This week’s note falls into the category of “and now for something completely different”. If parts seem technical, hopefully the gist is clear, and the one paragraph which has been bolded sets out the opportunities for UK-based investors.
The fog of war is a distraction in times such as these. How can you feel your way through the murk? What detail is important? Which issues should you care about?
Will there be a US recession? I have no idea, and no one does, not in any useful way. It is pointless spending a lot of time predicting it’s likelihood. More in “Recession scare. Should you care?”
Will the US stock market crash in 2026? I care, of course I care. The bubble will burst (overnight), the mania will die (painfully), and the visionaries will vanish (humiliated). But I have no practical analysis pointing at 2026 as the top. And I keep reminding myself, an irrational mania has no rational end.
What about the possibility of a US boom in 2026? It’s a crazy idea. Yet it is now a possibility which cannot be ignored, and the implications for investors are fundamental. Where does this fit in to our thinking?
Imagine the investment landscape like a battlefield. I have decent visibility of the battlefield, but far from total – some things aren’t in view, many are random. To help with that visibility I often talk about Attack and Defence, the two basic pillars which guide our investment approach.
These pillars are supported by a number of principles, some of which are:
Plan don’t predict.
Accept you will be wrong.
Process wins in a crisis…
…and thereby sidestep both decision paralysis and over-reaction.
Protect your capital, and survive being wrong or surprised, by speedily applying a robust stop-loss.
Practice practice practice. Because if you apply your process for the first time when you are under heavy fire, you will likely suffer substantial losses.
Accept the need to act on incomplete information and stay flexible.
Don’t let noisy “intelligence”, the fog of war, degrade your discipline and commitment to your process.
Prepare with pre-mortems, not post-mortems.
Scenarios, identify the 2-3 most obvious one’s which would impact your current positioning and know how you will respond.
The possibility of a US boom in 2026 is one such a scenario we must consider, because it is increasingly plausible and the implications are considerable, both within our Attack and Defence.
The evidence keeps building that Trump intends an economic boom in 2026. He will need to do this for the Republicans to have a chance in the Mid Term election next November, and because his MAGA fantasy, and his legacy, can only survive in a US which is booming.
He has problems that need solving. Tariffs have raised revenue for the government, but are pushing up inflation, particularly for the less well off. His tax cuts in the Big Beautiful Bill were a boon for the wealthy, but the social security cuts hit the poorest. Interest rates need to go up to combat inflation already in the pipeline, but this will slow growth.
Not surprisingly, Trump is aggressively pushing back.
Attacking the Federal Reserve’s credibility, demanding that they cut interest rates to 1%, which is the opposite of what the central bank should be doing, and would likely push inflation higher.
Helicopter money is back on the agenda. Simply drop cash into everyone’s bank accounts. It’s an option in an emergency. But the only emergency is Trump’s legacy and time is running out.
Price caps on drugs, possibly food.
More tax cuts, but better targeted at his base.
Massively increase affordable housing and subsidise first time buyers.
Ditto with infrastructure spending, which can be targeted in areas where he needs votes, and can be very visible.
Attacking the Fed undermines the confidence of global investors, and all the other ideas cost a lot of money, and at a time when the US government is already living far beyond its means day to day. This is the deficit you hear about, the difference between government income and government expenditure. This deficit is filled by the government issuing bonds, and those bonds are bought by institutions around the globe for the interest rate they offer, the yield, and because the US is trusted to repay the capital at the end of the bonds term e.g. in 10 years.
There are twin problems. The mountain of debt accumulated is already at a level which is worrying the bond buyers on whom the US government depends. Inflation, and inflation expectations, are already expected to be higher in 2026. This pushes up the yields on US bonds, as the holders want extra compensation for the inflation risk they are taking.
If Trump is determined to manufacture a boom, even higher inflation expectations will push bond yields higher still. This is important in the US economy, as 10 year bond yields are the benchmark for mortgages and much company debt. It would also make such higher yielding bonds relatively more attractive than the hugely over-valued stock market, increasing the likelihood of the stock market tumbling, which is not a great look on Trump’s watch.
How can Trump square this circle, if we assume that he is very determined to engineer that boom?
I am not an expert in this field, far from it. But it feels like Trump would have to cap bond yields (to prevent a collapse in existing bond prices) and re-introduce quantitative easing, QE, with the Federal Reserve buying up new bond issues. In parallel, he would continue to abuse the Federal Reserve in the hope that ridicule will get them to cut interest rates – he cannot force that to happen by Executive order, which he liberally applies in other areas.
Initially the pain from the latter would be felt in the US dollar, as confidence suffers. Why? Because such measures are typically only introduced in extremis, and the only extreme now is Trump’s obsession with generating a boom in 2026.
The impact on other assets is interesting. This boom could add oxygen to a US stock market already “enjoying” bubble status – a melt-up instead of a melt-down. If you didn’t have the stomach to arrive late at the tech party, there are clear alternatives. Gold and metals and commodity equities, plus inflation-linked bonds. UK equities also benefit in a world with a weakening US dollar, commodities on the up, revival of the Value-style, and messy inflation.
The latter would be the first leg of the boom, and it should be marked out by the dollar falling. For the sake of argument assume that this first leg could persist for 6-18 months.
The most interesting and dangerous bit is when the authorities have to decide when and how to remove the cap on bond yields, when the risk of a historic collapse in US asset prices comes clearly into view through the fog. This is why introducing such controls in the first place should only be considered if, for example, you are threatened with depression - and certainly not to engineer a boom!
That is why Ray Dalio says that Trump’s apparent direction of travel is a “bold and dangerous big bet”. A decade ago this sort of possibility would have been regarded as “fringe paranoia”. Now the unthinkable is thinkable. It might be said that it has become a credible minority view within the investment community.
So this is a hugely significant scenario, a possibility, for which we will be on the look-out in the months ahead. At the moment the US dollar is moving up - keep an eye out for this reversing.
Now let’s focus on what is happening right now in markets. Only the Indian stock market was up over the week, just 1%. The US, China, Germany and France were off by 3-5%, and the UK indices by 2%. The S&P 500 appears to be heading towards that support at 6300-6400.
Commodities had a horrible week, with uranium notably poor, with losses of 6-8%. It was a great week to get familiar with the volatility in the metals! Gold miners were almost as bad. They did turn down immediately, as I mooted last week if a multi-month correction is under way.
Ahead of the UK Budget next week, it is notable that global investors have been buying the UK, outweighing the domestic investors more inclined to sell midst media-driven gloom. For those global buyers wishing to be less exposed to the US the UK offers something different. A fascinating few days lie ahead.