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Ruffer: the significant risks of radical monetary policy
Japan's move into negative rate territory last month has left Ruffer managers Hamish Baillie and Steve Russell worried about a loss of confidence in paper money.
The Ruffer investment team has become increasingly concerned over negative interest rates becoming the norm in a number of countries across the globe.
Ruffer Investment Company (RICA ) managers Hamish Baillie (pictured left) and Steve Russell (right) aired their concern in their investment commentary covering February, a month which saw Japan implement negative interest rates on excess bank reserves.
While the pair highlighted the country was not alone in taking this step, with Sweden, Switzerland, Denmark and the European Central Bank already there, they pointed out that Japan's move was more profound and far-reaching.
‘Global banks (including our Japanese ones), already under pressure following the falls in energy and commodity prices, were knocked again,’ the duo said.
‘The gold price perked up as the credibility of central banks was called into question and markets fretted over the possibility of a rerun of the 2008 crisis.’
This, Baillie and Russell said, opened the door for the ‘whispers of more radical policy response becoming mainstream.
‘Since 2008 we have seen a continual creep in the radical becoming mainstream,’ they said.
'Quantitative easing, once considered reckless, is now a primary policy tool. Zero interest rates were implausible, but now negative rates are becoming widespread.
'This drift into increasingly radical areas of monetary policy, while necessary as an antidote to the high-debt/low-growth hangover of the financial crisis, comes with significant risks.'
The pair added: ‘Fiscal tools are blunt and their use greatly increases the chances of a slip-up and the accompanying loss of confidence in paper money as a store of value (or its electronic equivalent if the proponents of the cashless society have their way).
‘The direction of travel remains constant and the harder it becomes to generate sufficient economic growth for indebted economies to deleverage, the more experimental and extreme simulative policies will become.’
The £310 million Ruffer Investment Company saw its net asset value (NAV) dip by 0.3% in February. It is best known for having protected shareholders' capital during the financial crisis. Over the past five years the trust's portfolio is up 13.4% versus an average of 30.8% in the AIC Flexible Investment peer group and 48.3% gain by the FTSE World index. Shareholder total returns have been lower, however, at 4.7%. The shares trade on a -2.3% discount to NAV.
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by Gavin Lumsden on Oct 28, 2016 at 16:26