Bescent calls for "moderate long-term interest rates," Bank of America Hartnett: return to the "Nixon era," go long on gold, digital currencies, and U.S. Treasuries, short the dollar!

From political pressure to the latest warnings from Wall Street's major banks, a script reminiscent of the "Nixon era" seems to be unfolding.

Recently, U.S. Treasury Secretary Janet Yellen publicly "tapped" the Federal Reserve, urging it to return to its statutory missions, including "moderate long-term interest rates," and criticizing its unconventional policies for exacerbating inequality and threatening its own independence.

Following this, Michael Hartnett, Chief Investment Strategist at Bank of America, released a report indicating that the current situation is highly similar to the "Nixon era" of the 1970s, where political pressure will force the Federal Reserve to pivot, potentially adopting the extreme tool of yield curve control (YCC).

Before the Federal Reserve officially commits to YCC, Hartnett is optimistic about gold and digital currencies, bearish on the dollar, and believes investors should prepare for a rebound in bond prices and a spread in the stock market.

A Reenactment of the "Nixon Era" Under Political Pressure?

An article from Wall Street Journal stated that Yellen criticized the Federal Reserve's quantitative easing as a dangerous experiment in her signed article, urging it to refocus on its three statutory missions, including "moderate long-term interest rates"—namely maximizing employment, stabilizing prices, and maintaining moderate long-term interest rates. This statement was seen by the market as a call for the Federal Reserve to more actively manage long-term rates.

Coincidentally, Hartnett reached a similar conclusion in his latest report, but he believes that the main driving force behind the Federal Reserve's pivot will be political pressure.

Hartnett wrote in the report that this scene is reminiscent of the early 1970s during the Nixon era. At that time, to create economic prosperity before the elections, the Nixon administration pressured then-Federal Reserve Chairman Arthur Burns to implement large-scale monetary easing.

The result was a drop in the Federal Funds rate from 9% to 3%, a depreciation of the dollar, and the emergence of a bull market in growth stocks represented by the "Nifty Fifty." Hartnett believes history is repeating itself, and political motives before elections will once again dominate monetary policy.

Yield Curve Control: An Inevitable Policy Tool?

Hartnett believes that against the backdrop of soaring long-term bond yields globally, policymakers cannot tolerate the disorderly rise in government financing costs.

Currently, the global sovereign bond market is under immense pressure, with long-term government bond yields in the UK, France, and Japan reaching decades-high levels, and the U.S. 30-year Treasury yield testing the psychological barrier of 5%. However, Hartnett believes that risk assets are responding mildly to this, precisely because the market is "betting" that central banks will eventually intervene.

Therefore, he predicts that to prevent government financing costs from spiraling out of control, policymakers will resort to "price maintenance operations," such as Operation Twist, quantitative easing (QE), and ultimately yield curve control (YCC) The Bank of America's global fund manager survey in August shows that 54% of respondents expect the Federal Reserve to adopt Yield Curve Control (YCC).

Go long on U.S. Treasuries, gold, and digital currencies, and short the U.S. dollar!

Under the judgment of "the Nixon era repeating" and "YCC will eventually come," Hartnett outlines a clear trading strategy: go long on bonds, gold, and digital currencies, and short the U.S. dollar until the U.S. commits to implementing YCC.

• Step 1: Go long on bonds (Long Bonds)

The direct consequence of YCC is to artificially suppress bond yields. Hartnett believes that as U.S. economic data shows signs of weakness, such as a 2.8% year-on-year decline in July construction spending, the Federal Reserve already has sufficient reason to cut interest rates, and political pressure will accelerate this process. He predicts that the trend for U.S. bond yields is towards 4%, rather than continuing to rise towards 6%. This means there is significant upside potential for bond prices.

• Step 2: Go long on gold and digital currencies (Long Gold & Crypto)

This is the essence of the entire strategy. YCC is essentially the monetization of debt, that is, "printing money" to finance the government. This process will severely erode the purchasing power of fiat currency. Hartnett clearly points out that gold and digital currencies, as stores of value independent of sovereign credit, are the best tools to hedge against such currency depreciation. His advice is straightforward: "Go long on gold and cryptocurrencies until the U.S. commits to implementing YCC."

• Step 3: Go short on the U.S. dollar (Short US Dollar)

This is the inevitable result of the first two steps. When a country's central bank announces it will print unlimited amounts of money to lower domestic interest rates, the international credibility and value of its currency will inevitably be damaged. The historical example of a 10% depreciation of the dollar during the Nixon era serves as a warning. Therefore, shorting the U.S. dollar is the most logically seamless part of this grand narrative.

The core logic of this strategy is: YCC means the central bank prints money to buy bonds to lower interest rates, leading to currency depreciation. Gold and digital currencies will benefit from this. At the same time, with interest rates being forcibly suppressed, it will be favorable for bond prices and will open up upward space for interest-sensitive sectors such as small-cap stocks, real estate investment trusts (REITs), and biotechnology stocks.

After prosperity comes: inflation and collapse?

Hartnett also reminds investors that historical scripts always have a second act.

Just like in the Nixon era, the easing and prosperity of 1970-72 were followed by uncontrollable inflation and a market collapse in 1973-74. He recalls that this prosperity ultimately ended with inflation soaring from 3% to 12% and a 45% drop in U.S. stocks.

This means that while the current trading window is tempting, it also harbors significant long-term risks. But before that, the market may follow the policy's "Visible Fist," staging a policy-driven asset feast