Last week I passed along some of the economic concerns shared at a recent meeting by Nick Calamos, Chief Investment Officer of Calamos Funds. In addition to high national debt, the topic of last week’s column, Calamos is concerned about the anti-business climate in Washington, tax increases, low consumer savings rates, and high unemployment.
To avoid a severe contraction in our economy, we will need interest rates to stay near zero and our economic growth to outpace inflation. Most experts agree that may happen in the short run, but such a scenario is unsustainable.
Calamos didn’t hesitate to label the attitude in Washington, DC, as anti-business. “The current administration is attacking business. There are no ifs, ands, or buts about it,” he said.
He explained that as government raises taxes and takes more of the economic pie, the private sector does worse. There is historically an inverse relationship between government spending and market performance. “Higher taxes means less capital available to grow your business,” he noted. “Federal spending has grown eight times faster than median income since 1970.” Calamos believes a major reason for this has been the lack of a line item veto.
Calamos explained there is also an inverse relationship between lifestyle and taxes and regulations. As taxes and regulations go down, lifestyles go up. One index that measures taxes and regulations is the Index of Economic Freedom. It has moved the US from the second-highest rated economy to number eight this year, dropping it from a “free” rating to a “mostly free” rating. Canada, Australia, and New Zealand are all rated higher than the US.
Currently, the US is still experiencing more deflationary pressures than inflationary, though it is teetering between deflation and inflation. Calamos said, “We are not concerned about CPI deflation. That’s good deflation,” noting that globalization produces more competition and competition forces prices down. “The deflation we care about is the deflation of our assets like real estate and equities.”
When you blend all of this analysis together, the result is a picture that is very unstable and unclear. Businesses and investors need to be confident in order to expand and invest, and the current economy inspires anything but confidence. This is evident by the high volatility in the marketplace.
In the face of this daunting forecast, what should you do to protect your financial future?
First, get your own financial house in order. Calamos says that personal savings should be at 7% or 8% of income. Currently the average in the US is less than 3%. Pay down debt now and lower your expenses. Frugal is the new normal. This will clear the way for you to absorb the tax increases that are sure to come upon all taxpayers, not just the wealthy.
Second, be sure your investments are well diversified among at least five asset classes. In addition to US stocks and bonds, you will want to consider inflation-indexed bonds, commodities, real estate, managed futures, market neutral, and international investments in your portfolio.
Third, resist the temptation to make what may be the most serious investment mistake of all—not investing. Certainly, you don’t want to fall victim to get-rich-quick schemes or high risk speculation. But burying everything in peanut butter jars in your back yard isn’t the way to get through challenging financial times, either.
The best way to ride out financial chaos may be to accept what you cannot control—the world economy—and change what you can control—your own finances. By getting your personal finances in order, you will do what you can to change “long term scared” into “long term prepared.”