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Investing Expert Butowsky to Moneynews: Brace for Rising Inflation After Obama Victory

By Forrest Jones and David Nelson   |   Tuesday, 06 Nov 2012 11:27 PM

With the re-election of President Barack Obama, investors need to prepare for inflation that will result from the fiscal and monetary stimulus programs rolled out under the administration's first term, said Ed Butowsky, managing partner at Chapwood Capital Investment Management.

Under the president's first term, fiscal stimulus programs such as the American Recovery and Reinvestment Act and the president's Affordable Care Act, otherwise known as Obamacare, ramped up spending and laid the groundwork for higher taxes.

The Federal Reserve, meanwhile, slashed interest rates to near zero and pumped the economy with trillions of dollars in fresh liquidity via a monetary policy tool known as quantitative easing, under which the U.S. central bank buys bonds from banks and floods the economy with excess money supply to encourage investing and hiring.

Sooner or later, inflation will follow suit and rock-bottom interest rates will rise, so investors need to prepare today, Butowsky told Newsmax TV in an exclusive interview.

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"What I am telling clients to do is stay completely away from any long-term interest-rate sensitive bonds," said Butowsky, stressing the danger of owning longer-term municipal and government debt that will get eaten alive by rising inflation and interest rates.

"Stay away from those because the only thing that impacts them are rising interest rates, and I truly believe that interest rates are going to rise because we are in an inflationary economy," Butowsky added.

"I've been very outspoken about it. I believe that we are in stagflation and the only way to get out of stagflation is to reduce taxes across the board. I don't think we are going to be seeing that any time soon."

During his campaign, President Obama said wealthier Americans should pay more in taxes, while Obama's healthcare reform law will raise taxes on investment income such as from capital gains or dividend payments.

Other tax hikes could be lurking on the horizon as well.

At the end of this year, the Bush-era tax cuts and other tax breaks expire right at the same time automatic cuts to government spending outlined during the 2011 debt-ceiling deal kick in, a one-two punch known as a fiscal cliff that could send the country into recession next year.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

The nonpartisan Congressional Budget Office has estimated that failure to address the cliff could contract the economy by 0.5 percent next year.

Lawmakers have been largely unwilling to tackle tax and spending reforms in an election year though now that elections have passed, they may put political differences aside and find a way to steer the economy away from disaster even if with stop-gap solutions such as punting the deadlines.

In the meantime, don't ditch dividend stocks out of fears of tax hikes on investment income, said Butowsky.

Large institutional investors that drive markets will ensure demand.

Plus even a watered down compromise is better than disaster.

"I believe that Obama and all of the people in his administration know that they have to basically stop this. So I think there is going to be negotiation" Butowsky said.

"They will probably kick the can down the road. We are all tired of hearing that, but I believe that is what's going to occur so I do not believe that we are going to get this fiscal cliff."

Do keep an eye on Europe, where a debt crisis continues to rage on.

Greece is facing homegrown opposition to austerity measures needed to secure its next tranche of bailout money, with even members of the ruling coalition balking at fresh rounds of tax hikes and wage cuts.

Failure in Athens to push through austerity could prompt the European Union and the International Monetary Fund to halt rescue funding, which could conceivably open the door to a Greek exit from the eurozone.

Don't worry about Greece as much as the larger Spain, Butowsky said.

The country recently secured a bailout for its banking sector but has yet to ask its neighbors and multilateral lenders for sovereign rescue funding.

Budget proposals out of Madrid seem to suggest the country is crafting spending policies that would adhere to austerity demands that would likely be slapped on the country in exchange for rescue financing.

Furthermore, requesting assistance would qualify the country to participate in the European Central Bank's bond-buying program, under which the monetary authority would buy sovereign Spanish debt carrying maturities of up to three years, which would slash borrowing costs in the country and ease credit conditions.

Spain, however, has yet to request a bailout and continues to drive uncertainty.

Considering big U.S. corporations rely heavily on Europe for sales, an escalating European debt crisis could rattle earnings in the U.S. and with them, the U.S. economy as a whole.

"Don't forget about Europe. It's lurking out there and as Europe goes so goes the rest of our market," Butowsky said.

"Because so much of our earnings gains come from earnings outside of our borders. Europe is key to how well our market does in the short run."

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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