Should investors play it safe while fear factors remain?

Peter Spiller says "the markets are like frogs being boiled slowly". An unusual analogy, but then Spiller is an unusual fund manager.

For years he has been extraordinarily successful - and been at the extreme end of those who preach and practice caution. Despite the growing mood of optimism over global economic prospects, Spiller's concerns have only deepened; but the markets, like the poor frogs, will not realise what's happening until it is too late.

He offers a remarkable statistic: "The annual increase under QE [quantitative easing] is greater than the entire money base pre-Lehman Brothers," he says of US money supply since the financial crisis.

"In June 2008, the monetary base was $833 billion (£501 billion). By June 2010, it was $2 trillion. The figure last May was $3.1 trillion, and has been rising rapidly since then. Since QE3 [third round of quantitative easing] started they've been printing $85 billion a month. Truly astonishing."

High debt levels and the forces of deflation are quite strong, he says, "and this will keep central banks in an accommodating mode. They are terrified of deflation and the likelihood is that this combination of financial repression and printing will continue for some time."

Prices far too high

This flood of money has buoyed up the prices of everything, "classic cars, equities, art and even corporate bonds", he says. Prices are far too high, way above what they would be in a normal interest rate environment; "but we aren't in that and won't be for some time.

"I shouldn't be too adamant when debating how this is all going to play out. We've never been in this situation before - but while we can't look back in history, the broad outline is clear," he says.

He refers to a Bank of England chart speculating on the effects of QE on asset values.

"It is schematic," he says. "No numbers… but when you stop QE, money supply stays flat at that high level. Nominal GDP goes up, but the prices of real assets rapidly drop to where they were when QE started. Let us hope it is not true."

The chart was produced more than two years ago, in the Bank's third quarter inflation report for 2011. Spiller's long-term investment record, as measured by his flagship investment trust, Capital Gearing, is near-peerless. But 2013 was not especially kind.

Progress was also muted elsewhere, as Spiller's three other funds - CG Portfolio Funds: Real Return, Dollar Fund and Capital Value - all produced figures that reflect their defensive status. His supporters will not be surprised, however, since Spiller's priority is wealth preservation.

Security of TIPS

Spiller has long favoured US Treasury inflation-protected securities (TIPS) as the best asset class, offering security and protection against an anticipated wave of inflation. But in 2013, after good gains in recent years, TIPS prices fell.

"I was surprised by how rapidly the sell-off took place when the [eventual] end of tapering was first hinted at. But values have now been rebuilt. The level of real yields, in five years' time, is now 1.5%.

"My suggestion is that the real yields will be a lot less, so there is the potential for capital gain in real terms. Whatever the chances of higher interest rates were, they are now greater," he says.

As for the great initiative to create inflation in Japan, through socalled "Abenomics", Spiller says much depends on wage levels. The authorities need to see growth in wages, and at the moment, "there are only signs that they are going up". Spiller also doubts that gold will prove as good a hedge against inflation as some now expect.

"Where it has a role is as protection against extreme outcomes: if China became politically unstable, for instance, or as a hedge against hyper-inflation."

At the moment, he says, gold is at a "significant premium" to its long-term values. Spiller remains a critic of the euro, if a more pessimistic one.

"It has suffered its heart attack and now has an incurable disease. The levels of debt are so huge that a break-up would cause a huge financial crisis. In the case of Germany, losses would be €6 trillion, or 10% of the entire personal assets of the German people.

Peter Spiller runs the Capital Gearing Investment Trust.