War! What Is It Good For? Absolutely Your Pension

As seen in this month’s issue of Master Investor Magazine.

There’s a Scandinavian theory that if a war is inevitable then postponing it will simply make it all the fiercer once it comes. In other words, peace comes at a price. And one we may not think is reasonable if we could be presented with the data. I wonder if, given the choice, Tito would have kept peace in the Balkans all those years if he could have sorted things out in the 1940s with much less bloodshed than happened after his death?

I have a theory that, whether war is inevitable or not, global peace – indeed any peace – certainly does come at a price. In fact, global peace is probably unachievable. Living as we do in a very sheltered and charmed environment here in the west, whatever your circumstances, it’s all too easy to think that wars are something that happens elsewhere and really should be stopped. After all, it’s not like we’re causing them! It’s certainly nothing to do with us. Well that’s just naïve nonsense. But that’s ok.

The UK, that is a de facto ‘we’, is a major arms exporter. So is Sweden by the way, as well as France and Germany. The UK was responsible for 4% of global arms deliveries in the period 2009-2013 (according to SIPRI). And globally defence is a growing business. Not only does it provide around 200,000 jobs for Brits, but of course if we didn’t sell these arms someone else certainly would. So even if we stopped defence activity here, it would serve only to make us feel smug, it wouldn’t actually change anything in the real world. Oh, and it would also serve to make 200,000 unemployed and impact the ‘real functional expenditure’ of over £35 billion. That is the reality not the dream.

I’m a big fan of Machiavelli. At a time when much of the preoccupation was with now defunct (did you but know it) superstitious rubbish, he wrote a manual for success which is still valid today. Hats off for Niccolò. I bet he wouldn’t have considered any place for the ‘Geneva Convention’! A ridiculous set of rules that offers no solution to your being disadvantaged by your opponent ignoring them. No. Machiavelli came out with these wise words, noticeably absent from the GC: “If an injury has to be done to a man it should be so severe that his vengeance need not be feared.” (The Prince)

And to think that we can live without arms and without some sort of military, is to say we can live without a police force and just ask everyone to behave nicely.

Countries around the world are becoming nervous for whatever reason, and we don’t need to know or care why as investors. As a result they are tooling up. Even Japan is liberalising its laws on arming and just this week China got all bent out of shape because Japan enacted a law allowing them to deploy Japanese military overseas. Ironically, China itself has been arming at an alarming rate, and may well become the most heavily armed country on Earth. Mind you, a Republican in the White House won’t let that happen, I dare say, and statistically that’s what there’ll be next year after the election.

As much as people moan about cuts (even though we all knew the mid-noughties were too good to be true) there’d be a lot more cuts if you weren’t reading articles like this in the Guardian on 13th July that says: “The Government has issued more than 3,000 export licences for military and intelligence equipment worth a total of £12.3bn to countries which are on its own official list for human rights abuses.” Surely the best business in the world must be ‘glass houses’, because we all live in them.

And yet, with all these arms about, it seems you are less likely to be killed in conflict today than at any point in history. Perhaps they actually work as a deterrent after all.

Mind you, as we move forward, more and more capability is put in the hands of smaller and smaller nations and groups and at a decreasing cost. You can 3D print a firearm. It’ll probably kill you if you fire it, but some don’t care. Today I read that US arms manufacturer Raytheon are manufacturing missile parts using 3D printers, and they say it won’t be long before the whole missile can be 3D printed.

So how is this good for your pension? Given you’re not that likely to be killed in conflict, rising life expectancy, and especially if interest rates stay low for decades (they have in Japan you know), you’ll be needing as big a pot as you can get. A diverse defence portfolio in your arsenal is my suggestion for a bullet proof future. Countries keep arming, either to keep up with Jones-land, or because it seems lots of ordnance has a ‘best before’ date these days.

I quite like the combo of commercial aircraft and defence. Boeing is an obvious contender as is Lockheed Martin. Both companies have great looking charts, with the obvious caveat that we’ve just seen six years of rising US markets. I think they’re worthy of consideration. iShares do a DJ US Aerospace and Defense product listed on NYSE MKT, which has a chart to die for (counter-productive, and I use it only as a figure of speech).

There are domestic defence manufacturers if you don’t want to deal with currency risk, or if you simply don’t want to see defence spelt defense. BAE Systems (BA.) has a chart that looks a bit like the FTSE 100 chart, which regular readers will know I dislike immensely. However, it is a little more bullish rather than range-bound, but equally has struggled to make a decent ATH. It is still in an uptrend on this current leg of the bull market. The worry going forward is weakness in the UK and that the recent top might be a precursor to a head and shoulders forming in coming months, likely to be a feature of the whole market if it does. Rolls Royce (RR.) has problems and I wrote about them in a blog post on July 15th. Their chart looks awful! The old adage (“I’d rather be sad in Rolls Royce shares than be happy in Morrisons”) doesn’t apply to the shares.

I take the view that our prosperity comes at the expense of others. Someone somewhere is sacrificing the lifestyle we have to provide us with the lifestyle we have. To be more accurate, lots of people are sacrificing on behalf of each of us. They probably don’t realise that’s what’s happening, but it is. It’s quite axiomatic if you think about it. We all have many times our fair share of global wealth so it must be coming from somewhere. You may not like how our lifestyle is paid for but while there’s music and moonlight and love and romance let’s spend the money on defence.

* Global arms sales $1.702 trillion per year (statista).