Jonathan Ruffer on navigating investment risks and market crises

By Jonathan Ruffer

In the 26 years that Ruffer LLP has been in existence, a clear pattern has emerged. When the market mood is either complacent or ebullient, equity indices tend to rise strongly, and we lag behind them. An ‘unexpected’ crisis then hits, and Ruffer quickly recovers lost ground.

This pattern is entirely consistent with our stated raison d’etre—Ruffer is preoccupied with keeping our clients safe. To do that, we need to look towards and beyond the horizon, anticipating the next pivotal moment in markets, while being indifferent to how long it takes for this moment to come about.

Much depends, of course, on how one defines the phrase ‘pivotal moment’. But these moments are easy to predict, because they are so obvious. Today is no exception. If this appears to be a claim to genius, the fly in the ointment is that, while there might be some certainty as to what will happen, there is no certainty as to when it will happen. Indeed, to make money from these insights, one may have to wait a very long time—longer than either a client or professional fund manager finds comfortable.

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This is no game for the risk-averse. Success can only be achieved by investing a portfolio to take risk, and by so arranging it that, while each element often has substantial risk, the make-up of the whole has a robustness of balance such that the uncertainties that unfold allow the portfolio to make a positive return. This return needs to be sufficient, throughout the market cycle, to justify the whole exercise. And this we have done since we began in 1994.

Astonishingly, we haven’t had a secular bear market for nearly 40 years—the last one ended in August 1982. Since then, markets have done nothing except go up, punctuated by crises which bring market levels sharply down in a short period. This is best demonstrated by an examination of the last 150 quarters of the US equity market (S&P 500): 71% of them are up-periods, only 29% of them down (1). For Ruffer, our contrarian approach has been to capture as much of the sunlight as we dare, while holding tungsten-tipped instruments for extreme danger—danger which usually manifests from a cloudless sky.

That sky is about to change. The central message for investors is that we are going into an invert of the last period—markets will grind lower and lower, punctuated by rallies of prodigious strength. If these rallies are missed, the holding of almost-all assets for long term growth will be a miserable experience.

Consider the 1970s. The sharp fall in markets between September 1972 and January 1975 ended when the market nearly doubled in two months. From that level the market traded, in real terms, pretty much sideways until the summer of 1982. From there, it rallied by a further third in two months.

Final point on the investment style—Ruffer’s approach has nothing to do with being bullish or bearish; it is a continuation of what it is to be contrarian. We will continue to build portfolios designed to make as much money as is consistent with full protection against the dangers we see. These dangers will no longer be acute and unusual: they will be chronic.

The long period now ending has helped us understand survival in conditions which common sense suggests will reverse—but which, in essence, seem to continue indefinitely. In this next period, the menacing tactic will be buying for the bounce which never comes when it should—that fall from 1972 to 1975 (which had followed a benign period from Dunkirk onwards) saw no less than five major attempts at a rally before the real thing. For this next phase, we make no prediction on longevity, only on challenges—we expect it to be like sitting on an open AGA with bare buttocks: time will indeed pass slowly.

Why are we expecting (too weak a word!) the current market strength to end in a bad way? Because events have conspired to close off any escape route from the impasse which the whole world faces. The inescapable problem is that of indebtedness. There are different ways of assessing how much debt there is, and there is certainly no consensus as to how much debt will be in place before it should be considered dangerous.

We know in the US the amount of total debt to GDP is 300%, and that the corresponding figure in France is 370% (2). Is that too high? Well, it’s as high as it’s ever been, and that includes wartime. But is it too high? Ever since the 1850s there has never been anything like it in fiscally sound nations. For more than 100 years, the levels of borrowings have gone up, and for more than 100 years, many have nervously worried that the Rubicon has at last been crossed.

Once, I described it like this: “In 1959, the Malpasset Dam (pictured) burst, and a cascade of water swept down from the reservoir above, inundating the town of Frejus. In the aftermath of the tragedy, attention focused on the security guard whose job it was to monitor the gauges which measured any undue build-up of water pressure in the dam. It transpired that he had been tremendously alarmed some months earlier, when the needles started to push up into dangerous territory, but nobody else seemed very interested, and as they went well beyond the danger zone, he assumed that they were miscalibrated. He was reading a newspaper when the accident happened”.

That was written in April 1999, during the most spectacular bonanza now called the dotcom boom, which ended in tears.

Money borrowed always creates a vulnerability. The old joke, “a billion here, and a billion there, and pretty soon you are talking real money” is no longer a joke, because it’s no longer “real money”. The UK's National Health Service has been bailed out to the tune of £13.4 billion ($18.2 billion), a sum which even 10 years ago would have seemed incredible (3). Eventually, debt will have to come down—will it be through economic growth, through austerity, or through taxation?

The UK government is a pioneer in attempting to address the debt pile and has recently chosen to increase taxes. This is proving difficult politically. Its tackling of even this small amount of the overall indebtedness is billed as the end of the credibility of the government itself.

It’s true that the tax take is already the highest since the war, but with income tax and national insurance at under 50%, the very rich pay less than half what they did in the 1970s when the rates got to 98%. Today, a surprisingly few people pay an enormous amount of the total tax bill, because the quality of life and a natural indolence keeps their number, in fiscal terms, pleasingly high. Try taking a seriously bigger tranche though, and they will join the swifts in flying south to warmer climes. So, extra tax does not seem like the answer, although it is certainly on the way.

If the debt burden is not taxed away, can it be reduced through restraint of expenditure? Covid has seen a sharp reversal of such a possibility. Issuance of debt is continuing apace, aggravated by the purchase of long-dated government bonds. In terms of security, that is as prudent as selling the freehold of your house and exchanging it for an annual occupancy. The danger point for government borrowing is at the rollover dates—the long-dated bonds don’t need to be refreshed, but they’re disappearing: sold down, and paid with short term debt, with a correspondingly greater number of sensitive rollover dates.

The comparators which exist to the present situation are tenuous. Yes, the United States’ wartime debt was much the same (in comparative terms) as it is today, but it was a time when its economic dominance was absolute. Interest rates were as low as this in the UK in 1932 for a few months—but the level of the equity markets then do not invite favourable comparison with today.

The situation caused by Covid-19, being unprecedented, is easier to read intuitively than as an entry-line in a spreadsheet. And the bifurcation between China’s interests and those of the West—especially in the worlds of technology and infrastructure—is both adverse and difficult to quantify.

The world is therefore trapped on a ledge, savaged if interest rates go up, compromised if asset prices go down, and unable to stop the debt pile increasing until buyers go on strike. A tipping point will come when the purchasers of the world’s currencies no longer have the confidence to see them as a store of value. That, in our view, is the genesis of the next inflation. Those who think the party will continue currently see no evidence of an incipient crisis. That is like mistaking a mastiff’s growl for a conversational clearing of the throat.

Crises are crises precisely because they are unexpected, even when, at a deeper level, they are very much expected. There’s a litmus paper test on how seriously the world is considering a coming crisis—are commentators looking at the magician when they are trying to perceive the trick? In the 1930s, Europe, anxious to avoid war, pored over Hitler’s speeches, and every so often, he would throw them a bone: “I am a man who has no desire for aggression”.

Today, the economist, the political journalist and the hedge fund manager all read the opaque and conflicting signals from the central banks: they take comfort that to understand them you have to be clever, and you must understand the code within the statement; they calibrate their judgement by adjusting for the ebb and flow of the influence of the dramatis personae.

This all gives a fleeting sense of knowledge – but true knowledge lies in a different place. The magician deceives his audience by actions which draw attention away from the things that matter. Central bankers have no need of such prestidigitation—their followers are happy to deceive themselves. Our prediction? It will continue thus until it breaks—at which point the mastiff will have pounced, and a generational inversion in markets will begin.

(1) Bloomberg, September 2021

(2) Bloomberg and Ruffer calculations – combined public and private debt

(3), 2021

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

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