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‘“Guns N’ Kurtosis”: Investing in the new Cold War era’

The fall of the Berlin Wall in 1989 marked the symbolic end of the Cold War. But it was an economic not a military victory; a realisation in the Soviet Union that communism could never bring the same economic advancement as capitalism.

The West proclaimed a “new world order” led by the United States, which facilitated the fastest pace of globalisation since the “hundred years’ peace” of 1815-1914.1

It also began a 30-year bear market for European defence stocks. 

But geopolitical events have now changed course. This has significant yet underappreciated implications for investors.

Too much “Butter”

Without its historic adversary, NATO defence budgets were axed, resulting in an economic “peace dividend.”

At the time of the Suez Crisis in 1956, the UK was spending 7.6% of GDP on defence,2 accounting for 43% of government spending (a similar ratio to Russia today).3

Since then, spending on day-to-day public services (excluding armed forces) has increased from 18% of GDP to over 35% during COVID: fifteen times the annual defence budget.4

Never had the UK spent so little on “guns” relative to “butter.”

Fig 1. UK Defence Budget (Guns), Public Services (Butter) & UK Geopolitical Risk5

Germany’s Kiel Institute has pointed out that within its own country and across the whole of the G7 there has been a “growing disconnect” between low military spending and high and rising geopolitical risk, concluding: “we live in dangerous times, but military budgets in the West have not responded to these developments.”6

Russia and more importantly China, never accepted American hegemony, signing in 1997 a joint declaration to promote a “multi polar” world.7

Encouraged by Europe’s reluctance to rearm and President Biden’s weak leadership, the “anti-hegemonic” alliance led by China, continues to grow, now including not only Russia, Iran, and North Korea, but also Brazil and South Africa.

During the Cold War (1950 to 1989), the UK, France and Germany spent on average 5.5%, 3.6% and 3.2% of GDP respectively on defence, compared to just 2.4%, 2.0% and 1.3% since.8

In absolute terms, in 2022, British and French annual military spending was only slightly more than in 1989. Germany spent slightly less.

Fig 2: UK, French, German Defence Spend 1989 versus 2022.9

Retired US army general and Hoover Institute Fellow H R McMaster recently noted: “The perception of weakness is provocative to this axis of aggressors.”10 

More “Guns” Needed 

The Russian invasion of Ukraine in 2022 has along with American pressure for Europe to pay its fair share, been a watershed moment for the defence industry.

All European NATO countries now accept - though are not necessarily enthusiastically implementing - a 2% of GDP floor on annual defence budgets. But Europe would need to spend 3.5% of GDP on its military to match the US.11 

Equally important to the defence industry is how much of the budget is spent on hardware.

The NATO average today is 30% (up from just 10% in 2014) but countries in the frontline such as Finland and Poland are currently spending 50% on equipment.12

Fig 3: NATO spending on equipment13


Brussels is also determined for European nations to procure at least half of its hardware within the EU.14

The entire annual revenues of the quoted European defence industry last year (including the UK) were just $132bn.15

Fig 4: European Defence Company Revenues16

If NATO European annual spend of $375bn increases from 1.75% to 3% of GDP and 50% of this is spent on equipment exclusively sourced within Europe, then annual industry revenues will double17.

Fig 5: Increase in European Defence Equipment Spend18

After three decades of retrenchment, the biggest problem European defence companies currently face is ramping up manufacturing capabilities to meet demand.

To encourage investment, governments are offering defence contractors longer contracts and better payment terms.

But with the Russian annual military budget now thought unofficially to be as high as $160bn (10% GDP)19, a UK defence industry executive told me: “Putin is on a war footing today, but we have problems getting planning permission.”20 

Since the end of the Cold War, Western Europe has effectively disarmed: its number of tanks down 80%, fighter aircraft down 60%, with a halving of naval ships and submarines.21

Many European countries have already donated most of their ammunition and useful weaponry to Ukraine.

NATO is now recommending 30 days of battle inventory (previously 5 days) but the more urgent Ukrainian conflict has postponed Europe’s ability to rearm.22

The nature of combat in Ukraine has demonstrated that the next war is always different, requiring new kit: tanks with 360-degree armour, given vulnerability to loitering munitions; mobile artillery as a more cost-effective solution than precision missiles, for example in defending against drone attacks.23

German weaponsmith Rheinmetall, the global leader in the manufacture of NATO standard artillery and tank shells, is the best performing stock in Europe year-to-date.24

Space and submarine, where Britain’s biggest and most successful manufacturer BAE Systems is well-placed, are promising growth areas, since these are now the only truly stealth activities.25

Norway’s Kongsberg has an effective monopoly in next generation anti-ship missiles, the kind of which Taiwan might find useful.26 

Kurtosis: the risk of extreme events

It is too simplistic for investors to think about the new Cold War simply about defence spending.

War also has more profound economic consequences and wider investment implications, leading to greater risk of extreme events; what statisticians’ term “excess kurtosis” or “fat tails”, relative to a normalised bell-curve distribution.

In the unipolar post-Cold War world, investors prime concern was the economic cycle, which could be managed by central banks providing liquidity at moments of extreme stress, most notably in 2008 and 2020.

But central banks can’t resolve supply side problems, prevent de-globalisation, or fight geopolitical conflicts. 

This means investors must think about extreme “unpredictable” outcomes, structurally higher inflation, and higher volatility.


We are already witnessing a reshaping of the global economy. 

The generally low inflation of the post-Cold War era, which has allowed for historically low interest rates, has been facilitated by the deflationary impulse of Russian commodities and Chinese manufactured goods. This is now changing.

Eminent economist Charles Kindleberger wrote that “war both cuts off old connections in trade and finance and is likely to require the fashioning of the new.”27

Russian crude oil now gets sold at a discount to India and China, who – since we have destroyed our own fossil fuel industry - often export it back to Europe as refined product.

This disruption of optimal economic trade routes – deglobalisation - by geopolitics, as seen with the Houthi attacks on merchant vessels in the Red Sea, ironically requires more rather than less ships, for longer voyages, particularly crude oil carriers (Norway’s Frontline is the world’s biggest owner) and refined product tankers (Norway’s Hafnia and Denmark’s Torm).28

The American and Chinese economies continue to “decouple.”

Chinese exports to the US are now down some 25% from peak29; China foreign direct investment (FDI) has now turned negative, with Western corporations instead looking to “friend-shore” manufacturing to Malaysia, India, Vietnam, or Mexico instead. 

The US government has provided $280bn in subsidies via its CHIPS Act to “re-shore” semiconductor manufacturing from Asia,30 whilst also seeking to prevent the export of high-performance semiconductors and manufacturing equipment to China.

What is politically logical comes with economic cost.

“Outside” Money

The projection of geopolitical power is also changing the global financial system based around the hegemony of the US dollar.

There is currently $300bn of Russian financial assets frozen (mostly in Belgium’s Euroclear), which the US wants to give to Ukraine, but Europe, fearing retaliation, is resisting, instead considering using the accumulating interest as war reparations.31

Russia has responded by freezing the assets of investors from “non-friendly” countries. This should be a shot across the bows for any UK investors in the Chinese stock market.

Equally, the “anti-hegemonic” alliance is highly incentivised to diversify their assets “outside” the Western banking system to avoid political default risk.

Chinese holdings of US Treasuries are now down to just $800bn (from $1.2trillion at peak in 2016).32

Gold - with a market value of $15trillion - is the most liquid alternative as a store of value. The People’s Bank of China has recently emerged as its biggest buyer.33

Fig 6: Gold34


The “Axis” powers must also “de-dollarise” their financial systems since transacting in the greenback results in the problem of accumulating assets which could be confiscated. 

It also incurs the risk of being frozen out of international trade by sanctions via the dollar-based SWIFT payments system.

The new Cold War increases the attractiveness of “outside” money in all its forms: cash, gold, crypto, and for the “Axis” their own currencies. 

Russia, Iran, and Venezuela have already adopted China’s CIPS payment system to evade sanctions. China continues to explore a jointly issued Central Bank Digital Currency (CBDC) and migrate its commodity transactions from US dollars to Renminbi.35

However, the Renminbi share of global transactions is currently less than 3%.36

But rather than pay its friends in an arguably over-valued currency that is not fully convertible and could therefore only buy reciprocal Chinese goods and services, China has instead allowed convertibility into gold, which if done at scale would require it to further ramp-up its gold purchases.

But it is not clear whether China can really afford to fulfil its reserve currency ambitions.

Gold outshines the “Greenback”

America has enjoyed the “exorbitant privilege” of the greenback being the world’s reserve currency, whereby Middle Eastern “petrodollars” and subsequently Asian manufacturing trade surpluses were recycled back into its own assets, particularly its government debt, which in turn kept its interest rates low and stimulated the global economy through demand for imports. 

But as the British experience of the early twentieth century demonstrated, this privilege can be forfeit.

America is already running unprecedented fiscal stimulus at a time of full employment.

War increases demand for commodities, which is inflationary, particularly when they are mostly owned and controlled by your enemies.

The economic history of war suggests that rather than risk losing geopolitical conflicts, central banks of nations at war will backstop government debt, resorting to the printing press. In fact, the green ink on the new paper currency was the Civil War origin of the dollar’s “greenback” nickname.37

The inflationary nature of war and the attractiveness of “outside” money means that gold – and its more volatile peer silver - should replace government bonds as a portfolio risk diversifier. 

Having significantly underperformed the physical commodity, blue-chip gold miners such as Barrick and Newmont are a more geared play, now looking cheap perhaps for the first time in my investment career.

To all investors in the new Cold War era: “Welcome to the Jungle” and think about both “Guns N’ Kurtosis”. 


Barry Norris
Argonaut Capital
April 2024

1 See for example

2 Source: UK Office for National Statistics (ONS)

3 See for example Source: Russia’s Unprecedented War Budget Explained | Wilson Center

4 Source: UK Office for National Statistics (ONS)

5 Source: Argonaut Capital, UK ONS, Fed GPR Geopolitical Risk Index

6 Guns-vs-Butter_Kiel_Institute_Debate_MSC.pdf (


8 Source: Stockholm International Peace Research Institute

9 Source: Stockholm International Peace Research Institute

10 Source: Hoover Institute, Goodfellows, April 3rd, 2024

11 Source: NATO Argonaut

12 Source: NATO Argonaut

13 Source: NATO Argonaut

14 Source:

15 Source: Bloomberg, Argonaut

16 Source: Bloomberg, Argonaut

17 Source: Bloomberg, Argonaut

18 Source: Bloomberg, Argonaut

19 See:

20 Source: Bloomberg, Argonaut

21 Source: McKinsey “The Military Balance”

22 Source: Argonaut

23 Source: Argonaut

24 Source: Bloomberg

25 Source: Argonaut

26 Source: Argonaut

27 Charles P Kindleberger “A Financial History of Western Europe” 1984, P271

28 Source: Argonaut

29 Source: Bloomberg

30 See:

31 See:

32 Source: Bloomberg

33 See:

34 Source: Bloomberg

35 Source: BNP Exane

36 Source: BNP Exane

37 See: