market folly

Jonathan Ruffer is out with Ruffer Investment Company's latest market commentary. Ruffer has returned approximately 16% per year since 2004 and is gaining respect as a top UK manager, following in the footsteps of Odey Asset Management and Lansdowne Partners.

Back in April, we presented Ruffer's commentary stating that the fund was overweight Japan. In their July missive, we see that the UK manager is worried about China as the country fought off deflationary forces by expanding its monetary base after the financial crisis.


China Concern

Ruffer writes (emphasis ours),

"China is overheating; a dislocative slowdown would disrupt the financial markets, and this, in turn, would likely compromise the global economy. This dynamic was very visible in 2008 in the West: the trade crisis was not predictable, though the soundings of industrialists - trade responded to the mayhem in the financial world ... China has the capacity to derail the whole world, and they don't publish their railway timetable."

This isn't the first time we've heard managers sound the alarm regarding China. Grandmaster Capital's Peter Wolff says China is a debt-fueled investment bubble.

Yet on the other side of the table, the legendary Warren Buffett has said China will be a big driver of growth for the next 10-20 years.

The question Ruffer is asking though, is what exactly is this growth costing and what happens if it stalls? That's certainly something worth pondering. Ruffer concludes that, "It looks reasonable to acknowledge that if China needs to slow its economy, then most of the developed world will need to maintain very low policy rates to support growth and the banking system."


The Reflation Trade: Over?

The UK manager also goes on to declare that the reflation trade is 'no longer wholly appropriate.' While selling US dollars and buying commodities was *the* trade much of the past two years, Ruffer notes that "zero interest rates in America mean that the monetary policy of the entire world follows in its wake."

Ruffer argues that the performance of financial assets has been largely (if not completely) driven by dollar debasement via quantitative easing. Yet now that Ben Bernanke has signaled that QE3 is not the preferred choice of action, what happens to all the money chasing returns in a low interest rate environment?

The insurance policy that backstopped risk-taking is no longer there. Thus, the reflation trade is over.

Embedded below is Ruffer Investment Company's latest market commentary (email readers come to the site to read it):



For related reading on these topics, check out hedge fund Kleinheinz Capital's thoughts on how inflation is the biggest threat to emerging markets.