This one is a little different. Obviously, you must have noticed the humor in these emails has become seriously mediocre recently.

It’s getting tougher to write jokes into the newsletter on Saturday nights when you’re watching the children of Gaza being dug out from the rubble of airstrikes.

A ton of you asked us to write about the “Israeli-Gaza-Hamas conflict”*, and we found a lot of genuine curiosity about the inner mechanics of how war works.

We didn’t try to find an angle as much as try to organize some thoughts on the commerce + incentives involved in this situation*.

Hopefully, this will inform + supplement any further reading you do.

War and Profit: 3 Questions

1. How do countries buy weapons?

It’s a little complicated.

There’s 2 programs under the DoD called Foreign Military Sales (FMS) and Direct Commercial Sales (DCS).

• FMS facilitates the sale/transfer of U.S. arms and weapons to international partners/organizations. The U.S. can either sell its own stockpiles under this program or contract the orders out. FMS is a more transparent program than DCS.
  

• DCS is a program in which the buyer can negotiate with defense companies directly. DCS is a more flexible program than FMS.

This isn’t exact, but here’s how it works:

1. Basically, you kinda lay out when you need. You write a requirements document. There isn’t a particular format.
   

2. Your requirements doc is reviewed for national security purposes, human rights purposes, etc.
   

3. Then, if everything looks good. You can move onto the next step, which is procurement of the stuff you need… with FMS you’re working directly with the U.S. Gov’t, with DCS you’re working with the defense contractor
   

4. BUT…you have to check if your transaction exceeds the following dollar amount (see image below). In this case, transactions under DCS and FMS would trigger a Congressional notification.
   

5. Then there’s a payment process, and then delivery is figured out.

2. Okay, so who’s profiting?

Weapons manufacturers and defense contractors that have dealings with Israeli forces. There’s a huge list of companies, but here are some key players and what they’re supplying.

Note: All these companies saw their stocks pop right around October 7th.

• Lockheed Martin: A bunch of F-35 Jets. They’re stealth aircrafts supplied to Israel earlier this year.
  

• Boeing: Smart bombs. They accelerated delivery on a 2021 contract.
  

• Northrop Grumman: Various missile systems. They have a bunch of components integrated into different Israeli weapons systems.
  

• Raytheon: Iron-Dome Interceptor missiles. These things intercept short-range missiles. Stuff fired within 40-50 miles. The Iron Dome defense system was built by Rafael, an Israeli defense contractor. Raytheon assists in the production of the interceptors.

3. Can you put it this into a larger narrative?

Countries arming themselves up is never an isolated incident. Here is an excellent article talking about that.

Here's an example of what escalation looks like:

• When Russia began its assault on Ukraine last year, that caused countries like Poland, Finland, and Sweden to start arming up, due to regional instability + Russian aggression.
  

• As a result, Turkey + South Korea have ramped UP their weapons manufacturing, which incentivizes the companies of those countries to push for larger and larger weapons contracts
  

• And while Israel ramps up its military spending, we’ve seen a higher military spend across the region as a response.

All of which adds up to the highest global military spend since the end of the Cold War (2022).

We’ll leave you with a quote in the above-referenced article by Eric Lipton.

Again, none of this is investment advice.

*We’re using these terms as a function of familiarity. They don’t accurately describe what’s going on.

What AI made this week

Have a great week!

Ahmed and Peter