Blain’s Morning Porridge Dec 12^{th, 2025} – Outlook 2026: Conflict or Trade?

“The earth is littered with the ruins of empires that once believed they were eternal.”

2026 Outlooks contain rosy predictions for stock market upside, calmer bond markets, the triumph of AI, and even a few who still say Bitcoin will rule us all. But the major Macro risk will be global trade – what happens as China and the USA face off? Trump has fractured the Western Alliances even as China’s trade and military strength give it all the options. What will Emperor Xi choose to do?

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It is the time of the year for guessing what might happen next….

I have no crystal ball. All I can do is perceive the world through a glass, darkly – based on insights from friends and clients (who are often both). This morning I’m going to paint a Global Macro scenario that is already in play – triggered by Trump’s careless unravelling of the Western Alliances. If it plays through, it will utterly change markets.

It’s one I personally believe will set a tone of heightened market risk for the coming years. There are three critical ingredients to this outlook:

• China – Options
• Europe, Japan and Korea – Capacity, Intent and Deterrence
• Global Trade or Global Conflict

You will notice America does not feature. President Trump has played his hand and accelerated the coming economic and, perhaps, kinetic conflict. What matters now is how other nations now play the cards they’ve been dealt in the Great Game of Geopolitics.

China

It should be blindingly obvious the single most important Macro risk for global markets and trade in the coming year is volatility from China challenging the USA as global hegemon.

China’s strength and ability to face down America has become increasingly clear this year, trumping Trump on tariffs, technology, trade, rare earths and influence. Emperor Xi is holding what looks a strong hand. China is on course to surpass the USA as the premier economic power, and its newly evolved military might now enable it challenge America militarily.

• Chinese Tech is challenging US leadership in AI and a host of other areas. Its manufacturers are all across Global Markets selling cars, tech and consumer goods which are cheap and effective. Its economy is set to dominate ASEAN markets and through its belt and road initiatives its trade routes into Europe and the Middle East are functional.
• The American carrier task forces and their Pacific bases have no answer to China’s hypersonic glide missiles, ballistic ship killers and underwater attack drones. Chinese aircraft are armed with effective long range anti-aircraft missiles allowing them to snipe enemy planes out the sky. Its navy is overhauling the size, scope and capacity of the US Pacific fleet. However, Sun Tzu advises generals to have their enemies see what they want to see – not what is real.
• China has established a de facto alternative world order around BRICS and its increasing influence among nations once aligned to the USA, including the Middle East (they welcome Trump and give him trinkets), but they listen to Xi. India and parts of LatAm are engaged.

However, not all is well in China. The autocratic Xi is vulnerable to anything that may lose him “face”. There appears to have been dissent in the higher echelons of the People’s Liberation Army resulting in mass purges of the officer corps over the past 12 months. The emergence of a strong, feisty and unpredictable woman as Japan’s premier has been an embarrassing shock. The economy may be increasingly technologically advanced, but breakneck development has left local government tiers heavily indebted and in crisis. The property markets look unsustainable, and there is a looming demographic crisis. China needs global trade to thrive.

As the scale of China’s inevitable economic evolution becomes clear, and the “Western” nations wake up to defending themselves in a post American world, China sees its options being hemmed in by what my chum David Murrin terms “Strategic Compression”. (David Murrin is among the best informed past present and future facing military historian/specialist, price modeller/CIO and explainer of The Code of History and War – he’s invited all Morning Porridge readers to try his website on a trial basis – www.davidmurrin.co.uk).

David presents a very finely researched argument that XI faces a classic “now or never” inflection point. He wrote earlier this week: “rising empires, once compressed, and convinced time is turning against them, do not retreat – they break out.” He reckons China’s breakout point is upon us – history shows nations tend to go for it when they face a “use it or lose it” scenario.

At present, China’s anti-ship ballistic missiles, hypersonic glide weapons, standoff munitions and naval capacity could overwhelm the Americans in the Pacific in the opening minutes of an attack. However, given the speed at which the battlespace is evolving in Ukraine, and the lessons being absorbed, that advantage will only have a discrete window of opportunity.

Europe, Japan and Korea – Capacity, Intent and Deterrence

In the past year America’s allies have woken up to the Trump reality – they are former allies.

Increasingly Europe, Japan and South Korea are learning what this means – in the face of imminent aggression they have no choice but to rearm. The only factor that will stop better prepared and equipped aggressors is not just deterrence through rearmament, but the degree to which they believe the potential victim will fight back – intent. Bullies like Trump and Putin like to punch scared people who don’t hit back – they think twice if the victim stands up and makes clear they know they may lose, but they’re going to make it hurt.

(Trump still does not get that’s what Ukraine has done to the stupid, dumb Russians – who, with poor intel and overconfident of victory, rolled across the border in parade dress with light load-outs – and were sent packing.)

Europe is slowly waking up. Of the major powers, only German has yet grasped the metal and started spending the sums required. France is trapped in an economic quagmire of its own making. In the UK, there are parts of the Whitehall swamp that seem blithely unaware World War Three kicked off 4 years ago. Fortunately, the border states and Scandinavia are prepared and show clear intent to fight. To show clear intent, European smart military spending needs to rocket!

If we really wanted to stop Putin, the way to do so would be to beat Russia with all-out economic war, in production, and by being belligerently defence minded while enforcing a sky shield over at least half of Ukraine and helping the Ukrainians execute a shadow war across the oceans to sink the Russian shadow oil fleet. That means immediate substantive rearmament, demonstrating an intent to fight, and putting Russia on the back foot again.

One way to do deter Russia will be to remove Trump’s dubious appeasement and replace America from any and all Ukraine ceasefire discussions, while using sanctioned Russian money to equip Ukraine with whatever it needs, and stop being shy about advisors on the ground. Make quite clear Ukraine is part of democratic Europe. The big question is whether Europe can swifty present a unified defence front, and putting America aside risks Russia achieving its goal of splitting NATO.

Japan is equally significant – it remains an economic and production powerhouse. It effectively controls (through the Taiwan/Japan gap) China’s naval access. Already the feisty new Premier, Sanae Takaichi, has made clear Japan will support Taiwan, which has put Xi into a rage. Xi fears Japan for its capacity and history shows the Japanese do not treat war lightly. Together with Korea, these nations could become the new Arsenal of a non-American future versus China. Together, they could build the fleets the “West” needs to counter both China and Russia.

Global Trade or Global Conflict?

The decision appears to rest with China: trade or war. How will they decide if the costs and risks of a global conflict on the Chinese economy warrant an attack? They will weigh up the odds their current military tech lead is fleeting, the likelihood Trump will step down from conflict, and the upside of global leadership and new trade deals to build the economy if they successfully take Taiwan.

But critical to the decision will be how difficult it will be – will America’s former allies become increasingly belligerent and show intent to defend themselves post China/Russia’s success in fracturing Nato? Or can they be persuaded to roll over, accept Chinese hegemony and trade? The optimal solution for Europe is probably both – demonstrate deterrence and intent and engage in trade.

The new fund I’m working with, Spitfire Strategic Capital, will be investing into war winning defence platforms, weapons that will change the battlespace. It’s part of the deterrence message – demonstrating to aggressors the intent to stop them. (We are currently in our first capital raise – interested institutional investors should get in touch.) The upside potential for western economies in terms of renewed tech innovation and defence industry multipliers is huge.

The danger is conflict. Nations seeking to recover lost prestige or gain hegemony, often play the military advantage card – from France in 1812 invading Russia to complete its domination of Europe, or Nazi Germany rolling into Russia in 1941 after it established battlespace dominance through perfected Blitzkrieg. In both cases it was the invasion of Russia destroyed both these aggressors. Today Russia in no longer the Steamroller with unlimited bodies to throw at machine guns.

China’s decision will largely depend on how effectively they think Japan and Korea will fight to control the Taiwan/Japan gap, and how Europe stands up to their proxy in Europe, Russia. But it is made more complex by the personalities involved – just as Putin has gambled his prestige on Ukraine, Xi needs Taiwan – which will require Japan to back down. Even a new optimal trading deals with America’s former allies may not compensate for the magnitude of his loss of face if Taiwan is not integrated into China.

Therefore, the threat of military action is elevated. Xi’s chiefs will have gamed a Taiwan invasion and concluded they can sink task forces and take out US island bases in a “Red Lightening” Pearl Harbour V2.0 attack, but can they cope with the unsinkable aircraft carrier Japan could become?

Trump’s America First policies and the levels of uncertainty as to how much he may support Japan and Korea if conflict threatens or kicks off is similar to the situation in 1914. Great Britain stood aside when Prussia and France went to war in 1870, but honoured its commitment to Belgium, thus averting what nearly became a repeat of Prussia’s earlier away win at the Battle of the Marne in 1914.

While Trump has taken the decision to walk away from Europe, (and needlessly insult its leaders) as it is not a concern of his America First vision, it’s unclear if he appreciates how the USA will require the active alliance and support of Japan and South Korea if it hopes to retain any presence in South East Asia should the Chinese strike.

When does all this happen?

Slowly at first – it’s already occurring in plain sight. When the game’s afoot it could all happen swiftly. To avoid it the fracturing Western Alliances would need to show they are reunited and have the intent to defend themselves and their democratic basis. That looks unlikely under Trump.

As I said earlier this week… stay long gold.

Have a great weekend…

Bill Blain

CEO – Windshift Capital

Author – The Morning Porridge

Partner – Shard Capital

Special Advisor – Spitfire Strategic Capital