Is There a New US Risk Premium?

The US equity risk premium has expanded somewhat as stocks have fallen and long-term bond yields have risen. But it is still very narrow, and ERPs have risen everywhere else in the world, too. Last week’s rise in bond yields and fall in the US dollar began with Miran’s first public speech since Senate approval as White House CEA chair. We tried to walk back the specifics of his radical November manifesto, but the speech still echoes its major theme: burden sharing by other nations, to compensate the US for providing the world’s reserve currency and defense umbrella. Trump said Friday he is going to fold defense spending into trade negotiations. One particularly alarming part of the speech hints at taxation of foreign holdings of Treasury securities to incentive their sale, and the subsequent purchase of US goods and services. This could trigger the demise of the US dollar as world’s reserve currency, which is Miran’s ultimate objective. For all these risks, we don’t have the evidence to make a recession call at this time. We are on high alert.