Positioning for 2026: Macro Bull & Bear Case & Debunking the Oil "Glut" Narrative
Macroeconomic Musings, Bullish and Bearish Indicators for 2026, Energy Market Overview
The Daily Compounder Macro Musings
Heading into each New Year there exists for us all an intense feeling of holding onto what was, alongside an undeniable excitement of what is to come. I have to admit that while my personal life brings me much excitement I cannot say I feel the same way for the US economy broadly. There are compelling cases to be made for what is to be expected in 2026 but if history is any guide we are entering into an ever-increasing period of market volatility stemming from high levels of margin debt, passive flows and ever stretching valuations.
While markets continue to hit all-time highs on the back of just a handful of equities, the economic back drop continues to show signs of weakness. Inflationary pressures loom despite multi year lows in oil and agricultural pricing, unemployment continues to increase, and the response from our government is to simply cease releasing economic data from sources like the Bureau of Labor Statistics (BLS) rather than deal with the underlying economic realities. The Trump administration is not the only admin who has turned a blind eye to systemic leverage in the system with a tendency to hit the panic button at any signs of a liquidity crunch and certainly will not be the last.
While we think the FED is an unnecessary and harmful entity for the US broadly, there is an undeniable psychological phenomenon that brings out the animal spirits of the market anytime rates are cut. It would appear from recent headlines that Powell is going to be out in May and Trump will appoint a much more agreeable Fed Chair that will slash rates to where Trump wants them. The level of rates in the view of the current admin is 2% which is currently below the rate of inflation even with a weak commodity market broadly.
As we exit 2025, we leave behind a tremendous amount of Tariff uncertainty as well that Powell and others have blamed inflationary pressures on. While we think there may be “some” tariff certainty post the Supreme Court ruling, it cannot be denied that the US is now seen as an unreliable and volatile trading partner. The effects of that shock to our allies and trading partners will not disappear overnight and we think will have lasting psychological impact.
On the topic of tariffs, I think it is important to try to understand why the Trump Admin has behaved the way it has, and what the goal of these tariffs truly was. When Liberation Day was originally announced our knee jerk read was Trump was going to make deals with everyone but China, locking them out of world trade and pressuring them to “play nice”. In this way the US would be dealing with the major imbalance of trade not just between the US and China, but China and all of its trade partners. It turned out, this was not the approach Trump and his Administration took. After it was clear this was not about a trade balance with China, our second theory was that Trump, though publicly stating how great and strong America is, can see the writing on the wall for this economy. We thought that the shock to the system from Liberation Day would force trading partners to come to the table a cut deals with the US knowing that behind the scenes this April 2nd Tariff Day was coming from a position of weakness and desperation, not strength.
As we sit here 8 months later, we are still confused as to the direction Trump is heading with the tariff policy but what we feel certain of is this will ultimately fuel the inflationary world we model out in house. The use of the Tariff funds has already been stated as a way to stimulate the economy and put cash in the pockets of consumers rather than to pay down debt or invest in US infrastructure.
Given the stated use of the Tariff funds, and the inflation we think is coming down the pipe, it is worth asking how Trump and Co. plan to handle rates on the back of what could be an extremely hot economy with an ever-weakening US dollar. Knowing Trumps personality and studying past inflationary episodes it would not surprise us at all if price caps/ price setting was done as it has been in the past. Nixxon put price caps on the US economy ahead of election season and though Trump does not have an election to prepare for personally, 2026 Midterms are rapidly approaching, and all stops will be pulled out ahead of the midterms to win over the voting class which essentially means anything is on the table.
On the back of all this, we are now interested in kinetic conflict with Venezuela. It is interesting to us that Venezuela has been selected as the country of choice by the Trump Administration and while they will ultimately point to drug smuggling and issues of immigration, make no mistake about it a war with Venezuela would be done for one thing and one thing only, Oil. We think the interest in a hot war with Venezuela would be an admission by the Drill Baby Drill crowd that US production simply can’t sustain its current trajectory which makes sense as every day more evidence of Permian production weakness rears its ugly head.
Macro Bull Case
