I’m a James Bond fan and today’s topic reminds me of this dialogue from Casino Royale (2006):

Terrorist: “Do you believe in God, Mr. Le Chiffre?”

Le Chiffre: “No. I believe in a reasonable rate of return.”

I want to put aside the daily ups-and-downs of the markets, to examine the uncomfortable relationship between money and morality.

This news item on June 2 caught my eye: Germany’s biggest financial institution, Deutsche Bank (NYSE: DB), was raided by authorities for lying to investors about its environmental, social, and governance (ESG) programs.

And just last week, the U.S. Securities and Exchange Commission slapped a $1.5 million fine on Bank of New York Mellon (NYSE: BK) for bogus ESG claims.

The practice of using ESG as a con for investors is called “greenwashing,” and it’s running rampant. ESG is a noble idea, but it’s being deployed as a ruse by unscrupulous companies to burnish their public images. It was inevitable that ESG would get corrupted.

Let’s segue to the military. We’re taught at an early age that life is precious. The Bible commands: “Thou shalt not kill.” Homicide is considered the worst crime of all.

And yet, in 2021 total worldwide military expenditures surpassed the two trillion (USD) mark for the first time, reaching $2113 billion. Global spending in 2021 was 0.7% higher than in 2020 and 12% higher than in 2012.

The United States has by far the world’s biggest military budget, at more than $800 billion last year. As the Russia-Ukraine war grinds on and civilian atrocities mount, countries around the world, especially in Western Europe, are planning to dramatically boost their military budgets beyond already elevated levels.

By the way: An estimated 698 million people, or 9% of the global population, currently live in extreme poverty, defined as subsisting on less than $1.90 a day.

The Pentagon’s guarantee…

In my younger days, I specialized in covering the aerospace/defense sector. To forge better personal contacts and get a visceral feel for the industry, I learned how to fly helicopters. That’s a picture of yours truly, emerging from the cockpit after flying an AH-1 Cobra attack helicopter.

I don’t claim to be anything remotely as adept as Top Gun: Maverick, but I acquitted myself competently in the cockpit (my stints were strictly training exercises, courtesy of local National Guard units).

Did I have qualms about piloting war machines? Not really. War has been a reality since the dawn of human existence.

There’s a dirty secret buried within U.S. military contracting. The Pentagon doesn’t like to talk about it, but my sources explained to me how defense contractors are guaranteed a hefty profit.

That means shareholders of those contractors not only tap the inexorable growth of global defense budgets, but they also get a powerful inflation hedge.

It’s because of the “cost-plus” contract. A cost-plus contract is one in which the contractor is paid for all of a project’s expenses, plus an added fee for the job. The added fee is intended to be the contractor’s profit, whether or not the project goes over budget. And very often, weapons programs go way over budget.

The “plus” part is usually in the range of 10% to 20% of the project’s total cost. What’s more, many of these contracts are no-bid. It’s all courtesy of the taxpayer, in the name of patriotism. Defense contractors spend millions on lobbying and political contributions, and hence enjoy powerful bipartisan support on Capitol Hill.

The “military-industrial complex,” as President Eisenhower famously called it, represents a cash-generating machine for management and investors. James Bond’s nemesis Le Chiffre would approve.

When there’s an outbreak of deadly conflict, as we’re seeing in Eastern Europe, it’s a bonanza for military budgets and equities. Defense stocks generally speaking are 1) growth propositions; 2) recession-resistant; and 3) inflation hedges.

Morality: in the eye of the beholder…

Is the link between war and profits immoral? As you seek to make money in our capitalist system, that’s a murky question.

Consider “sin” stocks, e.g., tobacco, alcohol, and gambling. Many ordinary working Americans love to smoke, drink, and…hit the town in Vegas, baby.

Should you shun the stocks of firearms makers, because of mass shootings in Buffalo, Uvalde, Tulsa, and most recently Ames? Well, many citizens consider it their moral duty to unreservedly uphold the Second Amendment. Should you dump the stocks of fossil fuel producers, because of their contribution to global warming? Tell that to individual retirement investors who rely on carbon-intensive energy stocks for growth and income.

These days, I closely cover the burgeoning marijuana industry. Despite empirical research that shows marijuana conveys many physical and psychological benefits, I occasionally get angry emails from readers who denounce me for touting investments in a psychotropic substance they still regard as “the devil’s weed.”

The upshot: Successful investors take the world as it is, not as they wish it to be.

The doctor will see you now…

Regardless of any industry or sector, “sinful” or otherwise, there are proven methods to make inflation-protected income, week after week. Which brings me to my colleague, Dr. Joe Duarte.

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John Persinos is the editorial director of Investing Daily.

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