Wall Street and K Street

In April 1590 Henry IV of Navarre, the Protestant heir presumptive to the French crown, led his army of 20,000 to the outskirts of Paris and laid siege to the Catholic city of 220,000.  Grain inventories amounted to only a one month supply, so food prices immediately soared.  Poor citizens were wracked by acute hunger in less than two weeks, and city officials forced the Jesuit College to share its stock of food.  But before long the Parisian poor had to move on from eating grain to consuming their own cats and dogs, which were “killed and cooked with herbs and roots in large pots,” producing a runny stew  that was consumed with an ounce of bread. By mid-summer the city’s elite was exchanging their jewels, tapestries, and other treasures for porridge of “cooked grass and weeds without salt, and pots of horse-meat, ass, and mule.”

The Case for Cannibalism

The starving poor rioted in August, but the unrest was viciously put down by the city government, determined to avoid surrender to the hated Protestants.  The body count proceeded to mount; “some mornings there were 100, 150, and at times as many as 200 dead of hunger in the streets,” a contemporary reported.  Extreme measures were in order.  Bones in a cemetery were disinterred, ground into powder and mixed with water to form wafers.  Cannibalism inevitably followed, which raised delicate theological issues.  A prominent Catholic argued “there was less danger [in the hereafter] by eating a child in such circumstances, than by recognizing . . . a heretic [Henry IV].”  Historian Lauro Martines, in his fine book Furies, estimates that at least 13,000, but possibly as many as 30,000, perished in the siege.

Two Centuries of Religious War

This tale of cannibalism on the Seine was far from unique in early modern Europe. The siege of Paris was just one of many horrific sieges, wars and sackings motivated by religious fanaticism in the 16^th and 17^th centuries.  There was the siege of Sancerre, a Protestant stronghold in the Loire Valley, in 1572; the sacking of Magdeburg in 1631 (part of Germany’s Thirty Years War); the sacking of Brescia (1512) when a quarter of the city’s population died; and the sacking of Antwerp in 1576.  Although real politic was also in play, all of these and many other catastrophic military clashes were inspired by religion.  To the combatants, a few weeks or months of hell on earth was preferable to eternal damnation.

Connecticut Conflagration

Nor was this fanaticism restricted to the eastern shores of the North Atlantic.  In New England in the 1630s sporadic deadly clashes between Pequot Indians and English Puritan settlers culminated in a horrific conflagration in 1637, well described by celebrated historian Bernard Bailyn in his latest book, The Barbarous Years.  The Pequots, including not only warriors but several hundred men, women and children, retreated to a fort in Mystic, Connecticut, which was immediately surrounded by 90 English troops.  They proceeded to block the exits, set fire to the fort, and kill about 40 Indians who attempted to escape the flames.  In all an estimated 600 to 700 Pequot perished in the blaze.  It was, a witness averred, “an awful sight to see them thus frying in the fire, and the streams of blood quenching the same, and horrible was the stink and scent thereof.”  But in what they termed this “divine slaughter” the English perceived the righteous hand of God, “who had wrought so wonderfully for them, thus to enclose their enemies in their hands and give them so speedy a victory over so proud and insulting an enemy.”

From Paris 1590 to Damascus 2013

Europe’s religious fanaticism throws current events in the Middle East into sharp historical perspective.  To my inexpert eye, there is not much difference between Sunni vs. Shia today and Protestant vs. Catholic in 1590–nor is Muslim hatred of Jews and Christians particularly surprising or unnatural.  As we learned in Iraq and Afghanistan, the notion that Muslim fanaticism and factionalism in the Mideast can be moderated by enlightened western intervention is simply false.  For the U.S., such incursions are all cost and no benefit—not even much gratitude from the intended beneficiaries. The West can do nothing more in the region than protect its own interests and let history play out—including civil wars such as the one now raging in Syria.  A great many individuals on both sides of that conflict hate the U.S. and Israel.  It is indeed unfortunate that the death toll is 70,000 and climbing, but there is little we can do about it; indeed, our intervention might prolong the conflict.  Nor do we have a moral obligation to intervene – any more than the British did in the 1860s, when 625,000 perished in the American Civil War.

Given the costly failure of past American interventions, which were viciously condemned by the left, it’s downright weird to read New York Times pundit Bill Keller’s fanciful tale of how things would play out if we intervened in Syria.  From his comfortable office overlooking Times Square, Keller sketches this pleasant reverie: “The United States moves to assert control of the arming and training of rebels. . . . We [bomb Syria and force the Assad regime to sue for peace].  All of this must be carefully choreographed, and accompanied by a symphony of diplomacy to keep our allies with us and our adversaries at bay.  The aim would be to eventually have a transition government….”  Which raises the obvious question, “transition” to what? Very likely to a democratically elected regime of anti-Semitic, anti-Christian, anti-American, anti-Israel Muslim fanatics, similar to the one now governing Egypt.  No thank you.  (To be fair to Keller, some Republicans such as John McCain and Bill Kristol share his naïve optimism.)

On a more positive note, Christianity’s long-term trend toward moderation is applicable to Islam as well.  All texts, including religious texts, are subject to wide interpretation.  Muslim fanaticism in the Middle East may well moderate over time.  But as the history of European Christianity shows, that can be a very protracted process.

Sources:   Lauro Martines, Furies: War in Europe, 1450-1700 (New York, 2013); Bernard Bailyn, The Barbarous Years: The Conflict of Civilizations, 1600-1675 (New York, 2013).

Copyright Thomas Doerflinger 2013.  All Rights Reserved.

First quarter earnings look OK but not great and broadly consistent with Wall Street strategists’ expectation of $108 for S&P 500 EPS this year.  That’s bad news for bears who expect weak profits to derail the rally.  Despite mediocre profits, the “valuation levitation” we have been writing about for months should continue, because the stock market rally is not being driven by “better than expected profits” but, rather, by the fact that stocks are “too cheap” in an age of sub-2% bond yield.  It’s a replay of the 1980s.  Look for the S&P 500 to be above 1650 by the end of this year, which would imply a trailing PE ratio of just 15.2x, and a prospective dividend yield on 2014 DPS of 2.4%– attractive when the 10-year Treasury bond yields 2%.

Though CEOs are no more clairvoyant than economists, they do have an insider’s view of order books, customers’ psychology, and the state of the world economy.  Here are seven themes:

• Europe’s recession is severe and there is little reason to believe it will end later this year.  Companies are already cutting forecasts for H2 2013 sales.  As we have often noted, the continent is plagued by structural problems going way beyond a dysfunctional currency.
• The U.S. is chugging along, powered by housing, autos, and energy production.  But higher taxes, sequestration, weak exports and Obama’s anti-growth policies are keeping the economy stuck in second gear.
• Emerging markets are fairly healthy but, unlike 2010 and 2011, are not strong enough to power many positive EPS surprises.
• Capital spending is soft, to judge by the reports out of IBM, Accenture, Caterpillar, the big Telcos, and others.  This does not bode well for hiring by large firms.
• Despite the headwind of a strong dollar, many “defensive” companies in consumer staples and healthcare have come through with decent earnings, including Coke, Pepsi, JNJ, Abbot, Baxter, Philip Morris, KMB, etc.  Declining commodity input costs help.  (This does not mean they are necessarily great stocks to buy at today’s lofty PE multiples.)
• Companies have become very good at scratching out modest profit growth in a weak macro environment via restructuring, acquisitions, share buy-backs, cost-cutting, and modest organic growth. Profit bears (such as Bill Gross and sundry Financial Times pundits) have been worrying for years, if not decades, that profits’ share of national income was “too high” and would decline as wages rebounded and margins were squeezed.  It will happen eventually, but maybe not any time soon.
• In this tepid environment, there are not many fast growing markets, or large companies with solid double-digit revenue growth.  Exceptions are U.S. housing, on-line advertising, biotechnology (if you have the right drugs), fracking, and a few exceptionally well-positioned consumer companies—think EBAY, GOOG, GILD, SBUX, etc.

Weak Commodity Prices—Negative for Profits Short-term, but Positive Long-term

For this year lower prices for oil, copper, and other commodities are bearish for profits, because they shift national income from companies to consumers—when oil prices drop ExxonMobil earns less but Jane Doe spends less at the pump.  But although it may take a dollar or two off of 2013 S&P 500 EPS, the recent drop in oil prices is positive in that the consumer relief allows the economy to keep growing; it cuts the risk we will tip over into recession.  Thus weak commodity prices increases the probability that profits will keep growing in 2014 – which is more important to investors than whether profits this year are $107 or $110.

The drop in oil prices is positive for airlines and broadly positive for consumer-oriented companies (particularly vendors of commodity-intensive products such as soap), both because their customers have more discretionary income and because input costs decline.  The profit impact is not huge but does help companies like P&G “make their numbers” in a soft economy. In addition to energy producers, lower commodity prices hurt industrial companies that supply compressors, trucks, graders and other equipment to energy and mining companies.

Copyright Thomas Doerflinger 2013.  All Rights Reserved

On Sunday we drove down to a synagogue in Edison, NJ to hear a talk by Pamela Geller, a controversial anti-Jihad activist.  I counted four police cars outside because the Rabbi had received death threats and someone shot pellets at his garage door. He has been attacked previously. Geller had been scheduled to speak at a synagogue in Great Neck, Long Island but was disinvited, according to the Great Neck synagogue, because of “legal liability and potential security exposure of our institution and its member families.  In an era of heightened security concerns it is irresponsible to jeopardize the safety of those who call Great Neck Synagogue home, especially our children, . . . “

That is pathetic.  The synagogue caved in to the forces of political correctness to prevent its members from hearing Geller’s views on Sharia law. There are two possibilities. Either the leadership of the Great Neck synagogue was lying, and there was not really any “potential security exposure”—it just didn’t want to take the heat of sponsoring a controversial speaker—or, on the other hand, there was indeed a security risk, in which case Geller’s warnings about the “Islamification of America” are correct.  Neither possibility is acceptable.

Like a well trained poodle, the mainstream media – CBS, the Star Ledger, News 12, etc. — unthinkingly side with the apostles of political correctness.  They ignore the simple, crucial distinction that Geller makes between coercive, violent Jihad—the ideology that brought down the twin towers, bombed subways in London and Madrid, led to a massacre in Fort Hood, planted a bomb in Times Square, etc.  – and the religion of Islam, most of whose adherents are nonviolent. Reporters gravely note that the Anti-Defamation League and the Southern Poverty Law Center have branded Geller’s organization a “hate group,” which is like reporting that Starbucks thinks two cups of coffee in the morning are better than one.  The ADL and SPLC are in the hate group business; the more the merrier. No need to grapple with complicating complexities, such as the fact that the jihadists Geller criticizes systematically oppress  women and gays, Jews and Christians. (If they had been around in the 1830s, ADL and SPLC might have branded William Lloyd Garrison’s American Anti-Slavery Society as a “hate group” that vilified southern whites.)

A Great American and His Dead Son

The first speaker on Sunday was Gregory Buckley Senior, whose son, Marine Lance Corporal Gregory Buckley Junior, was murdered in Afghanistan last year.  In a moving and courageous speech Mr. Buckley made a very convincing case that the U.S. should withdraw all troops from that country as soon as possible, if not sooner.  Our troops there are treated as second class citizens who are not permitted to possess their weapons when they sleep and at other times of the day.  Greg Jr. wrote his father several prescient letters predicting his own murder, which was carried out by a sixteen-year-old while Greg and his buddies were lifting weights (weaponless) in a gym.  It has been obvious for at least a couple of years that U.S. troops can achieve nothing positive in Afghanistan and should be brought home. Back in the autumn of 2010 I heard that point persuasively made by Bing West in a lecture, complete with video of fire fights he had been in a couple of months previous.  Neo-cons like Bill Kristol who talk about victory in Afghanistan are misguided.  Greg Buckley Sr. states that, because he has spoken out against our pointless presence there, the Pentagon has failed to provide a full report of his son’s murder in a timely manner.