Tonight is New Year’s Eve in The Swamp.

There won’t be a ball drop, like in Times Square. No one will sing “Auld Lang Syne.” But at midnight, the carriage turns back into a pumpkin, as the federal government’s fiscal year ends. Every dollar a Pentagon manager hasn’t spent by then goes back to the Treasury.

And nobody in the Department of War wants to give money back.

Yesterday, I showed you Richard Maybury’s cones. Government money pours into one spot and spreads out from there. The people at the tip get paid first. I also showed you a new cone forming around American magnets and metals, with a fence around it that goes up January 1st.

Now, here’s the part about timing.

Use It or Lose It

Picture yourself as a Pentagon budget manager. It’s late September. You’ve got $10 million left in your account.

You could give it back, saving the taxpayers $10 million.

Only you’d get a smaller budget next year, because you clearly didn't need the money.

Your boss wouldn’t congratulate you on a job well done. Instead, he’d ask why you shrank your own department.

Or… you could spend it.

So you make the only real choice available: spend it.

Two economists, Jeffrey Liebman and Neale Mahoney, studied every federal contract they could find from 2004 through 2009. They discovered that federal spending in the last week of the fiscal year runs 4.9x higher than in a typical week.

Nearly 5x the money in 1 week, because that money ain’t gonna spend itself!

It gets worse. They also checked the quality of year-end tech projects. Contracts signed in that last week were 2x to 6x more likely to earn poor ratings. To the surprise of absolutely no one, managers spent rush money badly.

That’s Hayek’s Knowledge Problem in a nutshell. No price signal tells a manager whether a purchase makes sense. There’s only a deadline.

In a real business, spending money you don’t need to costs you.

In DC’s Swamp, saving money you don’t need to spend costs you.

Furthermore, the researchers found proof. The one agency allowed to roll unspent budget money into the next year didn’t show the spike.

The Second Clock

The spending sprint happens every year. But this year, the second clock changes everything.

As I wrote yesterday, the Pentagon’s new sourcing rule takes effect January 1st. After that, contractors can’t deliver certain magnets, tungsten, or tantalum with a supply chain that runs through China, Russia, Iran, or North Korea. For the most common rare earth magnets, that covers every step from the mine to the finished part.

Let’s put the two clocks side by side.

Tonight, managers race to commit this year’s money. Much of it pays for parts that ship next year. And parts that ship next year must follow next year’s rules.

So a contract signed this week for February delivery can’t lean on a Chinese magnet. The buyer has to find a clean supplier. And there aren’t many.

You can’t build a mine in 90 days. You can’t permit a refinery by Christmas. For the most part, the companies that can meet the rule by January 1st are the ones already present and accounted for.

Why the Small Ones Move

Let’s say a giant defense contractor sells weaponry worth many billions of dollars every year. If the government awards it yet another $50 million contract, its stock wouldn’t budge.

But if the government hands that same $50 million contract to a company worth only $300 million, that's 1/6th of the entire company’s value. The stock would certainly notice.

Same money. Same cone. But it produces a drastically different result. That’s why the tip of the cone favors small companies over large ones.

But remember what I said about Palantir yesterday. The cone tells you where to look. It doesn’t tell you what to buy.

The research I just cited proves the point. The rush money gets spent badly. Some of it will land on companies with mines, plants, and paying customers. Some will land on companies with a drill hole and a press release. The cone rewards the first group and punishes the second.

A good way to play this is with Nassim Taleb’s “barbell.” He thinks investors should keep most of their money in safe, boring places. Then they can put a small slice into bold bets with large upside and survivable losses. If one bet works, it can improve your portfolio significantly. If one fails, it won’t ruin your finances.

Wrap Up

Most investors will read about this rule in January, after the fence goes up and the orders are signed.

You’re reading about it on Fiscal New Year's Eve, with both clocks in view.

That’s the whole game Maybury taught. You don’t need to be the smartest person in the room. You need to know where the money pours and when. The cone shows you where. The calendar shows you when.

Tonight, both point to the same place.

Have a great day ahead.