Source: Wall Street News
Michael Hartnett, Chief Investment Strategist at Bank of America, believes that Trump is driving global fiscal expansion, fostering a "New World Order = New World Bull Market" framework. Under this framework, the bull market in gold and silver will persist, and the current 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, approaching its historically weakest level, and its exchange rate against the Chinese Yuan is the lowest since 1992. Hartnett warns that if these ultra-weak East Asian currencies experience rapid appreciation, it would reverse the outflow of Asian capital, threatening the global market's liquidity environment.
Regarding asset allocation, Hartnett recommends going long on international stocks and assets related to "economic recovery," while remaining bullish on gold's long-term prospects. He considers China 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 the historical high of $6000, and 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 US unemployment can remain low and whether Trump can boost his approval ratings by reducing the cost of living.
01 New World Order Fosters Global Bull Market
Assuming the Yen does not collapse in the short term, Hartnett believes the market is entering a "New World Order = New World Bull Market" phase. Trump is promoting global fiscal expansion, taking over from Biden's previous approach.
Under this pattern, Hartnett suggests going long on international stocks, as positioning in American exceptionalism is rotating towards global rebalancing. Data shows that US stock funds attracted $1.6 trillion inflows in the 2020s, while global funds only saw $0.4 trillion inflows; this imbalance is expected to correct.
China is Hartnett's most favored market. He believes 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 have remained stable, indicating no revolution in the region. This is positive news for markets, as Iran accounts for 5% of global oil supply and 12% of oil reserves.
02 Gold Bull Market Far From Over
Hartnett emphasizes that the New World Order not only fosters a stock bull market but also a gold bull market.
Although gold, especially silver, is overbought in the short term—silver prices are 104% above the 200-day moving average, the most overbought level since 1980—the long-term logic for gold's rise remains valid.
Gold has been the best-performing asset of the 2020s, driven by factors including war, populism, the end of globalization, excessive fiscal expansion, and debt devaluation.
The Federal Reserve and the Trump administration are expected to add $600 billion in quantitative easing liquidity by purchasing Treasury bonds and mortgage-backed securities in 2026.
Over the past four years, gold has outperformed bonds and US stocks, with no signs of this trend reversing. Although overbought bull markets always experience strong pullbacks, it can be argued that a higher allocation to gold remains justified.
Currently, the allocation to gold among Bank of America's high-net-worth clients is only 0.6%. Considering the average gain of about 300% in the four gold bull markets of the past century, the gold price is expected to break through $6000.
03 Small-Caps and Economic Recovery Assets Benefit
Besides gold, other assets also benefit in the New World Bull Market.
Hartnett believes that interest rate, tax, and tariff cuts, along with the "put protection" provided by the Fed, the Trump administration, and Generation Z, are the reasons for the market's rotation into "devaluation" trades (e.g., gold, Nikkei index) and "liquidity" trades (e.g., space, robotics) after the Fed's rate cut on October 29 and Trump's election victory on November 4.
Hartnett recommends going long on "economic recovery" related assets, including mid-caps, small-caps, homebuilders, retail, and transportation sectors, while shorting large-cap tech until the following occurs:
First, the US unemployment rate rises to 5%. This could be driven by cost-cutting by businesses, AI adoption, and immigration restrictions failing to prevent rising unemployment. Notably, youth unemployment has risen from 4.5% to 8%, and while immigration to Canada 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 will be unfavorable for cyclical sectors.
Second, Trump's policies fail to significantly reduce 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 rating is 42%, his economic policy approval is 41%, and his inflation policy approval is only 36%.
Historically, Nixon's price and wage freeze in August 1971 to reduce the cost of living did work—Nixon's approval rating rose from 49% in August 1971 to 62% at his re-election in November 1972.
But if Trump's approval ratings do not improve by the end of Q1, midterm election risks will rise, making it harder for investors to continue going long on "Trump prosperity" cyclical assets.
04 East Asian Currency Appreciation Poses the Biggest Risk
Hartnett points out that the current Q1 market consensus is extremely bullish, and the biggest risk comes from the rapid appreciation of the Japanese Yen, South Korean Won, and New Taiwan Dollar. The Yen is currently trading near 160, and its exchange rate against the Chinese Yuan is at its weakest since 1992.
Rapid appreciation of these currencies could be triggered by a Bank of Japan rate hike, US quantitative easing, Sino-Japanese geopolitics, or hedging missteps.
If this occurs, it would cause a global liquidity crunch, as the capital flowing into the US, Europe, and emerging markets from Asian countries recycling their $1.2 trillion current account surplus would reverse.
Hartnett's warning signal is a risk-aversion combination of "Yen rising, MOVE Index rising." Investors need to closely monitor this indicator to judge when to exit the market.
