Markets Gyrate as the Megapolitical Foundations Fall Away

by Wall Street Rebel - James Dale Davidson | 06/01/2022 8:21 AM
Markets Gyrate as the Megapolitical Foundations Fall Away

"Battalion by battalion—….the British division began to fire. As the range shortened until by 6.45, more than 12,000 infantry were engaged in that mechanical scattering of death that the polite nations of the earth have brought to such monstrous perfection…

"The Maxim guns exhausted all the water in their jackets, and several had to be refreshed from the water bottles of the Cameron Highlanders before they could go on with their deadly work. The empty cartridge cases, tinkling to the ground, formed small but growing heaps beside each man. And all the time out on the plain on the other side bullets were shearing through flesh, smashing and splintering bone; blood spouted from terrible wounds; valiant men were struggling on through a hell of whistling metal, exploding shells, and spurting dust----suffering, despairing, dying….

"The Maxim guns pulsated feverishly. Two were even dragged by the enterprise of a subaltern to the very summit of Surgham, and from this elevated position intervened with bloody effect. Thus the long line moved forward in irresistible strength…

"Thus ended the Battle of Omdurman---the most signal triumph ever gained by the arms of science over barbarians. Within the space of five hours the strongest and best-armed savage army yet arrayed against a modern European Power had been destroyed and dispersed, with hardly any difficulty, comparatively small risk, and insignificant loss to the victors.

[Editor's Note: The Dervish Army, approximately 52,000 strong, suffered losses of 20,000 dead, 22,000 wounded, and some 5,000 taken prisoner--an unbelievable 90% casualty rate! By contrast, the Anglo-Egyptian Army, some 23,000 strong, suffered losses of 48 dead, and 382 wounded--an equally unbelievable 2% casualty rate, thus showing the superiority of modern firepower!] — Winston S. Churchill, "The Battle of Omdurman, 1898"


The Megapolitics of Death

When the late Lord Rees-Mogg and I set out to harness intuition about how the world is changing in Blood in the Streets - first published 25 years ago in June 1987, we introduced the concept of "megapolitics." We defined it as a framework for identifying and analyzing the boundary forces that determine how power is exercised in the world.

A generous reviewer named "Bootsy" on Amazon described Blood in the Streets as "A fascinating guide to power and how the world really works….I read it for the first time about 15 years ago, and it totally changed my perspective on how to look at the world.

She continues, crediting our effort "to describe how raw power still shapes the world and how it is quite well hidden in the modern world, and then gives examples of what raw power in the modern world looks like without us realizing what we are seeing.

The basic idea is to show how the world actually works and encourage the reader to take a viewpoint that spans 20-30 years or longer to understand what is going on.

"Adopting this mindset, you rapidly realize that most news is noise and is irrelevant, although it definitely forms a pattern. And then occasionally an issue will rear its head that is actually very important with repercussions but does not appear to be at the outset."

In Blood in the Streets, a momentous event was the lopsided Battle of Omdurman, where an Anglo-Egyptian army of 23,000 soldiers literally decimated a Dervish army of 53,000. The Anglo-Egyptian fatalities were .00225 Dervish deaths. The Battle of Omdurman marked the end of the Islamist regime established by the Mahdi in Sudan.

To deconstruct this more clearly, It was too easy for the "polite nations of the earth" to misread the British massacre of the Dervish Army as an indication that their technology made it possible to fight and win wars "with hardly any difficulty, comparatively small risk, and insignificant loss to the victors."

Closer analysis, stimulated by World War I, showed that machine guns, per se, did not mean that fighting could proceed with "hardly any difficulty." On the contrary, the machine guns actually contributed to vastly increasing the cost of projecting power because they could only be deployed effectively in conjunction with other expensive weapons systems.

World War I was a bloody stalemate until the combatants deployed new weapons like tanks, airplanes, and poison gas. These raised the scale of arming an effective fighting force.

Now we have a "megapolitical" bookend to the Battle of Omdurman "that is very important with repercussions, but does not appear to be at the outset."

The Bayraktar TB2

I refer to the War in Ukraine. The surprisingly valiant and effective defense mounted by Ukraine following the invasion by Russia seems to mark a megapolitical turning point in the technology of warfare.

Cheap but lethal Turkish drones, the Bayraktar TB2 unmanned aerial vehicles (UAVs), which carry lightweight, laser-guided bombs, have been used by Ukraine to great effect. Ukrainian surprise attacks on Russian formations on the outskirts of Kyiv demoralized the invaders and led to losses of many tanks and motorized vehicles, along with Air defense capabilities. 

As reported in The New Yorker, the Bayraktar is the product of Selçuk Bayraktar, "the son of a Turkish auto-parts entrepreneur," and now one of the world's leading weapons manufacturers. "In defense of Ukraine, Bayraktar has become a legend, the namesake of a baby lemur at the Kyiv zoo…"

The lethal effects of the Bayraktar TB2 have surprised Western military experts. They tended to think that the Bayraktar TB2 was too slow and had too wide a radar footprint to excel on the battlefield. Wrong.

As reported by Stephen Witt in The New Yorker, "Military analysts had previously assumed that slow, low-flying drones would be of little use in conventional combat, but the TB2 can take out the anti-aircraft systems that are designed to destroy it."

Publicly available video footage shows that TB2s destroyed at least ten Russian PantsyrS1 air defense missile batteries and disrupted the Russian supply lines by bombing targets with MAM-C or MAM-L laser-guided missiles. Using laser-guided bombs, "the drone was able to strike a target the size of a picnic blanket from five miles away." estimates that the Turkish drones, which are much cheaper than US-made Predator drones, have destroyed "well over 750 military vehicles, including tanks, armored vehicles, trucks, air defense systems, artillery systems, ballistic missile launchers, aircraft, helicopters, radars, field fortifications, command posts, and various other hostile equipment."

Ukraine is thought to have six operational Bayraktar TB2s and 48 more pending delivery.

T-90 Russian battle tanks cost the U.S. dollar equivalent of $4.5 million. In January 2019, Ukraine purchased three ground control stations for the Turkish UAVs. Later that year, in March 2019, Ukraine acquired the first batch of Bayraktar TB2s at "a cost of one-two million dollars each."

The effective unit cost of a Bayraktar TB2 is higher than $1 million-to-$2 million. Not the least reason for the higher operating cost is that the TB2 "has more than 40 onboard computers," Witt notes, "and the company sends out software updates several times a month to adapt to adversarial tactics."

Evidence from the first few months of the Russian invasion of Ukraine, along with results from 2020 fighting in Caucusus, have demonstrated the military superiority of TB2 drones over the array of Russian armaments. An independent tally in Nagorno-Karabakh showed "more than five hundred targets destroyed, including tanks, artillery, and missile-defense systems."

In the chaos that followed the collapse of the Soviet Union, Armenian troops, with backing from Russia, occupied 14% of Azerbaijan. The conflict simmered until 2020, when Azerbaijan, armed with Turkish Bayraktar TB2s, sought to recapture Armenian-occupied territory in and around the enclave of Nagorno-Karabakh.

The fight went well for Azerbaijan.

The trilateral ceasefire agreement between Azerbaijan, Armenia, and Russia resulted in Azerbaijan regaining all of the Armenian-occupied territories surrounding Nagorno-Karabakh, including large swaths of Nagorno-Karabakh, notably the city of Shush.

These developments support the seemingly sweeping conclusion that cheap, Bayraktar TB2 drones have altered the nature of warfare. Perhaps in fundamental ways that imply far less prosperity for the "merchants of death," the vast "deep state military contractors that have outperformed the S&P 500 in the decades since 9/11.

In fact, if you had invested $10,000 divided evenly among America's top five military contractors on September 18, 2001 — the day George W. Bush signed the "Authorization for the Use of Military Force" (a declaration of war light) in the wake of the 9/11 terrorist attacks (and re-invested all dividends) you would have realized a 58% premium over what you could have earned in the broader market in the same period. 

That is calculated through the end of the War in Afghanistan marked by the inglorious flight of the Afghan President Ashraf Ghani in August of last year. Boeing, Raytheon, Lockheed Martin, Northrup Grumman, and General Dynamics enjoyed decades of superior returns notwithstanding the end of the Cold War.

An unorthodox Turkish military contractor has changed the script with technological innovation — the lethal and low-cost Bayraktar TB2 drones that may antiquate large swaths of conventional military weapons and doctrine.

For example, the TB2 has shown that T-90 Russian battle tanks costing the U.S. dollar equivalent of $4.5 million each are sitting ducks on the battlefield. The same is likely to be true of the super-heavy US M1A2 battle tank — which costs $6.21 million per tank.

The record shows that there is little stewardship of spending by the Pentagon. In a better world, the increased vulnerability of expensive 20th-century vintage weapons systems like tanks, armored personnel carriers, and rocket launchers to cheap 21st drones implies that fewer investments would be lavished on such weapons systems. I suspect that will be true to some extent. And that means lower profits for the big five "merchants of death."

It also means a weaker U.S. dollar. For decades, Middle Eastern oil kingdoms have recycled petrodollars by purchasing billions of dollars worth of U.S. weapons systems. If these multi-billion dollar systems prove to be neutralized by cheap Turkish drones, then the oil kingdoms will no longer need to price oil in dollars to purchase such anachronistic weapons systems.

The results to be expected include a weaker U.S. dollar to come.

You can also look for higher effective tax rates in the U.S. as the "exorbitant privilege" that the U.S. has enjoyed in being able to print the world's reserve currency fades away.

Years of investigating financial crises have also taught me that hardworking individuals frequently suffer the most... the taxpayers... the folks who "play by the rules," endure the brunt of the penalties. I was hoping you could stay up to date by subscribing to my newsletter, Strategic Investment.

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