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Ruffer's Dannatt: You can't just turn the global economy off and on again

20 March 2020

The investment director warns the global economy “is an incredibly intricate, complex and interconnected system” and may take up to a year to recover from its shutdown.

By Anthony Luzio,

Editor, Trustnet Magazine

Investors predicting that the coming recession will be short-lived are likely to be left severely disappointed, according to Ruffer’s Bertie Dannatt (pictured), who warns the global economy cannot just be switched off and on again.

In an article published on Trustnet earlier this week, M&G’s Richard Woolnough claimed the unique circumstances surrounding the coming downturn mean it will be relatively simple to predict when it will end.

“This virus appears to exhibit seasonal patterns like influenza and, once it has made its way through the population, immunity can build up,” he explained. “At some point therefore, presumably within three months, government policy will be changed and we can potentially return to normal behaviour.”

The manager added that the resulting recovery will see “the biggest ever jump in GDP on a weekly and monthly basis in many countries”.

However, Dannatt, investment director at Ruffer, believes the resulting damage from the economic shutdown – combined with the oil price war between Saudi Arabia and Russia – could well last for up to a year.

“We have concerns this [crash] has further to go yet,” he explained. “There will come a time when there is the potential for a bounceback for risk assets. But we are not in the V-shaped recovery camp.

“Our view is the global economy as an entity is an incredibly intricate, complex and interconnected system that can't simply be rebooted overnight. The supply chain damage caused by the two shocks makes it difficult for us to see how a sharp V-shape recovery is possible.”

Ruffer has long argued that the actions of central banks have distorted asset prices to dangerous levels since the financial crisis.

And Dannatt said that the market is coming around to the view that the use of monetary policy has been exhausted. This is why the S&P 500 fell 12 per cent in US dollar terms on Monday, the day after the Federal Reserve announced it would effectively cut interest rates to zero and introduce a $700bn QE programme.

Performance of index (in $) in 2020

Source: FE Analytics

“This is akin to a gunfight,” he said. “What is different to 2008 is that 2008 was in essence a financial crisis, which could be remedied with financial tools.

“Here you've got a real supply and demand shock in the real economy. And the answer to that is not monetary tools, but fiscal.

“And, as Jerome Powell acknowledged himself, governments need to step up. Governments need to take on the baton from here.”

Dannatt has been encouraged by how quickly the focus has moved from monetary to fiscal stimulus since the start of the coronavirus crisis. However, he said there are three major obstacles to this response: to begin with, equities and credit are exposed in the interim – how do you stimulate economies in the western world that are effectively shut?

The second relates to the current political environment in the US.

“How do you coordinate and bring around a fiscal response of sufficient magnitude to reassure financial markets when the politics in the world's largest economy are so divided in an election year?” he added.

“There are many Democrat politicians who are not going to be in favour of signing up to a big fiscal bailout if that means Donald Trump would go on to serve for another four years and take the credit for having bailed out the US economy.”

And third, Dannatt said that a persuasive fiscal stimulus programme will need to be international in nature and will require coordinated action from the US and China, where relations are currently tense.

“I think it's definitely difficult to know where we go from here,” the manager continued.

“But we can definitely see the potential for an air pocket, where markets have woken up to the fact that central bankers who were believed to be omnipotent and all powerful have actually been shown to be impotent in this particular crisis – the emperor has been shown to be wearing no clothes.

“There is a lag in time for a suitable fiscal response to come. And even in the short term, the huge measures that have already been announced are probably not enough. How does that help the man on the street today who is having to lay off workers and close his shop, because economies in the western world will be getting closed down?”

Data from FE Analytics shows the LF Ruffer Total Return fund is down just 3.71 per cent year to date, compared with losses of 14.95 per cent from the IA Mixed Investment 20-60% Shares sector.

Performance of fund vs sector in 2020

Source: FE Analytics

It has made 45.96 per cent over the past 10 years compared with gains of 37.57 per cent from the sector.

Performance of fund vs sector over 10yrs

Source: FE Analytics

The fund is £3bn in size and has ongoing charges of 1.22 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.