Last month we looked at the parallels between today and the early 1940s.
Just as the New Deal and WWII mobilization unleashed pent-up demand out of the Depression, today we have the convergence of post-COVID fiscal stimulus, re-industrialization and wartime defense production (supplying weapons to Ukraine), and a Manhattan Project-like effort to win the AI race.
Add to this, today Trump suggested adding another half-a-trillion dollars in defense spending next year to build the "Dream Military."
So, we're building defense, energy, chips, supply chains and data centers at wartime-like intensity. And as we've discussed in past notes, the run-up in precious and industrial metals are already reflecting a wartime behavior — particularly the gold/silver ratio.
And remember, this 40s analogue is of particular interest, because the U.S. averaged 14% real GDP growth through the period — a huge expansion of the economy.
With all this in mind, we talked yesterday about the divergence between big tech stock performance and the rest of the market. The year of "AI diffusion" should start to float all boats, not just big tech.
If history is our guide, the catch-up trade could be violent. In the early 40s analogue, it wasn't the S&P 500 leading the charge, it was bottom-decile small caps, which exploded for returns of 63%, 143%, 71% and 94% in consecutive years.
PS: If you know someone that might like to receive my daily notes, they can sign up by clicking below …
