As central banks are being forced to raise interest rates quicker than they would like due to persistently high inflation, markets are clearly showing their discontent, especially those segments most exposed such as long-duration stocks and bonds.
In a nutshell, we’ve been spoiled: It has been far too easy to make money for far too long, and mother nature has a funny way of upending things when that happens and restoring a state of balance — or as the pundits call it, mean reverting. Take a look at the Nasdaq run from 1990 to its 2000 implosion, the oil and gas and commodities market from 2000 through to its 2014 collapse and now back to the tech sector from 2008 until today. Lather, rinse, repeat.
A decade of accommodative monetary policy has essentially resulted in investors becoming addicts looking for their next fix from central bankers who have become accustomed to quickly lowering interest rates at the first sign of trouble, but who refuse to increase them when conditions normalize.
Interest rates have been allowed to test record lows, even pushing negative in some cases, which was fine as long as inflation was below its so-called benchmark of two per cent.
The central banks appeared to have a magical elixir that could fuel economic growth without the wage increases that usually accompany accommodative policy thanks to globalization and a steady flow of cheaper goods from Asia to Amazon to your front door. Overnight, tech companies became oligopolies promising to set up infrastructure in whichever region offered the best tax incentives and grants. Asset prices, especially real estate here in Canada, skyrocketed as speculators took advantage of nearly free money.
Then COVID-19 struck and everything changed. Supply chains became disrupted as the opening and shutting of economies disrupted trade between countries. And just when things were starting to improve, Russia invaded Ukraine, resulting in sanctions and the disruption of food and energy supplies to Europe, Africa and other regions. All of this has left many to wonder if it is now worth domesticating production and paying a higher price for goods in return for greater stability in supply.
Then you have unemployed university students, who are unable to find work in their desired fields and have no choice but to turn to the areas where there are a record number of job openings such as at Starbucks and Amazon.