December 28, 2021

5 Things That Might Come Back to Bite Us in 2022





Rick Bookstaber

Co-Founder and Head of Risk

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Five things that were not a big deal in 2021 but that might come back to bite us in 2022: Crypto, new retail, market technicals, inflation and low rates. 



We are finishing out the second year of living dangerously, but not in the markets. When things are going great, risk often is growing under the covers. Here are five things that were not a big deal in 2021 but that might come back to bite us in 2022.


1. Crypto. I have written repeatedly about the problems with cryptocurrency. It doesn’t rise to a risk for the markets because, first of all, it is a market that basically is on the order of the market capitalization of some individual stocks. Secondly, it is not a major investment of large institutions or the broader retail market. But it is a dramatization of the broader mindset in the markets. The canary in the coal mine, so to speak. If crypto is crazy, so are the markets — though less so.


2. New retail. What we saw with GameStop and AMC was more like watching a car crash in slow motion. But it is a manifestation of a trend — maybe even a paradigm shift in the markets. We are seeing the emergence of a new type of retail investing. What we are calling meme stocks is not really the point. It is that the new retail makes dinner-and-a-movie, bite-size trades for entertainment purposes, propelled by social media, which is to say on things other than the intersection of risk and expected returns founded on thoughtful analysis.


3.  Market technicals. Another thing I have been monitoring and writing about throughout the year: Vulnerability from leverage and concentration, both at or near all-time highs. So are valuations like P/E or price to sales. People find arguments for why out-of-this-world fundamentals actually are earth-bound. They did it with the internet stocks in 2000, too. In any case, even if you buy into the story du jour for fundamentals, where we sit now with the “technicals” suggests that if a boulder rolls down the hill, the ice is thick.


4. Inflation. I put inflation on this list as a potential risk even though it is already in the center of financial news because it is a new phenomenon to most anyone under 60. The last time it was an issue in the U.S. was in the 1970s. We have worked through recessions and market-driven crashes. But the systemic effects and the chronic risk fatigue of inflation will be new.


5. Low rates. This is nothing new, we have been in secular decline mode for years.  The risk comes from complacency. From not entertaining a scenario of higher rates — and I mean more than 50 basis points higher rates — and their implication for the low-risk bucket of a portfolio. At this point, most investors see low rates as the true state of nature. This is how the world is supposed to be. I’m not saying returning to the era of double-digit rates. But how about rates at 4% or 5%?


Many investors feel that Treasuries are a safe asset. You do get your principal back. But in the meantime, they can have substantial losses.


Rick Bookstaber has held chief risk officer roles at major institutions, most recently the pension and endowment of the University of California. He holds a Ph.D. from MIT.