Fat Tails on Fire

Entering 2026, we have been shocked by the narrow goldilocks consensus on the economy, pairing improving growth with declining inflation and additional fiscal and monetary stimulus. Indeed – the global economy is growing, and the US is accelerating, too, as extra fiscal measures kick in. But the cost of adding fiscal and monetary stimulus at a time when real-time growth measures are already rising to mid-single digits is likely to be currency depreciation and/or inflation. 

On the one hand, the Trump administration’s policy could succeed in its attempt to regain hard resources, move strategic production back to the US and engineer a deflationary growth boom, while at the same time revamping the US Dollar’s monetary dominance in the financial system. On the other hand, many see the recent geopolitical actions in Venezuela, as well as the negotiations and tensions over Greenland, Alberta and Cuba as disorderly and too-late attempts to regain control of natural resources – unlikely to alter the course of US debt sustainability. 

The irony is – financial markets are currently pricing in both outcomes at the same time. 
The recent rally in precious metals, driven by both global central bank purchases as well as institutional investors in Asia, signals increasing fears over the US ability to service its debt without pushing interest rates further below inflation. The markets’ focus on debasement risk has seen a pause after Kevin Warsh’s nomination as the future Fed Chair – but we believe the administration will continue to exert its pressure on monetary policy. 

At the same time, credit and rates markets remain calm, pricing in stable term premia and record-low credit spreads. This seems to suggest that despite increasing deficits in the public sector, as well as record high capex in public and private credit, debt sustainability is not an issue. But, as we know, both rates and credit markets have been kept stable by monetary liquidity – and the first cracks have already opened up last year. 

There lies the opportunity for investors. As global powers compete for control of technology, strategic geographies and raw materials, record fiscal and monetary stimulus have compressed risk premia to record lows: no country can afford a recession while in an existential fight. As history shows the ultimate loser is often the currency: investors have been buying riskier assets for capital preservation and to escape debasement risk.  

But while hard assets can provide a safe haven, credit markets are near the point of offering only downside risk