Coverage in the face of new uncertainty



LONDON – By many indicators, the world is facing record levels of turbulence, both in the global economy and the geopolitical landscape. This new global disorder reflects a wide variety of factors, leading investors and business leaders to wonder how best to protect themselves from such uncertainty.

Many factors are contributing to the deteriorating GDP outlook and heightened volatility, including deglobalization, now exacerbated by tariffs, rising inflation risks, and technological competition between the United States and China. Meanwhile, geopolitical uncertainty is growing as a result of deepening regional rifts, the reconstitution of emerging market trading blocs, such as the BRICS+ group of major emerging economies, and ongoing hot wars. Social uncertainty, stemming from record levels of migration and displacement, is fueling populism and distrust of governments in many advanced economies.

Until recently, financial market volatility had been historically high, although not as high as one might expect, implying a degree of market complacency. For example, the VIX, a volatility indicator, had hovered between 15 and 20 points in the first weeks of 2025, compared to 12-14 points in the same period the previous year. Similarly, the MOVE (Merrill Lynch Options Volatility Estimate), an indicator of interest rate volatility, had remained elevated, close to 100 points, since February 2022, compared to 50-80 points in previous years. However, following Donald Trump's "Liberation Day" tariffs, the VIX spiked above 40 and the MOVE above 130.

Given such uncertainty, there are three ways to consider hedging. The first, “tier one” hedging, encompasses the conventional methods investors use when financial markets are functioning normally and the rule of law is not in question. All of these options presuppose a stable relationship (the “base”) between financial markets and real assets. Financial contracts will be reliably cleared, and hedges will protect investors as intended.

For example, buying S&P 500 put options or protecting the CDX (Credit Default Exchange) protects an investor's equity and fixed-income assets, respectively, since these contracts will continue to generate dividends even after a crisis. In these cases, assets are protected, as well-functioning financial markets and the rule of law ensure sufficient liquidity and transparency.

There is also level two hedge, which is used when financial markets fail to balance, leaving investors exposed despite holding a financial contract. This scenario assumes a closed system where the failure of level one financial hedges is not isolated or localized, but universal. These situations are rare in a globalized world, since even if a national exchange fails, financial contracts for globally traded assets, such as gold or oil, could be settled elsewhere.

Consider the 2008 global financial crisis, when governments intervened to ensure the settlement of contracts, effectively securing the economy and the financial system by upholding the rule of law. Although the relationship between financial and real assets was initially disrupted, government intervention was sufficient to stabilize markets. As long as the rule of law is maintained, property rights, contracts, counterparty agreements, and the payment of bills and rent remain enforceable. In these cases, the government can create a firewall to buy time and allow the system to rebuild, so that tier-one hedges can function properly again. Government action intended to protect society at large from systemic risk constitutes a hedge in itself.

Finally, with Level 3 coverage, not only do financial markets collapse, but the rule of law also breaks down, leaving investors exposed and uninsured (because Level 1 and Level 2 coverage have lost its force). In these scenarios, financial contracts cannot be resolved, and the government is reluctant or unable to intervene. This is more common in relatively underdeveloped emerging markets with weak financial and legal systems.

In this case, the only protection is the possession of real, physical, and portable assets, such as gold coins, stamps, and works of art, or the control of resources such as land, water, or energy. If the rule of law fails, physical possession of an asset may prevail over legal title, meaning owners must take additional measures to protect their assets.

The greatest weakness of any system is the institutional infrastructure that supports it, because if that fails, so does everything else. In today's world, investors cannot rely solely on Level 1 coverage. They must consider what level of protection they need for Level 2 and Level 3 scenarios. When the relationship between the financial and the physical world proves less stable than expected, it is necessary to understand the alternatives.

The author

Dambisa Moyo, an international economist, is the author of four New York Times bestsellers, including “The Edge of Chaos: Why Democracy Fails to Deliver Economic Growth—and How to Fix It” (Basic Books, 2018). © Project Syndicate 1995–2025.