For commodities to benefit from reflation, rising inflation alone is not sufficient. It must be accompanied by a genuine economic and industrial rebound, indicated by rising Purchasing Managers' Indexes (PMIs). This combination dramatically improves commodity returns, especially for energy and industrial metals.

In high-inflation environments, stocks and bonds tend to move in the same direction, nullifying the diversification benefit of the classic 60/40 portfolio. This forces investors to seek non-correlated returns in real assets like infrastructure, energy, and commodities.

The primary economic risk for the next year is not recession but overheating. A dovish shift at the Federal Reserve, potentially from a new Trump appointee, combined with loose fiscal policy and tariffs, could accelerate inflation to 4%, dislodge expectations, and spike long-term yields.

Keith McCullough's core process categorizes the economy into four "quads" based on the accelerating or decelerating rates of change for GDP growth and inflation. Each quad has a predictable asset allocation playbook, with Quad 2 (both accelerating) being the best and Quad 4 (both slowing) being the worst for investors.

The 2026 outlook for government bonds and the US dollar is not a straight line. It's a tale of two halves, with an expected front-loaded rally (lower yields, softer dollar) by mid-year as the Fed cuts rates, before yields and the dollar drift higher into year-end.

The post-COVID era of high government spending has ushered in a new economic paradigm. The elongated 10-year cycles of 1980-2020 are gone, replaced by shorter, more intense two-year bull markets followed by one-year downturns. This framework suggests we are currently in the early stages of a new up cycle.

The current economic cycle is unlikely to end in a classic nominal slowdown where everyone loses their jobs. Instead, the terminal risk is a resurgence of high inflation, which would prevent the Federal Reserve from providing stimulus and could trigger a 2022-style market downturn.

The strategic value of commodities in a modern portfolio has shifted from generating returns to providing a crucial hedge against two growing threats. These are unsustainable fiscal policies that weaken currencies ('debasement risk') and the increasing use of commodities as geopolitical weapons that cause supply disruptions.

The reason for the Fed's rate cuts is critical. A "good" cycle with firm growth and declining inflation leads to strong commodity returns. Conversely, a "bad" cycle with decelerating growth and sticky inflation results in negative returns, making the 'why' more important than the 'what'.