A Global Trend in the Making

Today’s Markets and Money is going to spare you any more discussion of the RBA decision to hold the cash rate steady, and look at an even bigger global trend. The implications of this could run for years, including in stocks. What is it? Germany’s remilitarization.

And it’s for the very reason geopolitical analyst George Friedman told me about last week on the DR podcast (check it out on iTunes or Stitcher). The fault line is the territory between Germany and Russia.

Like any natural fault line, it’s always there. But over any period of time the tremors run stronger or weaker. For the past 20 years, the tremors have been weak. Now they’re getting stronger.

There are two main reasons that the German military is weak. The first is NATO, which is really to say the United States, has guaranteed European security since the end of the Second World War. The second is Germany’s belligerent history.

But with a forceful Russia to the East, the Germans are starting to feel insecure. The Financial Times reported on Monday that,

Germany has pledged to raise military spending in coming years, as Berlin seeks to reconcile a commitment to play a more assertive role in global security with a military that is in dire need of overhaul…

‘In a speech last week outlining security threats Ursula von der Leyen, defence minister, said: “To our east we see in Russia an actor who is eager to return to the power politics of yesteryear.”’

And if you think Germany feels insecure, spare a thought for Poland. Hitler and Stalin carved the country up before the Wehrmacht invaded the Soviet Union. Poland’s been stomped on for centuries by Russians, Germans, and occasionally any other European power that felt ambitious. It’s still, and always will be, vulnerable on both borders.

But, according to Friedman in his new book Flashpoints: The Emerging Crisis in Europe, what Poland does have is an ally in the United States. That’s why Friedman considers Poland a key — and rising — country for the 21st century.

American grand strategy, Friedman argues, is designed to prevent any regional hegemon forming. The US doesn’t want to see German technology united with Russian natural resources. So they’ll use Poland as a wedge. What Poland gets in return is technology transfers, investment, and the implicit backing of the US military. Like Napoleon, the Americans will seek to use Polish freedom as an excuse to curb Russian power.

For now at least, in another historical twist of irony, the Germans and Poles have a mutual interest in defence as relations with Russia sour.

That’s why two of America’s ‘defence’ firms — Lockheed Martin and Raytheon — are trying to woo €8 billion in contracts from both countries to supply aircraft and missile defence systems.

But the key quote might be this one: ‘Lockheed is hoping Germany and Poland will be the first customers…in what the company estimates could be a market worth as much as $100bn over the next 15 years. More than 30 countries are seen as likely to invest in new or upgraded missile defence systems over this period.

I actually know of one investor who bought US defence stocks like Lockheed around 1990 and never sold. In fact, he’s kept adding to his position over time. That’s through the Asian Financial Crisis, the dot com bust, and the global financial crisis.

Despite the emotional roller coaster, his central premise is that the big US defence firms own the congressman anyway, and any study of history shows peace doesn’t last long. It’s not a particularly heart warming view of the world, but you can’t fault the logic (or the success, sadly).

Byron King, who writes Military Tech Alert, says there’s a global arms race going on and few people are paying attention. This trend is not isolated to Europe. Japan, India and China are all either planning or committing significant funds to their militaries.

And of course, there is the United States. A central premise of geopolitics is that whoever controls the world’s ocean controls the world. For the last hundred years, that’s been America. An interesting stock to watch in this space is Huntington Ingalls Inc [NYSE: HII],a shipbuilder.

And while there is a lot of rhetoric about the US spending less on ‘defence’, somebody is still getting orders it seems…

Huntington Ingalls breaks out

Click to enlarge
Source: Market Analyst
As Byron told us at the WWD conference , the US Navy is currently as small as it was during the First World War. One wonders if it will stay that way. Huntington Ingalls may keep running for some time yet.

Unfortunately, Friedman’s conclusion is that the 21st century may be bloodier than the 20th. We don’t have to invest in it, but we don’t have to be naïve about the nature of government and politics either.


Callum Newman,
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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