Hong Hao: Outlook for 2026 – Holding and Profiting Source: Chief Economists Forum Hong Hao is the Managing Partner & CIO of Lianhua Asset Management and a member of the China Chief Economists Forum. Hong Hao serves as Partner and Chief Investment Officer at Lianhua Asset. This article is a transcript of Hong Hao's speech at the 2026 China Chief Economists Forum Annual Conference.
Thank you for the opportunity to share my market outlook for 2026. The previous speaker, Mr. Zheng, provided a detailed analysis of the relationship between the Chinese and US economies and commodities. I will approach the topic from a different perspective, with the theme "Outlook for 2026: Holding and Profiting." First, it is essential to clarify the core drivers behind the Federal Reserve's interest rate cuts. This chart illustrates the changes in the total size of the Fed's balance sheet: after peaking at $9.1 trillion in 2022, quantitative tightening began, and it has now fallen to just over $6 trillion, a reduction of $3 trillion. Concurrent with this balance sheet reduction, the incremental growth in new US employment has been continuously decreasing, an effect particularly pronounced for low-income groups. However, alongside this, the S&P 500 has continued to strengthen, with corporate earnings rising steadily, indicating that the US stock market rally has solid fundamental support. When the Fed's balance sheet shrank to just over $6 trillion, short-term liquidity began to tighten; the balance in the reverse repo facility dropped to an extremely low level of around $10 billion, and the repo rate surged significantly, even far exceeding the Fed's benchmark rate. As the repo market is a core source of short-term liquidity, funding stress there impacts the functioning of various financial markets, for instance, significantly increasing the cost of carry trades for hedge funds. Therefore, the Fed's policy direction for 2026 is already quite predictable: although a halt to quantitative tightening was originally planned for December 1st, the Fed has actually begun balance sheet expansion (relevant data is available in public Fed information), and a rate cut in January is highly probable. Furthermore, candidates for the next Fed Chair are likely to be announced in January; if a Trump ally is appointed, the possibility of substantial Fed rate cuts increases further.
Discussing Sino-US relations, this chart reveals two key phenomena: firstly, China's current account surplus continues to hit record highs (blue line), indicating strong exports; secondly, US long-term inflation expectations (white line) are highly correlated with China's export trends, with the strength of Chinese exports persistently limiting the downside for US long-term inflation expectations. Since the initial trade war in 2018, new supply chains and production centers have gradually formed, yet Chinese manufacturing continues to capture market share from other countries, such as the automotive manufacturing markets of Japan and Germany. Consequently, while short-term US inflation might decline due to transient factors like rent and utilities, the long-term inflation expectations closely watched by financial markets are difficult to control effectively. This will lead to a "steepening" US yield curve – long-term rates, pressured by high inflation expectations, will find it hard to fall significantly and may even hover at elevated levels or rise, while short-term rates decline steadily with Fed rate cuts. This configuration will benefit various financial institutions; the fact that share prices of many US banks have recently reached new highs since the 2007-2008 subprime mortgage crisis exemplifies this logic. If US long-term inflation expectations remain uncontrolled, the Fed's insistence on cutting rates would further weaken the credibility of the US dollar, driving precious metal prices to continue soaring.
This chart shows the nearly 40-year trend of gold (log scale) and a red trend line, clearly displaying two arcs forming a standard "cup and handle" pattern. Statistically, after an asset price forms a "cup and handle" structure, the probability of a subsequent rise approaches 99%. Numerous narratives support higher gold prices, such as the erosion of US dollar credibility, increased central bank purchases, and gold's pivotal role amidst a potential restructuring of the Bretton Woods system. While these arguments have merit, the key is translating the narrative into a specific price target. Applying the technical analysis logic that "the depth of the cup determines the height of the target," gold's fair valuation lies approximately in the $4,300-$4,500 range (with an error margin of about $200). Within a new monetary system, gold will become the anchor for valuing all assets. It is worth noting that gold merely making a marginal new high is of limited significance; what truly alters the investment landscape is the valuation of other assets priced in gold.
Looking at silver, the yellow line represents a 60-year major cycle chart for silver (log scale), and the white line shows silver's returns. The chart reveals that silver has formed a massive 60-year "cup and handle" pattern. Compared to gold's approximately 20-year "cup and handle" structure, silver's pattern is more textbook-perfect and symmetrical. Following the "depth of the cup determines the target" logic, the silver price is far from reaching its peak ($80 is not the end). If gold maintains a fair price of $4,500, and considering that ratios like the gold-to-silver ratio, gold-to-copper ratio, and gold-to-oil ratio remain near historical lows, significant upside potential exists for other non-ferrous metals. From an inflation-adjusted perspective, both the nominal and real prices of silver have broken above long-term trends to set new highs, and "new highs are meant to be bought," providing an important reference for investment (it must be clarified that this analysis is not purely a technical investment recommendation).
In this chart, the white line represents a global liquidity indicator, synthesized by fitting hundreds of liquidity and monetary indicators from the real economies of major global economies. Keynes once said, "Money is the bridge between history and the future"; predicting asset price movements fundamentally hinges on understanding changes in monetary conditions. Data updated at the end of December shows global liquidity continues to rise, consistent with the logic of the Fed's urgency to cut rates and expand its balance sheet, and the Chinese central bank has also entered a balance sheet expansion cycle. Correlating this global liquidity indicator with various asset prices reveals that gold's returns are nearing historical extremes, while silver shows a more significant correlation with global liquidity, essentially moving in tandem. Crucially, the global liquidity indicator leads global asset prices by 3-6 months, and stock market trends themselves lead fundamental changes by 3-6 months, making this indicator an effective leading indicator for fundamentals by 6-12 months. The current sustained improvement in global liquidity implies that silver's upward trend is far from over.
Gold is often viewed as a safe-haven asset, but its attributes can change with market conditions, following the adage "antiques in prosperous times, gold in turbulent times." The yellow line shows the gold trend, and the white line the S&P index; in most cases, they move inversely, highlighting gold's safe-haven role. When constructing an "all-weather" investment portfolio, one might select five asset classes with low or negative correlation, such as gold, bonds, stocks, and Bitcoin; even including high-risk assets can lower the overall portfolio risk. However, there are periods when gold and stocks rise and fall together, as seen during the Plaza Accord era; this phenomenon is re-emerging currently. Furthermore, the cycle between gold's highs and lows spans approximately 17 years, a cycle composed of superimposed 3.5-year minor cycles, which is not coincidental.
Finally, examining the S&P index, this chart displays its 200-year trend and a 35-year return cycle derived from a quantitative cyclical model. The troughs of this cycle occurred in 1939, 1974, and 2009, each separated by 35 years (equivalent to two 17.5-year mid-cycles or ten 3.5-year minor cycles superimposed). 2026 is exactly 17 years from 2009, placing us at the peak phase of this cycle. Cycle peaks are often accompanied by bubbles, where forgotten assets might experience explosive growth (e.g., non-ferrous metals with weak fundamentals), and new asset classes (like digital currencies) could see breakouts. 2026 is the Year of the Horse in the Chinese zodiac, specifically the "Bing Wu" year in the sexagenary cycle. Both "Bing" and "Wu" represent extreme Yang energy, corresponding to the Li trigram, symbolizing the gathering of "three fires." Currently, major global central banks (the Fed, PBOC, etc.) are entering balance sheet expansion cycles. The combination of ample liquidity and peak cycle effects makes it highly probable that this will foster a "Great Bubble." And bubbles present crucial opportunities for investment to "reverse fate and change destiny." I wish you all outstanding investment performance in 2026. Thank you everyone!
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