The Fluid War Scenario

As the brutalRusso-Ukrainian war continues unabated, Ukrainian forces are receiving aplethora of US/Nato and western allies military aid that have kept the Russianmilitary from seizing most cities, notably the capital Kyiv. As a follow-up tomy SA article The US DefenseIndustry’s War Stimulus published 2 February 2022, three weeks before the Russian invasionof Ukraine, US defense stocks have performance exceptionally well. I believethat US defense industry stocks are poised to continue their huge gains as theycapture greater global market share.

Russia’s modernizedmilitary, although vastly superior in numbers and firepower to Ukraine’s, has beenstymied by Ukraine’s motivated and determined defenders. The Ukrainians haveutilized the basic but effective, easy-to-use, highly mobile anti-tank weaponsfurnished by US/Nato that include:

·       TheJavelin and Next Generation Light Anti-Tank Weapons (NLAWs).

·       Thelumbering Turkish Bayratakar TB2 drones which rely on electronic innards madein US and Canada.

The Weaponry Demand:Near, Medium & Future

With respect to the immediateneed, Ukraine urgently requires additional military assistance as the Russianmilitary continue their bombardment and advance on Ukrainian cities.

The near futureneeds are the manufacture, inventory replenishment and export of US/Nato andother western allies’ weaponry to present-day and possibly post-war insurgents.

With respect to the mediumto long-term needs smaller European countries such as the Nato memberBaltic countries and non-Nato countries such as Moldova are fearful of becomingRussia’s next target. Furthermore Middle East countries are wary about Iran,South Korea’s perpetual suspicions about North Korean intentions and otherAsian countries who are suspicious about an emboldened and expansionist-mindedChina. However one assesses the Russo-Ukrainian war, the world has become a farmore dangerous place.

The InvestmentOpportunities

Some of the largest USdefense contractors are Boeing, Northrup Grumman, General Dynamics, RaytheonIndustries and Lockheed Martin that represent the tip of the spear to protectAmerica in an increasingly dangerous world with highly capable and motivatedenemies such as Russia, China, Iran and North Korea.

The link to the barchart entitled The World’s BiggestArms Exportersprovided by the Stockholm International of Peace Research Institute (SIPRI) presents a listing ofthese companies and sales from 2017 to 2021 with the US continuing to be theoverwhelming dominant player in this market.

Huge Gains onRecommended Stocks

Below is a chartindicating the largest firms and their respective NYSE stock tickers from myaforementioned SA article, their specialties and market performance for thepast month almost to the day since the beginning of the Russo-Ukraine war.Every stock has posted exceptionally gains during this period except Boeing.

Below is a chartindicating the available Exchange Traded Funds (EFT) from my aforementioned SAarticle, for those investors who prefer defense industry sectors and theirone-month performance since the beginning of the Russo-Ukraine war, all ofwhich have provided exceptional returns:

 Globally countries havepledged to dramatically increase military spending. The following chartentitled Eastern Europe and AsiaSpend More on Military provided by SIPRI indicates the dramatic increase inspending of Eastern European countries well before the Russian invaded occurredin February 2022.

Double Edge InvestmentSword

As explained in theaforementioned passage, the US defense industry appears to have an increasingmarket share dominance over Russian weaponry sales going forward. Howeverinflation has increased dramatically resulting in present-day fiscal andpolitical challenges.

Firstly for many years the USdefense industry’s inflation projection was based on an inflation rate of 2.2%.Nowadays it’s suddenly closer to 7.7% causing a serious budgetary crimp infulfilling the US defense industry’s needs even beyond the pre-Russo-Ukrainianwar requirements.

Secondly, with the fast-approaching2022 midterm elections, US governmental authorization for an aggressive defensebudget increase in 2023 will be contingent on the political make-up, situationin Ukraine and elsewhere.

There will becompetition in funding, between the US defense industry export needs to supportgovernment foreign policy and civilian demands creating a potential “crowdingout” scenario.

Within the military toughfiscal decision will have to be made with respect to new long-term contractsfor critical materials like aluminum and titanium and prioritizing expensesbetween daily fuel, labor and materiel costs vs R&D.

Even with a generous2023 increase the US defense industry sales may not rise as much asanticipated. Although mainstream news sources dramatize and promotesophisticated, high-tech trophy weaponry, historically conflicts around theglobe rely primarily on small arms. Basic weaponry regardless of origin, is operationallyefficient & effective with the huge price tag and subsequent specializedtraining, maintenance and spare parts.

For this reason Russiansmall arms and basic weaponry may still maintain market share to countrieswhose objectives are internal control against political enemies, restivecitizenry and indigenous insurgents rather than foreign expansionist pursuits.

Thirdly, most countrieswhether democratic or autocratic will have to make excruciating expenditure decisionsbetween weapon and food. As discussed in my recent SA article entitled Buy Opportunities withTightening Global Agriculture Markets published prewar on 19 February 2022articulates this growing global dilemma. Governments will have to make the mutuallyexclusive choice between mitigating the short-term internal security threat ofcivil unrest or medium-term hostile threats from a nearby rival country.

Conclusion

For the aforementionedreasons the US defense industry, as the tip-of-the-spear, vanguard of global democracy,have convincing arguments in persuading and receiving additional governmentfunding for both present-day and near future requirements. For this reason Icontinue to be bullish with respect to US defense industry investments.

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The Cerulean CouncilLLC is a NYC-based think-tank that provides prescient, beyond-the-horizon,contrarian perspectives and risk assessments on geopolitical dynamics andglobal urban security.