Last week at Econopolis we had the pleasure of a 2-day visit by William (Bill) White, former Chief Economist of the BIS and one of the few economists who predicted the financial crisis of 2007-09 (most notably by confronting Alan Greenspan at the 2003 Jackson Hole meeting). As Mr. White has 50 years of experience as economist, the 2 days of presentations and debates offered some interesting insights about the state of the global economy.
Key takeaways from Mr. White
- The global economy is far less manageable and controllable than many people (including policy makers) believe. The economy is a complex, adaptive system in which there is no ‘equilibrium’. Economic models are not suited to capture the full complexity of reality and should be treated with caution.
- Ultra easy monetary policy will not work as intended, mostly because the impact of current ‘unconventional’ measures on confidence is not very well understood. Moreover, the current monetary experiment holds important risks (inflation, bubbles, possible impact on potential growth, …). Still, central banks are likely to continue down their current path as that is the right thing to do according to their models.
- There is currently a long list of risks: structural growth slowdown in developed markets, unintended consequences of aggressive monetary policy, overindebtedness throughout the global economy but especially in emerging markets (EM were part of the solution in 2008, but are now part of the problem), political risks basically everywhere, …
- Eventually one or more of these risks are bound to go south, which could easily push the economy into a new global crisis. As a lot of our macro crisis-fighting tools have already been used up, this will be a substantial challenge. However, timing of this is basically impossible. Mr. White freely admitted that the one thing he had gotten most wrong throughout his career was the ability of central bankers to keep things going.
- Crucially, Mr. White did not offer any easy solution for the current predicament. There is simply no easy way out of the current situation. A comprehensive rethink of the setup of monetary policy (pure inflation-targeting has proved not to work) and of the global financial system is required, but will probably only happen after the next crisis (people, including policy makers, do not easily change their fundamental beliefs).
Implications for our strategy
Although Mr. White’s assessment was quite gloomy, and we do not necessarily agree with all of his statements, we do share his view that the world economy is not about to snap back to its pre-crisis equilibrium. The world economy has fundamentally changed through a combination of cyclical (the fallout of the crisis) and structural (population ageing, the debt overhang) issues. Moreover, there is indeed a long list of risks in the global economy, albeit that there are also positive risks (technology, EM).
All this creates a volatile climate for financial markets, which is exacerbated by the current stance of monetary policy. Dealing with this requires a flexible, highly active investment strategy that is prepared to move in and out markets in function of the opportunities within the low yield environment. These are key characteristics of our investment strategy.