Key Concepts
- Disinflationary Outlook: A prevailing expectation of falling inflation in 2026, driven by a cooling labor market and declining shelter costs.
- Yen Revaluation: A strong belief in the undervaluation of the Japanese Yen and its potential for significant appreciation, particularly with anticipated Fed rate cuts.
- AI & Energy Demand: The AI race is viewed as a new Cold War, with electricity generation capacity – particularly in China – being the decisive factor, potentially leading to energy rationing.
- US Economic Bifurcation: A K-shaped recovery characterized by booming AI-related sectors and struggling “old economy” industries, with consumer spending concentrated among the top 10% of earners.
- Investment Strategy: Emphasis on risk management, diversification, income generation, and capitalizing on undervalued assets like the Yen.
Economic Outlook & Inflation (David Rosenberg)
The discussion began with a focus on the US economic outlook and inflation. Rosenberg strongly disagreed with the notion of early-stage secular inflation, arguing that the market is misinterpreting signals and focusing on lagging indicators. He believes inflation will return to target and even fall below it by the second quarter of 2026, driven by a cooling labor market and declining shelter costs. He emphasized the importance of being “forecast dependent” rather than solely “data dependent,” anticipating future inflation trends. He drew parallels to the 2008 inflation scare, suggesting a similar deflationary outcome could unfold. The US economy is described as highly “lopsided,” with a K-shaped recovery where AI-related capital expenditure is booming (up 17% annually) while the “old economy” is experiencing negative growth (-3%). Real disposable personal income is nearly negative, yet consumer spending remains elevated due to a decline in the personal savings rate.
Federal Reserve & Political Influence
Rosenberg acknowledged the potential for political influence in the upcoming Fed chair selection, with Kevin Worsh emerging as a likely successor to Jerome Powell due to his central bank experience. However, he stressed that the Fed is an institution and data dependency will ultimately dictate policy, potentially leading to more aggressive rate cuts than currently priced in. He cautioned against overstating the impact of a new chairman, emphasizing the Fed’s single mandate of maintaining a healthy labor market to control inflation.
Rosenberg Research & Services
Rosenberg Research serves 2,300 clients across 40 countries, providing investment and economic analysis across all asset classes. Services include daily commentary, weekly reports, and a 24/7 “information hotbox” offering direct access to Rosenberg for client interaction. A two-week free trial is available ([email protected]).
Trade of the Week: Long Yen Position (Eric Townsend & Patrick Szna)
Based on Rosenberg’s Yen revaluation thesis, a trade was proposed: a long December 2026 Yen futures contract coupled with a purchase of December 2026 66 calls at a premium of roughly 3.6% of the underlying price. This structure offers open-ended upside potential. Implied volatility on the Yen is currently low, reducing Vega risk. Detailed trade specifics are available on page three of the accompanying chart deck, and implementation guidance is offered through Big Picture Trading (bigpicturetrading.com) with a 14-day free trial and weekly webinars.
The AI Race & Energy Capacity (Eric Townsend)
Townsend framed the AI race as a new Cold War, representing an existential competition for military and economic dominance between the US and China. He argued that spare electricity generation capacity, not GPU technology, will be the determining factor. China currently holds a significant advantage in electricity generation capacity, both currently and in planned nuclear construction, and is also leading in commercializing thorium energy. The US faces significant hurdles in expanding nuclear capacity due to lengthy construction times and cost overruns. Townsend predicted a future need for massive investment in natural gas-fired power plants as a short-term solution, potentially requiring government intervention.
Market Specific Outlooks (Eric Townsend & Patrick Szna)
- S&P 500: Anticipation of a dovish policy error by the Fed in 2026. JP Morgan has significant open interest in options at the 7,000 strike for the December 31st expiration.
- US Dollar: Downtrend established, with key support at 98 violated, potentially retesting lows around 96.
- Crude Oil: A shift to slight backwardation suggests a potential rally, confirmed by a break above the 100-day moving average (60.26 WTI).
- Gold: Broke above its all-time high of 4,400, with measured move targets in the 4,900-5,100 range, with a possible retest of the 4,370 breakout zone.
- Silver, Platinum, Palladium: Exhibiting parabolic moves, requiring caution. Silver completed a measured move to 72.
- Uranium: Strengthening prices, presenting an asymmetric opportunity. Goldman Sachs’ bullish report on uranium is seen as a positive catalyst.
Conclusion
The discussion presented a compelling case for disinflation in 2026, driven by a cooling labor market and declining shelter costs. A key investment thesis centered on the undervalued Japanese Yen and its potential for revaluation. Furthermore, the analysis highlighted the critical role of energy capacity in the AI race, with China holding a significant advantage. The overall message emphasized a cautious, risk-managed investment approach, prioritizing income generation and capitalizing on undervalued assets in a rapidly evolving economic landscape.
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