Loose Change - January 4th, 2023
By STEVEN I. WEISS
It’s a new year, and everyone’s investment returns, donations and other family-office matters are starting fresh.
What is there to look forward to in the year ahead? We spoke with family-office representatives and other experts to get their take on a range of topics — from economic forecasting and investing trends to taxes and philanthropy.
The Economy? The big wild card heading into 2023 is something no one can predict with great accuracy: where the economy is headed — amid tapering inflation, uncertainty about the Fed’s plans for raising rates, the resilience of the consumer, which direction the housing market will move, and how unemployment and the labor market generally will be affected. “We’re already seeing a pandemic-induced bubble in housing burst,” said Diane Swonk, a Chicago-based chief economist at KPMG. That bubble is bursting more outside the largest urban areas, she said. Of the 10 cities that saw the largest drop in housing prices in the most recent Case-Shiller results, only four – Los Angeles, San Diego, Phoenix and Dallas – are among the 10 most populous U.S. cities. Given that the housing market generally experiences the largest and earliest effects from changes in monetary policy, it can be a leading indicator of where the broader economy is headed. For the economy more broadly, Swonk predicts a Fed-induced recession that will be “short and shallow in the first half of 2023,” on the assumption that the Federal Reserve will be unable to pull off the “soft landing” that Fed Chairman Jerome Powell and others have expressed hope for in public comments — as they fight inflation and simultaneously suppress wages, with higher interest rates.
"KPMG economist Diane Swonk predicts a Federal Reserve-induced recession that will be “short and shallow in the first half of 2023,” on the assumption the Fed will be unable to pull off the “soft landing.”
Swonk thinks a coming recession can have relatively minor effects “as long as we don’t have this thing become something larger,” leading to defaults in emerging markets or larger portions of the global economy. She emphasized that one of the largest factors affecting the economy is still illness. “We had 70% more people out sick [in the early fall] than in the beginning of the pandemic,” Swonk said, adding that she’ll continue to keep an eye on COVID, the flu and other disease numbers to get a sense of where we’re going. When it comes to unemployment, Swonk said, low levels are related to a labor force that is “about 3.5 million people shy of where we thought it would be,” in part because of 2 million more retirements than expected during the pandemic. Among younger workers, she said, “acute shortages in both child care and long-term care” are keeping many parents — especially women — from joining or rejoining the workforce to the degree they otherwise would.
Public markets: The large investment banks predict a wide range of potential outcomes for the S&P 500 this year, with Barclays suggesting 3,675 at the low end and Deutsche Bank 4,500 at the high end. That represents a possible drop of 9.7% all the way to a jump of 10.5% from the year-end close of 3,839. Of course, the predictions for the year ahead might not be any more accurate than those for last year. In December 2021, analyst forecasts ranged from 4,400 (Morgan Stanley) to 5,300 (BMO Capital Markets), representing a miss of between 14.6% and 38%. In bond markets, higher rates will mean higher yields and the opportunity to earn perhaps 4% or more on Treasuries for the time being. Of course, that could trigger a collapse in higher-yield commercial debt, something that bond bears have been waiting more than a decade to see. “We’re all excited because we can earn 4% on short-term treasuries and get rewarded without taking any risk,” said Sharon Olson of Olson Wealth Group.
Philanthropy: We saw record-breaking philanthropy during the pandemic. Will giving slow down now? It’s too early to say and to predict by how much. Nonetheless, we could already be seeing a shift in where donations are going. “During the pandemic and over the past couple of years, there’s been much more philanthropic support to core, basic needs — support to sustain welfare and health, not at the sacrifice of other causes but additional philanthropy that has flowed into the space,” said David Fisher, executive managing director of family-office services at Cresset. But now, “we’re beginning to see some pulling back on that, with people focusing on what have been from a historical perspective their personal passions,” Fisher said.
Regulation and taxation: Predictions about major changes in tax law didn’t come true in the first two years of the Biden administration. And now with a Congress divided between the parties, few expect significant legislation to pass. However, one prior regulation coming into focus in 2023 is the Corporate Transparency Act, which will require new reporting. The CTA requires corporations, LLCs and other companies to file a report with the Treasury Department’s Financial Crimes Enforcement Network that includes personal identifying information about beneficial owners and applicants. Getting paperwork in order requires a substantial amount of time. Existing entities have until Jan. 1, 2025, to submit their first filings, and new entities have until Jan. 1, 2024. But for those that have relied on corporate structures to maintain some anonymity about their ownership and avoid public scrutiny, the clock is ticking on finding a new model.
Investing trends: “For me, I’m still in real estate” said Kent Swig of Swig Equities in New York. As prices drop, he said, “I believe that there is great opportunity in the residential marketplace.” To go after apartment buildings, Swig is raising a $250 million fund. “Multifamily rental is an exceptional opportunity in select cities, mostly dense urban environments,” he said. With lending taking a hit because of high interest rates and a lot of cash sitting on the sidelines, Swig sees 2023 as a time to buy, especially in San Francisco, Los Angeles, Boston, Washington and New York. One sentiment shared by nearly everyone interviewed late last year was a mix of eager anticipation and cautious concern for the year ahead. On one hand, some investable assets are going to drop to levels that make them seem a lot more attractive than a year or two ago. However, analysts and investors wonder where a true bottom will be for any given investment. In other words: don’t try to catch a falling knife.
On the nonfamily-office side, that’s usually the sell side. And on the sell side, what happens is they’re always trying. They’re always worried about their returns, and they’re worried about their returns because that’s how they sell it to investors. I’m not saying that investors and family offices are not worried about returns — we are. But most family offices aren’t going to say, “I’m not investing in that unless I’m getting 20% back.” A lot of family offices have a much longer view. They've been around for 100 or 150 years, some of them, or 50 years, and their investments are in things that are going to provide long-term growth. So let’s say they have to kick out 5% to give a payment to each one of the heirs. They just need 7% or 8%, and they’re going to usually side on something that’s just a slightly bit safer and less volatile. Family offices need to sustain growth, and they can’t go into crazy investments with crazy returns and put the legacy of the family at risk. So usually they’ll have a portion — if they’re inclined to do so — that goes into startups or seeds, or angels, or venture, where there might be higher returns. But they’ll have a lot of the bulk of the legacy family office in something slightly more conservative that will grow over time.
Where does that leave family offices as they consider current economic conditions?
Families are now sitting there going, “What is the signaling?” Are we headed for an earnings recession, which is much scarier to us than inflation? Because for the families of wealth, inflation isn’t as critical as it is for other folks. But an earnings recession is. Earnings are used for distribution to the family members and to their trusts.
When we put that into the context of the larger economic discussion, it sounds like you’re saying that family offices are more aligned with labor than corporations or those that often invest in them, which tend to want to see cost cuts in times of economic uncertainty.
would say yes for some family offices. The family office that owned 20 John Deere stores, the family offices that are in real estate, family offices that made their money in publishing, those kinds of things tend to be as a trend more conservative [in their approach to investment risk and reward]. That’s for a lot of family offices, but not everyone. There are family offices where the principal made their money in the financial markets, and they’re going to be much more aggressive on their investments.
Are there any large-scale changes or trends you’re seeing in the family-office world?
I’ll tell you something very interesting [that] I noticed during COVID, [with] a lot of family offices who had never — not one time in their glorious history — invested in venture, let alone angels to companies, any of that. When we went to Zoom, because you couldn’t meet with people face to face, and you couldn’t go visit all the little companies like we had traditionally done for 50 or 60 years, all of a sudden these families started investing in earlier stages, like late-stage venture. So you started seeing some shifting in what families invested in toward early-stage things because of the way that these opportunities were being communicated to them and because of the way they could view them. The end result was that you now have more family offices than pre-COVID who are investing in earlier-stage — and by that I mean late-stage venture — than we had before COVID. It changed things. It changed a mindset of “Oh, we’re just a real estate family” to “Now, we’re just a real estate family who happened to put some money into Pfizer, Moderna, or masks, or whatever.” Whether it goes back, now that things have opened up, I don’t think so. I think we have a next gen coming up that is much more open-minded and willing to use the internet and be on Zoom and do all these things. And the old guard is starting to age out, and what’s coming is going to be fascinating because the way they interact with the world and with technology is so very different than the 50-plus group that’s currently in charge of most of the family offices, either as a family member or as an executive.
Swiss private bank merges with multifamily office: The 13 employees of Sartus Capital, a multifamily office established by XP in 2016, are now part of the Swiss private bank Cité Gestion after a merger. The move .increases the bank’s head count by more than 10% and brings its total assets under management to $7.5 billion
Watches beat stocks: The Rolex resale market generated better returns over the past decade than the stock market, gold and real estate, according to an analysis from Bob’s Watches. Meanwhile, the Financial Times found that a dominant gray market has made it nearly impossible to buy a brand-new Rolex at retail, as international buyers and crypto millionaires drove up demand. These days, the FT reported, you need to be a special customer .of a jewelry store to be given the opportunity to purchase a new Rolex
Estate-tax exemption rises to nearly $26 million: The annual inflation adjustment to the federal estate-tax exemption is $1.7 million for 2023, the largest jump since legislation doubled the exemption in 2018. The .individual exemption is now $12.9 million and double that for married couples