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Ruffer: forget new normal, this is old peculiar

by David Campbell on Jun 10, 2014 at 07:20

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.’

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3 comments so far. Why not have your say?

Knowledgable insider

Jun 10, 2014 at 09:12

Was it Keynes who quoted 'when the circumstances change I change my opinion' ? I have been a long term fan of Ruffer but cant help feeling that more flexibility in their outlook might hepl their cause.

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philip brown

Jun 10, 2014 at 10:20

I’m holding on to all my Ruffer funds and wouldn’t dream of selling, but I just hope the end of the world comes soon so we can all get back to making some money again.

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Andrew Pitt

Jun 10, 2014 at 11:01

I tend to look at a calendar year's return. Ruffer Investment Company made 7.8% excluding dividends in 2013. Even Peter Spiller of Capital Gearing Trust had his first down year in 2013/14 since he started in 1982, though made 3% excluding dividends in 2013 as a calendar year. The question is whether he and people like Ruffer and Troy are wrong. Jonathan Ruffer in his last quarterly review said 'We favour tending towards being foolish now, rather than later'. He also reminds us that it was the mouse that went cheeseless was the mouse that got away.

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