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“The armed forces could not have won the war alone. Scientists and businessmen contributed techniques and weapons which enabled us to outwit and overwhelm the enemy.”

— General Dwight D. Eisenhower

Friday macro-industrial charts

When former President Eisenhower warned of the “unwarranted influence” of a military-industrial complex in the US, he cited a disproportionate level of defense spending relative to corporate earnings: “We annually spend on military security more than the net income of all United States corporations.”

I think he’d be pleasantly surprised to see how things have turned out.

In 1961, defense spending was double corporate income ($64 billion vs. $32 billion).

In 2024, it’s the reverse: US corporate income was more than triple US defense spending last year ($3.4 trillion vs. $1 trillion).

Eisenhower might still balk at the idea of a trillion-dollar defense budget — adjusted for inflation, that’s 3x greater than it was in 1961.

But he’d be happy to hear that some of that spending helped win the Cold War for the US, put a man on the Moon, and — perhaps most importantly — provided seed capital for the world-beating US tech industry.

The first Silicon Valley IPO, in 1956, was Varian Associates, which built microwave tubes for the military; Fairchild Semiconductor, the ur-company of Silicon Valley, got its first big order from the US Air Force in 1958; Hewlett Packard and others made satellites possible for the Department of Defense; defense R&D contracts turned Stanford University into a world-class research institution; ARPA invented the internet; and DARPA provided research grants to Larry Page and Sergey Brin.

In short, the Department of Defense bankrolled Silicon Valley — or, as the author Margaret O’Mara puts it, defense spending was “the big-government engine hidden under the hood of the Valley’s shiny new entrepreneurial sports car.”

Peaceniks like myself might feel conflicted about that, but we can all feel good about Silicon Valley’s role in winning the Space Race and the US military’s role in developing the internet. 

These days, defense contracting accounts for only a fraction of tech startup funding, so this dynamic is mostly history. 

But we may be headed back to the future: The incoming Trump administration is expected to redirect defense spending from major contractors like Lockheed Martin to Silicon Valley startups like Palantir.

This is partly why President Biden invoked Eisenhower this week by warning of an emerging “tech-industrial complex” that he believes is contributing to an “oligarchy…of extreme wealth, power and influence.”

This, he fears, “threatens our entire democracy.” 

But I suspect he’d nonetheless be happy with this morning’s news that Palantir is investing in Shield AI, a maker of AI-powered military drones, at a $5 billion valuation — because the US certainly does not want its drones coming from China, as the FBI recently warned.

President Biden probably also appreciates having the ability to dictate which countries have access to the all-important GPUs made by US-based Nvidia, as he did this week — and also the power to force the all-important TSMC to build factories in the US, as the company lamented in its earnings call yesterday.

In the 2020s, controlling Silicon Valley may be more instrumental in the president’s ability to project US power than controlling the US military is — and this, I think, makes Biden’s tech-industrial complex sort of the inverse of Eisenhower’s military-industrial one.

President Biden would certainly not approve of designating the crypto industry as a national priority, as Trump will reportedly do on Monday — and I can see why, because even to a crypto newsletter writer like myself, that seems like a bridge too far.

But that is the world we live in — when technology and national defense are inextricably intertwined, even crypto can seem like a strategically important asset.

Let’s check the charts.

Profits vs. defense spend:

US corporate net income (blue) vs. US defense spending (red) — the dotcom boom seemed to be an inflection point, with corporate profits pulling away with the rise of mega cap tech in the 2000s and now accelerating with the rise of AI.

Your US tax dollars at work:

Defense accounts for about half of all discretionary spending, according to this chart from the FT.

The market thinks it will be spent differently:

Since the election on Nov. 5, shares of Palantir, the Silicon Valley defense contractor, are up 41% while the shares of traditional defense contractors are down as much as 13%.

No change:

It should be another bumper quarter for US corporate earnings with the Atlanta Fed GDPNow model expecting Q4 growth to come in at 3%.

Also no change:

Despite the bumper economy, the federal government continues to spend far more than it taxes.

Hard times in Harvard Square:

The Wall Street Journal reports that 23% of the 2024 class of Harvard MBAs remain unemployed nearly a year after graduation, up from just 10% in 2022.

Fewer VC jobs:

VC funding is sharply lower, with new entrants being hit hardest — new VCs raised only $4 billion in 2024.

Fewer hedge fund jobs:

2024 was the ninth straight year of outflows for equity hedge funds. Investors may be doing their own stock picking via ETFs: The S&P 500 equal weight ETF had $14.4 billion of inflows in the second half of the year. There are also fewer stocks to trade: The CEO of Goldman Sachs noted this week that there’s no reason for companies to go public anymore because there’s now so much private funding available.

Pawternity leave is out:

Fewer people are quitting their jobs, which has allowed companies to slash perks “such as college-tuition assistance and time off for a sick pet,” the WSJ reported this week. 

Stocks think stocks are expensive:

Robert Shiller’s CAPE ratio (a 10-year average P/E) is nearing its highest ever level outside of the dotcom bubble. Better yet, the Leuthold Group calculates that it currently requires 208 hours of work to buy one unit of the S&P 500 index, the highest amount since at least 1947.

How many hours of work does it take to buy one bitcoin?

Let’s end with bitcoin in honor of crypto’s expected promotion into the new tech-industrial complex on Monday: $105,000 — wow.

Have a great weekend, oligarchic readers.

— Byron Gilliam

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