On October 27th Eastern Time, in his latest report, U.S. Bank analyst Hartnett mentioned that the U.S. presidential election would strengthen four core trading strategies on Wall Street, namely being bullish on gold and technology stocks, bearish on bonds, and the rest of the assets as "rents," which provide relatively stable returns but have limited growth potential.

Hartnett presented his reasons for being bullish on gold. On one hand, the market is concerned that the Federal Reserve's interest rate cuts could lead to inflation and economic overheating, rather than economic growth. The actual market response to the Fed's rate cuts is that investors are selling U.S. Treasury bonds; for instance, the yields on European and American base bonds both jumped into double digits last week. At the same time, the concentration of the U.S. stock market has increased, with investors buying into the seven tech giants rather than the broader market.

Additionally, demographics and immigration policies are key factors. Hartnett is worried that Western voters are beginning to vote against mass immigration, leading to a decrease in workers, which forces employers to raise wages. In order to maintain profits, companies might pass these costs onto consumers, resulting in inflation, which is also a reason for Hartnett's bullish stance on gold.

Fiscal Policy and Inflation Costs Drive the Gold Bull Market

A week ago, U.S. Bank analyst Michael Hartnett released a report stating that despite the market's general expectation of a Republican landslide, the performance of two assets stood out: gold and crude oil. Historically, if the Republicans won big, the price of gold should be lower, and the price of oil should be higher.

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However, the results were exactly the opposite. Gold has continued to rise in recent years, repeatedly hitting new highs within the year. Spot gold set a new record for three consecutive days this week, climbing to a new high of $2,758.49 on Wednesday, far exceeding the 2020 high of $2,000 and the 2011 high of $1,900. Hartnett pointed out that the driving force behind this gold bull market mainly stems from fiscal policy and inflation.

In the 2020s, the U.S. and the world have experienced fiscal overspending, with governments printing large amounts of money to stimulate the economy. Coupled with global political instability, technology and trade wars have brought great uncertainty, protectionism has damaged global supply chains, and these factors have exacerbated inflation, triggering global demand for safe-haven assets. Market concerns about currency devaluation have led to a significant purchase of gold for value preservation, pushing gold prices higher.

Furthermore, the Federal Reserve has started a cycle of interest rate cuts, which may continue in the coming quarters. If not controlled properly, it could stimulate inflation to "re-emerge." Moreover, Bitcoin recently touched the $75,000 mark, setting a new historical high, further proving the market's concerns about inflation and the devaluation of the dollar.

Based on these circumstances, Hartnett predicted that gold prices will rise further in the future, surpassing $3,000 per ounce. Judging solely from last week's gold price performance, his predictive logic continues to be confirmed. When the gold price broke through the new high of $2,750 last week, it had already accumulated a 31% increase from the beginning of the year, becoming the asset with the highest return on investment for the year, even surpassing Bitcoin.Prediction market platform Polymarket has recently opened a market that allows people to bet whether the price of gold will reach $3,000 by January 1st.

On October 27th Eastern Time, Hartnett mentioned in his latest report that gold has not only reached an all-time high relative to global stock markets (excluding the U.S. stock market), but also outperformed the New York Stock Exchange index over the past decade. This means that gold has not only performed well in the short term but is also a good investment in the long term. As a result, investors have started to buy gold in large quantities, with the weekly inflow of funds into gold funds reaching the highest since July 2020.

Over the past decade, gold has been a relatively low-key investment choice and has not received much attention from investors who pursue quick profits. These investors prefer assets with large price fluctuations in the short term and can quickly buy and sell to make profits. Hartnett is concerned that if the price of gold suddenly soars, these short-term profit-seeking investors may start to buy gold in large quantities, hoping to profit from it.

Hartnett warns: "We are bullish on gold, but if the price of gold and bond yields rise chaotically due to the results of the U.S. presidential election, it may disrupt the current 'Goldilocks' market condition, that is, the market environment that is neither hot nor cold, just right, and will reverse the gold bull market. If the price of gold soars suddenly, it may lead to a faster market decline.

This is because a rapid increase in gold prices may be seen as a sign of market instability, causing investors to become cautious and reduce investments. On the contrary, a slow and stable increase in gold prices is the ideal situation, which is usually seen as a sign of a healthy and stable market.

Core Wall Street trading strategy: Long gold and technology stocks

Hartnett believes that the four core trading strategies that will strengthen Wall Street are:

1. Long gold, which can hedge against inflation.

2. Long technology stocks, especially AI.3. Shorting U.S. Treasury bonds is based on concerns about the U.S. debt and deficit issues. If the government has excessive debt, it may affect its credit and the stability of its currency.

4. Everything else is "rent," which means that any investments other than the three strategies mentioned above are seen as income similar to "rent." They provide a relatively stable return but have limited growth potential.

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

1. Economic recession. If economic data, especially the non-farm payroll report, shows fewer than 50,000 new jobs, this usually indicates a slowdown in the economy, which may lead to a recession. In this case, investors typically withdraw from the riskier stock market and turn to the relatively safe and lower-risk bond market. Bonds usually provide more stable returns during periods of economic uncertainty.

2. Election landslide and inflation. If the U.S. election results lead to a landslide victory for one party, and the non-farm payroll exceeds 250,000, this may indicate that the economy is growing rapidly. This would lead the Federal Reserve to raise interest rates instead of lowering them to stimulate the economy and reverse the leadership of gold and tech stocks.

Under normal circumstances, bond yields would decline when the Federal Reserve lowers interest rates. However, this time the situation is a bit unusual. Bonds are not as attractive as before, and bond yields have actually risen significantly after the Federal Reserve's rate cuts. Last Friday, the 10-year U.S. Treasury yield approached a three-month high, and European and American base bond yields both jumped into double digits last week.

This may be because the market is worried that the Federal Reserve may have made a significant policy mistake, and the Federal Reserve's decisions may have triggered the next wave of inflation. Therefore, despite the Federal Reserve's rate cuts, the actual financial environment has become tighter, and the actual cost of borrowing has not been reduced by much.

At the same time, Hartnett also believes that it is not a good time to buy stocks now. Although this situation has not yet affected the stock market, as corporate earnings in the third quarter were still good, the rise in the stock market is mainly concentrated on the top seven tech giants, not most stocks, which is not healthy.

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

In summary, Hartnett believes that the market's reaction indicates that the market is worried that the Federal Reserve's rate cuts may lead to inflation and economic overheating, rather than economic growth. Therefore, it is not a good time to buy bonds or various stocks, which is why he is bullish on gold.Unless AI Accelerates, Tightened Immigration Policies Could Trigger Inflation Crisis

Additionally, another reason for Hartnett's long-term bullish stance on gold is demographics. He cited the saying "demography is destiny" and noted that in recent years, globalists have brought deflationary pressure by introducing millions of illegal immigrants. However, Western voters are now beginning to vote against such mass immigration, which could lead to inflation. This is because restricting immigration might reduce the labor supply, thereby driving up wages and prices.

Hartnett explains as follows:

1. Government debt and inflation. Hartnett said that excessive fiscal spending by the U.S. government, coupled with the Federal Reserve's potential policies leading to inflation, and the reversal of globalization trends (deglobalization), could result in money losing its value and prices rising. These are all reasons for the 30-year U.S. Treasury bond prices to have fallen by 47% since March 2020.

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

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

In summary, Hartnett believes that despite declining birth rates, the populations of Canada and the UK are still growing due to increased immigration. This population growth is positive for investors as it aids economic growth. However, it could also lead to inflation, as there is more money in the market and increased demand. This is why Hartnett is long-term bullish on gold, as gold is typically seen as a hedge against inflation.

But now, immigration policies have changed. 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, the average citizens (middle class) of these countries found their lives becoming increasingly difficult. This is because central bank policies have made the rich richer, while it has become harder for ordinary people and the poor to make money. The widening wealth gap has led to dissatisfaction among many, who are now demanding government action. This is why more and more people are supporting political parties that advocate for stricter immigration policies.Now, politicians in North America and Europe are beginning to respond to voters' demands by adopting stricter immigration policies. For instance, Canada plans to reduce the number of temporary foreign workers from 7% to 5% of the total population. Hartnett points out that in this context, the tightening of immigration policies leads to a decrease in the number of immigrants, and employers may have to raise wages to attract and retain workers. An increase in wages would add to production costs, and businesses, in order to maintain profits, might pass these costs on to consumers, which could also lead to inflation.

Therefore, an increase in immigration might drive up prices by increasing consumer demand, while a restricted labor supply might add inflationary pressure by driving up wages and production costs. Both scenarios could lead to price increases, but the underlying economic mechanisms are different.

Hartnett mentions that unless the adoption of AI accelerates significantly, this inflationary pressure might persist. This is because AI can enhance productivity without the need for additional human labor.

It is also worth noting that, despite the potential impact of immigration trends on the labor market, the current wage growth in Canada, the UK, and the US remains quite robust. Wages are rising in these three countries, with growth rates of 4.6% in Canada, 4.4% in the UK, and 4.0% in the US. This indicates that even with immigration into the labor markets of these countries, wages are still increasing, suggesting that labor demand remains strong.

He reviewed the situation of the 1970s, where at the beginning of the decade, many countries adopted loose fiscal and monetary policies to stimulate the economy, but later found that this led to excessive inflation, necessitating further policy adjustments to control inflation. Hartnett believes that the current situation is similar to the 1970s and might also require inflation to end the current loose policies.

Finally, Hartnett predicts that if geopolitical conditions improve by 2025, such as international relations becoming more harmonious, oil prices might decrease. This would be beneficial for international market investments, as reduced energy costs typically stimulate economic growth.