One of the themes I've addressed regularly this year as the U.S. political campaigns progress is how federal outlays for 2018 will be allocated. The two fundamental issues have been the competing narratives for increased defense spending and the promise of the creation of a federal infrastructure program.
This is the classic "guns and butter," with both presidential candidates promising to deliver both spending on national defense and the domestic economy.
Investors, however, have made a different decision that should be sobering for everyone.
Although the infrastructure stocks performed well during the first half of this year as global economic, political and military tensions have increased, investors have decided that, regardless of the political rhetoric, infrastructure is not going to get funded because defense spending must be.
This is what happened in 2014 as well.
In his State of the Union speech that year, President Obama announced his intention to pursue a federal infrastructure investment program, as I discussed at the time in the column, "State of the Union Speech Falls Flat."
A few months later, Russia's President Vladimir Putin invaded Ukraine's Crimean Peninsula, and that dashed any hopes of diverting federal spending from defense to domestic infrastructure.
The infrastructure stocks immediately crashed, falling by an average of about 50% across the sector over the next two years, and didn't start rebounding again until early this year, as both Donald Trump and Hillary Clinton began promising a federally funded infrastructure program.
There are two fundamental problems with infrastructure spending, though.
First, in order for it to enter the "Overton Window" of political possibility, a unique and rare global economic situation has to be present. That is that the U.S. has be suffering from domestic economic malaise, while the rest of the world is relatively peaceful and productive.
But since the U.S. is the world's marginal consumption engine, when the U.S. is suffering economic stagnation, so is most of the rest of the world. That gives rise to military conflicts that preclude the U.S. from diverting funds from defense spending in order to fund domestic infrastructure spending.
It's the Catch-22 for infrastructure that I was hoping would not occur this time.
Second, even if that rare situation arose, a federal program extraordinarily would be difficult to implement because -- outside of the U.S. highway system, which is already funded by the Highway Trust Fund, which is funded with the federal 18.4-cents-per-gallon gasoline tax -- infrastructure is a state-level issue.
As global political tensions have risen, largely as a result of global economic malaise, investors have decided that, once again, infrastructure spending will have to be punted and fiscal stimulus will come by way of increased defense spending and war preparations.
In the past three, months the largest government contractors have soared and the infrastructure stocks have tanked. I don't think that's going to reverse, regardless of who wins the election or what the degree of gridlock I wrote about yesterday ends up being.
Bizarrely, in my opinion, the largest government contractor, Lockheed Martin (LMT) , is down by about 9% in the past three months. I don't think that will last, though. Raytheon (RTN) is down by about 2%, but I don't think that trajectory will continue either.
On the other hand, the infrastructure companies I've written about this year are all down over the same time period. Jacobs Engineering (JEC) is down about 7%, Fluor (FLR) down 20%, and Chicago Bridge & Iron (CBI) 26%.
I don't expect those trends to reverse either.
The U.S. and the rest of the world appear to be on an expanding war trajectory again.
I discussed the history of the war as economic policy last December in the column, "When All Else Fails, Go to War."