The United States Has Become a Rogue State

The author argues the U.S. has become an increasingly erratic and predatory power—exemplified by the Trump administration’s war with Iran—and will remain a major geopolitical risk for at least three more years. Expected responses from other states include balancing (hard and soft), bandwagoning, political manipulation, de-risking trade links (accelerated since reciprocal tariffs in April 2025), and potential regional nuclear proliferation (e.g., South Korea/Japan). For portfolios, anticipate elevated geopolitical risk premia, higher defense and energy market volatility, and continued push by trading partners to diversify away from U.S. exposure.

Analysis

The most important market implication is that geopolitical unpredictability is becoming a persistent structural risk, not a short-lived shock. Expect a multi-year reallocation: allies will accelerate trade diversification and nearshoring decisions that can shave several percentage points off U.S. export share to key partners over 2–4 years while lifting regional trade corridors and port/rail capex in Europe and Asia.

Defense and dual‑use industries are the clearest near‑term beneficiaries as governments scramble to fill perceived protection gaps; incremental procurement cycles are lumpy but can add 5–15% revenue upside for primes and European contractors over 12–36 months. At the same time, tighter export controls and sanctions will fragment high‑tech supply chains, creating a durable capex wave in non‑U.S. fabs and equipment suppliers even as access to certain Chinese markets remains constrained.

Macro and tail risks are asymmetric: in the weeks–months window a major escalation or sanction shock would push volatility, FX dislocations, and safe‑haven flows (USD/gold) sharply higher; over years, incremental de‑dollarization and reserve diversification are plausible but slow, creating regime uncertainty rather than an immediate collapse of the dollar. Key reversals are political: a credible de‑escalation, a change in U.S. administration, or rapid allied coordination could unwind much of the risk premia within 3–12 months, so positioning should be dynamic and event‑linked.

Key Decisions for Investors

• Defensive long on defense primes (LMT, RTX, NOC) — equal‑weighted basket via 12‑month call spreads (buy ATM calls, sell 25–30% OTM) to cap premium. Timeframe 6–18 months; upside scenario +20–30% if procurement accelerates, downside limited to premium paid (~100% downside of option premium). Trim 50% on clear de‑escalation signals or negative Congressional budget votes.
• European dual‑use exposure (BAE.L via LSE/ADR, EADSY) — buy shares or 18–36 month LEAP calls to capture accelerated NATO/EU procurement and export wins as partners reduce U.S. dependence. Target return 20%+ over 12–36 months; key risks are FX and slower EU budget approvals.
• Portfolio tail hedge: allocate 1.5–3% to volatility and safe havens — buy 3‑month VIX call spreads and GLD (or GDX for leveraged upside). This combination protects against short‑term escalation (VIX) while capturing multi‑month flight‑to‑safety (gold). Expect VIX payoff multiples 3–10x in an acute shock and GLD to rally 10–25% in a sustained risk‑off leg.
• Event‑driven tactical: buy 3–6 month S&P 3–5% OTM puts equal to 1–2% portfolio weight as insurance around key catalysts (major military escalation, sanctions rounds, or large political events). This is cheap insurance against tail risk; if none materializes, cost is an acceptable drag on returns (premium lost).