They are just shouting themselves in the ass....

Wall Street war games GOP threats to Pentagon budget

By SAM SUTTON

GOP hawks are threatening to lay siege to the defense budget. Wall Street doesn’t know what to make of it.

“We've gotten questions about it from people who normally don't ask about this kind of stuff,” Alec Phillips, chief political economist at Goldman Sachs, told MM on Monday evening, referring to demands by some Republicans for spending reductions that could chop as much as 10 percent from the Pentagon budget. “I’m a little skeptical that a cut that large would actually get pushed through.”

A potential reduction in defense spending could cast a pall on an industry that had become a haven for investors seeking a reprieve from geopolitical threats and a possible recession.

“We are in a secular shift from benign globalization to great power competition.” said Vance Serchuk, the executive director of private equity firm KKR’s Global Institute, “That transition to great power competition will impose new complexities and requirements for capital providers to navigate.” (KKR owns a major stake in Axel Springer SE, the parent company of POLITICO.)

Washington has done everything possible to support that investment thesis. Back-to-back defense spending bills signed by President Joe Biden authorized huge boosts to the Pentagon, and many financiers — including JPMorgan Chase CEO Jamie Dimon — have been cheering for Congress to double down because of the war in Ukraine and looming tensions with China. More money for the military means more money for aerospace and defense businesses.

Newly anointed speaker Kevin McCarthy’s (R-Calif.) deal with conservatives to cap discretionary spending at fiscal 2022 levels — which would wipe out the $75 billion defense increase enacted last month — could complicate that. While the deal doesn’t include any specifics on what that means for the national security spending, fiscal hardliners like Rep. Jim Jordan (R-Ohio) say that defense cuts could be on the table as lawmakers embark on painful negotiations over the federal debt limit.

Share prices of major defense contractors like Lockheed Martin and Northrop Grumman sank over the last several days as investors “wait to see what Congress does and see how this debate plays out,” Dan Clifton, who heads Washington research at the institutional brokerage Strategas, told MM.

“Most people know that the defense cuts are not the base case, but there is a clear risk aversion from investors since these headlines crossed the wires midday Friday,” he said.

The potential threat comes with plenty of caveats. As our Connor O’Brien reports, many Republicans – including the conservatives who extracted some of McCarthy’s most painful concessions — “have sought to quash chatter of Pentagon cuts, noting they could instead look to make reductions from the non-military side of the ledger.”

The Pentagon has plenty of allies on both sides of the aisle, as well as in the Senate, who will put up a fight if conservatives attempt to slash their programs in the coming battle over the debt ceiling.

“The narrative about defense spending being cut back is a bit overblown, since President Biden and the Democratic Senate (not to mention, many House Republicans) are not going to support significant cuts to defense spending, especially in the particular geopolitical context,” said Libby Cantrill, a managing director in PIMCO's portfolio management group who’s in charge of assessing political and policy risks.

Another key caveat?: “The worst case scenario is that defense spending is flat to 2023, although keep in mind that 2023 defense spending represented an increase in spending of 10 percent on a nominal basis relative to 2022,” Cantrill added. “Even under that scenario, spending would continue to be up for the Pentagon relative to previous years.”