Last Friday's trading session witnessed historic volatility that will be recorded in the annals of market history. From a sudden stock market slide and a sharp dollar rebound, to the bombshell rumor that former Fed "super hawk" Kevin Warsh might replace Powell, this series of events ultimately triggered a record single-day plunge in silver. Nevertheless, despite the roller-coaster market action on Friday, Michael Hartnett, Chief Investment Strategist at Bank of America, reiterated his stance: "Debasement is Da Base Case." For investors, this implies that although short-term volatility is intense, the macro logic driving gold and physical assets higher remains robust. Unless a "bigger event," more disruptive than the current macro narrative, occurs, this bull market fueled by currency debasement will not end easily. However, investors must remain vigilant about potential liquidity deleveraging risks in the first half of the year, which could trigger a sharp correction to cleanse excessive "greed."
Weak Dollar and the Political Economy of the "Rust Belt"
Although the dollar exchange rate rebounded on Friday, Hartnett pointed out that the dollar has actually depreciated by 12% since Trump's inauguration. This weakness is not accidental but a policy orientation. A weak dollar is seen as a key tool to boost manufacturing in crucial swing states of the "Rust Belt," such as Pennsylvania, Michigan, and Wisconsin. This is not merely an economic issue but a matter of political survival. Hartnett's data shows a high correlation between presidential approval ratings and the dollar's trajectory during Trump's first and potential second terms. Looking at historical cycles, since 1970, the average decline in a dollar bear market has been as high as 30%. Within this macro context, gold and emerging market (EM) equities have typically been the top-performing asset classes. As long as "currency debasement" remains a policy tool, the long-term downward pressure on the dollar will continue to support physical assets.
The Glorious Return of the "Permanent Portfolio"
Hartnett emphasized that the traditional 60/40 stock-bond strategy is no longer suitable for the current environment. It is being replaced by the "Permanent Portfolio" (25/25/25/25), comprising equal 25% allocations to stocks, bonds, gold, and cash. The performance data for this strategy is striking: Its 10-year return has reached 8.7%, marking its best performance since 1992. Even more remarkable, the portfolio recorded a substantial 23% gain in 2025, its best annual performance since 1979. This data strongly underscores the importance of including gold and cash in core asset allocations during an era of currency debasement and inflationary volatility. Regarding future asset rotation, Hartnett, a noted contrarian investor, pointed out that the "pain trade" in 2020 was being long gold, whereas by 2026, the contrarian trade might shift to "being long bonds." However, against the backdrop of a global debt glut, it remains to be seen whether this contrarian thinking will prove effective this time.
Only a "Bigger Event" Can End the "Great Gold Bull Market"
Although gold prices have recently shown "bubbly" characteristics and experienced a significant pullback last Friday, Hartnett believes this does not alter the bigger picture. Investment trends in the 2020s are dominated by war, inflation, protectionism, and wealth redistribution. Currently, the price level of gold suggests negative US real interest rates, which aligns with the base case scenario of widely expected excess liquidity, dollar depreciation, and US economic prosperity ahead of the election. Risks, however, persist. Hartnett warned that non-US asset allocators currently hold 64% of the US stock market's capitalization, 55% of the global corporate bond market, and 50% of the global government bond market. Given this highly concentrated positioning, if non-US investors were to reduce their stock and Treasury bond holdings by just 5%, it would trigger $1.5 trillion in capital outflows. Considering the US currently faces a $1.4 trillion current account deficit and a $1.7 trillion budget deficit, the impact of such capital outflows would be substantial. Hartnett stressed that great gold bull markets are typically only ended by "bigger events." Amid the current overly bullish sentiment, a trigger for deleveraging, a reversal of the currency debasement trend, and a correction among the winners of the recent boom in the first half of the year would necessarily be a major macro event capable of disrupting the existing liquidity logic. Until such an event, the debasement trade continues to run ahead of the risks.
2026 Trading Strategy Outlook: BIG + MID
Looking ahead, Hartnett maintains his signature contrarian mindset. While being long gold was the "pain trade" for asset allocators in 2020, he believes the contrarian trade for 2026 might be going long bonds. However, he also acknowledges that, given the global debt deluge, this contrarian thinking could be wrong this time. For specific trading strategies in 2026, Hartnett highlighted the "BIG + MID" combination. This is a theme he has repeatedly mentioned in recent reports, expressing optimism for Bitcoin, International equities, Gold, and Mid-cap stocks. As we pass the midpoint of the 2020s, this strategy aims to capture asset classes that may outperform under the new macro paradigm.
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