Taxes, inflation and growth all heading up: wealth conference



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June 9, 2014

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EXPERT’S PODIUMTaxes, inflation and growth all heading up: wealth conferenceThane StennerPublished Thursday, Mar. 14, 2013The third annual global TIGER 21 conference was held in Palm Beach, Florida last month. It was attended byalmost 400 high-net-worth (HNW) members and spouses from across the U.S. and Canada. Members have rangesof net worth from $12-million to over a billion, from all different sectors and walks of life.The annual conference offers an excellent opportunity to get a “sneak peak” into the financial topics and issues thatHNW individuals are concerned (and excited) about. I’ve found Tigers enjoy being “plugged in” to the best informationpossible, and talking with some of the best investment minds out there. It helps them make better decisions (notperfect, but better) and encourages them think outside the investment box as it were.This year, I had the pleasure of speaking one-on-one to dozens of fellow TIGER 21 Members and listening to theworld-class speakers. I also chaired a session for Canadian members. Here are some of the big ideas that came outof the conference, along with some thoughts on how you might capitalize on them.Cautious optimismOn balance, I would say the general mood was better than a year ago, and considerably better than two years ago.Call it a feeling of cautious optimism ‚Äì a sense that the worst has passed, but we’re not out of the woods yet.That said, skepticism remains about the strength of the U.S. economy, and there’s a good deal of concern aboutmacro-economic issues. There’s also a feeling that the market has gotten better very quickly, and most believe we’redue for a correction or pause over the next three to six months.The TIGERS I spoke to are maintaining a close watch on their portfolios, and are now taking a defensive stancewhile avoiding speculative positions. I think this is a prudent approach right now.Inflation, inflation, inflationA recurring topic was future inflation. Almost every one of the conference speakers had something to say aboutit, and many of the members also mentioned specific steps they’ve recently taken to protect themselves from apotential uptick in inflation.The reason: governments around the world are printing money at a furious pace, and are likely to continue as theystruggle to deal with fiscal deficits. Sooner or later, it seems likely that inflation might come back‚Äìwith a vengeance.Most TIGERS I spoke to believe short-term rates could remain low for the next two to three years. However, there’sa belief that when mid-term to longer-term rates do turn up, they could turn up quickly.Such a view has important implications for the proactive investor. Most TIGERS tend to be ahead of the curve intheir thinking‚Äìso it was no surprise when I found that a lot of them have already positioned themselves defensivelyon fixed income by shortening duration and investing in floating rate bonds, TIPs, and similar securities. They’re alsoinvesting assets with built-in inflation protection‚Äìincome-generating real estate was mentioned several times, and anumber of presenters and TIGERS suggested gold as a possible “Tylenol hedge” for possible market “tail events.”Get rid of variable rate debtOne interesting theme I came across was to capitalize on potential inflation by locking in long-term debt now. SamZell and Barry Sternlicht (both real estate gurus and noted contrarian investors) suggested now is the time to get outof variable-interest rate debt.Zell in particular expressed how he believes that he doesn’t buy into the theory of gradually rising interest rates; whenrates rise, they could go up rapidly, in response to some unexpected economic or political catalyst. He suggested thatextending and locking in terms at extremely low rates now would be a very good idea.I think this is important insight for everyone with a mortgage or other debt to consider. If bonds yields go up, mortgagerates will go up. Those who locked in for longer term won’t be affected as negatively.Tax rates are going upThere was a lot of talk about taxes this year. That’s not a surprise, considering the fiscal cliff debate raised taxes forwealthy Americans. Here in Canada, we can see provincial income tax rates are going up in Alberta, British Columbia,Ontario, and Quebec.Most TIGERS I spoke to expect this trend to continue. Such an attitude would certainly explain the ongoing popularityof tax-advantaged investments such as muni bonds in the U.S., for example, as well as dividend-paying stocks.Bottom line: tax efficiency is going to be an extremely important “filter” when assessing investments. Tax alphastrategies are going to be an even more important theme in the years ahead.Modestly bullish on global growthI hosted a session with David Darst Chief Investment Strategist of Morgan Stanley and Heidi Richardson, ChiefInvestment Strategist for BlackRock. Their insights on global investing sparked a lively discussion with CanadianTIGERS.Darst is a “cautious bull” on global growth, and a fan of European and Japanese equities. Richardson echoed hisgeneral sentiment. They confirmed that equity valuations are cheap in Europe, and many companies are well-positioned to sell to emerging markets because of the fall in the euro and looser labour conditions. Darst for onebelieves the financial conditions are “calming down” on the continent, and both suggest that it may be time to take alook at Northern Europe (i.e., Germany, Scandinavia).Their discussion provided a good counterpoint to the U.S.-centric approach that many investors (including myself)have taken over the past several quarters. My own feeling is that Southern Europe is a place for only for the bravestof investors. But we’ll be taking a look at Northern European equities more closely in the months to come.