2022- Risk and interest rates are back!
2022 was the year where a decade+ era ,of low interest rates, came to an end.
The question is would it come back or not?
For example, if we look at Japan, they have a Zero interest rates policy for decades and still maintain a relatively stable economy. We will not get into the unique characteristics, why Japan’s BOJ acts that way, but it means that its possible.
The major effect of that era, that most central banks did not take into consideration, was the change of attitude of people towards risk, when they got custom to Zero interest rates.
Risk comes in all forms and shapes and not just reflected in interest rates, but during the past decade, the risk calculation by investors, in general, became loose in all aspects. Many types of risks were ignored, which brought to much riskier investment decisions.
One could expect that with the significant comeback of the interest rates, in 2022, we would see a collapse in value across all markets, as a result, but it didn’t happen.
There was a collapse, but not as could be expected to happen, as a consequence of the loose risk decisions over the past decade.
Part of it is because of the growing market share of technology companies. If, two decades ago, the technology sector accounted for about 10%-15% of the global stock market, now it is accounted for double that share, about 25%-30%. Actually, its probably much higher as major tech companies prefer to stay private.
It became a significant element of the global market and most important, this sector, in principle, has a different attitude towards risk, which is not so directly related to interest rates.
Looking ahead, we expect to see a continuous growth of this sector, which means that we could expect a different approach towards risk, with interest rates play a less important role.
Interest rates are still the main monetary tool of central banks, but with the advancement of technology, it might lose its significant effect on prices and inflation, depends on the growing effect of technology on all markets aspects.
With some imagination, this scenario could resemble the situation of Japan’s, in the 1980s, so it might be possible to get back to the Zero interest rates ecosystem of the past decade.
This is still to vague to predict, but one thing is for sure: risk towards technology is different and technology’s role in the markets is growing, so new risk paradigms are required and soon.