November 5, 2011
REVERSION TO THE MEAN:
Why Defense Stocks Could get Crushed in Coming Years (David Sterman, 11/05/11, Townhall)Cuts in military spending already have the support of most Democrats, but a rising number of deficit hawks in the Republican Party are willing to trim Department of Defense (DoD) spending as well. Still, a negotiated budget will be far friendlier to the DoD than the automatic cuts that may take place on Nov. 23. How much are we talking about? About $454 billion from the next DoD budget. That's more than one-third of all planned automatic cuts that would take place. And these cuts come on top of $350 billion in previously agreed-upon cuts as a result of this summer's budget agreement.
The number of soldiers on active duty would likely have to shrink, but it's impossible to quickly shed tens of thousands of soldiers, shutter dozens of military bases and withdraw from key strategic regions around the world. This is a long-term possibility, but not a short-term one. Instead, look for the budget axe to come down hard on defense contractors, all of whom live off lucrative contracts to build billion-dollar planes, ships and security systems. Merrill Lynch says spending by defense contractors will shrink 3.3% annually for the next five years -- and even this number may prove optimistic. Defense spending has risen from 3% of gross domestic product in the 1990s to a current 4.8%. A return to that 3% level represents a 35% drop.
Merrill's analysts note that since Operation Enduring Freedom began in October 2001, defense and security spending has risen 74%. "In our view, this defense budget trend is unsustainable considering the current political and economic backdrop. We expect the budget to decline and revert to the mean, particularly as our operations in Iraq and Afghanistan wind down."
There's a big old peace dividend coming with the last ism defeated, one of the reasons that deficit hysteria is so silly.
Posted by oj at November 5, 2011 6:25 PM
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