Bank of America Hartnett: "The new global order = the new global bull market = the gold and silver bull market," with the biggest risk to the bull market being the appreciation of East Asian currencies.

Source: Wall Street Journal

U.S. Bank Chief Investment Strategist Hartnett believes that Trump is driving global fiscal expansion, leading to a “New World Order = New World Bull Market” pattern. Under this framework, the bull markets in gold and silver will continue, while the biggest current risk is the rapid appreciation of the yen, won, and New Taiwan dollar, which could trigger a global liquidity crunch.

The yen is currently approaching 160, nearing its weakest level in history, and the USD/CNY exchange rate has hit its lowest since 1992. Hartnett warns that if these ultra-weak East Asian currencies appreciate rapidly, it will cause a reversal of capital outflows from Asia, threatening the global liquidity environment.

In terms of asset allocation, Hartnett recommends going long on international stocks and assets related to “economic recovery,” while maintaining a positive outlook on gold’s long-term prospects. He considers China the most promising market, as the end of deflation there could catalyze bull markets in Japan and Europe.

Gold is expected to break through its historic high of $6,000, while small-cap and mid-cap stocks will benefit from policies such as interest rate cuts, tax reductions, and tariffs. However, the sustainability of this optimistic outlook depends on whether the U.S. unemployment rate can stay low and whether Trump can boost approval ratings by lowering living costs.

01 The New World Order Spurs a Global Bull Market

Assuming the yen will not crash in the short term, Hartnett believes the market is entering a “New World Order = New World Bull Market” phase. Trump is pushing for global fiscal expansion, succeeding Biden’s previous approach.

Under this pattern, Hartnett suggests going long on international stocks, as the U.S. exceptionalism position is rotating toward a global rebalancing. Data shows that U.S. stock funds saw inflows of $1.6 trillion in the 2020s, while global funds only saw inflows of $0.4 trillion, indicating this imbalance may correct.

China is Hartnett’s most favored market. He believes that the end of deflation in China will serve as a catalyst for bull markets in Japan and Europe.

From a geopolitical perspective, the Tehran Stock Exchange has risen 65% since August last year, while markets in Saudi Arabia and Dubai remain stable, indicating no revolution in the region. This is positive news for markets because Iran accounts for 5% of global oil supply and 12% of oil reserves.

02 The Gold Bull Market Is Far From Over

Hartnett emphasizes that the New World Order has not only spawned a stock bull market but also a gold bull market.

Although short-term gold, especially silver, is overbought—silver prices are 104% above the 200-day moving average, the most overbought level since 1980—the long-term bullish logic for gold remains intact.

Gold was the best-performing asset in 2020, driven by factors such as war, populism, the end of globalization, excessive fiscal expansion, and debt devaluation.

The Federal Reserve and the Trump administration are expected to increase $600 billion in quantitative easing liquidity by 2026 through purchases of government bonds and mortgage-backed securities.

Over the past four years, gold has outperformed bonds and U.S. stocks, and there are no signs of this trend reversing. While overbought bull markets often experience strong corrections, it remains reasonable to maintain a higher allocation to gold.

Currently, U.S. high-net-worth clients have only a 0.6% allocation to gold. Considering that the average increase during four past gold bull markets was about 300%, gold prices could break through $6,000.

03 Small-Caps and Assets Related to Economic Recovery Benefit

Besides gold, other assets are also benefiting from the new world bull market.

Hartnett believes that interest rate, tax, and tariff cuts, along with the “put options” provided by the Federal Reserve, Trump administration, and Generation Z, explain the market rotation after the Fed’s rate cut on October 29, 2022, and Trump’s victory on November 4, 2022, into “devaluation” trades (such as gold, Nikkei index) and “liquidity” trades (such as space, robotics).

He recommends going long on assets related to “economic recovery,” including mid-cap stocks, small-cap stocks, homebuilders, retail, and transportation sectors, while shorting large tech stocks until the following conditions are met:

First, the U.S. unemployment rate rises to 5%. This could be driven by corporate cost-cutting, AI applications, and immigration restrictions failing to prevent unemployment from rising. Notably, youth unemployment has increased from 4.5% to 8%, while Canadian immigration has sharply declined, yet unemployment has still risen from 4.8% to 6.8% over the past three years. If tax cuts are saved rather than spent, it will be unfavorable for cyclical sectors.

Second, Trump’s policies fail to pass large-scale interventions to lower living costs. Main street interest rates remain high, and if energy, insurance, healthcare, and AI-driven electricity prices do not decline, Trump’s low approval ratings will be hard to improve. Currently, Trump’s overall approval rating is 42%, economic policy support is 41%, and inflation policy support is only 36%.

Historically, Nixon’s price and wage freeze in August 1971 to improve living costs was effective—Nixon’s approval rating rose from 49% in August 1971 to 62% when he was re-elected in November 1972.

However, if Trump’s approval rating does not improve by the end of Q1, the risk of midterm elections increases, making it harder for investors to continue going long on “Trump prosperity” cyclical assets.

04 The Appreciation of East Asian Currencies Is the Biggest Risk

Hartnett points out that the current Q1 market consensus is extremely bullish, but the biggest risk comes from the rapid appreciation of the yen, won, and New Taiwan dollar. The yen is currently trading near 160, and the USD/CNY exchange rate is at its weakest since 1992.

This rapid appreciation could be triggered by Bank of Japan rate hikes, U.S. quantitative easing, Japan-China geopolitical tensions, or hedging errors.

Once it occurs, it will trigger a global liquidity tightening, as capital inflows into the U.S., Europe, and emerging markets to recover the $1.2 trillion current account surplus in Asia will reverse.

Hartnett’s warning signals are a “risk hedging combination” of “yen appreciation and rising MOVE index.” Investors need to closely monitor this indicator to determine when to exit the market.