Bank of America Hartnett: Yield curve control is coming, gold and cryptocurrencies become "defensive weapons"

Amid the intertwining of U.S. debt pressure and expectations of policy shifts, the market is undergoing a profound paradigm shift.

Michael Hartnett, Chief Investment Strategist at Bank of America, recently stated that policymakers may resort to currency devaluation as a core path to address debt challenges, and discussions around unconventional tools such as Yield Curve Control (YCC) have returned to the table. In this context, gold and cryptocurrencies are increasingly highlighted as assets to hedge against dollar devaluation and inflation risks.

As the world enters a new round of monetary easing, market expectations for the Federal Reserve to join the "rate-cutting party" have peaked. Since 2025, 88 central banks globally have implemented rate cuts, marking the fastest easing pace since 2020. This expectation has driven asset prices, including stocks, credit, gold, and cryptocurrencies, to new highs, as investors prepare for dovish statements from the Federal Reserve Chairman at the Jackson Hole Global Central Bank Annual Meeting.

However, Hartnett's core argument is "Disruption = Debasement." He believes that the increasing discussions around the independence of the Federal Reserve, higher inflation targets, price controls in specific industries, and the revaluation of gold all point in one direction: policy disruptions will aim to lower the dollar exchange rate to more easily finance the U.S.'s massive debt and deficits.

For investors, this means that the attractiveness of holding government bonds long-term is declining, while the historically high valuations in the stock and credit markets also face risks. Hartnett suggests that investors should increase their allocation to gold and cryptocurrencies to seek refuge in a potential long-term bear market for the dollar in the coming years.

Policy Shift Imminent, Dollar Devaluation Likely Inevitable

Hartnett believes that the U.S. government's demand for economic prosperity and asset bubbles by 2025 to 2026 is seen as the most straightforward path to reversing debt and deficit trends. This potential policy objective makes shorting the dollar a clear investment theme entering 2026 and beyond, with expectations that the Dollar Index (DXY) will fall below 90.

As of the time of writing, the Dollar Index has fallen 0.36% to 97.85.

This expectation explains why global investors continue to avoid long-term government bonds, instead flocking to the stock and credit markets, which are already at historically high valuations. Data shows that the price-to-book ratio of the S&P 500 Index has reached a record 5.3 times, surpassing the peak during the tech bubble; Its forward price-to-earnings ratio is 22.5 times, ranking in the 95th percentile since 1988.

At the same time, the credit spread for U.S. investment-grade A+ bonds is only 64 basis points, placing it in the 98th percentile over the past 30 years. Investors seem to generally agree that, “Anything but Bonds.”

Hartnett points out that, in addition to the artificial intelligence boom, factors driving high valuations include currency depreciation (beneficial for nominal assets), demographic changes (millennials and Generation Z are more inclined to accumulate wealth through stocks), and the global consumption rebalancing from the U.S. to other parts of the world.

Jackson Hole Meeting: Beware of “Sell the Fact”

Although the market generally expects Federal Reserve Chairman Powell to release dovish signals at the Jackson Hole annual meeting, Hartnett warns investors that this could be a typical “buy the rumor, sell the news” trading opportunity. He believes that market sentiment has already become extremely optimistic before the meeting, and any dovish remarks are likely to be fully priced in, potentially triggering profit-taking afterward.

The market's desire for Federal Reserve interest rate cuts is backed by the reality of U.S. fiscal pressures. Data shows that the average maturity of U.S. Treasury bonds is 5-6 years. To stabilize annual interest expenses of up to $1.2 trillion, the yield on 5-year U.S. Treasury bonds needs to fall below 3.1%. This provides a strong incentive for the Federal Reserve to adopt accommodative policies, and even eventually implement yield curve control, reinforcing market expectations for rate cuts.

Gold and Cryptocurrency: New “Safe Havens” for Portfolios

In the context of a general trend of U.S. dollar depreciation, Hartnett believes that gold, cryptocurrencies, commodities, and emerging markets will be the biggest winners, as investors actively seek tools to hedge against inflation and dollar depreciation. A popular saying in the market aptly describes the current mindset:

“I just hope the market's rise can outpace the currency's decline.”

According to Bank of America's August Global Fund Manager Survey (FMS), there is still significant room for improvement in investors' relevant allocations. The survey shows that only 9% of the surveyed fund managers have exposure to cryptocurrencies, with a weighted average allocation of only 0.3% of assets under management (AUM). In contrast, the proportion of investors holding gold is 48%, with an allocation of 2.2% of AUM

In the energy market, Hartnett has proposed a long-term view that differs from mainstream opinions. He believes that current oil and natural gas prices (which have fallen 41% since March) have already priced in expectations for peace in the Russia-Ukraine conflict. He further analyzes that the geopolitical strategy of the Trump administration aims to lower energy prices for American consumers.

According to Hartnett, if the United States collaborates with Russia to jointly develop cheaper and safer northern shipping routes and cooperates to exploit the Arctic region, which accounts for 15% of the world's undiscovered oil reserves and 30% of natural gas, it would mean that the bear market for energy prices would deepen further until 2026. Although expectations surrounding related agreements may lead to a price rebound in the short term, the long-term trend points to lower energy prices.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk