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Q and A with Jonathan Ruffer

Most subscribers to my blog know that you can find an archive of my FT columns on the Independent Investor website. I have also added there a transcript of an interview with Jonathan Ruffer, the founder of Ruffer Investment Management (now Ruffer LLP), which formed part of the research for my most recent contribution to The Spectator, which appeared in last week’s issue.

Ruffer has been pursuing its distinctive absolute return approach to investment since 1994. Results to date have been outstanding: double digit compound growth with low volatility. Here is an extract from the Q and A, describing in Ruffer’s own words how his team predicted the onset of the credit crunch well before it happened:

I think the trouble with human beings, and certainly with the market, is that the market is an idiot savant.  If it picks up a thought, it can get almost immediately to the most sophisticated implication that derives from that thought. But if it isn’t thinking that thought, something can be crashingly obvious and nobody picks it up. A good example of that, something that we called to the detail, was the credit crunch of 2008, when we had a double-digit return despite being a long-only house. The truth is that, although the timing of 2008 wasn’t obvious, the event itself was fantastically obvious.

Once every generation or so what happens is that whole societies decide to borrow money. You get an inflection point when greed turns to fear, everybody runs for cover, and everybody wants to sell the collateral. What happens is not just that asset prices go down, but that the markets glitch up and that rocks a financial system to its very foundations.  Put like that, the credit crunch was obvious.

I don’t find myself saying “We are geniuses. We saw it coming”. As far as we were concerned, it was more a case of saying “What, you’re off to Moscow in February? Well, do take a thick coat because it will be bloody cold!” In that sense, it was correct predicatively, but the nuance of what is going on there is absolutely obvious. It’s going to be high inflation, with interest rates well below the rate of inflation.  Now, that is as strikingly and simply obvious as the credit crunch, but the difficulty is when that is going to happen, and the fact that, between now and then, we might well be looking at teetering over the deflationary edge.

The way I think of it is quite simple. You are in a car driving along a straight road. The tyre blows out, which is the credit crunch. The car lurches to the left, which is deflation. The driver hauls on the wheel, and now the question is are you going to go into the left-hand ditch or the right-hand ditch. People have this extraordinary view that inflation and deflation are opposites, but of course they’re not opposites at all. They’re both examples of monetary instability. I would say what’s the opposite of madness and genius? The answer is not the other, it is accountancy.

Now what’s the opposite of inflation and deflation? The answer is monetary stability. And with the tyre having burst, the common ground, the truth that you can articulate is that we have monetary instability, and then you simply have to work out whether or not the left or the right ditch is going to happen. Now, if you do nothing, the deflationary events which are created by this dislocation means that you are condemned to a depression, as the bad drags down the good.

But if you come at this from a world where the last time America was faced with this, in the 1930s, they created the iconic awful event of the 20th Century, in the same way that for the UK it was the Battle of the Somme, if you’re confronted today with a rock and a hard place, and the rock is the iconic event which must always be avoided, don’t be surprised if you end up within the hard place.

In the other ditch?

Yes, in the other direction. What that tells you is that every time the figures don’t add up, you end up risking letting the iconic event which must never happen again happen. You will always turn the wheel the other way. The key thing is that that actually gives you the clearing system. One way of understanding these debts is that they are like destabilising voids in the body politicks of the economic system. Where you have a debt that cannot be paid off, the system is always looking for a way of filling that void.

Now, the truth is that if you have interest rates well below the rate of inflation, then the savings of savers provide the ballast which solves the problem. That is why in Britain in the ‘70s you ended up with the savers having lost, in real terms, a great deal of money. Yet by 1982, you were in a world where the indebtedness which had threatened to bring down the system in 1974, and had never been paid off in real terms, had been solved.  Not only is the left-hand rock the iconic thing that must never happen again, but the right-hand world of currency compromise actually creates a clearing system.  So that is what will happen, but it might not happen for years.

To read the full transcript, simply go to the Independent Investor site and follow the link on the left hand menu entitled Ruffer Interview. There is also a pdf version to download.

Written by Jonathan Davis

October 18, 2010 at 10:40 AM