The Weekender is my bi-weekly take on macro shifts and emerging themes. It’s not investment advice — or even our firm’s official view. I aim simply to inform, challenge, and maybe entertain. If you’d like this in your inbox every other Saturday morning via Northern Trust, subscribe to The Weekender.

Key themes:

• Federal Reserve Dynamics: Kevin Hassett likely to be next chair, with potential use of Section 13(3) lending powers

 

• Liquidity & Balance Sheet: Quantitative tightening ends, but Fed speeches hint at a smaller balance sheet and possible yield curve control

 

• Left-Tail Risks: Recession, elevated valuations or midterm moderation

 

• Right-Tail Risks: Reacceleration

 

• Tech Wave: AI, robotics and cloud convergence mirror Manhattan Project-scale initiatives.

 

• Global Debt Risks: UK, France and Japan in focus — too consensual?

Outguessing the Guessers

No need to anticipate the anticipation of others. By now, you’ve read every commentator’s prognostication for 2026. So what’s left to anticipate? What’s more fun — and sometimes rewarding — is to guess what those guesses haven’t yet guessed. Fight the gaps, in other words. What follows is an exercise in tail risks: an attempt to identify what’s not already identified, with a stocking-filler resource for those who want to dig deeper.

Kevin’s Here to Lend a Hand

I love the name Kevin — I’ve got a brother, two uncles, and once a cat called Kevin. Sadly, however, it’s become very unpopular as a baby name. Like Gary. So I was pleased to see it’s increasingly likely Kevin Hassett will be the next Fed chair. My reading of Hassett is he appears to be a low-tax, low-rates, pro-growth, pro-crypto economist who believes capex and AI will deliver productivity, giving the Fed cover to run things hot without unsettling inflation — a view echoed by benign inflation breakevens.

He’s a structural stock market bull, albeit with questionable timing (he co-authored Dow 36,000 just before the dot-com bust). Hassett wrote “Spending, Taxes, and Certainty: A Road Map to 4%” in The 4% Solution, architected President Donald Trump’s 2017 tax bill (Tax Cuts and Jobs Act), and shares the view that regulatory dominance (a la quantitative easing [QE]) has created perverse outcomes — inequality and unaffordability.

Hassett sees monetary policy as a tool to promote — not create — growth and views housing affordability as central to economic policy. Lower rates would stimulate housing and ease costs for students and lower-income cohorts. But Hassett may go further, tapping the Fed’s lending powers under Section 13(3) of the Federal Reserve Act — if he can persuade Treasury Secretary Scott Bessent that “exigent” circumstances exist. That shouldn’t be hard: Both Bessent and the president have called housing and student loans a “crisis.” With midterms approaching, a pivot to Main Street seems plausible — mortgage reforms, social housing and lower tariffs on construction goods all fit this framing. So my first guess, albeit a long shot — Kevin lending a hand via 13(3) — is one few others are guessing.

Shrinking The Balance Sheet

One popular guess: The Fed’s balance sheet will stop shrinking and may even rise again. Quantitative tightening has ended, which should free up reserves, ease repo pressure, and improve liquidity (Bitcoin rejoice!). But reading speeches from Bessent, Vice Chair for Supervision Michelle Bowman and member of the Fed Board of Governors Stephen Miran within the context of a Main Street pivot above, crisis tools like QE may face curtailment, with focus shifting toward shrinking the balance sheet and lowering rates as the principal delivery mechanism for monetary policy.

Investment conclusion? Unclear. The Fed’s been shrinking its balance sheet for some time, and markets haven’t seemed bothered (see all-time highs). Moreover, reforming the Supplementary Leverage Ratio (SLR), which should improve banking liquidity, could pick up any slack — possibly as early as Jan 1, 2026. Worth watching, as is the last line of Bessent’s speech above, noting the Fed’s mandate includes a third goal: “moderate long-term rates.” That could foreshadow yield curve control — a form of financial repression supply-constrained real assets thrive in. Think gold, silver, copper. Again.

Left-Tail Risk: Recession, Elevated Valuations or Midterm Moderation

Consensus points to another decent year for U.S. equities in 2026. Left-tail risks: AI concentration proves a bug, not a feature, or system leverage cracks if AI monetization lags or recession hits.

Elsewhere, proponents of the PE cycle argue we’re entering a range-bound market—one where high multiples contract over time, indices trade sideways for years (like post-1929, Nifty Fifty, dot-com). Vitaliy Katsenelson’s Active Value Investing and Robert Hagstrom’s Who’s Afraid of a Sideways Market? illustrate this well. Hagstrom notes the Dow was 784 in Oct 1975 — and is still 784 seven years later. Yet 40% of stocks doubled in that period. A stock-picker’s market where selectivity matters — perhaps AI beneficiaries (old economy) over AI builders (new economy), or commodities over compute? Or perhaps a move from Beta to Factor exposures, noting it was quality, value, low-vol, and high-dividend stocks that performed well in previous range-bound markets? I guess we shall see. But another reason for caution: Midterm election years historically deliver flat returns — though markets rally strongly afterward.

Right-Tail Risk: Reacceleration

Why is reacceleration a risk? Because scepticism (not euphoria) still dominates — sentiment screams “bubble,” positioning is neutral. That’s not the anatomy of a market top. Risk for some portfolios: not enough risk-on. So here’s the counter — and hopefully fatter — right tail.

Data center capex alone could add $400 billion to GDP next year, with GDP multipliers across chips, construction, copper, concrete, and consultants. Fiscal drag flips to stimulus via the One Big Beautiful Bill Act. Full expensing — an effective corporate tax cut — frees cash for reinvestment. Strategic capital flows from The Office of Strategic Capital, The Department of Energy, The Department of War, The CHIPS Research & Development Office, plus $6 trillion in pledged foreign direct investment (even half that amount would be historic). Streamlined approvals could unlock more investment and remove the gating constraint of energy. Indeed, Energy Secretary Chris Wright wants approval timelines cut from 3–5 years to 60 days. Commodities, especially those deemed strategic (silver, uranium, aluminum, copper) or sanction free (gold) could spike, but broad inflation seems unlikely thanks to productivity gains in services.

Add a dovish, pro-growth Fed cutting rates to stimulate housing and construction (every new home built adds three new jobs) — another growth vector easing affordability pressures. All this within a global rate-cutting cycle — 312 cuts in 24 months, similar to post-Lehman Brothers bankruptcy, but then GDP was negative; now it may accelerate. If so, parallels to the ’90s emerge — not the bubble, but to the last time the Fed cut into a tech-led, non-inflationary boom.

The Cloud Revolution

Bubbles are easier to spot in hindsight. They rarely pop when everyone’s calling the top — and typically need Fed hikes (see above: unlikely). We’ve written about differences between now and dot-com. The most powerful is time: 32 years of compounding infrastructure, data and networks versus just five in the ’90s. Calling time on the AI revolution before seeing its applications is like selling Apple before the App Store. Value may shift from builders to beneficiaries, but dispersion and rotation is healthy.

History suggests it’s seldom wise to bet against the full industrial, entrepreneurial, financial and political might of the U.S. when it aligns around a goal — like winning the AI race. In recent months, two initiatives mirror the Manhattan Project in scale: the AI Action Plan and the Genesis Mission, aimed at accelerating scientific discovery and solving seemingly intractable problems like curing cancer. Now a third project may soon join them: robotics. As we wrote in Beyond the Bubble, humanoid robotics could become one of the largest applications of machine intelligence — and a massive consumer and generator of data, compute and storage. For right-tail persuasion, read The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and A Roaring 2020s. Given the current sentiment, author Mark Mills’ guess is certainly not consensus.

Bond Vigilantes

Debt, deficits, and rising bond yields are among the most cited risks for 2026 — particularly in the sovereign markets of the UK, France and Japan. Of these, Japan stands out given the yen’s role as a funding currency in the carry trade. Budget flexibility buys the UK some time. France is shielded by the Transmission Protection Instrument (TPI). But Japan — led by a pro-growth prime minister, with core inflation near 3%, 10-year yields at their highest since 2007, and 30-year yields at record highs — is flashing warning signals.

So why are markets so calm?

Since Japan ended yield curve control in early 2024, rising Japan 10-year government bond (JGB) yields have been a focal point in risk discussions. If you had been told on January 1 that 10-year JGB yields would be closer to 2% than 1% by year-end, you might have expected an equity rout, a sharp yen rebound, and perhaps even tremors in markets dominated by Japanese savings — like U.S. Treasurys. Yet the opposite has occurred: Japanese equities are breaking out, the yen has weakened to record lows against the dollar and euro, and U.S. Treasurys are near their highs for the year.

What explains this?

My cursory investigation suggests inflation pressures are largely supply-driven (e.g., food) and likely to ease further — meaning this isn’t the start of an aggressive rate-hiking cycle. Markets expect another hike later this month, but normalization should be gradual. Crucially, real rates remain deeply negative, discouraging repatriation. While price-insensitive buyers such as the government may tolerate this, real-return seekers — like pension and insurance companies (who now hold more U.S. Treasurys than the Japanese government) — will care.

Until that changes, and assuming the Fed cuts rates and steepens the curve (making U.S. Treasuries even more attractive), those betting that rising Japanese bond yields will trigger a carry trade unwind may need to think again. The bigger risk is more likely to come from somewhere no one is currently guessing.

Final Thoughts for the Year of the Horse

Tail risks — left and right — are often where opportunity lies. Whether it’s Kevin Hassett at the Fed, a recession, a reacceleration, robotics joining AI as a growth engine, or a sideways market favoring selectivity, 2026 promises surprises and opportunities. The edge may belong to those who can outguess the guesses.