2026: A Year of Turbulence

  “ When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

                          Chuck Prince, Citigroup CEO, July 2007

 

Before discussing the outlook for 2026, I would like to review what we got wrong and what we got right about 2025. (See: https://shulmaven.blogspot.com/2024/12/2025-revenge-of-bond-vigilantes.html )

 

·       Yet again we were wrong about the stock market. Instead of the S&P 500 trading in a 6400-5500 range stocks traded between 6900- 4900 and closing at the top of the range. We thought stocks would end the year lower.

·       We were right about inflation running at 3% annual rate. The year-over-year change in the CPI of 2.7% reported for November will be revised higher to correct data errors.

·       We were right about tariffs and the mass deportations of illegal/undocumented immigrants.

·       We were wrong about the 10-Year U.S. Treasury yield exceeding 5%. The yield peaked early at 4.79% and trended lower towards 4%.

·       We were mostly correct about the passage of the Trump tax cuts thinking that the 2017 cuts would be extended and the SALT deduction would increase to $20,000, it turned out to be $40,000 with an income cap. We were wrong about other aspects of the Trump tax package that passed. (i.e., no tax on tips and overtime)

·       We were wrong about Congress taking down two Trump cabinet appointees.

·       We were right about Israel attacking Iran’s nuclear infrastructure.

·       We were right about France being on the road to becoming the new Greece.

 

Because I am a glutton for punishment here are my thoughts about 2026.

 

·       Inflation will run hotter than what the market expects. It will end the year at a 4% run rate. The combination of fiscal stimulus, monetary ease and AI capital spending will propel inflation higher. 3% will be the new 2%.

·       The yield on the 30-year U.S. Treasury bond will approach 5.5% causing both the Treasury and the new Trump Fed to institute a policy of yield curve control. It has already started with the Fed buying $40 billion of T-Bills a month through April and the Treasury swapping long term bonds for T-Bills.

·       Gold will surge past $5,000/ounce.

·       Stocks will trade in a broad 7500-5500 trading range and close down by more than 10%. The $310 of S&P 500 estimated earnings will not be enough to levitate stock prices. Put simply, the time to dance will soon be over.

·       NVDIA margins will take a big hit late in the year as competition forces price cutting. (See: https://shulmaven.blogspot.com/2025/12/the-economic-obsolescence-to-nvidia-gpus.html )

·       The Democrats will seize control of the House gaining anywhere between 15-40 seats and could very well take the Senate. Just to note the last time one party controlled all three branches of government was 2003-2006 inclusive and before that it was 1977-1980 inclusive. Americans like divided government. I would also point out that in wave elections partisan redistricting actually hurts rather than helps. ( See: https://shulmaven.blogspot.com/2018/07/gerrymandering-wont-save-republicans-in.html )

·       The Minnesota Medicaid scandal will reach into the offices of Governor Tim Walz and Congresswoman Ilhan Omar.

·       Israel will again attack Iran’s nuke and missile infrastructure.

·       Khamenei will meet his virgins in the sky and Maduro will be out.

 

As usual I end with I am often wrong, but never in doubt.

Some Thoughts on Trump's National Security Strategy

Earlier this week the Trump Administration released its updated National Security Strategy. (See: https://www.whitehouse.gov/wp-content/uploads/2025/12/2025-National-Security-Strategy.pdf ) Needless to say that given the howls that went up, it was far from being universally applauded, especially in Europe. Europe is rightly concerned that the era of having a NATO umbrella over the continent is over. However, given earlier commentaries coming from Vice President Vance, in particular, the document should not come as a surprise. Trump’s policy of selling out allies and cozying up to adversaries is all there in black and white.

I have three preliminary thoughts on the strategy. First, it is harkening back to the America First of 1939-1941. It focuses in on hemispheric security to the exclusion of Europe and just has America First leader Charles Lindbergh was open to a modus vivendi with Nazi Germany, here we have America open to a condominium with Putin’s Russia. It certainly does not bode well for Ukraine and for that matter Israel. Further, the strategy puts policy muscle behind Trump’s Caribbean buildup against Venezuela. To the Trump Administration Latin America is now part of an American economic zone.

Second, there is the strong smell of Yalta in the document. Instead of Roosevelt and Stalin dividing up Europe, we now have Trump, Putin and especially Xi dividing up the world into spheres of interest. The glue holding the deal together is economic self-interest. Where Taiwan fits into this over the longer term is very ambiguous.

Third, there are some hard policy realities behind the document. Europe has the ability to defend itself against Russia; it only lacks the will. Russia remains bogged down in Ukraine after more than three years of war indicating it is not as strong as once thought. If Ukraine can hold its own against Russia, so too can a much larger Europe.

What perhaps pissed off Europe the most was that the document called out its “civilization decline.” Unfortunately, that is the reality, and Europe has to recognize that advanced welfare states cannot run a policy of open borders without severe consequences. Simply put, in a generation Europe will not be the Europe of history. Net net, the policy calls for the U.S. to be an offshore balancer with respect to the world outside of Latin America. (See: https://shulmaven.blogspot.com/2025/08/my-review-of-andrew-lamberts-no-more.html )

My Review of Volker Ullrich's "Fateful Hours: The Collapse of the Weimar Republic, 1918-1933"

The Slow Descent into an Abyss

German historian and Hitler biographer Volker Ullrich ( See: Shulmaven: My Amazon Review of Volker Ullrich's "Hitler: Downfall, 1939-1945 , Shulmaven: My Amazon Review of Volker Ullrich's "Hitler: Ascent, 1889-1939", and Shulmaven: My Amazon Review of Volker Ullrich's "Germany 1923: Hyper Inflation, Hitler's Putsch and...." ) has chronicled the rise and then the slow collapse of the Weimar Republic, 1918-1933. ( See: Shulmaven: My Amazon Review of Frank McDonough's "The Weimar Years: Rise and Fall 1918-1933" and  Shulmaven: My Amazon Review of Benjamin Carter Hett's "The Death of Democracy: Hitler's Rise to Power and the Downfall of the Weimar Republic"   )  Like others Ullrich does not believe that the collapse was inevitable and neither was the rise of Hitler. There was much human agency involved as well as three untimely deaths.

The first and most dramatic was the political assignation of foreign minister Walter Rathenau in 1922. Rathenau had just shocked Europe with the Rapallo Treaty with the Soviet Union and was working on solving the reparations crisis. He was perhaps the only German statesman that the Allies trusted enough to make a deal on reparations. With his death the road was open to the reparations crisis of 1923 which brought on the occupation of the Ruhr and the hyper-inflation of 1923, a shock that Germany would not really recover from.

The second two would die of natural causes. President Friedrich Ebert died in 1925 paving the way for Paul von Hindenburg and  former prime minister and foreign minister Gustav Stresemann in 1929.  Although Stresemann was the leader of the right wing German National People's Party, he firmly supported the Weimar Constitution and he showed his mettle in Ruhr/inflation crisis of 1923. He was, perhaps, the only politician in Germany who could have taken on Hitler. 

Ullrich believes that, at the outset, Weimar did not do enough to reform German society, especially after the general strike of 1920 put down the Kapp putsch. Whether the Social Democrats had the will and the power to do it is an open question. Indeed, they relied on the Frei Corps to put down a communist revolt in 1919. Of course, had they succeeded, history would have taken a different turn.

To Ullrich the election of the authoritarian Hindenburg represented the hinge of German history. It was Hindenburg along with the machinations of prime ministers Franz von Papen and Kurt von Schleicher that enabled Hitler to come to power in 1933. They though Hitler could be controlled, but they were immediately disabused of that notion.

In my mind Ullrich doesn’t spend enough time on the socialist/communist split. Had those two leftwing parties held together they had the votes to stop Hitler. Instead, the communists went to bed with the Nazi’s in 1931-32 helping to bring down the Bruning government. They did this just when Heinrich Bruning’s policies were on the brink of success at the Lausanne Conference, which suspended reparations payments.

To sum up, Weimar was dealt with a bad hand that it played well for a while, but at the end of the day it wasn’t quite enough. Ullrich warns that today in the West we have a far better hand, but it remains to be seen whether the forces of the populist Right will be contained. We ignore his warning at our peril. 

My Review of Mike Wallace's Gotham at War: A History of New York City, 1933-1945

 Big Apple History Through a Socialist Lens

 

Self-professed leftist historian and John Jay College professor, Mike Wallace has written a history of New York City through the New Deal years and World War II. In reading this long book (976 pages in the print edition), it seemed that it took the full thirteen years of his history. Needless to say, the book is way too long and covers way too much minutia.

 

Wallace discusses at length how the city’s various ethnic groups approached the coming of World War II. His view of New York’s ethnic groups is through the lens of cultural pluralism. Although that view has some merit, he ignores the fact that New York was becoming more homogenized and, on its way, to being a melting pot. He ignores two facets causing this. This first is that the public schools were inculcating Americanism into the minds of its students. Second, he ignores the roll of baseball which put sometimes antagonistic ethnic groups in rooting for their respective teams. Indeed, the Yankee-Dodger subway World Series was a classic and no matter which team they were rooting for, fans marveled at Joe Di Maggio's 56 game hitting streak.

 

With Hitler’s coming to power in 1933 New York’s Jews, the largest Jewish community in the world, stood as one against him. They had to face off against local Nazi’s in the German American Bund and plea with Roosevelt, to no avail, to open immigration for Jews fleeing Europe. Here Wallace ignores the role of the New York mob which stood foursquare behind the Jews in breaking up Nazi rallies. ( Shulmaven: My Amazon Review of Michael Benson's "Gangsters vs. Nazis" ) Wallace rightly notes the perfidy of New York Times publisher Arthur Sulzberger in his downplaying of the Holocaust.

 

Wallace is all-in on the New Deal and LaGuardia’s social democratic vision for New York. What he ignores is that LaGuardia’s vision was funded by a hugely disproportionate amount of dollars flowing from Washington D.C.  Those who followed him did not have the largess of Washington behind them and that put the city on an unsustainable fiscal path. Simply put, to him business was bad and government was good.

 

True to his beliefs Wallace spends an inordinate amount of time on the three-way split between, the communists, the socialists, and the New Deal liberals. This would play out in the dumping of Henry Wallace as Roosevelt’s VP in 1944. He also ignores the real gravity of the Rosenberg spy ring which went well beyond atomic spying.  

 

Wallace is particularly good at discussing the policy differences between the Fighting Liberals and the Wall Street Warriors in their focus on bringing the U.S. into the war. Both groups had decidedly different war aims. The Fighting Liberals wanted to globalize the New Deal while the Wall Street Warriors following Henry Luce's "Amercian Century,"  wanted to establish U.S. hegemony.  Incidentally, both supported free trade. Many of the architects of the Cold War who came out of Wall Street banks and law firms are here. They include Dean Acheson, James Forrestal, Paul Nitze, and John Foster Dulles, who by the way was too cozy with Nazi Germany in the 1930’s.

 

We also have a whole bunch of folks who featured in my childhood growing up in New York City in the 1950’s. The include future U.S. Congresswoman Bella Abzug, feminist Betty Friedan, governors Dewey, Harriman, and Rockefeller, expert builder Robert Moses, Congressman Adam Clayton Power, Mayor Robert Wagner Jr., Attorney General Herbert Brownell, civil rights leader Bayard Rustin, and builder Bill Zeckendorf.  All-in-all, quite a cast of characters.

 

The book ends with a discussion on planning for the postwar world. There were many plans drawn up under the belief that the New Deal was still alive. It wasn’t and it pretty much died after the 1938 election. To my mind the planners failed to understand that what New Yorkers wanted were automobiles, houses, and babies. They did not want to be cooped up in apartments the planners imagined. Those desires set off the race to the suburbs of Long Island, Westchester, and New Jersey and if you really think about it represented a continuation of the trend that was established in the 1920’s that was interrupted by the depression and the war.

The Economic Obsolescence Risk to NVIDIA GPU's

The financial press has had a field day in discussing the depreciation risk associated with high end NVIDIA GPU chips. However, lurking beneath the surface is the risk of economic obsolescence. That risk will come from the availability of lower cost chips such as the Google Tensor processor. Moreover, additional competition will come from Amazon and Elon Musk who are developing their own chip sets.

The arithmetic is simple. A high-end NVIDIA GPU chip set costs about $60,000 of that $43,800 represents NVIDIA’s extraordinarily high 73% gross margin. In this example NVIDIA’s cost is $16,200. Herein lies the risk. Lower cost chips produced, at say a more normal, but still high 60% gross margin would yield a price of $40,500. Thus, AI competitors using the newer chips would have a significant 1/3 cost advantage thereby rendering the existing NVIDIA chips economically obsolete. In a way NVIDIA could very well become a victim of its own success.

To be sure, NVIDIA is a technological behemoth, and it has its CUDA software to lock in existing customers. Nevertheless, the mere existence of a 73% gross margin will ultimately bring price competition into the GPU landscape.