Whether you walk away believing that President Trump will make the world “fairer,” dream of Trumpian tax cuts and deregulation, or recoil at his trade wars and extreme unpredictability, the harsh reality is that all of it inevitably comes with more volatility and less growth.
Last week, the Financial Times published the chart below. The widely followed Economic Policy Uncertainty Index (EPU), developed by Baker, Bloom, and Davis, has gone to the moon—nearly double the level seen during the Covid crisis. And back then, a lot of people genuinely believed the world might end.
We are now facing an unprecedented level of uncertainty. It’s nearly impossible to make any meaningful predictions about the economy, which rules will apply tomorrow, or which policies will be abandoned by next week. This kind of instability affects financial markets, businesses, households, and society as a whole. A quick glance at ASML’s numbers confirms this.
The facts
Analysts at index provider FTSE Russell showed in an October report that sudden spikes in the EPU—so-called uncertainty shocks—often trigger short but intense waves of market instability. This time, the turbulence comes just as companies are trying to shape their strategies around US policy and the ongoing trade war. That’s more than just speculation—it points to real, tangible economic damage alongside increased volatility.
Researchers at the Federal Reserve Bank of St. Louis calculated that the uncertainty shock in the first quarter of 2025 was an astonishing 3.8 standard deviations above the long-term average. For comparison, during the Covid pandemic, that figure was “only” between 2.5 and 3. According to their model, such a shock results in a contraction of more than 1 percent in economic growth and employment, spread over the following six to eight quarters. Inflation also declines—not due to stellar work by the Federal Reserve, but simply because no one dares to spend.
The numbers aren’t much better in the eurozone. The European Commission concluded last November that if policy-related uncertainty were to return to pre-pandemic levels, eurozone GDP would be 1.2 percent higher. That’s not a rounding error—it’s serious economic damage.
Unpredictable
With Trump, you simply don’t know where you stand. And in my view, that also applies to those who claim to understand or support his policies. Extreme measures are literally announced, reversed, or rewritten halfway through with the stroke of a pen.
What we’re witnessing here is the concept of the “option value of waiting.” That value is currently sky-high, making it more appealing to simply do nothing for the time being. Whether it’s investing in a new factory (where should you build it?), launching a product, or hiring new staff—without a clear direction, waiting becomes the safer move to avoid making the wrong decision.
Given the clear link between economic uncertainty on the one hand, and market volatility and recession risk on the other, Trump is playing with fire.
Financial markets are constantly trying to price in all possible scenarios: recessions, central bank moves, inflation, sentiment—you name it. But uncertainty caused by erratic economic policy is almost impossible to quantify, hard to measure, and toxic to confidence.
Just as animal spirits can spark (irrational) optimism and a willingness to take risks, policy uncertainty works in the opposite direction. It creates a climate of fear and hesitation, where investors avoid risk and delay spending and investment—potentially triggering a recession.
In other words: roulette policy.
Jeroen Blokland analyzes striking, timely charts on financial markets and macroeconomics in his newsletter, The Market Routine. He also manages the Blokland Smart Multi-Asset Fund, which invests in equities, gold, and bitcoin.