| August 22, 2013 | | | | |  | | | A Sweet Spot Off the Budget Butcher Block | | | - Trying to understand the guys who brought us the coffee break app...
- A riddle: How many admirals and generals does it take to command the armed forces?
- Plus, Byron King on the insane flow of money in the defense community, his recent sit-down with some Hillrats and more!
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 | | Peter Coyne | Hosni Mubarak, the deposed president of Egypt, was released from jail today.
He was put under house arrest in a hospital in Cairo. Mubarak's release hinged on a legal technicality. "Seven weeks after a military coup ousted the country's first democratically elected president, Mohamed Morsi," reports Abigail Hauslohner and Mary Beth Sheridan for The Washington Post, "and put an end to its brief experiment with Islamist rule, some met the court decision with nostalgia for Mubarak's order."
Maybe President Obama is feeling nostalgic too. It seems like he was on the wrong side of the Egypt bet. Since 1975, the U.S. has sent $50 billion in economic and military aid to Egypt. Now the country is in chaos. What the heck was the point of sending all that money?
"Well, umm…
"Errr... national security purposes and other vital interests…"
Whatever the reason, can you say you're surprised? We're talking about the Department of Defense. These are the same guys who funded an iPhone app to alert users when it is the best time to take a coffee break. They spent money researching what fish could teach us about democracy!
And those are just a few dropsicles that swell the Pentagon's budget to elephantiasis. Each year, they get half a trillion dollars (that's 11 zeros) to spend. You didn't think they were going to spend every cent carefully, did you?
In order to keep the money flowing, the Pentagon has pursued a policy of "brass creep." Case in point: During World War II, there were 30 ships for every admiral. Today, there are more admirals than ships.
Huh?
In total, there are 973 generals and admirals. Many top brass have cohorts of chauffeurs, chefs and secretaries. Some have runway-ready private jets. Still others get motorcade escorts and mansion homes. The cost of the benefits to each top officer works out to roughly $1 million. One general, Kip Ward, used his staff and military equipment to take his wife shopping and send her on taxpayer-funded vacations.
What do these generals do?
One retired U.S. army colonel, Jack Jacobs, says many are "spending time writing and defending plans with Congress, and trying to get the money." They're essentially lobbyists, but on the Pentagon's payroll. Heh. Because that's not a conflict of interest or anything.
The DoD is a money-sucking juggernaut. And despite spending reduction rhetoric, our guess is that nothing in its path will stop it. But if you can pocket your political leanings for a minute, there's a hidden cash cow we'd like to share with you... though we'll need your agreement to keep it hush-hush.
Over the next five years, the Pentagon is seeking an additional $23 billion. That money is needed to beef up their computer networks against cybersecurity threats. It's also to give the Pentagon greater cyberoffensive capabilities. Former secretary of defense Leon Panetta said "a cyberattack perpetrated by nation-states or violent extremist groups could be as destructive as the terrorist attack of Sept. 11."
And his successor, Chuck Hagel, rang the same alarm based on "the growing threat of cyberintrusions, some of which appear to be tied to the Chinese government and military." Simply put, cybersecurity is the new boogeyman. And to bash this threat into submission, the Pentagon is going to spend gobs of money.
In fact, our resident military expert, Byron King, has recently declassified government documents stating the U.S. plans to spend more than $16.1 billion in private contracts combating this new threat. This is uncharted territory.
Never before has the Pentagon spent this much on its cybersecurity infrastructure. And never before have we gotten the ground-floor scoop on how you could carve out a hunk of those billions for yourself. Byron's dubbed this new clash, the "fifth domain of war," and he has his own short list of companies that could turn every $1 invested into $550 (you read that correctly).
But because of the sensitive government nature of this information, we have to play it safe and do something we've never done before. We ask that you sign this confidentiality agreement that you won't share Byron's information with anyone else. (Don't worry, we're not asking you for any personal information or obligating you to do anything.)
Simply agree not to share the info and you'll be taken to a Web page where you can read Byron's information for free. However, without agreeing to keep the info under your hat... we have to block your access -- again, just to play it safe on our end. Simply click here to sign the confidentiality agreement and view Byron's information.
In today's episode of The Daily Reckoning, Bryon dissects this opportunity for you in detail as well as his recent trip into the belly of the beast. He had a unique opportunity to sit down and talked with a few Hillrats.
Read on below...
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| | | | A Sweet Spot Off the Budget Butcher Block | | | | by Byron King | | | I have a new investment recommendation for Daily Reckoning readers. The idea is squarely in the middle of the high-tech materials space. It's true cutting-edge! (Heck, NASA and many U.S. national labs are part of it.)
I was in Washington, D.C., for a couple days last week. Things are totally screwed up -- both on the "political" side in the District proper and the military side in northern Virginia. It's worrisome. It's scary.
For all the money that flows through Washington, the spending situation is simply insane. I'm reminded of something I learned in an earlier life, when I practiced bankruptcy law: Liquidity is not the same as solvency.
That is, you can have lots of money but no payment plan. You can have big cash flow and still be insolvent. You can have money but still be unable to pay your bills as they come due. It's true for individuals and true for Big Government.
Yes, every federal agency has rules labeled "financial controls." Every office has a budget and its dreaded comptroller. Heaven help the humble bureaucrat who pays too much for an airline ticket, rental car or motel room. And oh, by the way, the so-called "government rate" for day-to-day operations is designed to find the middle rear seats on airplanes, the crummiest rental cars and the most fleabag motels. Not everybody gets to spend big bucks vacationing on Martha's Vineyard, if you know what I mean.
But at the top end of government spending? Up in the ether, where Congress is supposed to exercise budget oversight and control? That system is just plain broken. It scarcely exists anymore, really.
The Budget Impoundment and Control Act of 1974 totally ruined modern federal spending, and by extension national governance and long-term solvency (long story). More recently, the country has had no true, deliberative "federal budget" in at least five years. The U.S. is running off a series of "continuing resolutions" that just put spending and increases on autopilot.
Sure, Congress tweaks the budget here and there. Let's say that a big political issue pops up. You'll see a special appropriation -- larded up with all manner of pork-barrel spending. But there's never an overall budget review or rationalization. Programs never die. Heck, the Department of Agriculture pays dead people not to grow crops.
The country is too politically divided to make big political changes. It reflects in Congress and the executive branch.
Then again... we get to that Defense Department "sequester" thing. It's a political budget gimmick that went bad -- although there are plenty of people in Washington who want to see the Defense Department suffer. They have their reasons.
During my trip, I called on offices in the Pentagon and along Jefferson Davis Highway in nearby Crystal City. The defense budget is taking billions of dollars in hits between now and the end of fiscal 2013, on Sept. 30. In 2014, the budget is taking a $50 billion hit, more or less.
It follows that life today inside military procurement commands is all about squeezing juice out of every line item. And oh... those green eyeshade guys are brutal.
For example, budget wonks already canceled the 2013 season for the military's iconic flight demonstration teams, the Navy Blue Angels and the Air Force Thunderbirds. Why spend another $20 million to let people across the country see military airplanes, right?
Now the budget musketeers are running spreadsheets on how to reduce pay for troops and cut back on things like housing allowances and retiree health care. It's grim.
The thing is now that the Iraq war is over (we're out of there, anyhow) and the Afghanistan war is winding down (we'll be gone soon), the nation doesn't need all those expensive ground pounders. Send the old war horses out to pasture, eh?
Looking ahead, the country needs to recapitalize its defense equipment. That is, we fought two Middle East wars with tanks, trucks, airplanes and ships that date back to the 1970s, 1980s and 1990s. Much of the nation's equipment is worn out.
We get into nasty procurement situations, though. Consider the problematic F-35 airplane that's supposed to do everything but can't (don't get me started). Or the even more problematic littoral combat ship that's also supposed to do everything but can't (ditto). God forbid that we buy more submarines that CAN do astonishing things. Or recapitalize the space satellites that are fast running out of service life.
In essence, the country is getting rid of soldiers who know how to fight in order to buy super-expensive equipment that can't do the job. It's the worst of all worlds. To paraphrase Winston Churchill, I hope we eventually do the right thing, but it'll likely be after we've tried all the wrong things.
I visited Capitol Hill too and spoke with a couple of congressional staffers. They were cordial, as well as professional and candid about spending issues. They gave every indication of understanding how screwed up things are. At the same time, these guys were relieved not to be covered by Obamacare anymore, courtesy of President Obama's recent executive action. Oh, to live in such a happy nest!
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One of the things that struck me in Washington was how fake things are. One big image hit me right in the eyeballs as I was riding in a taxi to one of the nice office buildings up on Capitol Hill. Here's the U.S. Supreme Court building. Notice anything?
Apparently, the Supreme Court building is under repair. That's OK. If the building needs to be fixed up, then fix it up. But here's where the Washington mindset gets interesting. Rather than have passersby and visitors to see scaffolding and such -- "men at work" and all -- there's a huge drape in front of the edifice giving the appearance of all being normal.
The Supreme Court building is "normal," of course, until you look closely and realize that it's fake, like a Potemkin village in the days of Russian Empress Catherine II.
The Potemkin Supreme Court prompts a couple of thoughts. First, that's taxpayer dollars at work hiding the evidence of construction (while the Blue Angels and Thunderbirds are grounded). Second -- and maybe it's just me -- but if the front of the building is fake, then what does that say about what goes on inside? Just sayin'...
Leaving town, I drove north along the George Washington Memorial Parkway. Looking back at Washington in the rearview mirror, I had this truly foreboding sense that the "old way" of doing things is over. There's not enough money. At least, there's not enough money to do things the way we've done them for many decades. The government just spends it wrong.
Looking ahead, what's next? Will the nation fund anything new and unusual? If you know much about government bureaucrats, you probably think that they'd be crazy to spend funds on anything that's untried, untested and way out there on the bounds of reality, right?
Actually, that's wrong. Amidst the budget carnage, there are sweet spots. There's funding for true innovation. I'm tempted to say, "Don't tell Congress," lest they slice it out of the next defense appropriation.
But for now, there's a revolution going on in the world of atomic-scale materials. For our purposes -- yours and mine -- it's investable.
And this brings me to the new investment idea that I have for you. It offers a way for you to surf the wave of the next industrial revolution. Plus, I promise that I can put my finger exactly on a variety of new substances and technologies that WILL revolutionize military technology.
Just to be clear, I'm not talking about little, teeny-tiny incremental improvements in this legacy system or that. I'm not talking about a tweak here or there. None of this "5% increment" stuff. Nope. Not at all -- although the new tech will doubtless find its way there, too.
I've been a student of military issues and technology for nearly 40 years -- 31 of them associated with the U.S. Navy, on active duty and in the Reserve. I've been around big systems, big technology, big procurements and big money. And I have to confess that this next era of military technology is hard even for me to characterize.
Think in terms of how the USS Monitor and CSS Merrimack (aka Virginia) changed the nature of warfare on one afternoon on March 8, 1862, when the two "ironclad" ships shot it out at Hampton Roads.
Looking ahead, we're about to see changes as dramatic as, say, when ancient warriors went from tossing spears to shooting arrows or medieval soldiers went from shooting arrows to firing projectiles with gunpowder.
I call this next phase in military technology the "fifth domain of war". It's simply incredible (not to mention lucrative) In fact, I've uncovered some declassified government documents that reveal an incredibly urgent investment opportunity. According to months of research and closed-door meetings, the Pentagon's about to shower a few private contractors with huge payments -- $16.1 billion.
The Pentagon calls it "Plan X." In the past, it produced the opportunity to turn every $1 invested into $550 or more. But because of the sensitive nature of this information, I'm going to have to ask you to sign to sign a confidentiality agreement before I reveal the details. It doesn't obligate you or require and personal information. Just your agreement.
Simply click here to sign the confidentiality agreement and then you'll be redirected to my research, free of charge.
Regards,
Byron King
for The Daily Reckoning
| | | | | | |  Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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