JUNE 4, 2011.
The Bullish Case for the U.S. Economy
Investment strategist Robert Doll says America's edge is faster population growth, companies that are global in scope, and a culture of innovation and entrepreneurship.
By JAMES FREEMAN
It's been a dreary week for economic news: slow job creation, falling home prices, lagging auto and consumer sales, and a sell-off in stocks. So it seems like a good moment to check in with one of Wall Street's leading perma-optimists, BlackRock Chief Equity Strategist Bob Doll, to see if he's still bullish on America.
To my considerable relief, he doesn't disappoint. "Credit markets are sound. Money growth is good," says Mr. Doll, whose optimism has been the right market call since March 9, 2009, when stocks hit their post-crisis lows. The Dow has since risen more than 85%, and Mr. Doll expects the slow economic expansion to continue.
As intriguing in this moment of U.S. pessimism is the 56-year-old uber-investor's long-term bullishness on American companies and U.S. competitiveness. "You could say we're the best house in a bad neighborhood," says the man who has spent 28 years managing money. "We have fewer problems and more solutions than Europe or Japan."
Mr. Doll is sitting in a conference room at one of BlackRock's two giant offices in midtown Manhattan. While his company remains obscure to most Americans, and has only existed since 1988, it is now the world's largest money manager.
Born as a subsidiary of the private equity firm Blackstone, the company went public in 1999 and after a series of mergers and acquisitions, BlackRock now keeps watch on more than $3.6 trillion of client money. Mr. Doll's job is to allocate almost $30 billion among shares of large U.S. corporations and to advise clients on the most compelling opportunities for equity investment.
Notably, his focus remains the United States, and he believes that the most important reason why America's house remains the nicest in the neighborhood of developed countries is that our family keeps getting bigger.
"Over the next 20 years, the U.S. work force is going to grow by 11%, Europe's going to fall by five, and Japan's going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth," he says. "And the reason for this is pretty simple. We have higher immigration than both of these, and we make more babies. We have a higher fertility rate. And they are the long-term determinants of population growth and therefore work force growth." Mr. Doll and his wife seem to be doing their part with three children.
But many Americans, whether they favor pundits on the right or the left, may have a hard time accepting that population growth and immigration are the keys to our prosperity. Mr. Doll explains the economics: "The long-term growth rate of any economy is the product of the change in the size of the work force multiplied by the productivity of the work force." Productivity is very hard to predict, he reports, but demographics is easy. "You count noses." And that tally shows a very healthy America.
But doesn't Mr. Doll smell trouble on productivity? It rose just 1.3% in the first quarter compared to the same quarter last year. He says that U.S. productivity is "OK and better than lots of other places." This is a recurring theme of our discussion— that America is the least worst among the major developed economies.
Mr. Doll's optimism comes despite his skepticism about the last several years of heavy government intervention in the economy. His team at BlackRock calculated that, at most, half of the 2009 stimulus program was "true stimulus" for the economy. What about the rest? "Call your congressman and find out where the money went." More than a few readers may be tempted to call BlackRock and ask how they concluded that even half of it was spent effectively.
What about the impact of ObamaCare, the 2010 Dodd-Frank financial reform law, and the president's continuing advocacy of tax increases? "All three of them are retardants to growth," says Mr. Doll.
He also concedes that "we face formidable long-term structural problems that make the U.S. less attractive than it otherwise might be," and yet he has written in these pages about America remaining a "city upon a hill" in the vision of Puritan John Winthrop. Mr. Doll could be making the least inspiring case for American exceptionalism in the history of the republic. "You might say we win by default, which is not a fun way to win," he says.
But can we really win merely by staying ahead of Europe and Japan? So far the answer seems to be yes. People are invariably shocked when Mr. Doll tells them that in 1995 the U.S. produced roughly 25% of the world's goods and services and in 2010, after 15 years that included a tech bust, a terrorist attack and a housing bust that triggered a financial crisis, the U.S. was still producing that same 25% of global GDP.
How is this possible given the rapid rise of China and India? Mr. Doll says the increase in emerging markets' share of the world economy has come "at the expense of mostly Japan and a bit Europe. The U.S. has held its own, which I think is a statement of our ability to be productive in a tough world."
But an investor would still have more upside in developing countries than in the U.S., right? Mr. Doll says that if he were forced to lock up his money in one place for the next 10 or 20 years he would indeed select the developing world and specifically India over China.
China's population will grow only slightly faster than that of the U.S. between now and 2030, he says, whereas he expects India's population to increase 32%, suggesting robust GDP growth. "The one-child birth policy in China will eventually arrest the growth rate of China to a much smaller number."
But in the short run, Mr. Doll likes the U.S. equity market best of all and reports that this is where most of his personal investments are, largely in the funds he oversees. "The U.S. stock market and the U.S. economy are increasingly different animals. It used to be when U.S. economic growth went a certain direction, so did the stock market," because so much of the business done by these companies was domestic. But now 40% happens elsewhere. Mr. Doll estimates that, over the next five years, 70% of the incremental earnings growth of S&P 500 companies will come from outside the U.S.
Among the formidable U.S. companies that he thinks are attractively priced now are Applied Materials, which makes the machines that make computer chips, pharmaceutical giant Bristol-Myers, and Chevron. He also believes that Alcoa "fits the slowly expanding global economy," and he is "increasingly intrigued" by Microsoft, a "blue chip" tech company with a stagnant stock price.
Mr. Doll is less bullish on the future for U.S. jobs. "I hope the number is not as high as seven or eight [percent unemployment] but I think it's higher than five," he says. "Said differently, when I went to school, we studied that full employment was 3% unemployment and then I went into the work world and I never saw three. And I think with almost every passing cycle—for a lot of reasons, technology being cheaper and more reliable than most human beings, as an example—the structural unemployment rate slowly but surely has moved higher. And I think that continues. So I hope it's not seven or eight. I think it's a little lower than that, hopefully six or seven. . . . Sad but true. And that has political and social consequences that I don't think we even know what to do with yet."
Inflation will also be higher, though Mr. Doll doesn't expect the Fed to let it get out of hand. Regulation is still too much of a burden, especially on young companies trying to go public, he adds, and "We need a major overhaul of our tax system if we're going to create more incentives and more productivity."
But even with all our problems, he says, "I think the entrepreneurial spirit is alive and well in the U.S." He argues that we are still the source of technological innovation and home to the greatest universities and the most creative businesses. He sees promising advances in health care and alternative energy technologies. By alternative he doesn't necessarily mean "green" energy, but simply new power sources given that he expects oil prices to keep rising.
Also, it should be noted that his outlook is premised on meaningful spending reductions in Washington. "I think we are moving in an austerity direction," he says. "Six months ago, no one had a plan that said, 'I'm going to be able to cut the deficit by X trillion over Y years." Now, with House passage of a bill by Rep. Paul Ryan (R., Wis.) and the looming vote on the nation's debt limit, he hopefully notes that all sides are at least talking about "trillions over years."
Mr. Doll's optimism—or, more accurately, his lack of pessimism—has at times gotten the best of him, as in 2008. "We turned slightly to the negative side of neutral, but I never said, 'Get out,'" he recalls. "The severity and rapidity of the problems was beyond belief."
Now in 2011, his views may not strike anyone as wildly optimistic. But on Wall Street, Mr. Doll's sobering catalog of U.S. weaknesses is what passes for bullishness. With unemployment hitting 9.1%, Main Street can hardly be any more cheerful.
All of which suggests a political opportunity for someone who can present a credible plan to return to low unemployment and robust economic growth. Optimism about the future is implicit in America's high birth rate. Pundits may continue to try to convince voters to accept a new normal, but Americans are probably aiming higher than the best house in a bad neighborhood.
Mr. Freeman is assistant editor of The Journal's editorial page.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
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