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Covid-19 and the dawn of a new market era

The era of monetary dominance is over. Helicopter money signals investment regime changes ahead.
The Green Line
Alexander_Chartres
Alexander Chartres
Investment Director

It was the avalanche we have long feared. From record peak to bear market, the S&P fell faster during the ‘corona crash’ than ever before, as this month’s chart shows.

At peak turmoil, conventional offsets (bonds, gold) proved flaky friends: investors sold what they could, not what they perhaps should. Specialist crash protections allowed Ruffer portfolios to hold their ground.

The virus is especially dangerous for those with underlying conditions. History’s longest bull market – living on a glut of borrowed money and time – was one such victim. The era of monetary policy supremacy is another. For long-term investors, this is game-changing.

Since 1987, investors have been trained to ‘buy the dip’ by the Fed’s response to each market crisis: cut rates to fresh lows to support asset prices and the economy – the ‘Greenspan put’.

So with rates already at – or sometimes below – zero before the virus hit, central bankers’ cupboard of effective stimulus for a serious economic shock was looking bare.

On Sunday 15 March, amidst extreme market turmoil, the Federal Reserve threw the kitchen sink at the crisis – rates to zero, massive quantitative easing. Stocks plunged the following day. This was the Fed’s ‘emperor has no clothes’ moment.

Monetary policy alone is impotent in the face of a simultaneous collapse in supply and demand – and markets knew it.

Enter ‘helicopter money’ – central bank financing of governments’ fiscal stimulus of the real economy (eg tax cuts, infrastructure, furloughed wages, etc). It will be a hard habit for politicians to kick in our over-indebted and austerity-fatigued era.

During the credit crunch, monetary stimulus was aimed at the financial system, inflating asset prices. This time, fiscal spending will hit the real economy just as supply chains are reengineered for resilience rather than efficiency.

Longer-term, higher real world inflation is likely, even as rates remain nailed to the floor to make the covid-19 fiscal blitz affordable.

This deeper financial repression could transform the investment landscape. For example, rather than offsetting one another, stocks and bonds could fall together if inflation rose materially. Investors would need to rethink core strategies.

The solution? We believe this needs to include inflation-protected bonds, gold, defence against further deterioration in credit markets, and the right sort of equities for a changing world. We own some of each.

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World order has never been so complex for investors. The US and China have entered a new phase of long-term strategic global competition.
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Ruffer Review 2020
Download our 2020 edition of the Ruffer Review. It covers everything from a new Cold War to the likely impact of the post-crisis surge in government spending.
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Will COVID-19 cause a recession?
March 2020: February saw concerns over coronavirus truly go global. Whilst public safety and containment of the outbreak must clearly be the primary concern, for financial markets the key question is will the virus cause a recession?
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Chart source: Yahoo Finance, Ruffer analysis

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

London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France