BofA's Hartnett: 'New Global Order = New Global Bull Market = Gold and Silver Bull Market.' The biggest risk to the bull market is the appreciation of East Asian currencies

Jan 18 18:40

Hartnett, Chief Investment Strategist at Bank of America, believes that Trump is driving global fiscal expansion, creating a "New World Order = New World Bull Market" scenario. Under this framework, the bull markets for gold and silver will continue, while the biggest risk lies in the rapid appreciation of the Japanese yen, South Korean won, and New Taiwan dollar potentially triggering a global liquidity crunch.

The yen is currently near 160, close to its historically weakest level, with its exchange rate against the renminbi hitting the lowest point since 1992. Hartnett warned that if these ultra-weak East Asian currencies experience rapid appreciation, it would lead to a reversal of capital outflows from Asia, threatening the liquidity environment in global markets.

In terms of asset allocation, Hartnett recommends going long on international equities and assets related to "economic recovery," while maintaining a positive outlook on the long-term prospects for gold. He considers China to be his most favored market, as the end of deflation in China will act as a catalyst for bull markets in Japan and Europe.

Gold is expected to break through its all-time high of $6,000 per ounce, while small-cap and mid-cap stocks will benefit from policies reducing interest rates, taxes, and tariffs. However, the sustainability of this optimistic outlook depends on whether the U.S. unemployment rate can remain low and whether Trump can increase his approval ratings by lowering living costs.

Appreciation of East Asian currencies poses the greatest risk.

Hartnett pointed out that the market consensus in the first quarter is extremely bullish, with the biggest risk coming from the rapid appreciation of the Japanese yen, South Korean won, and New Taiwan dollar. The yen is currently trading near 160, at its weakest level against the renminbi since 1992.

A rapid appreciation of these currencies could be triggered by factors such as interest rate hikes by the Bank of Japan, U.S. quantitative easing, geopolitical tensions between Japan and China, or hedging errors. Once it occurs, it would cause a global liquidity crunch because capital inflows into the U.S., Europe, and emerging markets—used by Asian countries to recycle $1.2 trillion in current account surpluses—would reverse.

Hartnett's warning signal is the risk-averse combination of "yen appreciation and rising MOVE Index." Investors need to closely monitor this indicator to determine when to exit the market.

The New World Order Spurs a Global Bull Market.

Assuming the yen does not collapse in the short term, Hartnett believes the market is entering a phase of "New World Order = New World Bull Market." Trump is pushing for global fiscal expansion, continuing the approach previously adopted by Biden.

Within this framework, Hartnett recommends going long on international equities as positions centered on American exceptionalism are rotating towards global rebalancing. Data shows that equity funds in the U.S. attracted inflows of $1.6 trillion during the 2020s, compared to only $0.4 trillion for global funds, indicating an imbalance that is likely to be corrected.

China is Hartnett’s most favored market. He believes that the end of China's deflation will act as a catalyst for bull markets in Japan and Europe. From a geopolitical perspective, the Tehran Stock Exchange has surged 65% since August last year, while markets in Saudi Arabia and Dubai have remained stable, signaling that no revolutions are expected in the region. This is positive for markets, given that Iran accounts for 5% of global oil supply and 12% of oil reserves.

The gold bull market is far from over.

Hartnett emphasized that the new world order is giving rise not only to equity bull markets but also to a bull market in gold. Although gold, and especially silver, has become overbought in the short term—with silver prices trading 104% above their 200-day moving average, the most overbought level since 1980—the long-term rationale for gold's upward trajectory remains intact.

Gold was the best-performing asset of the 2020s, driven by factors such as war, populism, the end of globalization, fiscal excess, and debt devaluation. The Federal Reserve and the Trump administration are projected to inject $600 billion in quantitative easing liquidity by purchasing Treasury bonds and mortgage-backed securities by 2026.

Over the past four years, gold has outperformed bonds and U.S. equities, with no signs of reversal in this trend. While overbought bull markets inevitably experience sharp corrections, it can still be argued that maintaining a higher allocation to gold remains reasonable. Currently, high-net-worth clients of Bank of America allocate only 0.6% of their portfolios to gold. Considering that the average gains of the four major gold bull markets over the past century were approximately 300%, gold prices could potentially exceed $6,000.

Small-cap stocks and assets related to economic recovery benefit.

Beyond gold, other assets are also benefiting from the new world bull market. Hartnett attributes the market rotation towards 'devaluation' trades (such as gold and the Nikkei Index) and 'liquidity' trades (such as space and robotics) after the Federal Reserve's interest rate cut on October 29 last year and Trump's election victory on November 4 to reductions in interest rates, taxes, and tariffs, as well as 'put option protection' provided by the Federal Reserve, the Trump administration, and Generation Z.

Hartnett advises going long on assets tied to 'economic recovery,' including mid-cap stocks, small-cap stocks, homebuilders, retail, and transportation sectors, while shorting large-cap technology stocks until the following conditions arise:

First, the U.S. unemployment rate rises to 5%. This could be driven by corporate cost-cutting, the application of artificial intelligence, and the failure of immigration restrictions to prevent a rise in unemployment. Notably, youth unemployment has risen from 4.5% to 8%, while Canada’s unemployment rate has increased from 4.8% to 6.8% over the past three years despite a significant drop in immigration. If tax cuts lead to savings rather than consumption, cyclical sectors will be adversely affected.

Secondly, Trump's policies have failed to reduce the cost of living through large-scale interventions. Main Street interest rates remain high, and unless prices for energy, insurance, healthcare, and electricity — driven up by artificial intelligence — decline, Trump’s low approval ratings will be difficult to improve. Currently, Trump's overall approval rating stands at 42%, with 41% support for his economic policies and only 36% for his inflation management.

Historically, Nixon's move in August 1971 to freeze prices and wages did succeed in improving the cost of living — Nixon’s approval rating rose from 49% in August 1971 to 62% at his re-election in November 1972. However, if Trump’s approval rating fails to improve by the end of the first quarter, midterm election risks will rise, making it more challenging for investors to continue favoring "Trump boom" cyclical assets.

Editor/Rice