The co-manager of the £2.9bn Ruffer Total Return Fund is convinced that the ongoing debt crisis, exposed so brutally in 2008, can only end one way. As such the fund remains heavily exposed to index-linked gilts (around 35%) and gold.
In her first press conference, new Fed chairwoman Janet Yellen suggested yesterday that the central bank would now be unlikely to raise rates if US unemployment falls to 6.5%. Meanwhile, despite some positive news in this week’s Budget, it is clear that UK government debt is still rising, predicted to reach 78.7% by 2016.
“I think Janet Yellen and Mark Carney have taken the easy money/ultra low interest rate policies on to the next level,” said Russell.
“The MPC viewed zero interest rates as an emergency measure to counter the crisis and, five years on, it is difficult to still describe it as an emergency measure; it is more of a permanent policy.
No other option
“Low interest rates have become more engrained into financial system and that is a form of financial repression and a form of financial instability. When you have no return on risk-free capital, it increases the chance of capital misallocation and an accident, but they don’t have any other option.”
He added: “[Central bankers] have made it clear that interest rates will stay nailed to the floor for a very long time. Eventually they will misjudge the way the markets are moving and inflation expectations will start to rise, people realise that won’t result in high interest rates to choke it off, and within that is the mechanism where you get more worried about inflation because there’s no break on it.”
Russell has been allocated in anticipation of an inflationary shock for some time, and says he is surprised that it has yet to happen, though he is prepared to wait.
Debt has been a primary concern for some time – in 2006 and 2007 the portfolio had no more than 30% in equities and large holdings in Swiss government bonds, UK short-dated gilts and gold. This foresight was rewarded with 20.8% returns during 2008 at the peak of the last credit crisis.
