How Should Investors Think about Tariffs in 2025?

Economic

Summary:

In 2025, as tariffs fluctuate in the headlines, market opportunities may arise when tariff implementation and consequences are mispriced.

To conclude the year, tariffs have once again become a focal point, with Google searches for the term spiking in November and December. The Federal Reserve is also paying close attention, as Chair Powell mentioned the potential inflationary effects of tariffs as a reason some FOMC members might have raised their inflation forecasts for the coming year and increased the perceived upside risks to prices. The lessons from the "Trade War 1.0" of 2018 and 2019 remain relevant. There is much more tariff talk than tariff action, which does not mean that markets don’t react negatively in the short-term, but does mean that investors need to separate the signal from the noise. In 2025, as tariffs fluctuate in the headlines, market opportunities may arise when tariff implementation and consequences are mispriced.

The "Trade War" of 2018 and 2019 serves as a template for a potential "Trade War 2.0," offering four key lessons:

Tariff talk noise rises but eventually subsides: We may see a repeat of escalating tariff threats, but the likelihood of most being implemented is low. In 2018-2019, many tariffs were threatened on major trading partners, with estimates suggesting the average tariff rate on all U.S. imports could rise from 1.4% to over 11% if all were implemented. Some tariffs were enacted (on washing machines, solar panels, steel, aluminum and Chinese goods), raising the average tariff rate by 2020 but only to 2.8%. Negotiations around immigration and defense spending granted many countries a reprieve. Investors should moderate their fears of significant tariff increases, currently projected to reach 17.7% by the Tax Foundation (assuming 20% universal tariffs and 60% tariffs on all Chinese goods).

Even tariff threats can rock markets – in the short-term: Likely to see a repeat of the “stronger dollar for longer” move. In 2018, the U.S. dollar index appreciated a maximum 10% around tariff announcement windows and almost 5% again in 2019. Given the forward looking nature of markets, global equities (including the U.S.) had a negative year in 2018, with multiples contracting at least 20% that year.

There is an important signal from the Trade War: Despite limited surface changes, there was a significant shift in tariffs on Chinese imports: from 2.7% in 2017 to 9.8% in 2020. Supply chains have been dramatically restructured since the first Trade War, with the percentage of total U.S. imports from China dropping from 21% in 2017 to 14% today, while imports from Mexico and Southeast Asia have surged. Despite the U.S.-China Phase I trade deal of 2020, China has shifted its imports, with U.S. imports decreasing in representation and those of agriculture-producing Emerging Markets surging. Tariffs on Chinese goods are likely to increase further, turbocharging this reorganization of supply chains.

Investment opportunities arise amidst tariff-related volatility: After a challenging 2018, global equities rebounded impressively in 2019, with the U.S. +32%, Europe +26% and emerging markets +19%, led by multiple expansion. As reality proves less harsh than feared, short-term sell-offs tend to be short-lived. This includes international markets that may face tariff threats early next year but could eventually see a reprieve. This includes Europe and Mexico, which were under fire previously but saw no tariff changes and Southeast Asia, a significant beneficiary of "friendshoring." While fears about tariffs boosting U.S. inflation may exert upward pressure on yields, the scale and scope of tariffs are unlikely to alter the U.S. inflation normalization theme.

Some tariff talk is noise, some is important signal

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

FOREX.com

Economic

Central Bank

Major central banks may further adjust monetary policy in 2025 as the European Central Bank (ECB) insists that ‘the disinflation process is well on track,’ but the Federal Reserve may change gears at a slower pace as Chairman Jerome Powell and Co. forecast less rate-cuts for next year.

North America

Federal Reserve

The Federal Open Market Committee (FOMC) acknowledged that ‘our policy stance is now significantly less restrictive’ after lowering US interest rates by another 25bp at its last meeting for 2024, with the central bank going onto say that ‘we can therefore be more cautious as we consider further adjustments to our policy rate.’

It seems as though the FOMC will say on track to further unwind its restrictive policy in 2025, but the committee may continue to adjust its forward guidance as the update to the Summary of Economic Projections (SEP) shows that ‘the median participant projects that the appropriate level of the federal funds rate will be 3.9% at the end of next year’ compared to the 3.4% forecast at the September meeting.

In turn, speculation surrounding Fed policy may continue to sway foreign exchange markets as Chairman Powell and Co. insist that ‘monetary policy will adjust in order to best promote our maximum employment and price stability goals,’ and the US Dollar may outperform against its major counterparts in 2025 should the FOMC show a greater willingness to further combat inflation.

Europe

European Central Bank

The European Central Bank (ECB) lowered Euro Area interest rates by 25bp in December, and the Governing Council may continue to shift gears in 2025 as ‘most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis.’

It seems as though the ECB will stick to its rate-cutting cycle as the ‘staff now expect a slower economic recovery than in the September projections,’ and the Governing Council may unwind its restrictive policy at a faster pace as President Christine Lagarde reveals that ‘there were some discussions, with some proposals to consider possibly 50 basis points.’

As a result, the Governing Council may sound increasingly dovish in 2025 as ‘underlying inflation is overall developing in line with a sustained return of inflation to target,’ and it remains to be seen if the ECB will reach its neutral rate ahead of its US counterpart amid the upward revision in the Fed’s interest rate dot-plot.

Keep in mind, EUR/USD continues to hold below pre-US election rates after registering a fresh yearly low (1.0333) in November, and a weekly close below the 1.0370 (38.2% Fibonacci extension) to 1.0410 (50% Fibonacci retracement) region may push the exchange rate towards 1.0200 (61.8% Fibonacci retracement).

Next area of interest comes in around 0.9910 (78.6% Fibonacci retracement) to 0.9950 (50% Fibonacci extension), but EUR/USD may track the flattening slope in the 50-Week SMA (1.0824) if it continues to hold above 1.0200 (61.8% Fibonacci retracement).

Need a weekly close above 1.0610 (38.2% Fibonacci retracement) to bring the 1.0870 (23.6% Fibonacci retracement) to 1.0940 (50% Fibonacci retracement) zone on the radar, with the next region of interest coming in around 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension).

Asia/Pacific

Bank of Japan

Meanwhile, the Bank of Japan (BoJ) voted 8 to 1 to keep the benchmark interest rate around 0.25% in December, and the central bank may retain the current policy over the coming months as ‘underlying CPI inflation is expected to increase gradually.’

As a result, the Japanese Yen may continue to service as a funding-currency as the BoJ remains reluctant to pursue a rate-hike cycle, but Governor Kazuo Ueda and Co. may come under pressure to implement higher interest rates as ‘Japan's economy is likely to keep growing at a pace above its potential growth rate.’

With that said, the carry-trade may further unwind in 2025 should the BoJ adopt a hawkish guidance, and the Japanese Yen may face increases volatility over the coming months as major central banks continue to change gears.

USD/JPY trades back above pre-US election rates as it pushes above the November high (156.75), with a breach above 160.40 (1990 high) opening up the 2024 high (161.95).

Next region of interest comes in around the December 1986 high (163.95), but lack of momentum to close above 160.40 (1990 high) on a weekly basis may keep USD/JPY within the 2024 range.

Need a weekly close below 156.50 (78.6% Fibonacci extension) to bring 153.80 (23.6% Fibonacci retracement) on the radar, with the next area of interest coming in around 148.70 (38.2% Fibonacci retracement) to 150.30 (61.8% Fibonacci extension).

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Goldman Sachs

Economic

The pace of mergers and acquisitions around the world gained momentum this year, and there are signs that deal-making will accelerate in 2025, say Stephan Feldgoise and Mark Sorrell, the co-heads of the global mergers and acquisitions business in Goldman Sachs Global Banking & Markets.

There’s been a “gradual crescendo of factors” behind the rise in acquisitions, Feldgoise says in an episode of Goldman Sachs Exchanges. Those factors include: a decline in borrowing costs, a drive from private equity sponsors to return capital to their limited partner (LP) investors, and corporate repositioning in the form of strategic dealmaking. While the uncertainty from a rush of major elections around the world sparked market volatility, deal activity increased about 10% this year and may rise by a similar percentage in 2025, he says.

The conditions for private equity activity are becoming more solid. Historically, those deals have comprised almost 40% of the market for acquisitions, but recently it’s been closer to 20-30%, Feldgoise says. Part of the reason for the decline is that it’s been more challenging to sell and monetize business and return to the market. IPOs have been more constrained, but that may be changing.

Global Deal-making is Expected to Gain Momentum in 2025_1

“For sponsors to feel the confidence to put their assets into the market — the dual track, as we call it, which is equally pursuing an IPO at the same time as M&A — is a very powerful tool,” he says.

Interest rates have declined, but there’s been some “psychological adjustment” in markets because rates had been so low following the financial crisis, Feldgoise says. Private equity sponsors benefited from rock-bottom rates and have had to adjust their models as valuations conform to a different paradigm.

“The world got used to free money for well over a decade,” he says. “If you look at the level of absolute rates now, it's still relatively low if you look over 30 years or 40 years or 50 years.”

Will private equity deals increase in 2025?

At the same time, private equity firms are deploying capital, after a decline, at a rate closer to historical average, Sorrell says.

“There's a good number of firms saying their rate of deployment is on plan or even slightly ahead of plan versus where they were at the beginning of the year,” he says. A substantial amount of that capital is going into deals to take public companies private. Private equity exits, meanwhile, are well below historical levels.

“That is the place, I think, in 2025 where we're watching very closely as valuation gaps close,” Sorrell says. It will be important to monitor the state of the IPO market and rate of exit transactions, which he says will be key to unlocking more deal activity.

“The big difference from this time last year is how quickly the rate of deployment has improved both in traditional private equity and infrastructure,” he says. “Digital infrastructure is a great example where there's been an incredibly active deployment of capital around the world.”

Feldgoise says they spend a lot of time in boardrooms talking about how generative AI will ripple through the economy. It’s a topic that touches on everything from semiconductors to real estate and to the additional power needed for data centers. While it’s not likely to be a major part of the market for acquisitions, the environment may change as AI matures and it becomes clearer how to value these companies.

“It may evolve into more of an M&A market once the companies and the winners become clearer,” he says.

How will the US election impact M&A?

Though election uncertainty caused an increase in market volatility, corporate executives tend to take a very long perspective. “Boards think in decades,” Feldgoise says. While an administration’s policies and the economic cycle have an impact in the shorter run, they tend to have less of an impact in overall, long-term strategic activity.

“Businesses are generational, multi-decade, and people are thinking that way," he adds. "That's why we remain bullish on M&A regardless of geopolitical or regulatory or electoral situations.”

European mergers and acquisitions increased sharply in 2024 after a muted year for deals in 2023 amid slow economic growth, Sorrell says. “Within the space of a few months, we've gone to a very much more normal rate of dealmaking in Europe,” he says. He points out that there has been a wave of transactions among financial companies and an increase in deals taking public companies private.

Australian dealmaking has rebounded in a similar fashion to that of Europe, Sorrell says. “The other bright spots in Asia are India, which remains very, very strategic for many of our clients, both corporate and private equity, and Japan as well,” he says.

Transactions in China have yet to accelerate amid slower economic growth. “With that exception, my own view is that Asia is trending in the direction Europe has been trending,” he says. “It's just running a few months behind in terms of the general trajectory.”

Feldgoise says the US, meanwhile, has benefited from perceived stability, energy supply, and onshoring of manufacturing and investment from the government in certain sectors. He says there’s been an “incredible focus” from companies looking to tap into the growth in the US.

Healthcare M&A has growing momentum

Acquisitions among healthcare companies grew last year, and Feldgoise says that momentum will likely continue in 2025. Technology and consumer firms have also been among the sectors looking for growth through dealmaking. Large energy companies have been acquiring inventory in a major, multi-year wave of consolidation.

“Scale is increasingly more important,” he says. “Scale across geography for diversification of supply chains and manufacturing. Scale across products for being able to understand where growth might be and being able to capture those market opportunities. Scale for financing and balance sheet heft in stormy financing or capital markets.”

The main question now is the rate of dealmaking growth in 2025, Sorrell says. “The next 12 months will be a better environment for, particularly, large deal making activity than the previous 12 months, because of [the] risk appetite, financing environment, regulatory conditions, geopolitical conditions,” he says.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Glendon

Economic

CRE8 Enterprise Ltd., a prominent player in the foodservice and hospitality sector, is preparing for its initial public offering (IPO) with a goal to raise $10.5 million. Known for its innovative approach to providing high-quality food and beverage services, the company’s IPO represents a strategic move to expand its operations and enhance its market position.

With plans to list on the NASDAQ under the symbol CRE, this IPO has garnered significant attention from investors eager to participate in the growth of a company that blends operational excellence with a commitment to sustainability.

A Unique Player in the Foodservice Industry

Founded in 2018 and based in Hong Kong, CRE8 Enterprise Ltd. specializes in delivering comprehensive foodservice management and operations solutions. The company serves a diverse client base across Asia, focusing on efficient service delivery, culinary innovation, and customer satisfaction.

CRE8 leverages its expertise to offer turnkey solutions, including menu development, supply chain management, and staff training. This adaptability positions the company as a leader in a competitive and ever-evolving industry.

The IPO Details

CRE8 Enterprise Ltd. aims to raise $10.5 million by offering 2.1 million ordinary shares priced at $5 each. This funding will be instrumental in fueling the company’s expansion plans, which include entering new markets and enhancing its technology-driven operations.

The proceeds from the IPO are earmarked for:

Scaling its foodservice operations across Asia and potentially North America.Investing in state-of-the-art equipment and technology to streamline operations.Strengthening its workforce and training programs to ensure service excellence.

The company has selected Network 1 Financial Securities as the bookrunner for the offering, reflecting its intent to partner with established players to ensure a successful market debut.

Market Opportunity and Growth Potential

The foodservice and hospitality industry is projected to experience sustained growth, driven by increased demand for diverse culinary experiences, the rise of delivery services, and technological advancements in food preparation and logistics.

CRE8 Enterprise Ltd. is well-positioned to capitalize on these trends with its proven track record and ability to adapt to market demands. Its focus on offering tailored solutions to clients, coupled with a commitment to sustainability and innovation, gives it a competitive edge.

The company’s strategic decision to list on the NASDAQ also signals its ambition to attract a global investor base and establish itself as a leader in the international foodservice market.

Challenges and Strategies

While the IPO presents exciting opportunities, CRE8 Enterprise Ltd. will face challenges such as:

Adapting to different regulatory environments in new markets.Navigating supply chain disruptions and rising operational costs.Maintaining service quality while scaling rapidly.

To address these, the company plans to leverage its established relationships with suppliers, invest in staff training, and adopt advanced technologies to optimize its operations.

Why Investors Should Watch CRE8

CRE8 Enterprise Ltd. offers a compelling investment opportunity for those seeking exposure to the growing foodservice and hospitality sector. The company’s innovative approach, robust growth strategy, and clear focus on sustainability position it as a promising candidate for long-term success.

With its IPO, CRE8 not only seeks to raise capital but also to build its reputation as a global foodservice leader. Investors who recognize the potential of this sector and the strength of CRE8’s business model may find this offering particularly attractive.

Conclusion

CRE8 Enterprise Ltd.’s upcoming IPO marks a significant milestone for the company and the industry. With a solid foundation, innovative practices, and a clear growth trajectory, CRE8 is well-positioned to make an impact on the global foodservice market. As the company prepares to debut on the NASDAQ, investors and industry stakeholders alike will be watching closely to see how this dynamic player evolves in the coming years.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Glendon

Economic

Diginex Ltd. (DGX) is preparing for a significant leap with its upcoming Initial Public Offering (IPO), offering investors the opportunity to gain exposure to the rapidly evolving world of blockchain and digital transformation. With a strong focus on providing blockchain-based solutions across a variety of sectors, Diginex is positioning itself as a leader in the space.

The Core Focus of Diginex

Diginex Ltd. is uniquely focused on developing blockchain solutions that transcend the realm of cryptocurrency. While many companies have capitalized on the rise of digital currencies, Diginex seeks to bring the transformative power of blockchain to more conventional industries. Their goal is to enhance transparency, reduce inefficiencies, and secure data across various sectors such as finance, supply chain, and healthcare.

Diginex’s flagship solutions, like asset tokenization and data privacy, are designed to tackle some of the most pressing challenges of today’s businesses. By ensuring data integrity and reducing fraud, Diginex empowers organizations to operate in a more efficient and secure environment, making blockchain an indispensable tool for the modern enterprise.

The Market Opportunity

The market for blockchain technology is expanding rapidly, with businesses increasingly turning to it for solutions to enhance operational efficiency, cut costs, and build trust. Diginex aims to be at the forefront of this transformation, leveraging its expertise to cater to industries poised for digital disruption. Blockchain’s potential to improve transparency, streamline processes, and ensure accountability is undeniable, and Diginex is capitalizing on this growing demand.

The IPO provides an entry point for investors seeking to capitalize on blockchain's future role in industries such as banking, logistics, healthcare, and government services. As the digital economy continues to expand, the need for robust and secure blockchain applications will only intensify. Diginex’s diversified offerings, including blockchain infrastructure, compliance solutions, and digital asset management, make it a company with significant growth potential.

Details of the IPO

Diginex’s IPO will trade under the ticker symbol DGX. Through the offering, the company aims to raise substantial capital to further expand its operations and invest in new technologies. Proceeds will be used to scale its blockchain solutions and strengthen its platform to meet growing global demand. The IPO will also help increase visibility in the competitive blockchain space, positioning Diginex as a leading player in the digital transformation movement.

The IPO itself is expected to create excitement in the market, given Diginex's innovative business model and experienced leadership. Investors will have the opportunity to participate in the company’s journey as it seeks to bridge the gap between the complex world of blockchain and real-world business applications.

Management’s Role in Driving Success

At the helm of Diginex is a management team with deep expertise in both technology and global business operations. Their background in scaling businesses in the digital and blockchain space provides them with a competitive edge. The team’s strategic vision and experience in navigating the challenges of deploying blockchain solutions in diverse industries make them well-equipped to drive Diginex’s growth.

The Risks of Investing in Blockchain

While Diginex offers exciting prospects, blockchain technology still faces several challenges, including regulatory hurdles, public skepticism, and competitive pressures. As blockchain adoption continues to grow, companies in this space will need to manage these risks effectively to maintain their position in the market. However, Diginex’s proactive approach to regulatory compliance and its emphasis on practical, scalable solutions help mitigate some of these concerns.

Looking Ahead

For investors, the Diginex IPO presents an exciting opportunity to enter the rapidly expanding world of blockchain technology. With its strong product offerings, strategic focus on business applications, and experienced management team, Diginex is well-positioned to make a significant impact in the digital transformation space.

By tapping into blockchain’s potential to revolutionize industries, Diginex is poised for long-term growth, making its IPO an attractive prospect for investors looking to capitalize on one of the most transformative technologies of our time.

Conclusion

The Diginex Ltd. (DGX) IPO is a milestone for the company and for investors looking to get in on the ground floor of a blockchain-driven future. With its innovative approach and market-ready solutions, Diginex is set to transform the way industries operate, offering investors an exciting opportunity in the rapidly expanding blockchain space.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Glendon

Economic

Dogecoin (DOGE), the cryptocurrency born as a meme, has gained immense popularity thanks to its active community and utility in tipping and microtransactions. Whether you're new to crypto or an enthusiast looking to grow your holdings, there are several ways to earn Dogecoin without making an upfront investment. Here’s a breakdown of practical methods to earn free DOGE.

1. Crypto Faucets: The Easiest Way to Start

Crypto faucets are websites or apps that reward users with small amounts of cryptocurrency for completing simple tasks like solving captchas, watching ads, or playing games. Dogecoin faucets are widely available and a great way to start earning DOGE.

Pros:

Beginner-friendly, no upfront costs.

Cons:

Rewards are minimal, requiring time and patience.

Pro Tip: Combine multiple faucets to maximize your earnings.

2. Participate in Airdrops

Cryptocurrency airdrops are promotional events where tokens or coins are distributed for free. Many projects use Dogecoin for airdrops to build their communities.

How to Find Airdrops:

Follow Dogecoin communities on platforms like Twitter and Reddit.Use dedicated websites like AirdropAlert and Airdrops.io.

Tasks May Include:

Joining Telegram groups.Retweeting posts.Signing up for newsletters.

3. Staking and Interest Platforms

Some platforms offer staking or interest-based rewards for holding Dogecoin. While traditional staking isn’t applicable to DOGE (as it’s a Proof-of-Work coin), lending your DOGE on certain platforms can yield passive income.

Important Note: Ensure the platform is reputable to avoid scams.

4. Dogecoin Mining

If you have the hardware and technical know-how, mining is a way to earn DOGE by validating transactions on its blockchain. Mining involves solving complex mathematical problems, but mining pools make it accessible for smaller players.

Requirements:

Mining hardware (ASICs are ideal).Mining software (e.g., CGMiner).

Alternative: Join a mining pool like Prohashing or Aikapool to combine resources and share rewards.

5. Freelancing for Dogecoin

Offer your skills and services to earn Dogecoin as payment. The Dogecoin community is known for its generosity, making it a viable avenue for earning.

Where to Start:

Websites like DogePayMe and Taskonomics.Social media platforms and forums with Dogecoin enthusiasts.

6. Referral Programs

Many crypto platforms offer referral programs where you can earn Dogecoin by inviting others to join.

Steps to Get Started:

Popular platforms like Binance and OKX often run referral programs.

7. Tipping and Microtransactions

The Dogecoin community frequently tips members for quality content, memes, or helpful comments on platforms like Reddit and Twitter.

How to Get Tipped:

Engage with Dogecoin-focused communities. Create or share valuable content.

8. Play-to-Earn Games and Apps

Some games reward users with Dogecoin for playing or completing tasks. Look for crypto-centric games or apps in the Google Play or Apple App Store.

Caution: Always research the legitimacy of apps before downloading.

Best Practices to Maximize Free DOGE Earnings

Diversify Your Efforts:

Use multiple methods simultaneously to increase your earnings.

Engage in the Community:

The Dogecoin community is active and supportive. Building connections can lead to tips and opportunities.

Avoid Scams:

Be cautious of platforms promising unrealistically high rewards. Always do your due diligence.

Final Thoughts

Earning free Dogecoin is not only a fun way to get involved in the crypto space but also a stepping stone to understanding blockchain technology. While the rewards might seem small initially, persistence and strategic efforts can help you accumulate DOGE over time.

Start small, stay consistent, and join the Dogecoin community to make the most of your free DOGE journey!

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

CEPR

Economic

In times of extreme stress, banks instinctively prioritise self-preservation to weather the storm. Whereas this is understandable from their perspective, it leads to perhaps the most significant harm caused by financial crises.

Milton Friedman's controversial criterion states that a business's objective is to make money for its owners (see Kotz 2022). When applied by a bank CEO, this principle manifests in two distinct behavioural regimes.

Most of the time – perhaps 999 days in a thousand – banks focus on maximising profit through regular borrowing and lending activities.

However, on that rare one day in a thousand, when a major upheaval strikes and a crisis unfolds, short-term profit takes a backseat to survival. Banks halt the provision of liquidity and start hoarding it, triggering runs, fire sales, and a denial of credit to the real economy. This is usually the main economic damage of crises. It is difficult to predict or prevent – and impossible to regulate – because it arises from self-preservation.

These two vastly different behavioural regimes frustrate investors and regulators, not least because statistical models based on normal times fail to capture them.

The one-in-a-thousand-day problem

The buildup to a crisis and the recovery afterwards are prolonged processes that can span years or even decades. But the actual crisis erupts suddenly, catching almost everyone off guard. It is as if we go to bed one night and wake up the next morning to find ourselves in a crisis.

Fortunately, crises are rare. According to Laeven and Valencia's (2018) financial crises database, the typical OECD country experiences a systemic crisis once every 43 years. Given that the high-intensity phase of a crisis is relatively short, it is reasonable to say that a country is not in an acute crisis 999 out of a thousand days, but in crisis on that one remaining day.

The intense phase of a crisis is driven by banks striving to survive. Profit becomes irrelevant because they are willing to incur significant losses if it means securing their future. Critical decisions are made for entirely different reasons than usual – and often not by the usual people.

Survival hinges on having as much liquidity as possible. Banks minimise liquidity outflows and convert their liquidity into the safest assets available – historically gold; today, central bank reserves. When investors ‘went on strike’ in August 2007, they were motivated by survival.

This drive for self-preservation leads to fire sales and runs. Entities dependent on ample liquidity face hardship or even collapse, while the real economy suffers as credit lines are cancelled and banks refuse to lend. These outcomes constitute the main damage from crises and explain why central banks inject liquidity during such times.

Collectively, this indicates two distinct states: the usual 999 days when banks maximise profit, and that critical last day when they focus on survival. Roy's (1952) criterion aptly describes this behaviour – maximising profit while ensuring they do not go bankrupt. Thus, these two behavioural regimes are a direct consequence of aiming to maximise shareholder value.

Speed is essential

The shift from pursuing short-term profits to survival happens almost instantaneously. Once a bank decides it needs to weather a storm, acting quickly is crucial. The first bank to withdraw liquidity from the system stands the best chance of survival. Those who hesitate will suffer, and even fail.

This was evident when the Hong Kong family office Archegos Capital Management could not meet margin calls. Two of its prime brokers – Morgan Stanley and Goldman Sachs – acted almost immediately and mostly avoided losses. The other two – Nomura (which lost about $2 billion) and Credit Suisse (which lost about $5.5 billion) – hesitated, held lengthy meetings, and hoped for the best.

Implications for risk measurement

The one-in-a-thousand-day problem signifies a complete structural break in the financial system's stochastic processes because the 999-day regime differs fundamentally from the crisis regime.

Each 999-day regime also differs from others. Crises occur when risks are ignored and accumulate to a critical point. Once a crisis happens, that particular risk will not be overlooked again, and new hedging constraints will alter how prices evolve. This means we have a limited ability to predict price movements after a crisis.

Consequently, models based solely on the 999 normal days – an almost unavoidable practice – cannot forecast the likelihood of a crisis or its developments. Attempting to do so leads to what I have termed ‘model hallucination’ (Danielsson 2024).

This also explains why market risk techniques such as value-at-risk (VaR) and expected shortfall (ES), which focus on relatively frequent events (for VaR, one in a hundred days; for ES, one in forty days), are inherently uninformative about crises.

After the 2008 crisis, I organised an event with senior decision makers from that period. Tellingly, one of them remarked: "We used the models until we didn't".

Policy consequences

The one-in-a-thousand-day problem leads to significant misunderstandings about crises.

Excessive leverage and reliance on ample liquidity are the underlying causes of crises. But the immediate crisis trigger and the ensuing damage result from financial institutions simply trying to survive.

Therefore, when analysing crises, we must consider both factors: leverage and liquidity as the fundamental causes, and self-preservation as the immediate cause, which influences the likelihood and severity of a crisis.

We can regulate leverage and liquidity through macroprudential measures. However, we cannot regulate self-preservation. Banks’ behaviour during a crisis is not misconduct or excessive risk-taking – it is the instinct to survive.

In fact, financial regulations can inadvertently exacerbate the one-in-a-thousand-day problem.

Imagine all financial institutions prudently adhere to regulatory demands. Regulators increasingly instruct them on how to measure and respond to risk. When an external shock occurs – such as a virus outbreak or war – all these prudent institutions perceive and react to the risk similarly because they are following the same instructions from the authorities. The result is collective selling in a declining market and uncontrollable fire sales. These prudent banks are not permitted to put a floor under the market and halt the fire sales. Only central bank liquidity injections do so.

This is the fallacy of composition in financial regulations: making all institutions prudent can actually increase the likelihood and severity of crises.

The impact of artificial intelligence

The growing use of artificial intelligence (AI) exacerbates the one-in-a-thousand-day problem (Danielsson and Uthemann 2024).

In banks, one of the primary users of AI and advanced computing is the treasury function – the division that manages liquidity. When the treasury AI detects rising uncertainties, it swiftly decides whether to profit by supplying liquidity and stabilising the market, or to withdraw liquidity, which might trigger systemic stress.

Here, AI's strengths – speed and decisiveness – can be detrimental.

In a crisis, the treasury AI acts swiftly. Stress that might have unfolded over days or weeks now escalates in minutes or hours. AI's ability to handle complexity and respond rapidly means future crises are likely to be much more sudden and vicious than those we have experienced so far.

Conclusion

A common belief holds that one stochastic process governs how banks and other financial institutions behave, regardless of the underlying conditions – maximising short-term profits within set constraints. If this were true, we could use data from normal times to model not only bank behaviour during stress but also the likelihood of crises.

However, this view is incorrect.

There are two states: routine profit maximisation for about 999 days out of a thousand, and self-preservation on that one critical day.

In crises, banks disregard short-term profits to focus on survival. This means that normal-time behaviour cannot predict actions during a crisis or the likelihood of one occurring. It also implies that post-crisis behaviour and market dynamics will differ from previous patterns.

The survival instinct explains why crises can be so suddenly triggered and become so severe.

As we increasingly adopt AI for liquidity management, future crises may become particularly swift and intense, unfolding in minutes or hours rather than days or weeks.

Recognising the one-in-a-thousand-day problem allows authorities to mitigate the damage caused by crises and enables investors to hedge risks or even profit. Otherwise, they risk being blindsided, exacerbating the resulting harm.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

How Should Investors Think about Tariffs in 2025?

Some tariff talk is noise, some is important signal

2025 Central Bank Outlook Preview

North America

Europe

Asia/Pacific

Global Deal-making is Expected to Gain Momentum in 2025

Will private equity deals increase in 2025?

How will the US election impact M&A?

Healthcare M&A has growing momentum

CRE8 Enterprise Ltd. IPO: A Gateway to Expansion

A Unique Player in the Foodservice Industry

The IPO Details

Market Opportunity and Growth Potential

Challenges and Strategies

Why Investors Should Watch CRE8

Conclusion

Diginex Ltd. (DGX) IPO: A Game-Changer in Blockchain Technology

The Core Focus of Diginex

The Market Opportunity

Details of the IPO

Management’s Role in Driving Success

The Risks of Investing in Blockchain

Looking Ahead

Conclusion

How to Earn Free Dogecoin: Tips and Strategies

1. Crypto Faucets: The Easiest Way to Start

Pros:

Cons:

2. Participate in Airdrops

How to Find Airdrops:

Tasks May Include:

3. Staking and Interest Platforms

4. Dogecoin Mining

Requirements:

5. Freelancing for Dogecoin

Where to Start:

6. Referral Programs

Steps to Get Started:

7. Tipping and Microtransactions

How to Get Tipped:

8. Play-to-Earn Games and Apps

Best Practices to Maximize Free DOGE Earnings

Diversify Your Efforts:

Engage in the Community:

Avoid Scams:

Final Thoughts

The One-in-a-thousand-day Problem

The one-in-a-thousand-day problem

Speed is essential

Implications for risk measurement

Policy consequences

The impact of artificial intelligence

Conclusion

Risk Disclosure