War Economy Asset Returns
Use this file when: Stress-testing portfolio against great-power conflict scenarios. Historical data from WWI, WWII, and Cold War-adjacent periods.
WWII Government Asset Controls
“All WWII major powers (United States, United Kingdom, Germany, Japan) implemented: Rationing, Production Controls, Price/Wage Controls, Import/Export Restrictions, Takeover of Central Bank.” — a-00018
Asset markets in WWII were government-directed, not free markets:
- US: 94% top marginal tax rate, price controls, FX controls
- UK: 98% top marginal tax rate, partial CB takeover
- Germany: 60% top marginal rate + comprehensive controls
- Japan: 74% + market closures
“United States WWII: Top Marginal Tax Rate 94%. UK: 98%. Germany: 60%. Japan: 74%. All had market closures (except US), price controls, FX controls, asset ownership restrictions, and limits on corporate profits.” — a-00019
The US was the exception to market closures — explained by geographic isolation (no direct domestic combat) + being the dominant winning power.
Equity Performance: Military Outcomes Matter
“Equities in Germany perform well as the Axis powers dominate from 1939 to 1942. In contrast, both US and UK equities rally almost continuously after the 1942 Battle of Midway until the end of the war. When German/Japanese markets reopen post-war: massive declines.” — a-00020
Military momentum is the dominant driver:
- Axis equity boom (1939-42) → complete reversal post-war
- Allied equity rally from Midway (1942) → strong post-war returns
- Lesson: equity markets in great-power conflicts are pricing probability of winning, not economic fundamentals
For investors: holding equities of the losing power produced -100% outcomes even for those who survived the equity rally phase.
Decade-by-Decade Return History
“Real Returns by decade: 1910-20: US equity -2%, Germany -14% equity; 1920-30: US +16%, Germany -24% (hyperinflation); 1940-50: Japan equity -28%, Germany -4%, US +3%; 1970-80: US equity -2%, Japan +3%; 1980-90: US +13%, Japan +19%, Germany +10%.” — a-00022
Key lessons from multi-decade data:
- War-adjacent decades: catastrophic for losing-side investors
- Hyperinflation decades: destroy bonds AND equities in real terms
- Post-war reconstruction: strong real equity returns for winning powers
- Stagflation (1970s): negative real equity returns across almost all markets
- Disinflation (1980s): exceptional returns everywhere — driven by Volcker’s regime shift
The Catastrophic Loss Distribution
“Worst 20-year real return periods: Russia 1900-1918: -100%. China 1930-1950: -100%. Germany 1903-1923: -100%. Japan 1928-1948: -96%. Austria 1903-1923: -95%. France 1930-1950: -93%.” — a-00023
The -100% outcomes occurred when political discontinuity eliminated the market entirely — not just price declines. Communist revolution (Russia, China), hyperinflation (Germany, Austria), conquest (France) all produced complete elimination of prior financial claims.
Market Closures
“Stock market closures: WWI produced the largest closure by GDP share (~40%+ of global GDP in closed markets); WWII second largest.” — a-00025
During WWI/WWII, over 40% of global GDP by market value was in closed markets. Geographic diversification only works if the diversification is into open markets — the US market being open during WWII was the exception, not the rule.
War Economy Portfolio Strategy
For great-power conflict scenarios:
- Hold assets in the most geographically/politically insulated market (historically, the US)
- Gold and commodities provide purchasing power protection across both winning and losing sides
- Avoid long bonds — confiscation risk, price controls, and inflation all impair bonds
- Equities of winning powers recover strongly post-war; losing powers → permanent impairment
- International diversification must account for potential market closure (US assets >> foreign assets in closed-market scenarios)