By Harley Bassman

About the author: Harley Bassman is the managing partner at Simplify Asset Management. He is the creator of the MOVE index, the standard measure of interest-rate volatility.

Consider a slight twist on Russian playwright Anton Chekhov's storytelling principle that a writer "must not put a loaded rifle on the stage if no one is thinking of firing it." Every element in a story must be necessary and purposeful.

The twist: Once a tariff has been seen, it cannot be unseen. So, once global tariff reform has been placed on stage, its effects on financial markets cannot be fully reversed, even if the policy is rescinded.

The markets were supremely unsettled on April 2, "Liberation Day," when President Donald Trump offered a tariff profile that was higher than anticipated. The Cboe Volatility Index, or VIX, screamed above 50, well over the eight-year post--global financial crisis average of 15.3. Similarly, the MOVE Index, which measures the implied volatility of one-month options on U.S. Treasuries, now ranges between 100 to 140, well above its prior average of 65.9.

I would propose that these jumps in the MOVE and the VIX aren't short-term blips that will quickly resolve. Rather, they may be permanent, or at least they will not dissipate until the end of the Trump presidency in 2029.

Prior peaks of the MOVE and VIX included the 1994 Long-Term Capital Management hedge fund collapse, the 2001 Enron incineration, the 2008-09 financial crisis, and the 2020 Covid panic. They all had a "mean reverting" nature, where a return to normal was not only possible, but in fact was likely. These were exogenous, but not permanent, shocks to the financial system.

The same can't be said for the current round of political shocks to the core functioning of government. We can't anticipate their denouement, at least not for the next four years.

The uncertainty of Trump's policies is a feature, not a bug. Much like President Richard Nixon, Trump believes that being seen as a bit crazy gives him a tactical advantage in negotiations by leveraging the other party's emotional responses and potentially creating a sense of uncertainty or unpredictability.

In support of this notion of longer-term uncertainty, I would point to the recent price action in gold, which has a history (and reputation) as a stable store of value for the length of human history. Gold rose nearly $1,000 an ounce after Trump's election in November, with a realized volatility of over 35% since his new tariff policies were announced. So great has been the demand for physical gold (ingots) that the most recent gross domestic product report tipped below zero, since imports subtract from the GDP calculation.

The U.S. Dollar Index has also dropped sharply. This index tends to rise during times of stress and is well-correlated to the level of U.S. interest rates, as one prefers to own the dollar when it offers a higher return. Thus, it is anomalous that the USD Index cratered as rates rose.

The popular press has trouble deciding if the president wants to turn back the clock to the postwar U.S. domination of the 1950s or the Gilded Age 1890s, but I might suggest we are reviving the policy uncertainty of the early 1980s Volcker era.

In those days, there were no rate-policy announcements, no 2:15 p.m. news conferences, and definitely no dots. The only way to know if the Federal Reserve had altered its policies was to wait until 11:15 a.m. the next day to see if the Fed executed "system repo" trades to push or pull its overnight funding rate.

That may sound unsettling for those too young to remember that era. But I would argue that injecting uncertainty into the financial system is a public policy good.

I have long said that former Fed Chair Alan Greenspan's stated policy of raising rates at a "measured pace" was ground zero for the 2008-09 financial crisis. By signaling to investors that he would raise rates by only a quarter point every six weeks (the time between Fed meetings), he effectively blessed an increase in risk-taking.

So, too, do the Fed's quarterly dots in its Summary of Economic Projections encourage excess risk via moral hazard. The projections released after the March 2021 Fed meeting, and Chair Jerome Powell's comments at the time, indicated the Fed expected its federal-funds rate to hug near zero (0.125%) until March 2023.

Is it any wonder that Silicon Valley Bank, Signature Bank, and First Republic Bank thought it was a fine idea to buy Fannie Mae 2% mortgage-backed securities at par and not hedge them?

As such, let's give the president credit. A policy of uncertainty may be bothersome to many investors, but it nonetheless could reduce the moral hazard that leads to excess leverage, unhedged balance sheets, and -- worst of all -- a more negatively convex risk profile.

An unhindered open market creates a feedback loop between those who need capital, those who have capital, and the government that acts as referee. Government intervention disrupts the flow of information, and bad information leads to bad policies.

To return to Chekhov, that uncertainty is all but permanent. Trump has placed the tariff gun on the table. It will remain part of our story even if our play's lead actor says he no longer plans to use it.

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May 09, 2025 08:42 ET (12:42 GMT)

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