Article published by John Stepek, Editor of  MoneyWeek which makes a lot of sense to me.

I’m not sure what investors expected the Fed to do last night. I’m not sure they knew themselves. But whatever it was, they didn’t get it.

Ben Bernanke didn’t save the world.

It’s not as if the Fed did nothing. It committed itself to ‘Operation Twist’. We’ll explain the details below, but in some ways the move was even more aggressive than analysts had expected.

But stocks fell anyway. So what’s going on?

Operation Twist left the market underwhelmed

Last night the Federal Reserve did pretty much what the pundits had expected it to do, and a little bit more. It launched ‘Operation Twist’ (so-called because they did something similar back in the ‘60s, when the ‘twist’ was the popular dance).

Here’s how it works. The Fed will sell $400bn worth of US government bonds (Treasuries) which mature in three years or less. They’ll use that money to buy $400bn worth of longer-dated Treasuries, those maturing in six to 30 years.

On top of that, they’ll use the proceeds of any maturing mortgage securities they hold (these are bonds backed by mortgages), to buy up further mortgage-related debt.

What’s the point? The point is that short-term interest rates are as low as they can go. The Fed wants to push down longer-term interest rates as well. All things being equal, this should make remortgaging cheaper in America, for anyone that can actually gain access to credit – which is a big if.

Now, markets are meant to price future events in. So given that the Fed only did what was expected, why the collapse? Confused analysts are blaming it on all sorts of things. Some say it was the Fed’s “gloomy view” of the economy that startled everyone. Others blamed the dive in Asian stocks on weaker-than-expected manufacturing data from China.

But the Fed hasn’t exactly been hiding its worries about the economy. And China has been at the back of investors’ minds for a while.

Investors are waking up to the truth about central banks

What’s the real problem?

I keep an eye on Twitter through the day (you can follow my musings and those of the rest of the MoneyWeek team if you’re on it – you can find us here). It’s handy for breaking news but it’s also interesting to read the chatter from traders.

It was very clear yesterday that most traders were reluctant to hold any big positions before the Fed meeting. Because they had no idea which way it would go.

In short, lots of people in the market yesterday thought that Ben Bernanke might pull a bazooka from his back pocket and somehow stun the markets with another flood of money or some brilliant new idea to prop up asset prices.

When he didn’t, that left a lot of disappointment, and a great big shorting opportunity. And that’s the real problem. Investors are starting to realise that there are limits to central bankers’ power.

From ‘house prices always go up’ to ‘a bet on the eurozone is a bet on Germany’, the financial crisis put paid to a lot of ‘sure things’. Now it looks as though the biggest, most dangerous myth of all – the Greenspan / Bernanke put – is on the verge of collapse.

Even the International Monetary Fund (IMF) – a lagging indicator if ever there was one – is waking up to the fact that loose money is the cause of our woes, not the cure. As Lex notes in the FT today, the IMF’s latest global financial stability report warns that we could already be facing a fresh credit problem.

This is the slowest economic recovery since 1929, says the IMF. “Yet it is the fastest rebound in credit.” Basically, with interest rates at rock-bottom levels, investors have “abandoned disciplined investing styles” and simply piled into “anything that pays a yield”. In short, “when capital is too cheap, it is mis-allocated”.

We’re heading for turbulent times

It’d be great news if the markets finally woke up to the poisonous effects of cheap money. Maybe we’d get back to valuing stocks, property and bonds on the basis of what they’re worth, rather than on the basis that central banks won’t let their prices fall.

Trouble is, investors might then also find out that most assets were worth a lot less than they’d thought. In the ensuing chaos, a lot of people would go bust. Banks on both sides of the Atlantic are already looking wobbly again. Another reason for the plunge in markets yesterday was the downgrading of three US banks by Moody’s. And the European situation isn’t getting any better.

Turbulent times lie ahead. In short, hang on to gold, be very picky when it comes to stocks, and avoid government bonds and banks.

————–  ENDS ——————————

The dollar is being perceived as a safe haven at present, yet the US has a massive debt problem which many feel is not being dealt with.  Gilts are offering nothing except a real rate of loss, bank deposits are the same and we have CPI at around 4.5% – 5% and rising.  These may be times for clients to consider reducing their risk profile, even if it is on a tempory basis.  Thankfully, stock markets are not correlated to economic growth!

Peter Waller – Investment Director

In depth and interesting report.  To read, please click  Gold Report 2011

We live in interesting times. In the US I am sure that Obama and the Republicans will agree to lift the debt ceiling from $14.3 trillion. But it will be, and will be seen as, a shabby fudge. The US will probably lose its AAA debt rating as a result and within months. Quite simply the USA spends too much and refuses to accept reality. The days of dollar hegemony are drawing rapidly to a close. The US dollar is a great medium and long term short even without another bout of QE and that prospect now looks far more likely than it did a week ago.

Europe is even more of a mess. Sovereign debt we know about. Friday threw up another horror with the stress testing of European banks to see how they will survive the next downturn. It was not that 9 failed the tests but the way the EU fudged the tests to allow dodgy banks to pass that is so horrific. Take Greek debt – it can currently be bought at 50 cents in the Euro ( not that anyone with half a brain cell would want to buy it) but in the bank stress tests it was valued at 85 cents in the Euro. What a farce! Given that the EU engages in fudge after fudge its credibility and that of the Euro is now in tatters. On Monday expect sharp mark downs in banking stocks across the EU as the markets collectively stick 2 fingers up at the recent stress tests.

No wonder gold is almost at $1600 oz. Currencies such as the Swiss France and Aussie and Canadian dollars are too small to be viewed as safe reserve currencies. The Yuan and Rupee are unproven and volatile. And now the US Dollar and Euro are so utterly holed beneath the waterline there is only 1 safe world currency. I have told you again and again that I expect to see $1700 gold this year and $2,000 gold in 2012. If anything I am beginning to think that those forecasts are just too low. Anyone without 10-15% of their portfolio in gold equities or well managed gold funds is running a very serious risk indeed. Gold equities have started to respond to the higher gold price & we have also seen a pick up in M&A activity in the sector because valuations are just far too low. But even today you can buy shares in a stack of decent companies on sub 2 times free cashflows even at $1500 gold.

I should add that while no British banks came close to failing the stress tests you do not know where the Euro farce will end. One of my 7 themes for 2011 was to avoid bank stocks entirely. I stand by that today. It will be an interesting week that lies ahead.

I wish you the best of luck in the week that lies ahead.

Tom Winnifrith

CEO of Rivington Street Holdings

There are no gifts from Greece to beware of ….

The following article is taken from the SF t1ps Smaller Companies Gold Fund July Newsletter ;-

The Greek rescue package has theoretically been agreed but the real story starts here with the country having to implement around thirty draconian measures to ensure it receives its next tranche of funding. Agreeing the points is one thing but analysis of what these measures actually consist of highlights the fact that implementation is not going to be as rapid or as smooth as our leaders would have us believe. Some of the most onerous points are that; VAT is set to jump from 19% to 23%, luxury items like yachts, pools, and cars will be hit with special levies (which will see the real money flee the country). As people with high incomes and high value properties will have to pony up more through higher income taxes and taxes on land –more high net worth individuals will look to evade tax or leave all together.

Excise taxes on fuel, cigarettes, and alcohol are set to jump by one third, which is likely to hit the middle classes hard, whilst anyone in the public sector will see their pay cut by 15%. Approximately 2000 schools are to be shut, with the government moving to privatise a good deal of its enterprises including several ports, airports, motorways – basically anything which could be used to generate tax revenues. The fact that most assets set for privitisation are economic basket cases which are unsellable is a minor detail we shall gloss over.

A look at the full list of agreed points would make Zeus weep. The real issue is that the actual causes of the problems are not being addressed and the can continues to be kicked down the road. The most recent data from Eurostat showed that in 2010 Greek sovereign debt was equal to 143% of GDP and we can only assume that this has increased since. On top of this, although the austerity package is relatively harsh, the savings and revenues from asset sales etc are actually only equal to around 10% of the total outstanding amount that Greece owes its creditors. The current package will see Greece funded for the short term but by September the situation will be exactly the same.

What the last week has done however is take the spotlight away from the US. In reality, despite the political rhetoric from hardline Republicans, the debt ceiling will undoubtedly be raised just before the 2nd August deadline and the country will continue to spend, spend, spend money it does not have. Since it was imposed in 1917 the debt ceiling has been raised 93 times, 10 times since 2001, so this really is not a big deal for the country in terms of its past performance but like Greece the solution is not massive tax hikes. In 2010 revenues equalled roughly 14% of US GDP whilst Government spending in terms of GDP came in at 24%. This highlights how US spending needs to be reigned back in line with annual revenues. It will not be.

There are only a number of options for the US from here. The first is default. This is in reality inconceivable but not impossible. As Angela Merkel stated in 2009 ‘there is a rumour that nations cannot go bankrupt. That rumour is false’. But the most likely route for the US is continued debasement, inflation and stimulus. Greece does not have the luxury of currency and interest rate manipulation and that is why it is now a when not an if in terms of default. Whether this comes as a re-profiling, a haircut, or a re-structured payment plan the net effect is the same and the ratings agencies have already warned that the ratings of the debt securities will reflect this.

As Nikolaus Kopernikus stated; ‘Among the countless evils that bring about the demise of entire states, these four are probably the prior ones: internal discord, high mortality, infertility of the soil, and the deterioration of the money. The first three are so apparent that hardly anybody would contest them. The fourth evil, however, which stems from the money, is only noticed by a few, and only by those, who think deeply, for the states fall victim to demise not at the first attempt, but gradually, and almost invisibly.’ In terms of the US the country ticks all four of the above boxes. Internal discord within the structure of the government, an aging population with one in seven on foodstamps, infertility of the soil as a metaphorical illustration of the loss of competitiveness in regard to the emerging markets, and the deterioration of the country’s currency.

Gold is not a commodity.  It is a currency, and with the dollar and Euro holed beneath the waterline it is quite plausibly the world’s reserve currency, retaining its value whilst all other established currencies are debased as a means of whittling away at debt. Since 2007 the ECB, the Fed and the BoE have, on an aggregated basis, expanded their balance sheets by $4.5 trillion, with a 30% increase in the US monetary base in the past year alone inevitably resulting in decreased spending power. Inflation sees the real value of paper currencies destroyed and despite some moves into experimenting with the use of Gold in catalytic converters, the overriding use of the yellow metal is, and will continue to be, the retention of value.

With supply pretty much flat year on year, Erste Group expects that within twelve months the price of Gold will appreciated to $2,000/oz, supported by faltering supply from less than attractive operational environments like Namibia, etc, (greed is seeing the governments of such countries impose mining taxes and forced local ownership), a loss of skilled workers (Deloitte has estimated that by 2020, 20,000 workers will have left the industry to retire with no replacement) and increasing investment demand. Currently only 2% of China’s reserves, and just 0.15% of assets within pension funds are held in Gold which dramatically highlights how underweight in Gold most portfolios are currently.

Despite the compelling argument for Gold’s continued move upwards, Gold mining equities have materially underperformed the metal. The end of QE2 has seen a move away from risk assets and buyers in general sitting out of the market driven by fear of further downside. This has led to forced sellers (selling at any price to generate cash – possibly to cover leverage positions) marking down valuations. There is also the argument in regard to the knock-on effect of increased fuel costs and therefore increased operating costs for miners, but in the medium to short term the fact remains that the companies that are producing the asset will be demanded more and more and in time their valuations will reflect this.

This reflection of value will be through, as we have said in the past, one of two things. A sector re-rating or predators taking out profitable ‘bolt on’ operations. This year the aggregated free cash flow of the 16 companies making up the GBI  (the world’s largest gold companies) will amount to circa $8.5 billion, jumping to $14 billion by 2013 ceteris paribus. We expect this cash to be put to use snapping up the smaller companies. We have by no means seen the parabolic phase in gold mining equities, or in Gold itself for that fact and this is where, as everyone else is buying, we will be selling.

For the time being we are fairly fully invested and continue to purchase companies on very low multiples of either current free cash flow or projected cash flow (1 or 2 years out). In the short term we are now moving through, seasonally, the weaker part of the year for Gold and mining equities but with the underlying macro issues continuing to develop, the fundamentals remain very positive. When gold equities start to catch up the (rising) gold price the moves will be dramatic. It is pointless trying to time a trade back into gold. Just accept that valuations are dramatic, buy, hold and wait for the drama. It will not be long in coming.

Robert Sutherland-Smith

Please click on the following link  Budget 2011 Summary for details of the March Budget

Article from Tom Winnifrith of RSH to follow up the last video article below

I wake up and see that gold is now trading at $1,410 oz. It seems like just the other day that Gordon Brown was flogging the UK’s hoard at $255 an oz. Actually it was 13 years ago but whatever way you look at it, this was hardly an act of genius. There will be some who will argue that at an all time high it is time to bank gains. I am not one of them.

The story of the week remains the G20 squabbles (round 3) over competitive devaluation. The story so far. Two weeks ago the G20 agreed there would be no competitive devaluation of paper currencies. Two weeks ago minus a few hours and the Japanese and Americans broke ranks. And both will continue to break ranks. In Tokyo and Washington the printing presses are running at full tilt and will continue to do so. The only way those countries can clear the real value of their deficits is by inflation. And the only way they can kick-start their economies is by trashing their currencies.

But here is the catch. If the dollar slides then suddenly those economies operating in pounds/Euros/Rand etc become less competitive. As one sage put it “the dollar is our currency but your problem” Hence we get into a game of competitive devaluation. A race to the bottom. Suddenly the printing presses will be whirring across the globe. And as I have noted numerous times before, God is not printing any more gold.

Gold is still, in real terms, 30% below its peak of 1980. There is a long way to go in this bull run yet. And of course operational gearing means that the way to play this is via gold equities Hand on heart we believe that the best is yet to come… you ain’t seen anything yet! – the golden days they lie ahead!

That was a Year ago!

Click here to watch the short video.

Today, Slater’s argument is ever more compelling, and continues to make us believe we are simply at the foothills of the major rise in the Gold price. The race to the bottom of the currency ladder is simply just beginning; the Fed’s most recent meeting minutes left sufficient room for unprecedented further QE.

The real meaning and implication of inflation (or more simply currency dilution), is the further loss of the value of the World’s currencies.  Essentially, this means that the pound/dollar in the pocket today will inevitably be worth less in the future if more money is in supply. But that is just our thoughts. Let’s allow one of the UK’s most successful investors (albeit a year ago) explain the fundamental driving factors behind a sustained future growth in the Gold price, and subsequent operationally geared miners.

This is why we are keen to continue promoting Gold and include the BlackRock Gold and General Fund in all our portfolios.

Interesting article written by Strategist Max King :-

Investors, conditioned by the media to expect every market movement to be explicable by reference to items of news, look for catalysts to justify a change of direction. With the benefit of hindsight, changes of trend seem wholly rational but, at the time, they take most people by surprise – so much so that many remain in denial about them for weeks or months. That, we believe is what happened at the end of August. Since then, equity markets have rallied but government bond markets have weakened. Investors had become obsessed by a lengthening list of macro worries, chief among which was that the US would suffer a “double-dip” recession which would somehow metamorphose into a global depression, causing a collapse in corporate profits. Positive data from many parts of the world was ignored, as was another strong set of quarterly earnings. The gloom fed on itself, with “double-dip” concerns causing the market to weaken and then market weakness increasing the conviction that “double-dip” was imminent. Modest growth based on trade, investment and the private sector is surely better than fast growth based on reckless government spending and unsustainable credit growth. It only took a couple of pieces of better than expected data for some people to realise that these fears were grossly exaggerated and to start buying risk assets. This does not mean that the world faces a V shaped recovery after all, merely that modest but steady growth is

likely on average in the developed economies, enabling corporate profits to continue to grow.

Modest growth based on trade, investment and the private sector is surely better than fast growth based on reckless government spending and unsustainable credit growth.

It is not unusual for people to despair of recovery early in the cycle. In September 1992, Time Magazine noted that “nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years…the outward sign of the change is an economy that stubbornly refuses to recover from the recession… the current slump already ranks as the longest period of sustained weakness since the Great Depression.” Despair at the “jobless recovery” was repeated in 2002-5, leading to interest rates being kept too low.

In August 1979, after 13 years of dismal stock market returns, Business Week pronounced “the death of equities” sub captioned “how inflation is destroying the stock market.” Nine months later, a bull market started which, with interruptions, saw the Dow Jones Index multiply 15 fold in 20 years. It was inflation that died. Similarly, the last year has seen a flurry of Armageddon-like predictions from the usual suspects (notably the Economist) rounded off by the recent pronouncement from Citigroup’s strategists that the equity cult was dead, to be replaced by “the new cult of the bond.” With equity valuations having reached historic lows and bond valuations historic highs, such prognostications are little short of bizarre.

For bond investors, there are clear warning signs. Among recent record issuance, Microsoft recently sold 3 year debt carrying a coupon of 0.875%, the lowest ever on corporate bonds. US 10 year corporate bonds have been issued yielding below 3% and there has been a return of the 100 year bond; past issuance of these has marked market peaks. Money has been flooding into bond funds and the need to comfort these investors leads supposedly independent economists and strategists to focus on news that is bond friendly and ignore what is not.

“For equity investors, the combination of excellent value, strong and probably under-stated earnings growth, excessively bearish sentiment, a lack of issuance and fund out-flows (which can only improve) points to a major long-term buying opportunity. Such opportunities occur very rarely and only when consensus opinion points strongly in the other direction.”

The list of macro concerns will not disappear overnight: markets climb a wall of worry, they do not wait for the wall to collapse. Some of the concerns may even increase; for example, widening credit spreads between Euro-zone government bonds and increasing economic divergence point to the return of the Euro-zone crisis. That could expose the fudges of the EU banking stress tests and the new Basel 3 regulations as window dressing on a still dangerously exposed European banking system. The risk of counter-productive government measures is ever present, the data from some economies will remain poor and from others erratic. Investors will not forget the last 10 years and the lessons so painfully learned in a hurry.

For equity investors, the combination of excellent value, strong and probably under-stated earnings growth, excessively bearish sentiment, a lack of issuance and fund out-flows (which can only improve) points to a major long-term buying opportunity. In time, some positive surprises should emerge. As in previous recoveries, growth may turn out rather better than expected, despite (or because of) the retrenchment of government spending. Fiscal deficits could fall sooner than expected, corporate profits could continue to out-pace economic growth and currency crises, however painful in the short term, could have positive long term consequences. At a time when companies have never been so profitable or government finances so badly managed, it is extraordinary that investors are flocking to government bonds and spurning equities. In a few years time, investors may wonder what all the fuss was about and those who stayed on the sidelines may regret missing one of the best buying opportunities for equities for years.

Max King

Strategist

1^st October 2010

2000 – 2009 has been a miserable decade for equity investors. Annual returns in Sterling on both the FTSE100 and the MSCI World indices were below 1% in nominal terms and negative after taking account of UK inflation averaging 2.5%. Returns from UK smaller companies a little over 5% per annum but even these were no better than the returns from gilts. A normal expectation would be that equities should earn an annual “equity risk premium” of about 4% over the return on “risk free” government bonds and more from smaller companies.

Research by Legg Mason shows that this is only the second time in history when Wall Street’s returns have turned negative over 10 years (the other was in the late 1930s) but there have been 13 periods since 1871 in which they turned negative in real terms. On average, this created a tremendous buying opportunity with subsequent 10 year real returns above 10% per annum. Investors who were slow off the mark or jumped the gun by being a year late or early were only mildly penalised; they saw returns of 12.3% and 10.1% per annum compared with 13% for those who caught the market at its low point.

 It will pay to remember that Wall Street’s history shows four previous extended periods of consolidation lasting over 10 years; each was followed by an extended period of strong performance.

 Poring over past data as a guide to the future has become a popular pastime and it needs to be remembered that the average of past experience is not a good predictor of the future. The circumstances are different each time and the range of historic outcomes is wide. Nevertheless, fundamental factors support the positive outlook that history indicates: the valuation of markets is reasonable and there is good visibility of strong earnings growth.

It might seem that emerging markets offer the best opportunities; after all, they did not suffer from the problems of over-extended credit, bloated government and inflated expectations which have bedevilled developed economies. Ostensibly, this has already been reflected in a far from miserable decade for emerging markets: the MSCI emerging markets index, excluding income, doubled in the last decade; the Shanghai Composite gained 191%; India’s Sensex 30 rose 226%; Brazil’s Bovespa index rose 314%; and the Russian market 724%.  However, the 1990s had been a very disappointing decade with the bright hopes encouraged by the fall of the Berlin Wall swamped by false starts, legacy problems and a multitude of mistakes. The collapse in emerging markets in the late 1990s left them very cheaply valued and the subsequent strong performance partly reflects performance off a low base.

The disparity between emerging and developed market performance is unlikely to be as stark in the current decade as in the last one but superior economic growth, increasing economic and social stability, high corporate returns of increasing quality and reasonable valuation suggest that returns will still be better for emerging than for developed markets. Smaller companies should also average annual returns a couple of percent above larger companies, in line with the long term trend.

The disparity between emerging and developed market performance is unlikely to be as stark in the current decade as in the last one.

The outlook for government bonds, even assuming fiscal deficits are brought under control, is much less positive. Gilts have returned an annual 5.5% for the last 10 years and the Citibank world government bond index in Sterling 6.6%. The equity risk premium has therefore been -3.9% and -6.4% respectively and it will take a lot of equity performance to return to the long-term trend of +4%. While equities average double digit returns, investors in government bonds are unlikely to do better than collect the yield over the next decade and maybe much less. Investors in quality corporate bonds should do better because yields are higher but the prospects for capital gains are slim.

Developed equity markets are still some 25% below their all time highs. They can rise 10% per annum (equating to a return in the low teens with dividends) for three years before they reach their all time high. By then, markets will have been broadly flat for 13 years and there will be a considerable psychological barrier to break through. It will then pay to remember that Wall Street’s history shows four previous extended periods of consolidation lasting over 10 years; each was followed by an extended period of strong performance.

On an annual basis, performance is likely to be volatile. In the last 36 years, the All Share index has moved by less than 5% (up or down) only five times. It has moved more than 15% 21 times and by more than 20% 14 times. The favourite prediction of most strategists, of single digit returns, is actually very unusual on both sides of the Atlantic. Investors will need to remember that a decade of strong returns will contain some exceptional years but also some negative ones. Patience and nerve will be required at times, but it should be nothing compared to the last decade. This contained, according to the London Business School, two of the worst four bear markets in global equities since 1900, including the worst. It should be much longer than a decade before there is another of similar magnitude.

Peter Waller – Investment Director

(Source: Max King Investment Strategist)

4 March 2010

This year has shown why economics is known as the dismal science; with output falling, unemployment rising and a stack of problems for the future building up, times have never been so good for the doom-mongerers. 2009 has also proved to be a good year for investors; global equities are up some 30% year to date and over 60% from the low point, thereby recovering nearly half the fall since 2007. Corporate bonds, both investment grade and high yield, have performed well and, despite the dire warnings, returns from government bonds have been positive. Stock markets climb the wall of worry, and there are plenty of those at present. So much so that there is a danger that an excessive focus on the risks will lead investors to ignore the positives and so miss out on the potential returns which are there to be made over 2010 and beyond. These positives include the following.

1 On a prospective p/e ratio of below 14 times 2010 earnings, well below fair value of around 16, global equities remain very good value.

2 Earnings forecasts continue to be upgraded with over 60% of estimate changes positive. Analysts have responded cautiously to third quarter earnings which were well ahead

of expectations, so significant upgrades of the next few quarters’ earnings are almost inevitable. Initial estimates already pencil in mid teens earnings growth for 2011.

3 Corporate profitability has withstood a severe economic downturn well, largely as a result of strong productivity growth. Not only have costs been cut but there are significant pay-offs coming through from past investment, particularly technology related. The US productivity growth in this recession has been by far the best for 50 years. There is a danger that an excessive focus on the risks will lead investors to ignore the positives.

4 Economic growth in 2010 and subsequent years in developed economies is likely to be modest, but that should make the expansion phase long and durable. If it is based on investment rather than credit expansion or government spending, the result should be a more stable global economy and, possibly, an increase in the trend rate of growth.

5 The collapse of communism 20 years ago sparked political, social and economic change throughout what was then known as the third world. The consequence is strong economic growth and sharply rising living standards in what are now known as the emerging economies. This process has much further to go. Concern about the relatively few failures and dysfunctional states should not detract from the success of the many.

6 The fiscal challenge facing the developed economies in financing and reducing huge budget deficits is severe, but the experience of Canada and Sweden shows that it is not insoluble, and the economic and social cost may be surprisingly easy to bear. Moreover, public opinion is behind such retrenchment.

7 Bond investors do not require immediate and drastic action; if presented with a coherent plan over several years, they are likely to be willing to finance continuing deficits at modest interest rates. Spreads between corporate bonds and government bonds remain generous, particularly since the default rate appears to have peaked.

8 Interest rates are likely to rise in 2010 but this is already reflected in market interest rates. Well over 3% can be earned on 3 month notice deposits in the UK and nearly all

new fixed mortgages are charging an APR of above 4% already. A rise in interest rates will be an indicator of a return to normality, and therefore positive. There are significant further returns to be made in 2010 and, potentially, for several years thereafter.

9 The scale of quantitative easing in the developed economies has been huge but it has only counteracted the contraction in bank lending, and so threatens little inflation for now. Productivity growth and high output gaps promise continued low inflation while the withdrawal of liquidity in due course will be feasible if governments gain the confidence of bond investors in their fiscal policies. Runaway inflation as a result of printing money is far from inevitable.

10 Oil supplies are finite but reserve estimates for natural gas have been rising strongly. High energy prices have encouraged greater efficiency and the nuclear industry around the world is undergoing a renaissance, reducing the pressure on fossil fuels. High base metal prices are leading to investment in mine expansion and encouraging more efficient usage. As genetically modified crops spread around the world, crop yields will continue to rise while the faddish diversion of grain to produce bio-fuels is on the wane. In short, higher commodity prices are restraining consumption, increasing output and encouraging increased productivity. Cost push inflation and mass starvation are not in prospect.

11 Investors are focused on the uncertainties and reluctant to take risks. Flows into equities from both retail and professional investors are low and the slightest wobble in markets sends investors running for cover. Investors are more worried about the downside than excited by the upside and euphoria about the gains this year is notably absent. Poor sentiment is a classic indicator that the gains will continue.

We at Admiral believe there are significant further returns to be made in 2010 and, potentially, for several years thereafter.

Peter Waller – Investment Director