Following up on last week's video in which we pointed out that the US equity risk premium is at 23-year lows... It's the same, pretty much, in all developed nations. ERPs are higher when you move from the core of development, say Germany, to the periphery, say Italy. And by extension, ERPs are higher in emerging markets, even a big one like China. If your game is to get paid for risk, be in emerging markets. If your game is to get paid for growth, be in developed markets.
What you’re not hearing about the narrowest equity risk premium in 23 years
Friday, May 23, 2025
The Moody's downgrade is an example of Trump-induced uncertainty that markets are smart enough to ignore.
Update to Strategic View
The US equity risk premium has fallen to negative 36 bp, the lowest level since April 2002. On the face of it this means investors are not requiring compensation for bearing equity risk instead of staying in riskless bonds. Indeed, it seems investors are paying to take risk. But the ERP averaged about this level from 1982 to 1999, and that was the best-performing 17 years in the history of the stock market. It was a time of technology revolutions, tax cuts and relief from hyper-inflation -- just like now. Yet uncertainty is said to be intolerably high. A recent example is the Moody's downgrade of US debt. Treasury yields are no higher than they were a year ago, and Moody's is tainted by its failures in the GFC and its overt politicization. The downgrade was timed at the moment of greatest difficulty for the Big Beautiful Bill in the House. Moody's sees tax cuts as fiscally reckless, but not spending hikes. In this case the tax cuts offset tax hikes implied by the new tariffs. The trick is to not be distracted by Trump's crusade to attract attention, and the complicity of the media in order to sell your attention to advertisers.