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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

German War Machine "Kaput" Equals DEMAND for Defense

Jeffrey C. Borneman | October 24, 2014

Back in June, Germany announced the creation of its version of The Pentagon; an effort to pull together the various European Defense contractors into an efficient and profitable organization. Just weeks before that, Germany made headlines by boasting it would supply what the "UN now lacks in key capacities and capabilities which other nations do not have." A new report detailing Germany's Defense industry show it in utter shambles.

How badly can the strongest economy in Eurozone mismanage its Defense structure, budget and readiness?

"So short of equipment, at present Germany would be powerless to respond if a fellow NATO member were to ask for military assistance said German Defense Minister Ursula Von Der Leyen," reports Peter Dorrie of War is Boring, quoting the explosive report to the German parliament: "(C)onfessing that half of the armed forces heavy equipment is unserviceable and can’t deploy in a crisis."

The stunning particulars of the report exposes weakness and mismanagement to the core: "Tanks, ships and planes are late, too costly - and half of them aren't fit for service,"

It is a longstanding requirement that NATO member countries spend at least two percent of GDP on Defense for the sole purpose of being at the ready if a fellow NATO member requires military assistance. Nevertheless, as recently as this summer Von Der Leyen balked at increasing the German military budget from 1.3 percent to 2 percent of GDP. Her reluctance is noteworthy considering the Airbus A400M tanker is still in development and years behind schedule while Germany's famed Luftwaffe "can field only 80 Typhoon and Tornado fighters out of 140," and "the bulk of Germany's air force is currently grounded."  

Von Der Leyen said "she would look into the possibility of leasing equipment to plug some gaps ... " and that seems to be a theme as politicians in all parties have called for the Defense Ministry "to invest more to plug the gaps."

The report exposes the unreliability of Germany as military ally, period. The situation, best described as a confession by the German government, is being blamed on mismanagement and "procurement" problems but at its root is generations of reliance on the US Defense umbrella. Germany had no need to maintain critical hardware for deployment as there was no imminent military threat and NATO membership meant only providing housing for US troops and airstrips for US air assets.

The world is changing around Germany and, despite entering a triple-dip recession, it will be shamed into Defense readiness one way or another. The ostensible leader of Europe has been caught with its proverbial knickers dragging in the dirt - and if called upon today stop a Russian invasion of Ukraine or elsewhere, it seems the NATO commander would first be directed to the nearest mechanic for an update on spare parts ...

Calls from members of the German government to bolster the Defense budget are growing. Christian Democrat defense expert Henning Otte told the Welt am Sonnta today, "From 2016 it will be necessary to increase the budget - by whatever amount of money is necessary to fulfill all our commitments."

Investor takeaway: At times, the geopolitical tea leaves must be read slowly and carefully to fully appreciate the shifting of DEMAND - this is not one of those times. Germany will dramatically increase domestic Defense spending and it won't begin in 2016. The "gaps" in the military readiness must come from abroad and the bulk of that procurement will likely be US suppliers.

If you want to know more about how the MDEF™ Investing strategy is positioned in this, or other geopolitical possibilities, please contact us directly.

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