Benign Deflation . . . or . . . Central Bankers Gone Wild

Posted on June 5, 2014 by tomdoerflinger

On Wall Street, alas, no bad deed goes unrewarded. After failing to anticipate even one of the past three recessions, and after sitting idly by during the housing bubble as the “safety and soundness” of the U.S. banking system evaporated, the Federal Reserve’s mandate expanded.  No longer does it merely set the short-term “policy rate” – the Fed Funds rate. Now it manipulates bond yields with “quantitative easing” and tries to precisely set the U.S. inflation rate. Alarm bells sound in the Marriner S. Eccles Building on Constitution Avenue when the inflation rate drifts below the Fed’s 2% target; supposedly this means we’re headed toward the same deflationary sinkhole that swallowed the U.S. in the 1930s and Japan in the 1990s.

In a recent speech Chair Yellen explained, “The FOMC strives to avoid inflation slipping too far below its 2 percent objective because, at very low inflation rates, adverse economic developments could more easily push the economy into deflation.”  Yellen thinks low inflation poses two risks. It raises the “real” Fed funds rate and, secondly, “persistent inflation well below this expected [2%] value increases the real burden of debt for households and firms, which may put a drag on economic activity.” Another central banker gone wild, IMF head Christine Lagarde, agrees, warning, “If inflation is the genie, then deflation is the ogre that must be fought decisively.”

Meet the Whacky Marx Brothers

The logical flaw in central bankers’ low inflation fixation is exposed by the famous Marx brothers, Manny, Moe, and Jack. They each agreed with Yellen and Lagarde while uttering these whacky non sequitors:

Manny, a graduate student in Boston: “High inflation is great. Paying off my student loans should be really easy, because for the past six years my tuition bills soared 10% per year. Unfortunately, salaries in my intended profession have been pretty stagnant.”

Moe, a middle class father: “This low inflation is killing me. It’s getting harder and harder to pay my mortgage because cheap natural gas is cutting my heating and cooling bills. Plus, I get all this free stuff on the Internet that I used to have to pay for.”

Jack, a small business man: “I love these inflationary pressures. Obamacare, a rising minimum wage, and Obama’s war on coal are sending my costs through the roof. I have to try to raise prices, but I’ll lose some customers and my profit margins will be squeezed. I’m holding off any new hires until my costs stabilize.”

The point is that often inflation (soaring tuitions that render higher education unaffordable, rising costs due to over-regulation) impedes economic growth and, conversely, deflation (cheaper energy, cheaper information via the Internet) unambiguously promotes economic growth.

Deflation / Inflation: the Cause Matters

Like many economists, Yellen and Lagarde’s Olympian 35,000 foot perspective ignores nitty gritty micro-economic reality—i.e., what causes high or low inflation.In the real world, there are two types of deflation, one “bad” and the other “good:”

  • Debt deflation, a vicious spiral where prices decline because consumers and businesses are unable to service their debts, so they sell assets, causing prices to decline further, which makes debt even more unmanageable.
  • Benign deflation, where technological advances cut costs, so consumers get more for less. Fracking and the Internet are both great examples.

Rather than lumping these two, diametrically opposite, deflations together and creating a simple-minded inflation target, central bankers and other policy makers should address the specific institutional problems that are creating debt deflation. That means “structural reform” to promote economic growth, thereby shrinking the debt/GDP ratio:

  • In the 1990s Japan failed to carry out structural reforms such as letting “zombie banks” die, eliminating incestuous cross holdings among corporations, deregulating farming and other protected industries, and opening up the country to imports.
  • In Europe today, many of these same reforms are needed. Europe is about five years behind the U.S. in recapitalizing its banks to promote lending to small businesses. Hollande’s tax hikes have hurt hiring. Little has been done to free up the Italian economy.
  • As for the U.S., Obama’s regulatory onslaught is raising energy costs and damaging what once was a flexible labor market. And there are the sins of omission—no corporate tax reform, no trade agreements, no Keystone XL Pipeline, etc. The result is slow growth and high unemployment. Debt, per se, is not the problem. Five years into an economic expansion the U.S. has already delevered; the debt burdens of businesses, governments, and households are manageable, provided economic growth is robust. Alas, I see no evidence that Chair Yellen realizes that over-regulation is impeding growth, particularly job growth.

Conventional Keynesians like Paul Krugman think higher inflation would benefit the middle class and hurt the rich. Wrong. Given a slack labor market and weak unions, rising inflation would not boost nominal wages much and real wages would fall, because rising U.S. inflation would weaken the dollar and increase commodity (i.e., food and energy) prices. This is the reverse of the 1998 pattern (see below). To the extent higher inflation reduced real interest rates, it would depress the incomes of middle class savers who own CD’s and bonds.  Meanwhile Wall Street speculators would adjust to higher inflation. Commodity speculation would come back into vogue, and highly leveraged, filthy rich, private equity tycoons would benefit enormously from a reduction in their real debt burden.

A Blast from the Past (1998): “Benign Deflation?”

We have been here before. In 1997 and 1998 deflation stalked the world economy as one “LDC” after another—Thailand, Indonesia, Korea, Brazil, Russia–succumbed to tightening credit conditions and declining investor confidence in their ability to service debt. Eventually, in October 1998, financial panic visited the U.S. as Long-term Capital Management, a giant hedge fund run by former Salomon Brothers “rocket scientists,” which had borrowed from all the big houses on the Street, imploded. As inventories piled up and commodity prices plummeted, economists feared deflation would drag down the global economy. Interestingly, Asia carried out the “structural reforms” that have eluded Europe and got back on its feet in a year or two. Weak commodity prices were one reason why real wage growth in the U.S. was strong in the late 1990s. Despite “deflation,” median real household incomes increased 8.4% between 1996 and 1999; by contrast, it declined 4.2% over the three years ending 2012.

As this unpleasantness unfolded, I co-authored a research report for PaineWebber titled “Benign Deflation?” which became a reading assignment for a course at NYU’s Stern School of Business. You can find it on the Web by googling “doerflinger benign deflation NYU.” Here are the “good parts.”

Excerpts from “Benign Deflation?”

  • If the U.S. were to experience deflation in coming years, it would be benign deflation similar to that of the late 19th century, driven by technological progress and accompanied by healthy economic growth.
  • Benign deflation is distinct from debt deflation, when prices plunge because debtors are unable to pay their debts, the financial system is damaged, and economic activity declines. The current turmoil in Asia is a prime example of debt deflation.
  • The risk of debt deflation in the U.S. is far lower now than in the 1980s, because 1) the U.S. economy has successfully made the transition to low inflation and 2) debt ratios are declining or stabilizing.
  • By preventing companies from boosting earnings through price increases, benign deflation encourages cost-cutting via innovation. This occurred in the late 19th century and is occurring today.

Deflation is compatible with Growth

Even though the price level was declining, the decades after the Civil War were a period of explosive economic growth and creativity. The completion of a continental railroad network, and the concomitant telegraph system, created a national market that encouraged a spate of technological innovations. The number of patents issued doubled between the 1860s and 1880s. Among the specific innovations introduced were:

  • Use of electricity in factories
  • The electric streetcar
  • Refrigerated cars for meat-packing
  • The telephone
  • The typewriter
  • The roller mill to process oatmeal and flour
  • Major advances in making steel, which replaced iron for many uses.

In the last four decades of the 19th century, value added by U.S. manufactures grew at a pace of 5-7% annually. From the 1870s to the 1890s—a period of rapid population growth driven by heavy immigration from Europe—national income per capita expanded by a remarkable 88%. It is quite possible that the deflation of the late 19th century to some degree caused this spate of technological innovation. Unable to raise prices in order to boost profits, businesses had no choice but to cut costs via innovation.

Increasingly, technological innovation will involve creative use of the Internet, which is doing for information what the railroads did for physical products—dramatically increasing the ease and speed with which information can be moved and manipulated. This is not only saving labor but also reducing inventory costs and raising the productivity of physical plant. By reducing inventory levels and minimizing inventory swings, better information technology is tending to mute the business cycle.

Copyright Thomas Doerflinger 2014. All Rights Reserved

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Stocks Can Scale a New Wall of Worry

Posted on May 28, 2014 by tomdoerflinger

Last year, despite slowing profit growth, U.S. equities experienced a “valuation levitation” because they were too cheap compared to bonds and cash. Why own a bond yielding 3-5% when you could own a stock with a 3% dividend yield, 8% EPS growth and 10% DPS growth? But late last year, after stocks had run up and many strategists boosted price targets, I flagged a worrisome “whiff of complacency.” The broad stock market did indeed take a breather in the first four months of 2014, but aggressive traders pushed “momentum stocks” to ridiculous valuations by the end of February, when the average PE on 2014 EPS of Tesla, FaceBook, LinkedIn and Twitter was 511x (or a mere 132x excluding Twitter).

Six Bricks of the New Wall of Worry

For stocks to make meaningful new highs from here, complacency and greed needed to be replaced by perplexity and fear. The proverbial “Wall of Worry,” which loomed large at the beginning of 2013, needs to be rebuilt. That is in fact happening as traders confront:

  • The painful collapse of many “momentum” stocks, partly due to forced liquidation by hedge funds.
  • This year small cap stocks (Russell 2000) have lagged the S&P 500 by nearly 600 bps.
  • Those two trends have led to what is, for many market technicians, a disturbing “divergence” between small caps and the S&P 500. Quite a few commentators on CNBC have argued that the S&P 500 will follow the Russell 2000 lower.
  • Supposedly stock market “fundamentals” have been disappointing. When stocks were soaring near the end of 2013, some investors talked themselves into believing this presaged a strengthening global economy. That view was mostly wrong; things have improved a little but not a lot. U.S. GDP was flat in Q1, much of Europe is stagnant, Japan is fairly weak, and China’s real estate bust is proceeding on schedule. Much needed “structural” reform in all these regions is mostly talk not action. Political turmoil in Ukraine, Thailand, Egypt, Libya, etc. does not help. Neither does the Obama Administration’s continued regulatory onslaught.
  • These allegedly deflationary macro pressures seem to be confirmed by the surprising strength of bond markets, with the 10-year Treasury yielding just 2.54%. The bond market is said to have a higher IQ than the stock market. Hmmm. That would be the same bond market that was priced for low inflation in 1972 (10-year Treasury at 6.21%) and hyper-inflation in 1981 (10-year at 13.92%).
  • Putting these macro factor together with A) uninspiring Q1 earnings and B) profit margins already at record highs, bears conclude that over the next few quarters weak revenue growth will produce major earnings disappointments.

But This Wall Looks Scalable

Those six bricks comprise the Wall of Worry that stocks need to scale over the next year, producing attractive relative returns. I think stocks can do it because:

  • It is bullish, not bearish, that dumb speculation in momentum stocks ended with a thud, before it got out of hand as in the 1990s.
  • Divergence between the S&P 500 and the Russell 2000? Even if you drink the technicians’ Kool-Aid, it all depends on your time frame. You could argue the divergence happened last year, when the Russell 2000 vastly outperformed SPX, and now the two indices are coming back into sync. Year to date the Russell has lagged the S&P 500 by 594 bps, but over the past two years both indices have appreciated 42-44%. Looks to me like convergence, not divergence.
  • The Fed is still dovish, as worried about deflation as inflation. Ultimately this could prove to be a mistake, but not yet. For now, loose monetary policy in Washington, Frankfurt, and Tokyo is keeping bond yields low.
  • The global macro picture may be worse than bulls expected, but nevertheless it is improving slightly, to about 3% global GDP growth this year from 2.5% last year. Europe, by far the most important foreign market for U.S. multinationals, is growing modestly rather than shrinking.
  • Despite bad weather which hit some industries hard, Q1 earnings were not too bad. Strategists continue to look for $117-$120 in S&P 500 earnings this year, and a 5-8% gain next year. The media do a poor job of assessing profits. They forget that U.S. nominal GDP is an imperfect proxy for revenue and EPS growth. Large companies can pull many levers to grow EPS, including organic revenue growth globally (not just domestically), acquisitions, restructuring / cost-cutting, and share buy-backs.
  • A big Republican victory in the November U.S. elections, which is looking more likely following the VA scandal and constructive primaries, would be bullish for stocks.

I admit stocks are no longer cheap. Using $118 in 2014 SPX EPS, the S&P 500 trades at a multiple of 16.2x, versus a 2004-2006 average PE on trailing pro forma EPS of 16.9x. But rates are much lower now. You have the choice of zero return on cash, modest return on overpriced bonds, or blue chip stocks that can deliver a high single digit total return comprised of 2% dividend yield and 5-8% EPS growth. And dividend growth will exceed earnings growth over the next two or three years. So stocks should be able to scale the new wall of worry. Some investors worry when stocks hit record highs, but don’t forget that earnings are also at record highs; this year S&P 500 EPS will be 109% higher than in 2000.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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WSJ May 24 2006 Fed Freakout: a Bernanke Geithner Recession?

Posted on May 21, 2014 by tomdoerflinger

Fed Freak-out

A Bernanke Geithner Recession?

Real Estate Reels from Coast to Coast

By Randall Cunningham And Martha Ridzoli

WASHINGTON  May 23   The Federal Reserve’s surprise decision a week ago to prohibit sub-prime lending continued to roil financial markets and politics. Some analysts speculate it could cause a recession and cost Republicans control of Congress. Since the announcement stocks have dropped 8%, with the heaviest losses in financial firms exposed to housing such as Fannie Mae, Freddie Mac, Countrywide, and Washington Mutual, which have all dropped 16% or more. Shares of investment banks heavily exposed to sub-prime also declined sharply. In the bond market yields on lower-rated real estate related issues soared 150-200 basis points even as rates on 10-year Treasuries fell 35 basis points to 4.64%. Countrywide suspended a planned $350 million bond offering; its share price plunged 26% in two days. As part of its controversial decision the Fed pledged to provide liquidity to adversely affected firms; one fund manager likened that to the gun slinger who offers to pay his victim’s funeral expenses.

Economists disagree as to whether the Fed move will cause a full-fledged recession. Pessimists note that, after a prolonged spell of anemic job growth, hiring had finally accelerated, led by construction jobs and housing-related service jobs such as mortgage bankers, appraisers, lawyers, and realtors. The Fed decision is already having an impact. Wells Fargo announced 5,000 temporary mortgage servicing layoffs; Wachovia, Washington Mutual, and Countrywide made similar announcements. The housing market is starting to slow. Paul Johansen, manager of KB Homes’ new Alta Vista development near Sacramento, said traffic slowed sharply last weekend, with interest declining not only for entry-level homes but also more expensive models. “Move-up customers know the Fed decision makes it tougher to sell their homes to first-time buyers. We’ll finish the houses we’ve started but won’t be laying any new foundations for a while.”

Wall Street’s enormous mortgage banking machine is grinding to a halt, costing jobs and shrinking anticipated year-end bonuses. Last week trading desks took heavy losses on sub-prime paper, which may push some banks’ second quarter income statements into the red. Madelyn Wentworth, realtor with Douglas Elliman, expects sales of Manhattan co-ops and East Hampton vacation homes to decline sharply. “Buyers will pull back and wait for bargains to appear,” she said.

The Fed move met with harsh bi-partisan criticism on Capitol Hill, which has been bombarded with complaints from groups ranging from the National Association of Home Builders to the NAACP. “The Federal Reserve’s arbitrary decision will shut tens of thousands of hard-working middle class Americans out of the housing market. For them, the American dream will remain just a dream” said Martha Rodriguez, spokesperson for the NAHB. Barney Frank (D: Massachusetts), ranking Democrat on the House Financial Services Committee, said yesterday on Meet the Press, “Someone needs to remind Mr. Bernanke and Mr. Geithner that the mission of the Fed is to prevent recessions, not cause them.” Congressman Ron Paul (R: Texas) said, “The Federal Reserve’s reckless decision is a direct result of its promiscuous and unrestrained money printing which created a runaway bubble in the housing market. If anyone needed more evidence that the Fed is out of control and requires major reform, this is it.” Republican politicians attempted to distance themselves from the Fed decision but Nathan Gottesman, an independent political consultant, said “The probability the GOP can maintain control of Congress just got a lot smaller. Even if the economy merely slows sharply over the next six months and then recovers, in early November voters will be seeing economic reports from September, which won’t be pretty.”

Critics charged the Fed’s sub-prime crackdown was unnecessary, because it represents a small part of the mortgage market and an even smaller share of overall lending. They cite a 2005 study by Federal Reserve economists who “projected that even if there were a 20 percent nationwide decline in housing prices, it would cause only about half the economic damage of the bursting of the dot-com bubble.” One government economist stated, “Subprime is only about one-seventh of the mortgage market, barely $1 trillion out of the nation’s $55 trillion in financial assets, and it does not appear to be infecting the rest of the credit boom. Delinquencies on and loan losses on consumer lending continue to run at quite low rates.” But pessimists counter that the U.S. is in an unprecedented credit expansion fueled by rising home prices. They argue many low-income consumers are taking out risky, complex mortgages with low down payments that they will be unable to service unless home prices continue to increase. Even a modest decline in home . . . . .

 

TMD Note: The two quotations in the last paragraph describe actual Fed studies mentioned in Timothy Geithner’s book, Stress Test. Biased critics blame the financial crisis on bankers’ greed and deregulation, but that is only partly correct. Geithner does cite Alan Greenspan’s naïve faith in the rationality of markets; someone should have reminded Alan about the panics of 1819, 1837, 1857, 1873, 1893, 1907, 1929 and 1987. Both Greenspan and Larry Summers were far too confident in the ability of derivatives to limit risk; often they amplified it.  They should have known that financial innovations, not yet tested in a downturn, usually produce nasty surprises. (Think commercial banks in the 1790s, leveraged investment trusts in the 1920s, portfolio insurance in 1987.) Geithner takes pride in his cautionary speeches about financial risk delivered between 2003 and 2007, but no one on Wall Street was paying attention.

But regulatory failure was the product not only of free-market ideology but also malfunctioning government institutions. Deregulation? Many thousands of bureaucrats were showing up for work every day at the Federal Reserve, the Treasury, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of Federal Housing Enterprise Oversight, and the New York State Insurance Commission, not to mention many other state agencies and various committees of Congress. Why was this cast of thousands so spectacularly ineffectual? As Geithner admits, “regulatory capture” (particularly at the Office of Thrift Supervision, Wamu’s regulator), fragmented responsibility (e.g., the Fed regulated Bank Holding Companies such as JPM and Citi but not their banking subsidiaries), and clueless incompetence (particularly at Chris Cox’s SEC, regulator of the investment banks) all played a role. No one had overall responsibility for survival of the system; everyone was handling just one part of the elephant. Senior folks at the Fed were insufficiently aware of crazy mortgage lending (which was being widely discussed on Wall Street), and they were too confident in their economists’ analyses. “Everyone knew” that some borrowers were taking out ridiculously risky mortgages, such as undocumented “liar loans,”“Pick a Payment” loans and low teaser rate mortgages, but no serious effort was made to prohibit them.

One key factor which Geithner ignores: Democrats’ relentless pressure on banks and Fannie/Freddie to expand lending to low-income borrowers. It started with the Community Reinvestment Act of 1977 and accelerated in the later years of the Clinton Administration, led by HUD Secretary Andrew Cuomo. Banks were under the gun to make what were later reclassified as “predatory loans.” Democrats, and some Republicans, opposed the Bush Administration’s efforts to pass legislation designed to reduce risk at Fannie and Freddie. So it is clear that a massive and multifaceted governmental failure was a prime cause of the financial crisis, which by 2005 or 2006 could not have been averted without a costly economic downturn.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

 

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Do the Dow Industrials Grow Much More Slowly than Smaller Competitors? We Examine 20 Industries

Posted on May 12, 2014 by tomdoerflinger

For a growth stock investor like myself, a major challenge is buying companies that really will grow as fast as Wall Street expects—and sell names that run out of gas before it’s obvious to the market.  A major risk is that companies get so big they can no longer grow rapidly because they:

  • Are battling the law of large numbers.
  • Already dominate their domestic market, so go overseas where margins are lower (think Wal-Mart in China).
  • Are too big to manage (JPM’s London Whale).
  • Make dumb acquisitions that are only profitable for the investment bankers (Pfizer since 1999).
  • Diversify into a temporarily lucrative but risky ancillary business (GE Capital).
  • Over-diversify, lose focus, and become a grab bag of mediocre businesses (P&G, J&J for a while).

I decided to quantify this risk by comparing the “Biggest” company in various industries with smaller but important competitors (“the Merely Big”).  My methodology is not airtight and would not pass muster at The Journal of Finance, but it gets the job done.

Focus on 20 “Biggest” and Compare with 2-6 “Merely Big“ In Same Industry

To identify the “Biggest” I used 19 of the 30 Dow Industrials (plus Schlumberger) that each had a group of 2-6 smaller competitors in the same industry.  For example, I compared CAT with Cummins, Deere, ITW, Joy Global, and Paccar. On average, in the 20 industries studied the market cap of the “Biggest” was four times the average market cap of the “Merely Big” in that industry.  I calculated the 2004-2014E EPS CAGR (compound annual growth rate) of each company, to which I added the current dividend yield to calculate “Growth+Yield.”  (Notice I am looking only at “fundamentals”—not the valuation or price performance of the stock.)  So, for example, CAT’s EPS grew from $2.88 in 2004 to $6.23 in 2014, a CAGR of 8%; CAT’s current yield is 2.3%, so its Growth+Yield is 10.3%.  That compares with an average Growth+Yield for the five aforementioned “Merely Bigs” of 13.8%.  So, in this industry, the “Biggest” (CAT) had a Growth+Yield that was only 75% of the “Merely Bigs” (10.3 / 13.8 = 0.75 or 75%).

Again, I performed this analysis for 20 “Biggest” companies in a variety of industries.  In all the study involves 103 companies with an aggregate market cap of $7.4 trillion, or nearly half the market cap of the entire S&P 500.

The Biggest Lag, but Not By Too Much

So, what did I learn? The “Biggest” usually lag the “Merely Big” but in many cases not by a huge amount.  I was impressed that many—though by no means all—giant, dominant, comparatively safe companies were able to keep up with, or nearly keep up with, smaller competitors.  Specifically:

  • In 5 of the 20 industries, the “Biggest” had a higher Growth+Yield than the “Merely Big” companies it was compared to.  In 15 industries it was lower, but often not much lower.
  • Comparing Growth+Yield of the “Biggest” with the average Growth+Yield of the “Merely Big” in its industry (a la the 75% figure in the CAT example), the median value for the 20 industries was 87%.  (13 of the 20 were above 80%.)  This 87% figure means, for example, that if the Growth+Yield return of the “Biggest” was 10%, the average Growth+Yield of the “Merely Bigs” in that industry would be 11.5%.
  • This result is better than it looks because in most cases the Biggest is considerably less risky than some of the “Merely Bigs” it is compared to.
  • Shifting from relative to absolute figures, the median Growth+Yield of the 20 “Biggest” was 10.3%–not bad.
  •  As we would expect, the Biggest delivered a higher proportion of Growth+Yield via dividend yield as opposed to earnings growth. For the typical (median) company, the dividend yield was 37% higher for the Biggest than for the Merely Bigs in the same industry.

From Fundamentals to Stock Price: Beware the Street’s Love Affair with the Biggest

Though there were a few disasters like PFE and GE (see below), overall the Biggest did better than I expected.  But keep in mind that we are talking here about “fundamentals” (EPS growth and dividend yield) NOT valuation and stock price performance.  If you pay too much for the “Biggest” company it can be a bad stock even though the earnings growth remains fairly strong.  This is true, for example, of MSFT, KO and INTC, which are still trading below their peaks of 1998-2000.

Obviously if you pay for 15% secular growth in a stock and it turns out to be only 10%, price performance will be poor.  Psychologically and analytically, it is extremely difficult to figure out if and when the growth of an industry leader such as Coke or Microsoft will decelerate.  And, frankly, Wall Street tends to do a poor job here, for a few reasons:

  • By definition, these have been great stocks that have trampled the bears for years.  (I remember an analyst who was bearish on MSFT in the mid-1980s, until the stock gave him a nervous breakdown and he left Wall Street.)
  • Analysts may not be eager to downgrade a popular stock that all their clients own in size.
  • Every analyst needs some stocks rated “Buy,” partly because they have clients that must have an investment in the industry and want to know, “What’s your top pick in the space?”—even if the space is not attractive.  A  good example is Big Pharma over the past 10 years.
  • When EPS growth slows, analysts are prone to maintain a “Buy” and tell clients, “The stock is cheap.  The PE ratio relative to the S&P 500 is well below historical norms.” This is a dumb observation if the multiple is declining because growth is slowing.
  • Finally, and oddly, the Street does not do a great job of spotting secular trends that hurt growth—such as Coca-Cola being hurt by the aging and increasing health consciousness of  consumers; big pharma failing to replace revenue lost to patent expirations; big banks being hurt by harsh regulations since 2009; or paper, newspaper, office products retailers, and PC printing companies being hurt by the shift to the mobile web.

A Look at the Twenty Stocks, from Best to Worst

Methodological note:  When reading about individual stocks, one should not put excessive weight on the 2004-2014 EPS CAGR and “Growth+Yield” because CAGR’s are sensitive to end points.  If a company had a bad year in 2004 and/or a particularly good year in 2014, this would flatter the growth rate. The converse is also true.   Also, investing is always about the future; past growth may not be sustainable.  On this score, it is reassuring that the average 2014 EPS growth rate of the 20 “Biggest” is 7.6%; their current average dividend yield is 2.7%

JP Morgan:  At 9.8%, its Growth+Yield was not particularly high on an absolute basis, but it was 242% of the average of the “Merely Big” (USB, PNC, STI, BK, FITB, STT) some of which were clobbered by the financial crisis.

Travelers:  A high Growth+Yield of 16.5%, which was 228% of the Merely Bigs (CB, ALL, MMC, PFG).

Exxon-Mobil had a decent Growth+Yield of 9.8%, which was actually 160% of the average of the Merely Big (APA, APC, OXY, DVN).

Boeing:  A duopoly is a wonderful thing, and BA benefits from Asia’s travel explosion.  BA had a very high Growth+Yield of 19%, or 122% of the average of the Merely Bigs (GD, LMT, NOC, RTN).

Coca-Cola:  Its 10.3% Growth+Yield was 108% of the average of the Merely Bigs (PEP, GIS, K and HSY).  In this industry the Growth+Yield was remarkably uniform across the five companies, ranging from 9.2% to 10.3%.

Wal-Mart’s  Growth+Yield was 10.6%, 97% of the average of the Merely Bigs (COST, TGT, KSS, M, KR). Saturation and Amazon are big challenges in the future.  Also, retailing is rather difficult to take abroad successfully.

IBM:  Its Growth+Yield was high at 15.8%, which was 96% of the peers (Accenture, HPQ, ORCL).

Schlumberger’s Growth +Yield was very high at 20.1%, 96% of the average of HAL and BHI.  This is an underappreciated “high tech industry” that oil producers around the world—whether private or state-owned companies—need.  Admittedly it is more risky than oil producers because it is leveraged to capital spending, not oil and gas output and price.

Microsoft: Growth+Yield of 12.8%, 92% of the average of ADBE, GOOG, INTU, ADSK.

United Health had a decent Growth+Yield of 12.4%, 88% of the average of WLP, AET, CI and HUM.

McDonald’s has a solid Growth+Yield of 14.7%, 86% of the average of fast-growing SBUX and YUM.  Whether MCD can keep growing rapidly is far from clear, given saturation, tough competition, and being locked into a “not very good for you” menu by its kitchen configuration.  Plus, Obamanomics continues to hurt MCD’s low-income customer base.

AT&T has a Growth+Yield of 11.5%, 85% of the average of CMCSA, DISH, DTV, AND TWC.

JNJ has a decent Growth+Yield of 9.4%, 81% of the average of BAX, MDT, and BDX.  After a period of severe mismanagement of its consumer business, JNJ’s organic growth is picking up thanks to a new CEO and a rollout of successful new drugs (which, to be fair, were initially developed under the prior CEO).

P&G has a decent Growth+Yield of 9.2%, but it is only 76% of the average of CL, CHD, EL, CLX, and KMB.

Caterpillar, as mentioned, had a Growth+Yield of 10.3%, 75% of its peer group.

American Express has a Growth+Yield of 8.2%, which is 67% of the Mergely Bigs (COF, DFS, AMP, and TROW).  However, AXP is a fundamentally safer stock than some of its peers.

Intel has a Growth+Yield of 8.4%, which is only 61% of the merely big (QCOM, SNDK, ADI, TXN).  INTC missed the boat on the shift from PC’s to smart phones and tablets and now has a smaller market cap than QCOM.  However, as the world’s best designer and builder of chips it remains very competitive long term.

DuPont’s Growth+Yield was 8.8%, which is not too bad in absolute terms but just 61% of the merely big (DOW, PPG, PX, APD, EMN, MON).  DD is streamlining to improve its growth rate.

Pfizer:  a low Growth+Yield of just 4.0%, 50% of the average of MRK, LLY, BMY, and AMGN.  Amgen has grown EPS at a 14% clip, versus just 1.8% for the four Big Pharma names.  PFE’s sudden shift from restructuring mode to another giant deal (buying AstraZeneca) suggests its organic growth prospects are poor.

GE had a dreadful Growth+Yield of just 3.8%, 31% of the average Merely Big (UTX, HON, ETN, DHR, EMR, ITW).  Mr. Immelt has done his best, but the company was clobbered by the financial crisis and has a too big to manage problem.  A smart analyst once told me it would be impossible to find a CEO who could effectively manage GE’s disparate parts.

Selected Mega-caps Are a Decent Investment

The average PE ratio of these 20 stocks on 2014 EPS is 15.1x—very reasonable in a low-rate environment.  Investors get a 2.7% current yield plus growth of 5-10% per year, in most cases.  Yes, the quoted price of the shares will fluctuate.  But you own some of the biggest and best companies in the world.  It is strange that, at a time when pundits are complaining about how capitalism creates inequality as the rich get richer, investors are lukewarm on owning shares of big, successful companies.  The 20 stocks discussed here are a sample, not a portfolio, and there are names on the list I definitely would not own.  Consult your investment advisor or do your own work.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Democrats’ Obama Problem

Posted on May 7, 2014 by tomdoerflinger

The “Sunday Review “section of the New York Times—what used to be called the “Op-Ed” Section—unerringly reveals liberals’ current fantasies and fixations.  Now they’re in a panic about the surpassing incompetence of the Obama presidency, a somnolent ineptitude so perverse and pervasive it could damage the reputations of all known accomplices—including Hillary.  No less than three articles in the latest “Sunday Review” attempt to inoculate Hillary from Obama-Incompetence.

Start with Maureen Dowd’s column titled “42 and 45 Overpower 44—As singles hitter strikes out, Hillary’s on deck.”  I’m not positive, but I’m pretty sure this is Dowd’s first column since 1999 that does not mention “W” and “Rummy.”  Her new target is Obama, whom she attacks as “fatigued and fed-up.”  “Obama’s reign has become increasingly bloodless . . . Things have now reached the point where it feels as though 42 and 45 have already taken over the reins of Washington power from 44, who is fading Snapchat-fast.”  (Not fast enough; he’ll be golfing at Andrews Air Force Base for another 33 months, but who’s counting?)  Of course, Dowd wants us to forget that Hillary was a chief “architect” of Obama’s incoherent foreign policy—something the House Benghazi hearings will prevent.

Then we have globe-trotting savant Thomas L. Friedman explaining to us that, yes, our foreign policy is a mess and the U.S. is on the wrong track, but “It’s Not Just About Obama.”  “There has been a festival of commentary of late bemoaning the pusillanimous foreign policy of President Obama,” but Tom wishes to “rise in – partial – defense of Mr. Obama.”  “To pretend that Obama’s wariness is just because he’s a sissy community organizer” is nonsense, Tom tells us.  It’s partly the fault of, let’s see, “the decisions by the Bush I and Clinton teams to expand NATO,” the Bush II team deciding to fight two unsuccessful wars, the weakness of our European allies, the political fragility of Mideast nations, our $1.3 trillion debt to China, and political corruption in Ukraine.  But there is a still deeper cause of American weakness in the world, according to Tom:  “Our biggest problem, though, is not Europe or Obama.  Our biggest problem is us and our own political paralysis” which has produced a failure “to do more nation-building at home first—including infrastructure investment, replacing income and corporate taxes with a carbon tax, a major new push for both energy efficiency and properly extracted natural gas, skill-building and immigration reform and gradual long-term fiscal rebalancing.”  In Friedman’s reckoning, these numerous domestic policy failures have nothing to do with Obama.  He’s just President of the United States.

Then we have a full-page editorial titled “President Obama and the World,” where The Times addresses the widespread perception that “the world sometimes seems as if it is flying apart, with Mr. Obama unable to fix it.”  It was a mistake, the Times acknowledges, for Obama to fancy himself a transformational figure whose mere election would enhance America’s global stature.  It admits further that the “perception—of weakness, dithering, inaction, there are many names for it – has indisputably had a negative effect on Mr. Obama’s global standing.”  The Times gamely wades through Obama’s various foreign policy misadventures–Syria, Iraq, Afghanistan, Russia, Ukraine, Iran, “the Asian puzzle,” Israel and the Palestinians, “Arab turmoil”– to demonstrate that “Mr. Obama’s record on foreign policy is not as bad as critics say.”  Faint praise indeed.

One thing is certain.  Vladimir Putin won’t let Obama’s foreign policy problems go away.  Obama would have to improve the situation with a humbling change of course—a policy “reset,” if you will.  Unfortunately excessive humility is not generally counted among Obama’s personal deficiencies.  So the next two and a half years could be challenging for Hillary and the Democrats, as well as for Rand Paul and other so-called “neo-isolationists” in the Republican Party, who will have to recalibrate their approach to foreign affairs.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Sins of Commission and Omission Curb GDP Growth

Posted on April 30, 2014 by tomdoerflinger

Bulls on U.S. GDP growth have been wrong for five years, and they are still wrong.  Q1 GDP grew just 0.1%.  Sure, weather was a problem, but, as Mr. El Arian points out, in a robust economy bad weather in part of the US would not derail growth.  Because of how GDP arithmetic works (growth rates are versus the prior quarter, not versus the year-ago-quarter), a weak Q1 brings down growth for the whole year, because even if growth picks up in the next three quarters it is starting from a lower base.

What bullish Wall Street economists, as well as supposedly deep thinkers like Summers and Krugman, miss is that economic policy matters, and Obama’s policies are terrible—assuming you care about economic growth rather than just winning elections by pandering to special interests such as big- money California enviro-maniacs.  Obamacare’s tax hikes and disincentives to hire, ending the “Bush tax cuts for the rich,” Dodd Frank’s unnecessary red tape for community banks, the EPA’s attack on fossil fuel, the NLRB’s attack on Boeing, and Obama’s sophomoric attacks on “millionaires and billionaires” have all hurt growth.

And so have the things Obama has not done.  Like fellow socialist Thomas Piketty, Obama cannot fathom the notion that creating conditions that facilitate profit-making activities by private companies would generate jobs, raise living standards, and reduce poverty.  So he has not bothered to push a variety of reforms and initiatives that would do just that, including:

  • Approving the Keystone XL pipeline, a privately financed “shovel ready” infrastructure project that creates high-paying jobs and boosts business confidence, not to mention improves relations with Canada.
  • Encouraging LNG exports by expediting approval of new export facilities.
  • Deferring to Harry Reid, Obama has failed to secure from Congress fast-track trade approval that would facilitate trade agreements with Europe and with Pacific Rim countries.
  • Because Obama has not bothered with corporate tax reform, the U.S. still has the highest corporate tax rate in the world and about $2 trillion in profits is stranded overseas.  This is creating serious distortions.  Pharma giant Pfizer, which used to be a serial acquirer, supposedly had shifted to restructuring and divesting in order to become a more focused company.  Now it has decided to spend $100 billion to acquire another pharma giant with a weak pipeline, Britain’s AstraZeneca.  If the deal makes sense (very debatable) it is only because Pfizer can use its stranded overseas cash while becoming a London-based company with a much lower tax rate.  GE is probably trying to buy most of the French company Alstom because it cannot think of anything else to do with its overseas profits.  Meanwhile, 88% of Apples’ $151 billion in cash and marketable securities is stuck offshore, so instead of simply returning some of the money to shareholders via buy-backs and dividends it raised another $12 billion in the bond market.  Smart move.  EBAY’s stock is down 4.7% today because it took a charge for the potential tax hit from repatriating overseas cash.

I could go on, but the reality is that U.S. economic growth will continue to be stymied by Obama’s anti-growth sins of commission and omission.  Confidence is being further undermined by his weak foreign policy.  Yes, in retrospect perhaps the Iraq War was a costly mistake that increased Iran’s regional influence.  But Iraq was then and Ukraine is now.  Putin is not Saddam.  Obama is right to reject the cowboy diplomacy of John McCain.  But irresolute and incremental baby steps are not the way to dissuade Putin from invading Ukraine.  Tougher sanctions on the Russian economy (not just select Putin cronies) and a robust energy policy that lowers prices, slams the Russian economy and reduces Europe’s dependence on Gazprom are the way to go—for diplomatic, economic, and environmental reasons.  Specifically,  Obama should approve the Keystone XL Pipeline, permit renewed U.S. exports of crude oil, open up more Federal land to oil and gas production, accelerate permits for LNG export facilities, and release oil from the Strategic Petroleum Reserve. A collapse in energy prices, Russian GDP and the ruble would get Putin’s attention—all without firing a shot. (But, then again, what would Tom Steyer say?)

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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What’s the Catalyst? — Wrong Question for Long-term Investors

Posted on April 28, 2014 by tomdoerflinger

One advantage of being a geezer on Wall Street is that you’ve seen a lot of markets and the different ways people can think about stocks.  In the mid-1980s everyone was looking for “restructuring plays” that a junk-bond financed corporate raider might attack.  After the 1987 crash there was a takeover boom and every broker became an overnight expert in merger arbitrage. In the late 1990s it was all about one-decision growth stocks; Cisco looked cheap in 1999, provided you calculated the PE using estimated 2010 EPS.  Coming out of the financial crisis it was all about macro; correlations were high so you could trade ETF’s and forget about individual stocks.

In recent years another distinctive characteristic of Street thinking, and Wall Street research, is the search for a catalyst.  It’s not enough to find a stock with a reasonable valuation that really will grow 15% per year over the next five years.  To give it a compelling “Buy” rating that will excite the sales force, the analyst needs to find a reason why it will perform well soon.  That is what many hedge funds, a key client base of brokerage firms, are looking for, because they can use financial leverage and stock options to make a good return quickly.  For hedgies, 10% in two months is better than 25% in 12 months, or so I was told by the research director of a giant fund.

I have no problem with this approach to investing, but it only works for certain smart professionals who are staring at their screens 14 hours a day and are constantly getting new ideas from dozens of analysts and salesmen.  It doesn’t work for individual investors.  They are better off owning solid growth stocks for long periods of time, much as Buffett does.  That means holding them during periods when there is indeed no “catalyst,” as the stock goes sideways or even down for a few months even as earnings grow.

Consider Starbucks, which I own.  The stock climbed above 80 last November but has since declined to the low-70s.  The chart looks pretty bad.  The company reported earnings last Thursday, and the news was mostly good – on target EPS, 6% comp sales despite bad weather, interesting new initiatives.  Yet one well-respected analyst maintained his “Hold” rating and $80 price target (implying 14% total return in a year) because consensus EPS estimates were not likely to be raised.  In other words, the company will keep growing and you will make good money in a year, but the stock is fairly priced and it is hard to think of a reason why there will be upside surprises in EPS and stock price.  Me, I’ll take a 14% annual return every day of the week.

Perverse Side Effects

The “what’s the catalyst?” mentality has certain perverse effects.  It draws Wall Street’s attention to controversial and volatile but fundamentally terrible stocks.  A great example is J.C. Penney.  What a mess.  Take a mediocre company in a bad business—selling to middle class Americans under assault from Obamanomics—and bring in a Silicon Valley retail guru who revolutionizes the business (out with weekly coupon circulars, in with coffee bars and branded boutiques) and pretty much destroys it.  (You have to try really, really hard to get minus 25% same store sales when the U.S. economy is not in a depression.)  Investors should have simply stayed away, or stayed short, for two years as the stock dropped 78% and underperformed the SPX by 110%.  But Street traders, attracted by JCP’s volatility, kept playing the short and the long side of the name.

Another perverse effect is that analysts will oversimplify a business as they search for a catalyst.  Most large companies have many divisions serving diverse markets.  They are not highly “leveraged” to a single market.  But, in search of a catalyst analysts and investors will oversimplify a business and argue that the shares will be driven by one macro variable.  For example, John Deere (which I also own) has been a consensus short of hedgies on the theory that corn prices will drop, U.S. farmers’ incomes will fall, and their purchases of tractors and combines will plummet.  But, there is more to the DE story than farmers in Iowa.  Fully 36% of revenues are outside the U.S.  Looking at 2013 operating income, 6% is construction and forestry (which are improving) and 15% is financial services.  As for the 79% of operating income generated by the “Ag and turf” division, U.S. farmers’ income is driven by the price of soybeans and other crops, in addition to corn.  The bear story on DE may ultimately be proven right, but so far it has not worked.  Over the last six months DE has outperformed the market by 590 bps.

Another case, similar to DE, is Caterpillar, which supposedly was a “play” on weakness in China.  Although China’s economy has indeed been weaker than expected, which has hit CAT’s mining equipment business, CAT shares have performed well because other end markets that it serves, such as construction and energy, have been strong.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

 

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Obama and Putin Talk Ukraine, Moldavia, Estonia – and Obmacare !

Posted on April 24, 2014 by tomdoerflinger

TOP SECRET

Transcript: POTUS – Putin Phone Conference, April 14, 2014           Page 2 of 6

. . . repect the sovereignty of Ukraine.  Moldavia and Estonia must also remain free and independent, without interference from Russia.  It is for that reason that U.S. armed forces will participate in military exercises, along with troops of our NATO allies, in those nations, as well as Poland, over the next few months.  These activities will be purely defensive in nature, designed to reassure our allies in the region.  We have no desire to be provocative or to appear belligerent.  We are hopeful that further sanctions will not be necessary, as they ultimately have a negative economic effect not only on Russia but on Europe and ultimately the United States as well.

Putin:  Mr. President, permit me to bring up a related topic.  Speaking purely hypothetically, in your elections next November, what would be the result if the names and pertinent information of, let us say, one hundred thousand so-called Obamacare enrollees appeared on the Internet?  I speak purely hypothetically, of course.

POTUS:  Wha wha, why do you ask?  How could that happen?  What does that have to do with Ukraine?

Putin:  Nothing directly.  And, again, I speak purely hypothetically.  But I am very reliably informed that the so-called Obamacare website did not have the best security arrangements, especially in the early days when it was still under construction.  Even that big store chain you have in America, how do you say, Target was more secure.  And look what happened to it.

POTUS:  Yes, but we have much better security now.  We have had no big problems.  Now back to the sovereignty of Ukraine.  Let me assure you that we have no aggressive designs against your country, and we appreciate your concern for the rights and welfare of Russian speakers in Eastern Ukraine.  But according to protocols of international law, as defined by the United Nations and other international bodies, nations are not permitted to interfere with the political or constitutional affairs of a separate sovereign nation. We and our allies fully expect these rules to be followed.

Putin:  Again, purely hypothetically, let me select randomly from a pile of papers here on my desk.  [4.7 second pause, muffled conversation, papers ruffling]  Here’s one:  Doris Johnson, age 45.  She is divorced.  Identification number, how you say, Social Security Number 156 24 1038.  Household income in 2012, $48,527.  She has hypertension and takes Benicar daily.  Moderate concussion from auto accident in 2010.  Occasional headaches.  Two children.  James, age 16, has asthma and William age 12.  They live at 28 Webster Street, Youngstown Ohio.  They have a Bronze plan with $3,000 deductible, and pay $655 per month after subsidies for their health insurance.

POTUS:  Let me assure you again, Mr. President, that we have no desire to threaten Russia’s legitimate interests in Eastern Ukraine . . . .

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Stocks: Where We Stand

Posted on April 15, 2014 by tomdoerflinger

They will rise this year, but not dramatically.  Early in 2013, when the Street was cautious, we expected “valuation levitation,” which happened.  Late last year we warned rising complacency would lead to higher volatility, but we stayed positive as investors “reach for yield.”   Volatility has indeed soared as momentum stocks collapsed.  What next?  Profits will rise 8-9% this year and so will stock prices, to around 2000 on the S&P 500.  Most of the return will likely come in the fourth quarter, after Republicans do well in the November elections.

Profits Will Be OK, Not Great

I see no reason for either the U.S. or global economy to accelerate meaningfully this year.  Economists continue to underestimate the negative impact of Obamacare on hiring (which, by the way, has not improved over the past two years). A friend of mine saw his monthly health insurance costs rise from $750 to $1,750, with higher deductibles; he is not unusual.  And keep in mind the employer mandate has yet to be implemented. The NFIB small business optimism index remains in recession territory. Obama continues to resist pro-growth measurers such as the Keystone Pipeline and corporate tax reform.  His push for a big hike in the minimum wage discourages hiring.  But capital spending may pick up modestly; for example, truck orders look fairly strong.

Globally, the main positive is that Europe, a key market for U.S. multinationals, is growing rather than shrinking.   But let’s not exaggerate the improvement; France and Italy are stagnant, and the banking system still needs to de-lever. (Europe lags the U.S. by five years in this department.) The key emerging market, China, is slowing and many others have political / economic problems that retard growth (e.g., India, Brazil, Venezuela, Egypt, Turkey, Russia, Thailand).

Against this tepid economic backdrop, with profit margins are at all-time highs, a major positive profit surprise is improbable.  We look for SPX EPS of $119-$120 in S&P 500, which is roughly the top-down consensus.

The Message from the “Early Reporters:” Fairly Positive

They were mixed but not bad.  We saw good or in-line results from Paychex, Fastenal, Cintas, Monsanto, Micron, Kroger, General Mills and ConAgra.  JB Hunt, a major trucking firm, posted solid 9% revenue growth.   Poor results from Bed Bath & Beyond and Family Dollar partly reflect bad weather and vulnerable business models.

More worrisome were poor results in the two most important “swing factors” for profits—big energy and big banks.  Chevron preannounced soft results; big oil is spending oodles of money but not finding much oil.  JP Morgan, particularly its FICC division, is being hit by tougher regulation; Wall Street analysts have done a poor job assessing just how much Dodd Frank will weigh on profits as compliance costs rise, trading revenue slows, and balance sheet leverage declines.  I will be interested to see Goldman’s Q1 results.  (Wells Fargo’s Q1 was better than JPM, with 4% loan growth.  But the beat was low-quality.)

Thirst for Yield Supports Equity Valuations

Janet Yellen is a full-feathered dove.  Even if rates do start to rise late next year money market funds’ average return in 2016 will probably be less than 1%.  Meanwhile, bonds are expensive and risky.  So large-cap stocks are attractive for yield-oriented investors.  SPX DPS growth has average 15.5% over the past three years; with the payout ratio still low at 32%, dividends will probably grow 15-17% this year.  (The 2013 comparison is easy because some firms accelerated dividend payments to Q4 2012, before tax rates rose.)  The S&P 500’s current yield on 2014 DPS is 2.2%, but it is easy to assemble a portfolio yielding 3-4%.   Investors’ thirst for yield should keep the trailing PE on pro forma EPS about where it was at the end of last year, 16.8x, implying a year-end price of 2000 (16.8* $119 = 1999).

History Strongly Suggests Most of the 2014 Return May Come in Q4

Stocks should act better over the next month as attention turns from downbeat “sentiment” about high-fliers to decent “fundamentals” revealed in Q1 profit reports.  Even if Q1 earnings are not great, managements will highlight improving demand in March and April (as Fastenal, an industrial bellwether, did). That said it may take a while for investors to digest the demise of momentum stocks.  Before long we will be in the August doldrums, followed by the pre-election jitters in September and October.  So stocks may not do much in Q2 and Q3 and then perform well in Q4 following a strong Republican showing in the election.  There is a very pronounced tendency for stocks to be strong in the fourth quarter of mid-term election years.  Consider:

  • Looking, first, at all 69 years since 1945, stocks tend to be strong in Q4.  The average pattern of S&P 500 price return by quarter is: Q1 +2.2% / Q2 +2.0% / Q3 +0.4% / Q4 +3.9%.  If we look at median price returns, Q4 strength is even more pronounced:  Q1 +2.2% / Q2 +2.1% / Q3  +2.5% / Q4 +4.9%.
  • Now let’s look at 17 mid-term election years since 1945:  The average return in Q4 is 7.7% and the median is 7.9%. That is far above the typical Q4 return, and nearly four times the typical quarterly return in the first, second and third quarters of all years since 1945.

Obviously, past may not be prologue. Unexpected events may intrude.  But in current circumstances the historical norm seems very relevant.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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Where Are Krugman’s Black Colleagues?—a Disturbing Diversity Dearth

Posted on April 10, 2014 by tomdoerflinger

Without regard for civility or accuracy, econo-gadfly Paul Krugman will accuse conservatives of racism at the drop of a hat.  In a recent NYT column he:

  • Accused Paul Ryan of using a “racist dog-whistle” for making comments similar to Barack Obama’s.
  • Accused CNBC’s Rick Santelli of being racist for attacking Obama’s proposed mortgage subsidies, most of which would have gone to whites, not blacks.
  • Accused the Tea Party of being racist even though African Americans Dr. Ben Carson, Col. Allen West, Senator Tim Scott and Herman Cain are among its heroes.
  • Accused the Tea Party of being racist for opposing Obamacare but not corporate welfare, such as Wall Street bailouts.  This is factually incorrect; many Tea Party people did oppose TARP.

Actually, it looks like Krugman and his colleagues in the Princeton Economics Department are not all that keen on racial diversity.  Krugman may be happy to pose as the Great White Hope of America’s non-white masses, but you are not likely to find black professors occupying offices down the hall from his.  Despite the University’s strong support for a demographically diverse faculty, the Princeton Economics Department has only one African American professor.  Of 61 faculty members listed on the Department’s website, only one is black. That is 1.6%, whereas fully 8% of the undergraduate population was black in 2012.  So much for faculty diversity.  Not much has changed since the genteel, homogeneous days of F. Scott Fitzgerald in the 1920s.

Princeton’s President, in an expansive report on the virtues of diversity, intoned “Diversity is . . . a precondition for academic excellence, institutional relevance, and national vitality.  Engagement with this issue is central, not tangential, to Princeton’s mission and to the maintenance of its leadership in higher education.”  Well, it looks like Princeton’s econ majors can forget about getting an “academically excellent” education.  They don’t have much chance of taking an economics course from a black professor.   There is only one, and she is Dean of the Woodrow Wilson School, which means she doesn’t have much time to teach undergraduates.

What makes the Princeton Economics Department’s nearly lily-white hew so ironic is that the Department is packed with Democratic Party stalwarts (Krugman, Alan Blinder, Alan Kreuger, Uwe Reinhardt), and the Democratic Party constantly lambasts Republicans for their alleged aversion to racial diversity.  Never mind.

Don’t get me wrong.  I’m sure some of Krugman’s best friends are black. And, to recycle the lawyerly verbiage in Krugman’s nasty NYT hit piece on Rep. Ryan, “just to be clear, there’s no evidence that Mr. Krugman is personally a racist.”  He’s just a hypocrite.

Copyright Thomas Doerflinger 2014.  All Rights Reserved.

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