As external events spin beyond control, investors who prudently increase exposure to the defense and aerospace sectors may actually profit while the Obama administration ineptly and inexorably stokes World War III.
The keys to successful investing during these profoundly dangerous moments include patience, thorough analysis and concentrating most on mitigating risks. Securities of well-run and properly capitalized defense and aerospace contractors may hold appealing prospects for those with medium- and long-term investment horizons.
Defying Congress, the Constitution and the electorate, President Obama now provokes hostilities with Russia over territories once integral to the Soviet Union, foments instability throughout the Islamic world and challenges China in the Pacific — all before formally declaring a single war.
Without meaningful public debate or effective oversight, our commander in chief behaves like an arsonist dressed as a fireman. He simultaneously fans geopolitical flames while selling himself to the gullible as an anti-war Nobel Peace laureate.
America and our rising adversaries may pull back from the brink starting this week on the 13th anniversary of the Sept. 11 terrorist attacks. Russia and China may conceivably resist temptation to extend their reach and influence as America flounders.
But more likely, continued rush toward global conflict could spell opportunity for investors willing to increase their exposure selectively to the military-industrial complex, and decrease exposure to other industries that may suffer when consumer demand inevitably slumps.
Can America finance World War III
We may not be able to fathom humanity’s loss in another protracted global conflict, but we can contrast defense spending during the peak of World War II with recent levels to discern how much higher they might rise should the worst occur.
Data available online from the Commerce Department’s Bureau of Economic Analysis in its national income and product tables allow us to measure total military spending as a percentage of private labor income (private-sector wages plus proprietors’ incomes).
In 1944, U.S. military spending was 86 percent of private labor income. In contrast, the highest-level military spending reached from 2006 to 2013 was 13 percent of private labor income, in 2010.
If America were to ramp up defense expenditures to reach World War II levels as a percentage of private labor income, we would need to increase from 2013 levels ($770 billion) to $6.2 trillion.
The United States is far more constrained financially this year than it was in 1945, after it helped win World War II.
As of year-end 2013, participants within the American economy (governments, financial institutions, businesses and households) owed $56 trillion, according to estimates by the Federal Reserve System (our central bank). This debt load was 7.7 times private labor income in 2013.
By comparison, America’s total debt at the end of World War II was just 3.1 times private labor income. Would the American government stretch for years to finance whatever spending is required to prosecute World War III?
As one temporarily retired statesperson might say: “You betcha!”
The trouble is that most financial institutions, businesses and households would have to reduce their borrowing and annual purchases, so many businesses outside defense and aerospace likely would suffer, hurting the traded values of their common shares.
Do your own homework first
Experienced, astute investors perform their own research and analysis before they buy or sell securities, concentrating upon relative valuations.
One metric worth considering is scale, measured in terms of the number of employees and in how much free cash flow the company regularly generates on a per-employee basis.
Another factor worth considering is whether a company in which you might invest could be acquired. Here, the largest companies are the least likely to be taken over.
You should never rush to invest, but you should start forming your own views concerning publicly traded, American defense and aerospace contractors.
• Charles Ortel serves as managing director of Newport Value Partners (NewportValue.com), which provides economic research to executives and to investment firms.