Forward-looking indicators suggest that the U.S. nominal growth cycle is once again accelerating. This trend is underpinned by a significant increase in inflation-adjusted primary fiscal spending, which is currently higher than at this point in the 2024-2025 period. Concurrently, global real-economy money printing is also exhibiting strong growth, mirroring the pace seen in 2025. It is important to recall that inflationary money is generated through government deficits and credit creation by financial institutions, including banks and shadow banks.
In 2026, the primary drivers of this robust global money printing are identified as concerted fiscal deficits among G20 nations and the capital expenditure cycle for artificial intelligence, which is being financed through debt. Furthermore, leading economic indicators point towards a stabilization and potential acceleration in the U.S. labor market. The New York Federal Reserve's probability of finding a job within the next three months has stabilized, and the weekly ADP job creation series has shown a positive shift, moving from a deficit of 50,000 in June 2025 to a surplus of 42,000 currently.
Given that the growth of the U.S. labor force, representing the supply side of the labor market, is estimated to be near zero, even a modest increase in labor demand can initiate a virtuous cycle within the job market. However, this potential virtuous cycle in the U.S. job market is not expected to immediately lead to runaway inflation, at least in the short term. While a tightening labor market will inevitably exert upward pressure on wages, the current starting point for U.S. wage growth remains very modest.
The Federal Reserve's dual mandate, which involves both preventing a collapse in the job market and maintaining core inflation below 3% (with the understanding that the 2% target is no longer the primary focus), would typically necessitate a different policy response. The market is currently pricing in a significant probability of a Federal Reserve rate hike in December. However, enacting a rate hike requires a majority of the 12 voting members of the Federal Open Market Committee (FOMC) to support it. In the event of a 6-6 tie, the FOMC Chair holds the deciding vote.
Recent discussions by the new FOMC Chair suggest a potential strategy of shrinking the balance sheet as a means to justify interest rate cuts. Additionally, there is a proposal to shift the inflation benchmark from core Personal Consumption Expenditures (PCE) to trimmed mean PCE, which is typically a lower figure. These developments indicate a reluctance among some key figures to raise interest rates. To achieve a rate hike, at least seven FOMC members would need to vote in favor.
Even under the assumption that the three dissenting members from the May meeting would vote for a hike, and that Barr would join them, an additional four votes would be required from the remaining members: Warsh, Williams, Powell, Cook, Bowman, Waller, Paulson, and Jefferson. This scenario suggests a potential "BoE-zation" of the FOMC, where a majority might be hesitant to tighten policy. If this analysis holds, the U.S. is likely to "run it hot" again, with accelerating U.S. and global money printing, picking up nominal growth, and a labor market that has found a bottom and may accelerate.
This macro setup, characterized by strong money printing and a potentially hesitant Federal Reserve, historically favors certain asset classes. Backtests over 40 years suggest that high-beta equities, including small-cap, emerging market, and value-tilted stocks, tend to perform well. Similarly, high-beta commodities such as silver, copper, and gold, along with long cyclical and high-yielding foreign exchange (FX) pairs (like ZAR/JPY) and curve steepeners, have shown strong performance. Conversely, defensive FX plays and long bonds may underperform.
Despite these historical trends, there appears to be a notable lack of interest in gold and small-cap, value, and emerging market equities among some large macro investors. This divergence could be attributed to the recent dominance of AI-related stocks in the equity market or a general sentiment that precious metals like gold and silver are stagnant. Option market positioning further supports this observation, with 25-delta gold calls trading at a discount to puts, indicating a greater investor focus on downside protection rather than upside potential.
The geopolitical situation, particularly concerning Iran and the Strait of Hormuz, remains a significant wildcard. While recent news of potential peace deal progress and a possible reopening of the Strait of Hormuz has led to a slide in oil prices, the market may not be fully prepared for the implications of unlocked energy flows. If geopolitical tensions escalate or a resolution is prolonged, the entire economic outlook could shift dramatically, rendering the current analysis irrelevant. However, if energy flows normalize, the economy could indeed "run it hot."
This scenario presents a complex outlook for investors. The potential for accelerating nominal growth, coupled with a Federal Reserve that may be constrained in its ability to raise rates, could create an environment conducive to risk assets. However, the lack of conviction in traditional inflation hedges like gold and the ongoing geopolitical uncertainties add layers of complexity. The market's current positioning suggests a potential underestimation of the risks and opportunities associated with an economy that "runs hot."
Investors should closely monitor key indicators such as U.S. fiscal spending, global money printing trends, and labor market data. The Federal Reserve's policy decisions, particularly the internal dynamics of the FOMC and its stance on inflation benchmarks, will be crucial. Furthermore, any developments in the geopolitical landscape, especially concerning energy supply routes, could significantly alter the economic trajectory. The interplay of these factors will determine whether the U.S. economy indeed "runs it hot" and how markets will react to such a scenario.
The Federal Reserve's mandate to maintain both price stability and maximum employment creates a delicate balancing act. With inflation potentially re-accelerating and the labor market showing signs of strength, the Fed faces a difficult decision. The market's expectation of a rate hike in December contrasts with the internal divisions within the FOMC, suggesting a potential policy lag or a reluctance to tighten aggressively. This policy dynamic is central to the "run it hot" thesis.
The role of fiscal policy in driving nominal growth cannot be overstated. Elevated levels of inflation-adjusted primary fiscal spending, exceeding those of previous years, are injecting significant liquidity into the economy. This fiscal impulse, combined with global money printing, creates a potent cocktail for economic expansion. The sustainability of this fiscal spending and its impact on inflation will be critical factors to watch.
Moreover, the AI capital expenditure cycle, financed through debt, is contributing to global money printing. This technological investment boom, while potentially boosting productivity in the long run, is adding to the current inflationary pressures. The interaction between technological advancement and monetary policy will be a key theme in the coming periods.
the confluence of accelerating money printing, a stabilizing labor market, and a Federal Reserve potentially hesitant to tighten policy suggests a heightened risk of the U.S. economy "running hot." This environment could favor risk assets, but investors must remain vigilant to geopolitical risks and the market's current positioning, which appears to be underweighting traditional inflation hedges.
