On October 27th, Eastern Time, Bank of America analyst Hartnett mentioned in his latest report that the U.S. presidential election will strengthen four core trading strategies on Wall Street, which are bullish on gold and technology stocks, bearish on bonds, with other assets being 'rents', providing relatively stable returns but limited growth potential.

Hartnett presented his reasons for being bullish on gold. On one hand, the market is concerned that a Fed rate cut may lead to inflation and economic overheating rather than economic growth. The actual market reaction to the Fed rate cut is investors selling U.S. Treasury bonds, with yields of Euro-American government bonds jumping by double digits last week. At the same time, there is higher concentration in U.S. stocks, with investors buying magnificent 7 technology giants rather than the broader market.

In addition, global political uncertainty, whether in France or in the United Kingdom, has seen voters' reduced interest in mainstream political parties. Investors are also beginning to doubt whether these parties will implement traditional fiscal and monetary policies, leading to a decreased willingness among investors to purchase government bonds. Therefore, Hartnett believes that now is not a good time to buy bonds and stocks.

Population and immigration policies are also key factors. Hartnett is concerned that Western voters are beginning to vote against large-scale immigration, leading to a reduction in workers and employers having to raise wages. To maintain profits, companies may pass these costs on to consumers, causing inflation. This is also a reason for Hartnett's bullish view on gold.

Fiscal policy and inflation costs drive the gold bull market.

A week ago, Bank of America analyst Michael Hartnett released a report stating that despite the market generally expecting a Republican landslide victory, two assets have performed differently, which are gold and crude oil. Historically, if the Republican Party wins by a large margin, the price of gold should be lower, and the price of oil should be higher.

However, the results are quite the opposite. Gold has been on a continuous rise in recent years, hitting new highs throughout the year, with spot gold hitting historic highs for three consecutive days this week, reaching a new high of $2758.49 on Wednesday, far exceeding the previous highs of $2000 in 2020 and $1900 in 2011. Hartnett pointed out that the driving force behind this gold bull market cycle mainly comes from fiscal policy and inflation.

In the 2020s, the United States and global fiscal deficits led to the government printing lots of money to stimulate the economy, combined with global political instability. The technology and trade wars brought great uncertainty, protectionism prevailed, disrupting the global supply chain, all of which exacerbated inflation, triggered global safe-haven demand. The market worries about currency depreciation and buys a large amount of gold to hedge against value loss, driving the gold price to continue rising.

Furthermore, the Federal Reserve has started a rate-cutting cycle, and in the coming quarters, it may continue to cut rates. Once the pace is not well controlled, it may stimulate inflation to rise again. In addition, Bitcoin recently reached the milestone of $0.075 million, hitting a new historical high, further proving the market's concerns about inflation and the depreciation of the U.S. dollar.

Based on these circumstances, Hartnett once predicted that the gold price will further increase in the future, surpassing $3,000 per ounce. Just from the performance of gold prices last week, his predictive logic has been continuously confirmed. When the gold price rose above $2,750 to a new high last week, it had accumulated an increase of about 31% since the beginning of the year, becoming the top asset in terms of annual return, even surpassing Bitcoin.

Polymarket, a predictive market platform, recently opened a market for people to bet on whether the price of gold will reach $3,000 on January 1st.

On October 27th, Eastern Time, Hartnett mentioned in his latest report that gold has not only reached a historical high relative to global stock markets (excluding U.S. stocks) but has also outperformed the NYSE index over the past 10 years. This means that gold is not only performing well in the short term but also a good long-term investment. Therefore, investors have started buying significant amounts of gold, with the weekly fund inflow of gold funds reaching the highest since July 2020.

In the past decade, gold has been a relatively low-profile investment choice without attracting much attention from investors seeking quick profits. These investors prefer assets with large price fluctuations over the short term and the ability to quickly buy and sell for profit. Hartnett is concerned that if the price of gold suddenly surges, those seeking short-term profits may start buying a lot of gold in hopes of profiting from it.

Hartnett warned: "We are bullish on gold, but if the chaos in gold prices and bond yields due to the U.S. presidential election results disrupt the current 'Goldilocks' market state, the kind of market environment that is just right, neither hot nor cold, it may reverse the gold bull market. If the price of gold suddenly spikes, it may lead to a faster market downturn.

The rapid rise in the price of gold may be seen as a signal of market instability, causing investors to become cautious and reduce investments. On the other hand, a slow and steady increase in the price of gold is considered an ideal situation, usually viewed as a sign of a healthy and stable market.

Wall Street trading core strategy: long gold and technology stocks

Hartnett believes that the upcoming US presidential election will strengthen four core trading strategies on Wall Street:

Long gold, which can hedge against inflation and populist risks. Populism may lead to policy instability and increase economic uncertainty.

Long technology stocks, especially AI.

Short US Treasury bonds, based on concerns about US debt and deficit issues. If the government debt is too high, it may affect its credit and monetary stability.

Everything else is considered 'rents', meaning that investments other than the above three strategies are seen as income similar to 'rents'. They provide relatively stable returns but with limited growth potential.

It is worth noting that Hartnett warns that if any of the following two situations occur, these four core trading strategies will change:

Economic recession. If economic data, especially the non-farm payroll report showing less than 0.05 million new payroll jobs, typically indicating a slowdown, which may lead to a recession. In this scenario, investors usually withdraw from higher risk stock markets and opt for relatively safe, lower-risk bond markets that usually provide more stable returns during periods of economic uncertainty.

A big win in the election and hotung inflation. If the US election results in one side winning big and an additional employment of over 0.25 million, this could mean that the economy is rapidly growing. This could lead to the Federal Reserve raising interest rates instead of cutting them to stimulate the economy, and reversing the leading positions of gold and technology stocks.

Normally, when the Federal Reserve cuts interest rates, bond yields decrease. However, this time it's a bit different. Bonds are not as attractive as before, with bond yields actually rising significantly after the Federal Reserve cut rates. Last Friday, the 10-year US bond yield hit a three-month high again, while European and American bond yields jumped by double digits last week.

This may be because the market is concerned that the Federal Reserve may have made a significant policy mistake, and that Federal Reserve decisions may trigger the next wave of inflation. Therefore, despite the rate cut by the Federal Reserve, the actual financial environment has become tighter, and the actual cost of borrowing has not decreased much.

At the same time, Hartnett also believes that now is not a good time to buy stocks. Although this situation has not yet affected the stock market as third-quarter company earnings are still good, stock market gains are mainly concentrated on the magnificent 7 in technology rather than most stocks, which is not healthy.

Additionally, Hartnett pointed out that the Risk Parity Risk (RPAR) dropped by 5% in October. Risk Parity is an investment strategy aimed at balancing the risks of different assets. When Risk Parity decreases, it means that market risks are increasing, and investors may become more cautious. This is a warning signal, indicating that if financial conditions further tighten, such as if borrowing becomes more expensive or difficult, investors may reduce their investments in stocks, which could have a negative impact on risky assets like stocks.

Overall, Hartnett believes that the market's reaction indicates concerns that the Fed's rate cuts may lead to inflation and economic overheating, rather than economic growth. Therefore, now is not a good time to buy bonds or various stocks. This is also why he is bullish on gold.

Unless AI accelerates, immigration policies tighten, or cause an inflation crisis.

Also, another reason Hartnett is bullish on gold in the long term is demographics. He quotes the saying 'demographics determine destiny' and points out that in recent years, globalists have brought deflationary pressure by introducing millions of illegal immigrants. However, now Western voters are starting to vote against this large-scale immigration, which could result in inflation. Restricting immigration could reduce labor supply, thereby raising wages and prices.

Hartnett's explanation is as follows:

1. Government debt and inflation. Hartnett said that excessive government spending in the United States, combined with the policies that the Federal Reserve may adopt to cause inflation, as well as the reversal of the globalization trend (deglobalization), may lead to money losing value, price increases, all contributing to the 47% decline in the price of 30-year US bonds since March 2020.

2. The impact of immigration on population growth. Hartnett mentioned that in Canada and the United Kingdom, although the number of births and deaths are almost equal, the population is still growing due to a large number of people immigrating to these countries. In the UK, the number of births and deaths reached the same level, which has only happened for the third time in the past 185 years. However, despite the decrease in the number of births, the UK's population still grew by 1.1% in 2024, the highest growth rate in 74 years. The situation is similar in Canada, with a population growth of 3.2% in 2023, the highest level since 1957.

3. How investors view immigration. Hartnett stated that investors generally view immigration positively because it contributes to economic growth. On the one hand, immigration increases labor supply, which may lower labor costs (wages) as there are more people available to work in the market. On the other hand, the increase in immigration also means that government and consumer spending will increase because new immigrants need to consume and pay taxes.

Overall, Hartnett believes that despite the declining birth rates, the populations of Canada and the UK are still growing due to the increase in immigration. This population growth is positive for investors as it contributes to economic growth. However, it may also lead to inflation because there is more money in the market and demand increases. This is why Hartnett is bullish on gold in the long term, as gold is usually seen as a hedge against inflation.

But now immigration policies are changing. In the past, policymakers in some Western countries tried to address the issues of aging populations and labor shortages by increasing immigration. They believed that immigration could increase the workforce and promote economic growth. However, at the same time, ordinary people (middle class) in these countries found their lives becoming increasingly difficult. This is because the policies of central banks make the rich richer, while ordinary and poor people find it increasingly difficult to earn money. The widening wealth gap has made many people dissatisfied, leading them to demand action from the government. More and more people are supporting parties advocating stricter immigration policies.

Now, politicians in North America and Europe are beginning to respond to the demands of voters by adopting stricter immigration policies. For example, Canada plans to reduce the number of temporary foreign workers from 7% of the total population to 5%. Hartnett pointed out that in this context, tightening immigration policies lead to a decrease in the number of immigrants, and employers may have to raise wages to attract and retain workers. Rising wages will increase production costs, and companies may pass these costs on to consumers to maintain profits, which can also lead to inflation.

Therefore, an increase in immigration may push up prices by increasing consumer demand, while limited labor supply may increase inflationary pressures by raising wages and production costs. Both situations can lead to price increases, but the underlying economic mechanisms are different.

Hartnett mentioned that unless the adoption rate of AI significantly accelerates, the pressure of this inflation may continue to exist. This is because AI can improve production efficiency without the need to increase manpower.

It is also worth noting that Hartnett mentioned that although immigration trends may have an impact on the labor market, the wage growth starting point in Canada, the United Kingdom, and the United States is still quite strong. The wage levels in these three countries are rising, with growth rates of 4.6% in Canada, 4.4% in the United Kingdom, and 4.0% in the United States. This indicates that even with immigrants entering the labor markets of these countries, wages are still increasing, illustrating a relatively strong demand for labor.

He reviewed the situation in the 1970s, where in the early 1970s, many countries adopted loose fiscal and monetary policies to stimulate the economy. However, it was later discovered that this led to excessive inflation, requiring further policy adjustments to control inflation. Hartnett believes that the current situation is similar to the 1970s and may also require inflation to end the current loose policy.

Global political situations are unstable.

He also expressed concerns about the growth and debt levels of the United States government, with annual interest payments exceeding 1.1 trillion U.S. dollars. The debt level of the U.S. government is very high and continues to increase.

Another issue is the political situation. In the 2024 elections, in the United Kingdom, only 57% of voters voted for mainstream political parties, the lowest level since 1918. In France, this percentage is 36%, the lowest level since 1945. This means that more and more voters no longer support traditional mainstream parties, possibly turning to smaller parties or choosing not to vote.

As voter interest in mainstream parties decreases, investors also begin to doubt whether these parties will implement traditional fiscal and monetary policies. This doubt has led to a decrease in investors' willingness to buy government bonds ('buyer's strike'). Investors are reluctant to buy government bonds for fear that the government may not implement effective policies to ensure stable economic growth. As a result, there is a cautious attitude towards investing in government bonds and the stock market. Investments in the stock market are becoming more concentrated, with technology giants appearing more stable while the future of other companies is less certain.

Hartnett believes that if the outcome of the U.S. elections results in a political and fiscal deadlock, such as no party being able to clearly control the government, this uncertainty may change investors' behavior. Political deadlock may force the government to adopt more cautious and conservative policies, which could restore investors' confidence in government bonds.

Finally, Hartnett predicts that if the geopolitical situation improves in 2025, such as more harmonious international relations, then oil prices may decrease. This would be beneficial for international market investments, as a reduction in energy costs typically stimulates economic growth.

Editor/ping