market folly

UK hedge fund manager Jonathan Ruffer's third quarter letter highlights the UK economic and investment environment and outlines his concern regarding the potential for high inflation.

Ruffer LLP manages £12 billion and has seen annual returns of around 11.5%. Ruffer's well known for warning investors of the credit crisis as early as 2006. When markets tanked in 2008, Ruffer returned positive double digits. His next concern is inflation.

Ruffer writes, "Interest rates are welded to a near-zero rate. The central banks simply cannot put interest rates up, almost whatever happens to inflation. It is a gaping hole above the waterline, which could sink the ship if rates are raised to combat inflation. It leaves us all defenceless."

While the manager says inflation isn't violent yet, there are many catalysts that could make it so. He cautions that high inflation, low interest rate environments are horrible for savers. So how do you combat it?

Ruffer writes, "Inflation-linked government bonds (of surviving nations) are designed for exactly this economic climate. It is not a high inflation rate which makes them thrive – it is the differential between inflation and interest rates. They have the capacity to become enormously valuable – like Titanic lifeboats – in a world where the ordinary saver despairs of keeping his nest egg safe. We have a great deal of your assets in them because we are approaching what I’ve described before as an airless valley which we have to pass through."

It seems the hedge fund manager is advocating indexed linked Gilts in the UK - the equivalent of TIPS in the US. This is one of the recommendations for the best investments during inflation.

Embedded below is Ruffer's letter (email readers click the link to come read it):




We've also highlighted how hedge fund Kleinheinz Capital says inflation is the biggest threat to emerging markets.