Bank of America Hartnett: Wall Street will "surrender" before the Federal Reserve, and can only pay for the "Great Beautiful Plan" by relying on the "Great Bubble"

Wall Street may preemptively finance Trump's massive fiscal plan by creating a stock market bubble.

Michael Hartnett, Chief Investment Strategist at Bank of America, warned that the conflict between Trump and Powell is entering a critical stage, which could prompt the market to act early, financing Trump's "Great Beautiful Plan" by creating a stock market bubble, which will stimulate nominal GDP growth but may also exacerbate inflation expectations and pressure on the bond market.

Market "Preemptively" Creates Bubble to Finance the "Great Beautiful Plan"

As the "Great Beautiful Plan" advances, the conflict between Trump and Powell over interest rate cuts is becoming increasingly sharp.

As previously mentioned by Wall Street Insights, Hartnett expects that in the coming weeks, Wall Street will position itself ahead of the Federal Reserve's "surrender," with U.S. policy shifting from the "detox mode" (i.e., high interest rates, tight fiscal policy, deflating bubbles) in the first half of 2025 to the "nominal GDP boom mode" (i.e., interest rate cuts, tax reductions, tariff reductions) in the second half of 2025 to the first half of 2026.

This is Trump's only way to reduce the debt/GDP ratio after "abandoning spending cuts," which is to dilute debt by stimulating nominal GDP growth.

Hartnett reiterated that the easiest path to finance Trump's "Great Beautiful Plan" is to create "a beautiful big bubble," especially if Trump forcibly removes the Federal Reserve Chairman, which the market would immediately interpret as a "dovish turn." The Federal Reserve would be forced to cut interest rates without a recession, further inflating the bubble.

It is worth noting that this policy shift will not wait for a formal announcement; traders will "preemptively" act.

Under Fiscal Pressure, Interest Rate Cuts Are "Imminent"

Hartnett analyzed that while conflicts between the president and the Federal Reserve Chairman are rare, historical cases of central bank governors being dismissed by heads of state stem from three reasons: conflicts over interest rate policies, exchange rate issues, or corruption allegations.

Notably, every instance of a central bank governor being dismissed has been accompanied by a significant drop in the exchange rate.

Currently, U.S. government spending has reached a record $7 trillion. Hartnett's analysis shows that Trump finds it difficult to achieve balance through cuts: $4 trillion in mandatory spending is untouchable, $1 trillion in discretionary spending has been abandoned for cuts (such as the DOGE plan), and another $1 trillion in defense spending needs to be maintained.

The remaining option is to reduce $1 trillion in debt interest costs. Hartnett predicts that if the federal funds rate is lowered to 3.25%, it could stabilize debt spending; if further lowered to 2% (with five-year Treasury yields at 2.5%), it could save $200 billion.

However, the actual effect is questionable. Hartnett acknowledged that if the Federal Reserve significantly cuts interest rates (as Trump recently requested on Truth Social, down to 1%), short-term rates may decline, but long-term yields could soar due to market expectations of future rate hikes, as seen after the Fed's 50 basis point cut in September 2024 This means that the volatility in the bond market will be amplified, short-term debt instruments will be more attractive, while long-term U.S. Treasuries will face selling pressure.

Stock Market Reaching New Highs Signals Bubble

Hartnett proposed the VIBBE mnemonic for identifying market bubbles, which are always synonymous with five elements: Valuation, Inflation, Bonds, Breadth, and Exponential price moves.

Hartnett also pointed out that the biggest bubble signal will be: stocks completely ignoring rising inflation expectations and bond yields while reaching new highs.

Based on this analysis, Hartnett proposed four optimal trading strategies:

1. Short the dollar (dollar depreciation)
2. Long gold/cryptocurrency (hedge against anarchy)
3. Short 30-year U.S. Treasuries (the Federal Reserve cuts rates in prosperity rather than recession)
4. Long a barbell combination of U.S. tech stocks and EAFE/emerging market value stocks (hedge against bubbles)

Risk Warning and Disclaimer

The market carries 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 align with their specific circumstances. Investing based on this is at your own risk