June 2025
While having a conversation with a podcast guest last week, I was introduced to a term I had never heard before: VUCA. That’s an acronym that stands for volatility, uncertainty, complexity, and ambiguity. According to my guest, all four are touchstones for the global environment in the middle of 2025. Many people have commented on how the world is becoming less predictable and more dangerous, but that was the first time I heard someone come up with a term that tried to encapsulate everything at once. Having heard the term, I thought I would take a moment to point to some specific examples of each of the four elements:
Volatility
- In early April, the so-called ‘liberation day’ tariff announcement caused stocks to tumble almost 10% in one day. Then, less than a week later, those same punitive tariffs were postponed for 90 days and replaced with new, across the board 10% tariffs. Markets reacted swiftly and begin a rapid ascent so that now, at the end of the quarter, most market levels are near where they were at the start of the quarter.
- The VIX indicator has been more volatile than usual in the recent past. Many commentators see this as a ‘new normal’.
Uncertainty
- Recently, the American administration was crowing about how it had utterly and totally destroyed Iranian nuclear capabilities. In the days that followed, the veracity of that boast was called into question. At the time of writing, it is unclear where the truth lies.
- Similarly, ceasefire agreements are on again and off again. The stakes are high, but few people would go so far as to suggest that the end game is in any way obvious.
Complexity
- Has there ever been a point in history where investors and policy makers alike need to contend with so many interwoven mega threats? The United States now has a $37 trillion accumulated debt and is adding to it by over $2 trillion annually. Climate change is an ongoing threat that demands our attention. Income and wealth inequality are the highest they have been in nearly a century. Political polarization is increasing throughout the world. Demographic challenges make meaningful economic growth nearly impossible…. and so on.
- Solving one problem might well exacerbate another. There are several highly credible commentators who insist that for the first time in half a century, the stars are aligning for a prolonged bout of stagflation. Fighting inflation means central bankers need to be willing to raise interest rates. Then again, if economic growth really is grinding to a halt, higher rates will merely ump the brakes on economic growth and would also accelerate the aforementioned debt problem.
Ambiguity
- If you can figure out what’s really going on, you’re either brilliant, or, more likely, deluding yourself with a false sense of control. Markets went up when it looked as though the Iranian nuclear facility was destroyed, then went up further when that appeared not to be the case. Political tensions caused people to worry about the security of oil supply through the straits of Hormuz, yet the price of oil dropped precipitously. Up seems to be becoming the new down.
- Nothing seems to make sense anymore. In a previous blog post, I questioned the efficacy of the efficient market hypothesis. I remain surprised that markets seem unresponsive to tariff developments. There has been no material change over the quarter, even though the largest economy in the world has effectively slapped a new 10% tariff on all other nations.
No one really knows where all this will lead us. Will the conflict in the Middle East intensify or de-escalate? Will Canada and the United States reach a trade deal before the end of June? If so, what will it take entail, and what will American deals with other nations look like if Canada chooses to go first? The 90-day moratorium on the liberation day tariffs ends on July 9th. Will the previously announced tariffs be reintroduced? Will Iran’s proxies (Hamas and Hezbollah) continue to engage in some form of guerrilla warfare even if Iran sues for peace? Throughout all of this, market valuations remain dangerously high. Robert Shiller’s CAPE (cyclically adjusted price earnings) ratio for the S&P 500 has been hovering in the mid 30s for almost all of the past five-plus years. The historical level is about half that.
I remain concerned that investors are largely being seduced by optimism bias. That’s where people recognize that while things may very well go wrong, they nonetheless also believe that they will not be personally impacted. The way I see it, a lot of investors have been shot at repeatedly, but the bullets have (so far) missed. Sooner or later, some of those bullets will start hitting their targets. I worry that when they do, people will claim to be surprised by the turn of events. Anyone who’s been paying attention should be unsurprised. Call it the vindication of VUCA.