Ruffer: Economy 'incapable' of enduring interest rates over 5%

investmentweek.co.uk:

Duncan MacIness (pictured) co-manages the Ruffer Investment Company alongside Jasmine Yeo.

In the trust's July fund report, managers Duncan MacInnes and Jasmine Yeo said that despite managing to avoid a recession so far, the US and UK will soon be entering one.

The managers argued economic fundamentals have continued to weaken towards «recessionary territory», citing «visible cracks» in the labour market, manufacturing survey data and a reduced availability of credit.

Despite this, they noted the Nasdaq had risen 27% year-to-date due to market optimism that the economy will avoid a recession.

Lower than expected job creation in the US lifts hopes for 'soft landing'

«The Federal Reserve, the IMF, the Bank of England and Goldman Sachs, amongst others, have moved their forecasts to suggest a soft landing, or no landing, is the most likely outcome for the global economy,» they said. 

«A new, rosier narrative has emerged: that a recession will be avoided, and immaculate disinflation has been achieved vindicating market bulls and central bankers alike.»

This level of optimism has allowed credit spreads to tighten, equity market puts to become cheaper and the VIX volatility index to fall back to pre-covid levels, leaving these protections «highly attractive», they added.

Additionally,the end of the Bank of Japan's yield curve control policy was a key indicator of a shift in markets, the managers said, describing it as «the starting pistol for something bigger».

«Japanese government bond yields floating higher may be the final anchor to slip loose on global duration, which will have ripples across other capital markets,» they wrote.

UK stagflation to return after five years of 'lost growth'

Real yields, which the managers