MacroVoices #509 Marko Papic: Geo-macro Outlook for 2026

Key Concepts

Geopolitics and Market Drivers: The increasing influence of political and geopolitical events on financial markets.
President Trump's Negotiation Strategy: A pattern of aggressive rhetoric followed by unexpected negotiations and settlements.
Venezuela's Oil Reserves: The significant but underutilized oil potential of Venezuela and its implications for global oil prices.
Saudi Arabia's Domestic Priorities: The need for Saudi Arabia to increase oil revenues to fund its Vision 2030 economic diversification plan.
Russia-Ukraine Peace Deal: The potential market impact of a resolution to the conflict, including oil supply and geopolitical realignments.
US-China Relations: The evolving dynamic between the US and China, with a focus on potential tariff reductions and trade deals.
European Defense Spending: The ongoing rearmament trend in Europe, driven by geopolitical concerns and fiscal stimulus.
Chinese Equities Performance: The strong performance of Chinese stocks in 2025 and potential for further upside.
US Midterm Elections: The critical role of the upcoming midterm elections in shaping economic and market policy.
Monetary Policy vs. Fiscal Policy: The shift towards monetary policy as the primary tool for economic stimulation in the US due to depleted fiscal room.
Housing Market Reflation: The focus on revitalizing the US housing market through lower borrowing rates and innovative mortgage solutions.
Central Bank Independence: The debate surrounding the independence of central banks and its impact on markets.
Dollar Weakness: The potential for a weakening US dollar and its implications for global asset allocation.
Asymmetric Trading: Strategies focused on managing risk and capitalizing on opportunities with defined risk/reward profiles.

Geopolitics and Market Implications

Venezuela and Potential Air War/Negotiations:

President Trump's "No-Fly Zone" Declaration: President Trump's declaration of a no-fly zone over Venezuela via Truth Social, rather than traditional Pentagon channels, is interpreted as a tactic to initiate negotiations rather than an immediate prelude to an air war.
Trump's "Maximum Pressure" Framework: This aligns with Trump's established strategy of aggressive posturing ("punch people in the mouth") before engaging in negotiations, as seen in past trade disputes.
Maduro's Concessions: Reports suggest Maduro is offering significant concessions, which Trump is leveraging.
No Ground Incursion: A ground invasion of Venezuela is deemed highly unlikely due to Trump's aversion to prolonged military engagements like those in Afghanistan and Iraq.
Potential for "Parking Lot" Scenario: A 50/50 chance exists that Venezuela could be subjected to extensive bombing if negotiations fail, given its limited defensive capabilities.
Oil Price Impact:
- Short-term Bullish: A military conflict could drive oil prices up due to supply fears.
- Long-term Bearish (Unlikely Soon): A hypothetical scenario where US companies develop Venezuela's vast, underutilized oil reserves could be bearish long-term, but this is considered a fantasy in the short to medium term due to Venezuela's destroyed productive capacity.
Urgency and Saudi Arabia's Role: The urgency behind the Venezuela situation is linked to Saudi Arabia's need for higher oil prices. Crown Prince Mohammed bin Salman (MBS) reportedly informed President Trump that Saudi Arabia cannot indefinitely keep OPEC production high to suppress prices, especially with its domestic development goals (Vision 2030). Saudi Arabia needs Brent crude prices around $70-75.
US Need for Alternative Crude: The US needs to secure alternative crude sources as OPEC production is expected to decrease in 2026.
Venezuela's Production Reality: The idea of quickly replacing Venezuelan oil production (estimated at 17 million barrels/day) is dismissed as unrealistic due to the country's "third world status" and destroyed infrastructure.

Russia-Ukraine Peace Deal and Oil Prices:

Trump's Push for Peace: President Trump is actively pushing for a peace agreement, which would be a significant foreign policy accomplishment.
Potential for Sanctions Relief: A peace deal could lead to the relaxation of sanctions on Russia, potentially bringing more Russian oil back to the market.
Oil Price Impact:
- Short-term Decline: A peace deal could lead to a 5% decline in oil prices, primarily due to the lifting of sanctions on Russian diesel, which would impact other products.
- Limited Downside: Further significant price declines are unlikely, with Brent potentially reaching $55 and WTI $50 at the lowest.
Geopolitical Realignment: A potential "reverse Nixon" strategy might be in play, aiming to decouple Russia from China and foster closer ties with the US. The 28-point plan with Russian input suggests potential US-Russia collaboration.

Japan-China Tensions and US-China Relations:

Aggressive Japanese Premier: The new Japanese Prime Minister, Takayishi, is described as populist and nationalistic, with a more aggressive foreign policy stance than her predecessors, influenced by her mentor Shinzō Abe. Her ruling party's alliance with the more aggressive Innovation Party further amplifies this.
Muted Chinese Response: Despite Japan's more assertive stance, China's response has been surprisingly muted. This is attributed to President Trump's upcoming visit to China and his continued friendly rhetoric towards President Xi.
China's Strategic Calculation: China is likely testing the US alliance in East Asia and its willingness to isolate Japan, but its current approach is not as aggressive as it could be.
US-China Détente: The primary story is the potential for a US-China détente. Trump is seen as the only leader capable of brokering a trade deal with China, similar to Nixon's opening to China.
Tariff Reductions: A significant surprise for investors in 2026 could be further unilateral reductions in Chinese tariffs by President Trump, driven by his focus on inflation and the midterm elections. This could lead to a progressively improving US-China relationship.

Market Outlook Based on Geopolitics:

Oil Prices: Expected to rise in 2026 as Saudi Arabia prioritizes its domestic needs over US demands for low prices.
European Aerospace and Defense: Despite expectations of a ceasefire, Europe's rearmament cycle is far from over due to ongoing geopolitical threats (Putin) and its role as fiscal stimulus. Investors are advised to buy back into sold-off equities in this sector.
Chinese Equities: The best-performing equities in 2025, with potential for further upside due to a US-China détente and significant untapped institutional allocation. Many institutional investors (sovereign wealth funds, pension funds) have minimal exposure to Chinese assets despite China's economic significance.
Global Outperformance: The combination of rising oil prices, strong European defense, and booming Chinese equities suggests another year where the rest of the world outperforms US equities and assets, mirroring the trend of 2025.

US Politics and Market Impact

Midterm Elections and Economic Stimulation:

President Trump's Goal: President Trump's primary objective is to win the midterm elections, which historically presidents tend to lose.
Avoiding Economic Slowdown: To achieve this, preventing an economic slowdown is crucial. Current forecasts indicate a slowing labor market and declining consumer sentiment.
Fiscal Policy Limitations: Further fiscal stimulus is unlikely due to the bond market's negative reaction to previous profligate spending (bond yields rose significantly in late 2024/early 2025) and Republican opposition to increased debt.
Monetary Policy as the Primary Tool: With fiscal levers exhausted, monetary policy is the only remaining path to reflate the US economy and incentivize consumers.
Housing Market Focus: The administration is prioritizing the housing market through initiatives like assumable and portable mortgages, and the potential declaration of a housing emergency. The goal is to lower borrowing rates and reflate the housing cycle, addressing the high cost of essential middle-class goods like housing, education, healthcare, and childcare.
"Main Street" vs. "Wall Street": While initial rhetoric from Treasury Secretary Scott Besson emphasized "Main Street over Wall Street," this terminology has been dropped. The realization is that the stock market is intrinsically linked to the real economy, as the top income deciles drive consumption. A slowdown in the stock market would necessitate a recession, which the administration appears unwilling to accept.
Fed's Role: The Federal Reserve is expected to cut rates aggressively after May 2026, effectively steepening the yield curve and benefiting Wall Street, potentially creating a larger bubble.

Central Bank Independence and Market Implications:

Erosion of Independence: The expectation is that President Trump will appoint a Fed chair who allows monetary policy to be more dovish than it should be, leading to a potential erosion of central bank independence.
Historical Precedent: This is not unprecedented, as US monetary policy has historically been dovish under various administrations.
Market Reaction: Erosion of independent central banking is seen as positive for equities ("yolo time, baby").
Dollar Weakness as an Escape Valve: The primary consequence of this dovish monetary policy is expected to be US dollar weakness.
Investment Strategy: The recommended strategy is to increase exposure to non-US assets (Euro, Renminbi) and diversify away from dollar-denominated assets. This includes European, Chinese, and Japanese equities, rather than solely relying on safe-haven assets like gold and Bitcoin, especially if a recession is avoided.

Kevin Hasset as Fed Chair:

Credentials and Experience: Kevin Hasset is presented as a highly experienced economist with a long history of advising Republican presidential campaigns, countering claims that he is merely a "Trump guy."
Confirmation Prospects: While Democrats and liberal media may portray Hasset negatively, his confirmation is likely, potentially with some Republican defections.
Monetary Policy Outlook: Regardless of the specific Fed chair, US monetary policy is expected to be more dovish, with the Fed funds rate potentially 50 basis points lower than it should be. This is seen as a continuation of a trend observed in the last 25 years, rather than a radical shift towards an "emerging market" scenario.
Historical Examples of Dovish Policy: The housing crisis of 2007, the Fed's response to the GFC, and Jay Powell's handling of inflation post-2020 are cited as examples of periods where US monetary policy was arguably too dovish.

Market Analysis and Trade Ideas

S&P 500:

Momentum: Strong upward momentum since November 21st, trading above the 5-day and longer-term moving averages.
Outlook: On the fence regarding a year-end Santa rally to new all-time highs. Stochastics are topping out, suggesting a potential short-term dip. The key technical level to watch is the 50-day moving average.
Correction: The market has experienced a 6% correction, with many metrics oversold. The current rally could lead to new highs or a larger topping formation.
Key Catalysts: The FOMC meeting and delayed jobs numbers in mid-December will be crucial in determining the Fed's dovish pivot and the market's direction.
Range-bound Trading: The next week is expected to be range-bound until these major news events are released.

US Dollar Index (DXY):

Technical Break: The short-term trend line since late September has broken to the downside, but without significant momentum.
First Close Below 50-day MA: This is the first close below the 50-day moving average in months, signaling potential weakness.
Implications of Dollar Weakness: A resumption of dollar selling would confirm the reflation trade, favoring emerging markets, international equities, and commodities.
Headline Driven: The dollar's future direction will likely be driven by headlines, particularly President Trump's and Besson's next moves.

Crude Oil:

Fundamentals: Decidedly bullish fundamentals, with Cushing inventories at operational minimums.
Short-term Suppression: Invisible hands are expected to keep oil prices low through the midterm elections.
Price Action: Selling for nearly 40 days without accelerating to lower lows.
Potential Catalysts: A Russia-Ukraine peace deal or escalation in Venezuela could impact prices.
Momentum Divergence: Momentum indicators suggest downside momentum has dissipated and reversed.
Outlook: Speculation of closing above $60 in the coming weeks, especially with a weak US dollar. However, oil is still in a primary downtrend and holding below the 50-day moving average.

Gold:

Breakout: Formative breakout from a symmetrical triangle formation completed to the upside.
Consolidation: Currently in a consolidation phase (45 days), which is shorter than previous corrections.
Short-term Pause: Short-term stochastics are overbought, suggesting a temporary pause or dip before the rally resumes.
Measured Move Targets: Potential targets in the 4930 to 5120 range.
Confirmation: Silver futures have already broken out with momentum, and gold miners are breaking to higher highs, indicating bullish sentiment.
Timing: A breakout to new all-time highs is possible in December, likely after the FOMC and jobs data releases.

Uranium:

Long-term Fundamentals: Extremely bullish long-term fundamentals.
Short-to-Intermediate Term Concern: Uranium miners are showing "dead catish" behavior, lagging the S&P 500's recovery.
Technicals: Miners have not retraced a significant portion of their correction, and short-term stochastics are overbought, suggesting a potential dip or consolidation.
Buying Opportunity: Any short-term downside is seen as a buying opportunity, but the timing and depth of the dip are uncertain.
Lagging Sector: Uranium is lagging the S&P 500, which is unusual as it typically bottoms and recovers before the broader market.
Uranium Futures: Consolidating and could bullishly break out.
Uranium Stocks: Have corrected 50% of their prior rise, making them interesting for buy-on-dip traders.

Copper:

Breakout: Fresh breakout to new cycle highs, particularly on the LME, driven by staggering demand for physical metal.
Demand Drivers: Goldman Sachs points to Asian demand, specifically from Taiwan and Korea, with eventual winding up in China.
Technical Significance: A significant breakout to higher highs, surpassing previous highs except for a tariff-induced spike.
Price Target: Measuring out for a test of the 575 level, with a retest of the July high (tariff bump) being 100% on the table.
Bullish Outlook: A decidedly bullish breakout, with copper plays gaining momentum.

10-Year Treasury Note Yields:

Settling In: Treasury yields have settled in, hovering around the 4% level and the 50-day moving average.
Dollar Impact: The potential for a dollar breakdown will influence the short-term trend of yields.
Technical Signal: Breaking higher from current levels would be a significant technical signal.
Bullish Bond Market: The last six months have seen a generally bullish Treasury bond market, and the question is whether this will end with higher yields.

BCA Research GeoMacro Function

Core Premise: In 2025 and beyond, macro investors must incorporate politics and geopolitics into their frameworks. These are not optional but integral components.
Holistic Approach: GeoMacro blends politics, geopolitics, and macroeconomics, treating them as interconnected.
Asset Class Focus: The strategy aims to call the direction of five major asset classes: S&P 500, US Dollar, 10-year Yield, Gold, and Oil. Success in three out of five is considered sufficient for accurate global asset allocation.
Policy Maker Focus: The emphasis is on forecasting policy maker reactions to economic data, rather than solely relying on linear extrapolation of mathematical data.
Track Record: The strategy has performed well over the last two years, with a bullish stance on the S&P 500 and a target of 6,950.

Postgame Segment and Trade of the Week

European Defense Trade: A bullish trade on European defense equities is recommended, despite recent profit-taking. The rearmament cycle is seen as ongoing due to geopolitical threats and fiscal stimulus.
Trade Idea: Long Airbus stock, with a January 190-170 put spread as downside protection to soften drawdowns if timing is early.
Asymmetric Trading Challenge: A year-long initiative launching in 2026 to help traders master asymmetric setups with real-time guidance and accountability. Details available at bigpicturetrading.com/challenge.
Research Roundup: Includes links to the asymmetric challenge webinar, interview transcript, trade of the week chart book, and curated articles.

Conclusion and Synthesis

The Macrovoices episode 509 delves into the intricate interplay between geopolitics, US politics, and financial markets in the lead-up to the 2026 midterm elections. The central thesis is that President Trump's administration will prioritize economic stimulation and electoral success, primarily through dovish monetary policy, leading to potential dollar weakness and a continued outperformance of global assets over US equities.

Key geopolitical flashpoints like Venezuela, Russia-Ukraine, and US-China relations are analyzed not just for their immediate market impact but as strategic moves influencing broader economic objectives. Saudi Arabia's domestic needs are identified as a critical factor in future oil price dynamics, suggesting a potential shift away from sustained low prices.

The discussion highlights the exhaustion of fiscal policy as a stimulus tool, placing the onus on the Federal Reserve to manage economic growth. This is expected to result in a more dovish monetary policy, potentially eroding central bank independence and creating asset bubbles, with the US dollar serving as the primary escape valve.

For investors, the takeaway is to diversify away from dollar-denominated assets and consider overweighting European defense, Chinese equities, and other international markets. The episode emphasizes the importance of incorporating political and geopolitical analysis into investment frameworks, as these factors are increasingly becoming the primary drivers of market movements. The recommended trade of the week on European defense equities exemplifies this approach, betting on a sustained trend despite short-term headwinds.