US Or China: Whose Bubbles Will Loom Larger In 2026?

Forty years later, his desire for a“Mar-a-Lago Accord” seeks to recreate a global trade dynamic that no longer exists. Not when so much of the global wealth needed to command markets is in the broader BRICS (Brazil, Russia, India, China, South Africa) universe, including oil-rich states such as Saudi Arabia and the United Arab Emirates.

Even so, Trump's top economic officials, including Treasury Secretary Scott Bessent, clearly haven't schooled him on why the“exorbitant privilege” that Washington enjoys, including the ability to issue debt at markedly low yields, is a plus for America.

Might all this come to a head in 2026? Again, it hasn't yet. Even the May decision by Moody's Investors Service to revoke Washington's last AAA rating caused little more than a ripple in debt markets.

The reaction seemed to be that the dollar, for better or worse, remains the global system's primary currency, despite intensifying efforts to find alternatives.

One wild card here is how the Trump-Xi relationship evolves - or devolves - in 2026. As the year progresses, Chinese leader Xi could hold the specter of massive US Treasury sales over Trump World's head.

Japan, too, of course. So far, Prime Minister Sanae Takaichi, in office just 71 days, has chosen to coddle Trump rather than stand Tokyo's ground - just like her mentor, 2012-2020 leader Shinzo Abe. This is despite most of Trump's Asia policies running counter to Tokyo's national interests - including on Taiwan, North Korea and Russia.

For all Abe's obsequiousness - including nominating Trump for a Nobel Peace Prize - Trump 1.0 still pulled out of the Trans-Pacific Partnership free trade pact that overtly excluded China.

Now, as Trump pursues a“grand bargain” trade deal with China, Japan is a mere bystander, hoping such a pact doesn't leave its economy on the cutting room floor.

As such, it's hard to envision Takaichi playing hardball with Tokyo's vast dollar holdings. There is, of course, a mutually assured destruction dynamic at play here.

Dumping large blocks of Treasuries would sharply raise borrowing costs, reducing US consumers' ability to buy Japanese goods. Yet Takaichi could use Tokyo's role as Washington's top financier as leverage if Trump decides to increase tariffs again.

Surely, Trump will notice at some point that Tokyo isn't wiring the $550 billion“signing bonus” the White House demanded. Neither is Seoul expediting the $350 billion payment that Trump seemed to think would be at the US Treasury by now.

And that 600 billion euro“gift” Trump is waiting on from the EU? As the wait grows longer, who knows where EU tariffs might go next year?

Trump World might grow impatient that China isn't sitting down to forge the“grand bargain” trade deal of Trump's dreams. Given the one-year truce Trump gifted Xi in late October, a US-China pact might materialize in early 2027, at the earliest.

News in November that China's trade surplus reached $1 trillion for the first time, despite a 47.5% US tariff, must have had Team Trump fuming.

As slowing US job growth hurts Trump's approval ratings, there are reasonable odds he might lash out at trading partners with new tariffs in 2026. These levies are both intensifying inflation risks and roiling global markets.

The AI bubble is its own wildcard. The“possibility that the boom in data center construction will result in a glut” remains a“key risk,” says Howard Marks, co-founder of Oaktree Capital Management.“We'll see which lenders maintain discipline in today's heady environment.”

Jonas Goltermann, analyst at Capital Economics, says the valuations environment“now has many of the hallmarks of a bubble” amid“hyperbolic beliefs about AI's potential within the industry and among investors.”

Some are less concerned. Goldman Sachs analyst Jim Schneider thinks that AI's portion of the overall data center market will double to 30% over the next two years.“We believe [data center] occupancy will continue to tighten through the medium term before the market loosens,” he notes.

Or might China's myriad imbalances be the ones to go awry in 2026? The nation's multi-year property crisis is its own widowmaker trade. Yet China Vanke's recent success in avoiding a default may just delay the pain.