Lessons learned at DAC Day 1: Taking our bearings

The global economy is on the road to recovery. In fact, said veteran economist Patricia Croft, a speaker at the opening day of the Distinguished Advisor Conference in Naples, Fla., we are half way there.

That is the good news — but it is also the bad news. It means the economy has this far to go again to overcome what Croft called “the post-crisis collateral damage.” And as consumers and advisors take their bearings in this continuing period of volatility and restructuring, they are faced with challenges, but also opportunities.

Of course, as Croft noted, all eyes are on the U.S. and the impending “fiscal cliff.” Dec. 31, 2012, sees the end of the U.S. Budget Control Act 2011 and the tax cuts introduced by former president George Bush. As Knowledge Bureau president and lead speaker Evelyn Jacks explained, that spells higher taxes and massive cuts in government spending, which could send the U.S. into a recession.

Author and investment guru Gordon Pape does not see the U.S. going over the fiscal cliff, however. Newly re-elected President Obama’s resounding win and the Tea Party’s significance losses should smooth the path to resolution. For Pape, the danger lies in the timing of the compromise negotiated by Obama and the Republican-controlled House of Representatives.

“If 2011 brinksmanship repeats itself,” he said, “there will be trouble. It will be a black Christmas for the stock markets. The closer we get to the precipice, the more people will get out of the market. Because taxes on dividends and capital gains are affected, it needs to be resolved early on. If investors don’t know, they will sell off and lock in capital gains before Dec. 31.”

There are a number of signs the economy is strengthening. Terry Jenkins, president and CEO of BMO Private Bank, U.S., noted that wealth is growing again. According to a 2011 study of people with more than $30 million in net worth, there are 185,795 people globally controlling US$25 trillion. In the U.S. alone, there are 57,860 ultra-high-net worth individuals controlling US$7.6 trillion.

But, as Jenkins noted, that brings with it its own set of risks — growing “income inequality” and anti-wealth sentiment has made for social unrest. Jenkins referenced a CIA study in which, of 22 major countries, only three have more acute income disparity than the U.S.

There are, of course, a host of other risks that threaten the global recovery. Croft listed her  top risks for the year ahead: Europe; China; policy mistakes; protectionism and populism; bubbles, including the real estate bubble; political/geopolitical uncertainly; Bin Ladenism or the stirring of the Arab world against the West; and climate change.

“We live in a world of 2% growth,” said Croft. “Austerity alone is not the answer.”

Pape’s outlook for 2013 isn’t so different from Croft's. He expects:
• European “angst” to continue; 
• slow growth although not a recession;
• Mideast tension to keep markets unsettled;
• China to regain momentum;
• a gradual recovery in commodities;
• an end to the bond bull — maybe!
• gold to keep rising. 

Within that context, Pape does see opportunities. His “best plays” for 2013 are yield plays; selected growth stocks; gold and silver; and the New York stock market.

The volatility of the economy and the markets emphasizes the importance of the message delivered by two other Day 1 speakers. David Gray, vice president of individual distribution, wholesale channel at Sun Life Financial Canada, spoke of the value of advice and the research that repeatedly shows that individuals who work with advisors, who have financial plans, are more confident of the future and sleep better at night.

Scott Mackenzie, president of Morningstar Canada in Toronto, addressed asset allocation and new thinking in the application of asset allocation models. In any situation, a disciplined asset allocation approach, with regular rebalancing, can increase returns — and even more so in the conditions of the past few years.

Mackenzie also introduced an investor psychology element. Since Nassim Nicholas Taleb wrote his book The Black Swan: The impact of the highly improbable, we have gotten used to the concept that events that are inconsistent with past events still happen. Mackenzie talked about “black turkeys,” as defined by economist Laurence Siegel as an event that is everywhere in the data, that happens all the time, but to which we are willfully blind.

“We systemically ignore information,” Mackenzie said.

He also referred to the “flaw of averages,” the idea that simplifying something down to one figure is dangerous.

The reality is advisors acting on behalf of clients can’t afford to ignore any of the realities of today’s marketplace.

The speakers’ presentations can be downloaded by clicking here.