All-weather investing

Seeking good positive returns.

Come rain or shine.

Ruffer provides investment management services for institutions, pension funds, charities, financial planners and individual investors.
Ruffer LLP
Select Location
UK
Europe
Australia
US
Asia
Middle East
Channel Islands
Rest of world
Type of investor
Individual investors
Institutional
Charity
Family office
Financial planner
Individual investors
Institutional
Charity
Wholesale
Institutional
Institutional
Institutional
All investors
All investors
London
80 Victoria Street
London SW1E 5JL
Edinburgh
31 Charlotte Square
Edinburgh EH2 4ET
Paris
103 boulevard Haussmann
75008 Paris, France

Not all inflationistas wear flares

Hermione_Davies
Hermione Davies
Investment Director

Investors have divided into two camps. Those who believe inflation will subside and the rise in prices will prove temporary. And others who fear we are entering a period of high sustained inflation reminiscent of the 1970s.

We consider both scenarios unlikely.

Overlay the bottom chart on the top and you would be forgiven for believing that we are now on the same trajectory as we were 50 years ago. There are parallels but to assume the economy will meet the same inflationary fate would be a grave mistake for investors.

We believe we are entering a new inflationary era. But unlike the 1970s, it won’t be marked out by shockingly high inflation rates. Instead, investors will confront a world of inflation volatility. In this environment, the gap between interest rates and headline inflation will widen – creating a dangerous chasm known as negative real yields.

Take energy prices, wages and interest rates. On first glance, the music sounds quite familiar. But closer listening reveals that we may be at a different concert altogether.

Rising energy prices were chief amongst the culprits in sparking inflation in the 1970s. And while oil and gas prices have more than doubled in the last year, the world is not likely to see the ten-fold increase in energy costs that triggered the 1970s inflation.1

Wages are less likely to spiral. The past 40 years witnessed an extraordinary expansion of the global labour market – in effect, screwing the lid tight on wage inflation. The political, technological and social forces which suppressed wages may now be dwindling, but these forces are measured in decades, not months, and so we shouldn’t expect wages to spring up from the depths. Labour market dynamics have changed. When Britain’s coal miners ended their 1972 strike by accepting a pay increase of 35%, roughly 50% of the workforce was unionised. Today that has fallen to 24%.2

Interest rates may rise – but they can only rise so far. By 1979, interest rates in the UK reached 17%.3 A year later, rates surpassed 18% in the US.4 But this time around, the firepower of central banks is limited – that is what we should be worrying about.

The world economy is more vulnerable to (and intolerant of) interest rate increases than it used to be. The government debt to GDP ratio for developed economies has risen from 20% in the 1970s to over 100% now.5 Put simply, governments have become addicted to zero-cost borrowing and cannot afford for it to increase. And with asset prices also anchored to zero rates, it looks impossible for modern central banks to raise rates much without sending shockwaves through bond and equity markets.

This is how negative real yields come into play. The latest US CPI release means that the Real Fed Funds Rate (the difference between headline inflation and the Federal Open Market Committee’s (FOMC) main policy rate) was below -6% in October.6 That’s lower than at any point in the 1970s. By this measure, monetary policy is even more accommodative now than it was back then. And potentially even more dangerous.

This is the defining trait of the next inflationary era. Not double-digit inflation readings like the 1970s, but deeply negative real yields – mixed in with a sizeable dose of inflation volatility.

Demise of the deflation machine
The global economy has been inherently disinflationary since at least the early 1990s. The result: a generation of investors who have never had to take inflation risk seriously.
Read
Inflation protection toolkit
The return of inflation poses a critical threat to balanced portfolios – severing the relationship between bonds and equites which has held steady for nearly half a century. And yet investors, so far, have stuck to what they know – trusting a portfolio built for the world which we are leaving. We look at how the risk of inflation might be mispriced, and why it may pay to be prudent.
Read
Worried about inflation
The return of inflation poses a critical threat to balanced portfolios – severing the relationship between bonds and equites which has held steady for nearly half a century. And yet investors, so far, have stuck to what they know – trusting a portfolio built for the world which we are leaving.
Read
  1. Reuters
  2. National Statistics DBEIS (Department for Business, Energy & Industrial Strategy)
  3. Bank of England
  4. St Louis Fed
  5. GFD (Global Financial Data), Deutsche Bank
  6. Deutsche Bank, Bloomberg

Chart source: Office of National Statistics, data to 31 October 2021

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

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. 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