U.S. Federal Debt Held by Public As % of
Source: OMB, Capital Alpha Partners
Net Interest Outlays As % of GDP
Source: OMB, Capital
Implied Interest Rate on Debt Held by the
Source: OMB, Capital Alpha Partners
Source: OMB, CBO Capital Alpha Partners
Congress Usually Acts When Deficits > 5%
Source: OMB, Capital Alpha Partners
Penn Budget Project: How Much U.S.
Source: Penn Wharton Budget Model. Oct 2023
Penn Budget Project. Rate Sensitivities
Source: Penn Wharton Budget Model, Social Security Board of Trustees Report (May 2024)
Source: Uppsala University
Why Now? Why Will This Persist?
• Authoritarian regime behavior
• Religious/political extremism
• Failed/failing states – intervention by outsiders
• Relative weakness of U.S. and European militaries. Risk avoidance
• Proliferation of low-cost long-range strike weapons, and networks
Hezbollah-Israel: Different Than 2006
Formosa Invasion Plan 1944—Never
Executed
Warning Signs of Taiwan Invasion
Satellite imagery of PLA force build-up
Frequent PLA exercises
Munitions production surges
Freezes on foreign assets in China, return of Chinese assets in foreign states
Stockpiling of critical commodities, rare earth elements
Psychological preparation of the population for war
General mobilization, “stop loss” of conscripts
Russia as a Military Threat
What does Russia’s military look like in 2026-30?
• Outcome of Ukraine War
• Size of ground forces
• Armor, artillery, air defense, and logistics: ability to conduct offensive combined arms operations against NATO forces
• Ability to learn and change
• Putin or new leadership?
Main weaknesses
• State of Russia Air Force
• Dependence on China
• Economy
U.S. Defense Spending As % of GDP
Source: OMB, Capital Alpha Partners
Source: OMB, Capital Alpha Partners,
U.S. Defense Challenges
Current munitions/weapons stockpiles (this is a global issue)
Time to build major weapons systems (56 months is typical. 96 for attack submarines)
Inability to rapidly scale production
DoD concepts of operations and acquisition system
The behavior of some major defense primes. Capital allocation
Recruitment shortfalls
Some glimmers of change
• Replicator, “Hellscape”
• DIU and defense tech
Source: Gallup
U.S. Defense at Higher Levels of GDP
Source: Capital Alpha Partners, OMB
Global Market Verdicts on Defense
Thoughts & Provocations
Where’s the tipping point between national security/existence and sound fiscal policies?
Are “long wars” back?
• who fights them?
• who supplies them?
Where will defense contractors and defense market segments be “disrupted?” (autonomy, unmanned, networks)
End of New START and its implications for global security
Will nuclear weapons proliferate as states look for cheaper security?
Do markets understand risks from wars over Taiwan, Russia/Eastern Europe, and Israel?
Survivor Bias, But...
Source: “Which Stocks Generated the Highest Long-Term Returns” by Hendrick Bessembinder. July 2024