The Dow has been on a tear, but don’t relax. There’s still a lot to worry about.
That was the theme of Tiger 21’s 2013 annual conference. Members of the elite club of ultra-wealthy investors gathered to discuss investment strategies, opportunities and other wealth-related issues.
They heard from an illustrious array of financial experts. Bears outnumbered bulls. Hot-button issues sparked discussion: artificially low interest rates, the potential for inflation, unsustainable government debt and potentially disruptive situations around the world.
“There are a host of issues and considerations members focus on when shaping their portfolios," Tiger 21’s founder, Michael Sonnenfeldt, said in a statement. “Becoming much more deliberate about understanding and analyzing them is often the hidden key to preserving wealth over the long haul.”
Following are comments made by presenters during the meeting, according to Tiger 21.
George Friedman, founder of the global intelligence firm Stratfor, said that from a macro perspective, the world periodically undergoes a spasm—usually a war or some other change in control in a major country—and if you’re prepared for the spasm, you can live through it.
He pointed to global hot spots where disruptions were a possibility: China, where the government is more interested in maintaining employment than growing the economy; Europe, where economic problems are forcing an untenable divide in the EU; and the U.S., where middle-class families increasingly cannot afford to live middle-class lives.
Kyle Bass, founder of Hayman Capital Management, saw problems ahead because of inflation, and suggested that investors needed to protect themselves from it.
“As equity prices keep going higher, it’s easy to lose sight of what's important in my opinion. If you are so focused on nominal pricing and equities and the monetary base is growing as fast as it is, you have to really focus on the insidious nature of what inflation is and how real returns might be negative in both equities and bonds. You're losing purchasing power.
“To protect yourself you need to own productive assets such as apartment complexes or an oil well or a global business that sells things in various different currencies. And if you really want to protect yourself, you put long-term fixed-rate debt on these businesses—just don't put too much debt on these businesses.”
Hutchins laid out what he saw as a recipe for inflation: slow growth, persistently high unemployment, muted consumption and low interest rates for a long time.
Yet, for all the issues facing investors, he was optimistic that America had the means to reinvent itself and restore international economic pre-eminence.
Pierre Lagrange, co-founder of GLG Partners, expounded on the attraction of Europe for equity investments: “It’s a bubble that we have to ride because it’s going to last for quite a period of time. The economy is so weak and the restructuring is so slow and social pressure is so high that the central banks are going to be forced to continue to put a lot of liquidity at work—so you have all the ingredients of a bubble.”
Lagrange said northern Europe was where the opportunities lay. Moreover, “European companies have to go out of their way to find other things to do because they don’t have domestic demand. They have to get out of Europe—which we love because then investing in European companies provides exposure to emerging markets.” He explained that investing in emerging markets through European companies was more palatable legally, in regard to governance, disclosure and working with company managers.
"There are issues in Europe that will work themselves out over time," he said. "This provides opportunities over the next five years."
He said he favored investments in northern European countries where the legal structure provides various safeguards. “These are countries where the rule of law dominates,” he said.
Lasry also saw upside in the U.S., with about a 2% growth forecast. “The dominant economy is still the U.S.," he said. "How goes the U.S., so goes the rest of the world economies.”
Eric Sprott, founder of Sprott Asset Management, was bearish on the economy. He lamented the financing of the U.S. government deficit and the inflationary pressure that will eventually need to be reckoned with. If the current course of the U.S. continues, he said, “I can safely say that Social Security will not be paid, Medicare will not be paid and government civil-service pension plans will not be paid.”
Sprott saw value in commodity investing. “Gold bugs see the logic of what is going on and know how to react to it.” He reported that between 70% and 80% of his personal assets were in precious metals. He said this would position him well if countries kept printing money because gold and silver prices would continue to increase. He said he was a big believer in owning the physical gold or silver.
Barry Sternlicht, chief executive of Starwood Capital Group, was also concerned about inflation and other tail risks in the world. “I am weary of being levered long to everything —my PE funds, my venture guys, my own real estate portfolio. I’m nervous about the complacency in the world today. Really nervous.”
On investments in light of the tail risks, Sternlicht said he was looking for safety in yield. “I’m trying to figure out how to build a portfolio with inflation protection," he said, "because the natural outcome of all this has got to be inflation at some point. And if there is no inflation, I’m still OK. I’m not underwriting the inflation, but I want to be able to participate in it.”
Sternlicht said the current economic conditions made this the perfect time for real estate investments. He pointed to three green lights for real estate investments:
- Positive leverage—when the yield on the property is greater than the cost of debt
- Protected by inflation—replacement costs go up with the cost of construction, so you buy below replacement cost
- No new supply—construction of office buildings is at the lowest point in the last 50 years, and two years ago, multifamily construction was the lowest since 1960.
Sam Zell, founder of Equity International, said of himself: “I am a professional opportunist… The name of the game is about measuring risk and reward. We need to make sure that we get paid for the risk we take.”
On the effect of world events on his outlook and the potential for a recession: “Most of my life has been spent dealing with assets in various states of distress. Currently, I am not terribly optimistic, which is totally contrary to my personality, considering what I view as the headwinds—whether they are Israel, the euro, [what was] the fiscal cliff or North Korea. It seems to me that prices should be materially lower. But stocks are up—is business that good? I don’t see it. Rather I see a 50–50 chance of a recession this year.”