The Start of 2020…


Despite the fact that the U.S. has not seen a shrinking economy in over 10 years, setting a new record for expansion, we do not believe that the immediate economic future holds anything different for investors. With consumption powering nearly 70% of the U.S. economy and with unemployment low at 3.5% and perhaps going lower still, a recession seems unlikely because the American consumer continues to buy. The consumer’s balance sheet is in very good shape with total liabilities equaling approximately 12% of total assets and debt payments equaling about 10% of disposable personal income.

Further, if trade tensions are reduced as a result of an agreement with China, then perhaps corporate capital investments will rise, adding upward momentum to the GDP growth rate.


There continues to be little upward pressure on the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Index. It has been below 2% for years, with little prospect for it to reach 2%, the Fed’s “line in the sand”, anytime soon. In fact, the Fed has let it be known that it would be acceptable if inflation “ran hot” for a period in order to make sure that inflation was indeed “back”, as the bankers are more scared of deflation than inflation. Central bankers around the world have been even more aggressive, embracing negative interest rates to spur growth and feed inflation – but with no success so far. Slack in the world’s economic system has allowed slow growth with little inflation, and there is still slack in the system. There are still underemployed people. There are still people who save more than they consume.


Money will stay “cheap” according to bond investors and the Fed seems to agree. With zero to negligible inflation around the world, there is little risk to price regarding the future value of cash. Investors seem to want liquidity – so much so that they are willing to lend cash to governments at a negative interest rate and thus accept a loss when they get their money back years later. How does this make sense? In our minds, it does not. If an investor is willing to accept not getting a return on their capital, as well as not even getting a return of their capital, then that is a market in our judgement that is “way too expensive” as we believe most bond markets are. Indeed, it is a wonderful time to be a borrower.


OPEC+ (OPEC plus Russia) has agreed to make substantial production cuts in order to support the price of oil in the marketplace. As per usual, it is Saudi Arabia, the Emirates and Kuwait who are bearing most of the responsibility for the success of price stability. The “deal” will last until mid-year 2020 and be revisited to judge the state of the market. Helping, not by choice but by forced discipline, are U.S. producers who are being required by their bankers to curtail drilling – to stop finding uneconomic reserves. Shutting “the taps” a bit, curtailing supply, should help. Further, if trade improves around the world, energy demand also should rise. Both should support pricing, but probably not in time to stop a new wave of consolidation in the industry. Back when the price of oil peaked at over $100/barrel and no exploration company management team could control their enthusiasm and no Wall Street banker could refuse any driller, too many dollars flowed into the business and money was poorly spent on uneconomic prospects. Debts are now coming due and a number of exploration companies will have nowhere to go to “roll over” their debts. So, mergers and acquisitions will occur.


There is a lot of talk about “decarbonizing” the world. In certain countries (think Denmark) and in certain industries, steps are being taken and there has been limited success. But economics are still getting in the way of a wholesale changeover from the combustion engine, which is deeply embedded in our energy-driven culture, to something electric and something “green”. China, a country devoted to solar panels and electric vehicles, recently cut subsidies for solar panels and production collapsed. China is building more megawatts of coal-fired electrical generating power than all that Europe is decommissioning. Why? Because coal-fired power is cheap to build and is reliable power for an economy which is still bringing hundreds of millions of people into the middle class (see chart on the following page).

The same is true elsewhere in Southeast Asia, as it is true in India. Natural gas is the fuel of choice in many of these emerging countries because it is plentiful around the world, making it cheap, and it is not so polluting as coal. So, when China moved to clean up the air around Beijing and Shanghai, the authorities replaced coal-fired plants nearby to Beijing and Shanghai with natural gas-fired stations and added to coal-fired plants farther away in Mongolia after expanding the transmission systems to get the electricity to Beijing and Shanghai. In 2020, carbon emissions will not fall around the world. They may drop in Denmark – but not in Asia. Cheap, reliable energy is still important to most of the world’s governments when they think about how to promote economic growth and support their emerging middle classes. The combustion engine may be dying – but it is not dead. Energy stocks are cheap.


Since 2012, the U.S. and international indices have parted company regarding performance. Both indices (as represented by the S&P 500 and the All Country World ex-U.S.) have done well – but the U.S. performance has been much better. This would suggest that it might be time for some “reversion to the mean” or a closing of a gap.

As can be seen in the chart and table above, statistically the ACWI ex-U.S. is much less expensive than the S&P 500. This has been true for some years, much to the chagrin of world investors, as a concentration in U.S. stocks has been a better bet. However, an important catalyst may change the equation. For most of recent years the dollar has been a strong currency. Higher interest rates and uncertainty about trade have pushed investors to American shores. But as the interest rate differential has closed with the lowering of U.S. interest rates and as there is more talk of a trade deal with China, thus reducing some of that uncertainty, then investors may well sell the dollar and invest offshore in countries which are more trade-dependent and trade-leveraged. The statistical rationale for such an investment switch is certainly present and we think the catalyst to make the change finally might be presenting itself.


In the U.S., 2020 will be an election year with everything that entails. It will also be an election year with a special difference – a sitting President has been impeached. There will be months of politicking and campaigning. There will be huge amounts of money spent (good for the economy) to sway public opinion, first arguing the innocence or guilt regarding the impeachable offenses and then concerning the aftermath of that exercise and political positions on economic, social and international issues. The first six months of the year could well continue the momentum in markets which were extant in 2019. The second half of the year could be different depending on polls and election results. Further supporting first half market potential are the three interest rate cuts of 2019, which will filter through the financial system with positive effect.


It has often been written about this stock rally in the U.S. that it has been the most hated rally in market history. Throughout the years there have been vociferous doubters about the strength of the economy and the equity markets. There has been a constant “wall of worry” which investors have reluctantly climbed, which coincidentally has made us more confident of our more positive positioning in equities over the years.

As can be seen above, investors since 2007 have been sellers of stocks and buyers of bonds. Especially stark is the picture of the relative cash flows in 2019 when investors liquidated stocks and heavily bought bonds in the face of a roaring S&P 500 performance. The next chart demonstrates another historical phenomenon – after years of terrific stock market performance, when some investors might think the markets have run too far, there follows another year of solid stock market performance.

So, while we do not expect a subsequent year of superlative returns in the U.S. stock market, we do expect a year of solid returns.


We think that divided government will continue after the elections of 2020. As a result, we are not expecting any “earth-shattering” policy accomplishments as it will be hard for the branches of government to agree on anything. Remember that the Affordable Care Act happened, barely, when the Democrats controlled government. Likewise, the 2017 tax cut was enacted only when the Republicans controlled the show in Washington. “Little stuff” will get done, but nothing big.


There has been some chatter in the marketplace that companies have a wider stakeholder base to whom they are accountable than simply the shareholder. In Europe, corporate Boards have union representation on them. In the U.S. it has been suggested that the seeking of profits should no longer rank as the primary company objective – but be pushed further down the goal hierarchy beneath “greater goods” like the environment or diversity or social justice. There is certainly an audience for such thinking. However, investment and corporate sage Warren Buffet recently penned an editorial saying that the only goal for corporate leadership should be the maximization of company profits to benefit the shareholders. Then let the shareholders decide what to do with their money, because they would better know how to spend it wisely than some detached corporate organization not involved with a particular cause. We agree with Mr. Buffet that such decisions are better left to local stake-holders. Further, the discipline imposed on management to reward the owners of a company teach management teams the value of a dollar and the scarcity value of precious capital. Recently, such shareholder pressure has been applied to numerous company management teams and the results have been heartening.

As can be seen above, uses of cash have flowed a bit more to the shareholder, have remained rather stable with regard to capital expenditures and research and development, and have been diverted from acquisitions. All in all, a good result.

We wish all our readers a very Happy and Healthy New Year…….


Our Annual “Scorecard” On Our Thinking As We Ended 2018, Looking Forward To 2019

  1. U.S. inflation, using the Fed’s favorite measure, will “remain around” 2%, giving the Fed some “room” to pause interest rate increases. No – Inflation <2% & the Fed cut interest rates 3 times during the year.
  2. U.S. GDP growth 2%-3%; rest of the world range 1% (think Eurozone) – 7% (think India). Yes – India however as a bit slower than expected.
  3. U.S. unemployment will stay low. Yes – Down to 3.5%
  4. U.S. corporate profits +6%-9%. Yes – Better than expected by the Street.
  5. West Texas Intermediate crude oil will recover to a range of $60-$70/barrel. Yes – Tensions in the Middle East are putting “risk” back into investor equations.
  6. The Dollar will drift lower. Yes – At the end of the year, the Dollar swooned a bit.
  7. U.S. consumer sentiment will stay strong. Yes – The consumer was the “strength” of the U.S. economy in 2019.
  8. Corporate chiefs will become more timid spending money; state governments will spend more. Yes – Indecision due to trade worries still present. But relief may be on the way with some sort of China deal.
  9. The U.S. and China will do a trade deal. Yes – Phase 1 to be signed 1/15/2020.
  10. Equity markets will do well. Yes.


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results.

We recommend that you compare our statement with the statement that you receive from your custodian.

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