Trade-Offs: What Other Things U.S. Defense Expenditures Could Pay For

The U.S. defense spending is the highest in the world. In fact, the amount spent each year is more than the combined military expenditures of the next few countries.

According to the National Priorities Project, US taxpayers paid $528.49 billion for the Department of Defense. Unlike allocations to other areas, allocations to the military in the Federal budget is usually not given much thought by the Congress. The National Priorities Project questions if the country is making the right choices in allocating high portion of the annual budget to defense.

Here is how a dollar paid by taxpayers is spent by the state:

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US Tax Dollar Spending Chart

Source: National Priorities Project

After health spending, the second highest allocation goes to defense. This is not surprising since the military is huge and it takes a lot of money to maintain a world-class military. However some have argued that one way to reduce the burden on American taxpayers is to shift the costs to some of the allies such as Germany South Korea, etc. This way American taxpayers do not have end up footing the bill, for example, to protect South Koreans from a North Korean invasion or Germans from Russia. Countries such as Germany and South Korea are wealthy enough to be able to pay the cost of protection.

The billions of dollars spent on defense could have paid for the following instead:

6.54 million Elementary School Teachers for 1 Year, or
7.13 million Clean Energy Jobs Created for 1 Year, or
9.51 million Infrastructure Jobs Created for 1 Year, or
5.28 million Jobs with Supports Created in High Poverty Communities for 1 Year, or
62.58 million Head Start Slots for Children for 1 Year, or
51.15 million Military Veterans Receiving VA Medical Care for 1 Year, or
15.91 million Scholarships for University Students for 4 Years, or
22.72 million Students Receiving Pell Grants of $5,815 for 4 Years, or
222.93 million Children Receiving Low-Income Healthcare for 1 Year, or
595.33 million Households with Wind Power for 1 Year, or
148.46 million Adults Receiving Low-Income Healthcare for 1 Year, or
367.73 million Households with Solar Electricity for 1 Year

Source: TRADE-OFFS: YOUR MONEY, YOUR CHOICES,  National Priorities Project


ASX All Ordinaries PE Ratio and Dividend Yield Since 1980

Australian stocks have high dividend yields compared to US stocks. Investors starved for income should consider investing in Australia not only for the high yields but also for their dividend stability and potential price appreciation. Historically Australian firms have had generous dividend payout policies and many firms did not cut or reduce dividends during the Global Financial Crisis(GFC) of 2008-09.

At the end of last month Australia’s ASX All Ordinaries Index had a P/E ratio of over 17 and a dividend yield of 4.27%, The following chart shows the historical PE ratio and dividend yield since 1980.

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ASX All Ordinaries PE Ratio and Dividend Yields since 1980 Chart

Source: Market Index


Some of the Australian ADRs trading on the US markets are:

  • Westpac Banking Corp (WBK), National Australia Bank Limited (NABZY), Commonwealth Bank of Australia (CMWAY) and Australia & New Zealand Banking Group Limited (ANZBY)  in the banking sector. All have dividend yields of over 5%.  Australia does not deduct dividend withholding taxes for US investors.
  • Telstra Corp Ltd (TLSYY) in the telcom sector
  • Beverages maket Coca-Cola Amatil (CCLAY)

Note: Dividend yields noted above are as of Aug 26, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long NABZY and WBK

Invest In Foreign Firms To Profit From US Consumer Spending

Some investors not have exposure to foreign companies in their portfolios because of home bias.Others may avoid investing in overseas firms due to the additional risks involved such as political risk, currency exchange risk,  transparency issues, etc. For these investors there is a way to gain from the stability and growth the US consumer spending. This way can be called as “Going abroad to come home”. Basically this strategy involves investing in foreign companies that have substantial operations in the US and derive a big part of their revenues from the US.

Investing in international companies that have a major presence in the US market has many advantages. One advantage is diversification. Instead of simply owning US stocks, an investor holding foreign stocks can benefit from this diversification since the correlation between the US markets and some foreign markets can be very low. Another advantage is the potential ability to generate higher gains by owning foreign stocks. For example, US sports goods maker Nike(NKE) has had a tremendous run the past few years competitor Adidas AG(ADDYY) of Germany has soared in the past year. So an investors owing both Nike and Adidas could earn better returns than owning only Nike.

The below is an excerpt from a white paper by Jeffrey Kleintop of Charles Schwab published last year:

Going abroad to come home Not every company covers all the markets or products in a sector, leaving gaps in a domestic only portfolio that can result in a different magnitude of performance. U.S.-based companies do not even provide exposure to all the markets or products produced for the U.S.

Just as it is true that there are some U.S.-based companies that gain much of their revenue abroad, there are global companies that derive much of their revenue in the U.S. As you can see from the small sample of companies in Figure 9, major categories and popular brands are offered to U.S. consumers by non-U.S.-based companies.

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Foreign Firms with Big US Revenues

As you can see, exposure to global companies is necessary even when seeking exposure to just the U.S. economy.

Source: The case for a global perspective,  Jeffrey Kleintop, Charles Schwab

A few examples of foreign firms with big revenues from the US market include BASF(BASFY) of Germany in the chemical industry, Canadian banking giant Toronto Dominion Bank (TD), consumer staples maker Nestle (NSRGY) of Switzerland, oil major BP(BP) of the UK, etc.

The key takeaway is that by holding overseas companies with strong US revenues investors can get the best of both worlds – the benefits of owing non-US firms and at the same time profiting from the large and growing US consumer spending.

Disclosure: Long TD

The Global Scale of the U.S. Economy

The US economy is the second largest in the world behind China. Based on 2015 data, the US GDP is about $18.0 Trillion in terms of Purchasing Power Parity (PPP). At about 321 million, the population of the country is much smaller than China.

The size of the individual states in the US is equal to higher than many countries. The following map shows how each state compares with countries in terms of economy:

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Source: 11 Reasons Why Everyone Wants to Move to Texas, U.S. Investors

Obviously the above is purely an economic comparison. It does not mean the country of Ireland is equal to a state like Louisiana…..

Map of EU Overseas Countries and Territories

The European Union(EU) includes countries and territories that are outside from Europe. For example, countries such as Aruba and Netherlands Antilles in the Caribbean are also part of EU though they are far away from mainland Europe and are closer to the US and North America than Europe. Similarly the beautiful island of Reunion in the middle of nowhere in the Indian Ocean is also in the EU since Reunion is a French overseas department.

The map below shows all the EU Overseas Countries, Territories and Outermost Regions:

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EU Overseas Countries and Territories Map

Source: Wikipedia


Contribution to Global GDP by Select Countries

The contribution to global GDP by select countries is shown in the chart below. The US accounts for the largest portion of the world’s GDP.

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Contribution of Global GDP for select Countries

Source: Out!, Compass 23, 16, Barclays

The UK accounts for less than 5% of the GDP. Since the British economy is so small at a global level all the drama related to Brexit a few months were over-hyped. When markets crashed due to the Brexit fears it was a great time to pick stocks cheap.Though China is a developing country the sixe of the economy is huge compared to that of Britain.

The key takeaway is that the size of the economy at the global level matters. So when panic ensues due to some reason in countries such as the UK or Brazil it is not a good strategy to dump stocks.