Donald Trump Presidency Could Use This to Boost the Economy Lombardi Letter 2017-01-10 11:27:54 Donald TrumpDonald Trump PresidencyChinadefense stocksmilitary industrial complexstealth fightermilitary industrial complexLockheed MartinSukhoi T-50 Under the Donald Trump presidency, an arms race with China is likely. Higher U.S. defense spending will fuel the industrial military complex. U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/01/Donald-Trump-150x150.jpg

Donald Trump Presidency Could Use This to Boost the Economy

U.S. Economy - By |
Donald Trump

Defense Spending & Arms Race with China Could Be Key Aspects of Donald Trump Presidency

More than Russia, China is the country that the United States should be watching. The Donald Trump presidency could be right to switch foreign policy focus away from Moscow and toward Beijing. An arms race with China is likely, and higher U.S. defense spending will fuel the military industrial complex.

The Chinese invented gunpowder after all. Is it any surprise that China is already the second-largest arms manufacturer? As for your investments, defense stocks will make more sense than ever in 2017 and beyond. China’s race to rival the United States in arms production capability will only encourage the Donald Trump presidency’s goal of improving the U.S. military.

If you hold Lockheed Martin Corporation (NYSE:LMT), Boeing Co (NYSE:BA), or Northrop Grumman Corporation (NYSE:NOC)—just to mention a few—China’s rising superpower ambitions can only help your portfolio. That’s because of Donald Trump’s reaction to China’s militarism.

The new Donald Trump presidency has set the tone of his relations with Beijing. He has chosen a devil-may-care attitude. Trump has spoken directly to Taiwan’s president on the phone—a diplomatic faux pas for anyone serious about diplomatic ties to China. He has also made China a frequent target of his tweets.

China’s Army Has Shifted to Focus on Strength by Technology 

The “People’s Army of Liberation” (PLA) (the official name of the Chinese army) is relying less on that seemingly infinite Chinese resource of manpower, and relying ever more on technology. While military analysts and diplomats think about what China’s military escalation means, the U.S. military industrial complex cannot—and will not—stand idle.

Whatever you think about the military industrial complex and President Eisenhower’s warning about its political power, if you are interested in your investment portfolio’s performance, China’s buildup is good news. In 2016, U.S. military spending as a percentage of gross domestic product (GDP) was 3.61%, the highest in the North Atlantic Treaty Organization (NATO). China’s military budget is roughly about two percent of its GDP, although it’s difficult to obtain reliable figures.

China has increased its military spending for five consecutive years. Despite its lower GDP projections for 2017, China plans to increase military spending yet again. In turn, regional rival powers like Japan have also been raising military expenditures. Indeed, China’s militarism has been fueling an ever more heated arms race in Asia. That too benefits U.S. military contractors and defense stocks.

The situation generates more demand for a host of American-made hardware, including the “F-35” fighter jet.

Rise of the Chinese Military Industrial Complex Could Benefit U.S. Defense Stocks

In response to China’s buildup, the Pentagon will have a significant excuse to request—and obtain—more funds to spend on improving the U.S. military’s hardware.

China is developing new drones, jet fighters, aircraft carriers, and bombers. Take the “DF-ZF” as an example. It’s a supersonic missile that can travel at a speed of Mach 10. That’s 7,000 mph or 10 times the speed of sound. (Source: “China Successfully Tests Hypersonic Weapon System,” Popular Mechanics, April 28, 2016.)

If desired, Chinese authorities can ask that it be deployed with a nuclear warhead.

The U.S. has an equivalent, which is (on paper) a faster alternative, but it will take longer to develop.

China also has the “AG600,” the world’s largest seaplane in the world, the “J31” stealth fighter, and the “Xian Y-20” military cargo plane (similar to the “C-17”). Such advanced manufacturing techniques as 3D printing are already commonplace to ease their production.

China Has Shed its “Junkyard Army” Image

Just a few years ago, observers described China’s military as a “Junkyard Army.” That’s because so much of its military equipment was recycled from second-hand Russian-made hardware. Now the People’s Republic of China is the second-largest exporter of military hardware. China is developing a power capable of putting a strain on U.S. forces.

This philosophy also stretches to the type of recruits that the PLA wants to attract. Instead of focusing on strong youths from the countryside—as in the past—China’s military is changing the rules to encourage university graduates to apply in increasing numbers. Technology is key in China’s military.

Until 2011, two-thirds of Chinese conscripts had to come from the countryside. It was one of the many shortcuts to a lifetime of secure employment for young people. The government, in turn, found it to be a useful strategy to speed up urbanization. Now, nerds, such as those featured in the popular TV series The Big Bang Theory, are more welcome. (Source: “China’s PLA Gets Smarter (and Bigger, Faster, Stronger),” Foreign Policy, August 9, 2016.)

The PLA is becoming more and more high-tech. Therefore, it does not need large units of soldiers. The battles of the future will no longer need to employ hundreds of divisions. Rather, it will need better technology. Not surprisingly, China’s defense budget has risen since 1988.  That said, the Pentagon will also invest in counter-intelligence technology.

Given the designs, from airplanes to tanks and other equipment, China will be tempted to copy more intensely as it accelerates its technological development. Some of the results have also shown that the execution falls below the promise.

China’s Stealth Fighters & Aircraft Carriers: Here’s What it Means for U.S. Defense Industry

China’s “Chengdu J-20” stealth fighter, which flew for the first time last November, proved to be noisier than any stealth plane has the right to be. Earlier that year, Su Bin, a Chinese engineer, was charged with having stolen U.S. military secrets related to the “F-22,” F-35, and “C-17” designs. (Source: “Su Bin deserves respect whether guilty or innocent,” Global Times, March 24, 2016.) Cloning remains a concern.

Two Chinese companies that the Pentagon will observe closely are AVIC and China North Industries Corporation (more commonly known as Norinco). The latter could have outsold Lockheed Martin and Boeing combined last year. Norinco makes pistols and machine guns, especially low-cost ones. It also offers cutting-edge technology: drones, for instance.

AVIC designed the Chengdu J-20 and the “Shenyang J-31” stealth fighters and the invisible fighter, which should become operational by 2020. China’s exports are meant to entice armies of developing nations from Pakistan to Sub-Saharan Africa, where wars are frequent and where China enjoys an ever-rising commercial advantage over the U.S. and Europe.

A smaller, but no less important player, is the China State Shipbuilding Corporation, which recently launched the first Chinese aircraft carrier. Trump’s assessment of the multiple Chinese threats to the U.S. military will be unequivocal. It’s not just about Washington going to war. China’s growing military threat can be sold politically.

Trump’s psychology and nationalism will prove a better prospect still for U.S. defense stocks. The U.S cannot allow China to outshine its biggest symbol of technological and geopolitical strength: its military industry. It’s a question of image, which Donald Trump cares about. Meanwhile, China is challenging the U.S. as never before.

China has at least two more aircraft carriers under construction. It has modernized its naval fleet (a crucial concern to U.S. allies like Japan and South Korea) to such an extent that it’s almost on par with the U.S. Navy. (Source: “China Naval Modernization: Implications for U.S. Navy Capabilities—Background and Issues for Congress,” Congressional Research Service, June 17, 2016.)

Not to be outdone, Russia is close to launching production of the “Sukhoi T-50.” This jet fighter boasts three-dimensional thrust vectoring, radar absorbing materials, and tremendous maneuverability.

It will take years to achieve, but it’s not procrastinating on achieving this goal. Technology is the centerpiece. The United States, and Donald Trump, cannot afford to not respond. The Chinese are aiming for higher-quality equipment. It’s not just for actual defense purposes; it’s to achieve a competitive advantage in the international weapons trade by being cheaper—but just as effective as—U.S. or European equivalents.

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