Hedge fund guru warns of period of very high inflation

Jonathan Ruffer, who predicted the credit crunch, and whose company Ruffer LLP has more than £12bn invested, believes the fact that the UK has kept its own currency means it has a “safety valve” which the Eurozone lacks. But he says the UK’s reliance on world trade makes it more vulnerable to a global slump than many of its competitors.

Mr Ruffer, from Stokesley, North Yorkshire, was speaking to the Yorkshire Post ahead of a talk he was giving to the business community in Leeds, organised by M2B, Ministry to Business.

Ruffer LLP has barely had a down year and its annual growth is about 11.5 per cent. Mr Ruffer, a devout Christian, describes himself as “a bit of an idiot savant”, when asked how he made his predictions about the credit fall in 2008.

He said there are lots of things he can’t understand, meaning that the things he can perceive he sees with “more clarity” than others, adding: “I’m fascinated by what makes people tick. And what has happened over the course of the last couple of hundred years, is you’ve had an absolute kaleidoscope of different pressures and situations. But people’s reactions to those situations are pretty similar. What one is always looking for is how people are likely to respond to certain events.”

Although this gives you “startling clarity” about what is going to happen, it doesn’t give you a timescale for when it will happen, Mr Ruffer said.

“So the credit crunch was not something that if you were very, very clever you could perceive. It was absolutely inevitable. What wasn’t inevitable was the fact that it was going to happen in 2008.”

Mr Ruffer continued: “To me it’s absolutely plain as a pikestaff that at some point in the future there’s going to be very high inflation and interest rates really nailed to the floor at nearly nothing. It happened in Britain in the 1970s.” UK Inflation averaged 13 per cent a year in the 1970s, and peaked at 25 per cent in 1975.

“You must be able to make time your friend for investment,” said Mr Ruffer, who explained: “If you can invest in a way where your assets protect each other and are protected by the other investments, what it allows you to do is to hold positions for much longer than is conventionally true.”

Mr Ruffer added: “Why we got 2008 right is that it was obvious what was going to eventually happen. It was also obvious that the right place to be was in the currencies that people were borrowing, basically the Swiss franc and the yen. What we needed to have were other assets away from that denouement. That’s why over a long period of time our portfolios have been very stable.”

On the world economy, he said: “The problem is there’s too much debt in the world. And it’s not really capable of being repaid and that’s the problem that the central bankers face. And the problem is that if debt is allowed to default so the people who owe money simply go bust, what the head of the Federal Reserve, Ben Bernanke, can see very clearly is that that will bring about a repeat of the 1930s depression. He will do anything he can to stop debts defaulting.”

In the Eurozone, Mr Ruffer said it was estimated that two trillion dollars was needed to recapitalise the banks, adding: “Well, the betting has to be that 2 trillion dollars will be found.”

He said this would have been a much harder thing to do in the 1930s when you would have had to find a ‘Titanic’ full of gold and there wasn’t enough gold around, adding: “But now with the paper currency, it’s always possible to do that.”

Mr Ruffer said: “Sooner or later people will lose confidence with their currency. If you think of Gordon Brown pumping £155bn into the UK economy to keep it afloat some commentators say, ‘Oh he’s just printing money’.

“The way to think about these injections of money is that it’s like writing a cheque. If I gave you a cheque for a billion pounds, you don’t have to know whether I’m worth a billion pounds or not, you simply have to know that my bank is prepared to honour the cheque. If it is, then you are a billion pounds richer whether I was worth nothing or £10bn. That’s not the important thing, it is what the bank does about it.

“So when Gordon Brown writes a cheque for £155bn what you need to know is, ‘Who is the banker on that? What’s the bank?’ And the answer is it’s all of us who have money. If we do nothing then basically the extra £155bn joins the economy and that money is validated. But at any moment the holders say, ‘No more of that’, then that’s the moment of crisis.”

There are two big confidences that ordinary people have in the financial system, said Mr Ruffer.

He said: “One is that when they put money in the bank it’s safe and in 2008 they lost their nerve on that, and the other is that the £20 will get them to Leeds Airport. But what the act of using confidence on the extra injection of money is that what happens is you think my £20 is worth what it is today but I’ve no idea what it will be worth in a year’s time. So I’ll spend it today.

“And if everybody spends money at once the effect of that is huge inflation.”

Mr Ruffer added: “Britain is in quite a healthy position because the one safety valve in all of this is to have your own currency.”

Because the Euro value is set by Germany and Northern Europe, countries such as Greece, Portugal and Spain have to operate with too high a currency and they can’t do it, he said.

Mr Ruffer continued: “Whereas Britain simply allowed its currency to drift away and that’s what’s happened. So our currency is well down on 2008 and that’s made our situation easier. Our difficulty is that we are more reliant on world trade than most places.”

Predicting the meltdown

Trained as a stockbroker and barrister before moving into private client investment management in 1980, Jonathan Ruffer is chairman and chief executive of Ruffer LLP.

He established Ruffer Investment Management Limited in 1994, which transferred its investment business to Ruffer LLP in 2004. By 2008, they had been warning clients that financial disaster lay ahead for at least two years.

The defensive positioning of his funds, which made positive returns in 2006-07 but underperformed some rivals while the credit bubble inflated, was not vindicated until the global meltdown. Ruffer made a double-digit return in 2008.