Reviving Guns & Butter?

Economic historians sometimes refer to mid-1960s’ US fiscal policy as “Guns & Butter”. The government initiated the Great Society spending programs (butter) at the same time defense spending was increasing for the Vietnam War (guns). The political consensus at the time was that the government could increase defense spending and simultaneously increase spending on social programs without negatively affecting the budget deficit or inflation.

Some observers today have drawn parallels between the recent oil price surge spurring inflation and the oil shocks of the 1970s. But there are also stark similarities to the 1960s Guns & Butter period. Investors should consider whether current geopolitical events and domestic politics could be mimicking the 1960s with longer-lasting effects than oil shocks have historically had.

Current investor positioning, despite the possible confluence of 1960s-like and 1970s-like events, suggests there may be investment opportunities in pro-inflation, shorter-duration assets.

Guns & Butter

Today’s fiscal policy differs meaningfully from that of the 1960s. “Butter” in the 1960s’ Great Society plan was broad-based spending programs for health care (Medicare and Medicaid), jobs, civil rights, education, and the environment. Some of those same programs are now being reduced or eliminated.

By contrast, current fiscal policy’s Butter is primarily large tax cuts within the so-called One Big Beautiful Bill (OBBB). Table 1 shows federal tax cuts as a percentage of GDP, and the OBBB ranks 6th largest on the list of tax cuts in the post-war period based on the author’s assumptions.

However, there are “Guns” in the OBBB, too. Congress approved a 2026 budget of roughly $800 billion for the Pentagon, which was increased by an additional $150 billion in the OBBB. The Pentagon recently requested an additional $200 billion for the Iran war. So, defense spending could surpass initial budget allocations by a whopping 44%.

If the OBBB is indeed as big as advertised, then history might eventually view the 2020s’ Guns & Butter as being based on a coupling of defense spending with sizeable tax cuts instead of with the social program spending as in the 1960s.

Regardless, it appears the new Guns & Butter fiscal policy could result in higher-than-expected inflation and budget deficits.

Importantly, the significant fiscal stimulus of tax cuts and defense spending is arriving when the labor markets are already healthy. Jobless claims, a leading indicator of employment and of the overall economy, are showing strength resembling the readings during the 1960s Guns & Butter period.

Heresy!!!! Cash might outperform if Guns & Butter returns.

Asset returns during the 1960s Guns & Butter period were vastly different from investors’ recent experiences (see Charts 3 and 4). Unlike asset returns over the past 5-10 years which were led by longer-duration investments like growth stocks, venture capital, and cryptocurrencies, shorter-duration investments outperformed during the Guns & Butter period as inflation began to accelerate.

We realize well that it might be total heresy in today’s investment world to say this, but the fact is cash, the ultimate short-duration investment, was one of the better performing asset classes during the Guns & Butter period!

Traditional fixed-income, such as Treasuries and investment grade corporate credit had negative absolute returns during the Guns & Butter period and real returns were negative (i.e., returns underperformed inflation).

Small stocks performed the best during the period among the major asset classes on an absolute basis, on a risk-adjusted basis, and on an inflation-adjusted basis. However, the index representing small stocks in the charts, the Ibbotson Small Stock Index, is largely a small cap value index comprised of out-of-favor smaller stocks and fallen angels (stocks that used to have larger capitalizations). Small cap investors today tend to focus on small cap growth and venture capital, and not on the value-oriented small cap group this index represents.

Recent investor positioning seems contrary to this historical precedent. According to a recent Bank of America Securities report [1], investors remain underweight cash relative to the historical average and insignificant flows into small cap stocks seem to reflect investors’ general indifference toward the asset class.

Although gold underperformed stocks during the Guns & Butter period, its real asset inflation-protection proved beneficial relative to traditional fixed-income based on both absolute and risk-adjusted performance.

Reviving Guns & Butter

The current political and economic environment does seem to be on a path to mimic the 1960s Guns & Butter period. The consensus seems undisturbed by the fiscal policy combination of massive tax cuts and accelerating defense spending much as was the case in the 1960s.

In addition, the possibility remains (although it’s getting more remote) that the Federal Reserve might cut interest rates as well. It’s hard to believe that stimulative monetary policy despite fiscal largess won’t increase inflation expectations.

Accordingly, we believe that investors should continue to follow our 2026 theme of “Boring is Beautiful”. Dividends, value, shorter-duration higher quality fixed-income, and gold remain the cornerstone of our presentpositioning.