The Big Australian has been on a big run recently with BHP Billiton Limited (ASX: BHP) shares gaining around 19% since the November 8 election of U.S. president Donald Trump.
The election of a new President has got investors thinking that inflation and commodity prices could pick up in the 12-18 months ahead as a Trump administration moves to aggressively slash personal and company tax rates, while spending up to $1 trillion on infrastructure projects.
The anticipated "great reflation" should according to economic theory cause commodity prices to rise as an expanding money supply generally means more money is required to buy the same amount of any commodity.
A debt fuelled spending boom on infrastructure should also lessen the purchasing power of money by adding to inflationary pressures, while increasing demand for commodities like iron ore.
This all sounds good in theory, but it's certain Australia and its mining giants like BHP, South 32 Ltd (ASX: S32) Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) will never see a return to the commodity boom from 2002-2013 that was fuelled by a once-in-history Chinese construction super cycle.
Nothing will ever replace China's breakneck rate of urbanisation over the last decade and its demand for commodities has now permanently fallen away as its economy transitions away from a centralised investment model to a services model.
In particular a Trump-led U.S. infrastructure spending plan will not be sufficient to replicate the China boom, although if it does trigger a return to higher inflation it's fair to assume commodity prices could rise with the U.S. dollar and the Fed's fiscal loosening mandate.
However, commodities and their producers like BHP are well known for their cyclical characteristics and when you consider that BHP shares are up just 8% over the last 10 years despite massive equity injections and a ballooning debt profile it looks a stock to avoid for any growth or income-oriented investors.
Investors looking to make a short-term bet on the direction of commodity prices may make a small profit on BHP stock, but given the unpredictability of President Trump it's not a bet I'd be keen to make.
