in 1994. Jonathan reflects on the genesis of the firm, making mistakes, the character traits that shape his investment style, and the challenges and opportunities facing investors today. And crucially, how these are reflected in the Ruffer portfolio.

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Early and ready

Thu, 06 Jul 2023 23:00:00 GMT

Investment Director Steve Russell reviews the downtrend in performance this year in the context of a global equity market rally.

Steve explains why we retain high conviction in a strongly defensive position in portfolios despite investor sentiment having turned more positive. He also discusses the assets we expect to generate returns in worsening financial conditions.

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Something always breaks

Wed, 05 Apr 2023 23:00:00 GMT

After a strong start to the year, markets were destabilised by a shift in liquidity dynamics in March. Central banks now face a reckoning. Their choice is simple – inflation stability or financial stability – but it isn’t easy.

Investment Director Jos North joins Rory McIvor to discuss how recent developments fit into Ruffer’s investment thinking and what is needed to protect investors’ capital at this critical juncture in markets.

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Led by the Fed

Fri, 06 Jan 2023 00:00:00 GMT

Of the many storylines to unfold in 2022, only one really mattered to investors – rising interest rates and falling asset prices. The chief protagonist in this tale – the Federal Reserve - conducted one of the fastest and steepest rate hiking cycles in financial history. But how much further do they need to go?

Fiona Ker discusses the unenviable choices facing central bankers and explains why monetary policy will continue to dominate the narrative in the next chapter in markets.

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Investment Review – Q3 2022

Sun, 02 Oct 2022 23:00:00 GMT

Moods are created by events, for sure – but events are created by moods, too. Kipling’s verse balances the permanence and evanescence of greatness – it was written at the time of Queen Victoria’s Diamond Jubilee, when tout le monde gathered to celebrate:

The tumult and the shouting dies;
The Captains and the Kings depart:
Lord God of Hosts, be with us yet,
Lest we forget – lest we forget!
Lo, all our pomp of yesterday
Is one with Nineveh and Tyre!
Judge of the Nations, spare us yet,
Lest we forget - lest we forget!

Rudyard Kipling died on 18 January, 1936. His death was the first of three which occurred in the same week, and marked, to my mind, a formal eclipse of that old order. George V, King of England, Emperor of India, died on 20 January. Three days later the voice of Empire, Dame Clara Butt, whose powerful contralto (une voix obscène, opined Reynaldo Hahn) had boomed out Land of Hope and Glory, dominating the massed voices of the crowds gathered for Empire Day each year in Hyde Park.

Humanity has a tendency to believe that a settled pattern of order will continue indefinitely.

What has this to do with investment? Humanity has a tendency to believe that a settled pattern of order will continue indefinitely. That’s where we are now – the world of investment has been in a unidirectional bull market for forty years – since 10 August 1982. Kipling wrote the words quoted above in 1897, but not until his death, and those of the other representatives of that old order, did the inherent dangers of the reordering of the tectonic plates become relevantly apparent.

Economists are not the greatest readers of events, but one of them, Hyman Minsky, was prophetic, and like many pukka prophets, he was hardly known in his lifetime. His great insight was that the dislocations which follow a long period of stability are greater than those which occur in uncertain times. It may have been Minsky or one of his followers who used the image of an hourglass, where the sand forms a triangular mound in its lower half, as it passes from top to bottom; the sand, being unstable, regularly causes small avalanches which flatten its landscape; if, however, the chance configuration of the sand allows the mound to become taller, bigger, then the moment of its destruction is more dislocative. The Minsky moment is a Rudyard Kipling moment – you can point to both a confidence in the stability of things around a society, and know, at the same time, it does not end happily.

There are two arguments for this to be relevant today. The first is the extreme levels of debt which have been created over decades, leading to a modus operandi throughout the investment and commercial world which depends on its further creation, and at low rates of interest. The second is to beware the evil eye which accompanies sustained success.

In the forty-five years I have been an investor, I cannot recall a more dangerous period than today.

In the forty-five years I have been an investor, I cannot recall a more dangerous period than today. It sometimes happens that markets are about to fall sharply, and we are no stranger to navigating them – my first as a stand-alone fund manager was in 1987. But each of these falls, so far, has been partial, in that there were asset-classes which did not participate in the decline, or – as has more recently been the case – there have been insurances which had been overlooked or disdained, and offered a good risk/reward. In 1987, for instance, the real-yield on index-linked stocks approached 5% – it was hard, really, to own anything else; today, those yields are negative, meaning that you are bound to lose money in them (in real terms) if you hold them to maturity.

This chronic sense that investments are dangerous is now accompanied by an acute sense of specific danger to the markets – the rumblings of a liquidity crisis, perhaps the first in a series in the years ahead. What is liquidity? When money’s a-plenty, the question to ask is: ‘do I want to buy it?’ When there’s no money, then the question is more fundamental: ‘can I buy it?’ Dr Johnson, not admittedly one of nature’s economic smartboys, captured it well, visiting the Western Isles, and noticing that eggs changed hands for a ha’penny, whereas, on the mainland, they cost a penny. Johnson turned to his scribe and said, “They are not cheap because there is a surfeit of eggs, but because there is a dearth of ha’pence.” We have lived, certainly since Alan Greenspan in the 1980s, in a world where any shortage of ha’pennies has been met with a cascade of half-crowns from the central banks – aided and abetted by the commercial banks who have been able to mint brand new coinage through wind, through weather. What we have come to take for granted cannot necessarily be relied upon in a world where there is a concerted effort to control the amount of money available.

When there’s no money in the system, and the channels of its creation are blocked, many fine investments, which, in normal circumstances would be mouth-watering to own, are unsellable. If, at that point, you need money, and all you have are assets – watch out!

We are watching out. Over the last generation, there have been several liquidity crises, but central banks (the Federal Reserve, in practice) have always created the necessary money. This is not magic – banks, both commercial and central, create money routinely – the granting of a loan by either one of them is itself a creative act: it is, in accounting terms, merely the creation of a liability, matching the loan to a customer/counterparty, which is a corresponding asset in its books.

We see pressures building, pressures that encourage a liquidation of risky assets, and a degradation in the liquidity conditions of markets.

At Ruffer we see pressures building, pressures that encourage a liquidation of risky assets, and a degradation in the liquidity conditions of markets. The simplicity of the following explanation, centred on the United States, will be unattractive for two opposite reasons. To the technician, it will be a Thomas the Tank Engine survey of deeply complex and technical questions. To most human beings, it will bring about Winston Churchill’s exasperated observation when Chancellor of the Exchequer, “When bankers get together, why do they always speak in Persian?”

The Federal Reserve is the ultimate source of money-creation. It has expanded its supply of money to the point where its credibility is coming into question, and so must contract it. But the Fed needs to tread carefully, and indeed it is being careful, notwithstanding its need to rein in that money because of inflationary pressures. (Central to our continuing belief that inflation is the end-game is the central bankers’ extreme reluctance to be harsh with the economy; our views are not changed by Jerome Powell’s recent belligerence – it’s one thing to sound fierce about raising interest rates when they are 3%, but quite another to do it at 20% in the midst of a recession, as his distinguished predecessor Paul Volcker did.) As well as battling to keep the quantity of money in check, the Fed is simultaneously straining to make sure the transmission of its interest rates to the real economy is working. As interest rates go up, savers expect to see that paid to them – but the commercial banks aren’t passing it on. One of the big savings vehicles in the US are Money-Market Funds – roughly 90% of which only invest in government quality instruments. There aren’t enough of these bonds, so the Fed is providing interest at its desired level to these funds, and now has tied up $2.36 trillion of money-market cash, in this service to the community. The key is that, unlike regular bank deposits, this $2.36 trillion cannot be injected into the US financial system if it’s needed. The Fed’s inflation-busting rhetoric means too, that it is shrinking its balance sheet. Commercial banks can, in theory, create money as easily and effectively as the Fed, except they, too, had whoopsies in 2008, and are now so regulated that they can’t create money in necessary size either. Indeed, their commercial imperative is to keep existing businesses supplied with liquidity, at a time when inflation is driving up the latter’s cash requirements – and, anyhow, the commercial banks make good margins on these loans, so why not divert more of their balance sheets to these activities, and away from lower-margin financial market funding activities?

We see danger ahead. Markets are still too high, and protection is expensive in an increasingly nervous world; common sense suggests one should invest conservatively, and in safe assets. In a world where people find themselves without the ability to pay commitments as they arise, forced selling drives prices. Among risky assets like equities, one of the counter-intuitive things in a liquidity crisis is that securities perceived as safest and most liquid go down sharply, because investors are forced to sell what they can, not what they want to. We therefore regard plentiful liquidity in the portfolio as overwhelmingly attractive; it allows us to make the most of the opportunities that arise in the aftermath of a crisis. But first we have to get through the storm.

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Ruffer round up Q3 22

Sun, 09 Oct 2022 23:00:00 GMT

Investment Manager Jasmine Yeo joins Rory McIvor to review a quarter of dizzying market activity. They discuss the volatility of UK gilts over recent weeks, consider the potential for a liquidation event in asset markets and provide an update on how the portfolio is positioned.

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Inflation – great expectations

Mon, 12 Jul 2021 00:00:00 GMT

Inflation is back, but for how long?

Bertie Dannatt joins Ruffer Radio to discuss how markets are digesting the return of inflation, and what rising prices mean for consumers and investors alike.

Impact of different rates of inflation on £100 worth of savings over a 20 year period.
Click to view larger image

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Ruffer round up Q2 22

Thu, 07 Jul 2022 23:00:00 GMT

Investment Director Duncan MacInnes joins Rory McIvor for a review of the quarter, discussing the scale of wealth destruction across markets and how they see this rippling out into real world behaviour, and looking forward to what could be on the horizon and what that means for investors.

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Winning by not losing – protection strategies

Wed, 15 Jun 2022 23:00:00 GMT

Avoiding major drawdowns in markets is key to outperforming over the long-term.

It may sound obvious, but in a world of near universal asset vulnerability, it has seldom been more important to stand resolute against falling markets.

In this episode, Lauren French and Andrew van Biljon discuss Ruffer's approach to protecting against tail risks in the market and they lift the lid on some of the more creative strategies in the portfolio today.

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Ruffer round up Q1 22

Tue, 12 Apr 2022 23:00:00 GMT

Investment Director, Lauren French joins Rory McIvor for a brief overview of the quarter. We reflect on the events that have dominated markets over the past three months – including the major developments we’re all talking about.

We also discuss one or two aspects which have received less attention, but may well be crucial for investors in the months ahead.

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From reduction to removal

Fri, 11 Mar 2022 00:00:00 GMT

Tim Kruger is the guest author in this year’s Ruffer Review. In this episode, we discuss his article which draws on his work in the field of carbon extraction and its role in the energy transition.

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Ruffer round up Q4 21

Thu, 13 Jan 2022 00:00:00 GMT

In this episode of Ruffer Radio, Investment Director, Matt Smith looks ahead at what investors can expect in 2022.

We briefly review the investments which worked well in Ruffer portfolios last year (and those that didn’t) and assess the opportunities and challenges arising from the return of economic, market and inflation volatility.

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Ruffer round up Q3 21

Sun, 10 Oct 2021 23:00:00 GMT

In this edition of Ruffer Radio, Investment Director Duncan MacInnes explores the key themes in today’s market environment.

A brief round up of how recent events impacted markets and Ruffer portfolios, and what investors have learned as we move into the fourth quarter.

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Mind over matter?

Sun, 18 Apr 2021 23:00:00 GMT

Can behavioural science make us better investors? Andrew van Biljon and Lauren French offer their insights into the world of behavioural economics.

A bias to belief

Thu, 25 Feb 2021 00:00:00 GMT

Bethany specialises in casting light on the shadier corners of the financial world, renowned for her exposé of the Enron scandal in the early 2000s. She joins us to discuss the tension between rational markets and emotional investors, what separates the visionary leader from the fraudster and how a bias to belief affects our decision-making.

Bethany is this year’s guest contributor to the Ruffer Review – our annual collection of thoughts and ideas – which we’ll be publishing in early March. You can sign up to receive a copy below.

More information

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Blackwells)

Saudi America (Financial Times)

All the Devils Are Here: The Hidden History of the Financial Crisis (New York Times)

How private equity is winning the coronavirus crisis (Vanity Fair)

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A view from the bridge

Fri, 08 Jan 2021 00:00:00 GMT

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.

More information

GMO, Tonight we leave the party like it’s 1999

Office for National Statistics (ONS)

US Treasury, Debt to the Penny

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Election 2020

Tue, 06 Oct 2020 23:00:00 GMT

All elections are equal. But some elections are more equal than others.

In the latest episode of Ruffer Radio, Dr Tim Smith and Alexander Chartres discuss the 2020 race to the White House and explore why this election, in the context of a broader shift in world order, may well be the most important for a generation.

More information

$2 trillion spend on green initiatives
Fossil fuel elimination
US market returns under Reagan and Carter, source: Shiller, Global Financial Data, Ruffer calculations
Biden lead on Trump
Electoral college result 2016
Bush versus Gore 2000

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Cold War II

Sun, 05 Jul 2020 23:00:00 GMT

Alexander Chartres, Investment Director and resident geopolitics specialist, explores the shifting sands of world order. He discusses the deteriorating relationship between the US and China and considers the implications of a new world disorder – on companies, portfolios and our everyday lives.

“After Cold War I, the world traded weapons of mass destruction for weapons of mass production.”

This shift heralded an extraordinarily benign era for investors, characterised by low inflation, low volatility and low interest rates.

The return of geopolitical instability signals a regime change for markets. At the heart of this, is a fierce contest between the US and China – “a long-term, full spectrum struggle for supremacy which will profoundly reshape the world as we know it.”

For the first time in a generation, investors must once again try to understand geopolitics and prepare their portfolios for Cold War II.

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Markets now and next

Sun, 26 Apr 2020 23:00:00 GMT

Duncan MacInnes discusses covid-19: how it has changed the investment landscape, the impact on the Ruffer portfolio and what could happen next.

This is the first episode of a new series of podcasts, where Ruffer will be exploring the investment universe and sharing their interpretation of what’s going on.

“It’s our view that we are moving through an economic regime change. Coronavirus is not the end of something, in fact it has accelerated a lot of trends that were already in motion—inequality, populism, deglobalisation and perhaps environmentalism and government involvement in our daily lives.

The conclusion is we think this will result in a wholly different economic and market landscape going forwards, so it will be essential to focus on keeping client’s capital safe.

Before this event we were worried about avalanche risk and valuation risk. Today we are still facing valuation risk—perhaps to a slightly lesser extent but we are now facing inflation risk and the fact that shareholder capitalism is likely to be under threat.

Because we have managed to preserve capital through this crisis so far and deliver a positive return, we are in a position to be able to be opportunistic and pick up bargains as and when they emerge as I think it’s too much to hope that it will be plain sailing from here.”

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