Best Defense Against Next Financial Crisis Is Defense Stocks
After the most hotly contested midterm elections since 1980, I am certain that America has come out more divided and that another financial crisis is unavoidable.
The Republicans gained in the Senate and the Democrats won a slight—really slight—majority in the House. Nevertheless, for ordinary Americans, the results make little difference.
Moving the conversation to the present and the markets, no matter what happens next, defense stocks like Boeing Co (NYSE:BA) represent the best bet against a financial crisis in the long term.
Something that rock singer, composer, and filmmaker Frank Zappa once said can help Americans make sense of it all: “Government is the entertainment division of the military-industrial complex.”
And Zappa would know, since his father, a chemist and mathematician, worked for said military-industrial complex.
The Defense Sector Always Wins, and Investors Win With Defense Stocks
Ultimately, American voters only had the opportunity to freely choose one of two options. Both options represent the same big interests, the biggest of which is the military-industrial complex. That’s unless things radically change—and it would take a revolution, rather than an election, to accomplish real change.
After all, the elections were about everything except policy.
Some Iranians, presumably, hoped for the Democrats to win at least one of the two Houses, if not an outright “Blue Wave.” That’s because President Donald Trump and the Republican-controlled Congress (until next January)—renewed sanctions against Iran on November 5, the day before the midterm vote.
Some naively think that the Democrats will lift the sanctions against Iran or soften Trump’s belligerence.
Instead, what we can expect now is simply that the Democrats will obstruct the White House on all issues, establishing total gridlock.
Meanwhile, the Republicans still have enough clout in the Senate to move from sanctions on Iran to direct U.S. military intervention. As for the present, Iran and the United States are already in a de facto economic war.
The Middle East Isn’t Going Away—And Don’t Forget China
The Jamal Khashoggi affair has done little to shake historic and deep U.S.-Saudi ties. Thus, Iran could challenge the U.S. by targeting exports of Saudi oil in the Strait of Hormuz, just as it did in the 1980s.
The Middle East continues to serve as a geopolitical arsenal ready to blow at the slightest provocation. Moreover, having raised the stakes with China, Trump has revoked a 1987 nuclear weapons agreement that President Ronald Reagan signed with his Soviet counterpart, Mikhail Gorbachev.
Some senior U.S. military officials, Lt. Gen. Ben Hodges among them, expect full-on war to break out between the United States and China in the next 15 years. (Source: “US war with China is likely in 15 years, retired general says,” Military Times, October 24, 2018.)
That expectation goes beyond any partisan politics.
China wants to become a total superpower and, sooner or later, its ambitions are going to interfere with the United States’ efforts to remain a superpower.
Therefore, regardless of who’s in the Oval Office or in Congress, Democrat or Republican, nobody will dare make significant cuts to the military budget.
As the global situation continues to stoke fear, the defense industry will continue to benefit from contracts. Accordingly, defense sector stocks should survive the many tensions and problems that will affect the markets.
If the Americans and the Chinese come to blows in a decade or so, the markets will be due for at least one major crash and financial crisis in that same period.
Electoral Results Don’t Change the Market Outcome
As for the economy, there’s nothing to ensure that Trump’s pro-market policies will reap rewards before he’s up for re-election in 2020. Even then, Trump’s policies have exacerbated debt while their fiscal stimulus effects will not last beyond 2018. Therefore, the risk of a financial crisis is high.
A stronger Trump—that is, one who will continue to rely on a pliable and willing Congress—may even attempt to pull off more fiscal stimulus, even as he engages in more aggressive foreign policy, benefiting defense stocks.
He may even begin to earnestly reserve resources for the much-promised infrastructure investment of his presidential campaign. Doing so, nonetheless, exposes Americans to a higher risk of economic collapse.
Trump Risks Overheating the Economy
Trump’s enthusiasm for fiscal stimulus could force the Federal Reserve to become even more aggressive about increasing interest rates. It’s as if the Federal Reserve is the strict parent who finds his/her children caught with their hands in the cookie jar.
And that would only exacerbate the debt problem in a hyper-indebted country like the United States.
Trump already complained about the Fed’s plan to lift interest rates back in October. Thus, he is well aware of the risks. As a last resort, the president could dismiss current Fed Chair Jerome Powell. Yet, such a move would only highlight the fragility of the entire U.S. economy and its reliance on quantitative easing (QE).
Trump could even use his powers to suppress the Federal Reserve.
Political Oversight of the Federal Reserve?
Few Americans are aware that the House of Representatives voted in 2015 for the Fed Oversight Reform and Modernization Act of 2015 (FORM Act), which would allow for greater political supervision of the currently-independent Federal Reserve. (Source: “House passes bill calling for rule-based monetary policy,” Reuters, November 19, 2015.)
Ironically, the Republicans who pushed for the act, which President Barack Obama threatened to veto at the time, did it because they were suspicious of the QE that the Fed had adopted to prevent America from experiencing another financial crisis.
Now those same Trump-supporting Republicans could push the FORM Act (and get it approved) to prevent the Fed from increasing interest rates!
The act clearly endangers the stock markets with higher-risk premiums. It also puts pressure on the dollar and U.S. Treasuries. It’s a move guaranteed to cause market havoc.
MAGA: Make America Gridlocked Again
The midterm election results will do nothing to reduce investors’ risks. Wall Street tends to dislike political gridlock and uncertainty. And that goes double for the stock market, which has become high on fiscal stimulus.
A weakened president will not be able to cut taxes any further to benefit his base. As for infrastructure investments, it depends on how the Democrats choose to play their hand.
The Democrats will likely try to stall Trump’s efforts, keeping a tight reign over the debt ceiling. Trump would become a sitting-duck president, unable to deliver his electoral promises to his base of support, weakening his chances of a second term.
The potential for a financial crisis oozes from any and all electoral outcomes. The stock market betrays its inherent weakness at every threat or hint of an interest rate hike.
The Market Party Has Simply Gone on Too Long and Too Hard
The one assurance from the midterm results is that U.S. military policy, from Iran, to Russia, to China will not change. Geopolitical realities are the one thing that still enjoys a modicum of bipartisan support.
As a reminder, liberals—including Hillary Clinton, Dianne Feinstein, and former Vice-President Joe Biden—enthusiastically supported George W. Bush when he called to invade Iraq in 2002. (Source: “Who voted to authorize force in Iraq October 2002?,” HuffPost, May 25, 2011.)
In other words, liberals in Congress have not failed the military-industrial complex. And the world itself has become more complex.
The confrontations, cold (limited to threats) or hot (involving actual combat), with Iran, Russia, and eventually China are inevitable.
Thus, the best investment you can make to protect yourself from the next financial crisis is the defense sector.