According to Frank Shostak who wrote for Mises Wire an essay entitled, Financial Bubbles: How they Make Us Poorer, “we rightly associate a bubble activity with an expansionary monetary policy of the central bank. This type of policy gives rise to various undertakings that, in the absence of the expansionary monetary policy, would not have emerged. An expansionary monetary policy - through the lowering of the interest rates via increases in the money supply - diverts savings to various projects that emerged on the back of the expansionary policy.....
Expansionary monetary policies via a central bank, which artificially expands money and credit, warps the structure of production, in part supporting malinvestment in activities that would not have emerged - at least at that time and to that extent - under a free market. Or we could say that there is a diversion of resources from wealth-generators towards non-wealth-generators as a result of the expansionary monetary policy of the central bank.”
MF: In earlier reports I already explained that the US economy was for the typical household far weaker than what the US government was claiming with its distorted statistics. Charlie Bilello notes that, “the labor market in the US has perhaps never been more confusing than it is today. The latest nonfarm payroll report revealed that the US has added an average of 10k jobs per month over the last 4 months, the fewest since the 2020 recession. The total number of jobs in the US increased by 0.6% over the past year, the slowest growth rate since March 2021. In the past 50 years, this type of weakness has preceded a recession and a spike in the Unemployment Rate 100% of the time”
I am bringing this up because a commentator recently opined that “The 60/40 Portfolio Is Dead Because Bonds No Longer Work.” While I do not entirely disagree with this statement, I would like to argue as follows.
Based on weakening economic statistics, and statements by the KNOW-IT- ALL INTERVENTIONIST, Mr. Trump, it is likely that at some point in 2026, Treasury securities could rally with gusto. One reason, which would support this line of thinking is that according to Callum Thomas (December 2, 2025), “Investor allocations to bonds have reached the lowest point since 2007.We’ve seen this happen before. Bond allocations reached major lows at both of the last two major stock market peaks (2000, 2007), and basically served as a bear market harbinger.”
So, my first contrarian recommendation for 2026 would be to increase the allocation to US Treasuries. I do not think that Treasuries have a huge upside potential based on fundamentals but given the current low exposure of investors, Treasuries could rally once the investment community realizes that the economy is in recession.
At the same time, we should also seriously consider the consequences of further US Treasury bond declines – that is the case where interest rates would go up and not down. Let us assume the TLT, which currently trades around 87.50 would decline to around 75. While not written in stone, it is likely that stocks would get hit very hard given their high valuations and the existing leverage.
Now, looking at some charts of longer-term bonds, we can observe a period of two years during which we had relative calm in interest rates because they moved largely sidewards. But this is likely going to change shortly with interest rates either going to rise substantially (bonds down) or with rates tumbling (bonds rallying sharply). I believe that in both cases US equities would decline.
As I explained in recent reports, I believe that 2026 will be for most investors a disappointing year because strategists are far too optimistic. A recent Bloomberg report was entitled: Bulls Only: Every Wall Street Analyst Now Predicts a Stock Rally (2025-12-29). Among others it noted that, “….after three years when the equity market’s rip-roaring run made a mockery of any bearish calls, sell-side strategists are marching in lockstep optimism, with the average year-end S&P 500 forecast implying another 9% gain next year. Not a single one of the 21 prognosticators surveyed by Bloomberg News is predicting a decline” (emphasis added).
Precious metals became at Christmas 2025 remarkably overbought and vulnerable to a more meaningful correction which transpired. However, among all the asset classes that I invest in (real estate, bonds & cash, stocks, precious metals), I still have a preference for precious metals in physical form given that global debt has climbed to an all-time high of $337.7 trillion by the end of the second quarter of 2025, according to the latest Global Debt Monitor from the Institute of International Finance (IIF), and that geopolitical tensions are increasing.
I hope all my readers are having a great time with friends and family this Holiday season. I wish you all the best in what promises to be a very exciting yet debilitating year 2026.
With kind regards
Yours sincerely
Marc Faber
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