Why The World Is Spending More On War

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Find new episodes, Sundays, wherever you get your podcasts. Welcome to Profty Markets, I'm Ed Elson, it is July 8th, let's check in on yesterday's market vitals. The major indices declined as Chipstock's tumble once again, more on that in a minute. Oil rose after three ships were attacked in the state of Hormuz, the U.S. rescinded its

authorization of Iranian oil sales following those strikes. Microsoft stock rose on news that it is replacing open AI and anthropic with its own models to bring down costs, and finally SpaceX declined nearly 7% on its first day in the NASDAQ 100. OK, what else is happening? The NATO summit kicked off yesterday in Turkey, and the big

takeaway so far is that a new global arms race is underway, Trump is pulling U.S. military assets out of Europe and shifting focus to the Middle East and Indo-Pacific that is forcing

Europe to show the more of its own defense NATO allies have agreed to at least $50 billion

in defense industry deals, and $40 billion in counter-drawn capabilities. But America isn't slowing down either, Trump's 2027 budget proposes $1.5 trillion for defense, which is the largest request in history, and Silicon Valley wants in defense tech companies have raised more than $19 billion so far this year, already blowing past last year's record in 2025. In short, an enormous amount of capital is flowing into defense right now.

The question is, what exactly are we gearing up for? Joining us to discuss this, we are speaking with Steve Feldstein, seeing a fellow at the Carnegie Endowment for International Peace, his new book, "Bites and Bullets", global rivalry, private tech, and the new shape of the modern warfare comes out in September. Steve, thank you so much for joining us on the show today. I'd love to get your initial reactions to what we saw at the NATO summit.

It seems like a big conclusion or a big takeaway is that we're going to spend a lot more money on weapons, a lot more money on defense, is that the right takeaway.

“I think it is. Thanks for having me on. And I really think that there's an overall context”

that's worth bearing in mind, and I think there's three factors that I've been looking at

over the past couple of years that are really relevant. So I think the first one is that we

are just seeing far more conflict occurring around the world today than even in the last five years. Last year, something like 250,000 people were killed alone on battlefields. So it means that war is prevalent and around, and countries recognize that there's growing levels of insecurity, and so that matters. I think the second thing is that we're seeing a growing medicine from Russia. As it continues to get on a wartime footing because of the Ukraine war,

as it continues to increase its drone capacity and manufacturing of other types of weapons, countries in Europe and NATO in particular are concerned, and they know they need to keep up, and they need to retool accordingly. And then finally, I think that's especially coming from the Iran War, we're seeing the use of new technologies, particularly AI targeting systems and so forth

“in play. And I think it's also giving a recognition to countries like Germany, France, and others”

that they also need to really think carefully about innovation and what types of weapon systems they need to incorporate so that they are able to fight wars effectively in the future. Yeah, I mean, one of the stats that blew me away that we just learned is that defense attack

has raised more than $19 billion this year, and that's in six months. So we already beat

last year's record, and it seems as though Silicon Valley and technology is playing more and more of a role on the battlefield. What do you make of that dynamic in that shift?

It's a trend that's really begun to ramp up. And I see it is not necessarily a substitute

to traditional arms manufacturers, but more as a compliment. So I'll give you a good case of point. A lot of people have focused on the Maven targeting system from Palantir that's paired with Claude, and how it was used in the Iran War. And so a lot of people look at on systems like that and they say, "Okay, we need something similar. We need a better way to have more efficient targeting and to match our missiles to potential places of military targets

to strike." So it doesn't mean that you don't need traditional ballistic missiles. What it does mean is that you need that plus you need a more efficient way in which to generate the coordinates for how you would target and identify different military assets. And so to that, and a lot of it is sort of creating other types of weaponry in addition to what's already needed in terms of munitions based on the fact that countries see that there's more war and more insecurity all

around, whether it's from China, prospectively Russia in the near region or other places. When you look at some of the tech companies that are participating, I mean some of the companies

you've written about Google, Meta, Confler, obviously Palantir, one thing that always strikes me

is these are companies that are offering enterprise software services and solutions and then also playing a role in the Ukraine war in the war in Iran. I mean, that's quite a striking dynamic and I wonder if that's something that we should, I don't know, maybe be worried or investigate in some capacity, the fact that, you know, the CEO of an enterprise company is also directing the outcomes of what happens on the battlefield. I'd be curious to get your views on

“what you make of that and if that is worth thinking about. I think you're right, it is a new role”

and I think there's a few different conflicts of interest that arise from that. I mean, I think

one of the great examples is, you know, if you have a company like Microsoft and it is both

have providing data infrastructure that is being used by militaries like Israel's military or other militaries, but it's also selling consumer goods to a wide variety of clients. Well, how do those two things work together? And I don't think there's an easy answer to that, but so far, they've been able to screw around the issue. At some point, these issues are going to become front and center where countries will say, look, either you're providing military

equipment for the security objectives of a particular country or you're selling to consumers across the board, neutral items meant for civilian applications and not for military use. And so these are, I think, questions that are coming to bear for variety companies, whether it's open AI, anthropic, Microsoft, Google, AWS or others, which are so far somewhat having it both ways. You mentioned earlier that what all of this spending tells us is how unstable things have

become from a geopolitical perspective. I remember last year, Jamie Diamond saying that this was sort of the most unstable, or maybe he said the most uncertain time since World War II.

“I mean, I think that was almost a year ago, that was certainly last year. Where are we now?”

Like, when you compare July 8th, 2026 to July 8th, 2025, is this a more unstable time and is it going to continue to get more unstable? It is. I mean, certainly last year, we hadn't yet encountered the Iran war and all the spillover effects from that. So that's a really big thing that everyone is sort of grappling with. And it's not just about Iran and immediate adversaries in the Middle East. It's about a wider security architecture and questions there. We also see a continuing

amount of fighting when it comes to the Ukraine war. And if anything, we're seeing even more escalation between the two sides with Ukraine striking Crimea, Russia coming back and striking Kiev and making bigger threats in terms of other potential adversaries. And so, and then that's not to mention the kind of prospective questions related to China, which frankly at this point has been quieter because of these other situations that taking place. So there are a lot of different geopolitical

“issues that are flaring up simultaneously. And we also are seeing, I think, a bit of an ebbing”

of power, or at least limitations to American power, at this point. Not to mention a volatile president who seems to change on a dime very quickly the geopolitical objectives of the United States. All these ingredients coming together make for lots of unpredictability when it comes to security and where things what things will look like in the coming months. Any other question for investors is, I mean, the main question is will the spending keep going up?

massive contracts? Will the et logic contracts? Will some of the larger, more traditional players get larger contracts? Will governments spend more and more? Do you think that defense spending will go even higher than it is today? So one issue is that we have seen a ramp up in NATO spending

“as you mentioned. And I think that will continue to increase, but what's interesting right now”

is that there's a gap between the amount of money that's there and the ability of current manufacturers to be able to produce according to the money that's been allocated. So I think the

first thing we're going to need to see is greater capacity that's built up to match the money and

the allocated contracts that are there for munitions. I think the second thing that we're going to see is a real ramp up when it comes to countering drones. So drones are proliferating. We're seeing that Iran, we're seeing that Ukraine and so forth. And we are also seeing a dire need by countries like UAE, Saudi, the United States for that matter, countries in Europe when it comes to actually countering these drones and coming up with the right systems. That's a growth area. That's an area where you're

just our starting to see products at scale come to the market. And I think you'll see continuing demand and investments for more of these types of systems, especially as we see drone use proliferate, which I'm certain will continue to be the case. Final question, Trump is now renewing his

threats, thoughts about Greenland. He said the territory quote should be controlled by the United

“States. Is the Greenland story not over? Is that something that we should be worth?”

It is worth us paying attention to, like we did at the beginning of the year? Well, it's certainly that over in his head, and because he is president of the country, I don't think we can completely dismiss it. It's not something that I tend to focus on on a day-to-day basis. Trump says a lot of things. He has a lot of grievances. He has a lot of different issues that are top of mind for him. They tend to move from a place to place, depending on context and where he is. So it's not

something that I think is due for an imminent action, but we can't just take it off the agenda completely either because he's a president of the United States, and he says it, and so therefore it matters. Steve Feldson is seeing a fellow at the Carnegie Endowment for International Peace. Steve, we appreciate your time. Thanks for having me. After the break, ship stocks take a tumble and for even more markets insights you can subscribe

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Gusto.com/markets and get three months free when you run your first payroll. That's three months of free payroll at Gusto.com/markets. Again, that's Gusto.com/markets. It's Donald Trump's still cool. Well, first there's what he was promising to America. He was promising change. Yes, that's a big change. Has he lived up to that? No, no, I want to say so. I was just disappointed. We're in Washington DC for one of the events

that Donald Trump is throwing for America's 250th anniversary and it's UFC night. Try to be American. We got free tickets. It's just going to be a great time. That's about it. It's an opportunity to talk to a group that was central in the 2024 election.

“Young men. Why do we think Trump and men seem to have a connection?”

I don't like here. It just knows how to advertise himself with a younger crowd. It aligns with masculinity. I feel like it's a certain extent. But if they don't like Donald Trump, what do they prefer politically otherwise? Here about my family. I care about my country. I want people to be safe and happy where they live. Here about my wallet zoom out. I'm a stead-hurrenton.

And this is America, actually. Catch us every Saturday on YouTube or wherever you get your podcast.

strength relative to the rest of the world? We're moving into a genuinely multi-polar world,

“and that's a world in which every nation is basically for itself because nations can no longer”

rely on the United States to protect them. I'm John Fineer. And I'm Jake Sullivan. And we're the host of The Long Game, a weekly national security podcast. This week, we sat down with the historian and foreign policy expert Bob Cagan to assess America's role in the world at 250th and the future of American power. The episodes out now search for and follow The Long Game, wherever you get your podcasts.

We're back with Prophogy Markets. Offer a meteoric rise. The semiconductor rally

might finally be slowing down. Samsung, which is up nearly 400% over the past year, posted

blowout earnings yesterday. The company saw revenues more than double and profits increased by 1,800% and still, that wasn't enough to satisfy investors. The stock fell 7% sending nearly the entire market down with it. The Philadelphia semiconductor index closed the day down 6%. The Nasdaq closed over 1% and the S&P 500 closed over a half percent. So for more on how Samsung's beat somehow spooked the market and what's going on with

chip stocks. We are speaking with Z-Francer, CIO and Co-Founder at Convexitas. Z thanks for joining us. Chips have just gotten crushed over the course of the day and if actually if we look at the semiconductor index over the past five days it's down 11%. This was supposed to be the leader it has been the leader in the market throughout the year and it seems like it's coming to an end your initial reactions to what we're seeing. Yeah, this quarter earnings is going to be very

different than Q1 earnings. It's as simple as valuations of change dramatically. Back in Q1,

“so I think back to April and early May when all these names were reporting, they basically all”

kind of did the beaten raise and mostly the stocks had very favorable performance on the day after those earnings. But spot P's were below three year average back then. Today they're about 10 handles above their three year average and four of P's back then were below the S&P 500. Today they're above the S&P 500. Now the peg ratio for the space is still reasonably attractive. What all that means is the market is pricing in much differently this time, the amount of growth embedded into these companies.

And so the hurdle is that much higher. So I would expect this entire earnings season to if there's anything, any small item that feels like a mess to have these kind of nasty downward moves and I expect it to just in general be a very volatile earnings season for the sector. Is there any reason why it's happening now? I mean, it just seems strange. Samsung reports this crazy earnings report. It's a beat on pretty much all fronts. And so I'm wrong about that. I'm pretty sure it was.

And yet now's the time that investors say, we're out, this has gotten, this has gone too far.

“Again, I think you're going to need micron level of blowout to really impress the market at this”

point with the current kind of valuation metrics in the space. Just looking at what Michael Barry has done. He's kind of made a name for himself in this semiconductor boom because he is shortening it. He shorted the semiconductor index. He shorted micron. He also shorted in video. He's betting that micron's going to fall 30%. What do you make of Michael Barry's moves? Do you

think that he's ultimately making the right choice? I expertise as in volatility. And when

looking at volatility, he's not in a unique camp. implied volatility, the actual price embedded within the options you can actually trade is off the charts. You know, semiconductor, you know, using that image, we can do the same thing with socks, the spread of volatility in the semiconductor ETFs in comparison to QQQ. Again, massive overlap of constituents. That spread is that it's 100th percentile. You know, SMH, but volatility on its own is near its all-time, 100th percentile.

This is a sector that's obviously performed very well. Yes, it's, you know, 10-ish percent off of those highs from, you know, a couple weeks back. But it's a common theme that folks are using options to bet against the space. And why I can say of the little bit more conviction is when you look at the indices, again, socks, SMH, things along, you know, that basket of style of trading instruments, daily volumes are about 4-1 puts to calls. Open interest is similarly about 4-1 puts to

that was heavily put slanted, suggesting that it's mostly people buying puts as volatility's

expanding well, that's mostly trading. And additionally, as semiconductor space has faded, as you said over the last, you know, 5-ish trading days, volatility in those ETFs is actually fading a little bit with it. So we're seeing that stocks up, vol, stocks down, vol down, which again suggests to me a significant amount of hedging, if potentially over hedging in that space, why when, you know, it's profitable to be hedging the space. There's a little bit of that monetization actually pushing

“volatility lower. So I think it's a, we'll call it, not a unique view by, you know, famous”

short participant. And the frankly, the options are pricing it in. I mean, it's really expensive

to have that view. Just want me to look at the comparison between, I guess, the, the chips. And so

the, the, the companies that are making money off of the AI infrastructure build out boom right now, versus the hyperscalers, I either companies that are paying to build out the AI infrastructure. So, you know, Microsoft, Oracle, Meta, et cetera. It's quite interesting because the hyperscalers have gotten punished so far this year. The, the, the, the, the, in for players, the chip stocks, the memory stocks. Those, those have, those are crushing, which makes sense. Those, those, those are the

companies that are really making all the money. But it seems like it's starting to reverse now. And it seems like the two are now starting to converge. I'd be curious to get your views on what

this all means to what we're seeing for the hyperscalers also for a lot of the software names,

“which are also bouncing back this week. Um, are those two dynamics related do you think?”

Meta's announcement last week. I think definitely, we'll call it spooks and folks in terms of the rotation now that they're going to lease out some of their excess capacity. Maybe it's not excess capacity. But I think that's on the markets currently reading it. But what I think is interesting for the long term where both might be successful is again, it's, it's an acid heavy buildup. It's a capital intensive buildout. And these hyperscalers or investment grade can borrow

essentially as cheaply as anybody out there. So if you're somebody like Meta borrowing at 30 year, you know, term at six, six and a half percent to be able to facilitate leasing out this compute to other players that cannot essentially lock in any sort of term in terms of financing, especially not at those rates, they're just kind of doing a, we'll call it grown-up type of play,

“where they're using their balance sheet to go ahead and build out capacity. The other players”

cannot. And hopefully capturing that spread of the long term. So, you know, I view it as, this is the next phase for the hyperscalers. They're building things out for themselves. Now they're coming up with additional ways to increase free cash flow from this spend on infrastructure build. But it doesn't necessarily mean the semiconductor wave is over. In fact, it might elongate it depending on how successful they are, essentially, becoming that intermediary between

the end client and building out that infrastructure. All right, Z-Front is CIO and Co-Founder at convexitasZ. Thank you so much. Thanks for having me. Over the past couple of years, we've heard many projections about what AI may do to the labor market, according to Dario Amade, AI could eliminate, quote, half of all entry-level white-collar jobs, and according to San Altman, entire job categories would be, quote, totally, totally gone. But lately, business leaders

have been changing their tune. San Altman recently told CNBC, quote, "Our industry underestimated how much we're going to be able to keep people at the center of everything." And Amade said that companies, quote, "can now do more with the same amount of resources," a recent paper from economists at Revelia Labs and Ram, seemed to back that up. They found that the biggest AI spend is hiring more than non-adopters, not less. So we wanted to speak to one of the authors of that study.

And ask the question, "Is AI coming for our jobs or not?" Joining us is Aura Karazian, lead economist at RAP, or thank you so much for joining us on the show. So the change of tune has been notable from these AI leaders. But you've been studying this year. You wrote a paper on AI job loss. You're finding seem to be that AI is not killing jobs. What did you find? You know, this is a market where there's been a lot of mixed messages,

both as far as what businesses are hearing about how they should be using AI and what people

ever study to use firm level data on what happens at firms that adopt AI. So instead of using

surveys or AI exposure scores, we could look at these firms bought AI, these firms didn't what happened to their hiring going forward. So we found as the firms using AI heavily, grew their head count 10% over the two years following adoption, the firms that used AI lightly only grew it about the same rate as the control groups. So we can talk exactly about what that means, high intensity versus low intensity. Beyond that, we also found outsized

growth for entry level hires. So 12% over two years. Yeah, could you explain break down those the difference in those control groups that what it means to sort of be adopting it heavily versus lightly? Well, we found out our research is that the vast majority of firms that are using AI are using it in a fairly simple and basic way. You might have a chatchipity subscription

“across your entire employee base, but I think if you've used that technology, you will notice”

very quickly it's nice to have, but it's not particularly productivity enhancing. It's certainly not the technology that's going to vault the United States into the next generation of economic

growth and development. However, the top third of firms in our data set are using AI a little

bit differently. They're more likely to use multiple models. They're more likely to use the coding agents. They're more likely to use dedicated software for a specific task like customer service operations. So those businesses tend to be assigned to our high intensity group and it's there that we see these concentrated gains. Now there are caveats with that too. Those firms tend to be in high growth sectors already. Now they're growth accelerates after AI adoption. And while we have

not seen any declines in hiring outside of these high growth firms, we're also not necessarily single out of gains from AI adoption. So that's I think the open question for research going forward whether or not the gains to AI adoption will be experienced by firms outside of tech. That seemed to be one of the interesting points is that we're seeing this specifically in the tech sector. We don't quite know how it works for the rest of these sectors and how generalizable it is.

One critique that I'd be interested to get your views on is that I mean, it doesn't seem that this is proving causality here, meaning it could be that if you're a company that is heavily adopting AI, maybe your hate count is growing for other reasons such as maybe your adventure back company and your forced to continue to grow. I know a lot of AI startups that are growing significantly and in that sense, I'm not sure it necessarily surprises me or disproves the long-term

thesis, which is that AI could ultimately reduce jobs at least in the short to maybe medium term.

“How do you respond to those critiques and do you think that they are valid?”

It's valid in that we do actually control for it, so we run the analysis on two different

control groups. One, we run it against firms that use AI versus firms that never use AI at all,

and there we see a very similar dynamic to what you're describing, firms that use AI are notably different than firms that don't even try it. They're already faster growing. They're more likely to be VC backed or in tech. Instead, we run this analysis against a different control group, firms that have not adopted AI yet in that period, but eventually do, and they're we're able to compare firms that are on otherwise similar growth paths. So in that version of the analysis,

which is how we primarily report our results, we do see that firms that adopt AI are already faster growing, but that growth accelerates after adoption. Now, to the extent that we can or cannot prove causality, I do think the step for further research is to now identify what are the mechanisms

“by which firms see this growth. And we, one of the very complicated facts about measuring AI”

adoption is that the firms that are using it well have no incentive to publish their playbook. They have no incentive to tell us what they're doing that is different and allows them to grow faster than their competitors. Now, we do have some signs of that starting to emerge in our data, specifically that they're using some of the more advanced tools and that they're using multiple models and they're experimenting heavily, but that's the question for future research.

For my own understanding, too, the control group that, as you explained, adopted AI later, compared to the earlier AI adopters who are presumably the C-backed and probably the whole thing is to, they're probably AI startups, really, that are growing really significantly. And you're saying, well, we found a batch of companies that adopted it later, to what extent does that still control for the problem? I guess would be my question, because could it not also be possible

that many of those companies are also VC backed and they simply saw adopting AI later as the assumption that companies that adopted it later are late stage companies, companies more similar to a large enterprise like a Microsoft or an Oracle or whatever? Well, not necessarily. I mean,

to firms that otherwise adopt with high intensity in the post-adoption period. And so we are

comparing firms that are like both in terms of their likelihood of being VC backed in terms of what they sell and what they're not their tech companies already and what they're not their startups. So, I do think our analysis is robust to that. But even so, if you compare, if you take out all of the tech companies in our data set, you know, you still find high intensity users of AI. And while they're not necessarily adding a lot of headcount, there are also not cutting headcount.

And so I think that's the finding that is informative as far as if you're someone on the job market and you are seeing these statements from CEOs saying that we have to do all these layouts because of AI.

“Let's say that you should be skeptical because our data shows that, you know, if they're”

not necessarily hiring more, their headcount is not necessarily changing because of AI adoption. Now, the mix of jobs may change going forward. But overall, the companies that adopt AI tend to grow faster following adoption. So, when you see some of these headlines that we've seen, obviously, now we're seeing sort of a change in the messaging from these AI leaders, presumably, because it's gotten so unpopular, I think, but I mean, jury's still out on that. But we have

seen a lot of headlines from companies, they say, you know, we're going to lay off 8,000, 10,000 people, and we're doing it because of AI. In fact, 100,000 layoffs so far this year have been attributed to AI. Do you think that they are kind of mis-attributing what the layoffs are really all about? And just saying something to, I'm going to please share holders. I mean, what do you make

“of those headlines? I can't so much exactly why companies say it. I mean, I think the fact is”

that most layoffs and job losses in general are due to a number of reasons. I mean, there's a side finding in this paper as well that the tech sector in general was shedding jobs in the post-pandemic over hiring period and that that trend reversed following AI adoption at these firms. We didn't spend a lot of time on that in the paper, but there's a side finding there that is AI that actually allowed the tech sector to start hiring again and that powered that boom. So does that not to say

that there won't be people who will be affected by AI in terms of, you know, their job prospects. As a member, this paper only focused on white color work. So we're not looking at the impact

of self-driving cars and drivers or manufacturing automation on factory workers. And then second,

even within white color work, there are still workers that may be affected by AI in the workplace and whether or not they're able to learn it quickly enough. Now, after we found this broad growth and hiring following adoption, the next test of the researchers will who are they hiring

“and what are they hiring differently. And although I think it's too soon to stay, say, on many”

metrics and job functions, we are seeing an outsized growth in entry level hiring. And you can imagine that that is, first of all, that's being powered by the firms that are high intensity

adopters of AI. It's our first sign that they're looking for different types of employees.

Likely people who already know how to use AI and use it well and what better place to look than recent grads, people in college and people who know how to use AI and new technologies well. As has been the case for all of the other technological developments over the last 20, 30, 40, 50 years. All right. All right, Karazian, lead economists at ramp. All right, we really appreciate your time. Thank you. Thanks for having me.

Okay, that's it for today. This episode was produced by Claire Miller and Allison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Danchalan, Kristen O'Donnell, Hugh and Missal Vario and our social producer is Jake McPherson. Thank you for listening to Prof. Markets from Prof. Media. If you liked what you heard, give us follow. I'm Ed Allison. I will see you tomorrow.