Global Defense - Bombs, Bullets, and Bucks
Jim O'Leary on 2/3/2011 12:00:00 AM
Two weeks ago, U.S. Secretary of Defense Robert Gates visited China with the intent to strengthen defense ties between the two countries. However, the Chinese military’s not-so-subtle timing of the unveiling of its J-20 stealth fighter overshadowed the trip and was intended as a message to the U.S. and the rest of the world that the PRC is on a power trip that goes beyond economic growth (read more). But it is the flush, ever-growing economy that opens China’s budget to endless military spending.
Not everyone has it so good. While defense is a crucial component of any nation’s “musts,” unbalanced expenditures can have financially devastating consequences without deep pockets. With this in mind, China is ‘putting it to’ the rest of the world. And that includes the United States; hence, the in-your-face flaunting of the sleek state-of-the art J-20 ‘Dirty Bird’ fighter with the big red star on its tail.
China is also adding to its increasingly formidable arsenal of Super-Class aircraft carriers that will boost its naval prowess to new heights. The carrier is a refurbished vessel purchased from a then cash-strapped Russia nine years ago and was due to be operational by 2010 (read more). Meanwhile, the United States is, at present, the only nation with functional super-carriers.
China has also announced it is about ready with its game-changing carrier-killer missile, the Dong Feng 21D (read more), which would potentially nullify U.S. military dominance in the South and East China Seas. This maritime region is especially important because of North Korea and disputed interests over Taiwan with China.
National defense is an expensive political proposition. Defense budgeting can be tricky in the face of political controversy, which, of course, is part and parcel of democratic states. One of China’s major advantages in maintaining its military is that the PRC doesn’t have to engage in domestic and internal political discussions on how much to spend when it comes to bullets and bombs. The other major factor at work for China is, obviously, that plentiful coffer endlessly funded by the growing economy.
While bombs and bullets are generally perceived as something bad for the world, making them and selling them clearly has a good business side to it. Global defense spending exceeds more than a trillion dollars annually. U.S. defense and homeland security expenditures account for nearly 5% of GDP. The United States military budget last year was approximately $663 billion, and that excludes the costs of the Afghanistan and Iraq conflicts. Of the $663 billion spent on armament, 90% went to domestic defense industry companies. Those same companies reaped substantial rewards from arms exports. The U.S. leads the world in arms production and sales to other countries. From 2002 to 2009, America accounted for about 40% of global arms sales, far outpacing the next supplier, Russia, at 18%, according to Global Issues data.
As the U.S. continues holding the upper-hand over everyone else in defense spending, China is moving forward at an alarming rate. According to the Stockholm International Peace Institute, Chinese defense spending increased to nearly $100 billion in 2009, from about $59 billion the year before. That put China in second place, leaping far ahead of the UK, France, and Russia, all of whom maintain expenditures ranging from $60 billion to $70 billion.
While China spends and builds from a point of economic strength, most other nations are struggling. Europe is coming off the threat of a severe sovereign debt crisis last spring, with the potential for a new crisis in view. Individual nations in the European Union must balance budgets with great care. Regional self-defense is, in some measure, dependent upon regional economic stability.
As for the United States, despite its superior military, a five-year defense budget reductionof $78 billion was recently announced. America’s might is assured for the moment, but China is mounting a challenge based on its current rate of increase. The Chinese are said to be immeasurably impressed by America’s display of military might and the sophistication of its armaments in the Persian Gulf War --- so impressed that it became a prime motivating factor in its current quest to achieve the power and stature it is now pursuing.
Could all of the recent show-of-force by China be a gauntlet to the ground to see who is capable of being the last man standing at some potentially cataclysmic point down the road? China’s economy grows, while America’s economy slows. It’s not a pretty picture.
Navellier researches investment opportunities around the world. We have successfully managed non-U.S. equity portfolios for over a decade. Our portfolios offer investors exposure to developed and emerging markets around the world through the sound stock selection of James O’Leary, CFA, a 30+ year veteran of the international markets. To learn more about any of our international portfolios, please call us at 800-887-8671 or email Traci Sinclair at email@example.com.
Navellier International Growth
Navellier International Small Cap
Navellier Emerging Markets
Important Disclosures Regarding Navellier's Blogs (updated December 2012)
*Navellier may hold this security in one or more investment strategies offered to its clients.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested.
One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings. Graphs are for illustrative and discussion purposes only.
Although information has been obtained from and is based upon sources Navellier believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date of the report and are subject to change without notice. This report is for informational purposes and is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. Any decision to purchase securities mentioned in this research must take into account existing public information on such security or any registered prospectus.
Past performance is no indication of future results.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Emerging Growth, Louis Navellier's Ultimate Growth, and Louis Navellier's Family Trust, are not based on any actual securities trading, portfolio, or accounts, and the newsletters reported performances should be considered mere "paper" or proforma performance results. (Trades based on the Navellier Family Trust newsletter are based on actual trades.) The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289. Navellier & Associates, Inc., does not have any relation to or affiliation with the owner of these newsletters. As noted above, there are material differences between Navellier Investment Products' portfolios and the InvestorPlace Media, LLC, newsletter portfolios. In most cases, Navellier's Investment Products have materially lower performance results than the InvestorPlace Media, LLC newsletter portfolios and advertising materials claim to have. The InvestorPlace Media, LLC newsletters and advertising materials typically contain performance claims that can significantly overstate the performance results compared to actual results for similar Navellier Investment Products.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months.