The Forever Investment Series, Vol. 3: Play Defense and Profit

By TradeSmith Editorial Staff

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With the delta variant of coronavirus now sweeping across the United States, we face new challenges for the economy.

We may see life grind to a halt yet again in some U.S. states. And we could easily see another pullback in the markets as a result.

Yet even with another wave sweeping the nation, it still doesn’t feel that life ever got back to normal.

Take the Olympics, for example. Remember, these Olympics weren’t supposed to happen this year. In 2020, the International Olympic Committee (IOC) moved the event back a year for the first time ever.

The same happened to the European Cup in soccer. The same goes for countless concerts, festivals, conferences, and other events.

Companies cut back on spending and workers. Budgets were changed at Fortune 500 companies and every mom-and-pop shop that you know.

All except for in one industry.

There were no cuts to defense spending. And those stocks performed very well over the last year.

So, what does that tell you about the market?

You should always play defense.

There’s Always Money in War

Last year, the world’s governments spent a whopping $1.981 trillion on their militaries, according to the Stockholm International Peace Research Institute (SIPRI).

That’s up 2.6% from 2019 and the highest number on record.

That’s despite the pandemic sending global GDP down by 4.4%.

So even as the pie was shrinking, countries around the world beefed up their militaries.

The U.S. alone accounts for 39% of the world’s military spending.

And SIPRI says we boosted our defense budget year-over-year in 2020 by 4.4%.

Even the world-stopping COVID-19 pandemic can’t stop security spending.

Because even before COVID-19, the world was getting tenser.

In Asia, China has been growing its military budget every year for 26 years running. And it’s using its forces to put more and more pressure on Taiwan, which it claims to own.

Chinese jets and naval vessels have been breaching Taiwan’s borders to send a message. One of President Xi Jinping’s missions in recent years has been to reunite Taiwan with mainland China under a “One China” principle.  

But China is flexing its muscles elsewhere, too. In 2020, dozens of Chinese and Indian soldiers died fighting each other in the Himalayas.

That event might seem remote. But at stake are crucial trade routes that could make or break China’s influence in South Asia.

In the South China Sea, China is building military bases on disputed islands.

The Chinese Navy scares away ships fishing in international waters almost daily.

One-third of all global shipping goes through the South China Sea. So China’s power play there is a clear attempt to secure its own trade – and threaten the control of the trade of others, too.

The American Initiatives

America is responding by building up its military presence in the Pacific region.

This trend means more cooperation with India and closer ties with Japan’s military.

In May 2017, we even supplied Vietnam’s coast guard with six patrol boats. This was part of a broader attempt to bolster the country against China’s rising presence.

This goes to show how quickly a common enemy can make you forget past disagreements.

And let’s not forget about Hong Kong, Britain’s former colony. The British handed the city back to China in 1997. At the time, China agreed to keep the place a democracy until at least 2047.

Instead, in June 2020 China imposed a “national security” law on Hong Kong. Despite its name, all the law did was make any criticism against China illegal.

China has arrested countless journalists, scholars, students, and politicians. Others have fled.

As a result, South Korea, Japan, and others are boosting their defense budgets. In fact, China recently threatened Japan with a nuclear attack should it interfere in Chinese politics.

Things elsewhere are tense, too.

In 2014, Russia invaded Ukraine and annexed Crimea. At the same time, it also started a low-grade rebellion in two eastern Ukrainian provinces.

Fighting there continues to this day in what is a proxy war between the West and Russia.

Nearby leaders in countries like Poland, Lithuania, Estonia, and Latvia are nervous. All four nations have experienced Russian invasions in the past. To no one’s surprise, all four countries responded to Russian military maneuvers by boosting their defense spending.

In the Middle East, Syria’s civil war continues with no signs of stopping.

In Africa, Ethiopia has descended into a civil war. Libya’s civil war seems like it may finally be ending. Unfortunately, that has pushed Libya’s jihadists to other countries.

In Chad, those jihadists managed to kill the country’s president in battle. In Mali, the jihadists have weakened the government so much, the military staged a coup. Twice. In a single year.

In both of these African countries and elsewhere, European forces are helping fight the jihadists. No one wants another ISIS that can once again launch terrorist attacks to Europe and beyond.

Europe also wants a stable Africa to stem the tide of refugees coming to its shores.

For similar reasons, the U.S. is looking to increase its military aid to South America.

Industries Positioned to Profit

All this spending will take many forms.

There’s money for guns, tanks, and ammo. But there’s also opportunity in sophisticated drones and electronic warfare systems that jam enemy communications.

Both are crucial tools in the conflict in eastern Ukraine.

There’s also another kind of electronic warfare.

I’m talking about the big increase in cyberattacks on businesses, hospitals, and pipelines.

After all, with America responsible for 39% of all defense spending, the probability of a direct attack is low.

Instead, enemies like Russia and China are looking for other ways to hurt us.

Take the May hack of the Colonial Pipeline system. Backed by Russia’s military intelligence service, those hackers stole 100 gigabytes of data.

They also shut down the pipeline that supplies much of the East Coast’s gasoline and jet fuel. And demanded a ransom of $4.4 million while they were at it.

To be paid in Bitcoin, of course.

The company ponied up, but the tool the hackers gave was so slow that it didn’t matter anyway. The pipeline system was down for a week, causing fuel shortages.

At least the FBI was able to recover most of the money.

But the Colonial Pipeline hack is just one example of the scourge of these ransomware attacks. According to Israeli cybersecurity company Varonis, a ransomware attack happens every 11 seconds.

Often, the targets have been hospitals. Because of the COVID-19 pandemic, hospitals were more critical than ever last year. Hackers, sponsored by China or Russia, took advantage.

The U.S. health care industry lost an estimated $20.8 billion to 92 ransomware attacks in the last year alone. The attacks hit 600 hospitals and affected 18 million patients, according to Varonis.

That number was a whopping 470% higher than in 2019.

But Russia and China have been hitting some higher-profile targets, too.

Last year, Russia-backed hackers managed to breach three software companies. They then used their software to piggyback into their primary targets.

They ended up with access to 11 federal departments, including the Department of Defense and Department of Homeland Security. Other targets included defense contractors, the British government, and even NATO.

The hack lasted some eight months, ending in December 2020. This was the worst case of cyber espionage ever.

But just one month later, China-sponsored hackers breached Microsoft’s email service. This gave them access to emails from at least 30,000 Microsoft customers, including both private companies and government agencies.

The truth is, this won’t stop. The rewards for the hackers are just too great. They keep making money with their ransom demands. Meanwhile, their government sponsors get access to valuable information.

So it’s time we adapt. Defense contractors help fill our needs for physical defense. But to protect us from virtual dangers, we need cybersecurity companies.

Tomorrow, I’ll dig into a few cybersecurity stocks that stand out, according to TradeSmith Finance. I think you’ll enjoy this list of stocks to buy to take advantage of this critical, long-term trend.