2026: Where Are We Going?

Making prognostications about the future of 2026 is, I admit, a stupid thing to do. No one can predict the future. Those who say they can are mostly just lucky. But, what the heck, maybe my guesses are just as good as anyone’s. We will see on January 1, 2027. Here goes.

Mid-term Elections and Donald Trump

My prognostication today is that the Republicans will lose one of the houses of Congress. It will be mostly Trump’s fault.

President Trump has voter problems. Prices are high, yet Trump denies it. People aren’t stupid when they pay for their groceries. Much of that is caused by his tariffs which have disrupted the formerly smoothly working international supply chain which had supplied us with a cornucopia of goods. Remember, it is we consumers who pay tariffs which is why it is just another tax. There isn’t much he can do to lower prices but getting rid of his tariffs would help. 

He’s also doing a great job of alienating just about everyone including some of his MAGA base. I watched a lot of his last campaign rally. And, while I am trying to be objective here, I saw many quizzical looks on his audience because much of what he said didn’t make sense. 

Trump then lashed out on Truth Social that Rob Reiner and his wife were murdered because of his anti-Trump views and that Reiner was “paranoid” and a “deranged person” because he didn’t recognize Trump’s greatness. Oops: Reiner was murdered by his son. But really Donald? The guy who gave us The Princess Bride and When Harry Met Sally? He just couldn’t leave politics out of it and praise Reiner’s contributions and mourn his loss? 

Even many Trump supporters are unhappy about ICE SWAT-like raids that deport grandmothers and college students and the people who labor in the back of restaurants and in our fields.

His Chief of Staff, Susan Wiles, publicly stated that he doesn’t listen to anyone and does whatever he wants. One wonders about his mental state.

As of this writing, Trump’s poll numbers are down. Poll aggregates put his disapproval rating among all voters is at about 50-55%. But that ignores the impact of independents. The key to the election will be independents, those who are neither Republican nor Democrat. According to a 2025 Gallup poll, about 40-43% of voters now identify as independents. Recent polls also show that 70-75% of independents disapprove of Trump’s job performance. The other 60% or so of voters are evenly divided between the two parties and we know how they will vote. This does not look good for Trump and the Republicans. Assuming Republicans and Democrats vote with their party, independents will swing the election, and they are unhappy with Trump. 

We are a long way from November 2026. There is no telling what politicians will do between now and then. 

Economy/Debt/Bitcoin

My prognosis today is that interest rates on Treasury bonds will rise despite the Fed and Treasury’s attempts to set them lower. Those rates impact interest rates in the private sector. Deficit spending will increase debt levels higher than Congressional Budget Office (CBO) estimates. Inflation will continue to exceed Fed targets. Trump will back off on tariffs as consumer prices and interest rates rise. Bitcoin will decline. The stock market? Who knows?

High Debt Levels

The government can’t seem to stop spending. Federal government spending now makes up about 23% of GDP. The deficit in 2026 will be funded by more borrowing and will add another $2+ trillion to overall federal debt. Currently, publicly held federal debt equals about 100% of GDP. If you add in government debt held by the federal government and its agencies it equals 120% of GDP. We have the third highest debt to GDP ratio of the top seven industrialized countries. We also lost our Treasury bond AAA gilt-edged credit rating because of looming deficits. That also leads to higher interest rates.

Most spending is mandatory. About 74% goes to Medicare, Medicaid, Social Security, defense, and interest on debt. The CBO which comes up with this data assumes that there will be more tax revenue coming in because of tax cuts which would spur the economy. This is a big “if.” A softening economy and a pullback in consumer spending is on the horizon. Also, they are counting on tariff revenues to help reduce the deficit. I believe that is magical thinking.

Private debt levels are also high. There are many new “creative” structured private non-bank investments into debt financing. Competition to place debt has forced lenders into loans to riskier companies with problematic equity and weaker revenue streams. With the rush to private lending, weaker loan standards create risks to creditor not seen since the 2008 Great Financial Crisis (GFC). Much of it is invested in AI companies. Some of these publicly held AI borrowers are seeing declining share prices as doubt grows about AI overinvestment. 

Stock Market Values and AI

CAPE, a measure of the ratio of per share stock price to earnings is at a high level not seen since 2000 and 2021. What’s been driving it is the AI boom, or about 10 stocks that have been pushed to very high values. They are responsible for most of GDP growth yet account for only 8% of the economy, which means the rest of the economy has had flat growth. Margin debt (stock purchased with borrowed money) is at $1.2 trillion or 1.78% of market value, the highest dollar amount on record. It was 2.91% at the peak of the dot.com boom. And all that money printed by the Fed during the pandemic (about $4.5 trillion) is almost fully invested, in case you wonder where the money comes from to drive this market to its current high. The Wall Street Journal and other publications have been running articles on the “eerie” similarities of the AI boom to the 2000 dot.com crash.

Crypto

Then there are cryptocurrencies such as bitcoin. Had you ignored my advice several years ago when I said bitcoin was an investment in thin air you would have made a lot of money. Apparently, many people thought thin air was the next big thing and they still do. My point was that it was like the tulip craze in Holland in the 1630s where tulip bulbs were bid up to fantastic prices (a single rare bulb was traded for a house) until someone realized that they were just flowers. The market crashed and Holland went into a long depression.

I still believe that bitcoin has no intrinsic value since it is just a program consisting of ones and zeroes and nothing else. I have studied the uses of cryptocurrencies and the potential uses of blockchain technology dreamed up over the years and none of them have shown any utility unless you wish to trade in illegal goods or hide assets.

Now Wall Street sees bitcoin as a way to make money and have jumped into the market with both feet. JPMorgan, Goldman Sachs, BlackRock, Schwab, Wells Fargo, Fidelity, etc. are all offering investments in bitcoin. There are many ways to do this. They offer bitcoin structured products, derivatives, futures, options, loans collateralized by bitcoin, ETFs. Some companies are buying on margin to increase their buying power of bitcoin. Some are offering “tether” coins which tie your bitcoin to dollar reserves they say are matched dollar to the dollar value of your coin. Promoters are coming up with more, clever investment structures to lure investors in.

I think this entire crypto market rests on a proverbial foundation of sand. It goes up because it goes up. The debt structures created around some bitcoin investments magnifies this risk. If bitcoin starts losing value from its high point (as in right now – from $120,000 to $85,000-ish) one wonders what could happen if it continues its slide. But of course, that couldn’t happen, could it? As a sign of flight to safety, gold hit $4,400 p/oz. the other day.

Tariffs

My prognostication today is that Trump will lower tariffs as prices rise because of inflation, supply shortages, and tariff costs. Also, soft corruption will give trade benefits to Trump supplicants in exchange for benefits bestowed on things Trump favors. Higher prices will impact consumer spending. It is likely the Supreme Court will rule against Trump’s unconstitutional use of tariffs.

For reasons known only to President Trump, he erected worldwide tariffs on “Liberation Day” back in April. There was a 10% tariff on all imports. Twenty-seven countries were hit with much higher tariffs. China was hit with a 125% tariff. Major trading partners such as Japan and Korea were hit with 24% and 25% (respectively) tariffs. The Dow declined 5% by week’s end and the S&P 500 was down 5.7%.

Trump often says that our manufacturing industry was “hollowed out” because of Chinese competition. That is incorrect. Yes, manufacturing employment has shrunk over the past 50 years, but it was because of modern production efficiencies. Manufacturing is still about the same percentage of GDP that it has always been. Despite all that, the U.S. is the world’s second largest exporter of manufactured goods and our workers because of those efficiencies are 10x more productive than, say, Chinese workers. We are very competitive.

Everything was working pretty smoothly before Trump. Jobs were high and unemployment was at a low. The economy was moving along smoothly and growing. That stopped because businesses didn’t know what he would do next and they couldn’t plan for the future. The result of tariffs has been a setback for American business and consumers.

We are already seeing higher prices, reduced economic growth, and lower real incomes. We are also seeing soft corruption in the Administration as businesses and importers beg for tariff exemptions and many get them by contributing some monetary benefit or contribution to something Trump favors.

At some point Trump will realize that tariffs are part of the problem as consumer prices remain stubbornly high and he will start giving more exemptions to importers. That point will be before the November election in an attempt to lower prices for voters.

China

My prognosis today is that we should not fear China and we will not join in a war with China and Taiwan. Trump will start reducing his high tariffs against Chinese goods.

China is still the world’s largest exporter. Good for them. We may complain they aren’t playing fair, or that they are stealing our technology. Whatever. We are still number two in manufactured goods. 

It’s always easy for politicians to paint China as the villain. After all they are Commies and run roughshod over their people. They cozy up to Russia, they threaten Taiwan. They flex their muscles in the China Sea. President Xi is a dictator and is consolidating his hold over the government and his people. 

Fear not. Unless you are a Chinese citizen or Taiwanese neither we nor our allies are going to go to war with China. 

First of all, they are a weak economic power. Their economy is a mess. Real estate values, the underpinning of a lot of Chinese who saw real estate investment as a path to wealth, have collapsed. Again. Their per capita income is below Uruguay’s, down at 93rd place. Our manufacturing workers generate about 10x what Chinese workers produce. With all of their vaunted enterprise, foreigners invest less than half in China of what foreigners invest in the U.S. More opportunity here. Their government dictates the economy and sets goals for economic output, a policy that has failed wherever tried, including in China’s past. Their population is collapsing as people marry later and put off having children. A declining population leads to a declining economy.

President Xi can rattle sabers all he wants, but he and China are not a military threat to us. They need us as their biggest customer. It is true that when things go bad for dictators, they threaten their “enemies” to generate nationalistic support and deflect criticism of their failures at home. Thus their increased belligerence about Taiwan and us.

Our China diplomacy is to walk a tightrope between Taiwan and China. We arm Taiwan but we have limited public diplomatic relations with them. Taiwan is a technological powerhouse, and China knows that and needs them and their mainland investments as well. We occasionally send in a fleet to remind China that the South China Sea is international waters, and the Philippines are an ally. Ditto Japan and Korea. 

The Wall Street Journal recently published a detailed analysis of what would happen if China invaded Taiwan. First is that we would not join in. We have no mutual defense treaty with them. Second, Taiwan is a well-armed porcupine. Third it would be very costly to both sides. A ravaged Taiwan would not be in China’s interest. China will continue to put pressure on Taiwan but will likely try to chip away at them and slowly gain some controls over them similar to Hong Kong. I believe the U.S. would try to negotiate a peaceful result. 

What we should do with China is reduce the tension by re-opening trade relations by lowering the punitive tariffs imposed by Trump. Trade with China has been an enormous benefit to us and them. We should normalize diplomatic relations in order to divert them from aligning with Russia and Iran. These are complex issues, but it would be better to adopt a posture with China that makes us, if not friends, friendly cooperative acquaintances.

Ukraine

What is our policy on Ukraine? I don’t think the administration has one. Russian President Vladimir Putin’s goal is to take all of Ukraine. From my perspective it appears Trump doesn’t know what to do. 

President Trump claimed he would stop the war in one day after his election. We are now in year four of the war. The Ukrainians have stopped the Russians in Eastern Ukraine at great cost to both sides. 

Europe is in a panic about this war. For good reason they fear Russia and believe Putin will not stop at Ukraine. Yet they have been ineffective in their role as negotiators or as a military power. They do supply weapons to Ukraine. They also just pledged a $105 billion loan to them. But they don’t seem to have a unified front. They are counting on us. We have been supplying some sophisticated weapons, such as missiles, but it has been sporadic. Ukraine and Europe do not see us as a reliable ally.

Trump has called Putin six times and met in person once to discuss an end to hostilities or even a temporary truce. The talks have been a failure. Putin sees us and Trump as being feckless and unwilling to seriously back Ukraine. He thinks he can win and is willing to pay the cost in bodies. It makes us weaker, and Trump looks foolish. If we do not take a strong stand against Putin, he will eventually roll through Ukraine and lurk on NATO’s border. That is what Europe fears, and it makes the world a more dangerous place. It will be costly for us and Europe but a stand against warmongers and a defeat of Russia will lead to a more peaceful and stable world. Will Trump’s legacy be the president who lost Ukraine to Putin?

Is it all doom and gloom?

I am not trying to preach doom and gloom. But I am not alone with my views. I believe that there are good investment values, and our resilient economy has shown the ability to absorb and respond to systemic shocks. I do think there is more risk in the economy and politics and a cautious approach would be a good thing right now.