2026: A Treacherous Path Lies Ahead

This next year presents significant systemic risks, all of whom have the capability to undermine the economic strength of most American households. Some of these risks, such as debt defaults emerging from unnatural behaviors in both debt issuance and liability management exercises (LME’s) have been brewing for over a decade. Others, such as inflation, have been persistent now for the better part of four years and show no signs of abating further. Moreover, the geopolitical instability introduced this year, caused by a combination of aggressive tariff policies, dubious foreign policy decisions, and veiled threats to the independence and thus the credibility of the Federal Reserve, all pose significant risk to the average American. Finally, the administration’s decision to upend the risk guidance of the Department of Labor in conjunction with the SEC, seemingly seek to undermine the very fiduciary protections that retirees rely on to defend what is likely their main source of income in their later years. Any spark in any one of these areas will likely cause economic blight for the majority of American households in some form. I will now discuss the treacherous path that we tread on.

Corporate Debt Defaults, Private Equity, and the Threat to Retirement Plan Fiduciaries

According to the so-called experts at S&P Global, at the end of 2024 they projected speculative grade debt defaults to move from 4.7% to 3.5% and held firm on that viewpoint even as economic pressures rose on businesses (S&P Global, April 2025). And yet the annual debt default rate sits at 4.6%, but don’t worry – they project it will drop to 4.0% by September 2026 (S&P Global, December 2025). Their thesis now, similar to theses presented in the past, is that “easing rates, slowing inflation, and modest economic growth” will help slow this persistent wave of corporate credit defaults.

However, what they fail to realize is that even if everything they believe will happen in their thesis does happen, the bottom line is that most of the value being securitized by these lines of speculative debt is purely on paper. When reality meets what happens on paper, and the loss of value is finally realized on paper, bad things happen. The reality is that in the post-COVID world, large commercial office buildings are not worth what they might have been ten years ago – a building that was once 70% occupied may only be 20-30% occupied today. Similarly, many businesses that are borrowing like this have never and likely will never be profitable. No matter what the interest rate is, over time as the lack of ability to pay back money grows, businesses will have to resort to liability management exercises (LMEs) to try and keep afloat. One example is Saks Global, which has had to resort to multiple rounds of LME, including debt restructuring, selling stakes of brands and other assets they own, but at the end of the day, the company cannot make money and Chapter 11 bankruptcy seems imminent was filed on January 13th. Each time an LME event occurs, someone is losing. If the solution is to sell more senior bond notes, previous lenders lose protections and value on what they lent the company previously. If the debt is swapped out for stock, that only provides value on paper, if the company can turn things around, while denying the creditor the interest payments they are relying on for their needs.

Which leads to another topic – the inclusion of alternative assets, including private equity, into retirement accounts. In December 2021, the U.S. Department of Labor released a Supplemental Statement that directly cautioned fiduciaries against the inclusion of private equity (PE) instruments, stating that “Except in the minority of situations, plan-level fiduciaries of small, individual account plans are not likely suited to evaluate the use of PE instruments in designated investment alternatives in individual account plans. The Department further notes that ERISA section 404(c) does not relieve a plan fiduciary of the prudence duties that apply to the selection and monitoring of designated investment alternatives, investment managers and investment advice service providers.” This means that the Department of Labor not only did not believe most plan-level fiduciaries did not have the ability to evaluate PE, but that the section of the law that shields plan fiduciaries from personal liability due to investment losses would not protect them if they could not meet the prudence duties of selecting and monitoring PE. In short, they felt it was a bad idea – and I agree wholeheartedly with that position.

On August 7th 2025, President Trump released an executive order that specifically sought to rescind the language provided above. Moreover, the EO goes on further to state directly after that “The Secretary (of the Department of Labor) shall also propose rules, regulations, or guidance, as the Secretary deems appropriate, that clarify the duties that a fiduciary owes plan participants under ERISA when deciding whether to make available to plan participants an asset allocation fund that includes investments in alternative assets” (The White House). This language implies that plan fiduciaries must consider alternative assets, but may be found liable under ERISA if they don’t include PE.

This is dangerous. Private equity by its very nature is private – it can be extraordinarily difficult if not outright impossible to receive objective data on its fundamental value and performance. The financial instruments that can exist surrounding these investments can be very complicated and/or outright fraudulent, where even professional PE firms and analysts do not know what they are looking at. An exemplar of this is First Brands, a major aftermarket supplier of auto parts, which filed for bankruptcy protection on September 28th, 2025 after disclosing liabilities ranged between $10 billion to $50 billion, with assets worth just $1 billion to $10 billion according to its bankruptcy petition (Reuters, September 2025). If that can happen at that scale, with as many experts involved in ownership of the company, why in the world would you want this type of investment in your retirement savings, the money you will in part need to rely on when you no longer want to or are unable to work? Plainly answered, you wouldn’t. I wouldn’t. So why would it be encouraged?

It is my belief that the administration wants to bail out private equity’s greed and lack of risk management discipline through the average American. By requiring 401(k) plan administrators to consider and potentially (likely) include PE, a new source of buyer emerges that ends up being forced to purchase these assets with a legal gun to their head – do this or we sue you for violating our new version of what a fiduciary looks like. And when these companies invariably fail – and they likely will fail – the testimony to Congress in the future will likely be very similar to the testimony former Goldman Sachs CEO Lloyd Blankfein gave when the late Senator Carl Levin of Michigan pressed him on why Goldman Sachs sold mortgage bonds they knew would likely be bad on April 27th, 2010:

“The people who were coming to us for risk in the housing market, wanted to have a security that gave them exposure to the housing market, and that’s what they got. The unfortunate thing… is that the housing market went south very quickly… and so people lost money in it. But the security itself delivered the specific exposure that the client wanted to have.”

Because yes, this is what the people wanted to have . . . said no one ever.

Unemployment Data and Consumer Debt Defaults

The past three years have produced increasing financial pressures on most Americans. Unemployment has risen from 3.5% at the beginning of 2023 to 4.6% at the end of 2025 according to the U.S. Bureau Labor Statistics, with approximately half of that rise occurring in the last twelve months to a level not seen since February 2017. This has resulted in a major uptick in both credit card delinquencies (+61.8% in the last three years) and auto loan defaults (+34.6% in the last three years), with the former reaching a level not seen since the wake of the financial crisis (Federal Reserve Bank of New York, December 2025). As a result, interest rates for credit cards have risen to an average of 21.39%, the highest average ever since the Federal Reserve started collecting data on this in 1994 and +46.1% greater than the long-term average interest rate of 14.48% (Federal Reserve Board, December 2025).

A Logical Fallacy: The Fed Funds Rate and its Effect on Bond Yields 

The Federal Funds rate is the target interest rate that U.S. banks lend reserves to each other overnight. This in turn establishes a sort of risk floor where other types of lending, such as credit cards, mortgages, as well as corporate and municipal bonds, are based at least in part on. One of the key economic policy thrusts from the current administration has been rooted in their logic that by lowering the Federal Funds rate, borrowing should become cheaper, and borrowing money at a lower rate is good for Americans.

The problem with this thesis is that it assumes that the only factor that impacts Treasury bill interest rates is the Federal Funds rate. If this is true, then when the Federal Reserve lowers interest rates, all interest rates across all debt instruments, particularly debt issued by the U.S. Department of the Treasury should move lower by around the same amount. But that is not what has happened at all, as illustrated by the chart below.

Over the past year and a half, the Federal Funds rate has been lowered by 1.75% from 5.50% to 3.75%. A short term debt instrument, the 2-year Treasury bill, has moved from 4.89% down to 3.49%, which makes sense; 1.40% is close to 1.75%, and they’re keeping your money longer than overnight, so you should get paid more for it. However, that is not what has happened with longer-term Treasury bills or mortgage rates at all. The 10-year Treasury bill, which is a typical reference for pricing mortgages since homeowners tend to stay in their homes around that length of time, only dropped by 0.33%. Mortgage rates moved lower by 0.83%, with most of the drop in rates attributed to increased demand from institutions looking for what they feel are safer investments as risks increased throughout 2025. And the 30-year Treasury bill actually increased over the same period of time by 0.20%, in complete contradiction with the Fed Funds rate decreasing.

So, if the short-term Treasury rates are moving in concert with the Fed Funds rate, but longer-term debt instruments are not, the big question is – why? In my view, there are a few  factors that outweigh the Fed’s influence. First, tariff policy has been all over the board with respect to its implementation, often driven by arbitrary and capricious motives. Second, the decisionmaking that has occurred recently with respect to both domestic and foreign policy have fostered increased instability both abroad and at home. Third, the persistent and increasingly aggressive attacks on Fed Chair Jerome Powell and the independence of the Federal Reserve add another vector of destabilization, this time attacking the underpinnings of the value of our currency globally and the trustworthiness of the reserve currency of the world to continue to serve in that capacity. Additionally, the dollar has fallen in value against the euro by over 13% in the past year, showing yet another piece of evidence as to where investor confidence has migrated (European Central Bank, January 2026).

This is all evidence that investors are nervous about the medium and long-term stability and growth of the United States. The market believes it is more risky to have long-term exposure to U.S.-based assets, that the United States may not be as stalwart as it once was. This creates an unvirtuous cycle:

• Investors believe it is more risky to own U.S.-based debt, so the market is bidding a higher yield to purchase Treasury bonds. This costs taxpayers more money. We sell approximately $25 billion of 30-year Treasury bonds a month. Just that difference of +0.2% interest yield results in increased interest costs of $68.6 billion annually to taxpayers. 
• Deficit spending is projected to reach 5.5% of GDP in 2026 according to the Bipartisan Policy Center, an evidence-based think tank (December 2025). Adding more debt to an already eye-watering 118% debt-to-GDP ratio adds more risk to Treasury bills as we add more logs to our proverbial bonfire (Federal Reserve Bank of St. Louis, September 2025). Additionally, the increased borrowing level means that there will be an increased supply of Treasury bills. Increased risk profile and increased supply means that yields will likely rise, not fall, to meet that spending demand, which may result in mortgage rates staying elevated since as I wrote earlier, the longer-dated Treasury bills are what is used to benchmark mortgage rates. 
• The dollar losing value to other currencies means that it is more expensive for Americans to purchase non-U.S. made goods, many of which cannot be made profitably on-shore in a global economy. This leads to persistent if not outright increased inflation, thereby counteracting any wage growth and decreasing purchasing power.
• Tariffs blanketed across a wide swath of goods we purchase from overseas adds another pressure adding to increased taxation paid by consumers, further counteracting wage growth and decreasing purchasing power.
• Lowering interest rates is intended to make borrowing cheaper and increase demand for goods and services. This artificially increases the supply of dollars, which in turns makes those dollars worth less and increases inflation as a result. 

All of this results in a higher risk premium, thus higher yields, making it on net more costly for America to borrow money, even with a lower Fed Funds rate. When the U.S. dollar loses value to other major currencies, American’s buying power is reduced, thereby fueling inflation. None of this will help the condition of the average American, who is increasingly struggling with the economic dynamics that are presently unfolding.

Titanic Glacier or Sisyphean Boulder

In my 2024 annual letter, I used the analogy of the Titanic and an iceberg, seeing only the tip of what is a massive underlying risk beneath the surface of the waters. At that time, I wrote about the threat of $800 billion in speculative grade debt due in 2025, and while obviously the debt market did not collapse, it has stayed perniciously weakened as debt defaults maintained a near 5% rate throughout 2025 (S&P Global, December 2025). Furthermore, much of the debt that was set to mature in 2025 did not in fact actually mature at all – the financiers kicked the can down the road, but now the numbers have grown further. Instead of peaking at $800 billion in speculative debt due in 2025, S&P Global reports that we currently can expect nearly $1 trillion in speculative-grade debt maturing in 2028, followed by over $800 billion maturing in 2029. As private equity companies burn through cash realizing losses, I question how much longer this game can be played. Based on the behaviors observed this past year, particularly with respect to the elevated amount of LME’s occurring and the number of LME’s that have become frequent flyers – going through an LME after defaulting on the previous LME like Saks Global mentioned earlier – that we are getting close to the end of the game.

So what happens when the game ends? Do we hit the proverbial glacier with the Titanic and go down with the ship?

That’s certainly a possibility, and if that possibility were to occur, I stand by the numbers I projected back in 2024 that we could expect an unemployment rate north of 10%. However, there is an alternative scenario that, in many respects, could be far worse than a so-called “crash out” of speculative debt and private equity. We could continue this pattern of kicking the debt down the road, with a persistent level of defaults that steadily increases year by year. If this were to happen, it would likely have a few coincidental effects.

1. When companies go through buyouts, mergers and acquisitions, or LME’s, layoffs tend to follow in an effort to shore up cash flow. This likely translates into a higher national unemployment rate.
2. Meanwhile, as bond supply increases and risk profile elevates as described earlier, the yield on longer-term bonds will likely increase as well as potential further weakening of the dollar currency, resulting in less purchasing power for the United States and increased inflation.
3. The overall average tariff on goods increased dramatically from 2.5% in 2024 to over 15% in 2025 (Werschkul, January 2026). This also reduces purchasing power and will likely be an upward pressure on inflation. 

This would lead to a malaise of both persistent unemployment and persistent inflation. In this scenario, we would have an unemployment rate around 6%, inflation around 4%, with mortgage rates in the 7-9% range and it would be “stuck” in that position for many years, oscillating in and around those numbers as the economy grinds in a textbook stagflation environment for a number of years.

Survive and Thrive Household Finance

Given the range of outcomes described, I believe it is time for households to begin taking what I would refer to as a “survive to thrive mentality” when it comes to household financial decisions. This means that given the threats we are facing, there are some behaviors that I believe will be constructive in helping you be prepared for whatever “next” ends up looking like. These behaviors will not only help you weather financial threats, but will also help you lay the groundwork for future wealth building and growth.

Increased Frugality and Real Tracking of Money. Examine carefully where each dollar you earn goes, focusing more on your microeconomics to make certain resources are being used fully and that wasteful or lost dollars are recaptured. This is foundational regardless of wealth level – you cannot build, grow, or survive on a compromised foundation. Clients tend to start with their discretionary spending, which is terrific, but I would also urge you to look at other non-discretionary aspects of your spending, such as energy consumption, shopping for insurance, and decreasing waste in the home.

High-Interest Debt Reduction. If you have any credit cards with high interest rates or have a promotional rate that will eventually expire, get lean and mean and use that savings to pay these things off immediately. They are a blight on your ability to build durable savings and real wealth. Fifteen years ago, when I personally had a significant amount of medical, auto, and credit card debt, I worked a full-time job and a weekend job for nearly three years to pay that all off – approximately $42,000 paid in full. It was not easy, and I had to live rather frugally for years, but since paying that all down in 2012 I have never looked back. It is so freeing to have that weight off of your shoulders, and you’ll amaze yourself with how easy it is to build savings and grow your money once you have that massive anchor cut off from you.

But here’s the catch – no one can do it for you. You need to knuckle down, work your butt off, and take care of your business. No excuses, no more kicking the can down the road. If what you’re reading here is making you upset, good. You should be mad. Get mad at AmEx, get mad at Visa, get mad at CareCredit and MOHELA – and then get to work and take care of your business. In my opinion, kicking these jokers to the curb is one of the greatest acts of self-love you could perform.

More Cash Savings. If you have less than six months’ worth of regular household expenses in cash savings, you now have a mission. You need to get to at least that amount, and I would argue even more than that if you are either a single-income household, own a business, or have a child(ren). Various professional organizations recommend considerably less cash defense – bluntly, I believe they do not look at data and are sleeping at the wheel. From our team’s observations of clients going through a job transition, securing a new job has typically taken 6-8 months for most positions. This coincides with data from the Bureau of Labor Statistics, who in 2012 reported that “more than a quarter (26.7 percent) of successful job searches lasted 6 months or longer, with about half of those taking more than a year (April 2012). Understandably, higher demand industries and skillsets may be able to count on a shorter runway, but that is not what we are seeing from the majority of situations. Moreover, if you are counting on the value of risk assets to be your emergency fund, you need to consider the idea that you can lose your job, and the market can go down, and you can have a roof leak or a car breakdown or both at the same time. When you have cash, you have options. When you don’t, you are stuck like Chuck with whatever the world serves up for you.

Learn New Skills. One of Warren Buffett’s famous sayings is “the best investment you can make is an investment in yourself.” I entirely agree with Warren. Learning new skills can help you be more attractive both to your current employer as well as future employers. Sometimes that learning will have a cost, but oftentimes it doesn’t or it may be something your company is willing to pay for. Our firm has paid for college degrees and courses for every team member, because I know that when my team has more skills, more abilities, our business will be able to defend itself better in a tough economy. Your workplace may have a similar understanding, so take advantage of their willingness to support you learning new abilities and earning certifications. As Warren also famously said, “The more you learn, the more you’ll earn.”

Conclusory Remarks

As I look ahead to this next year and beyond, I am deeply concerned with the weaknesses I see in our economy, both within the individual American household as well as more broadly at the overall economy. There is clear data showing these substantial weaknesses, with very little being done to address them, and what is being done seems to be more harmful than helpful. I have no power to move that needle. However, I do have a fantastic team that can help you chart a course to navigate it. I do see significant opportunities in the future from taking this prudent approach, but it will take both a prudent approach and the discipline to stay with that approach through the ups and downs we will experience going forward.

Legendary high school principal Joe Clark famously said that “Discipline is not the enemy of enthusiasm.” I would argue further that in these times, we need to become enthusiastic about being disciplined. We need to create an energy that celebrates wins in living more efficiently, in building new abilities, in right-sizing our household balance sheets and living more sustainably for it. These are the victories necessary to not just survive what is happening now, but to thrive in the future we hope will be better for all of us.

References

Bipartisan Policy Center. (2025, December 10). Deficit Tracker. Bipartisanpolicy.org. https://bipartisanpolicy.org/report/deficit-tracker/ 

Bureau of Labor Statistics, U.S. Department of Labor. (2012, April 24). Length of job search for the unemployed. TED: The Economics Daily. https://www.bls.gov/opub/ted/2012/ted_20120424.htm (visited January 16, 2026) (Bureau of Labor Statistics)

European Central Bank. (n.d.). Euro foreign exchange reference rates: US dollar (USD) — Euro foreign exchange reference rates chart. European Central Bank. Retrieved January 13, 2026, from https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-usd.en.html

Federal Reserve Bank of New York. (2025, December). Household debt and credit report. https://www.newyorkfed.org/microeconomics/hhdc/background.html

Federal Reserve Bank of St. Louis. (2025, September 25). Federal debt: total public debt as percent of gross domestic product. https://fred.stlouisfed.org/series/GFDEGDQ188S

Federal Reserve Board. (2025, December). Consumer Credit – G.19 – Release Dates. https://www.federalreserve.gov/releases/G19/ 

Reuters. (2025, September 29). Auto parts maker First Brands files for bankruptcy, revealing billions of dollars in liabilities. Yahoo Finance. https://finance.yahoo.com/news/auto-parts-maker-first-brands-043632748.html

S&P Global. (2025, April). Default, Transition and Recovery: Corporate Default Forecasts Maintained But Risks Are Rising. S&P Global. https://www.spglobal.com/ratings/en/regulatory/article/250425-default-transition-and-recovery-corporate-default-forecasts-maintained-but-risks-are-rising-s101621091

S&P Global. (2025, December). Default, Transition, and Recovery: U.S. Corporate Defaults Fall To The Lowest Level Since February. S&P Global. https://www.spglobal.com/ratings/en/regulatory/article/default-transition-and-recovery-us-corporate-defaults-fall-to-the-lowest-level-since-february-s101661849 

‌The White House. (2025, August 7). Democratizing access to alternative assets for 401(k) investors (Presidential Action). https://www.whitehouse.gov/presidential-actions/2025/08/democratizing-access-to-alternative-assets-for-401k-investors/

U.S. Bureau of Labor Statistics. (2025, December). Employment situation summary. December 2025).  BLS. https://www.bls.gov/news.release/empsit.nr0.htm

U.S. Department of Labor. (2021, December 21). ‌US Department of Labor releases Supplemental Statement on private equity investments in participant-directed retirement savings plans. DOL. https://www.dol.gov/newsroom/releases/ebsa/ebsa20211221 

Werschkul, B. (2026, January 8). US tariff rates ended 2025 above 15%. Experts don’t expect them to come down much in 2026. Yahoo Finance. https://finance.yahoo.com/news/us-tariff-rates-ended-2025-above-15-experts-dont-expect-them-to-come-down-much-in-2026-110008272.html