Crises may differ in their origin: be it a banking collapse, the pandemic, or now, the tariff shock, but they tend to **follow a familiar rhythm.** This rhythm is captured in the "Crisis Cycle" framework (see images from Mr. Damodaran), where a ***trigger event*** disrupts expectations, the market reacts, aftershocks ensue, and both short and long-term economic effects play out. The 2025 Tariff Crisis, sparked by the reintroduction of aggressive U.S. tariffs on April 2, has swiftly slotted into this pattern. But while the headlines may scream “trade war” what’s unfolding ***beneath the surface*** deserves attention on ***how risk is priced and repriced, in real time.*** ### What I'm thinking about #### 1. [[Equity Risk Premiums]] (ERP) Reveal Market Fear As uncertainty surged post-announcement, equity risk premiums (ERPs) which is the excess return investors demand for holding stocks over safer assets spiked from 4.54% to 5.08% between April 2 and April 4.Historically, ERP is the emotional barometer of a crisis. > During COVID, it ballooned from 4.83% to 7.75% in just over a month. The jump we’re seeing now, while not as extreme, suggests growing fear, especially as investors ***recalibrate earnings expectations and long-term growth*** in light of potential trade retaliation and supply chain costs. ### 2. Flight to Safety Pushes Treasury Rates Down In parallel, 10-year Treasury bond rates fell sharply from 4.27% to 4.01%, reflecting a classic “flight to safety”. Investors are rotating out of equities into safer government bonds, pushing ***bond prices up and yields down.*** The drop mirrors similar behavior seen during COVID and the 2008 financial crisis, where uncertainty triggered defensive positioning and risk aversion: further pressuring stock prices. ### 3. Experts React in Predictable Patterns As always, the noise from pundits falls into three familiar camps. - The “I told you so” crowd claims this was inevitable and validates their long-standing skepticism. - The “knee-jerk contrarians” insist now is a buying opportunity because markets always bounce back. - And the “I can’t decide” faction offers a cautious middle ground, advocating for watchful patience until uncertainty clears. Each camp speaks to a different psychological response to risk, but none has a crystal ball. Their narratives, while often persuasive, ***reflect partial truths.*** ### So What? For investors, the key is not to predict the outcome, but to understand the process. ERP spikes and falling T-bill rates aren’t just technical metrics: they’re emotional signals. They say: “we’re nervous, but we’re watching”. This is the moment to revalue portfolios, look for quality companies unjustly sold off, and set rational buy limits. It's also the time to tune out the noise and tune into process: monitoring ERP, adjusting for tariff-related aftershocks, and recognizing that uncertainty is not paralysis. It’s a signal to prepare. See: [[How Global Power is being Reshaped]] | [[China - Risky Bet or Unique Opportunity]] | [[Asset Pricing]] --- ### ![[Screenshot 2025-04-09 at 10.48.20.png]] ### ![[Screenshot 2025-04-09 at 10.48.58 1.png]] ![[Screenshot 2025-04-09 at 10.52.50.png]] ![[Screenshot 2025-04-09 at 10.52.08.png]]