LAS VEGAS - The federal budget deficit is estimated to skyrocket to $1.6 trillion in 2011, but Andrew H. Friedman of The Washington Update told a standing-room only crowd at the Investment Management Consultants Association's annual conference that there are still opportunities for investors.While the substantial deficit is here to stay, the $2 trillion in stimulus that has flooded the economy has made for huge growth in the stock market, Friedman explained. “We need to be careful what happens when the stimulus stops,” he added.
The deficit, Friedman explained, will lead to higher interest rates, greater inflation, and a decline of the U.S. dollar, which will ultimately lead to slower U.S. growth of 2% to 3% annually and higher taxes.
So, what should advisers do to shore up client portfolios?
Friedman believes that advisers need to blunt against these challenges by purchasing emerging market equities or U.S. multinational corporations that are selling into emerging markets. Also, they should be looking at emerging market debt and debt of other countries with non-dollar denominations.
Ultimately, advisers need to “prepare clients for higher taxes. After 2012 the gloves come off and we have to expect taxes are going up.”
For clients under 55, prepare for the reality that there probably will not be Social Security, Friedman said: “Last year 45% of American families paid no income tax and 45% of families received a payment from the government. Right now tax revenues are at their lowest since 1958.”
