Analysis-Silicon Valley-backed defense firms face growing pains after hot streak

Economic

Summary:

Silicon Valley defense startups are winning more Pentagon contracts, but now face the harder challenge of scaling production and competing with entrenched defense giants, prompting partnerships and calls to reform acquisition systems.

U.S. defense technology companies have roughly doubled their share of Pentagon contracts over the past year, but they face growing pains as they try to evolve from hot startups into heavyweights capable of building weapons at scale.

Valuations for unlisted firms developing everything from unmanned "wingman" fighter jets, drone boats and AI-driven autonomous software have surged this year, alongside a rise in small Pentagon contracts, as the success of drones in Russia's war on Ukraine has intensified interest in next-generation weapons.

For ‌instance, drone boat manufacturer Saronic Technologies, which is building a shipyard in Louisiana, was valued at $4 billion in February. Anduril Industries, the drone and autonomous weapons startup led by Palmer Luckey, doubled its valuation to $30 billion in June. And in a funding round last ‌month, radars and sensors company Chaos Industries doubled its valuation to $4.5 billion.

Now, the Silicon Valley-backed companies face a bigger challenge: moving beyond research and prototype contracts to producing weapons at scale and competing with established defense firms, according to interviews and speeches by more than a dozen industry executives at this weekend's Reagan National Defense Forum in Simi Valley, California.

"The defense tech space is booming, there are many people bringing commercial innovation to the defense area," said Christopher Calio, CEO of RTX, the defense giant behind the Patriot missile defense system and the engine that powers the F-35 fighter jet.

"I will say this, it's one thing to design and innovate. It's another thing to build ⁠a prototype, and then it's an entirely different ball game to then ‌scale manufacturing," Calio added.

SILICON VALLEY GETS LARGER SLICE OF PENTAGON PIE

Defense startups captured 1.3% of Pentagon contracts to defense firms in the first three quarters of this year, up from 0.6% a year earlier, according to data provided to Reuters by Govini, a Virginia-based defense analytics firm.

Meanwhile, the big defense "primes", which include Boeing, Lockheed Martin, RTX and Northrop ‍Grumman, held steady at 92% of Pentagon contracts. European defense firms' share slipped to 6.6% from 7.4%.

"There will have to be more companies that have a shot at winning some of these larger contracts," Anduril Chairman Trae Stephens told Reuters. But, he added, "this is a hard, hard business. And the DOD (U.S. Department of Defense) is not going to create 10 new primes. There's not enough money to go around."

The annual Reagan forum was a collision of eras, where four-star generals and Washington defense CEOs in tailored suits mixed with baseball-cap-clad AI and drone company founders, debating how to scale new technologies for the battlefield against the backdrop of Simi Valley’s rolling hills.

U.S. Defense Secretary Pete Hegseth ‌said the Pentagon would move away from a "prime" dominated culture to a system where nimbler commercial companies would speed up weapons production to help counter China's rapidly growing military.

"Our objective is simple, if monumental," Hegseth said in his keynote speech. "Transform the entire acquisition system to rapidly accelerate the fielding of capabilities and focus on results."

HARD TO CHANGE PENTAGON CULTURE

Defense executives said delivering on Hegseth's vision will be tough given entrenched political interests, a backlog of Pentagon mega-projects, a bureaucracy wedded to old ways and powerful defense giants with lobbying muscle.

Most defense tech firms are a long way off transitioning from a prototype contract, which might be worth $10 million to $30 million, into a major program with production targets like those the Pentagon has awarded to big defense firms for decades, said Zach Shore, chief revenue officer at Hermeus, an Atlanta-based company developing an uncrewed hypersonic military jet.

"That ⁠next layer of bureaucracy, that's the next wall that a lot of companies are going to come up on," Shore told Reuters.

This year, the Pentagon awarded large swathes of major programs - including Ukraine military aid packages, an Air Force fighter jet initiative, and the $175 billion Golden Dome missile project - to legacy defense contractors.

Despite these challenges, JPMorgan Chase CEO Jamie Dimon, who announced $10 billion of direct equity investments in defense, manufacturing and tech companies in October, fired a warning shot at any legacy defense contractors who might be resting on their laurels.

"There's a valley of death for big companies too, who ‍go by the wayside, usually driven by complacency, arrogance, bureaucracy," ⁠he said on a panel at the summit.

NEWCOMERS AND OLD GUARD FORGE PARTNERSHIPS

Heeding this call, many of the old guard of the defense industry expressed a willingness to embrace partnerships with next-generation defense companies.

"As the defense industrial base surges to support the growth, we need to leverage the established companies and the new entrants," L3Harris Technologies CEO Chris Kubasik told Reuters.

In September, Shield AI, a ⁠San Diego-based software and drone firm, announced a partnership to build autonomous vessels with HII, America's largest military shipbuilder. Last month, Anduril and South Korea's HD Hyundai Heavy Industries said they were teaming up to build ships for commercial and military use.

Zach Mears, Anduril’s ‌head of strategy, said the U.S. defense industry was approaching a tipping point after decades in which a small club of contractors dominated Pentagon deals.

"The light switch is in the ‌middle of being flipped," he said.

Source: Reuters

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Justin

Commodity

Stocks

An experimental Chinese nuclear plant reportedly just crossed a historic threshold, successfully operating the world's first thorium-based molten salt reactor (TMSR). The Chinese Academy of Sciences' Shanghai Institute of Applied Physics has broken a major scientific barrier by successfully converting thorium to uranium in a historic first.

The Hong Kong-based South China Morning Post reports that the breakthrough, which took place at an experimental reactor out in the Gobi Desert, is "poised to reshape the future of clean sustainable nuclear energy."

The process works by using a "precise sequence of nuclear reactions" in which naturally occurring thorium-232 absorbs a neutron, becoming thorium-233. Through a decay process, that isotope breaks down into protactinium-233 and then finally into uranium-233, a potent form of nuclear fuel that can sustain chain reactions for nuclear fission.

While this breakthrough was just publicized this month by a report by Science and Technology Daily, the TMSR has apparently been operational for years. Li Qingnuan, Communist Party secretary and deputy director at the Shanghai Institute of Applied Physics, told the outlet that "since achieving first criticality on October 11, 2023, the thorium molten salt reactor has been steadily generating heat through nuclear fission".

If the reports are true, this breakthrough would signal an incredible leap forward in a nuclear technology race that China is already winning handily. Although the United States is still the world's biggest producer of nuclear energy, that status won't last much longer. In the same time period that the United States built the overdue and over-budget Plant Vogtle, China built 13 reactors of similar scale, and has 33 more on the way. Beijing is also making major forays into the nuclear sectors of emerging economies, with particularly concerted efforts in Africa.

"The Chinese are moving very, very fast," Mark Hibbs, senior fellow at the Carnegie Endowment for International Peace and expert on the Chinese nuclear sector, told the New York Times. "They are very keen to show the world that their program is unstoppable."

But while China has invested huge sums of money and manpower into becoming a global nuclear energy innovator and superpower, the nation lacks sufficient uranium to power its lofty goals. While nuclear power production growth is dominated by China, uranium supply chains are dominated by Russia, which is home to nearly half (approximately 44 percent) of all global uranium enrichment capacity.

China has been buying up more and more of Russia's uranium, but reliance on exports is both risky and antithetical to China's ethos of domestic energy independence and international energy dominance. Russia's outsized presence in the nuclear fuel supply chain has resulted in some degree of risk and market volatility, as the Kremlin has shown that it is not afraid to use enriched uranium for political leverage.

"The nuclear energy supply chain sits atop the clean technology risk pyramid," warned a recent article from the Carnegie Endowment for International Peace. "Beyond standard supply chain considerations, nuclear exports are subject to a suite of safety and security concerns, and overreliance on a single technology or fuel provider can create significant dependencies given the limited number of suppliers and distinct intellectual property (IP)."

By sidestepping the uranium supply chain issue by using thorium instead, China is leaping over a critical hurdle and straight over the finish line for global nuclear power sector domination. Thorium is much more accessible and abundant than uranium, and could theoretically solve all of China's nuclear fuel problems. According to the South China Morning Post, just one mining site in Inner Mongolia " is estimated to hold enough of the element to power China entirely for more than 1,000 years."

Source: Zero Hedge

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Adam

Economic

The combination of gold and share prices soaring in unison is a phenomenon not seen in at least half a century and raises questions of a potential bubble in both, global central bank umbrella body, the Bank for International Settlements, says.

While equity markets continue to be driven by AI and tech gains, gold's 60% surge this year is set to be its biggest since 1979, fuelling debate about whether its traditional role as a safe-haven asset has changed.

"Gold has behaved very differently this year compared to its usual pattern," Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department at the BIS said as it released its final report of the year on Monday.

"The interesting phenomenon this time has been that gold has become much more like a speculative asset."

Dubbed the central bank to the world's central banks, the BIS has given regular warnings about potential stock market bubbles in recent years, but its concern around the co-movement with gold is two-fold.

Where would investors shelter if stocks and gold both crash. And what could it mean for central banks and other reserve managers given some have been heavy buyers of gold.

The BIS' analysis concluded that this year has been the first time gold and the S&P 500 have jointly exhibited "explosive behaviour" in the last 50 years.

Not only is gold up 60% this year, it is up more than 150% since 2022 when the post-COVID pandemic surge in inflation began to impact markets, alongside Russia's invasion of Ukraine and subsequent Western sanctions on Moscow.

Another possible bubble warning sign is that retail investors have also been piling in.

Gold exchange-traded fund (ETF) prices have been consistently trading at a premium relative to their net asset value (NAV) this year, signalling "strong buying pressure coupled with impediments to arbitrage," the BIS said.

Central banks' purchases have "clearly set a very firm tone in the price of gold," Shin added.

"Whenever you have prices actually doing quite well, you will see other investors jumping in, and certainly retail investors have also taken part (in the rally), and not just in gold".

GROWING FRAGILITY

The BIS gave a broader warning too about the "growing fragility" of the risk-on environment amid the concerns about artificial intelligence (AI) valuations and the recent 20% dives in cryptocurrencies like bitcoin.

The European Central Bank and Bank of England have both raised their own AI bubble concerns in recent weeks and the risk of an abrupt burst if investors' rosy expectations are not met.

Shin said the profits being made by the AI firms - now spending enormous amounts on data centers - was an important difference between now and the "dotcom bubble" of the early 2000s when firms weren't making money.

The "fundamental question", however, is whether those expenditures will be seen as being justified in the long run, Shin said, adding that the other key determinant for markets will be how the global economy holds up next year.

"So far, activity has been surprisingly resilient," Shin said.

The BIS is also watching where the dollar goes from here. This year it is headed for its biggest annual drop since the Lehman Brothers collapse in 2007.

"After the April episode (when U.S. President Donald Trump announced sweeping trade tariff plans), the dollar has been relatively stable," Shin said.

"I think the hedging behaviour of non-U.S. investors is going to be a very, very important input into how markets will co-move from here."

Source: reuters

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James Whitman

Political

● Spy chief speaks after U.S. strategy that is critical of Europe

● Says US strategy shows need to review alliances, boost Europe cooperation

● Europe must foster alternatives to U.S. tech like Palantir

There is no need for a rupture between Europe and the U.S. over Washington's new Security Strategy warning of "civilizational erasure" in the Old World, Germany's spy chief said on Monday.

In the new document, unveiled late last week, the Trump administration upends postwar assumptions about Europe's close relationship with the United States and takes European countries to task for continuing to rely heavily on the U.S. for their defence. Reuters reported on Friday that Washington wants Europe to take over the majority of NATO's conventional defence capabilities, from intelligence to missiles, by 2027.

"I would not draw from such a strategy the conclusion that we should break with America," Sinan Selen said at an event in Berlin, "and I also do not believe that our partners will break with us."

"But one important point is that we naturally have to continually review our alliances and further develop them, and that applies in particular to European networking."

Europe needs to become more independent overall, including in its security architecture, Selen said, alluding to concern over reliance on U.S. technology.

Europe "must be able to generate alternatives" for example to the crime-fighting software of CIA-backed Palantir Technologies (PLTR.O), opens new tab so it could then select the best solution, taking into account geostrategic considerations.

"We have industries and companies that can do these things. Perhaps they simply need more support," he said.

German security services also need expanded digital surveillance powers to better unmask people hiding behind fake profiles, map their online networks, and analyse their communications, before anything happens, said Selen.

The government is already working on this, he said.

"Other partners — I look specifically at France and the Netherlands — are far ahead of us in this regard," said Selen.

Germany has traditionally maintained some of the strictest data-privacy protections in Europe, shaped by its history of two dictatorships in the 20th century.

Source: Reuters

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Adam

Economic

The wave of capital pouring into artificial intelligence infrastructure is far from peaking, said Ben Powell, chief investment strategist for APAC at BlackRock, arguing the sector’s “picks and shovels” suppliers — from chipmakers to energy producers and copper-wire manufacturers — remain the clearest winners as hyperscalers race to outspend one another.

The surge in AI-related capital expenditure shows no sign of slowing as tech giants push aggressively to secure an edge in what they see as a winner-takes-all contest, Powell told CNBC Monday on the sidelines of the Abu Dhabi Finance Week.

“The capex deluge continues. The money is very, very clear,” he said, adding that BlackRock is focused on what he called a “traditional picks and shovels capex super boom, which still feels like it’s got more to go.”

AI infrastructure has been one of the biggest drivers of global investment this year, fueling a broader market rally, even as some investors question how long the boom can last.

Nvidia, whose GPU chips are the backbone of the AI revolution, became the first company to briefly surpass $5 trillion in market capitalization amid a dizzying AI-fueled market rally that sparked talk of an AI bubble.

Microsoft and OpenAI also reached a restructuring deal in October to support the ChatGPT developer’s fundraising efforts. OpenAI has reportedly been preparing for an initial public offering that could value the company at $1 trillion, according to Reuters.

The build-out has set off long-term procurement efforts across the tech sector, from chip supply agreements to power commitments. Grid operators from the U.S. to the Middle East are racing to meet soaring electricity demand from new data centers. Companies, including Amazon and Meta, have budgeted tens of billions of dollars annually for AI-related investments.

S&P Global estimates data-center power demand could nearly double by 2030, mostly driven by hyperscale, enterprise and leased facilities, along with crypto-mining sites.

‘Dipping toes into credit market’

Powell also noted that leading tech firms have only begun to tap capital markets to fund the next phase of AI expansion, suggesting additional capital is on the way.

“The big companies have only just started dipping their toes into the credit markets… feels like there’s a lot more they can do there,” he said.

The “hyperscalers” are behaving as if coming second would effectively leave them out of the market, Powell said. That mindset, he added, has pushed firms to accelerate spending even at the risk of overshooting.

Much of that capital, Powell noted, is likely to flow to the companies powering the AI build-out rather than model developers, reinforcing a growing view among global investors that the most durable gains from the AI boom may lie in the hardware, energy and infrastructure ecosystems behind the technology.

“If we’re the recipients of that cash flow, I guess that’s a pretty good place to be, whether you’re making chips, whether you’re making energy all the way down to the copper wiring,” Powell noted, expecting “positive surprises driving those stocks in the year ahead.”

Source: cnbc

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Adam

Economic

After consternation about whether the Federal Reserve will cut interest rates for a third time this year, the consensus is that the central bank will likely go ahead with a 25-basis point cut on Wednesday — even if it's a split decision.

“This is a hard call,” said Alan Blinder, former vice chair of the Fed and economics professor at Princeton. “[But] I do think it’s more likely they cut than not… It wouldn’t surprise me if this is a 'hawkish cut.'"

That is to say, a rate cut this week could come with a caution to markets not to expect the Fed to keep cutting meeting after meeting. Blinder said he also thinks there could be dissenters on both sides of the interest rate decision, given existing divisions within the committee.

Luke Tilley, chief economist for Wilmington Trust, who also thinks the Fed will cut rates Wednesday, predicted Fed Chair Jerome Powell will frame a rate cut the same way he did at the last press conference: by emphasizing differing opinions over further rate cuts and cautioning against assuming that the central bank will continue to cut.

Ahead of this week’s meeting, a handful of Fed officials have made the case that there is not a strong need to cut rates given concerns about inflation, which remains a full percentage point above the Fed's 2% target. Those include Boston Fed president Susan Collins and Kansas City Fed president Jeff Schmid.

Chicago Fed president Austan Goolsbee has also expressed hesitation about "frontloading" too many rate cuts, citing inflation. On the flipside, New York Fed president John Williams, vice chair of the Federal Open Market Committee and a member of Fed leadership, strongly signaled a few weeks ago that he could support a rate cut.

“I still see room for a further adjustment in the near term to the target range for the federal funds rate, to move the stance of policy closer to the range of neutral,” Williams said on Nov. 21.

To some Fed observers, that comment alone moved the odds.

“The vice chair, John Williams, usually doesn't strongly signal that much in a speech unless he has the Fed chair's endorsement,” said Loretta Mester, former president of the Cleveland Federal Reserve. “So my view is they're going to go ahead with another 25-basis point cut in December.”

While Mester says she thinks the Fed is not necessarily wrong to cut rates, she would not support it at this point and would want to see how the economy is faring at the beginning of next year, then course-correct if needed.

“I don't really see a compelling case to cut this time, other than the fact that it was in the interest rate projections from September,” she said. “I think it's more expeditious than a good economic argument.”

Blinder cautioned that if the central bank cuts rates again this week, policymakers risk making it harder to pull inflation down.

Blinder says, “we may be” at risk of unleashing persistent inflation if the Fed continues to cut rates.

“The question is whether we're there right now,” he said. “I think we may be.”

What the available data says

The release of inflation data continues to be delayed due to the government shutdown that ran for all of October and into November. The latest reading of the Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, was released with a two-month lag. For September, on a “core” basis excluding food and energy prices, inflation increased 2.8% in September, down a tenth of a percentage point from August. Fed officials expect inflation to end the year at 3.1%.

A stronger-than-expected — albeit stale — September jobs report showed payroll growth bounced back in September with 119,000 jobs added, compared with a loss of 4,000 for the month of August. That contributed to a volatile trend where job creation turned negative in June, increased in July, decreased again in August, and rebounded again in September.

A more recent anecdotal reading on the job market from the Fed’s Beige Book showed that in the first two weeks of November, layoffs ticked up, employers were implementing hiring freezes, and adjusting workers' hours. A few firms noted that artificial intelligence replaced entry-level positions or made existing workers productive enough to curb new hiring.

Fed officials will receive more real-time data releases the week after their meeting.

Looking ahead to 2026

Fed observers will be watching this week to see what officials signal about the future path of policy. Powell will hold his usual post-meeting press conference, and policymakers will unveil their latest quarterly projections for interest rates, which will include the outlook for 2026.

“I'm hoping that he'll give sort of a narrative about really how they're thinking about the economy,” Mester said.

She said she would take a cautious approach to further rate cuts because she sees inflation being driven not just by tariffs — which she considers one-time price increases — but also in the price of services.

While the Fed is trying to cushion against deterioration in the job market, Mester said she believes much of the softening is due to longer-term changes the Fed can’t control, such as shifting immigration policy that’s resulting in a smaller pool of workers. At the same time, she acknowledged weakening due to uncertainty over tariffs and firms wanting to protect their profit margins from tariffs, as well as the cost of labor.

“So you kind of have this sort of almost stasis in the labor market, and I'm not sure cutting interest rates does anything really to help that,” she said.

Wilmington Trust’s Tilley, however, predicted three more cuts at the next three Fed policy meetings because he thinks the job market is weakening and expects it to weaken further.

Tilley estimated that 154,000 government workers who took buyouts, dropping off payrolls in October, could boost the unemployment rate for November by nearly a tenth of a percentage point to 4.5%. He also noted that outside of healthcare jobs, private-sector job growth has been negative, according to BLS data.

“There are the federal employees, and you've also got new entrants to the labor force who are having a hard time finding jobs,” Tilley said. “So, it all comes together to reflect a very weak labor market.”

Aditya Bhave, senior US economist at Bank of America, projected two more cuts next June and July, not because the economy will need it, but because of a new chair of the Fed. That would leave rates in a range of 3.0 to 3.25%.

“Our forecast of additional cuts next year is due to the change in leadership, not our read on the economy,” said Bhave. “In fact, by cutting rates next week, we think the Fed would increase the risk of pushing policy into accommodative territory, just as fiscal stimulus kicks in.”

Amir Bagherpour, global managing director for Accenture, is predicting the Fed will cut rates one or two more times next year after cutting this week. That outlook assumes inflation as measured by core PCE will range from 2.5%-2.7% next year; GDP will be in the range of 1.5-1.8%; the unemployment rate will end next year in the range of 4.4-4.6%; and monthly jobs growth will average 75,000-125,000.

Fed officials will release new projections for inflation, GDP, and unemployment on Wednesday.

Source: finance.yahoo

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Winkelmann

Political

Economic

UK homes worth more than £2 million ($2.7 million) could drop about 5% in value next year as the market adjusts to a so-called mansion tax, according to forecasts from Hamptons.

The broker said it expected these homes — most of which are in London — to see a "one-off adjustment" in 2026 based on price reductions that factor in a new levy coming into force in April 2028. Chancellor of the Exchequer Rachel Reeves last month unveiled a tax on homes valued at more than £2 million, with a surcharge starting at £2,500 a year and rising to as much as £7,500.

A 5% price correction would be the largest annual drop in values since 2009 for homes that have maintained a value of more than £2 million during those years, according to Hamptons' data. The broker said it expected London to be the only region in Britain to see house prices fall in 2025, predicting a 0.5% decline in the year compared to growth of as much as 5% in other regions.

"It's hard to ignore the growing drag of taxation and politics," Aneisha Beveridge, head of research at Hamptons said in a report. London "is being held back by higher stamp duty and broader tax anxieties, locking some owners into their homes and others out of buying them."

The housing market has endured disruption partly caused by hikes to stamp duty and the abolition of a system that allowed wealthy foreigners, or so-called non-doms, to avoid UK taxes on their overseas earnings. The changes have disproportionately impacted activity in London, where the market has also been affected by fiscal worries, as Labour raises revenue to pay for higher public spending.

The new mansion tax targets less than 1% of all properties in England. However, most homes worth more than £2 million are in London, where property agents are warning the tax could amplify turbulence in the city's market.

London's already weak house price growth is set to significantly trail the rest of Britain for at least the next two years. Hamptons predicts London will be the only region to not see house prices rise next year, and says it will lag behind other UK regions in growth by as much as roughly 16 percentage points between 2024 and 2028.

The broker expects house prices to rise by 2.5% across Britain in 2026, followed by 2% growth in 2027 and a further 1.5% in 2028. It said political uncertainty will become a more prominent driver of property sentiment in 2028 — the year before the next planned general election.

Based on market views on interest rates, the base rate could move further downwards next year and "settle" at about 3.25% at the end of 2026, Hamptons said. This should increase Britons' chances of securing mortgage deals below 4%, it added.

"Inflation is easing, mortgage rates are falling, and affordability is improving," Hamptons' Beveridge said. "At the same time, the balance of power is shifting: the Midlands is forecast to have seen more price growth than London since prices bottomed out after the 2008 financial crash."