Everything is Being Repriced, Starting with Risk

June 12, 2023

by Charles Hugh Smith Of Two Minds

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?