December 23, 2007 in Business

Even the wealthy are cutting back — in moderation

Wall Street Journal The Spokesman-Review
 

For the wealthy, 2007 was the year that bigger was better — from yachts and incomes to personal staff and art collections.

In 2008, the rich are likely to be uttering a new mantra — downsizing.

The fallout from the debt-market crisis, along with growing concerns about inequality and the environment, are likely to usher in a year of moderation for the rich. Don’t worry: Conspicuous consumption won’t disappear.

Yet the recent surge in the population of millionaires and billionaires is likely to slow, at least in the near term. Buzzwords like “mass luxury” and “exclusive” are likely to be replaced by terms like “authenticity” and “sustainability.” In 2008, the rich will strive to be more down-to-earth, even as they take off in their new G550 private jets.

“I think there is increased anxiety among the wealthy,” says Peter White, a New York-based counselor to rich families. “But I also think there is a greater understanding of the interconnectedness of things, that what they do in their individual lives can have broader implications.”

Here are some of the most likely trends among the super-rich for 2008.

Conventional wisdom today says the wealthy are exempt from the forces of economic gravity. Luxury real-estate sales are booming, say real-estate agents, even as the rest of the housing market craters. Neiman Marcus is outshining Wal-Mart. The rich will continue to spend, we’re told, because they’re receiving the lion’s share of the nation’s wealth and income growth.

This has held true — so far. The rich (especially the super-wealthy) will fare better than the broader consumer, since they have more of a financial cushion. Yet because so much of today’s wealth is tied to financial markets, the wealthy will feel the effects of any dramatic decline in stock markets, hedge funds and private equity. One key issue: Mergers and acquisitions — the main drivers of big wealth — could die down with tighter credit.

The rich have also been funding their lifestyles with debt — from art loans and jumbo mortgages to jet financing. So if credit contracts further, high-end spending also will shrink.

Gregory D. Curtis, chairman of Greycourt & Co., a Pittsburgh-based wealth-advisory firm, says he knows several wealthy families who already have been burned by investments linked to subprime lending. “The wealthy may have a bigger cushion between themselves and the wolf at the door,” he says. “But they’re not immune.”

The runaway prices for art, wine, vintage cars and other collectibles are sure to slow next year. The bubble may not pop, per se, since there is so much demand from the newly rich in China, Russia, the Middle East and Latin America. And so far, prices of collectibles have held firm. Yet the markets have become so overrun with financial speculators — with art becoming the new “non-correlated asset” and wine becoming the ultimate liquidity event — that there’s bound to be a correction. Look for price drops of 10 percent or more for some of the secondary artists and winemakers that rely on American buyers.

Private-jet makers are all touting their new “green” programs, helping the wealthy ease their consciences about burning 600 gallons of fuel to fly to Florida. Carbon-offset programs will grow in popularity, along with efforts to reduce the number of jets flying empty on return trips.

Green-friendly homes, or eco-mansions, will also make headlines, oxymoron or not. Look for more solar-powered home theaters, drought-averse (yet expensive) gardens and indoor bowling alleys made from recycled wood chips.

With the presidential election casting a spotlight on inequality, the rich will feel more like targets. Hillary Clinton and Barack Obama vow to raise certain taxes on the wealthy and liberal billionaires like Warren Buffett and Bill Gross have said the rich don’t pay their share.

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