The Watchdog – Home and Abroad
Scott B. MacDonald, Ph.D. – January 20, 2026
Summary: For this week the dominant events are earnings (led by tech names), the Fed meeting (expect no change in rates), and the possibility of a new US government shutdown. Although the geopolitical fracas over Greenland has subsided for now, investors are wary of risk and are buying gold and other precious metals as a safe harbor trade. Fueling investor concern and helping drive down the US dollar to its weakest level in four years is the unpredictable policymaking in Washington. There is also concern over ripples in global markets from last week’s meltdown in the Japanese bond market and yen volatility. We expect that geopolitical risks may fade a little over the next two weeks, though we are carefully watching Iran, where a US naval task force is heading. Geopolitical volatility can trump robust earnings and stead economic expansion.
Headlines – At Home
Government shutdown? It was baseball great Yogi Berra who stated, “It’s déjà vu all over again”, implying that events are eerily repeating themselves. On January 30th, there is a risk of another government shutdown. The point of contention between Democrats and Republicans is a budget bill that includes funding for the Department of Homeland Security (DHS). After a controversial second shooting of a civilian by ICE (Immigration and Customs Enforcement) in Minneapolis, Senate Democrats vowed to block the bill.
What does Smith’s think? While funding for departments of the US government are at risk, some departments have already been funded. The Department of Commerce (which releases economic data) and the Department of Agriculture (which administrates food benefits) are in this category. Indeed, of the 12 annual appropriations bills required to fully fund the US government, six have already been signed by President Trump. The six remaining appropriation bills cover 78% of the federal government. Capitol Hill will see a lot of gnashing of teeth and a possible shutdown, but the impact is likely to be less severe on the economy and markets than the last one. A new shutdown only injects more drama into what is a tense election year.
Speaking of the Fed. The Fed’s FOMC starts on January 27 and ends on January 28. The Fed made three straight quarter-point rate cuts to end 2025, but expectations are for the central bank to keep the federal funds rate unchanged. Reasons for no rate cut this month is that that data shows labor markets stabilizing and inflation is holding steady, though still over the Fed target of 2%. However, inflationary pressures remain very much part of the economic landscape due to the lagging effects of tariffs, an expansion in the fiscal deficit (which could exceed 7% of GDP in 2026), a tighter labor market mirroring the effects of the shift in immigration policy, and possible looser monetary policy under a new Trump loyalist at the Fed.
What does Smith’s think? There is likely to be little drama in the actual FOMC meeting, but it is Federal Reserve Chair Jerome Powell’s press conference that will be closely watched. This is especially the case after the Department of Justice announced an investigation into the Fed head and with President Trump expected to soon name Powell’s replacement. Bottom line – no rate cut but plenty of political drama and inflation will remain very much part of the discussion.
Safe harbors for stormy weather. Geopolitics are helping gold reach new pricing highs, heading over $5,000. The idea of US and Denmark squaring off over Greenland certainly pushed gold up, though there are plenty of other geopolitical issues nagging investors. How far can gold go? The French bank SocGen expects gold to hit $6,000 by year-end.
One of the other safe harbor trades has been US Treasuries. Indeed, since April’s “Liberation Day” tariffs Europe has accounted for $280.85 billion up to November, roughly 80% of foreign buying of US Treasuries. Data has yet to show a “Sell America” trade, though that may quietly occur in upcoming months as European investors seek to derisk from higher US political risk and the unpredictability of President Trump’s policies.
What does Smith’s think? There is more geopolitical risk ahead as tariffs are proving to be a difficult issue to put to rest (as evidenced by new tariff threats against Canada and South Korea coming after threats against several European countries); Iran and Gaza remain sores in the Middle East; and the Russo-Ukrainian War still rages. Add to that mix US mid-term elections in November and a possible new government shutdown. Gold and precious metals are going up; US Treasuries will remain a staple for investors, though there may be a slow bleed in the months ahead as former allies opt to derisk.
Headlines – Sbroad and Geopolitical
Japan – Bond meltdown and its implications. The Japanese bond market is usually dull and boring; it appears that those days are over. Last week, Prime Minister Sanae Takaichi’s call for snap elections roiled markets. The Japanese leader’s move was motivated by her belief that she could receive a larger voting mandate which is needed to ensure support for pumping up growth by higher spending and tax relief.
What makes this significant is that Japan’s bond market is the third largest after the US and UK, estimated with a value of $10.4 trillion to $12 trillion. The market has long been used by the government to finance itself via what are referred to as JGBs (Japan Government Bonds), which stand at $7.3 trillion. The bond market jolt was significant, especially in the 30-year bonds.
What does Smith’s think? If Takaichi’s Liberal Democratic Party loses (which is a possibility), a new government will have to deal with bond investor concerns over any new spending which could take the debt to GDP ratio over its current 235%, one of the highest in the world. Investor squeamishness over JGBs is also affecting the yen. The big risk here is that to defend the yen and prevent a collapse of their own bond market, Japanese financial institutions will be forced to repatriate capital. And this could have a major impact on the US Treasury market; Japan is the largest foreign holder of US government debt at around $1.1 trillion. A selloff in US Treasuries would cause problems in the US economy, which, in turn could erode the standing of the US dollar as the global currency. Look for US-Japanese cooperation in currency markets with an eye to the early February elections.
Greenland – Talks are ongoing with a “framework of a future deal with respect to Greenland” announced last week. What is in that framework has yet to be revealed, though it is most likely that the Trump administration will get most of what it wants. Key to this was the US leader backed off new tariffs on those European countries who opposed his takeover efforts.
What does Smith’s think? The framework has taken Greenland off the geopolitical front burner for now, but a lot more ground will have to be covered for a deal to be consummated, with the major issue being ultimate ownership.
