- January 13, 2021
- Blog , The Trusted Navigator - Bernhard Koepp
2021 Commentary and Outlook. What’s next? – by Bernhard Koepp – CJ Lawrence 1-7-2021 – YouTube Video & Transcript
In this video, Bernhard Koepp discusses the events of January 6th, 2021 in Washington DC and gives an outlook on the economy and portfolio positioning for the coming year.
Video Transcript
Bernhard Koepp:
This is Bernhard Koepp from the C.J. Lawrence, wishing you a happy new year. Well look for Americans, this has been a long night last night. The events that we’ve all witnessed yesterday on Capitol Hill and what the country is going through is certainly unprecedented. We finished 2020 as Wall Street practitioners and economists, we’ve thought that 2020 was the ultimate stress test for the economy. It was the ultimate stress test for our healthcare system as we navigate through the pandemic but it seems like 2021 is now the ultimate stress test for our political system and our democracy. So we are tired today, it’s a new dawn, it’s a new day and we’ve tried to digest the things that happened that we saw on television yesterday. I think one of the key takeaways is that our institutions are strong, I thought the various speeches and declarations that we saw from our politicians and elected officials and the Senate and the Congress were quite impressive, better late than never.
Bernhard Koepp:
So we look forward to 2021, hopefully for a year where calm comes back to the political process and cooler heads will prevail. So I want to just revisit some of the themes and some of the things that we’ve discussed in 2020, at the end of 2020, give an outlook, an update on the macro environment. So, we begin the year on a stronger footing, certainly than we had the early periods of 2020. Our macro outlook remains very positive. The repercussions or the aftermath of the Georgia election. We [inaudible 00:02:19] surprise outcome that Democrats have taken both seats in the Senate, which basically makes the Senate a tie. So Republicans and Democrats have the same number of seats with the vice president has traditionally being the tying vote. So once the Biden administration take over, Kamala Harris as vice-president, will have the tiny vote in the Senate.
Bernhard Koepp:
So this opens a new legislative path for Democrats, certainly to more quickly move many of their through the Capitol Hill. So let’s look at some of the pluses and minuses of that. In terms of the macro outlook, we still are forecasting, roughly a 5% GDP growth for 2021. That is very constructive. If you think where we came from, it’s remarkable how resilient the economy has been. We spoke about the digital part of the economy but now we’re also seeing this in the industrial part of the economy that there’s a lot of activities. So one of the pluses and minuses of a Biden administration and a new sweep. Let’s look at the pluses first. Number one, stimulus. Look, we got a stimulus bill out in 2020, we expect more stimulus. So that certainly is additive to GDP growth.
Bernhard Koepp:
We made it clear that the base case or the U.S. economy in 2021 was 2% without any stimulus. So if we add stimulus one to two trillion in terms of payroll assistance and so forth, that that would add about 3% or 4% or even 5% to GDP growth. So that’s where we arrived, at a 5% or 6% GDP growth rate for 2020. That is certainly positive. The second item is infrastructure. Certainly with a unified Congress Senate house and Senate, it is more likely that we will get infrastructure type spending. If you think about infrastructure spending, it is quite additive to GDP in terms of employment and so forth.
Bernhard Koepp:
The third point, I think that a Biden administration brings is a move back to what we would call globalization. Certainly the Trump administration has been more protectionist, has been more, trade policies have been quite combative. We’ve had this battle with China. So we think we will move back to a more globalist approach to trade, which is more pro-growth. It’s clear that terrorists and protectionism is detrimental to global roles. So those are the positives. So the negatives, there is certainly a worry amongst, especially high net worth individuals that their taxes are going up. That will certainly happen. There’s no way we can sustain this amount of spending, whether it’s the short term measures that we’re seeing with the payroll or the infrastructure without any additional access. I think our best guess here is that that will not happen until 2022. So the Biden administration does not want to give rail the recovery of the economy.
Bernhard Koepp:
We spoke about this before. So our expectation is that we won’t see taxes changing until 2022. So what could happen here? Certainly income taxes for higher earners will go up and it’s still unclear whether capital gains taxes will also be included in that. There have been statements certainly out of the Biden campaign that capital gains taxes could go to the income tax rate. And we think that’s the starting point for negotiations. As you know, the laws are passed by Congress and the Senate and not by the president so there certainly will be a negotiation about this. In terms of the Democrats sweep on Capitol Hill, the margin is very slim. So I think we could still forecast at least that any policies coming out in the next couple of years will gravitate more to the center. We do not think that we will get extreme type policies out of this administration just because they do not, they have a slight majority. So they have to negotiate with the [inaudible 00:07:49] to the center.
Bernhard Koepp:
One thing we’re looking, we’ve said in the past is something we’re looking at very closely is the U.S. dollar. Certainly with the events yesterday which have been viewed by every democracy around the world and all the leadership around the world. We’ve seen statements from all the various leaders around the world supporting the democratic process in the United States. Certainly one of the things that we have to watch here is the U.S. dollar, we’ve noticed this last year. Certainly if we are going to borrow these incredible amounts of money to build the bridge, to get through the pandemic and get us to the point where hopefully by the summer of this year, where we could put the pandemic behind us. Money doesn’t grow on trees and we have to watch the solvency of the United States treasury, and the dollar is the canary in the coal mine here.
Bernhard Koepp:
If you look at a chart of the U.S. dollar, you’ve seen this high here, this was back in 2018. This low here, this is the Euro actually against the U.S. dollar. So we hit a low here against the Euro back in 2018, beginning of 2018. And then you had a strengthening basically of the U.S. dollar until about the middle of 2020. And then as you can see here, we’ve gone back to that weakening in our currency. I mean, this is something that helps our trade. Certainly if we’re exporting or trying to export our way out of this recession that was caused by the pandemic, trade will benefit from that but more importantly, capital flows overwhelmed everything. So we are the reserve currency of the world, the U.S. dollar. So if you have for attracted weakness in the U.S. dollar, and you have lack of confidence in the U.S. dollar for whatever reason, whether it’s weak economic fundamentals or questioning the democratic institutions of the United States, that would be a problem.
Bernhard Koepp:
So the good news today after what we saw in Washington, the dollar has strengthened again. So certainly what we saw last night was a clear indication that the democratic institutions, certainly Capitol Hill Congress and Senate are solid, and that they are clearly showing to the world and to the American people that our democratic institutions are unshakeable. And we expect that to continue going into 2021. Now, how does that translate into what we’re doing in our portfolio? We talked about this debate between the growth stocks and value stocks, certainly technology stocks have done very well last year. And that’s because we’ve got that acceleration of the digital transformation of the economy. And that was not because we wanted to do that, but because the pandemic required us to be digital to function. So we had this accelerated process of cloud computing.
Bernhard Koepp:
But the interesting thing now is we’re also seeing this in the analog, in the industrial side of the economy. So one of the shifts that we’re doing in our portfolio this year is to add exposure in the industrial side, but that is also digital transformation. And to gave you a couple of examples of that. So here, I went to the PCR test the other day as a part to keep our employees safe here at C.J. Lawrence, we try to test ourselves fairly often to see whether we have COVID or not. When I went to the hospital, Harlem just a couple of days ago, I got this wristband and it’s very interesting. So if you see the barcode that is on here, that is right here, and you see the company that does that barcode, this is Zebra technologies.
Bernhard Koepp:
It’s a very interesting company that we started investing in middle of last year. They are transforming the healthcare sector, the industrial manufacturing sector and retail sector when it comes to supply chains and RFID tags and barcodes. So here’s an interesting technology transformation story, Zebra technologies, which is basically transforming all the things we do and making it more efficient. So we see that also in companies like Rockwell Automation, which has been a recent purchase in our portfolio. This is a company that is known, has been around for a century. They were known for their robots. So if you look at pictures of car production, you see robots, these hands that basically make these, mechanical hands that assemble cars. But the bigger part of Rockwell’s business now is actually software to run the supply chains of these industrial processes. And that’s the next wave we think of our big opportunity that we’re seeing.
Bernhard Koepp:
So we’re fading a little bit, the technology side, the cloud computing side, which has been so tremendously strong last year. We still like these stocks. So the Adobes and the Microsoft and the Autodesks, these are tremendous companies, or on the cybersecurity side, the [inaudible 00:14:14] these are companies that have incredible earnings momentum still. And we like these but we’re basically moving to a barbell approach where we have the cloud computing side on the one side, and the digital transformation stocks on the industrial side on the other side. And these include Zebra technologies, Rockwell Automation, Jacobs Engineering. I mean Jacobs Engineering had a tremendous move just the last couple of days and it’s [inaudible 00:14:46] infrastructure. So it’s quite likely that, certainly if you look around the New York area, our infrastructure expenditure and investment has been neglected for quite a few years.
Bernhard Koepp:
So there’s quite a bit of up that’s going to happen now, certainly with the new administration, other stocks that we’ve added recently, FedEx. Certainly FedEx is known to everyone who uses Amazon and gets packages at home but it’s also logistics. If you do not, in your business, have basically figured out how to ship your goods and to do that efficiently and there are big companies like FedEx that will help you do that, you can’t operate in this economy. So look, we remain optimistic about the future. I mean, one thing that I’ve learned over the years is that investing is an optimistic endeavor. And if you’re not an optimist, you shouldn’t be investing. So we continue to invest in high quality companies that have sustainability. So we are optimistic about our companies. We’re also optimistic about the country and what we saw yesterday was unprecedented. It certainly shook any American watching that yesterday. And certainly people from abroad who are watching this were shocked, but I think what we saw in the later hours last night was a coming together. So we remain optimistic that the best of the country is still ahead of us. And we remain optimistic about our portfolios. We thank you for your support. It’s been a good year for C.J. Lawrence, and we hope to continue to help our clients and keep all your money and to hopefully guide you through all of the various economic Wall Street [inaudible 00:16:54].
Bernhard Koepp:
Thank you for your support. If you have any questions, you could shoot me an email at bkoepp@cjlawrence.com or give me a call at (212) 888-6342. Thank you very much. Bye.
Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.