Why inflation remains the biggest threat to investors

[Rock Private Office]

Extract from an article in FE Trustnet.

Steve Russell, who co-manages the Ruffer Investment Company and CF Ruffer Total Return fund, has retained his significant overweight to inflation linked bonds and gold, even though the Fed has confirmed that QE could end in the US as early as this year.

Both asset classes have sold off significantly in the aftermath of chairman Ben Bernanke’s announcement, but Russell says he has no plans to sell out of them as inflation remains an inevitable by-product of the high levels of liquidity in the system.

He still believes a consumer price index (CPI) in the high single digits is likely and expects negative interest rates of 4 to 5 per cent at the very least.

"Nothing has changed our view that central banks’ only option to get rid of the debt is to inflate it away through monetary easing," said Russell in an exclusive interview with FE Trustnet.

"The US is recovering a bit better than expected and so are some of the developed markets, but the fact remains that they haven’t done anything about their very high debt levels."

"People seem to have forgotten that. You see a lot of commentators talking about normalisation and the end of QE and rising interest rates, but we’re just looking at this and thinking 'you can’t have normalisation until you get rid of the debt'."

We see this tapering as one of the speed bumps along the way, but we’re not at the end of QE and the beginning of tightening – that’s a long way off in the grand scheme of things."

Russell acknowledges that worries over inflation in the mainstream are "off the agenda for now", but thinks the market has got complacent if it thinks quantitative easing is genuinely coming to an end.

"Inflation is the only way [central banks] will be able to get rid of the debt – the outlook for growth is no way near enough to make any in-roads, and it’s clear that economies won’t be able to bear the normalisation of interest rates," he explained.

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