On Friday, the market experienced a dramatic swing that will go down in history.
From a sudden stock market slump to a sharp rebound in the dollar, and then to the bombshell rumors that former Fed "super hawk" Kevin Warsh might replace Powell, this series of events ultimately triggered a record single-day plunge in gold and silver.
In the face of the rollercoaster-like market performance on Friday, Bank of America's chief investment strategist, Michael Hartnett, reiterated: "Debasement is the base case." ...p>
A Weak Dollar and the Political Economy of the "Rust Belt"
Despite a rebound in the dollar exchange rate on Friday, Hartnett points out that the dollar has actually fallen by 12% since Trump took office. This weakness is not accidental, but rather a policy-driven phenomenon.
A weak dollar is seen as a key means of boosting manufacturing in swing states in the "Rust Belt" such as Pennsylvania, Michigan, and Wisconsin.
This is not just an economic issue, but a matter of political survival. Hartnett data shows a high correlation between the president's approval rating and the dollar's performance during Trump's first and second terms. Historically, since 1970, the average decline during a dollar bear market has been as high as 30%. In this macroeconomic context, gold and emerging market (EM) equities are typically the best-performing asset classes. As long as currency devaluation remains a policy tool, the long-term downward pressure on the US dollar will continue to support real assets. Hartnett emphasizes that the traditional 60/40 stock/bond strategy is no longer suitable for the current environment, and instead, a "permanent portfolio" (25/25/25/25) consisting of 25% each of stocks, bonds, gold, and cash should be adopted. Data shows that the strategy's performance is astonishing: Its 10-year return reached 8.7%, marking its best performance since 1992. Even more remarkably, the portfolio recorded a massive 23% return in 2025, its best year since 1979. This data powerfully demonstrates the importance of including gold and cash in core asset allocations during an era of currency devaluation and inflationary volatility. Regarding future asset rotation, Hartnett, a renowned contrarian investor, pointed out that the "painful trade" of 2020 was to go long on gold, while by 2026, the contrarian trade might become "going long on bonds." However, given the global debt crisis, whether this contrarian thinking will be effective remains to be seen. The only thing that can end the “gold bull market” is a “bigger event”. Although gold prices have recently shown “bubble-like” characteristics, and even experienced a significant correction last Friday, Hartnett believes this hasn’t changed the overall picture. Investment trends in the 2020s are dominated by war, inflation, protectionism, and wealth redistribution. Currently, gold prices suggest negative real interest rates in the US, consistent with the widely expected scenario of excess liquidity, a depreciating dollar, and a booming US economy before the election. However, risks remain. Hartnett warns that non-US asset allocators currently hold 64% of the market capitalization of US equities, 55% of the global corporate bond market, and 50% of the global government bond market. Under this highly concentrated portfolio structure, if non-US investors were to reduce their stock and Treasury holdings by just 5%, it would result in a $1.5 trillion ($1.5tn) capital outflow. 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 enormous. Hartnett emphasizes that great gold bull markets are usually only ended by "bigger events." In the current overly bullish sentiment, the trigger for deleveraging, a reversal of currency devaluation trends, and a correction in the boom-and-bust cycle in the first half of the year must be some major macroeconomic event capable of disrupting the existing liquidity logic. Before that, currency devaluation trading is still risk-taking.
2026 Trading Strategy Outlook: BIG + MID
Looking ahead, Hartnett continues to maintain his signature contrarian thinking.
Looking to the future, Hartnett continues to maintain his signature contrarian thinking.
While going long on gold was a "painful trade" for asset allocators in 2020, he believes the contrarian trade for 2026 might be going long on bonds. However, he also acknowledges that against the backdrop of global debt overload, this contrarian thinking might backfire. Regarding specific trading strategies for 2026, Hartnett strongly recommends the "BIG + MID" combination. This is a theme he has repeatedly mentioned in recent reports, namely, a bullish outlook on Bitcoin, International stocks, Gold, and Mid-cap stocks. With the 2020s halfway through, this strategy aims to capture asset classes that are likely to outperform the market under the new macroeconomic paradigm.
Alex
