MacroVoices #511 Robert Kahn: Geopolitical Outlook For 2026
Robert Kahn of Eurasia Group discusses how tariffs remain central to the Trump administration's vision despite averaging 17%, predicting a shift toward industrial policy and direct market intervention. He forecasts an 80% probability that Democrats retake the House in midterms due to voter concerns about affordability.
Summary
Robert Kahn, Managing Director of Global Macro at Eurasia Group, provides a comprehensive analysis of the geopolitical landscape heading into 2026. He begins by discussing how tariffs have evolved from being the dominant story of 2025, explaining that while the average tariff rate is now around 17% (the largest shock since the 1930s), a three-tier structure has emerged: China at 30%, most countries at 10-15%, and Mexico/Canada below 10%. Kahn predicts the administration will pivot toward greater industrial policy and direct market intervention, including taking equity stakes in companies and profit shares from deals.
Regarding the midterm elections, Kahn emphasizes that affordability will be the central issue, with voters frustrated about rising costs and economic uncertainty. He places an 80% probability on Democrats retaking the House and 30% on taking the Senate, citing typical backlash patterns against first-term presidents with unified government control.
On Federal Reserve leadership, Kahn notes uncertainty about Trump's final choice for Fed chair, discussing how Kevin Hassett was initially favored but other candidates like Kevin Warsh and Chris Waller are gaining consideration. He warns that political pressure on the Fed could undermine its independence and credibility, potentially leading to counterproductive outcomes where lower policy rates don't translate to lower borrowing costs due to inflation fears.
Concerning the Russia-Ukraine conflict, Kahn expresses pessimism about current peace negotiations, noting Putin's maximalist demands and significant differences on territory and security guarantees. He predicts Europe will have to shoulder more financial responsibility for Ukraine, potentially through using frozen Russian assets. On U.S.-China relations, Kahn admits his earlier predictions of growing decoupling were somewhat off, as both countries have recognized their mutual dependency and established a framework for stepping back from trade conflicts.
Kahn concludes by discussing market implications, emphasizing that geopolitics will remain a key driver of volatility in 2026. He suggests the U.S. may be in a 'geopolitical recession' where politics isn't solving big problems effectively, and warns that factors including fragmentation and changing investment perceptions may lead to a higher neutral interest rate environment than the low-rate regime of the past two decades.
Key Insights
- Kahn argues that tariffs will remain central to the Trump administration's vision despite current rates being lower than initially expected, creating the largest tariff shock since the 1930s
- The speaker predicts the administration will pivot toward greater industrial policy and direct market intervention, including taking equity stakes in companies and profit shares from deals
- Kahn places an 80% probability on Democrats retaking the House in midterms due to voter frustration with affordability and rising costs of living
- The expert suggests that Trump's focus on lowering gasoline prices stems from political calculations about affordability being crucial for midterm election success
- Kahn warns that political pressure on the Fed for lower rates could backfire by creating inflation fears that steepen the yield curve and tighten financial conditions
- The analyst expresses pessimism about current Russia-Ukraine peace negotiations, citing Putin's maximalist demands and fundamental disagreements on territory and security
- Kahn admits his earlier predictions about U.S.-China decoupling were overly pessimistic, as both countries have recognized mutual dependency and established a conflict de-escalation framework
- The speaker argues that Europe will have to shoulder greater financial responsibility for Ukraine, likely through using frozen Russian assets for war funding
- Kahn suggests the U.S. is experiencing a 'geopolitical recession' where politics fails to solve big problems or bring people together effectively
- The expert predicts that geopolitics will remain a major driver of market volatility in 2026 due to policy uncertainty and the administration's management style
- Kahn argues that structural factors including fragmentation and changing investment perceptions may lead to a permanently higher neutral interest rate environment
- The analyst contends that Trump's desire for Ukrainian peace is motivated equally by humanitarian concerns and political calculations about removing Russian oil sanctions to lower energy prices
Topics
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