Summary

Recent market turmoil has revealed fundamental truths about risk management in an era of policy uncertainty. The unprecedented volatility triggered by POTUS’s tariff policies—followed by an abrupt 90-day pause—demonstrates how quickly market paradigms can shift when foundational trust is compromised. The first few months of 2025 offer valuable insights into RiskBridge’s risk-aware investment philosophy.

The Tariff Saga: A Case Study in Policy Volatility

The sudden implementation and partial reversal of sweeping tariffs created one of the most volatile trading periods on record. While risk assets initially rallied after the 90-day pause announcement, the damage was already evident: the 10-year US Treasury lost 3.6% in price, and US and European high-yield indices were down 2.8% and 1.7%, respectively. 

This volatility revealed three critical insights:

1. Policy Reversals Under Pressure: The administration’s willingness to change course when market pressure becomes too severe suggests a potential “floor” for risk assets. However, damage to corporate confidence has already been done, with many management teams now looking to diversify geographic exposure in ways that may prove suboptimal for growth and profitability.
2. Treasury Market Dysfunction: The unexpected sell-off in US Treasurys raises questions about market structure. While some attribute this to the unwinding of leveraged “basis trades,” a more worrying interpretation is the potential erosion of international confidence in US Treasurys as safe-haven assets.
3. Dollar Vulnerability: Since early March, the euro’s 9.5% appreciation against the dollar signals a potential reallocation away from US assets. While this doesn’t necessarily indicate a complete loss of safe-haven status, it strongly suggests investors reconsider geographic diversification benefits.

The Reflexivity Principle: Decision-Making Under Uncertainty

Market participants and policymakers face critical inflection points where decisions must be made under extreme uncertainty with significant consequences. These moments exemplify Reflexivity Theory – the bidirectional feedback loops between market perceptions and fundamental reality. Policy decisions affect market prices, influencing economic conditions and prompting further policy responses.

The tariff announcements altered investor perceptions, triggering market movements that forced policy reversal—a perfect illustration of reflexivity in action.

Understanding these feedback loops is paramount for investors. Early warning indicators often go unheeded until market movements become severe enough to force policy responses, creating opportunities for those who recognize the pattern early.

Systemic Imbalances  

America’s current situation embodies multiple systemic imbalances: debts, deficits, unfunded entitlements, income inequality, political dysfunction, and social division—all existing alongside historically high asset valuations and significant foreign ownership of US securities. This precarious combination has functioned only because investors maintained trust in the system.

When these foundations are compromised, interventions have followed a predictable pattern:

• Initial Intervention: The 90-day tariff suspension represents the first panicked intervention as equities, bonds, and the dollar plunged simultaneously.
• Testing Phase: Foreign investors selling into the intervention rally suggest skepticism about whether policy reversals can repair self-inflicted damage to system foundations.

Eventual Resolution: Markets ultimately find equilibrium through successful intervention or painful capitulation. The greater the system imbalance, the greater the intervention required.

Investment Implications

RiskBridge’s approach acknowledges several key potential investment implications: 

• Geographical Diversification: Europe may gain market share in asset allocations as investors seek alternatives to US exposure. Italy’s upgrade to BBB+ during market turmoil underscores this shift.
• Policy Volatility Premium: Markets now demand higher compensation for policy uncertainty, creating opportunities for those prepared to navigate this environment.
• Adaptive Positioning: Dynamically adjusting portfolio risk exposures allows flexibility during volatile periods.

Conclusion: The Path Forward

Market uncertainty, though painful, is often transitory. RiskBridge’s risk-aware approach enables investors to navigate these periods by:

• Recognizing possible early warning signals that others might ignore
• Understanding how systemic imbalances can affect intervention effectiveness
• Maintaining disciplined positioning that adapts to evolving conditions
• Prioritizing calm assessment over-reactive decision-making

We believe clear-eyed acceptance of reality, rather than resistance, offers the surest path through volatile times. RiskBridge’s approach is built on this fundamental understanding: markets eventually restore balance, but the path there requires patience and discipline. 

RiskBridge remains underweight equities, equal weight fixed income, overweight diversifiers, and holds 5-9% cash in client portfolios. Our views are subject to change at any time without advance notice.

DISCLOSURES:

The opinions / strategies above are for general information only, are not intended to provide specific advice or recommendations for any individual and may not reflect those of Lion Street Financial LLC. Diversification does not guarantee profit or protect against loss. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

Note: All market data referenced above is sourced from Bloomberg unless otherwise denoted.

Past performance is no guarantee of future results. Personnel of RiskBridge Advisors,LLC (“RiskBridge”) prepared the Risk Report. The views expressed herein do not constitute research, investment advice, or trade recommendations. RiskBridge may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof.

This Risk Report is distributed for informational purposes only. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed, and RiskBridge makes no representation as to its accuracy or completeness. Any opinions, recommendations, and assumptions included in this material are based upon current market conditions, reflect the judgment of RiskBridge as of the date indicated, and are subject to change without notice. You acknowledge and agree that RiskBridge is not obligated to provide any additional information or update such information when making the information available. Securities and/or indices highlighted or discussed in this communication are mentioned for illustrative purposes only and should not be construed as investment recommendations. All investments involve risk, including the loss of principal. Before implementing any strategy, consult with a qualified financial adviser and/or tax professional. Risk Report and this information are not intended to provide investment, tax, or legal advice, and this material is not to be relied upon in substitution for the exercise of independent judgment. This Risk Report is not to be reproduced, in whole or part, without the written consent of RiskBridge.