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Investment Review April 2023

Many impossible things are happening in the investment world at the moment; like the bluebottle which sits upside-down on the ceiling, we have to come to realise these things were not so impossible, after all.
Jonathan Ruffer, Chairman
Ruffer, Investment Review, 3 April 2023

RufferReviewApril 2023


2023-q1-inv-review wideMany impossible things are happening in the investment world at the moment; like the bluebottle which sits upside-down on the ceiling, we have to come to realise these things were not so impossible, after all. 

There has been a savage sirocco wind blowing into the banking industry, an industry which has become much safer since its near-death experience in 2008. Banks have been regulated to within an inch of their corporate lives, and a battery of consumer protections ensure that cash deposits are not lost. Credit Suisse – an archduke among them, dating from 1856 – imploded last month, having spent the past 15 years hopscotching into every cowpat and puddle in its path. Bank depositors have found the going uncomfortable, especially the smaller ones; the regional banks in the US have lost deposits, some to the majors, where their money is safe, some to money market funds, where the yield is high, and the safety feels absolute.

Injecting public money into a shortfall has worked well enough since 1998, when Long Term Capital Management was bailed out after one of the grenades they were juggling exploded. The bailouts have continued relentlessly since. But they won’t go on for ever.

Central banks, the executive arms of government in terms of maintaining the currency, are most effective when their own balance sheets are strong. The question remains whether they can afford what they are doing. There has been as yet no questioning, no nervousness, about whether governments are good for the promises they are making through their central banks. Except once: last autumn – a time the British, and Ruffer LLP, will long remember. A misjudged pirouette from a recently elected prime minister and her chancellor spooked the markets and caused a run on the UK government bond market. Leveraged pension funds were forced to put up more collateral to support the borrowings they had made against their gilt holdings – and those gilts proved unsellable. It happened that a separate proportion of their pension funds had investments with Ruffer. They needed money from anywhere; we returned substantial sums, and quickly – able to do so because we’d been alert to the dangers of a liquidity crisis.

So far, this has been the only occasion when such a crisis has been visited upon a grown-up country. The Bank of England stabilised the situation, and now the waters are again as calm in the fishponds of the pension fund industry. But will it stay that way? Every time there is a bailout, an integral element is the implicit acceptance by the market that the central bank is good for the debt. Over the long course of financial history, there has always come a moment when the lender says ‘No more!’ Note that he doesn’t say ‘no more’ to start with – he demands more compensation; the rate of interest the borrower pays increases.

It is ironic that the demon of illiquidity should have located a pocket of weakness in the banking citadels of the financial world, when it is the asset managers who are the weaklings of the herd, not the banks as a class. The mischief will be centred on investment portfolios. To survive, one will have to be careful in the sorts of assets one owns. There is usually a sharp changing of the guard in markets after an event which involves illiquidity – when the refreshing waters return, it is not always to the old favourites. In the emergency, though, the jewels and the paste are all jettisoned together, and real money can be made by having the firepower to buy assets from distressed investors. This requires a strong ammunition cart of cash, or cash-equivalent: the latter has to be regularly checked to confirm that there is a genuine equivalence. I am a bit queasy writing this, in case the crisis happens… and we find ourselves locked into our ‘safe’ investments.

What are, to Ruffer’s mind, the key building blocks which will build the high walls of the future? The first and the most important element is the reversal of interest rates. They have fallen relentlessly from the high teens 40 years ago, to negative by the end of 2021. The next most important, but closely linked to it, is the return of inflation. Inflation can be seen as another disease in the economic body politic. It is the marketplace’s way of disguising a reality, one always aligned to insolvency. In the days of metallic money, it took the form of debasement – the shiny golden veneer hid the copper beneath. Paper is more easily compromised. Paper money in Ming China – with its jolly message to its holders: ‘Forgers will be decapitated’ – was the first of a hundred million sister currencies which saw the value of their paper disappear. We have in our London office a Ming banknote, and an example, too, of one denominated in the least valuable currency which has ever existed: a 1946 Hungarian note with a stated value of 600 billion pengo.

Short-term movements can be extreme, in either direction. On a longer timescale, though, the idea that inflation will turn out to be a flat line 2% a year is vanishingly unlikely. We live in a world of money instability, which can very easily express itself as depression, as money proves to be too valuable for a society, and hibernates. More likely, perhaps, is a world in which money loses value quickly, creating winners and losers, with the consequent social cost. The consensus today is that inflation will be tamed; but two of its key drivers – a newly powerful workforce worldwide, and de-globalisation – make that a likely wrong call. If inflation is here to stay, markets have a great deal of de-rating to suffer.


‘Knowledge is power’ – a financial truth as much as a political. The known unknowns point to an extreme correction in all asset markets, at a time when society has loaded up on debt – the poor to get on the ladder, the rich to leap up it.


Our way of investing is to analyse how events may play out, while being intensely curious but indifferent as to the speed and sequence of the onset of the events. We then prepare for what we believe is likely to happen, but is not presumed to happen in any particular timescale. The art is to build into the investment mix a tolerance to much-delayed timescales; we fight to keep the beneficiaries of likely future outcomes in the portfolio by holding offsetting assets, so that we are not having to time an entry point. Last year, in that bout of illiquidity, we were heavily invested in long-duration index-linked gilts, which performed terribly, dropping by more than three quarters at one point – but we had swaptions which accreted value from the self-same dynamic, and we were therefore able to keep these important assets, without the penalty of the performance whipsaw as interest rates went up.

In making these judgements, we put great emphasis on past circumstances. Here’s an example, set out in the form of a question. Which circumstance was worse for the long-term investor – putting money into Wall Street at the beginning of October 1929, or doing so in the UK market at the end of 1936? Wall Street didn’t see a return of the original investment in real terms until 1954 – that’s a quarter of a century. The money-back date for the UK 1936 investor was 1985: half a century. The 1929 crash was a theatrical warning, maybe even the part-creator, of the Great Depression, which changed the character of the United States, and afflicted the whole world. By contrast, the 1936 debacle was not about the underlying investments; it was about the valuation rating which underpinned the pricing of them. Britain had largely escaped the Depression (outside its traditional smokestack industries). It did so by reducing interest rates to unprecedentedly low levels – in 1933 the government issued a Treasury 1% 1935/42. As this policy of ultra-low interest rates played out, there was a frenzy for income, and the sophisticated and hierarchic fixed interest market in the UK saw yield differentials contract. Thus Indian securities (traditionally considered as safe as gilts, but not actually guaranteed by the British government) traded on a narrower discount to them. Debentures closed in on Indian; in their wake came various issuances of unsecured loan stocks – sometimes as many as five, each having its place in the pecking order; next came the cascade of preference shares. Last of all was the equity market, which in those days was seen as a yield-bearing appendage of the fixed interest market – the tail end Charlie, who got what was left over.

When the mania for income subsided, each of these assets re-priced on their traditional spreads, resulting in a capital loss for each ratcheting up of yield. Indian stocks had a single consequent downgrade, but the equity market had to contend with each of those less secure holdings repricing downwards. Herein lies a clue, which can serve as an investment yardstick for today. As each of those yield differentials widened from 1937 onwards, it created a bear market in credit spreads. The comparative performances of 1929 America and 1936 Britain gives eloquent testimony to the idea that a social economic disaster is less destructive of value than a serial de-rating – if one is invested in the risk end of the spectrum. Add to that the possible pricing-in of the risk of sovereign default in countries thought to be safe from default.

‘Knowledge is power’ – a financial truth as much as a political. The known unknowns point to an extreme correction in all asset markets, at a time when society has loaded up on debt – the poor to get on the ladder, the rich to leap up it.  It is the cornerstone risk – a cornerstone reflected, as always, in our investment policy. Our emphasis is on never losing money, so that we can use the consequent stability to produce returns. It has worked for nearly 30 years; fingers crossed for the next 30.


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