Costs of Radical Uncertainty

An excerpt from our First Quarter 2025 Investment Brief: 

Markets take risk in stride. They are after all continuously discounting changing circumstances and attaching probabilities to unknown future outcomes. Markets are less adept, however, at coping with radical uncertainty, unknowns which cannot be characterized probabilistically.

Markets are attempting to cope with unprecedented levels of radical uncertainty concerning the scope, magnitude, timing, and persistence of tariffs. The magnitude of the proposed tariff changes, the suddenness of their implementation, and the repeated abrupt reversal of policy are compounding the difficulties markets face. The daily vacillation of U.S. tariff policy is not the only factor fueling uncertainty. The extent of retaliation by other countries is also unknown.

Nor is uncertainty limited to trade policy. The continued independence of the Fed is also in doubt, undermining confidence in the dollar as the preeminent global reserve currency and U.S. Treasuries as the ultimate safe haven. Uncertainty is further heightened by suggestions by the Chair of the Council of Economic Advisors that it might be advantageous to convert all or part of the existing stock of outstanding U.S. Treasury securities into zero coupon century bonds. Escalating uncertainty on multiple fronts is likely to have a profound impact on economic activity and increase financial fragility.