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We all know the mantra: Past performance is not indicative of future results. The same is true for risk. With the ups and downs of the markets come the ups and downs in risk. Risk varies because of the ebb and flow of market concentration, leverage, and investor sentiment.
But we are entering a new risk paradigm. Risks we have not seen for decades are reappearing. Risks that have never occurred before are becoming dominant. Some will be bothersome and require monitoring for the short term. Others are long-term, structural, even one step removed from existential. If we are not treating these explicitly in our risk calculus, then we are getting it wrong.
So, here is the countdown:
7. Special purpose acquisition companies. This is a good warmup for this list. SPACs are not so much a risk on their own as a type for the risks that are becoming prominent, money sloshing around in one of the most undisciplined vehicles ever concocted.
6. Meme investing. What social networks have done for discourse they now get to do to the markets. Apps have turned investing into a multiplayer game. Their effect on the markets is amplified because so much professionally managed capital is muted, sitting on the sidelines because of our penchant for passive investments. Add to this the investments that have poked through from the virtual world: Cryptocurrency and NFTs. Steeped as I am in the old-world ways of how markets operate and value is determined, I see this as a tulipmania-level risk, but at this point one that is self-limiting.
5. Inflation. Remember President Gerald Ford’s WIN buttons—“whip inflation now”? That era was the last time inflation started to rear its head. Concern about inflation risk would have been met by eyerolls a couple of years ago. Now we have inflation coming from all sides: helicopter money, cost push, demand pull. Combine that with the vulnerability of the market, the high concentration and leverage, and this risk is multiplied.
4. Geopolitics. In part thanks to social media, we have a change in geopolitics toward Balkanization and populism. For the markets, the risk is a drop in efficiency, fragility of supply chains, and the atomization of markets. Globalization built up over the course of two generations. If it unravels at the same rate this is a risk that might unfold over the next decades.
3. Artificial Intelligence. AI is a wild card because at its core is innovation and creativity. Almost by definition…
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