The Ruffer Investment team has cut its exposure to the dollar and increased its gold positioning after the Federal Reserve launched QE3 last month.
The team, which comprises Hamish Baillie and Steve Russell, fear the Fed chairman Ben Bernanke (pictured) has become ‘unrestrained’ in the use of quantitative easing.
It believes this has severe implications for the greenback, prompting the pair to cut exposure last month to dollar assets from 24% to 15% in their Ruffer Investment Company.
‘It [QE] changes the dynamics of the dollar as an offsetting asset,’ Baillie and Russell explained in their monthly investment update.
‘The dollar may still benefit from carry trade reversals at times of extreme deflationary stress but now that the Fed’s fingers are permanently hovering over the ‘Ctrl+P’ buttons there is a good chance that the market will look past deflationary concerns knowing that the Fed will act, or perhaps just knowing that the Fed can act will be enough.’
This theory also prompted Ruffer to raise gold exposure from 7% to 10% in September. 'We added to our bullion exposure ahead of the Fed’s QE3 announcement and so far this decision has been vindicated,’ Baillie and Russell said.
Meanwhile Ruffer remains fully committed to index linked gilts in spite of the ongoing debate as to how inflation will be calculated. The pair have a 10% exposure to the asset class on the grounds that inflationary pressures will more than compensate for the risk.
‘If we are right about the future path of inflation and interest rates then this change will be more of a minor irritation than a game changer as there will be very few alternatives for investors wishing to protect themselves from the ravages of negative real interest rates,’ Baille and Russell said.
‘The UK government will also be reluctant to upset the gilt market as this is the best vindication of their Plan A. In the short term there is no question that this debate is weighing on the prices of index linked gilts.’
Overall the Ruffer team continues to shift uncomfortably in its seat amid the range of concerns in the global economy.
'There remain plenty of concerns ahead, not least in the form of the fiscal cliff in the US, ongoing concerns about a slowdown in China and the ever-present rumblings from peripheral Europe,' Baille and Russell said.
‘What has changed is that central bankers may now be sufficiently armed to deal with some of the more immediate problems. If they can persuade politicians to back them up with supportive fiscal policies then the airbag may hold.
‘However, looking at the bigger picture of deleveraging, nothing has changed in the patient’s condition and the addiction to morphine (or is that adrenaline) is merely more entrenched.’