Blain’s Morning Porridge Jan 26th, 2026 – It’s not about Trump, it’s about China and Europe
“Europe loves to talk about the future but does nothing about it today.”
Gold surges through $5000 and markets remain distracted by the sturm et drang of words and events. The world is changing – but are we thinking about all the wrong things? The real issue for the future may be investment choices between authoritarian states vs nimble democratic nations.
This morning Gold spot is $5060. Investment banks and commodity research firms had a $4900 year-end target. It’s taken less than a month. Goldman has hiked its 2026 yellow-metal target to $5400. (The way things are going, we’ll be through that by March.)
Gold is a reliable measure of risk. The really interesting thing is how the 10-yr US Treasury Yield jumped 10 bp last week, and remains in the 4.20-25% range. In bond markets there is truth – Treasuries have decoupled from gold, meaning they no longer look such a safe-haven asset in a time of escalating tension. The world’s view of risk and safe havens has changed and changed utterly.
This week’s delivery of the Morning Porridge might be a bit random. I’m in Austria, taking part in Interbourse, a celebration of skiing and markets with over 400 finance professionals from across Europe and North America having a tremendous time on the slopes. The great thing about any industry social event is meeting folk – and hearing what they really think.
The consensus on piste (and bars) is the world is changing and less predictable. I’ve chatted with a leading Brexiteer who now admits the UK leaving the EU was a strategic disaster. Lots of people are praising Mark Carnery as the global voice of rational reason. Zelensky’s talk at Davos is seen as a wake-up call to Europe (essentially saying the same as Trump, but with credibility!) There are supporters of the US President – although most admit his multiple flaws – arguing with much good sense that Trump is a necessary evil as a catalyst for the rejuvenation of America. Europeans do not hate Americans – they love them – but are deeply concerned about why the Trump administrations so despises them, and by what is happening domestically. Europe and Democrats are not the enemy.
Being market professionals – we’re all trying to figure out how the world is changing, where shifting geopolitics will lead, and what will it mean for future investments, prices and growth. If I knew the answer to these questions, I’d be staying in a more expensive hotel!
There is endless analysis: What really happened last week in Davos? What will happen this week? Where will the battery of Trump threats, most of which are deliberate distractions he will never deliver on, lead us? How fractured is the Western Alliance? Will Europe mass pivot to China? There are reams of analysis and endless debate…
Enough of the noise – it is overwhelming rationality.
Potentially the most interesting thing that happened over the weekend was in Beijing, where the Emperor XI purged his top general and lifelong supporter Zhang Youxia on charges of corruption. I’ve heard a well-placed rumour Xi was reacting to an imminent coup – suggesting the Chinese surveillance state is not so monolithic as we thought. Adding some spice of Chinese instability to the mix and can only make the world a less predictable place.
And what struck me about the news from China is the charges against the general are framed in terms of corruption – the catch-all charge authoritarian states nervous of threats to the leadership use to remove threats.
When we talk about the success of Capitalism/Democracy versus Communism we are really talking about the efficiency of states. The capitalist system that enabled the British Empire and then The American Century thrived because capital, markets, entrepreneurship and legal systems combined to allow economies to function closer to their potential.
Inevitably frictions arise in capitalist economies; the growth of bureaucracy and regulation, income inequality, the need for state interventions, while rising domestic wealth and the pursuit of profit means businesses happily move production to cheaper places. (China did not steal American manufacturing – American firms moved it there to increase their profits!)
The defining failure of the Soviet Economy was not the social factors Marx identified in The Communist Manifesto (which should be required reading), or Lennin’s promises of a workers’ paradise. For a while the state-run command and control economy worked – and at times was capable for enormous productivity and invention – but the reality was endemic corruption ate away the state from within. From falsified production reports to meet state targets, to outright theft (like Russian supply trucks invading Ukraine with cardboard tyres!), the result was inevitable – kleptocracy, an oligarchy of robber barons, and the emergence of a dictator.
In the 1990s we all thought Russia’s emergence as a capitalist economy with limitless resources meant it would finally hit its potential – but instead under Putin it went dark. Today its’ war-time economy has created zero economic wealth for its people and remains a fraction of the size of comparably sized economies. That’s largely because the productive potential of the state is directed to the goal of preserving the leadership – Putin has staked his future on taking Ukraine.
China is a very different kind of communist state – capitalism with Chinese characteristics. It can point to enormous economic success in 30 years becoming the prime global manufacturer, a potential hegemonic power, a surveillance state that keeps its power through the Iron Rice Bowl compact with the people – prosperity in return for power. Over the years it’s become clear China’s economic rise, its swift infrastructure builds out, and its military expansion have come with enormous costs in terms of economic failure; industrial towns with nothing to make, a housing collapse, and now stories about military corruption – missiles fuelled with water rather than av-gas!
The machinations of power in Beijing and Xi’s need for control through purging any and all opposition hides the weakness of the party – Xi has staked his future on Taiwan. History seldom repeats – but it does resonate.
Which leads us back to Trump – a President has never had such a grip on the levers of American power, nor been so nakedly on the make. Trump plays a different game – utterly unconcerned when he makes demands and then rows back on them or accepting gifts from a Jumbo jet to a Noble peace medal from a recipient. He is disruptive and unpredictable – and sets the tone for his successors.
His legacy will set America’s future. A very smart Swiss friend was telling me last night to watch Vance – and to predict what dark paths an autocratic US run by billionaires (Vance is Peter Theil’s protégé) could take when millions of workers become “useless mouths” when AI replaces them.
All of which leaves Europe, Canada, Japan, Korea and Australia as the piggies in the middle – the middle-states Mark Carney identified last week likely to be the victims of authoritarian strong powers. Europe is the classic example – lots of individually weak states riven by a flawed path to unity, bureaucracy, over-regulation, and the kind of dither Zelensky railed about last week.
Individual weakness could be collective strength – and that’s potentially a very exciting future path. Imagine the diverse strengths of middle-sized states coming together? Preserving their cultures and diversity while economically strong because they embrace democracy, capitalism, law and reason? (What am I smoking….?)
Famously, “democracy is the worst form of government, except for anything else!’
What happens to our conventional investment wisdoms about safe-haven bonds and the value of any financial asset when the power of law is twisted to suit only the leadership? US Treasuries were the global standard of the risk-free asset – perceived as safe and liquid. Now we are waking up to new fears that were inconceivable just a few years ago – a global buyer strike? Loss of confidence in the dollar? The sustainability of the USA’s burgeoning deficit? What might by the consequences of the end of the dollar’s exorbitant privilege (as the currency of global trade) mean? How far might Trump, or his successors, go – maybe a Treasury default to punish European nations trading with China?
I’m wondering when to start scaling back my position on the Yellow Metal, but I see no fundamental reason to do so… yet. This, as they say, is not over till it’s over. The old bloke might have rambled in Davos last week, but the Fat Lady with sharp pointy stick and horned hat is yet to sing Gotterdammerung!
Out of time, and off to go skiing!
Bill Blain
Author of the Morning Porridge
Advisor – Spitfire Strategic Capital
