Is a Warp-Speed ‘Run It Hot’ Policy Coming in 2026?

I believe the US economy might be entering a temporary slowdown (’’Run It Cold’’ now), which will allow the {{Fed}} to cut a few times right before the 2026 ’’Run It Hot’’ Trump plan.

If I’ll end up being proven right, investors should drastically increase the share of Inflation Risk Premia (IRP) and Policymaker Protest Assets (PPA) in their portfolios.

Here are some data on the temporary US slowdown (’’Run It Cold’’).

The US {{labor market}} has only added 35k jobs/month over the last 3 months – this number has basically never been this weak outside recessions. Yet the supply side of the labor market is so weak that the {{unemployment rate}} only gently moves up, giving a false impression of stability.

If the supply of labor didn’t dry up so quickly due to the new immigration policies and the labor force participation rate (LFPR) held steady at April levels, the US unemployment rate would have jumped to 4.9%:

The supply of labor is extremely weak, and it’s behind the impression of ‘’stability’’ one has when looking at the US labor market – but the demand for labor is very weak under the hood.

The 6-month annualized pace of job creation in US cyclical industries (e.g. housing, manufacturing, transportation etc) stands at 0.3%. The cyclical private sector went on a hiring freeze:

Our US primary deficit tracker stands at 1.54% of {{GDP}} as per last week, already lagging behind the 2024 pace and way behind the 2023 staggering pace.

Tariffs came in at almost $30bn in July, and were this pace continues, we’d effectively face an additional $150bn of fiscal drag until the end of the year.

That alone means the US primary deficit might shrink by 15% from $1 trillion in 2024 to $850 billion in 2025:

So the math turns out relatively ugly over the next 3 months:

1) The private sector hiring pace is pretty much at stalling speed;

2) Real income growth and consumer spending are weak;

3) We face a ~150bn tax hike (read: tariff passthrough) over the remainder of the year;

4) There is no major offsetting tax stimulus as the OBBB kicks in mostly in 2026;

5) Ex-top 100 companies (read: the real employers) are already witnessing a margin hit;

6) Tariff passthrough will make this worse, and if companies try to aggressively pass to consumers…

7) …the ability to absorb the passthrough will be limited by low real income growth

In short, it’s possible the US economy will face a soft patch over the next 3-4 months.

But what happens after that?

If the Fed cuts with {{core PCE}} around 3%, it effectively brings down front-end real interest rates to almost 0% while {{inflation}} is running above their target.

Trump has already talked about using tariff income to cut taxes for low-income consumers: basically another fiscal injection ahead of the 2026 mid-terms.

Front-end zero or negative real rates with inflation above target and another fiscal injection coming is the recipe for a warp-speed ’’Run It Hot’’ policy in 2026.

The ‘’Run It Hot’’ policy is nothing new: the US applied it in 2003-2006 and in 2013-2019 to make sure the economy could recover from the 2001 and GFC crisis.

But the two prior experiments were run with inflation at or below target, no tariffs, no attacks on the Fed independence, and no hostile policymaking against the rest of the world. In that environment, buying assets denominated in USD that produce nominal income (e.g. equities and real estate) works wonders.

Today, I believe a mix of such investments and PPAs (Policymaking Protest Assets) would work better.

PPAs are assets denominated in USD that represent a release valve against unorthodox policy mix such as forcing real rates too low vis-à-vis the level of nominal GDP, manipulating long-end yields via reducing issuance or encouraging banks to buy (SLR reform), or incentivizing foreign countries to diversify away from USD investments.

Gold and metals in general are the longest-standing PPAs, and needless to say Bitcoin is also a valid contender for PPA properties:

Run It Cold now, but Run It Hot at warp-speed in 2026.

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