Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Defence Contracting Sector Under Trump

Companies / Sector Analysis Jan 04, 2017 - 05:02 PM GMT

By: John_Mauldin

Companies

BY PATRICK WATSON : This month, President-elect Trump annoyed some people when he criticized two top defense contractors on Twitter.

Wall Street isn’t used to presidents publicly criticizing major US companies. The tweets caused shares to tumble a few points for both Boeing (BA) and Lockheed Martin (LMT), which makes the F-35 fighter planes.


The stocks recovered quickly, but the sudden moves gave traders a few frantic minutes.

Within the same week, Trump also shared a Washington Post article about a study that exposed enormous bureaucratic waste at the Pentagon.

According to the article, the Pentagon buried the study because it feared “Congress would use the findings as an excuse to slash the defense budget”:

Pentagon leaders had requested the study to help make their enormous back-office bureaucracy more efficient and reinvest any savings in combat power. But after the project documented far more wasteful spending than expected, senior defense officials moved swiftly to kill it by discrediting and suppressing the results. […]

For the military, the major allure of the study was that it called for reallocating the $125 billion for troops and weapons. Among other options, the savings could have paid a large portion of the bill to rebuild the nation’s aging nuclear arsenal, or the operating expenses for 50 Army brigades.

But some Pentagon leaders said they fretted that by spotlighting so much waste, the study would undermine their repeated public assertions that years of budget austerity had left the armed forces starved of funds. Instead of providing more money, they said, they worried Congress and the White House might decide to cut deeper.

So, the plan was killed. The Pentagon imposed secrecy restrictions on the data making up the study, which ensured no one could replicate the findings. A 77-page summary report that had been made public was removed from a Pentagon website.

This doesn’t surprise me in the least.

Anyone who has been in the military knows about wasteful spending

A few months ago, I told our Macro Growth & Income Alert subscribers how, as a lieutenant, I had dozens of expensive vehicles forced on me. I had no troops to drive them and no place to park them. It didn’t matter. Someone up the chain had orders to spend millions of dollars on those vehicles and send them my way, so that’s what he did.

Every military officer has similar stories, so Trump is absolutely right about Pentagon waste. I’m convinced it costs lives too: Other units had to make do without urgently needed resources while I was getting Humvees jammed down my throat.

Such things don’t happen in the private sector (at least not as often) because corporations must show a profit. The Pentagon doesn’t… nor should it.

When you think about it, all defense spending is economically irrational.

Governments spend billions preparing for wars they hope to never fight. It’s kind of a very expensive insurance—we have to defend the nation from potential enemies, whatever it costs.

That simple fact gives military spending a natural upward bias. Combine that bias with bureaucratic inefficiency and the cleverness of defense contractors, and the result is… well, what we have.

The Trump administration will have a hard time changing everything

That F-35 program, for instance, is directly responsible for thousands of jobs in virtually every congressional district. The contractors arranged it that way on purpose. Canceling the F-35s might be the right move, budget-wise, but it would have serious political side effects.

President Eisenhower was way ahead of his time when he warned about the “military-industrial complex.” He knew from experience how political forces could make defense spending spin out of control. It is truly insane and no one has been able to change it.

Will Trump have better luck?

Maybe, though choosing retired USMC General James Mattis as secretary of defense doesn’t give me confidence. Mattis barely had his uniform off when he took a high-paying board seat with leading defense contractor General Dynamics (GD) in 2013.

But I could be wrong; some people say Mattis was a good general. Maybe he learned something from that private-sector experience that will help him rein in the contracting beast. I hope so—but I’m not going to bet on it.

No, the far better bet is that defense spending will remain strong and probably grow after Mattis and Trump take command. They may change priorities, but I can’t see them spending any less.

That being the case, I think it is a mistake to interpret those Trump tweets as a sign that defense spending is on a downhill slide. In fact, the opposite is much more likely.

The all-weather sector

It’s true that the US has the world’s largest defense budget, but other countries spend a lot too… and they will have to spend even more if Trump gets the US’s NATO allies to shoulder more of the financial burden.

I also bet Trump will not-so-subtly suggest they buy American products, which will offset any revenue loss from lower Pentagon spending.

I’ve been bullish on defense for a long time.

It is the closest I’ve found to an all-weather sector, and I believe it will stay that way. Global peace and harmony aren’t on the horizon yet.

If you have second thoughts about investing in defense stocks, I understand. In an ideal world, no one would have these kinds of “opportunities.”

On the other hand, we don’t have an ideal world (and probably never will). So, when reality hands you a lemon, there’s nothing wrong with making lemonade. Now is your chance.

Grab This Free Report to See What Lies Ahead in 2017

Now, for a limited time, you can download this free report from Mauldin Economics detailing the rocky roads that lie ahead for three globally important countries in 2017—and how the economic fallout from their coming crises could affect you. Top 3 Economic Surprises for 2017 is required reading for investors and concerned citizens alike. Get your free copy now.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in