The Future of Defense: Lessons from the Russia-Ukraine Conflict

Hello. This week we have a very important geopolitical success: Trump and Putin are having a meeting in Alaska, probably to discuss the Russia-Ukraine conflict along with other topics. I’m not a geopolitical expert and my area of expertise is the markets, but I will share from my experience what are the possible outcomes of this situation from a financial perspective. We’ve seen a massive investment in Defense from the European Union. Many weapons manufacturers, defense companies and AI companies surged due to the liquidity boost in these sectors. Defense spending rose 30% in 2024 and achieved 1.9% of Europe’s GDP, and is expected to keep rising. But is Russia that big of a threat to justify this spending? Or is it a simple maneuver to divert funds into these companies? Europe lacks the imperialist mentality of the USA or Russia, so the budget is probably overweighted, focused more on protecting than projecting power. The USA has maintained their control and hegemony through their strong army, and will keep doing so. Their military spending has indirect revenue. What we have learned from the Russian-Ukrainian conflict is that the war is not on the ground anymore, but rather in the air, internet and intelligence. In my opinion, Trump is not interested in finishing the war due to various factors: · United States is supplying high volumes of LNG, oil, and nuclear fuel to Europe. Keeping the war going only benefits the US and his energy sector.

· Russia's focus is in Ukraine. Even though US has aided Ukraine with billions of dollars, most of these funds stayed in the U.S., where new manufacturing facilities have been built, creating thousands of jobs. Anyways, a new Marshall Plan will be highly profitable. · Right now, It's interesting for the U.S. to have Russia occupied with Ukraine and spending 40% of its government budget on defense while there's proxy wars for minerals and fossil fuels in Africa or Middle East. · Europe's overspending in energy makes the U.S. more competitive in key manufacturing sectors.

From a technical perspective, we are not seeing yet signs of reversal in Defense spending and this sector might have more space to go upwards ($ITA ETF doubled SP500's performance since the war started). Looking at the markets, the war will go further on. There hasn't even been a sign of shakeout.

AI plays an important role as well. The U.S. defense spending in AI will keep flowing in order to have the most advanced defense systems in the world. According to a Berkeley Lab report, Data centers consumed about 4.4% of total U.S. electricity in 2023, and it's expected to consume between 6.7 and 12% of total U.S. electricity by 2028. Definitely, the key sectors to watch the next months to align ourselves with Trump's interests are: · Energy · Commodities · Defense · Artificial Intelligence · Cryptocurrencies