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Ruffer: forget new normal, this is old peculiar

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Ruffer: forget new normal, this is old peculiar

Ruffer has attacked the concept of a ‘new normal’ in investment markets and instead mooted the idea of an ‘old peculiar’ in which inflation will eventually ‘wreck conventional bond prices’.

Approvingly citing the label, coined by Ruffer consultant economist Peter Warburton, the company used the term to justify its 35% allocation to index-linked bonds in the Ruffer Investment Company.

In their monthly update, managers Hamish Baillie and Steve Russell (pictured) said ‘new normal’ – the concept popularised by Pimco in 2010 to describe an extended period in which the natural rate of interest would remain low - was one of a series of buzzwords banned on the desk.

While Pimco dropped the term last month and instead proclaimed a ‘new neutral’ period of low but sustainable growth, the idea has since entered the popular lexicon.

‘Behind closed doors there is some self-interest in promoting the New Normal,’ Baillie and Russell wrote. ‘For a fund manager heavily exposed to financial assets, be they bonds or equities, it justifies record high prices.

‘For the central banker it buys time; the cycle of de-leveraging in the west is in its infancy and will act as a drag on future growth. Far be it for us to question the great powers that be, but perhaps the focus of the New Normal advocates should be on real rather than nominal interest rates.’

The two managers bracketed the term alongside language abuses such as ‘new paradigm, super-cycle, winwin, guaranteed outcome, this time it’s different’.

Instead they quoted extensively from a recent update by Warburton in which he suggested that the inevitable consequence of an active monetary policy was and remained unpredictable inflation.

‘Yes, we live in a world where governments and their central banks have repressed nominal interest rates and clearly would love to continue to do so,’ wrote Warburton.

‘The problem is that they have not yet pulled off the other leg of the trade: the burst of inflation that stabilises the financial system while wrecking conventional government bond prices. The harder that central banks lean towards perpetual accommodation, the more certain it is that one day they will destabilise inflation and inflation expectations.’

‘Let’s be clear, if inflation expectations drift into outer space there is no Yellen put. For a time all assets – except gold and a few other honourable exceptions – will generate negative real returns.

‘As much as central banks are adamant that they are in control of the inflation outlook they also need the inflationary surprise.

‘I don’t believe in the new normal; I believe in the old peculiar, the volatile, jumpy world where honest money is made and foolish
money is lost.'

Seven of the managers' eight largest positions are in inflation-linked securities, led by a 7.1% allocation to a 2017-dated inflation-linked US Treasury and a 5.6% allocation to a 2055 Treasury.

Over the last five years the Ruffer Investment Company portfolio has returned 48.32% versus an 88% return on the FTSE World. Having traded at a premium for much of the last five years the shares have in recent months fallen to a discount.

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