This week, we had the privilege of listening to a Q&A session with Lord Mervyn King. Lord King is obviously a highly-intelligent and enormously experienced global economist – having governed the Bank of England for the ten-year period ending in July 2013. For readers who are interested, we share some of Lord King’s views below.
Of course, King had just returned from the IMF’s Annual Meeting in Washington DC. His feedback was that everyone is pretty optimistic about global growth. King’s own personal view was to be “cautiously” optimistic, with more of the focus on the “cautious” part. He noted that US participants were concerned over internal political risks. Ruling by Executive Order is less optimal than Congress led progression. With respect to US tax reform, King did note a high degree of general interest on the subject from legislators.
King did acknowledge the acceleration of global growth – and its uniform, broad-based nature. This uniformity increases the probability that inflation will accelerate, as most central bankers expect but have not yet seen with any great strength.
On protectionism, Lord King was not concerned. He noted that this subject has been a concern for the last 25 years and yet we had not seen much in the way of serious protectionism. This is a powerful and interesting argument since, as we know from our work on Bayes Theorem (here), the “base rate” probability of events typically dominate.
King was much more concerned about immigration. In his view, politicians do not have an answer for how to deal with the economic consequences of immigration; and worse, do not want to talk about it.
And on North Korea: we have already passed the point of no return on the state gaining access to a nuclear weapon, King believes. His concern is that the world is now on path to nuclear non-proliferation.
Finally, on Brexit, Lord King was sceptical of the proposed “transition” plan that is being talked about by the UK government. Why? A transition plan only makes sense if you know to what scenario you are transitioning. But this is completely unclear. And the ultimate end state of Brexit is not just up to the Brits, it is, in large part, a function of the Europeans. And this issue is not much of a priority for the Europeans at the moment. The key risk for investors, in King’s view, is the threat of a Labour victory at the next UK election – and the subsequent economic policies that might ensue.
Food for thought.
Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.