The Case for a Defensive Allocation

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Over the last six months, my firm has skewed its portfolio towards defense companies. We have done this intentionally. The world appears less safe today than at any time since the Berlin Wall came down. After 9/11 the world was united to fight terrorists. Even Russia – our Cold War foe – reached out to help the U.S. fight the terrorists who attacked us.

Fast-forward two decades. We live in a drastically different world.

The resurgence of nationalism had started to create cracks in attitudes about global trade, especially in the U.S., before the pandemic. The pandemic has just widened those cracks as it exposed fragilities in global just-in-time supply chains and unearthed a helpless feeling of discomfort when we realized that we rely on the kindness of strangers to manufacture such simple items as face masks. Bringing manufacturing back to the U.S. (or at least diversifying it away from China) is now about a lot more than jobs; it is an issue of national security.

Globalization led to shared interests; localization leads to an “us versus them” mentality.

China’s economic ascent, though based on a shaky foundation of debt and the biggest real estate bubble the world has ever seen, nevertheless presents a fresh challenge to U.S. global dominance. That ascent has continued much longer any rational person could have imagined. That is what you can get when you have an authoritarian regime controlling the economy, with the ability to borrow in its own currency. At some point this will not end well, but that is a topic for another time.