What, us worry? The Fed’s got our backs. From Charles Hugh Smith at oftwominds.com:
The global risk premium has increased dramatically and is increasing in an unpredictable arc. This structural trend of higher risks will reprice everything.
The global economy is changing in fundamental ways, and this is repricing everything: the cost of money/credit, the price of assets, the value of hedges and insurance, and so on. The core driver in all this repricing is risk, for it’s the reappraisal of risk that forces the repricing of everything.
When risk is low and transparent, the risk premium is low and this is reflected in low, stable costs. When risk soars and is difficult to assess, the risk premium rises and this pushes costs higher.
In terms of asset valuations, higher risks reprice assets higher or lower based on the risk profile: what happens to the asset if liquidity dries up in a risk-driven crisis? If credit dries up, what happens to demand for the asset?
Risk tends to be self-reinforcing. If we look around and see everyone else is confident that risk is theoretical rather than real, we stop buying hedges against bad things happening, and we pay a premium for assets that do well in low-risk eras.
But if we see other people getting defensive–selling assets, paying down debt, reducing spending and risk-on investing–then we pull in our horns, too.
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