By Randall W. Forsyth
Predictions are hard, especially about the future. So said the leading philosopher of the past century, Yogi Berra, although originally it was attributed to Niels Bohr, the quantum physicist, which isn't surprising since uncertainty is a core concept of quantum mechanics as described by Werner Heisenberg.
Regardless of who said it first, the contrast between their modesty about predictions and the hubris of market forecasters, who confidently look to what they call the foreseeable future, is striking.
I've recently read with skepticism scores of economic forecasts conjured up this time of year. An exception among them is the purposely titled "Outrageous Predictions" proffered annually by Saxo Bank of Denmark.
This year's most provocative prediction was that the impending nuptials of Taylor Swift and Travis Kelce would provide a shot of stimulus to the world economy. So, after Kelce's Kansas City Chiefs are (probably) eliminated from the National Football League playoffs, the bank's John J. Hardy hypothesizes that the tight end and the pop superstar will quickly wed and that she will immediately become pregnant.
The result: Hundreds of millions of Swifties will then quickly emulate their idol, setting off a marriage and baby boom among millennials and Gen Zers. World economic growth forecasts will be revised up by one percentage point annually for the next five years, says Saxo, leading Wall Street to dub the episode the "Swiftie put."
Leaving aside how easily a 30-something woman can conceive (a fact that has helped a thriving in vitro fertilization industry), other couples confront arguably a bigger hurdle to starting a family: affordability. In fact, that would be our nomination for the word of the year, rather than the phrase "rage bait," so dubbed by the Oxford Dictionary.
President Donald Trump asserts that Americans' complaints about affordability are a "con job" and a "hoax" perpetrated by Democrats. But Jim Bianco, eponym of Bianco Research, points to a Politico poll that finds 37% of Trump voters agreeing that "the cost of living is the worst they've ever seen." That contrasts with economists' assessment of inflation of 2.8% over the past year, based on the central bank's favored measure, or future inflation expectations, which Federal Reserve Chair Jerome Powell asserts are contained (based on implied future price rises embedded in Treasury inflation-protected securities, or TIPS).
Regular folks, however, have seen prices rise far faster than their wages in the five years since the start of the Covid pandemic, Bianco points out. Consumer prices are up over 26% over that span, while pay has grown just 22%. That's what's reflected in the Politico poll, which not surprisingly was even more negative among Democratic voters. Those sentiments are further reflected in the recent off-year election results, which saw Democrats making gains and a Republican eking out a narrow victory this past week in a deep-red Tennessee congressional race.
As for 2026, "who wins [the] affordability issue wins [the] midterms," declares the Bank of America strategy team led by Michael Hartnett, which regularly delivers astringently nonconsensus views. If the administration wants to run the economy and the stock market hot, investors should expect still-deeper government intervention "to directly control prices/boost supply in energy, healthcare, housing, insurance, utilities..." they wrote in a Nov. 13 client note.
That should produce good news in reduced "U.S. electoral affordability anger" from an end of the trade war and lower tariffs, they continued. How to control prices in such sensitive sectors and, at the same time, run a hot economy with loose monetary policy and a wide fiscal deficit, while inflation runs above target?
Precedents no longer seem to matter these days, but let us turn the clocks back more than a half-century.
On the Sunday evening of Aug. 15, 1971, President Richard Nixon announced a wage-and-price freeze, an import surcharge, and the end of the dollar's last link to convertibility into gold at $35 an ounce. With his re-election campaign looming in 1972, Nixon remembered well his loss to John F. Kennedy during the mild recession of April 1960 to February 1961.
Price controls would in theory cap inflation, then running over 4%. Meanwhile, terminating the greenback's tie to gold would let the Fed under the compliant Arthur Burns run a stimulative policy to deal with unemployment close to 6%. At the same time, protectionist tariffs were imposed. Inflation surged to 8.7% by the end of 1973, with prices rising double digits in the Great Inflation following the Organization of the Petroleum Exporting Countries' ratcheting up of oil prices.
What are the chances of a replay?
Inflation is running well ahead of the Fed's 2% target, while the labor market shows signs of weakening, even though the headline jobless rate remains contained at 4.4%. But as Powell has pointed out, that leaves the central bank no risk-free decision.
Could the administration try to unravel this Gordian knot by suppressing prices and pushing for easy money? It has already demonstrated a willingness to intervene in the private sector with massive ownership stakes in corporations such as Intel and others, while demanding payments from Nvidia and Advanced Micro Devices of 15% of revenue on some artificial-intelligence chip sales to China, among other measures. And any number of corporate policies have been altered to be in accord with administration priorities.
So, it may not rate as much of a surprise if, as Hartnett et al. put it, there is a further transition from an "invisible hand" of the market to the "visible fist" of government controls. They see that leading to "negative profit margins in these 'whip inflation' sectors," harking back to another sorry 1970s episode, the Whip Inflation Now, or WIN, buttons handed out by the hapless Ford administration.
All of these policy twists and turns would then lower the consumer price index, which the BofA team sees as spurring a "contrarian" rally in long-dated Treasury securities, with their higher prices translating into lower long-term borrowing costs.
Perhaps that could mollify the electorate. But would the bond market go along?
The betting markets see Kevin Hassett, director of Trump's National Economic Council, as the odds-on favorite to succeed Powell as Fed chair, based on perceptions that he's most likely to deliver the short-term interest-rate cuts that Trump has been loudly demanding.
But a reduction so far of 150 basis points (1.5 percentage points) in the federal-funds target since September 2024 has translated into a rise of some 50 basis points in the 10-year Treasury yield, the benchmark for key borrowing costs, notably mortgage rates. That's the only time in the past four-plus decades that has happened, Bianco observed. The four other Fed easing episodes saw the 10-year yield decline.
Peter Tchir, head of macro strategy at Academy Securities, sees a Hassett Fed working more closely with Treasury and the administration -- "helping to pave the way for lower yields and easier monetary conditions." The Treasury has been working toward that end since 2023 under the Biden administration by leaning heavily on issuance of short-term T-bills while capping the supply of longer-dated securities, writes Mehmet Beceren at Rosenberg Research. That effectively has compressed 10-year yields by 20 to 25 basis points, he estimates.
This "Activist Treasury Issuance" has had the impact of Fed quantitative easing -- the central bank's purchase of securities -- with two important effects: First, it lowers the term premium (the extra return to compensate investors for future uncertainty) on longer maturities below what the budget deficit would imply. Further, he adds, it has been "quietly supporting risk assets," notably stocks and corporate credit.
Trump's disruptions of the interplay between the Fed, Treasury financing, the banking system, and foreign capital flows will determine the 2026 economy, just as his trade disruptions were drivers of the 2025 economy, predicts Steven Blitz, chief U.S. economist at TS Lombard.
Here are the problems he sees: Treasury borrowing will increase 7% while the U.S. economy will grow 5% in nominal terms (real plus inflation). At the same time, banks would be expected to boost lending to support the economy, which would mean cutting their holdings of government securities. Meanwhile, interest payments represent 14% of federal outlays, more than the military, and is the fastest-growing part of the budget.
Further complicating Treasury's problem will be the need for foreign funds, which Blitz sees being deterred by a heightened inflation risk and the massive fiscal deficit.
Rising bond yields abroad also reduce the incentive to send capital stateside. In particular, soaring Japan government bond yields have made the domestic market more attractive than U.S. bonds for Japanese investors, after taking into account the risk of a falling dollar.
On that score, another of Saxo Bank's Outrageous Predictions is that the greenback's dominance may be challenged by the Chinese yuan, which Beijing would back with its growing gold reserves, writes Charu Chanana, the bank's chief investment strategist. That would provide something not seen in decades -- a currency tied to a tangible reserve rather than to government promises. (Official Chinese gold reserves are at 2,300 metric tons, but unofficial estimates put them at twice that or more, compared with U.S. holdings, according to the World Gold Council, of 8,133 metric tons.)
As confidence in a golden yuan grows, Chanana sees investors and reserve holders cutting their holdings of U.S. Treasuries, raising yields. Meanwhile, the dollar's share of global reserves could fall by a third as the gold-backed Chinese currency becomes a durable second global anchor, ending the dollar's effective monopoly. In the process, she sees gold rising above $6,000 an ounce, nearly a 50% increase.
Happy New Year!
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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December 05, 2025 15:28 ET (20:28 GMT)
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