Jonathan Ruffer: Seeking Refuge in Inflation-Linked Bonds, Gold & Japanese Equities (Q3 Commentary) ~ market folly

Tuesday, October 9, 2012

Jonathan Ruffer: Seeking Refuge in Inflation-Linked Bonds, Gold & Japanese Equities (Q3 Commentary)

It's been a while since we checked in on what Jonathan Ruffer is up to, so today we present the latest Q3 market commentary from his Ruffer Investment Company.  The UK-based fund provides perspective on the other side of the world and outlines what's worrying them currently.

On Dangers They See

"We therefore hold investments on the basis of how they will perform in an environment quite different from today, and we have identified two dangers which need to be guarded against.  The first and, arguably the most worrisome, is that the price of cash (no income on bank deposits) is distorted: you are robbed if you hold cash.  That drives savers into investments which have cash-like qualities.  The result is that the safer and surer an investment is, the more it will reflect (by overvaluation) the distortion of cash on deposit.  When that distortion reverses, the capital value of these safe investments will decline as they re-price for the new normal."

Ruffer goes on to lay out the second great risk that investors face at the moment:

"... to assess what will happen when the stimulus of monetary liquidity grinds to a halt."

Ruffer Sees Future Inflation

Of all the printing of money worldwide by central banks, Ruffer notes that:

"The markets, the inflation rate, the experts and the populace remain quiescent - but sooner or later that will change - and suddenly.  High inflation will follow - but not the hyper-inflation that the doomsters (who, as a group, are the guys who are looking in the right direction) hope for."

It's worth noting that Ruffer has been concerned about inflation for some time now. 

How They Are Playing It

"It is not  enough to see it coming: we need also to have the wisdom to know what is likely to represent a safe haven – bearing in  mind that safe havens are all entering this new and frightening overvalued phase, because the attack on savers has already started. That is probably the right way to look at the lack of yield on deposit. We are taking refuge in inflation-linked bonds and gold, of course: but we remain attracted by Japanese equities, which have, up until now, stood out like a bad deed on  Armistice Day. Japan is one of the few countries which will be the outright beneficiary of inflation, since the perils of  deflation have been an intermittent reality in that country. Although heavily indebted, the owners of the debt are exclusively  Japanese, and the government bonds they own are conventional, and not inflation-linked. Remember the argument above:  the way to clear the debt is to transfer the asset wealth from the saver to the borrower."

Embedded below is the latest market commentary from Jonathan Ruffer:

For additional recent investment manager commentary, head to: Dan Loeb's Q3 letter

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