2016 changed everything from politics to the markets. The election of Donald Trump was a catalyst, but it may not have the biggest effect in 2017 from an investor standpoint. So argues Jim Rickards, a 35-year veteran of Wall Street and author of the new book, “The Road to Ruin.”
“Everything depends on the Fed,” Rickards says in the attached video. The question in Rickards’ mind is whether the Fed will accommodate President-elect Donald Trump’s plans to increase spending through infrastructure projects as well as his proposals for tax cuts.
If the Fed does accommodate Trump’s plans, which would most likely increase the deficit, Rickards sees big inflation. In that case, “you definitely want gold, hard assets, energy, water, silver and things like that,” he says.
But, if the Fed decides to “lean in” and fight the inflation, Rickards argues this could throw the US economy into recession. In this scenario Rickards advises investors to go long on bonds, which have recently sold off in a big way. “Bonds could rally back and interest rates could go actually go a lot lower in a recession,” he says.
In order to protect portfolios in either scenario, Rickards proposes a “barbell” strategy. At one end of the barbell would be hard assets like gold, and on the other end would be investments like bonds. In the middle, Rickards says, is cash. “Cash reduces the overall volatility of the portfolio,” Rickards explains, “because it gives you a lot optionality.”
While there are two paths that could occur — recession or inflation — it will take time to play out. That time will give investors the ability to deploy cash towards the appropriate end of the barbell.
