January 8, 2026
The financial system is under major stress right now, and a core reason for this is inflation. We've been told a story, but the truth is, inflation is out of control and prices are simply too high. You and I know this from our everyday lives. Despite all the manipulation, all the printing money left, right, and center, they couldn't even get the official rate of inflation down to 2%. Then 2020 happened, and inflation went absolutely crazy. While the rate at which prices are going up has been declining, prices themselves are not going down. This is not deflation; this is still significant price inflation. They managed to get it down to 3%, but they tried for 2% and they gave up. It is not going to get there.
What does this mean for you and I? Inflation is going to stay high. Things are going to stay expensive, no matter who's in charge, no matter what regulations are put in place. We must get our stuff together. The Fed's favorite measure, the Personal Consumption Expenditure (PCE) tracker, is not a real rate of inflation, my goodness, not even close. But it's what they use. So, while we need to watch CPI because businesses and the government use it, we absolutely must pay attention to the real rate of inflation: what you see at the grocery store, what you pay for your electricity bill. The expectation, even for the Fed's preferred measure, is that it will remain above their 2% target well into mid-2026. The theme here is clear: inflation will not come down.
Beyond the official numbers, there are structural drivers for this persistent inflation. Seaglobalization and the push for reshoring manufacturing are driving up costs significantly. Bringing jobs back to countries like the United States means a much, much higher increase in prices. From personal experience, trying to get manufacturing done domestically is incredibly difficult and expensive. One quote for simply getting started was $75,000, compared to virtually $0 in a developing country for identical quality. Small businesses cannot absorb these costs. Consumers have a ceiling; they are only willing to pay so much for products. This reality is already contributing to a slowdown in purchases, especially for the middle class and those further down the economic ladder. This creates a challenging environment where delinquencies are rising, which is a major concern.
Asset managers are recognizing this trend, pivoting to inflation-linked products, which makes sense if you expect higher inflation to persist. However, you wouldn't want to put all your money in that, of course. We are also seeing persistent wage pressures, which further contributes to the inflationary cycle.
The Federal Reserve's Federal Open Market Committee (FOMC) is currently locked in a fierce debate about the interest rate path for 2026, all against the backdrop of these inflation concerns. They are debating whether to cut rates once, twice, or how many times, and by what depth. We won't know for sure until they act, but current indications suggest that they will not be cutting interest rates in January. Things could change, but for now, the expectation is that interest rates will remain higher for longer.
This "higher for longer" narrative has significant implications. While the markets might be a bit volatile as a result, what's truly important is the pressure this puts on mortgage rates and the national debt. These things become a burden for longer, applying more and more pressure across the financial system. The Fed's "dot plot," where voting members indicate their individual expectations for rate cuts, also points to this "higher for longer" scenario.
Market participants are currently betting on the first Fed rate cut to happen by Q3 2026. But consider the domino effect here: if interest rates remain high until then, mortgage rates will stay roughly where they are. What happens if inflation picks up again, if it starts to creep above that 3% mark before any cuts? That would create a serious problem. Employers might start seeing it as a recession, leading to layoffs, one after another after another.
The persistence of higher interest rates also continues to pressure financial sector valuations. Companies need to be lean, very lean, in this environment; their balance sheets matter more than ever. This sustained period of higher rates means that the housing market is likely to remain slow and low. You have to understand the knock-on effect this has on countless industries. As individuals, we also need to recognize that they are already printing money; we don't have to guess. This has already begun. Precious metals, for example, have risen considerably, even "straight to the moon," as some would say. But you don't want to buy something when it's going straight up like that. You don't sell if you own it, but don't pile in; that's not a wise move.
We are seeing some truly wacky stuff going on in the bond market right now, signaling persistent recessionary fears for 2026. The world curve remains inverted, which means you can get a good rate of return on short-term debt, like six months or one year, without needing to buy a 30-year bond. This is an unusual situation that typically doesn't happen when other conditions align, showing just how messed up things are. While market participants are pricing in a higher probability of a "soft landing," there's still a significant chance of a mild recession in 2026. You and I know what an "official recession" feels like. The "higher for longer" narrative is preventing a significant steepening of the yield curve, but when the yield curve inverts and then steepens, that's often a signal of recession. This is just one indicator, but we need to pay attention.
The risk of reacceleration of inflation is significant. If inflation picks up and employers perceive a recession, we could see job losses across the board, impacting many people. Already, delinquencies are rising, which is a big concern for the health of the economy and consumers.
In response to these uncertainties, various industries are making critical adjustments. Insurers, for example, are navigating this volatility by shifting to shorter duration assets for 2026. This reflects a desire for more immediate returns and less long-term exposure. The financial sector, in general, is under pressure from higher rates. There's a great risk rising for banks as inflation impacts consumer spending and potentially leads to business defaults. I would say, stay very clear of financial companies right now; watch out, it's a concern. Banks are also diversifying their hedging strategies, which they absolutely have to do during this period of intense uncertainty. That's the overarching message for 2026: uncertainty.
Beyond these financial maneuvers, governments are still spending a lot on new technologies, particularly the so-called "green transition." This includes significant investment in solar panels and related infrastructure, even by the world's biggest polluters like China. This spending will impact commodities and the broader infrastructure around it. We are also facing demographic headwinds, which are only getting worse. For individuals and businesses alike, it's crucial to be lean. Companies with strong, lean balance sheets are essential in this environment. As for personal investment, while precious metals have seen a surge due to money printing, it's generally not wise to pile into something when it's going straight up to the moon. You don't necessarily sell, but extreme caution is advised.