Despite being a relentlessly upbeat liberal-leftie media type, I’ve always had a soft spot for Private Frazer’s view of the world – “we’re all doomed, doomed”. I’m not sure if you can have a liberal leftie prepper (those who prepare for the end of the world) but if they exist I’d probably be one of them.
It’s why I’ve always admired Albert Edwards for sticking to his Ice Age theory and it’s why I’ve long invested – on and off, currently off – in the Ruffer Investment Company, an excellent investment trust with a multi-asset defensive strategy.
The current managers Hamish Baillie and Steve Russell have always taken a more cautious view of current financial exuberance but I think their latest note to investors from a few weeks back is definitely more of the Private Frazer variety. I’m going to quote at length from it because it so well argued and ultimately dismal.
Crucially for once I find myself disagreeing with them in two vital respects – more on that in a mo’
Anyway here’s what they have to say….
“ Once again we have eaten tomorrow’s cake today but this time at a moment when we were still trying to atone for yesterday’s binge. At this crucial juncture the stakes are now higher and the options more limited. On top of this (and to some extent because of it) there has been another important development in the last 12 months; the political winds have changed. Austerity is a vote loser and is off the table and the have-nots are voting for change. This means more spending to try to boost growth and more borrowing to fund that spending. The inflationary risks were already high and they are about to get higher.
What this boils down to is a transfer of wealth from the world’s savers to the world’s borrowers and now the political wind is firmly behind this movement. The mechanism for this change is financial repression; keep interest rates below the rate of inflation. This has been happening for some time in the UK, US and Europe and is likely to become more extreme. Our job is to protect our investors (the savers) and unlike the last crisis this one will not be optional and the hiding places will be few and far between. As we have explained before, index-linked bonds will play a critical role but the path to this denouement is unlikely to be a smooth one.
The question we are frequently asked is ‘When?’ and our answer, depending on how facetious we are feeling ranges from ‘Don’t know’ to ‘Don’t care’. Think back to 2006 – it did not matter whether you identified that it would be Lehmans rather than Bear Stearns that would bring down the banking system, the useful insight was to spot that at some point a systemically important bank would fail – the house of cards was already teetering and the signs were there. The situation is similar today; the catalyst is less interesting than the outcome. However, the question of ‘When?’ is important. If we are talking about an event 10 years hence (highly unlikely) then that is too long to ask our investors to wait, unless we can make them a steady return in the interim. If looked at through that prism then the last year has been a satisfactory one; a respectable return has been achieved in absolute terms and it has been achieved with a portfolio heavily skewed in a defensive direction. There will be tougher times ahead that will challenge our ability to preserve capital, but if we remain focussed on protecting investors’ capital and manage to repeat the performance of the last 12 months in making a steady positive return, then the Company should have a useful role to play for its investors”.
Ruffer’s managers are part of a wider movement, very vocal at the moment, who reckon that inflation linked assets might be a good idea because we’re about to run into an inflationary stumble. On this, I simply can’t agree although I absolutely concede that index linkers have been a good investment if you’d have held them for the last few years.
Obviously here in the UK, we’re struggling with inflationary conditions because of the self-inflicted Brexit affair and its impact on sterling. But on a more general level, every bit of evidence I see currently suggests we’re mired in a multi-year, arguably multi decade disinflationary scenario. The pressures of globalisation, free global capital flows and technology are intensifying. We are still midway through a painful but productive process of incorporating billions of formerly Communist citizens into a new global capitalist order. This process will take decades to work through and will involve intense populist flashpoints. But the direction of travel is clear: disinflation on a structural, global scale. The populists simply won’t be able to structurally alter this reality unless they go the whole hog and bet everything on a Marxist takeover (not impossible with Corbyn). I wish all those opposed to the free movement of capital, excessive immigration and unfair trade practices, good luck but I think they’re barking up the wrong tree.
Clearly, government’s will have to increase spending to accommodate these pressures but this will happen at the same time as central banks in the west start easing off their QE and scaling down their QE. So, we’ll have monetary tightening accompanied by fiscal loosening.
Net effect. Nothing. No real substantive change from the current position. We’ll still be stuck in a low growth rate environment with sub trend inflation.
The other point I’d disagree on is the transfer of wealth via financial repression. I sympathise with the Ruffer argument that we’ll see more extreme measures such as Helicopter Money – bring it on say I!
But the tone of this argument is, I think, misplaced and arguably insulting. Talk to most wealth managers and they’ll be disparaging about this process, as it’s a horrible assault on their client’s wealth. Which, I suppose, it is.
But, again, it’s a necessary reality. If there isn’t some form of redistribution, we’ll face societal collapse. Huge swathes of the electorate will simply decide they’ve had enough with the rigged capitalist system which seems to benefit a few, and they’ll demand disorder as a way of levelling. As I said before, I don’t think this will happen, largely because the system will engineer transfers of wealth via financial repression. It’s called democracy and the classic Victorian liberals can’t always demand that the political process ignore questions of redistribution and social justice.
Frankly, a few million pensioners complaining about low-interest rates is not a massive, catastrophic problem. If we have interest rates back to 5% – at which point said pensioners might be ecstatic – we’ll literally impoverish the entire working age population as they struggle with sky high mortgage and consumer debt rates.
We’d be awash with social unrest and students complaining about their loans will be the least of it. If the world is determined to remain committed to a debt/loans/bonds/credit based system of global financing, then we’re destined for a low rates environment for generations.
If the world is determined to remain committed to a debt/loans/bonds/credit based system of global financing, then we’re destined for a low rates environment for generations. Obviously, if the older, wealthier generation were willing to take extra risk and invest in new equity like structures that involve them gambling with their wealth to help those less fortunate than them, then we could rebase the system. Wouldn’t it be great for instance if we could encourage older investors to invest in innovative risk sharing mortgage structures which allowed via fintech based co ownership of a new home? In effect collectively the older generation would be financing the younger generation to buy a house and then share in their future – but not just via the Bank of Grandma and Grandad, collectively and society wide. Or sovereign bonds which only increased in value if the debtor nation experienced economic growth. Sadly though But I see zero chance of that happening, and so financial repression remains the best policy weapon.
I’m also increasingly reluctantly to accede to the Reset argument. As in ….the current system is doomed to fail, it’ll all come crashing down and we’ll have a massive policy reset as all risk assets correlate to one. Of course, this is possible but it ignores the fact that government’s and central banks still have weapons left in their armoury. Less, for sure, but still potent ones. I’ve already mentioned Helicopter Money but talk to the Modern Monetary Brigade (who I think are a bit “left field” I admit) and you can see plenty of policy tools available that could keep the system working in the next down turn.
If this is the case, many prepper investors donning their flak jackets and hiding out in their caves might face another decade of low or even returns as stock markets continue to increase in value.