Michael Hartnett, Chief Investment Strategist at Bank of America, posits that Trump is driving global fiscal expansion, fostering a "new world order = new world bull market" paradigm. Within this framework, the bull markets in gold and silver will persist, while the most significant current risk lies in the potential for rapid appreciation of the Japanese Yen, South Korean Won, and New Taiwan Dollar to trigger a global liquidity crunch. The Yen is currently near 160, approaching its historically weakest levels, with its exchange rate against the Renminbi hitting the lowest point since 1992. Hartnett warns that a swift strengthening of these ultra-weak East Asian currencies would reverse capital outflows from Asia, threatening the liquidity environment of global markets. Regarding asset allocation, Hartnett recommends going long on international equities and assets linked to "economic recovery," while maintaining a positive long-term outlook on gold. He identifies China as his most favored market, believing the end of deflation in China will act as a catalyst for bull markets in Japan and Europe. Gold is poised to break through its historical high, potentially reaching $6,000, while small-cap and mid-cap stocks are expected to benefit from policies reducing interest rates, taxes, and tariffs. However, the sustainability of this optimistic outlook depends on whether the US unemployment rate remains low and whether Trump can boost his approval ratings by lowering the cost of living. Hartnett points out that the current first-quarter market consensus is extremely bullish, with the greatest risk stemming from rapid appreciation of the Yen, Won, and New Taiwan Dollar. The Yen is currently trading near 160, at its weakest level against the Renminbi since 1992. Such rapid currency appreciation could be triggered by factors like Bank of Japan interest rate hikes, US quantitative easing, Sino-Japanese geopolitical tensions, or hedging missteps. If it occurs, it would provoke a global liquidity squeeze, as capital flowing from Asian countries—which recycle their $1.2 trillion current account surplus into US, European, and emerging markets—would reverse direction. Hartnett identifies the warning signal as a risk-off combination of "Yen rising, MOVE index rising." Investors need to monitor this indicator closely to determine when to exit the market. Assuming the Yen does not collapse in the short term, Hartnett believes markets are entering a "new world order = new world bull market" phase. Trump is pushing for global fiscal expansion, taking over from the approach previously seen under Biden. Within this framework, Hartnett advises going long on international stocks, as positioning favoring US exceptionalism is rotating towards a global rebalancing. Data shows that in the 2020s, US equity funds attracted $1.6 trillion in inflows, while global funds saw only $0.4 trillion, an imbalance that is expected to correct. China is Hartnett's most preferred market. He argues 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 last August, while Saudi and Dubai markets remain stable, suggesting no revolution is imminent in the region. This is positive news for markets, given Iran accounts for 5% of global oil supply and 12% of oil reserves. Hartnett emphasizes that the new world order fosters not only an equity bull market but also a gold bull market. Although gold, and particularly silver, are overbought in the short term—silver prices are 104% above their 200-day moving average, the most overbought level since 1980—the long-term case for gold's rise remains intact. Gold has been the best-performing asset of the 2020s, driven by factors including war, populism, the end of globalization, fiscal excess, and debt debasement. The Federal Reserve and the Trump administration are expected to add $600 billion in quantitative easing liquidity by 2026 through purchases of Treasury bonds and mortgage-backed securities. Over the past four years, gold has outperformed bonds and US stocks, with no signs of this trend reversing. While overbought bull markets always experience sharp corrections, a higher allocation to gold can still be justified. Currently, gold allocation among Bank of America's high-net-worth clients is only 0.6%. Considering the average gain in the four major gold bull markets of the past century was approximately 300%, gold prices could potentially break above $6,000. Beyond gold, other assets also benefit in the new world bull market. Hartnett believes that reductions in interest rates, taxes, and tariffs, coupled with "put protection" from the Fed, the Trump administration, and Generation Z, prompted the market rotation into "debasement" trades (like gold, Nikkei) and "liquidity" trades (like space, robotics) following the Fed's rate cut on October 29 and Trump's election victory on November 4. Hartnett recommends going long on assets related to "economic recovery," including mid-caps, small-caps, homebuilders, retail, and transportation sectors, while shorting large-cap tech stocks until the following conditions occur: Firstly, the US unemployment rate rises to 5%. This could be driven by corporate cost-cutting, AI adoption, and immigration restrictions failing to prevent rising unemployment. Notably, youth unemployment has increased from 4.5% to 8%, and while Canadian immigration has fallen sharply, its unemployment rate has still risen from 4.8% to 6.8% over the past three years. If tax cuts are saved rather than spent, it would be negative for cyclical sectors. Secondly, Trump's policies fail to substantially lower the cost of living through large-scale intervention. Main Street interest rates remain high; if energy, insurance, healthcare, and AI-driven electricity prices do not fall, Trump's low approval ratings will be difficult to improve. Currently, Trump's overall approval is 42%, his economic policy approval is 41%, and his inflation policy approval is just 36%. Historically, Nixon's price and wage freeze in August 1971 to address the cost of living did work—his approval rating rose from 49% in August 1971 to 62% upon his re-election in November 1972. However, if Trump's approval ratings do not improve by the end of the first quarter, mid-term election risks will increase, making it harder for investors to remain long on "Trump boom" cyclical assets.
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