The Next Super-Cycle

Defense Spending is just getting started

European leaders predictably agreed to another heap of sanctions on Russia - but just as predictably stopped short of a $50bn in military aide package for Ukraine. Warring powers have been economically strangled before, but the world’s second largest economy backing Moscow, don’t hold your breath. Still, Russia’s economy is showing cracks. Those overheated war-time economies are like snorting a line of Bolivian marching powder until they aren’t.

It also comes with paranoia. Russia’s very competent central bankers (who knew?) Have been warning the government that between the US and OPEC rests the capacity to flood the global oil markets. He may not admit it, but Vladimir Putin knows that it was a prolonged price collapse in energy prices in the 1980’s that contributed to then collapse of the Soviet Union.

Moscow’s central bankers are right, up to a point. OPEC’S spare capacity of about 5.3mm bpd is at a record high – equal to Russian’s current exports. After upping production Saudi Arabia still has room to expand. Low prices won’t make US producers move faster, but a Moscow’s biggest danger comes from non-US, non-OPEC producers like Guyana, Brazil and Kazakhstan to drill like the devil to squeeze all the money they can out of the legacy energy sectors. While economists are fussing over where global markets might be in the commodities super-cycle, the 4717 is eye-balling an altogether different super-cycle.

You could do worse than defense when there is a Bond villain at the head of an invading army in Europe and China eyeballing Taiwan.

Profits you’d rather not make

Overall, American defense contractors are looking at solid years ahead, and while they still dominate “the West” they are expensive, troubled and lack the infrastructure to ramp up quickly.

After two rotten years of cratering stock prices, crashes and fuselage panel hiccups - Boeing shares are up 11% after winning the contract for the 6th generation F-47. The Pentagon hasn’t released cost estimates but it looks set to be the most expensive fighter ever made. The chatter is that development costs have exceed $50bn and a unit price of hundreds of millions. President Trump has said that “an experimental version of the plane has been secretly flying for almost five years and we’re confident that it massively overpowers the capabilities of any other nation.” Meanwhile shares at Lockheed Martin, which makes the F-35 but lost on the F-47 bid, dropped 10% as Europeans grope around for alternatives - with Sweden’s Saab AB Gripen gaining traction for low operational and maintenance costs as well as advanced tech.

Sweden announced a jump in defense spending from 2.4% GDP to 3.5% by 2030 - funded mostly through borrowing. With the release of the German debt brake, they aren’t the only ones. German arms-maker Rheinmetall share price is up 12x since Russia's 2022 invasion. Armin Papperger, Rheinmetall’s CEO said the company is now churning out more artillery shells that the US at the moment. It doesn’t appear to be quarterly report hot air either, Moscow tried to have Papperger killed by a resurrecting a shadowy, Stalin-era agency called SMERSH, which I’d first heard of in. James Bond novel, whatever that tells you. As it stands, it hasn't seem to slowing down too much.

European defense firms are moving away from niche, low-volume producers, less Jaguar and Ferrari and more Chevrolet, Papperger can see the way that the economy and warfare are intertwined. Brussels wants some 50% of defense spending to be local, boosting European productivity and revenues at the same time. It’s working. Optimism is rising on Germany’s plans to boost infrastructure and defense spending, which will likely spill over into other supply sectors like energy and chemicals. Rheinmetall just overtook Volkswagen in market cap.

Industrial Überkompanie Thyssenkrupp had a 57% surge in order last year and is spinning off its naval arm in an highly anticipated IPO this year. The defense boom, which really hasn’t started in full, gunning is the entire European economy, where business has grown at its fastest tick in seven months, with factory output expanding for the first time in two years.

Capability Gap

Generals are famous for fighting the last war. Ukraine has made a name for itself fighting the next one, battle testing solutions in a bloody, realtime innovation lab. Private-equity firms like Tikehau Capital and Weinberg Capital Partners focus on small and medium companies, while venture capital steps in to fill “capacity gaps” with kit like drones, AI and cyberwarfare to copy US war-tech firms like Anduril Industries, Palantir and Shield AI. Larger players such as CVC Capital Partners  taking advantage of investors rethinking defense’s role in the free market.

Go East, Young Man.

Europe isn’t the only bloc of nervous US allies looking to re-arm outside of America’s fickle orbit. Defense-industry bosses from South Korean and Australia have been selling Canadians all sorts of military kit; from South Korean submarines and howitzers and Australian cutting edge over-the-horizon radar (JORN) for $4bn. The Pentagon was supposed to be the first in-line for JORN system, but that’s in doubt with cost-cutting taking center stage.

Between Japan and South Korea, arms-dealers revenues have jumped 25% since 2022 - to $63bn. While US arms-makers account for roughly $200bn, and still it dominate the market, East Asian manufacturing can fulfill orders faster than US counter-parts. At Japan’s Mitsubishi Heavy Industry sales are up 20% in Q4 2024. Hanwha Aerospace, South Korea’s largest defense contractor, sales rose 60% year on year selling kit to locals and Europe.

Last week Beijing revealed its own 6th Gen fighter, the J-36, featuring no tail, three engines for thrust and a host of stealth features.

So to be a complete bastard about it, this defense super-cycle has two possible outcomes: 1) the existential threat of collapsing world order will extend beyond the normal economic cycles, or 2) it won’t. At that point it won’t matter.

What the hell, be an optimist.

This article was updated on 15 May 2025

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