Let's talk about a roller coaster.
After several days of decline, stocks soared on Wednesday afternoon following President Trump's announcement of a suspension of tariffs. The S&P 500 jumped 9%, recording its third-largest daily gain since World War II.
Gold also saw fluctuations, falling below $3,000 an ounce, but the yellow metal recovered much of its loss and closed above $3,100.
It's hard to know what will happen next.
The only thing that seems certain is uncertainty.
Market volatility skyrocketed with the start of the trade war. The VIX volatility index shot up to 57.85 on April 9. To put that in perspective, it rose to 66 during the early days of the pandemic and to 79 in October 2008.
While the volatility index cooled slightly after the announcement of the suspension of tariffs, there is still a lot of uncertainty and nervousness in the market. We are just one announcement away from another round of market chaos.
Do you know what markets and companies dislike?
Uncertainty. What is regime uncertainty?
We are in a period of extreme political uncertainty. Whether you are an investor, business owner, or entrepreneur, it is extremely difficult to plan for the future under these conditions.
Regime uncertainty describes a lack of confidence in the direction of a government's future policies regarding taxes, regulations, and, in more extreme situations, the protection of property rights and consistent enforcement of the rule of law.
When people are unsure of what the government will do next, or if they fear a sudden change in the rules, long-term investment and economic activity are discouraged.
Regime uncertainty tends to encourage paralysis by analysis. People become obsessed with trying to figure out what might happen next and end up doing nothing, adopting a “wait and see” attitude instead.
For example, during the Great Depression, President Franklin D. Roosevelt created great political uncertainty by implementing the New Deal. Regulations and policies changed dramatically. Businesses felt insecure about the federal government's increasing intervention in the economy through price controls, taxes, labor laws, and other economic policies.
Economist Robert Higgs argued that this “regime uncertainty” prolonged the Great Depression by discouraging private investment. In his words: “Between 1935 and 1940, this issue took on paramount importance. So many entrepreneurs and investors lost confidence in their ability to predict the future regime of property rights that few were willing to risk their money on long-term investments.”
Ultimately, long-term economic growth depends on predictable rules. Sudden changes in taxes, regulation, or property rights cause businesses to adopt a defensive stance.
Although they do not reach Roosevelt's level, Trump's negotiating tactics are a breeding ground for uncertainty about the regime. Will the 90-day pause really last? Will exceptions be introduced? What will happen in 90 days?
No one knows.
Navigating regime uncertainty
How to navigate this kind of uncertainty?
If you have a business, especially one that depends on imports, I don't know what to tell you.
But investors can weather this storm if they keep a few things in mind.
Don't panic. You will see large fluctuations in the market. Resist the temptation to react impulsively to daily fluctuations. It's easy to get carried away by emotions. Don't do it.
Focus on the fundamentals. The trade war is unfolding in a broader context. Those fundamentals remain. We still have an inflation problem. We still have de-dollarization. We still have many bubbles in the market. We still have massive amounts of debt. The laws of supply and demand still apply. It's important to focus on the big picture and not get too carried away by the latest headlines.
Gold and silver are a symbol of stability. This does not mean that their price does not fluctuate sharply on a daily basis. But gold and silver are fundamentally money. They have been for over 5,000 years and will continue to be so when the trade war is a distant memory. Gold and silver are the ultimate safe havens.
They are generally protected from regime uncertainty because there is no counterparty risk.
We don't know what the future holds. But you can be sure that gold and silver will continue to be valued and desired around the world.
Mike Maharrey, Money Metals