Trump Ends the Peace Dividend: Investing in War.
March 12, 2025
The appalling spectacle of President Trump and Vice-President Vance verbally abusing Ukrainian President Zelenskyy was a watershed moment for the world. Conversational tones that were not even acceptable behind closed doors are now broadcast live. Trump sounded like a mob boss berating one of his underlings; giving him one last chance, before he has him whacked for insubordination.
Trump’s abandonment of Ukraine and his pivot away from Europe and towards Russia had a seismic effect on America’s allies. At long last, Europe realizes that it cannot continue to free ride on the U.S. military and will begin re-arming. Europeans will also come to realize that their high tax rates and social programs that incentivize sloth and disincentive economic growth and ambition will have to be curtailed.
The period that we are entering in less a new era than it is a return to normal, albeit which a much larger economy and 21st century technology. Europe has been a region of constant war, or war preparedness for millennia. It was only after two devastating world wars that Europe became pacified. The fall of the Iron Curtain in 1989 effectively eliminated any viable threat to Europe. Thanks to Trump’s anti-European foreign policy, this relatively short period of tranquility is over. Europe realizes it must defend itself against Russia as its primary external threat and will soon come to terms with the internal threat of Islamism. This latter issue may morph into an external threat if Turkey gets involved.
A report by the Bank of America pointed out that in 2005, there were only 12,000 war deaths globally. In context, over 300,000 people die a year from drowning. About 30,000 people died a day on average during World War II. Since the outbreak of the Russo-Ukrainian War, the globe has averaged 200 to 250 thousand war related deaths a year. Estimating further war deaths is difficult but this transitional and chaotic period is making it likely that we will not be returning to the levels of the mid 2000’s anytime soon.
Trump is pivoting away from Europe, who he personally detests, and towards Russia. He admires the strength and decisiveness of Putin and loathes the consensus seeking governments of Europe. Trump also sees the world, contrary to his stated nationalism, as a battle between the American mercantile empire and what he sees as woke globalism. It is a mistake to believe Trump is a free market capitalist. He seeks a return to the exploitative imperialism of the European powers between the 16th and 19th centuries. Those old imperial systems were supplanted by capitalism. The difference is that the Trump administration sees itself as the only power whereas before there were competing empires with the British eventually dominating.
Trump’s support of Putin is an effort to bring Russia into the American fold and away from China and Iran who he sees as greater threats. Whether or not one believes this is brilliant or moronically reckless does not change the fact that this is the Administration’s strategy; at least until Trump is distracted by something else. I happen to believe this is foolish. He is seriously underestimating Europe and this will have consequences, both geo-politically and economically. He is vastly overestimating America’s position and his own domestic support. As we used to say on Bay Street, he believes his own bullshit.
For the first time in decades, I believe that European equity markets yield better future opportunities than the U.S. After over thirty years of favoring the U.S. over Europe, I’m finally ready to reverse my position. However, I could very well be years early, if correct at all. Of course, we will need to watch government policies and trends as sanity could return to the U.S. and Europe could reverse again and continue the policies that have made it weak. However, the valuation metrics indicate that Europe is cheap relative to the U.S. It was cheap for good reasons but these reasons may be in the process of reversing.
Defense spending will rise whether wars are declared or not. This will provide investment opportunities as the world ramps up military spending. The global total G.D.P. is about $100 trillion U.S. Of that, $60 to $65 trillion is in the free world. Only about $20 trillion of G.D.P. are in the adversaries of the free world: China, Russia, Turkey, Iran and North Korea. China and Russia are both in decline but remain dangerous adversaries. Military spending will increase by a minimum of 1% a year. Therefore, we will see a bare minimum of $600 billion in additional military spending a year in the free world.
Investors can seize on this opportunity. An easy way to gain exposure is to buy the iShares U.S. Aerospace & Defense E.T.F. (Symbol: ITA). Three of the top companies in the fund are GE Aerospace, RTX Corp. (formerly Raytheon) and Boeing. The fund contains thirty-nine companies. Investors that wish to examine individual companies can use the list of ITA fund holdings as a guide.
Europe will rely heavily on their own defense firms. They have seen the U.S. withhold vital weapons from allies such as Israel, during the Biden regime, and Ukraine under Trump. They will not trust risking their security to an increasingly unreliable ally. Major European defense firms include Safran Electronics and Defense, Airbus, and BAE Systems. We would not underestimate Europe. Germany certainly has the potential to manufacture state of the art weapons as do other European nations.
Commodities like aluminum will also be crucial. Frankly. I’m not sure why Trump would want to alienate a major producer like Canada. A newly militarized Europe might happily buy Canadian aluminum. Other commodities related to defense will do well.
Modern warfare relies on technology. The Israel Defense Forces use A.I. extensively. This trend will grow, worldwide. Israel is a high-tech and defense-oriented society. It has also reached a consensus that it will have to rely on its own weapon systems as much as possible. We expect Israel to become major weapon exporters. This will turbo-charge the economy. Many of its best high-tech defense companies do not trade publicly. However, investors can get exposure to the overall Israeli economy with the iShares MSCI Israel E.T.F. (Symbol: EIS).
War has historically increased inflation and government debt. There is no reason to assume this future period will be different. Although Europe is a mixed bag, nations like Germany have far lower government debt levels than the U.S. We will discuss the implications of this in future articles.