The Pomo Letter: How to Resist the Zero Interest Rate Mind Virus
Investors have had life in “easy mode” for some time. That’s thanks largely to ZIRP, or zero interest rate policy. Interest rates are the cost to borrow money. That rate should be positive, to reflect that those lending are giving up purchasing power today.
Most of the past decade and the pandemic, however, saw interest rates at 5,000 year lows. That made it easy for anyone to borrow money with nearly no interest payments.
That fueled a more lavish lifestyle than would have happened at a higher level of interest rates. It also created more money overall in the financial system than there would have been.
Today, that trend is reversing. There are far higher costs to borrowing money. It’s high relative to the past decade, although it’s still on the low side historically.
With a higher cost of money, investors need to rethink the valuations of different assets. Early-stage companies with no revenues or commercially-viable product or services are worth far less to potential investors. So are fully-developed companies.
Chances are this trend will continue. That makes it a time for investors to be incredibly selective in what they’re buying. And to avoid high-growth stories right now, given the higher risk of failure without plentiful access to cheap capital.
While things are getting tougher out there, there are still plenty of chances to do so.