A Shift In US Procurement Spending Patterns Creates Immense Opportunities

By Peter Tchir of Academy Securities

ProSec or Production for Security

I know National Production for National Security (or ProSec) isn’t as catchy as Mag 7 or BRICs, but while we wait for someone to come up with a better way to describe the phenomenon that is developing, we will continue to use that.
From prior reports:

• ProSec – Investing in a Pre-War World. How a “Pre-War” mentality helps – urgency and sacrifice, in the advancement of Production for Security. The latest China Trade Deal sets in motion a 1-year window for the U.S. to be in a better position on processed/refined rare earths and critical minerals, a key element of ProSec.

• ProSec as a Global Philosophy. Production for Security goes beyond being a “trade.” It is a way of thinking that will supplant ESG as a driving force behind decisions for governments, corporations, and asset managers. We explore ProSec portfolio construction, and are continuing efforts on that front. With that in mind, this article hit the tape on Friday – An ETF to Mimic Government Investments. It has the advantage of being relatively easy to implement, but I think investment opportunities that are more encompassing of the full power of ProSec will become available.
• We were able to discuss ProSec, Electricity, and More, on October 31st on Bloomberg TV (the Academy Securities segment starts at the 3:50 mark).

Three “Academy” topics that deserve a bit of extra attention. These topics have been part of our published work for some time, and certainly crop up in most discussions, but we wanted to highlight them. There is a risk, we think, that they are “too much in the background” and want to bring them to the forefront.

• South and Central America. We could have gone with “Monroe Doctrine on Steroids” but that seemed a bit “crass” even by T-Report standards. The first place that Secretary of State Marco Rubio went was the Panama Canal. That was (and is) a major signal of a shift in focus on foreign policy (and I’m willing to bet that by the end of 2026, it will have a different name). The actions in and around Venezuela and Colombia are a distinct departure from actions that the U.S. was willing to do in the region. The support of Argentina’s currency (and thereby, its leader) ahead of the election has paid off and should do a lot to bring Argentina closer to the U.S. (China has made massive inroads into Argentina in the prior decade or so). The admin is focused on South and Central America – we need to be too.
• The “war” on drugs. I cannot remember the first time I heard the term “war on drugs.” I didn’t even bother to look it up, as that is largely irrelevant (and I think we all know how ineffectual the war on drugs has been – if fentanyl is any indication). We are now moving to an “actual war” on drugs. We don’t mean to be flippant on the subject, but certainly what we are doing around Venezuela is the closest we’ve seen to a “real” war on drugs in our lifetime. We can look at other actions the admin has taken around drugs (and criminals) and fit this into our narrative. Look for the Mexican Cartels to be targeted down the road. Politically, it is easier to set “new boundaries” in the war on drugs off the coast of Venezuela, than it is to set those boundaries in and around Mexico. However, once the new “rules of engagement” have been established, look for opportunities to apply them elsewhere. It seems like it should be in Mexico’s interest to work with the U.S. government to crack down on cartels. It would help both countries in many ways. The war on drugs is “finally” a real war (whether everyone likes it or not, or agrees with the methods being implemented).
• Streamlining Procurement. On November 7th, Secretary Hegseth is expected to outline a new Military Acquisition Process. This is something that the Geopolitical Intelligence Group has discussed (almost) ad nauseum. I say almost, because how can something so important and necessary be “sickening.” From annual budgets set years in advance, to ongoing spending on equipment or systems that either didn’t deliver what was expected, or aren’t necessary to today’s strategies (or versus current threats). DARPA has done an amazing job of developing new technologies, but the military has had only limited success in scaling up those technologies quickly. One of my favorite stories is that no one has ever made general/flag officer (General or Admiral) directly while in DARPA. They typically have to move to a major “command” to move up the ranks. This could all be changing rapidly – given what we are seeing in drones in Russia/Ukraine and hypersonics (Russia and China), and the change cannot happen fast enough. Even on the more “mundane” side of things – like relatively simple artillery shells, we have exposed that we are not well equipped to produce as many as we might need. Spending on Space, which much to the chagrin of General (ret.) Deptula hasn’t received the attention it deserves on the defense side of things – is likely to change. As one of the biggest “wallets” in the entire world, a shift in spending patterns here creates immense opportunities.
  • While not quite “procurement” just look at what the Army has done in terms of opening up the ability to build nuclear facilities on their bases. Look at what they have done already to secure domestic resources.
  • Ship building (from surface drones, to larger attack ships) and the ability to repair and maintain our existing fleet will be its own category of growth.
  • While we merely scratched the surface on the military side of this, look for procurement to change across the government. Medicaid seems like another obvious candidate to be examined by this administration.
• We may not be able to overstate the importance of this change in mentality, and it has the potential to be so massive. Also, think back to ProSec – what are the odds that entities the government has invested in (on behalf of the taxpayers) don’t have an edge? Again, not arguing necessarily how right or wrong that is, but it seems like a logical conclusion.

I hope my excitement with these developments comes through in the writing (just as much as my “dismay” after the Liberation Day tariffs came through – which were backed away from rapidly).

Electricity

Time to have some fun. 

I wanted to go with “Let’s Get Nuclear, let me hear your atoms talk” but really struggled to make anything out of the lyrics for what is a song that seems to be able to sneak into your head quite easily. This might be a worse “guilty pleasure” than using Cher lyrics

So, let’s get back to Electricity.

I’m pretty sure we’ve used OMD before – the “Enola Gay.”

Anyone who hasn’t listened, at least once (and preferably on repeat) to “If You Leave” after a breakup has missed out on a big part of the healing process. If you haven’t, I don’t suggest you break up just to go through the catharsis with this song playing in the background, but I digress.

Given the band’s political leanings, I suspect there is some strong messaging, but I think it is interesting to just go through the lyrics of “Electricity” as written (my bold highlights).

Our one source of energy

The ultimate discovery

Electric blue for me

Never more to be free

Electricity

Nuclear and HEP

Carbon fuels from the sea

Wasted electricity

Our one source of energy

Electricity

All we need to live today

A gift for man to throw away

The chance to change has nearly gone

The alternative is only one

The final source of energy

Solar electricity

It is a bit “heavy” on solar, but certainly touches on the sea, fossil fuels, wasted energy, nuclear, and hydroelectric (I think HEP stands for hydroelectric power).

These lyrics are from 1979.

We have argued that the roadmap for what we need to do to win the AI/Data Center race on the energy side has been laid out by China – just look at not only their current power supply, but also what they have built and what they have in construction. But here it is, to some extent, laid out in a song from the 70’s.

Maybe, just maybe, this is where the Pre-War mentality serves us well.

The combination of two things will propel us forward:

• The profit opportunity from data centers and AI. The National Security elements of AI and Data Centers. All of which are predicated on having enough electricity to feed the beast.
• A Pre-War mentality, where fear of losing our place drives us to rapid development and deployment.

I’d be remiss if I didn’t mention General (ret.) Groen’s discussion on China’s “energetic” (pun intended) pursuit of fusion. They are working on what is likely a “containment” facility for fusion reactions night and day. We know they are working at night because the welding is visible from space.

We too are working on fusion.

The mentality that I see shaping the energy industry is:

• Every source of energy (and energy storage) will need to be implemented in the coming years (and decades) to service the energy demands. Even if chips become more efficient, the growth in demand seems set to increase energy usage, almost regardless of efficiency. Nuclear power is going to rise to prominence, but solar, despite the admin’s current stance, will also be part of the effort.
• A “realistic” multi-decade plan is starting to take shape. What can be built today? What can be built in 5 years? What will take 10 years? What technology will we have at our disposal in 10 years’ time that is now merely in the laboratory or experimentation phase?
• This need for energy will:
  • Bind us to our closest neighbors and allies who can help. That may not seem obvious today, but it seems inevitable.
  • Drive our foreign policy, not just with Russia/Ukraine, or Greenland (both already fixtures around rare earths and critical minerals), but also with Africa. A region far too long ignored. A region that could become a cauldron for global problems (apparently there are 60 million displaced citizens) or a huge engine of growth and opportunity.

Again, maybe my passion (or fervent hope that we finally shift from a vision to a plan on “sustainability” in the truest sense of the word) is showing through at uncomfortable levels, but I think it is that important.

Bottom Line

Hopefully more food for thought on why we see ProSec™ (Production for Security) becoming the dominant framework for countries, corporations, and asset managers across the globe.

• Rates. I see Fed funds (mid) heading to either 2.875% or 3.125% by the May 6th announcement at the latest. Maybe the data tells us something different when we get there, but this admin (and Bessent) seems to be guiding us there, and I’m not sure I’d fight that. That will lower 10s to under 4% as we head into next year (remember, my view is that if it doesn’t occur “naturally” or “organically” it will occur as part of a coordinated effort between Treasury and the Fed).
• Credit. At the margins, some issues, but all in all, solid, steady performance. Not to ever challenge Jamie Dimon, but I know of some luxury condos where cockroaches have been found, and no one bailed on those luxury condos since cockroaches can be contained and eliminated. Yes, there are some problems at the margin, but nothing to set off problems in overall credit markets. Again, I believe that more money is lost by being forced to sell credit than ever occurs from losses due to default. Orders of magnitude more, and I just don’t see evidence of forced selling in any meaningful size being triggered.
• Equities. Not sure what to make of mega caps moving double digits (up or down) after earnings, so I will stick to being massively overweight companies that benefit from ProSec™ both domestically and also abroad.