All eyes are on oil thanks to the war in Iran. It gets all the headlines.

Talking heads debate shortages and supplies. But out of the spotlight, copper is ripping higher. It’s near an all-time high now:

This isn’t a new story. It’s the reason I jumped at the chance to run a junior copper explorer back in 2022. I knew that a copper bull market was coming. I was too early. But as an investor, the timing is perfect.

Some folks look at the chart and thing, “I missed it.” But here’s an example of what happened during the last copper bull market:

We used Freeport McMoRan (FCX) as a proxy for the major copper producers at the time. Coming out of the crash, Freeport’s shares ran 400% from January 2009 to January 2011. The price of copper exploded 225% higher.

Now compare that to the last two years:

As we can see here, Freeport’s shares didn’t start to rally until April 2025. Since then, they rose about 130%…well below the performance from 2009. And copper prices are only up about 45%…

That leaves us plenty of room for bigger gains.

And even if the copper prices stop rising for now, copper producers are about to generate massive cash flows. This will be the start of a massive round of consolidation, exploration, and development.

And it won’t be enough.

It takes nearly two decades to take a copper discovery to production. And thanks to nearly a decade of under investment from 2012 to 2023, there have been far too few new discoveries.

According to the analysts at S&P Global, new discoveries fell 90% since 1990. Since 2021, only six discoveries meet the “major discovery” criteria. And all the new production scheduled to come online between now and 2030 will only cover about 80% of expected demand.

That math is impossible to argue. We need copper to live a modern life. If you want the lights to come on when you flip the switch…you need copper. If you want to use ChatGPT or any other AI for that matter, you need more copper.

It doesn’t all have to be new, though. Recycling will add some back into the system. But you can’t recycle enough to meet the projected demand.

That means the price of copper must go up. And as we saw from the chart above, that’s already underway. However, the earnings growth hasn’t been priced in yet.

That’s why we want to buy now, even though these stock prices appreciated significantly. There are a couple of ways to own these stocks. For generalists who want some exposure to quality miners, the Sprott Copper Miners ETF (Nasdaq: COPP) is perfect.

COPP holds a basket of the world’s largest miners (percentages are estimates):

• Freeport McMoRan (26%)
• Teck Resources (11%)
• Antofogasta (9%)
• Hudbay Minerals (5.5%)
• KGHM Polska Miedz (5.5%)
• Lunding Mining (5.3%)
• Southern Copper (4.7%)

These are giant copper producers that will absolutely benefit from the rising copper price. However, for investors with more risk tolerance, there’s the Sprott Junior Copper Miners ETF (Nasdaq: COPJ). This holds the smaller, “up and coming” copper companies:

• Arizona Sonoran (6.3%)
• Faraday Copper (5.9%)
• Taseko Mines (5.2%)
• Firefly Metals (4.8%)
• Solaris Resources (4.7%)
• Minsur (4.6%)
• Osisko Metals (4.4%)
• ERO Copper (4.3%)

As you can see, there are much smaller portfolio memberships, which gives them more members. The exposure to these smaller companies gives them more opportunities to benefit from both production and discovery. Higher risk, but potentially higher reward as well.

These funds did well over the past year, but they have room to move. So, if you don’t have exposure to copper yet, you should get some now. Because, while oil gets all the headlines, copper is about to explode.

The post Don’t Buy Oil, Buy this Critical Commodity Instead appeared first on Daily Reckoning.

Just an hour or so to go! I can’t wait to watch Jim, Byron, Adam, Dan, Zach, Matt B., and the rest of the awesome Paradigm peeps at RickardsLive.com. Just click this link today at 1:00 p.m. ET, and you’ll be magically transported to America’s cheesesteak capital for a ticker-filled chat with the Paradigm’s celebrated macro mavens.

Now onto today’s edition.

Xi Jinping stood at a Seattle podium in 2015 and said, with a straight face, that the Thucydides Trap doesn’t exist. Then he spent the next 10 years building the world’s largest navy, the world’s largest army, and a hypersonic missile program designed specifically to kill American aircraft carriers.

That’s not a contradiction. That’s a magic trick.

And the beauty of it is that our side does the same thing from the other direction.

The Thucydides Trap has become the Swiss Army knife of international relations. Everyone picks it up, opens the blade they need, and puts it back down. Hawk or dove, Washington or Beijing, it doesn’t matter. The trap is infinitely useful precisely because it means something different to everyone who mentions it.

What Thucydides Actually Said

Thucydides wrote his history of the Peloponnesian War around 400 BC. His diagnosis of why Athens and Sparta went to war is the foundation of everything that follows. In his words, growing Athenian power and Sparta’s fear of it were the real cause of the war.

Harvard professor Graham Allison picked that up and ran with it. He looked at 500 years of history and found 16 cases where a rising power challenged a ruling one. In 12 of those, war followed. In 4, it did not. He called this structural tendency the Thucydides Trap and wrote a book asking whether America and China could escape it.

Note what Allison actually claims. He says the odds of serious conflict go up sharply. He doesn’t say war is inevitable. In fact, his book title ends with a question mark.

Xi quoted Allison’s concept to dismiss it. But if the concept were truly nonsense, why bother dismissing it at a state visit? You don’t waste a Seattle podium on things that don’t matter.

How the Trap Became a Tool

Here is where it gets useful for your personal BS detector.

Any partisan can use the Thucydides Trap to justify almost any policy position imaginable. Watch how this works.

The American hawk picks it up and says, “History shows that when a rising power threatens a ruling one, war follows.” We must arm. We must contain. We mustn’t be caught unprepared the way Sparta was. The trap demands we act.

The American dove picks it up and says, “History shows that miscalculation leads to catastrophe.” We must talk. We must de-escalate. We mustn’t blunder into a war nobody wants. The trap demands that we restrain ourselves.

Xi picks it up and says, “The trap only springs if you panic.” We are rising peacefully. Your fear is the problem, not our growth. The trap demands you calm down.

The European diplomat picks it up and says, “We are the wise adults in the room who can prevent great-power miscalculation. The trap demands that you both need us.”

The same historical framework justifies every single position. That isn’t a coincidence. That’s the sign of a concept that has been stretched so thin it covers everything… and therefore explains nothing.

The Domestic Sleight of Hand

Invoked constantly, the Thucydides Trap gives both parties a reason to spend money abroad and avoid the hard conversation at home.

Consider what Sparta actually looked like during its war with Athens. It was a rigid society held together by a warrior caste sitting on top of a population of enslaved people called Helots. Sparta won the war and then collapsed anyway from its own internal rot. The thing that made Sparta powerful was also the thing that made it brittle.

Athens had its own problems. The democracy that fought the war was the same democracy that voted to execute Socrates, launched a catastrophic invasion of Sicily on a whim, and purged its best generals at the worst possible moments.

Both powers destroyed themselves. External pressure was the occasion. Internal failure was the cause.

The lesson Thucydides actually teaches is about what happens when institutions rot from within, fear replaces judgment, and political short-termism overrides strategic patience. Unfortunately, that all sounds eerily familiar.

We can’t solve these problems by building more aircraft carriers. We solve them by fixing the bridges, schools, and supply chains that make a nation worth defending in the first place.

The Selectorate Problem

The uncomfortable truth is that leaders optimize for staying in power rather than for the national interest. The smaller the group whose loyalty you need to survive politically — your selectorate — the more you can ignore everyone else.

Apply that to the Thucydides Trap debate in Washington. Who benefits from a sustained China threat narrative? Defense contractors. Intelligence agencies. Think tanks funded by both. Congressional members with bases in their districts that need budget justification. Consultants who get called on television to explain the threat.

None of those people benefit from a quiet, boring conversation about road maintenance, hospital infrastructure, or why American kids score below average in math and science compared to their counterparts in Singapore, South Korea, and yes, China.

The trap is convenient. The domestic rot is inconvenient. We know which one gets the airtime.

What Taleb Would Say

As Allison presents it, the Thucydides Trap is a probabilistic model: 12 out of 16 cases ended in war. That sounds precise.

But how do you distinguish between a structural tendency and a narrative that makes historians feel clever in retrospect?

The honest answer is that nobody knows whether America and China are in one of the 12 or one of the 4. Anyone who tells you otherwise is selling something.

What we do know is that every war in human history has been expensive, deadly, and bad for the people who had to fight it. Even when the political class that launched it walked away fine. That fact requires no Greek historian to explain.

Wrap Up

The Thucydides Trap is real as a concept. Allison’s research is serious work, even if it is debated. The structural pressure between a rising China and an established America is real. None of that is fabricated.

What is fabricated is the idea that invoking Thucydides settles any argument about what we should do. It’s merely a framework that justifies any position, in any direction, for any audience. That makes it rhetorically powerful and analytically weak.

More importantly, the trap gives the political class a permanent excuse to ignore the domestic considerations in the name of the “national interest,” as if that even exists.

Rome didn’t fall to the barbarians. She fell to centuries of currency debasement, institutional corruption, and a tax burden that drove productive citizens off the land long before any barbarian showed up at the gate.

Your leaders aren’t evil for using the Thucydides Trap as cover. Most of them genuinely believe it. But they also genuinely benefit from believing it. Those two things are not mutually exclusive.

The bridges need fixing. The schools need fixing. The debt needs fixing. Can we compete with China? Maybe. But the real question is whether we can compete with our past selves?

Thucydides wrote about what happens when powerful societies choose fear over wisdom. He wasn’t writing about China. He was writing about us.

The post A Rather Convenient Trap appeared first on Daily Reckoning.

The ceasefire with Iran is hanging on by a thread.

Yesterday the American Navy fired on and disabled an empty oil tanker headed to Kharg island. The ship attempted to bypass the blockade and ignored commands to stop.

An aircraft fired a Hellfire missile into the tanker’s engine room, disabling it. CENTCOM posted a video of the incident on X:

Source: CENTCOM

AGM-114 Hellfire missile. Source: Military.com

In order to maintain the blockade’s credibility, U.S. forces are being forced to disable ships which attempt to run it. Some of them, at least.

Targets on Iran’s Qeshm Island in the Strait of Hormuz were also struck.

Meanwhile Iran targeted U.S. military bases in Bahrain and Kuwait. CENTCOM reports that all attacks failed or were intercepted. Iranian sources dispute this. Commercial satellite coverage of the areas has been severely restricted, so we likely won’t know the full story for a while.

Then today Iran hit Kuwait’s international airport with a missile and drone attack. At least one terminal was seriously damaged.

Kuwait’s International Airport

Kuwait is a key American ally in the region, hosting large military bases and cooperating on missile defense, and perhaps even conducting strikes of its own on Iran (though this is disputed).

Escalation, or Aggressive Negotiation?

Will this fresh action lead to a full-scale return to war? Or is it simply each side demonstrating that they aren’t afraid of fighting, to strengthen their position in negotiations?

I’m leaning toward aggressive negotiation. I don’t think either side wants a return to all-out war.

There is too much at stake. For Iran, the fate of their economy hangs in the balance. The worrying part is that they’ve been sanctioned for 47 years and are accustomed to dealing with hyperinflation and lean times.

However, Iranian lead negotiator M.B. Ghalibaf posted the following aggressive message on X back on May 29th:

For President Trump, a return to intense fighting would be unpopular at home, could crash markets, and may threaten the GOP’s midterm efforts. He seems determined to reach a diplomatic solution, but at the same time isn’t budging on his red lines.

Here’s the President’s latest Truth Social post on the Iran situation:

Both sides seem to want a deal, but at the same time neither is willing to compromise. So it is still possible that we see a return to full-scale fighting.

Chances are this eventually ends with a deal. But as we’ve noted multiple times, that could take many months at the current pace.

Economic Fallout Approaches

The price of diesel in California is currently $7.28 per gallon. In Texas, it’s $4.81.

For truckers, farmers, and other diesel consumers, this is a massive difference.

Part of the California prices can be explained by higher taxes. But the state’s problems go much deeper than that.

Strict California environmental regulations caused most oil refiners to flee the state decades ago. And they refuse to build new pipelines. So California imported most of its oil from Asian refineries, which sourced their crude from the Persian Gulf.

The West Coast, and especially California, are rapidly approaching tank bottom when it comes to jet fuel and other distillates (mostly diesel fuel):

California is being forced to import much more fuel from the Gulf of Mexico, which is a long trip requiring passage through the Panama Canal. That limits the size of tankers significantly.

This is why we say America is mostly self-reliant when it comes to petroleum. And we are exporting more fuel than ever before. Existing inventories are being drained as producers sell to the highest global bidders.

Rickards’ Take

In a recent update to subscribers, Jim Rickards laid out the Iran situation bluntly.

The peace talks are a farce.

At best, we have a fragile ceasefire. But the U.S. keeps bombing Iranian bases and Iran keeps firing drones and laying mines, so it’s a thin reed to lean on.

Trump’s only paths at this point are surrender, stalemate and escalation. Surrender won’t happen because the political damage to Trump and the loss of face are too much for Trump to bear. The Iranians won’t agree to anything that makes Trump look good. Why should they? They’re winning the war. Stalemate, in the form of a ceasefire, may continue, but that won’t reopen the Strait.

Escalation could happen, but it won’t achieve any of Trump’s goals, including handing over Iran’s highly enriched uranium or achieving regime change. Escalation might give Trump a short-term political boost among the war hawks. But it would be Trump’s Vietnam and would ruin his legacy. Most importantly, escalation won’t reopen the Strait.

The bottom line for investors and consumers is that the Strait will remain closed indefinitely, with all that implies for global supply chains and inflation. Markets are not priced for this. They are priced for a quick end to the war and the reopening of the Strait.

When reality sinks in, be prepared for major declines in stock prices, higher interest rates and an economic recession — or worse.

Jim is not one to sugarcoat. He calls it like he sees it, and has called this conflict more accurately than anyone else so far. And I agree with his assessment, unfortunately.

Stocks are priced for an immediate re-opening of the Strait of Hormuz. And that’s extremely unlikely.

Last week, when everyone was convinced a deal was around the corner, WTI crude oil dropped to $87 a barrel. Now that reality is setting in, it has since risen to $96.

If the Strait stays closed, we could easily see $150/barrel by the end of summer. If the war starts back up, and critical infrastructure is hit, such as Saudi Arabian pipelines which currently bypass the hot zones, we could go much higher.

Areas like California will be in serious trouble in the very near future. Diesel is already over $7 a gallon and likely going higher. Areas like Texas and those with oil fracking will be better off in terms of shortages, but prices will still sting.

The world remains on track for a major inflationary spike. When oil soars, the price of everything goes with it.

I continue to hold my oil stocks and precious metal investments. I’m a bit worried about miners over the short-run due to a possible oil price spike, but the sector remains cheap and has already been discounted significantly since the war began. I’m holding.

We’ll continue to explore ways to prepare for the turmoil ahead.

The post Missiles and Drones Fly as Iran War Smolders appeared first on Daily Reckoning.

According to the University of Michigan’s latest Index of Consumer Sentiment, a record number of Americans have negative views of the economy. This is yet more evidence that the American people are dissatisfied with their economic condition.

Some commentators have claimed to be perplexed by the people’s negative views of the economy since government statistics show that most Americans have good jobs that pay them good salaries.

One problem with this defense of the economy is that government statistics are manipulated to understate the true rates of inflation and unemployment. Trip Powers, writing on Substack, looks at the situation using a more accurate definition of unemployment than what is used by the government. By, for example, including those who have given up looking for work and those working part-time because they cannot find a full-time job, the unemployment rate is over ten percent. An unemployment rate that high indicates a significant economic downturn.

The main reason why even many Americans with above average incomes are dissatisfied with the economy is high prices. According to the latest Personal Consumption Expenditures (PCE) price index, which is known as the Federal Reserve’s favorite measure of inflation, prices have increased by an understated 3.8 percent over the past year.

The culprit behind the price increases is the Federal Reserve. Today, prices are several times higher than they were when President Nixon in 1971 severed the last link between the US dollar and gold, thus removing any restraints on the Federal Reserve’s ability to inflate the currency.

With inflation rising more than incomes, many Americans have suffered a loss of purchasing power even though their nominal income increased. The erosion of Americans’ purchasing power has led to a debt-based economy.

This has created a number of bubbles that likely will soon burst. According to an analysis of Federal Reserve data by economist Mike Shedlock, total car, credit card, and student loan debts are now higher, measured in real dollars, than nearly 20 years ago during the Great Recession.

Of course, the greatest debtor is the US government. The Federal Reserve’s practice of buying government debt in order to pump more money into the economy enables maintaining the largest government in history. Without the Federal Reserve, the US government would have to finance the welfare-warfare state via direct taxation, instead of through the central bank’s hidden (and regressive) inflation tax.

Many Americans voted for President Trump in 2024 because of his promise to lower prices. Now, Democrats may gain control of one or both houses of Congress by running as the party of “affordability.”

Unfortunately, most politicians think the way to address the affordability crisis is with more government spending facilitated by the Federal Reserve. That will only worsen the affordability crisis.

Eventually, Congress will be forced to cut spending as the soon to be over 40 trillion dollars Federal debt leads to a dollar crisis. This crisis will result in the collapse of the welfare, warfare, and fiat money system.

Whether it is replaced with an even more authoritarian system or a restoration of liberty depends in part on whether those of us who know the truth do all we can to spread the ideas of liberty. If we are successful, we can make America free, prosperous, and affordable.

Editor’s note: Read more at the Ron Paul Institute for Peace and Prosperity.

The post The Federal Reserve is Why the People are Unhappy appeared first on Daily Reckoning.

Today, we’ll discuss two hot sectors, gold and military technology. Both are subjects about which people write long books, but I’ll spare you the long book and give you a few short points to consider.

I’m focused on these two topics because this coming Thursday, June 4, at 1:00 pm Eastern Daylight Savings Time, Paradigm Press has a special broadcast for subscribers, live from Philadelphia.

As part of Paradigm’s ongoing America 250 effort, my colleague Jim Rickards (an old Philadelphian) will host an afternoon LIVESTREAMabout what’s going on in the world. His guest list includes yours truly and numerous other of our great editors.

And yes… We WILL offer investment names and stock picks. I can hear the chant of “TICKERS” now!

Be There on Thursday the 4^th

It’s now the beginning of June 2026, with only a month until Independence Day. So, this Thursday, June 4, at 1:00 p.m. EDT, the team from Strategic Intelligence will broadcast a live – and FREE – summit call from Philadelphia, former home of Benjamin Franklin and birthplace of the 1776 American experiment.

As America moves into its 250th year of national existence, we’ll ponder what drives markets at this point in history. Obvious motive forces include the Iran war, the associated global energy shock, persistent inflation, a broad affordability crisis, critical minerals and materials, gold, AI-driven power shortages and the future of the Trump agenda.

The host this Thursday will be Paradigm’s Aaron Gentzler, along with macro-economist and New York Times best-selling author Jim Rickards, plus me, Dan Amoss, Zach Scheidt, Matt Badiali, Adam Sharp and other colleagues. Together, we’ll share our latest research, investment ideas and market outlook.

And don’t worry; this won’t be a dry-as-dust economics talk. Expect fast-moving conversation, lively debate, behind-the-scenes stories and practical insights – aka Tickers! – that you can use immediately.

Throughout the event, we’ll present actionable investment ideas for you to consider. And again, just to be clear, there’s no cost to view the broadcast. We won’t ask for your credit card number! This event is on us… and it’s just us.

That is, the event is built around your Paradigm Team getting together to dissect world and national events, and share thoughts on the markets with our wonderful subscribers. To see the full agenda and reserve your spot, click here to view the special event page.

What’s the Story with Gold?

Now, let’s move along and discuss our favorite monetary metal, gold. Price-wise, gold began this month at $4,514 per ounce, well inside the range where it has traded for the past six weeks or so, between about $4,450 to $4,550. At current levels, the price of gold is down about 12% since February 28, when the kinetic war with Iran kicked off. Here’s the chart:

Price of gold is down about 12% in past three months.

Then again, this recent price of $4,514 is what gold posted back in… check notes… mid-January of this year, which at the time was a pop-the-champagne record level. So, if you have a time horizon of years versus a few months, gold is doing well.

Along these last lines, the current price of gold is up by over 34% from its price last year, in June 2025, about $3,350 per ounce back then. And that one-year price move says more about gold and its long-term relationship to the dollar than it says about three months of wartime, range-bound price-drift.

My point is that the gold price has been steadily rising for four years, and for a variety of reasons. One main factor is U.S. sanctions against Russia, which were prompted by the Ukraine conflict that began in February 2022. Back then, the U.S. froze Russian state assets and many nations looked on with shock, if not horror, and deliberately began to de-dollarize.

Broadly, this move out of dollars is reflected in substantial gold buys by central banks across the world. And central banks don’t buy gold to trade in and out; they’re holding for the long haul in a generational, macroeconomic, strategic-level trend.

Don’t just take my word on this last point. No less than London’s Financial Times, not exactly a gold-bug of a newspaper, says much the same thing in an article published today, June 2:

“Gold has overtaken U.S. government bonds as the world’s top reserve asset following years of relentless buying by central banks and a historic rally that has seen prices nearly double over the past two years.”

Meanwhile, from the standpoint of gold markets in general, U.S. government spending is out of control. Just this year (FY-2026), about 40% of federal outlays will be “funded” (some might say, “fake-funded”) by debt and accounting gimmickry. And so, the national debt – now over $39 trillion – increases while interest payout also climbs. Indeed, right now, annual national debt interest is a larger outlay than the entire defense budget.

Long-term, if not in the medium- and even short-term, the dollar’s purchasing power is steadily declining. It’s not out of line to say that we already see this reflected in rising inflation numbers for energy and food, and the Iran conflict and global oil mess just accelerated an ongoing, long-term process.

Sorry, but things won’t get better anytime soon, and this coming Thursday Jim Rickards, plus, Dan, Zach, Adam, Matt and I will all have more to say about gold and its price trends, as well as solid gold mining plays.

Meanwhile, many miners are spinning cash and growing earnings based on the current price of gold, let alone what can happen as the gold price begins to move up even more. Because frankly, we’re just beginning to glimpse the long-term profitability of well-run gold miners in the current price range for yellow metal.

The MilTech Boom (No Pun)

In other news – well, it’s not “new” news but it is meaningful – military tech is accelerating, soaring, booming, exploding, and overall lighting up the investment horizon. And of course, I’ll address some angles on this at the Thursday event.

Definitely, I’ll discuss America’s shipbuilding problems because there’s serious money going down not just to the coastline constructors, but also to companies all across the country. The two most important Navy builders are General Dynamics (GD) and Huntington Ingalls (HII). And for now, to keep it simple, I’ll just say that when it comes to big vessels with which to fight big wars, there’s nobody else.

That is, do you want submarines? It’s only GD and HII because no other company can even approach being qualified to build such vessels. Indeed, aside from these two names, just one other company in the entire U.S. economy is even qualified to cut into a submarine hull for maintenance, let alone build the beasts.

Submarine under construction. Credit U.S. Naval Institute.

Meanwhile, do you want large warships? Only HII can build aircraft carriers, let alone service them with refueling, and HII even has a lock on decommissioning the ships.

Or consider destroyers, namely the Arleigh Burke-class; again, it’s GD and HII. And yes, sure, the U.S. economy has “boatyards” that construct smaller vessels, such as for offshore oil work. But good luck finding companies with yards capable of anything sizeable, let alone suitable for warfighting.

Or go to a list of other vessels like amphibious assault ships (LPDs) or aviation-oriented assault vessels (LHAs). Again, it’s GD and HII and nobody else on the domestic horizon is even close to competing. And absolutely, there’s nothing simple about a military-scale shipyard.

Ingals shipyard at Pascagoula, Mississippi. Credit HII.

Then again, on Thursday we’ll have a list of investable suppliers for items like engines, electrical and combat system components, and nuclear power systems. On that last point, we’ll likely soon see long-lead buys for President Trump’s proposed “battleships,” which are really more like heavy battle-cruisers despite the official Navy designation (BBGN).

And don’t laugh or kid around about those battleships. I’ve discussed them in other articles and recently, no less than the Chief of Naval Operations (CNO) had very kind words about bringing this new class of vessel into existence.

On the aviation side, the U.S. is in the midst of a massive air power buildout that includes buying more legacy systems like the venerable, and much-improved F-15E, plus F-35s and the F-47 under development, and likely a new Navy aircraft called F/A-XX just now.

Notional image of proposed F-47 aircraft. Credit WarWingsDaily.com.

Plus, the U.S. is developing and fielding an entire menagerie of drones that range from tiny things that can be tossed like a javelin or fired from a mortar tube, to great big birds the size of a Boeing 737.

Meanwhile, along with ships and airplanes come munitions that range from families of underwater weapons like torpedoes and mines, through short-, medium-, long- and very-long-range missiles that do everything from intercept drones to kill orbiting satellites. And some of these weapons cost as much apiece as the ship or aircraft that might fire it.

Then there are all manners of electronics, and plenty of software to run it all and manage the battle. And okay, of course… this already involves phenomenal levels of AI, because how else do you think that the U.S. could have attacked over 800 targets per day in Iran during the March kinetic phase of the war? Hint: most targeting packages were prepared using AI, with final sign-off by a real person, or two or three levels of real people.

And on Thursday, I won’t neglect to mention the exotic metals and related materials that go into many of these MilTech platforms, munitions and electronics. This means rare earths, along with a host of other elements from the periodic table, that range from antimony and helium to tellurium and zirconium.

Periodic table, highlighting rare earths. Credit U.S. Geologic Survey.

In fact, this last aspect of MilTech is among the most critical of all because if you don’t have certain elements with key, specific metallurgical and/or electronic properties? Well, good luck making the overall weapon system work. Again, it gets technical in a hurry, and people write books about these things. But on Thursday I’ll explain and discuss who is doing what out in the investable economy.

And with that, let’s wrap it up. Allow me to bid you well, and thank you for subscribing and reading.

Best wishes… and Be There On Thursday!

The post TWO Red Hot Sectors — PLUS, “TICKERS!” appeared first on Daily Reckoning.

In the 1980s and ‘90s, China was among the poorest countries in the world.

More than 90% of the country’s population lived in extreme poverty in the early ‘80s.

In one of the most remarkable growth stories in history, the country has (at least according to government statistics) eliminated extreme poverty.

Source: Wikipedia

The real change began in 1978, when Chairman Deng Xiaoping began to open China up to foreign investment. He created “special economic zones” in areas like Shenzhen, where companies could take advantage of cheap labor and low taxes.

Industrialists from Taiwan, Japan, and the U.S. moved factories to mainland China to take advantage of the low-cost labor and loose regulations.

The image below shows Shenzhen in 1985 (top) vs 2015 (bottom).

Source: CGTN

The 1980s were the beginning of China’s industrial rise. The country went from typical communist central-planning (a disaster) to a unique form of “state capitalism”.

Ever since, China’s economic rise has shaken up the global economy. And it’s likely to get more challenging from here.

From Humble Beginnings

At first, China was attractive for its huge pool of low-cost labor. This was the “sweatshop era”, for lack of a better term.

Toys, garments, shoes, plastic widgets, etc. Components were mostly imported rather than made within China.

Since then, China has steadily climbed up the industrial ladder.

In the 1990s, China moved up the chain, creating more of its own components. It shifted into electronics, appliances, chemicals, and low-end machinery.

The 2000s was when explosive growth began. China was admitted to the World Trade Organization in 2001.

The country began to dominate in steel, cement, aluminum, electronics, solar panels, and industrial machinery. The scale of their industry became a serious threat to the world.

The Chinese government supported a massive buildout of industry. Cheap land, cheap loans, and subsidies rained down. It became increasingly difficult for the world to compete on price.

Countries began to put up tariffs on metals and other areas where China was the clear cost leader.

From 2008 to 2015, the China threat escalated. The country continued to move up the value chain, making increasingly complex machinery and products.

Companies that built in China got access to cheaper labor, but sacrificed their manufacturing secrets.

The Everything Threat

Historically, China has not been a hub of innovation. It is an iteration hub. They take someone else’s tech and hone it until the cost is rock-bottom.

Some of the tech is essentially stolen, and some of it China requires as payment for entering the massive Chinese market.

We’ve seen it play out in steel, aluminum, electric cars, high-speed trains, phones, telecom equipment, and more.

Let’s look at two examples where China is threatening major Western industries today.

Pharma

In a recent interview, Pfizer CEO Albert Bourla said, “I go to bed and wake up with two things on my mind. China and AI”.

The company just signed a $10.5 billion licensing deal for oncology treatments from a Chinese firm.

Pfizer isn’t the only one looking to China for new treatments. Last year, pharma companies spent a massive $137 billion licensing Chinese drugs and drug candidates.

Pfizer CEO Bourla said the following about Chinese competition:

“For every one area we have a company working on something novel, the Chinese have ten companies working on it too.”

Bourla warned that in terms of research and development, Chinese companies “do things 3 times faster and at half the cost”.

Pfizer and other pharma firms are currently licensing tons of potential treatments from China, but Bourla warns that won’t last. He says that eventually China will cut out the middleman and attempt to sell these products to the world directly.

China has expanded its mega-scale playbook to pharmaceuticals. This is potentially good for patients (more new drugs), but could be very bad for Western pharmaceutical stocks in the long run.

Auto-Mation Nation

The other area which is especially painful for the U.S., Japan, and Europe is automobiles.

Over the past few decades, China has invested heavily in car production. And today they’re far ahead of everyone else.

Source: Global Statistics

In 2000, China’s auto production was maybe 2% of the global total. Today it’s at least 35%.

Take a look at the past 10 years of car exports by the top 3 countries.

Source: The Economist

Ouch. China went from exporting around 1 million cars a year in 2016 to around 9 million today.

And in terms of electric vehicles, China is absolutely dominant.

In China, entry-level electric vehicles start at around $8,000 out-the-door. Ford CEO Jim Farley has called Chinese electric cars an “existential threat”, and their manufacturing process “the most humbling thing I’ve ever seen.”

Additionally, Japanese, European, and American car companies are now struggling to compete within the massive Chinese market. Selling into China was a huge profit center for Japanese and Western carmakers over the past few decades. That era is ending.

A Wakeup Call

China has its problems. Too much debt, not enough domestic spending. Citizens save too much, at least according to modern economic theory.

And “state capitalism” is far from perfect. Sometimes the result is “ghost cities” and bridges to nowhere.

But we can no longer ignore the threat of China’s massive scale. When they decide to move into an industry, shock waves radiate throughout the globe.

Today China has set its sights on semiconductors and advanced electronics. They are making a disturbing amount of progress on that front. I expect that within a decade, they’ll be fully caught up with Nvidia, Intel, and the memory giants like Samsung and SK Hynix. Costs and profits at Western giants will plummet as competition soars.

As Americans, we must heed this wakeup call. We can no longer dismiss Chinese goods as low quality junk. The country isn’t just a big pool of cheap labor anymore. It’s an industrial titan like the modern world has only seen following World War II, when America dominated with 50% of industrial capacity.

For too long we’ve coasted off of cheap Chinese goods. Corporations exported their manufacturing to the country to save a few percentage points. This kept corporate profits high, and inflation low, but hollowed out our manufacturing base. Millions lost high-paying jobs.

Now China has moved up the value chain and threatens our most profitable sectors.

We can’t win this war with sanctions. We’ve seen this play out with GPUs and other AI hardware. China has made incredible strides in these areas thanks to these restrictions, which gave them all the motivation they needed to build up domestic capabilities.

America needs to stop importing cheap foreign labor, and lean into empowering Americans to do what they do best: take risks, innovate, and grow.

Tackling fraud and waste must become a top priority. Efficiency is everything in this global industrial competition.

If we do these things, we can regain our place as an industrial titan. But it’s going to take time, sacrifice, and major political reforms.

The Chinese industrial threat is not going away anytime soon. It continues to grow and expand into new areas. What we covered today is just scratching the surface.

To compete, we must streamline regulation, lower taxes, and most importantly – re-industrialize with haste. We’ve made some early progress on the re-industrialization front, with the Trump administration bringing advanced chip manufacturing back to the country with TSMC’s new Arizona fab. But we need much more of this.

We may also need to let the dollar fall in a controlled manner, in order to make our exports more competitive.

The U.S. has all the ingredients required to regain our rightful place as a manufacturing powerhouse. Talent, natural resources, capital, and most importantly – the greatest entrepreneurial spirit the world has ever seen.

The future of American industry can still be bright. But we have work to do first.

The post The China Threat to… Everything appeared first on Daily Reckoning.

For what seems like the hundredth time, a deal with Iran is apparently just around the corner.

On Thursday, Axios, a news outlet with close ties to the Trump administration, reported the following:

U.S. and Iranian negotiators have reached an agreement on a 60-day memorandum of understanding to extend the ceasefire and launch negotiations on Iran’s nuclear program, but President Trump has yet to give his final approval, two U.S. officials and a regional source involved in the mediation efforts tell Axios. Iran has also not confirmed its acceptance.

Pay attention to the wording of this article. It states the deal is “mostly agreed to… but both sides still needed approval from senior leadership”.

Hmm, that doesn’t sound like much of a deal.

Regardless, stocks rallied and oil fell.

Reality Distortion Field

At a conference in New York yesterday, Exxon Senior VP Neil Chapman was blunt in his assessment of oil markets.

“Commercial inventories of crude oil, of liquids, think petroleum, gasoline, diesel, jet fuel, they’ve all run down… We’re approaching unheard of inventory levels. I mean really, really low levels. You can debate whether that’s going to hit those really low levels in two weeks or three weeks.

Once you get to that point, then you’ll see the price shoot up.”

Chapman went on to say that Exxon has modeled the effect such low inventories would have on price. His conclusion: $150 to $160 oil is entirely possible in the near future.

Despite this, WTI crude oil is currently trading at around $87 a barrel. There’s a serious disconnect here.

Despite market action, I believe there’s a very good chance oil could remain higher for much longer than most analysts expect.

Talking Oil Down

Whenever oil spikes, a news story hits the wire about a peace deal just around the corner. Oil crashes, stocks rally. Rinse, repeat.

We’ve seen this playbook run at least 6 times now. And it continues to work.

The question is: how many more times can this ruse be effective?

Violent Repricing

By this point I sound like a broken record on this topic. But unless the Strait of Hormuz opens up soon, we are going to see oil and inflation take off like a banshee.

Inflation is already jumping. Wholesale inflation (PPI) jumped 6% in April. And take a look at Personal Consumption Expenditures inflation (blue) and core PCE, which excludes food and energy (red):

The good news is that we’re not nearly at 2022 levels. But we could well be on the way there. And it’s important to keep in mind that these are official government statistics, which notoriously understate true price hikes.

There is a very good chance that the oil crisis isn’t over yet. If it worsens, inflation will get completely out of control.

Deteriorating Economy

Meanwhile real wages dropped in April, while spending rose. That means people are spending with credit cards or dipping into savings. As a result, the U.S. personal savings rate plummeted to 2.6%, levels last seen in 2008.

Source: Charlie Bilello

Americans are struggling to get by. The only things keeping our economy afloat are AI and spending by top earners.

The chart below shows the growing gap between the highest American earners and the bottom 80%. The top 10% now accounts for 48% of total spending.

Source: FT

The trend here looks downright awful.

The economy is also slowing. Q1 GDP growth came in at just 1.6%. Not long ago the estimate was for 3%. And like other government stats, this one is “massaged” too.

I fully expect the Trump administration to resort to stimulus checks, probably before the end of the year.

A Real Deal

A real lasting deal with Iran still seems months away. And we quite simply don’t have that much time. We need to reach a deal to open the Strait of Hormuz immediately. But this is Iran’s primary leverage, and they won’t give it up easily.

The damage to the world economy is piling up.

Both sides are acting like they have all the time in the world. This is intentional. As Jim Rickards says, it’s the grandest game of chicken ever played.

Neither side wants to give the impression that they need a deal to happen. But both do. It’s a heck of a pickle.

Getting a lasting deal done will require old-fashioned diplomacy and compromise. But right now everybody’s focused on saving face and making maximalist demands.

So despite the positive headlines, I’m not optimistic about a real resolution. This crisis could drag on through the rest of the year. And that would be disastrous for the world economy.

Despite this, I’m not necessarily bearish on hot stocks here. This is a certified market mania and attempting to short a market like this is hazardous. When investors want an excuse for stocks to rally, they’ll find it. However, when this market finally does break, watch out.

Here’s to hoping I’m wrong, and we get a lasting deal soon.

The post The “Iran Deal” Deception appeared first on Daily Reckoning.

Occasionally I come across a chart so fascinating, I know right away it’s going to be the focus of my next newsletter.

Here’s the latest one. It shows the valuation (market cap) of the world’s top 10 stock markets by country.

America’s stock market is currently bigger than the next 9 largest combined. By a wide margin.

In the MSCI World index, the U.S. makes up a whopping 72% of the total. That is despite only making up 26% of global GDP. (Note: The MSCI World index only includes “developed” markets such as European countries and Japan.)

Source: MSCI

The MSCI World index is supposed to represent the “world”, but today it’s 72% American stocks. The MSCI World index is used by ETFs and institutional investors to allocate their investment strategies.

This is primarily a result of American stocks crushing the rest of the world over recent decades. That, and the U.S. dollar’s strength due to being the world reserve currency.

The second largest country behind the U.S. is Japan, with 5.68%.

But here’s a shocker. Back in the 1980s, Japan peaked at 44% of the MSCI World index!

Japan’s stock market was actually bigger than the U.S. in the late 1980s. And Japan had roughly a third as many citizens. At that time, Japan was seen as an unstoppable force. It was dominant in cars, electronics, and other manufactured goods.

Japan’s stock market peaked in 1989. And it took until 2024 to surpass that late 1980s peak. The result was 3+ decades of horrible performance in Japanese stocks. Their market is starting to turn around today, but 35 years is a long time to wait…

Can America’s Run Continue?

That’s the big question. Can the U.S. keep stomping every other stock market into the dirt? Or will the cycle turn, as it always does?

Well, U.S. stocks are currently priced at nosebleed levels. The S&P 500 trades at an average P/E of around 28. That means if the average company paid out 100% of its earnings as dividends, it would take about 28 years to get your money back. And that’s assuming there were no taxes paid. It also assumes no earnings growth (or drops), so those two factors should roughly cancel out.

One other factor to consider: American markets today are HEAVILY tilted towards technology. Nvidia (NVDA), for example, makes up 6.5% of the total U.S. market by itself. So there are also serious concentration risks to consider. It works great on the way up, but not so much on the flip side.

Here’s how America’s valuations stack up against other global markets.

Global Stock Market Valuations (Price/Earnings) by Country ETF

• U.S.: 28 P/E (SPY)
• Brazil: 12 P/E (EWZ)
• China: 9 to 14 P/E (FXI and MCHI)
• Germany: 16 P/E (EWG)
• India: 23 P/E (INDA)

American companies are priced at very expensive levels, especially compared to markets like Brazil, China, and Europe. India is also expensive, which is why I avoid it.

Now, there is a reason for that American premium. We’re the home of innovation. New technologies are born here. And the dollar, despite its flaws, remains the world’s reserve currency.

However, the premium has gotten to extreme levels. And most Americans own few foreign stocks. And they own even fewer emerging markets (EM) like Brazil. Personally, I’m much more interested in EM than Europe. So that’s what we’re going to focus on.

I believe we are now entering a period when emerging market stocks will outperform the U.S. The chart below shows what that can look like. The S&P 500 is in dark blue, and the MSCI Emerging Markets index is in light blue.

So from 2001 to 2008, emerging markets outperformed the U.S. by more than 3x.

It’s a cycle. American stocks hit the ball out of the park for a while, and eventually they become overvalued. By that point, everyone has forgotten about emerging market stocks, and has almost no exposure. So EM is cheap, yields are high, and a rotation out of the U.S. and into EM begins.

I think that’s where we are today. EM stocks are finally waking up after 15+ years of underperformance. Brazil, which we’ve been highlighting for more than a year, is up 30% over that time, despite its recent pullback. That’s slightly above the S&P 500’s 28% return, in the midst of AI mania.

Once you factor in the relative valuations, EM is simply too cheap to ignore. American stocks are priced for perfection. EM is priced for an asteroid strike.

And no, I’m not saying to sell your U.S. stocks. They’re on a record run. But it won’t last forever.

So consider adding some emerging market exposure to your portfolio. The simplest way to do so is to own a large diverse ETF like Vanguard’s VWO. This gives broad exposure to the EM universe, and the expense ratio is a rock-bottom 0.06%. That’s practically free.

My favorite EM play remains the iShares Brazil ETF (EWZ). EWZ has pulled back from its recent highs, but is still cheap, high-yield, and in an uptrend.

Today, most of the world is overweight American stocks. And it’s worked out extremely well over the past 15 years. But now is the time to start diversifying.

When this AI mania eventually ends, it will pay to have significant exposure to emerging markets. Just as it did after the dotcom era, from 2001 to 2008.

The post The EM Outperformance Cycle appeared first on Daily Reckoning.

They were wrong in 1812. They were wrong in 1905. And they’re wrong again.

In 1812, English textile workers stormed mills across Yorkshire and Nottinghamshire. They smashed power looms and burned cotton frames. They called themselves Luddites, after a possibly mythical weaver named Ned Ludd who’d supposedly done the same years before.

Their grievance was simple: the machines were taking their jobs.

They were right about the short term… but spectacularly wrong about the long term.

The power loom didn’t destroy textile work. It created an industry so large Britain built an empire around it. By 1850, there were more textile workers in England than there had ever been, and they were richer, worked in heated buildings, and lived longer.

I call this the Wrecker’s Fallacy: the belief that a tool which replaces one task will destroy all the tasks around it. It sounds sensible. It’s almost always false.

Turning Water Into Wine, Silicon Valley-Style

Marc Andreessen sat across from Joe Rogan last week and tried to explain what AI is. He called it “turning sand into thought.” Chips are silicon. Silicon is sand. Run electricity through them in the right way, and you get something that reasons, generates, and acts. Not merely faster data retrieval or a fancier search box. Cognition.

His broader point: AI is “thought at scale, for everybody, in perpetuity.” Not a tool for the top 0.1%. It’s a layer of capability that any person with a device can tap into… indefinitely.

Yes, there are constraints. Current models are pattern-matchers, not thinkers in the full human sense. They cost a lot of energy. Sometimes, they make up stuff.

The gap between what AI boosters claim and what the models produce is real. Anyone who reads the fine print knows this.

But here is what the critics keep getting wrong: the gap is closing faster than they expected, and the Wrecker’s Fallacy is already running on schedule.

Always The Same Pattern

When Gutenberg invented the printing press, scribes panicked. The Church worried about large-scale heresy. Scholars warned that cheap books would drown readers in bad ideas.

But what happened instead? Literacy skyrocketed. Yes, the scribes disappeared. But new professions like editors, typesetters, publishers, and journalists came into being. The written word had become a generous employer indeed.

When the car arrived, blacksmiths and livery stable owners screamed doom. The auto industry killed its trade.

What also happened? America built 4 million miles of road. Mechanics, gas stations, trucking, tourism, suburbs, and fast food emerged from nothing. It gave us more employment, not less.

When spreadsheets hit in the 1980s, accountants feared mass unemployment. The opposite occurred. Cheap computing made financial analysis so useful that demand for accountants rose sharply for the next two decades.

The Wrecker’s Fallacy assumes fixed demand. If 1 worker can do the work of 10, then 9 workers will lose their jobs. But that’s not how economies work. As costs fall, demand rises. New markets and opportunities open. New needs appear that nobody had articulated because they couldn’t afford to.

As the saying goes, capitalism turns luxuries into necessities.

Capitalism’s Cheat Code

Strip away the Sand-Into-Thought poetry and the point is this: one person, equipped with AI agents, can now do work that used to require a team.

In Silicon Valley’s top shops, developers run 20 AI coding agents at once. Each agent works in parallel, 24 hours a day, 7 days a week. The human provides direction and judgment. The agents do the grunt work.

This will spread. After coders, it hits lawyers. Then doctors. Then writers, analysts, and logistics planners. Everyone who works with information will have access to a tireless, highly capable assistant that never calls in sick, never sulks, and never takes a long lunch.

The fear response says: “Jobs disappear.” The historical record says, “Costs fall, demand rises, new work appears that we haven’t named yet.”

This is not just a productivity story. It’s capitalism leveling the economic playing field.

For most of human history, access to expert advice, whether it was legal, medical, or financial, was rationed by price. The rich got good lawyers. The poor got whatever they could afford. AI breaks that ration.

Accessed on a cheap phone, a good AI model gives a farmer in rural Italy or a small business owner in Ohio the same quality of legal review that a Fortune 500 company pays a partner-level attorney to provide.

AI has created the most significant democratization of expertise since the advent of the printing press.

The Real Risks Aren’t What the Wreckers Fear

The critics aren’t entirely wrong to push back. They just target the wrong risks.

The real risk isn’t AI replacing human workers. It’s governments or quasi-governmental institutions consolidating control over AI. Andreessen calls this “authoritarian capture.”

Technology that democratizes expertise is powerful. But when locked behind government-approved guardrails, that same technology becomes a tool for controlling the masses.

Europe is already moving in that direction. The EU’s AI Act imposes compliance costs so heavy that only the largest firms can shoulder them. In practice, that means it shields incumbents and slows the democratizing effect to a crawl.

Yesteryear’s wreckers smashed machines to protect their guilds. Their modern descendants write regulations to protect their jobs. The motivation is the same, as is the damage.

Wrap Up

If history holds as it usually does, the winners in the AI era will be the people who pick it up first and figure out where it fits.

For investors, the immediate play is obvious: the picks-and-shovels infrastructure like chips, power, data centers, and the critical minerals that underpin it all. But this rally may be long in the tooth already, despite the President’s shout-out to Micron (MU).

A more nuanced strategy is to identify the sectors in which AI significantly reduces the cost of professional knowledge. Look at medicine, education, and financial planning firms that embrace these new cost dynamics by redesigning their operations instead of resisting the change.

Third, and this is key: take Claude 101 from Anthropic Academy. Learn about AI and become a user. You’ll be pleasantly shocked at what AI can do for you. Who knows? You may build what you have always dreamed of building.

The Yorkshire weavers who adapted to power looms made fortunes. The ones who smashed the machines went hungry.

AI has already changed everything. Which side of the loom are you standing on?

The post The Loom and Doom Crowd appeared first on Daily Reckoning.

While the war with Iran might be nearing a resolution, the war in Ukraine is heating up.

Whether this is the next stage in escalation, or the grand finale remains unclear. But lessons continue to emerge from this conflict, and world powers are beginning to act on them at scale.

Ukrainian long-range drones continue to hammer Russian energy and military sites. Targets up to 1,700 kilometers inside Russia are being hit.

A Ukrainian long-range drone. Source: AP

These strikes are causing serious economic damage to Russia, not to mention the environmental harm. Here’s a screenshot of recent fires at Russia’s Rosneft facility on the Black Sea after recent drone attacks.

Source: X

On the front lines, short-range drones are now Ukraine’s primary weapon holding back Russian advances. Most of these are small drones with anti-tank RPG warheads attached.

Crude, but highly effective. There are also bomber drones which drop grenades, mortars, and improvised munitions. Interceptor drones roam the skies, looking to foil enemy attacks.

Both sides are using flamethrower drones, which drip molten thermite to melt anti-drone netting and ignite enemy structures.

Meanwhile Russian long-range drones and missiles are increasingly hitting military sites in the capital, Kiev (Kyiv). And across the rest of the country. Glide bombs are devastating the front lines. And Russia is using at least as many short-range drones as Ukraine is.

It is estimated that up to 15,000 drones are being used in Ukraine per day. And that up to 90% of casualties are caused by these terrible little machines.

Traditional maneuver warfare is extremely difficult in these conditions. Advances crawl forward at a snail’s pace.

Tanks and IFVs are increasingly irrelevant on the battlefield. Even artillery, the “God of War”, has become an afterthought.

In just a few short years, this new class of drones have changed warfare forever. The question is: are American defense contractors ready for this new world?

Petraeus’ Warning

Former Army General and CIA Director David Petraeus is out with a new warning about drone warfare. I’m not a fan of the man, but what he says here is true.

“We have not remotely learned all the lessons we should have from the war in Ukraine.

That is the future of war right now. Ukraine is using 10,000 drones a day.

Ninety percent of the casualties on the Russian side are caused by drones. Tanks can’t manoeuvre anymore. They can’t survive. Armored vehicles can’t survive.

And by the way, there’s more coming. Within a year or two, we’re going to see unmanned systems that are not remotely piloted.

In the future, we’re going to see autonomous systems — truly autonomous — that do not require a pilot to remotely operate them.

Then you face drone swarms. And that is something for which we really don’t have a solution.”

Weapons Giants Fall Behind

America’s largest defense contractors, Lockheed Martin (LMT) and Northrop Grumman (NOC), have traditionally focused on gigantic programs. The F-35, naval ships, helicopters, cruise missiles, and big drones costing $30-90 million a piece.

These contractors have been forced to build their supply chains and manufacturing around getting support from specific political districts.

Elon Musk has been especially critical of U.S. defense firms, singling out manned fighter jets like the F-35 as “obsolete in the age of drones.”

Source: X

I’m not sure fighter jets are obsolete just yet. But tanks and other traditional weapons systems do seem to be moving in that direction.

The point is that making cheap disposable “kamikaze” drones at scale is outside the wheelhouse of big defense firms.

Now that the U.S. military wants low-cost attack drones, they are doing something unusual: going to smaller firms in search of innovation.

The Drone Dominance Program

It’s been over 4 years since the war in Ukraine began, and the disruptive potential of drone warfare became clear.

The Department of War is now beginning to ramp up drone programs. In Iran we saw the debut of the LUCAS attack drone, based on Iran’s Shahed-136.

Now the American military is looking to build 300,000 attack drones by 2028. That may sound like a lot, but it’s 15 days of supply for Russia and Ukraine.

And the requirements call for doing it without Chinese parts. That in itself is a huge challenge, because today China makes about 85% of the world’s commercial and personal drones. China’s supply chains are already incredibly developed, and it will take time to build out our own. The vast majority of Ukrainian and Russian drones used are either Chinese, or built with Chinese motors, batteries, servos, and other parts.

The Drone Dominance Program (DDP) is a fascinating development. The Department of War is tearing up the old playbook of 10-30 year development cycles and trying something fresh.

Dozens of companies were invited to participate in a series of trials. Various drones are tested for accuracy, speed, resistance to electronic warfare, and other objectives.

And the Department of War has an online leaderboard showing the top performers:

Source: Drone Dominance official site

Note the complete absence of any big defense contractors. The leading performer, Skycutter, is a small private U.K. company with plenty of frontline experience in Ukraine.

We are early in this new age of drone warfare. But it is set to shake up America’s stale defense contracting business. New players are emerging.

The legacy defense giants have been slow to adapt to this reality. They remain focused on cash cow programs.

And for a while, that playbook will work. But the future of warfare looks like it will be dominated by unmanned systems. And the big, slow, expensive drones they make today are clearly not cut out for this new world.

American defense giants have coasted for decades on gold-plated billion-dollar contracts. They have failed to produce effective hypersonic missiles and affordable attack drones. Their reign won’t last forever.

I’ll be watching to see which companies emerge as leaders in this new tech. Most of them are private startups at this point, so aren’t investable (yet).

But disruption is finally coming to the defense industry. It’s about time.

The post Defense Dinosaurs Fall Behind appeared first on Daily Reckoning.