Don’t Worry, the Cold War Is Still on and the Next Stock Market Crash Has Been Delayed
At Lombardi Letter, I’ve ‘enthusiastically’ embraced the defense industry and its stocks on Wall Street. Therefore, it was not without some trepidation, fearing a defense sector-led stock market crash, that I followed the Trump-Putin summit in Helsinki.
Would we get a stock market crash in exchange for a slightly better Washington-Moscow relationship?
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Over the past two years, the financial performance of big military contractors has pushed defense stocks to record highs. It’s no accident that this bullish phase for the likes of Lockheed Martin Corporation (NYSE:LMT) and its military-industrial rivals has coincided with an especially bad period for U.S.-Russia relations.
The détente on display after the longer-than-expected talks between U.S. President Donald Trump and Russian President Vladimir Putin was downright dangerous.
The two leaders appeared to have gotten along. No specifics were announced though; neither Trump nor Putin hinted at major concessions on key geopolitical crises.
Yet, it’s evident that the foundations for a resumption of dialogue between Washington and Moscow have been established. Or rather, were established.
Not 24 hours after Trump expressed satisfaction with Putin’s assurances that Russia did not hack the 2016 presidential election, the U.S. president made a 180-degree turn on the Russia-meddling allegations.
“The president and his administration are working very hard to make sure that … Russia is unable to meddle in our elections, as they have done in the past,” said White House Press Secretary Sarah Huckabee Sanders on July 18. (Source: “White House attempts to clarify Trump’s response to whether Russia is still targeting U.S. elections,” The Washington Post, July 18, 2018.)
Sanders added that the U.S. administration believes that a Russian threat still exists and that steps have been taken to address it.
In a few simple words and tweets, the U.S. president was persuaded to assure the establishment (or what some call the “Deep State”) that a confrontation with Russia remains on the table.
Trump backed down from statements that both contradicted and supported CIA and FBI officials over the nature and extent of Russia’s supposed threat.
Thus, after meeting Putin, shaking his hand, and appearing to take Putin’s version of 2016 election events as the correct one, it seems all is well.
Best Thing About Trump Is He Didn’t Start a War, But That’s About to Change
The Cold War remains at a temperature suitable for serving fine vodka. It’s not yet time for Russians and Americans to enjoy a hot toddy.
That’s one reason investors did not react to the Trump-Putin summit by pulling away from defense sector companies, averting a stock market crash. In fact, defense sector stocks went higher, despite the “threat” of peace.
It appears that the establishment was more willing to accept the opening of a dialogue with North Korea’s Kim Jong-un than the resumption of a dialogue with Russia. Defense sector stocks dropped after Trump met Kim Jong-un in Singapore in June 2018.
Had Trump managed to secure something from Putin or, better, managed not to give anything away, it would have calmed the neoconservative-dominated foreign policy wonks in Washington.
Rather, media pundits, former CIA and FBI directors John Brennan and James Comey, Hollywood celebrities, and journalists have turned the tables on the president.
The Putin Summit Has Become Trump’s First Major Boomerang
Trump and his advisors always knew that meeting Putin, in view of the pestering “Russiagate” allegations, would be a risk. They could not imagine just how risky it would be.
And now, to recover, Trump must undo whatever conciliatory tones he adopted with Putin. Pursuing further dialogue with Russia could cost the Republicans the midterm elections.
By extension, a Democratic-controlled Congress would intensify the pressure on Trump and activate the process of his impeachment.
Politically, Trump may have dug himself deeper into the FBI/CIA quagmire.
On the other hand, defense stock portfolios will benefit to the point of being among the few to survive the next major stock market crash.
Indeed, Trump will have to boost his hawkish credentials, just as President Bill Clinton had to do when the Monica Lewinsky story broke out. Does anyone remember Kosovo?
Trump actively promoted American defense contractors. He made no qualms about the fact that he’s a salesman.
In so doing, he made it abundantly clear why the North Atlantic Treaty Organization (NATO) still exists almost 30 years after the fall of the Berlin Wall and the demise of the Soviet Union. NATO is a tool to encourage American exports of military hardware.
Democrats Are the Ones Screaming for War Now
As it happens, the Helsinki meeting was exactly what the defense sector doctor ordered.
Peace is bad for business. Republicans used to be the party of big military spending. Now, the Democrats have surpassed them in hysteria over the mere chance of a U.S.-Russia détente.
They’re driving the arms race. Moreover, having prepared for better relations with Russia, Trump compensated for any loss to the defense industry by demanding that NATO members boost their spending on weapons.
Trump has received a loud and clear message in two ways:
- If he wants to help the Republicans win the midterms, he must add fuel to the fire of the current arms race.
- If he wants to prevent a stock market crash, demolishing the most successful (on the surface anyway) aspects of his presidency so far, he must shelve diplomacy and ensure that the U.S. has sufficiently scary enemies scattered around the world.
Election Hacking and Russia-Meddling Allegations Remain the Big Game in Town
As for accusations of treason against Trump, take them for what they’re worth.
Those playing the “treason” card against Trump have apparently forgotten the lies about weapons of mass destruction and former Secretary of State Colin Powell brandishing a sample of grandma’s finest yellowcake before the United Nations to build a casus belli against Saddam Hussein’s Iraq in 2003.
It matters little that, after almost three years of accusations and excruciating comments from media pundits, lawyers, the FBI, the CIA, and other acronyms, nobody has produced substantive evidence.
The investigation, moreover, is biased and ineffective because it had a culprit before it even began.
Rather than seek out who or what may or may not have tampered with the U.S. vote, it has focused on sifting through evidence that proves the case against the Russians only.
Then There’s What the Media Missed
Focused as they were on chasing and fueling the “Russiagate” story, the pundits missed an important message that Trump might have delivered to Putin: “Do what you want in your sphere of influence (i.e. Syria) but we’re going to war with Iran.”
That’s the kind of news that defense contractors dream about. And Trump has just brought that dream—or nightmare—closer to reality.
It’s well known that U.S. foreign policy in the Middle East gets much of its influence from Israel and Saudi Arabia. Both countries hold Iran as their chief enemy, and both acquire billions of dollars worth of weapons from the United States defense industry.
Russia, however, has good relations with both Iran and Israel. To maintain this status quo, Putin has assured Trump that he would pull out all the stops to ensure an equilibrium at the border between Syria, Israel, and the Golan Heights .
This is the border where World War III could have started—and where it could still start.
And Trump’s cancellation of the Iran nuclear deal, called the Joint Comprehensive Plan of Action (JCPOA), falls into that logic. It ensures that Iran remains an enemy, encouraging U.S. defense spending.
Another war could trigger another stock market crash. But the defense stocks will continue to fly.
