$1 trillion of spending, 'Trumpflation' and what it means for your portfolio

Caterpillar earth moving equipment.
Scott Olson | Getty Images
Caterpillar earth moving equipment.

After a few months that's seen the small matter of neo-liberalism dying and the beginning of the end of globalization, you might be forgiven for thinking that your portfolio might need a little updating.

Well, listening to the experts on CNBC last week there seems to be two schools of thought on this issue.

Among President-elect Donald Trump's vague plans for the White House was a $1 trillion spending package for U.S. infrastructure. This was no doubt one of the key reasons why perennial underachiever Caterpillar finished near the top of the Dow Jones on Wednesday with gains of nearly 8 percent.

It's also the reason why market participants like Marc Faber, the publisher of the Gloom, Boom & Doom Report, expect U.S. debt to surpass $20 trillion in under two months with Trump.

However, it's also the reason why people like Jim O'Neill, the former chairman of Goldman Sachs Asset Management, suggest that two decades of deflation might be coming to an end.

Government spending, if delivered on this scale, means jobs and wages. And more cash in the pockets of working class America will likely lead to inflation trending upwards - "Trumpflation" if you will. This will only be accentuated if the new president continues to vent his grievances at a dovish Federal Reserve.

What does this mean for your assets? Well, cash will get more expensive again but yield will return. The 30-year rally in fixed income is already starting to look a little dated with inflation usually favoring equities over bonds. In Europe, this could also mean opting for companies that have exposure to the U.S. if the rising tide in the world's largest economy doesn't manage to float all boats. Fiscal expansion might even catch on in the region if it works in the States.

It might specifically favor post-Brexit Britain too, with U.K. officials already eagerly awaiting any tariff-free trade deal thrown in our direction. There's also Russian stocks, with any rapprochement with President Vladimir Putin almost certainly being bullish for the wounded bear.

Last but by no means least, gold might start to look like a decent inflation hedge with your equities rather than a safe haven for scary times of market tumult.

But - as always - the second school of thought seems a little more sobering. Trump could fail, Trump could get bored, Trump might not last four years.

Several economists and asset managers have already warned of the risk of a downturn. Paul Krugman said Wednesday that "we are very probably looking at a global recession, with no end in sight."

In June, Moody's Analytics predicted that Donald Trump's plan to "make America great again" would result in a two-year-long recession and a sharp increase in unemployment.

Paul Gambles, managing partner at MBMG Group, has warned of a return to risk aversion and a snapback for U.S. Treasury yields if the $1 trillion spending package never sees the light of day.

"Some of this (spending) may get past Congress, but it's unlikely the whole lot would. Just a few ripples here, but the obvious opportunity may be in U.S. Treasurys," he told CNBC via email.

Wall Street and the world of finance lie in wait for the next stage in this unimaginable journey for the property magnate turned politician.

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