I spend about 50% of the time in my capital markets class talking about financial crises. The biggest takeaway I have from studying financial history myself is that humans have short memories, and have difficulty mapping how patterns of history from the past can repeat in the present. In other words, everyone knows the saying “history repeats itself” but they have trouble figuring out exactly what that means today.

When I look at the markets today, I see people in a state of shock about what happened from April 2-April 5 and also a lack of understanding of how much worse things can get. People are relying on patterns from the recent past when they should in fact be looking at patterns from the distant past. Specifically, in my view, investors need to be thinking about a wider dispersion of possible outcomes from today’s policy chaos than what the recent past of market history says is possible.

In this note, I’ll touch on how the zone of possible outcomes is much wider today due to both market and political factors. Full disclosure: I sold basically all of my liquid risk assets on Thursday and Friday. I think things are going to get much worse.

Market Uncertainty

I started moving into a more defensive asset allocation in late 2022. My thesis was that when interest rates go up, things break. A few things did break, but the economy as a whole didn’t. I also had a view that valuations were stretched, but I think John Hussman makes the argument about valuations more eloquently than I do, so I’ll leave it to him.

Given that valuations were already stretched even before the runup we had in 2024, I don’t see the 15% decline we’ve seen this year as a buying opportunity. Even if Donald Trump were to say, “you know what, I see that uncertainty is damaging to business and consumer confidence, so I’m going to be boring, clear, and predictable for the rest of my presidency, and I’m also going to remove all the tariffs,” I wouldn’t be inclined to add to risk at that point. When you combine the low likelihood that the President will suddenly provide clarity to markets with the facts that 1) consumer and business confidence is already in tatters and 2) valuations are still too high, I just can’t see a bull case for buying here.

The problem for retail investors in general is that most people investing today haven’t seen an environment like this. In recent market drawdowns, the market has quickly rebounded, and people seem to think that if there is a big collapse (like 2020) the central bank will jump back in with low rates and lots of liquidity. However, I don’t think the Fed jumping in with a large QE program can be taken for granted today because unlike those previous episodes, 1) inflation is already above target and 2) I think the Fed is becoming increasingly wary of keeping asset bubbles inflated forever and the disparity in wealth that creates between haves and have-nots. Retail investors conditioned to buy the dip may not recall that the 2001 market saw a peak-to-trough decline of ~80%.

Political Uncertainty

People have also forgotten what true incompetence in government looks like.

At least as far back as I can remember, we have had basically qualified people in government regardless of which political party has been in power. When political appointees are chosen for loyalty over competence, this is what we get. Nobody expected Signalgate. And a week after that, we get a new tariff policy that that Brad Setser, a well-known trade economist, described on Bloomberg’s Odd Lots as reminiscent of an economics term paper that someone rushed to turn in at 4 a.m. (Not to mention that it looks like whoever made the policy cut-pasted it from AI.)

In past financial crises, whatever the cause, at least we have had knowledgeable people in charge of managing the response. We don’t have that anymore. So whatever unexpected (or manufactured) crisis we get next, we have to consider the possibility that the policy response will be far less effective that it typically is. And it might not necessarily be a financial crisis—military, public health, and natural disaster-type crises also happen, and I have no confidence that this administration will have a better understanding of how to deal with those crises either.

In a nutshell, people who assume that government doesn’t ever do anything and therefore it doesn’t matter if we have qualified people in charge are in for a rude shock. And regardless of what your baseline expectation is of how this turns out, you need to consider that the worst-case scenario is significantly worse than it has been in previous crises.