Peter Spiller: ‘our situation today is the mirror image of the last 40 years’

The veteran Capital Gearing manager is forecasting a prolonged period of higher inflation. 

Capital Gearing Trust manager Peter Spiller has warned that the world economy is undergoing a major transition that will cause high inflation to stick around for longer than central bankers expect.  

Spiller, who this year marks 40 years at the helm of the £1.1 billion “capital preservation” trust, wrote in the fund’s annual report (published today) that the deflationary period that started in 1982, when US Federal Reserve head Paul Volcker jolted interest rates high to cripple inflation, has come to an end.

He said: “Our situation today is the mirror image of the last 40 years. Globalisation is being rolled back both for reasons of security of supply and the geopolitical risks associated with Russia and China.

“The just-in-time worldwide model of manufacturing is fading. Furthermore, there are no realistic candidates for any equivalent increases in the workforce of the capitalist economy from elsewhere. Manufacturing closer to home will be more secure, but also more expensive.

“The consequence will be wider than just goods; the bargaining power of labour is being at least partially restored.”

Spiller added that achieving net-zero carbon emissions would also fuel inflation through higher demand for natural resources amid a lack of investment in extracting new metal and miners.

Moreover, he argued that the high level of debt encouraged by abnormally low interest rates meant that raising interest rates too high came at too great a risk to the economy, so central banks would push for “financial repression”: higher than normal inflation to reduce the real value of debt.

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Spiller said: “History suggests that the only way to reduce the burden of excessive debt that does not risk a depression is to engage in financial repression: elevated inflation with moderate nominal rates. An extended period of financial repression is likely to cause some shocks, but in time will bring debt into better balance.”

However, Spiller argued that once this period of inflation ends, markets would be ready for their next bull run, as they were in 1982.

He said: “Our main objective is to keep shareholders’ capital whole during this period of repression, which with luck will end with an environment similar to 1982.

“That is to say, inflation and interest rates high but falling, price-to-earnings ratios low and rising, and debt no longer alarming. That would be a great environment from which to deliver the types of returns that shareholders of Capital Gearing Trust have enjoyed over the last 40 years.”

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In the 12 months to 31 March 2022, the net asset value of the trust rose 10.5% and the share price rose 10%.

Over the 40 years that Spiller has led investment at the trust, it has provided a compound share price annual return (with dividends reinvested) of 15.1%, and only once recorded a negative annual return.

Chair Jean Matterson said: “This is a very satisfactory performance in what has been a ‘topsy turvy’ market: first very strong, and then significantly weaker as we neared our year end.”