February 2018 Vol.9 Ed.2 Desmond Lachman on In conversation with Philippe Desfossés on pension financial sector risk Robert Stheeman funds’ sustainable investments Vicky Pryce on euro Jun Saito on inequality Dariush Yazdani on sovereign area banks in Japan funds’ investments in alternatives SEEKING STABILIT Risks from market bubbles BTN_02.18_001_cover.indd 1 01/02/2018 13:43 At Barings, we are evolving to meet the needs of our clients. With a global footprint and expertise across a broad range of public and private asset classes, we provide customized, innovative strategies and modern capital solutions. Learn more about how Barings is changing the definition of financial leadership. BARINGS.COM/ABOUT-US 17/452 Untitled-1.indd 1 31/01/2018 10:31 Contents February 2018. Vol.9 Ed.2 8 4 ABOUT OMFIF In conversation 5 LEADER 16 ROBERT STHEEMAN 6 REVIEW / AGENDA with David Marsh Cover: Financial stability Worldview 20 FED PERSONNEL CAROUSEL 8 MARKET EXCESSES HERALD IN FULL SWING CRISIS Darrell Delamaide Desmond Lachman 21 CONTAINING JAPANESE INEQUALITY 10 THREAT TO US INTEREST RATES Jun Saito Marsha Vande Berg 6 22 OPPORTUNITIES BEYOND 11 EMERGING MARKET GAINS SET MANUFACTURING TO FRAY 16 Otaviano Canuto Gary Kleiman 23 SERVICES ARE DRIVING DOWN INFLATION Ben Robinson 24 GOLD’S SOVEREIGN FUND APPEAL Dariush Yazdani 26 INVESTING PENSIONS FOR SUSTAINABLE GROWTH Philippe Desfossés 27 PENSION FUNDS DIVEST FROM 12 FOSSIL FUELS 27 Kat Usita 28 CRYPTOCURRENCY CRUSH Oliver Thew 29 BLOCKCHAIN BEYOND THE HYPE Bhavin Patel 12 GAPS IN GLOBAL FINANCIAL 30 Inquiry SAFETY NET 30 CHART OF THE MONTH: SWITZERLAND Danae Kyriakopoulou BANK LOANS TO GDP 14 SECURING THE EURO AREA’S 30 THE NUMBERS: DIGITAL DIGITS FUTURE 31 BOOK REVIEW: A TIRESOME Kalin Anev Janse THOUGHT EXPERIMENT 15 ECB’S EASY MONEY BOOSTS Julian Frazer Cover illustration: BUBBLE RISK 34 OMFIF ADVISERS NETWORK POLL Nick Lowndes Vicky Pryce Bitcoin market crash ‘inevitable’ OMFIF.ORG FEBRUARY 2018 BULLETIN 3 BTN_02.18_003_Contents copy tc.indd 3 02/02/2018 14:23 About OMFIF Black Wednesday, Brexit Dialogue on world finance and the making of Europe... and economic policy THE ca nea an nanca nn an neenen n an cena ann ecnc c an c neen a nnn ne e acce n SIX DAYS IN e cae ec ecane ea ae a c ne cena an een n an c enn n neae ae n eaen SEPTEMBER ce n nn an nae ce n a c an neen ee aca n ae anaeen caa ae an fi nanca enean ean cena an een n enn n ea an eae e e ‘GRIPPING PORTRAYAL’ ana eanceenancn ecane eeen c an ae ec an a ee Kenneth Clarke neann e ecn n an aee a ‘Required reading’ Norman Lamont Membership Membership offers insight through two complementary channels – Analysis ‘Dramatic account’ and Meetings – where members play a prominent role in shaping the Alistair Darling agenda. For more information about OMFIF membership, advertising or subscriptions contact eershio f.or Analysis OMFIF Analysis includes commentaries, charts, reports, summaries of meetings and The Bulletin. Contributors include in-house experts, advisers network members and representatives of member institutions and academic and offi cial odies. o suit an article for consideration contact the editorial team at analsiso f.or The 2017 Amazon bestseller by William Keegan, David Marsh Meetings and Richard Roberts OMFIF Meetins take lace ithin central anks and other offi cial institutions and are held under OMFIF Rules. A full list of past and With a foreword by forthcoming meetings is available on .o f.oreetins. For more Helmut Schlesinger information contact eetinso f.or OMFIF Advisers Network The 178-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: Available to monetary policy; political economy; capital markets; and industry and buy now at: investment. They support the work of OMFIF in a variety of ways, including omfi f.org/shop contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation. 4 BULLETIN FEBRUARY 2018 OMFIF.ORG BTN_02.18_004-005_About_Leader (copy tc).indd 4 01/02/2018 13:45 Leader Offi cial Monetary and Financial Institutions Forum Seeking stability 0 ron lace ondon 2 nited ingdom T 020 008 22 020 8 .omfi f.org arkets have entered 2018 facing contrasting realities between a Mstrengthening real economy and a buildu of fi nancial risk. onsensus BOARD forecasts see imroving groth for most economic regions. lobal markets David Marsh, Chairman including the T 100 and orld nde ended 201 on record highs. ut Jai Arya Pooma Kimis growth has largely been credit-fuelled, suggesting it may have been generated Edward Longhurst-Pierce by unstable fi nancial systems. lobal debt has reached levels never seen before Phil Middleton Mthuli Ncube at three times the sie of the global economy. John Nugée conomic history suggests this divergence is unlikely to continue. The John Plender uestion is hen and ho it ill sto and hat direction it ill take. ill Lauren Roberts Peter Wilkin stronger groth hel reduce fi nancial risks or ill asset market bubbles burst ADVISORY COUNCIL damaging the real economy? This is the question we have tried to answer in Meghnad Desai, Chairman this month’s ulletin. Johannes Witteveen, Honorary Chairman 2018 could be a pivotal year as central banks intensify scaling back monetary Louis de Montpellier, Deputy Chairman Frank Scheidig, Deputy Chairman suort. hether fi nancial markets ill rove resilient to these shifts as Songzuo Xiang, Deputy Chairman a chief concern among asset and reserve managers at OMFIF’s seminar on Hani Kablawi, Deputy Chairman Gary Smith, Deputy Chairman The reat ormalisation’ held in ondon at the end of anuary. f risks do Otaviano Canuto, Aslihan Gedik, materialise there may be no effective global fi nancial safety net to rotect Robert Johnson,William Keegan, countries that get into trouble. John Kornblum, Norman Lamont, Kingsley Moghalu, Fabrizio Saccomanni, ome markets are already seeing a correction. s anticiated by our dvisers Niels Thygesen, Ted Truman, etork the rice of bitcoin has droed substantially since the start of the Marsha Vande Berg, Ben Shenglin, Chair, OMFIF Economists Network year. oever there is still a lot to eect from the underlying blockchain technology as ’s digital eerts elain even rytoitties and EDITORIAL TEAM Danae Kyriakopoulou, Head of Research ogecoin. Simon Hadley, Production Manager This month marks the start of our annual analysis of asset allocation trends Julian Frazer, Subeditor as art of our lobal ublic nvestor ublication to be released in ay. e Jearelle Wolhuter, Subeditor Ben Robinson, Senior Economist investigate some of these in The ulletin such as the shift of ension funds Bhavin Patel, Economist away from fossil fuels and the need Kat Usita, Economist William Coningsby-Brown, Editorial Assistant for regulation to support a further Darrell Delamaide, US Editor move toards sustainable assets. MARKETING lobal ublic investors must not Chris Ostrowski, Head, Business Development forget warnings that environmental Sarah Butler, Deputy Head of Development risk could be the ultimate threat to James Fitzgerald, Senior Marketing Executive fi nancial stability for this generation. trictly no hotocoying is ermitted. t is illegal to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this ublication ithout the rior consent of the ublisher. hile every care is taken to rovide accurate information the publisher cannot accept liability for any errors or omissions. o resonsibility ill be acceted for any loss occurred by any individual due to acting or not acting as a result of any content in this ublication. n any secifi c matter reference should be made to an aroriate adviser. Danae Kyriakopoulou Company Number: 7032533. ISSN: 2398-4236 Chief Economist and Head of Research OMFIF.ORG FEBRUARY 2018 BULLETIN 5 BTN_02.18_004-005_About_Leader (copy tc).indd 5 01/02/2018 13:45 Review »23 January, London Doubts on German- French alliance PRODUCTIVITY and eort orders during the orld cometitiveness in ermany economic using. are sliing under a gradual enkel a member of the rocess of uroean uroean arliament had been nion harmonisation and a controversial backer of the far centralisation’ aimed at shoring right lternative for ermany u the euro and bridging the f no in the undestag economic ga ith rance and and on track to become the other members of the single formal erman oosition currency. under lans to reforge a grand That as the message from coalition beteen hancellor anslaf enkel former ngela erkel’s conservatives resident of the ederation of and the ocial emocratic erman ndustries in a series arty. enkel uit the f of meetings discussing ith some of the arty’s other his camaign to kee ritain s in rotest about its in the . enkel said the rightard shift. e no sits Above: Hans-Olaf Henkel at OMFIF’s offices in London. euro as holding back erman in the uroean arliament Inset: Henkel and Caroline Butler, OMFIF Adviser, at the London discussion. comanies’ efficiency since for an alliance of liberals and they ere rofiting unduly from conservative reformers. »30 January, London »13 December, Accra sset and isk anagement ractical tool for financial markets convened a grou of economic eerts and asset managers ’ eternal osition has imroved thanks to for a oneday seminar to summarise economic and financial macroeconomic reforms according to seakers at the launch develoments and discuss the outlook for ublic sector investment of ’s research for the arclays frica rou inancial management in uroe. ttendees discussed the imact of arkets nde. inancing costs are strongly related to countries’ unconventional monetary olicies and the ressure on central inde score making this an imortant ractical guide for frican banks’ balance sheets.