Toward a New World Order
The end of the unilateral US reduction of the barriers to trade was inevitable, Davos (wo)man still hasn't come to grips with the new world order.
The combination of the rage of the Denizens of Davos and the Japanese government bond and yen plunges led to us focusing this week’s note on one of the two underappreciated ‘26 themes, a rebalancing of global trade and the associated impact on capital flows.
A “new world order” in global trade and capital flows is emerging, with the U.S. trade deficit likely to contract through 2026, reshaping global savings, reducing foreign demand for U.S. assets, and increasing the risk of market volatility—especially for export-dependent economies.
Japan is at the center of this transition, constrained by negative real interest rates, persistent yen weakness, and the BOJ’s ultra-loose policy, while similar structural pressures are building in other Asian export economies like South Korea and Taiwan.
Globalization-era dynamics (the “global savings glut”) are unwinding, as Asia’s reduced trade surpluses diminish Treasury demand, though the U.S. Treasury market remains relatively resilient due to strong domestic absorption and slowing government spending growth.
Contrary to Davos consensus, tariffs and reduced immigration are disinflationary, with recent data showing cooling inflation, weaker wage growth, ample labor slack, and slowing consumption—challenging forecasts of tariff-driven inflation.
Looking ahead, higher real rates pose a key risk to equities, with a potential risk-off shock in early 2026 if 10-year real yields rise further; the authors favor gold diversification and selective hedges while remaining cautious on equities amid tightening financial conditions.