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- [00:00]
Jordan
Second breakfast twice in a week. It's, are you guys sick of us yet? We're going to talk Iran. Trump's promise of a $500 billion late Christmas present, Raytheon getting put on blast, as well as whatever else we get into. Who wants to kick us off?
- [00:23]
Brian
Yeah, I think we, I think we start off, let's start off with Iran because they're in the news. The former king's son, Reza Pahlavi, over the last couple of days had a couple of tweets, One calling for a night of protest to start at a specific hour in Tehran and Isfahan and across Iran. And then we saw that happen. There were actually, they're calling it days of rage and nights of protest and fire kind of across Iran where the Internet has been cut off as of last night in the country. So like flight awareness apps are no longer working and Internet dropped to zero. But yeah, looks, looks precarious for the, for the Ayatollah and the, the Islamic supreme jurisprudence that rules Iran currently.
- [01:16]
Eric
They are also not responding to the, the Peacock throne that this is. The monarchists chasing events once again as exiles are known to do. What are the sources of instability that we're monitoring? You know, I am not an Iran expert, but I worked on Iran paramilitary activity professionally. So there are segments of the Iranian state and their partners and proxies that I've invested a substantial part of my life trying to understand. So that makes me, I guess, somewhat qualified, but not an expert. What are the pressures? The capital city of Tehran is witnessing a like once in a thousand year drought. So the water tables are extraordinarily low. So we got water challenges. There are currency valuation challenges that are making purchasing of basic house staples limited. There is challenge faced across Iranian society with accessing what have historically been extraordinarily subsidized fuels. There is generalized discontent with, with Iranian military performance vis a vis the United States and Israel, while Iran continues to back partners and proxies internationally, some of which, like Lebanese Hezbollah, have collapsed in on themselves. And we are still just six years removed from the, the killing of Ghassem Soleimani and the arrival of COVID 19 into Iran. So I think there is a lack of appreciation of just how badly that pandemic attacked Iranian civil society, state capacity. And there are a series of injects that are pressuring this revolutionary state that has not delivered on its promise of functioning state or revolution.
- [03:41]
Brian
Yeah, I think, I think that's, I think that's right. I think, I mean if you look at the government of Iran, I think last week they announced that they were going to offer $7 a month payments, what accounted to $7, US$7 a month payments to households in Iran. So they clearly see, like, the finance is like the number one thing. But there's. There's this weird. There's also a weird. It's a weird inflection point for Iran because after Khomeini, into Khomeini, there was a weird transition period where the way the constitution was written for the leadership of Iran, basically only Khomeini could have been the leader. You had to have, you know, years of jurisprudence, you had to be an ayatollah, you had to have issued the right number of fatwas, you had to be a certain level Shia cleric. And really, he described a position that only he had and only he had attained. So then when he passes away, there is no clear error. And Rafsanjani, who at the time was the president and one of the leading speakers, he's passed away in the last decade. But he comes out and he's like, on his deathbed, he told me it was gonna be this guy. And there is literally nobody now in the wings who can take over for. For Khatmani. And he's old. He's been ill for a long time. He's never been in the best of health. If you ever watch or see photos of him, one of his hands is crippled. He actually kind of keeps it hidden because it's been crippled for most of his life and there is nobody next. So his son is in charge of the besiege, which is their paramilitary police force that comes out whenever there's protests. And there's been talk that, what if he makes him the. The next ayatollah or he somehow gets named in the thing. But it's. It's a weird inflection point because he's old. There's been all these. There's been all these happenings. We've seen a reduction in power of the irgc, both internally and externally to Iran. And then you've got just the. The geopolitics around it are destabilizing. On top of all of those pressures, though, you have iron. On 5 January, Netanyahu secretly approving the publicly released authorization to potentially conduct strikes against Iran if unknown triggers are met. Which just doesn't make. I don't know. I don't understand that, because we were talking about it beforehand. But the one thing that has been shown to unify Iranians in their past is an external Attack, especially by a country they hate.
- [06:23]
Tony
The one thing that's always brought up is let's say these protests are successful and what's the scaling of reforms to? There's a transition to democracy, real democracy, to some sort of various new form of authoritarian regime. Because it's, you know, the IRGC doesn't just go away. It might not have the power it once did, but you still have a bunch of paramilitaries who are actively scheming to make money and hurt people.
- [06:49]
Brian
So yeah, that's the hard thing. Right. Because the IRGC's budget doesn't come from the state of Iran. The IRGC, much like North Korea, operates under an eat what you kill mentality. So what they actually do is they front a lot of organizations that do construction in the Middle east, that do projects in South America and things and they will be fronts that will launder that money. So really the budget of the IRGC is kind of unknown. We have guesses. There are guesses. I'm sure there are people who do like, you know, certain terms of threat financing and stuff that could give you relatively accurate guesses. But what we know for sure is that the budget that's on paper of how much they give the IRGC is not the budget. So they are kind of a self sustaining ecosystem. What do they become if the regime collapses? Unless all of that gets taken away, it just becomes like a mafia, a very well armed mafia that's within Iran that still has these external ties to criminal networks around the world.
- [07:51]
Eric
Not to fine tune nice of a template but it's going to look a little bit like Pakistan. That there is going to be a hyper elite that is connected through military channels. There's going to be rich landowners. It's going to be a quasi feudal system. Well, much more akin to that than reforming and aligning on principles of democratic representation. The royals will try and there are going to be sponsors in western capitals. Soft handed goofballs that think the Pahlavi's are going to come back and resurrect the glories of the Peacock throne. And with the spirit of adventurism that is circling the drain that is Washington D.C. i fear for people taking that seriously.
- [08:50]
Tony
Where does Brett McGirt stand on the Peacock throne?
- [08:55]
Justin
Exactly.
- [08:56]
Jordan
Get him on the pod.
- [08:57]
Justin
One man's adventurism is another man's opportunity. It's.
- [09:02]
Jordan
Monarchists now, right?
- [09:05]
Tony
Say that.
- [09:06]
Justin
Yes, yes.
- [09:08]
Eric
So I got my first. This is a little bit of lore when I was in high school. You know, my dad was in the Insurance industry. And he had a strange period where he did a lot of European travel for a very narrow band because there's a lot of reinsurance in Europe. So I got to go to a World cup game when I was a kid in 1998 in France, and the United States played Iran. It was a big deal because of obvious tensions. And the United States played terribly because it's the United States. And the men's team typically plays terribly. But me as like a model UN kid at the time, I thought it was really interesting because there were Iranian flags all over the stadium, but it was the Iranian flag with the imperial emblem in the center. There was a overt monarchist crowd. It was not IRGC types. It was rich Iranians that were able to escape the revolution and were exercising a distinct form of nationalism there. And that that still exists from Los Angeles through Paris into London and all points beyond that. There is a sense of nostalgia for the Pahlavi dynasty. And I think any future Iranian courses of action is going to be complicated by people's authentic affection for that moment in Persian Iranian history. And if there are any actual policymakers listening to us, my recommendation would be, just because they speak flawless English, it does not mean that they are the best partner for what is to come.
- [10:46]
Tony
Eric, you do realize you just made your dad sound like a knock, right? He was in insurance sales and had European travel in the 90s.
- [10:54]
Eric
Yeah, well, the first reaction to anyone who assumes my father's role in the intelligence community would be ask him to speak a language other than English, even though he was born in Quebec. I would disabuse you immediately. He would get to pointy talky and shouting loudly in English very quickly.
- [11:18]
Brian
I think you just described two thirds of the dia. Sorry.
- [11:26]
Eric
All right, I got Google on my phone. Let me debrief. Let me debrief you. You said you saw.
- [11:36]
Jordan
Netanyahu. The. The conspiracy theory of him wanting to bomb Iran actually to keep the regime in power, so then he doesn't have to go anywhere. Trump, I don't think he's going to do anything, man. It's far away. Like, it's too much fuel. We already spent enough in Venezuela. We got other fish to fry. But, you know, there's been this, like, crazy arc over the past 20, like, Biden catching all or Obama catching all this shit for not supporting the protests. And then there's this, like, weird dance of, if we support them, does that actually undermine them? Because then they look like American stooges or whatever. My take is that just we're so far done. I just think we're like past this game, at least from the US Side. And it's really like an Israel variable where, um, the, the, the, the one outside actor that could like, actually get people to chill out is if, like, it seems like Israel is the one, you know, trying to.
- [12:40]
Tony
Yeah.
- [12:40]
Jordan
Egg it on.
- [12:42]
Brian
Yeah, maybe. I, I will say this though, from a countering China perspective. When you look at Venezuela, you know, Venezuela was 4% of the oil that goes to China. Right. And which we're going to continue selling or they're going to continue selling, supposedly. But Iran is a lot of more substantial. So instability in, in Iran especially regime collapse. It would. That could Enzo. Result in Iran being free to sell oil to the west and not to China and pull that out. That actually is, would be destabilizing somewhat for China because that's a much. And that's not just their, their oil that's used for vehicles and, and fuel, but that's also the heavy oil that's used for like asphalt making and things like that. That is, that is going important and is where their replacement for any loss from Venezuela would also come. So, like, there is like a geopolitical aspect to it for the United States. Like if this goes, if the Iranian regime collapses and becomes unfriendly to the people who were friendly to the Ayatollah regime, then it could be. It could severely impact both Russia's war efforts in Ukraine and China's. Just general economics right now.
- [13:58]
Tony
Yeah, you go ahead, Brian.
- [14:01]
Justin
I was just gonna say it sounds. It's another good opportunity for entrepreneurship on the policy front, where you get some people that are two or three levels down in the, in the National Security Council staff or over in state or wherever, they sort of join forces with people who are looking for some sort of business opportunity in Iran. And you can see like with Venezuela, where people came at it from multiple angles but were able to sort of coalesce around a central objective. And here it's going to be sticking their hands in some moving machinery that is the political process in Iran and hoping what comes out the other side both satisfies our desire to push back on China and Russia as well as give some people some grift back here at home.
- [14:41]
Tony
Yeah. Dollars to donuts, says at least one member of the government in exile, Royal Court, whatever you're calling them, says, oh yeah, we'll cut off the flow of oil to the Chinese if you put me back in powder.
- [14:53]
Brian
I mean, if I was Reza Pahlavi, it would be my number one push every time I talk.
- [14:56]
Tony
Did I just speak that into existence? Hopefully not, no.
- [14:59]
Eric
It was going to be a cast member from the Shahs of Sunset saying it. Oh, God. Trying to get some face time with somebody.
- [15:10]
Jordan
I mean, it would be in keeping, right? Like, why have a Nobel Prize winner when you can have a shot of Sunset?
- [15:16]
Justin
That's right. Someone with some social media presence.
- [15:19]
Brian
I forgot about Bravo in its heyday. Good Lord.
- [15:26]
Tony
No.
- [15:27]
Eric
I got Peacock recently. So I've been watching old episodes of SNL that I missed when I was in law school, and they got a lot of mileage out of old Bravo. So let me tell you, if you want to see an Andy Cohen impersonation, look up SNL from like 2013.
- [15:45]
Brian
Is it just him drunk?
- [15:47]
Eric
That's like the joke. It's like, look, they're drunk on tv. Let's make a skit about it.
- [15:54]
Tony
Speaking of drunk, we've now been promised an extra $500 billion for the DoT budget. So for those who do not see the news, the President said that we're gonna have an extra 500 billion or he's going to at least offer that up in the presidential budget to get us to 1.5 trillion for FD. FY27. That is supposed to be paid for in full with the tariffs. Lot. Lot of. A lot of tariff payments coming through, I guess. And I'm. Yeah, I. The math is not. Yeah. Broadly speaking, though, you know, there will be defense hawks that will say, this is the best thing ever. This is exactly what we've asked for. Even though that's not what you asked for. You asked for 3 to 5% above inflation for the last 10 years. A singular surge. You know, we're going to play an experiment here where we say, what would we do with $500 billion? But a singular surge of $500 billion is neither sustainable nor actually what the defense industry needs. Defer to Brian, on. On the exact details of that.
- [17:05]
Justin
Yeah, well, I think the defense industry loves. I mean, the current defense industry loves a backlog, right? So they just want order books that are full and the. The inclination of a lot of the kind of traditionalists out there is going to be take, let's buy, put on, order a bunch of today's ships, today's airplanes, today's weapons, and we're just going to stack up the orders and then the industry can work that off. And industry loves it because they can go back to their shareholders and say, look, we've got these returns on investment coming. They might make some investments in industrial capacity that the department can push them to make and we can sort of make it contingent upon that. But what then that happens is you just continue to build out today's force with all of its built in obsolescence. So you're going to stockpile a bunch of weapons and we're going to find that probably in the first conflict like they are used in. It's going to be like the Excalibur round where we have thousands of the sitting on the shelf that we can't employ because of GPS jamming. So we're going to find out some vulnerability in lrasm that the Chinese have determined they can exploit and we're going to have a bunch of lrasm sitting there on the shelf that we can't use because they're too hard to adapt. So I think the problem we face is that the traditionalists are going to say use this money to buy more of what we already are buying and just stack up the order books and stockpile all this so that we can deter through production or deter through inventory. And that's what the Mackenzie Eaglens of the world and all those folks are going to say, yeah, which is just a recipe for disaster.
- [18:31]
Tony
And I'm, I was actually going to say her name so I'm glad you did. But I would say that I wonder how this compares to what Chairman Rogers has been talking about in the last few weeks, which is that he wanted to use the 27 NDAA as a vehicle for. This is the year that we get defense industry build out. Right. In terms of policy, in terms of resiliency, in terms of infrastructure. And yeah, some of that money can be put towards infrastructure if you do it right. If, if you don't do what the, the traditional defense industry wants. There's, we've talked about on this podcast before. There's a lot of things you can spend money on. You know, I think a lot of that infrastructure has to go first because we've been putting it off for years.
- [19:15]
Justin
Yeah, well, you look at what a commercial company would do if they got an infusion of cash. They would invest in the, in infrastructure to be able to deliver whatever the product is in the future. They're not going to make the bet on, well, we're going to build the product that we think is the answer and we're going to put them out there in the market and hope that that worked out. They're going to build the infrastructure they, so they can adapt to whatever the market presents to Them as what the buyers want, which means I need to have production capacity that's able to flex to different products. I need to have modular designs that I can then adapt based on what happens in the field. I need software development and delivery pipeline so that I can change the software configuration of whatever it is I'm producing and then even change it in the field so I can add that ability to adapt to what the conditions create. That's what an Apple would do, is they would invest in that infrastructure to enable that. And you'd have somebody like Tim Cook work on supply chain and put billions and billions of dollars into supply chain product, supply chain management, supply chain, build out. But instead we're going to go, yeah, the inclination will be to buy a bunch of. Put a bunch of things on order of the current configuration and not make those investments and hope industry does. And they won't because they'll try to, you know, do this at the bare minimum. So if you want to be able to be like Ukraine, you got to build out this infrastructure for adaptation rather than building out a bunch of kit that's going to find itself obsolete within the first few rounds of a conflict.
- [20:39]
Tony
Exactly. And you know, I'll say that to emphasize money is not the sole problem here when it comes to building out these exquisite systems. It's jobs. You know, people have said a lot of like, hey, it's better to work at Amazon for higher pay than it is in a shipyard, depending who you ask. I don't know if that's entirely true, but it's definitely a case of you have to be able to train the people, you have to be able to pay for the people, you have to be able to actually get the spare parts on order, build out the supply chain like you said. And 500 billion doll dollars over a couple years can actually do that. But yeah, if we just end up with bigger order books for the same force design, this is going to be fruitless.
- [21:21]
Brian
Yeah, I mean, I think that's one of the things, like the lesson from Apple in China. With the amount of money that Apple put into basically building Foxconn and all of the instruments that it took to centralize that supply chain and make it as efficient as possible was more than what we're talking about right now in this one time Pop. I mean, I would even honestly see like things like appfit that we've been using that are supposed to. They're supposed to bridge the valley of death from like a new technology or a new device into the production. But really all of that money, what the industry is supposed to show is how I'm going to take this money. And it's not you buying parts or you buying a device. You're really buying expansion and quality and expansion and production capability. And how I'm getting like, you know, supply chain resilience. I would rather see that program go from $400 million to a billion dollars or $2 billion and actually like have more of those projects expanding their production capability over 5, 10, 15 years. Hopefully, you know, actually get it done before 2027. But that would be the ideal. But I mean really like you see exp areas like that, and then you couple that with stuff that, like what Eric was working at at offices, strategic capital, where you're actually expanding like access to the, the resources that are necessary to secure that supply chain. It wouldn't be necessarily buying more t lambs and lrasms. I mean, we have enough on Guam right now that it's threatening to tip the island over and they're still not being used.
- [23:09]
Justin
So like, we'll get into an explosive arc issue here pretty soon that the.
- [23:13]
Tony
Whole, that's part of the mil is we've, we've put so much on Guam, we actually have to invest in additional infrastructure to keep it from flipping over.
- [23:22]
Brian
We have to put it on the other side of the island to balance it out.
- [23:25]
Justin
Exactly. Some engineering that has to be done.
- [23:28]
Tony
So, Brian, I know you like to do kind of trade off exercises in your war games. I mean, I, I don't think in your next war game you should just say if you had an extra 500 billion, what would you spend? But if you want to walk us through how you like people to think through the trade offs or, you know, how, how you would add to a budget or take away from a budget, I think that would be helpful to kick us off.
- [23:52]
Justin
Yeah. So what we end up doing, and we're going through this funny funnily enough with Japan right now. So Japan's looking at the same, like a massive increase in their defense budget. And so they've asked us to help with thinking through how do you make those kinds of trades. But the thing first off to consider is the fully burdened cost of whatever you're buying. So if you're going to buy another ship or another airplane, well, there's people that are crewing that, then there's people that train those people, there's people that support those people, and there's a rotation of people that go to sea duty or flight duty, operational duty versus non Operational duty. Suddenly you get this. Each the fully burdened cost of each of those new platforms is pretty significant and it goes out into the future. So you get this one time infusion of cash. If it's not sustained out into the future, then you end up having to retire things early because you can no longer pay to keep them. So what we do is we'll look at over some kind of time window, so 10 years or longer to see if you make this investment. Now with whatever the two years of $500 billion extra per year that you get, how can you afford that over those? At least medium term and teams will have to contend with. If I buy a bunch of additional ships and aircraft, I'm going to have to then give up something else in the future to continue to keep them or I just make the force newer and I retire a bunch of old stuff early. And so that's one thing to consider. The other thing to consider is I think normally people say, oh, we'll just buy munitions because munitions don't have this tail cost because you can normally just put them in a storage lock or somewhere and they get maintained. Every whatever 10 or 15 years they get pulled out and maintained. And that's true. But now we've seen the challenge we've now seen and Ukraine has made this very stark is those weapons will become obsolete because they especially, especially if they're highly integrated things like Elrasm or Tomahawk or SM3 or JASM, then they're very hard to adapt. So if you end up with a situation where an enemy comes up with some countermeasure, it's going to be hard to make those relevant in that new environment. So you've set yourself up for potential obsolescence. And normally in a war game we will present that to them, we will give them, we'll punish people for doing that by showing some new vulnerability that's emerged. And you have to then go back and refit a bunch of weapons or throw them out entirely and come up with something different. So you can't just throw the money against kind of one term weapons investments and hope that that'll work out okay for you because you've built up this massive stockpile. And so what people will often then do is they'll start to step back and say okay, what do I. What's maybe more fundamental investments I can make with this money that enable me to succeed in whatever the conflict presents to me. And this is the work we just finished with DARPA looking at this idea of adaptation as the Central competition in warfare. And folks made investments in things like software pipelines and being able to repurpose commercial contract manufacturers to build weapons and militarily relevant drones. So one way attack drones, they put money into those kinds of investments, which is not, it's not trivial. You have to think about how do I get Jabil, which is a company that makes car chargers, automobile chargers and medical equipment and all this other stuff. They could make stuff for the military. They do make stuff for the military, but getting them to be able to be ready to turn and do production of one way attack drones requires some forethought and some investment and some designs that are on the shelf. And so we find that teams will tend to take that money and start plowing into those things if they're presented with a situation where traditional platforms create a tail cost that really constrains how much value you get out of them. If you, if you're looking at this midterm time period and you're presented with weapons that you might find are obsolete within the first several rounds of a conflict. So I think it's important to look at that 10 year time window because that's what really drives these choices. If you look at this as just a 12 year budget build, then you can make yourself feel really good with some sugar high investments in buying a bunch of ships and aircraft. And you're going to find that that's, that doesn't play out well in the end. The other thing that we end up finding is that these things don't deliver until the time period when by the time you get the ship or aircraft you bought with this 500 billion which is five or six years from now, they start showing up in the Force. Well, the money's gone by then and so you don't have the money to pay to crew them or deliver them or maintain them. And so by the time they deliver, you're already having to get rid of the stuff that you were hoping to build, have this massive capacity on, and the Force's size actually does not grow. It ends up that the force size stays about the same because of the just the dynamics. And all you've done is taken the force and made it newer. So Dave Deptula and those guys are happy that the Air Force isn't the oldest it's been in its history, but it's not going to get any bigger because the stuff they're building now is so much more expensive and so much more expensive to maintain than its predecessors.
- [28:55]
Tony
So the argument that people will make here in favor of it is 20, 27 is a year away. And I mean I've written that, hey, the time for figuring ourselves out is just about up. We got to figure out a game plan here. Even though 27 is, despite what some people say, not the go, no go date, it's just the when you need to be ready date. So with that being mind, I think we'll go around the room here and try to figure out, hey, you've got a year away. What are the things you would priorit here. That is creates a responsible, Brian, as you say, hedge force for that, you know, 27 to 30 window.
- [29:36]
Brian
Yeah. I think from my perspective, the first thing that I would do, and this is just because I've been kind of working in like the small manufacturing space for a little bit, is I would use a lot of that money to create a pathway for the small manufacturing companies. These companies that are less than 100 people, sometimes less than 20 people, but that do things like make respirators or make some other type of machine, but they don't sell to the government and they don't sell to the Department of Defense. There's no right now system to actually bring them on, help them through all the processes that get them to become a manufacturer, contractor. Otherwise, for the DoD or DoW, whatever we're calling it, I would use a substantial part of that money as a set aside to create a way to streamline bringing these manufacturers into that pipeline. Get them set up on all the systems, get them set up on the technology that they need to actually be able to receive products, orders, whatever, and then have them be able to start taking and generating at even very low rates just to start the production capability inside of their factories or inside of their production facilities. Because what, what that will do is that will start actually building out what the defense industrial base looks like. When we think about the defense industrial base, I think where we get wrong is we think about what can L3 produce, or what is anduril building, or what is General Atomics putting together. What we don't think about is that 98% of manufacturing in the United States is actually done by small businesses and small manufacturers. And those are not integrated into the defense industrial base in a meaningful way.
- [31:20]
Justin
And I think that's one of the projects or programs that came up in this DARPA study that we just completed looking at adaptation of the military is coming up with using some DARPA generated technology to better understand what the industrial base capacity is. When you go down to that lower tier contractor that could do some work, but has to be integrated with the work of a bunch of other companies in order to deliver some kind of useful product. But getting that sort of visibility, which is a Tim Cook Apple level understanding of the supply chain is something that the DoD could put more money against and I think could in the grand scheme of things, it's a pretty inexpensive way to generate surge.
- [31:57]
Jordan
This is like, this is like $500 million here, $500 million there. Come on guys, give me some big ticket stuff.
- [32:07]
Tony
Well, so I, I think one of the other things just to add on the Justin and then I, I'll jump into the big buys to satisfy Jordan's thirst for expensive purchases is that I, I would say a lot of raw materials need to be purchased and also the storage facilities for those raw material materials need to be built out. Right. There are some things that like, like you can't build stock stockpiles of fully built satellites ahead of time. Like that does, that's not really like a thing. You can build a couple but like there are limitations in how those materials are stored and there's cost to it. But kind of the long lead items, yes, those need to be built out more. So that's the secondary component of building out those small production lines. If that small business has to wait 18 months on a part like, well, that, that grinds the entire thing to a halt and that's why the sub gets held up. 18 months to be built right on the big buys. I'll, I'll talk about the army side. Like, I mean the army's got to pay for Watercraft, man. Like that's, you know, it's, it's, it's watercraft. It is long range fires, not just the munitions but the platforms themselves and, and there's a lot of enabling ISR that goes with that and that'll run you in the tens of billions at least if you want to combine all that together. Obviously the army's not going to get the big purchase here because it's, it's got to go to the Navy and Air Force and probably some space capabilities in there too. But I, I think for the army it's got to be that. For the Air Force, if they have that money, I would like to see them spend on, on more than one ISR platform because I know that they're, they're basically their purchase increases are limited by, by their budget and I would like to see them not just defer everything to on orbit isr. I'd like to see them invest more in Terrestrial ISR as a redundancy. I think those are, those are kind of my, my two main things. And then obviously, like, if you're talking about short term Navy buys, then yeah, you're talking about the sorts of things of one mro because you have to have that fur fight and they just don't have that. And then what are the sorts of things? So if you're talking about smaller plat platforms, not a giant battleship, but smaller platforms that can either operate in theater or at least support the bigger platforms in theater.
- [34:23]
Justin
To build on that. I would say going back to the point you brought about hedge forces, I think if you are looking to try to make a difference by 2027, it's going to be fielding those kinds of packages of uncrewed systems and dudes on the ground, dudettes on the ground that are going to be able to act as that first responder and try to push back on aggression, whether it's in the first island ch or it's in the Persian Gulf or it's over in the Giuk Gap. The Navy is looking at this right now of how can we field these hedge forces as a way to mitigate the kind of shrinkage of the fleet in general, but also the fact that the fleet is just not as relevant when it comes to these littoral environments as it had been in the past. And those are, those get expensive. When you're pricing those out, they do get many billions of dollars to be able to build these systems, integrate them, field them, have people operating them in theater, being able to sustain that force in some kind of relatively remote area. That's all expensive, but it's a pretty good investment when you compare it to the counter, which would be to invest in a much larger traditional force that's going to find itself probably pushed out the first few hours of a conflict anyway.
- [35:36]
Tony
Eric, you've been quiet. What do you want to pay for?
- [35:41]
Eric
Well, if we assume coherence among policymakers, and that's a fraught proposition, very big assumption. Yeah. If you wanted to follow the principles of the National Security Strategy of the United States, you wouldn't add $500 billion to the Pentagon's budget, you'd cut it by 40%. Because if the United States is going to enter a three part detente with the People's Republic of China and Russia, and if the United States is going to be an imperial actor in the Western Hemisphere and Eastern hemisphere parts of Greenland, you don't need $500 billion. The world is fundamentally different. So there are Major end items that in a normal moment in American history that I would be happy to advocate for, principally attack submarines. But the way that this is supposed to function is that there's a statement of principle that the White House publishes and Congress nominally agrees to it. And then the, the rest of the President's budget and then Congressional appropriations in a robust exchange with the Pentagon are supposed to flow through that. And we are reacting to abnormality today. So this $500 billion may never materialize because the President's budget never materializes. It's always changed in some material ways by Congress. But there's a core disconnect of the White House saying that the world that they want is demilitarized because the United States, Russia and China can take what they please in their own areas of influence. So there's nothing principally to fight for. So the $500 billion increase to the Department of Defense's budget, it is discordant. I started my comments, you know, up front by saying, hey, this is, this doesn't make any sense. This is out of order. But I also recognize that my, the reaction I just offered is based off of assumptions from a dead world. So I have to adapt and shift my disposition to react to the world of the living, not the graveyards of my youth.
- [38:00]
Justin
So I have one thing that I think, I mean, you bring up a good point from your from the dead world, Eric, that submarine production might be a good thing to invest in. There's an opportunity here with the Philly shipyard getting bought by Hanwha and they want to make this big investment in becoming a nuclear submarine shipyard. Why not throw a bunch of money in that and have Korea make a commensurate investment and you could end up creating a third nuclear submarine shipyard in the United States. And now it's a big one time infusion of cash, but that's a good, good place to maybe build some infrastructure that enables future productive capacity rather than buying more F47s or battle tanks or whatever.
- [38:45]
Tony
Alternatively, I always say, alternatively, you take that $500 billion, put it on a poly market bet that the Messiah will return by the end of the year and you'll get 5.5% back, apparently.
- [38:59]
Jordan
Well, one thing I can. Speaking of betting markets, we've got 80% chance right now for the Dems to take the House.
- [39:08]
Tony
And so I think that's low. What?
- [39:12]
Brian
You think that's low?
- [39:13]
Eric
80% call she or poly market.
- [39:16]
Jordan
Point being the, the, the, the universe in which the House is going to be giving a Pete Hegseth Led Department of War. Anything they want is just not one is just not a reality.
- [39:32]
Tony
Yeah, let's be very clear. Yeah, I'm not betting on this. $500 billion.
- [39:39]
Eric
Yeah, I feel like we're outfitting Warhammer 40K factions here, which is all very interesting.
- [39:47]
Jordan
All right. Okay.
- [39:48]
Eric
Anyone would break out some painted miniatures. Any weirdos?
- [39:51]
Jordan
Raytheon, We've got news around Trump saying like, we salary ceilings, no stock buybacks, no dividends. I don't know. Big Elizabeth Warren energy. This is always kind of in him a little bit where he like understands that taxing the rich is good politics. But then Republicans say like, no, you can't. But I guess this one is just kind of too weird for like enough people to really get upset about for him to back down. What is, what's everyone's read on this story?
- [40:25]
Eric
It's an indictment of the state of the defense industrial base. Because if RTX is sitting on all of this cash, Berkshire Hathaway style, and they're opting to make stock buybacks or paying out dividends from their cash as opposed to conducting M and A activity, they're seeing a lot of dead ends in defense tech. And I am a defense tech skeptic. I think a substantial portion of it is pure fable, cheaper. But if the primes are not using available cash to go out and buy startups and bring in their ip, that is a suppressed signal to me. Now, at core to this is that when you have publicly traded companies, their core responsibility is to their stockholders. They don't have any affirmative obligation to this broad sense of are you improving the defense industrial base? That's just. That's not how the American system functions. That's why the Defense Production act exists. It's that the Pentagon and the White House can compel certain activities when stockholder interests does not align with the national interest. So there is a long history of this kind of tension. Very. If you're an attorney, it very famously exploded into the legal conscience around the Korean War and Harry Truman's attempt to overtake steel industry to supply the fighting there. So President Trump is entering into an old argument and he's got this whiff of populism around him. And I have it on somewhat good authority that there are parts of the defense industrial base that wish that they had kicked in $10 million to the destruction of the east wing of the White House, because then they probably wouldn't be targeted.
- [42:21]
Tony
Yeah. So I'm curious here, Eric, because this is from a policy perspective, something that I've Thought about for a while and you know, I recognize that you would have to do this in a limited scope way, but is there a reason to create an exception to the fiduciary responsibility for companies under national security exemptions of basically saying that like, like with this finding of the office of the Secretary of Defense, whatever under these authorities basically saying that for production of whatever or during this time period the company basically can be capped at however much for buybacks or something. Is there a need for that or are there other mechanisms?
- [43:00]
Eric
Yeah, that would be taking a shotgun to the knee of these companies because stockholders want investment certainty. They do not want the executive being able to pull their card like that.
- [43:12]
Tony
That.
- [43:12]
Brian
Yeah, I would say too though like to some degree some of those things already exist. Like if you're government, if you're a prime, if you're working a prime on a contract or something like that, like there is a, there is a limit to the percentage of profit that you can charge. There are, it's already built in. You can't charge 100% markup or something like that. Like you have to, if you're working on again a government sponsored program where you're buy, where they're buying it. Like there's limits to how much profit you can kick in for services and how much profit you can have fixed in for devices that come out of those type of developments. It's different if it's like a fully commercial entity. Obviously there are differences there. I think L3 runs, their Tcom they call it, or their communications things are almost all commercial devices. So really there's no limit to what they can or can't do. But again it's how do you get the money to make the investments if you're people who you're, you're trying to get the money from the stockholders who are going to buy your stock all of a sudden don't want to buy your stock because it's not funding them via dividends or anything else. It's a double edged sword. Right. Like we want them to be able to produce more. So we're going to cap their ability to raise the money that is necessary to be able to produce more.
- [44:32]
Justin
Yeah, I think the challenge is that I think a lot of the institutional investors that put money into defense companies are looking for dividends and buybacks or mostly dividends because they're just trying to get a stream of income. It'll be difficult companies like Lockheed and RTX and others to be able to sustain their business over the long term. Obviously this is a blip. But if that were the model going forward, then there's going to be little attraction to being able into investing in those mature companies. Whereas the startups, everybody's looking for their payout when the company gets bought or goes IP gets IPO'd. So everybody's looking to get their return then. But once you're a mature company, this is the mechanism by which you, you reward your shareholders. If you want them to hold your stock, you're going to have to give them some kind of dividend once in a while or else they're going to eventually sell it and then go somewhere else.
- [45:24]
Tony
General Atomics is private, right? And so if this pressure continues, is there a world in which maybe not Raytheon, but is there a world in which some major prime considers trying to go private to avoid this level of, you know, scrutiny?
- [45:42]
Justin
That's a good question because it used to be that nobody had the kind of the dry powder to go and buy a Raytheon or maybe the Lockheed Martin would be better example. But now there's lots of private equity capital running around like this and you've got, you know, companies that are more than able to just buy outright a defense contractor and turn it into a private entity.
- [46:05]
Eric
But in a world of state driven market activity that we are in with the really unprecedented level of non wartime intervention into capital markets, delisting is not going to save you that if this White House turns the gorgon stair towards you, they can melt your walls and break your steel if they so choose. Issues. There are numerous levers that can be applied and I all of these companies that have massive contractual exposure to the federal government are going to have to contend with the modern world. It's about a year old now, but look at the stock performance of publicly traded companies like SAIC or Leidos and how they wobble with the onset of doge in, in January 2025 that there was this extraordinary set of threats over cutting all these consulting contracts. Some of it happened, other parts of it didn't.
- [47:11]
Tony
And.
- [47:14]
Eric
That is the contemporary world. That's the way that this executive wants to function. That's the way that the courts have permitted it. And you know, Tony earlier elevated like an interesting concept like is there an enterprising state that wants to provide fiduciary duty carve outs in its corporate law that encourage companies to incorporate there. My sense is no, that Delaware is still the 800 pound grill in the room because it's knowable, it is favorable to stockholders, investors like it and even all the fanfare about, about shifting your corporate operations and your state of incorporation to Texas has, has been less of a bonfire and more of a BIC lighter. So I think investors are going to remain nimble. They are going to recognize that we are in a weird, weird world. And the smartest of them, the true institutionals like the blackrocks, the vanguards of the world, recognize that this truth social post is probably more the result of a person at Mar A Lago whispering in the principal's ear about some rumor and it got them all fired up and he, he hanged a note about it. Maybe there's going to be an eo. But to Jordan's point, there's a bracket on some of this nonsense. The, the next House of representatives assuming that 80% holds is just not going to tolerate this at the same level.
- [48:43]
Tony
So I think there was an eo. I think it came out Wednesday night, Thursday morning.
- [48:48]
Eric
Yeah.
- [48:51]
Tony
Yeah.
- [48:52]
Eric
There's only so much that an EO can do when it comes to questions of corporate law.
- [48:59]
Tony
So Eric, to that point, can you explain why there are limits to EOs? Because I think a lot of people, particularly ones who are new to working in federal government contracting, I. E. A lot of people who invest in, in defense. Like why EOs are not the same as, as putting it into legislature.
- [49:17]
Eric
Yeah. An executive order is a statement of how the President and how the executive branch is going to interpret and enforce laws that are effectively already given to them. So they are maybe they are not changes in direction, but maybe changes in airspeed, if you want to think of it that way. That being said, the White House and that the Pentagon do exert authority over how they exert federal acquisitions activities like they do have a wide breadth of discretion. Congress has given them that. That Congress gives them the checkbook. But the Pentagon determines the targets of those checks and the White House sort of holds the pen. So this is an area where the White House is able to exert a strong degree of, of influence. Every White House is given the volume of executive orders that have come from this White House. Like if we can remember, like there's a shipbuilding eo, stuff like that from the Mike Waltz era. I think they are more flash than bank. I would be much more concerned were I a board member of Lockheed Martin or if I was at General Atomics or and one of the more well capitalized privately held companies like SpaceX. I would care if Congress takes up the mantle in the short run. I think we are witnessing a momentary act of frustration that is going to be forgotten this time next week on these EOs too.
- [50:59]
Justin
I think what differentiates the ones that are just a flash from ones that actually have some staying power is to what degree the administration embodies them in instructions and regulations and the actual processes that they employ inside the department. So the Department of War, they've taken some of these EOs and translated them into these memos that the SEC war puts out. And like on acquisition reform, there was an EO that drove those acquisition reform changes. He put that out in a memo and then now it's being reflected in various manuals and instructions inside the department. So as those things start to translate into the real procedures that the department uses, then, then they're going to have staying power. Because inside the government they refer back to this EO as being the reason they can do these things. But outside the administration, it's. You really don't. The EO doesn't drive your behavior any more than a presidential tweet does.
- [51:53]
Eric
Brian's precisely correct and Tony's skepticism is warranted. If I came across as glib. I'm trying to take a long view of some of these. But make no mistake, publicly traded companies go into crisis management. When this sort of attention is levied on them. They take it very seriously. There are lobbyists in, I feel like Ballard Partners is one of them in Greater Washington D.C. that are on retainer expressly to be a fire retardant on this. That the White House sets them aflame and then they call trusted intermediaries over to slow it down and to mask it. So I don't want to create a grand theory of self dealing or insider trading, but when the White House spokeswoman is speaking through a daily presentation and there is a live bet on call, she over when she ends it and she abruptly finishes her sentence without explanation in order to enable a narrow band of bettors to get a 50x. Just let that hang in the, in the air for a moment. Or when there is a extraordinarily well placed person on polymarket that makes 400 large because they know that there's a helicopter assault force moving into Caracas. My suspicion is that, that these signals are one, meant to panic people, but two, they're meant to benefit short positions.
- [53:43]
Tony
So let's, I think for five seconds, let's talk about the fact that I think we can all agree that government officials should not be able to use their. And obviously, like this is new, right? The, the idea that you can bet on, you know, outside of, you know, some back room in North Jersey. Right. Like the idea that you can bet on the length of a press conference in real time is new. Right. Or be able to do that, whatever else the hell is going on these days. That both puts operators at risk, impacts governments. Right. No government official should be able to use their position to either influence or directly profit from wage, you know, wagering on their jobs. Right. Like you. You can't use your government position to run for office. And so you should not be able to money on it either. I think that's a. A fairly decent thing to believe.
- [54:38]
Jordan
It's just a. I mean, if Congress is still just going to be allowed.
- [54:43]
Tony
To trade whenever and they should not.
- [54:45]
Jordan
It is a hard line. Absolutely should for like the random GS9s to not be able to do it. And I totally agree with you. Like it is really dangerous and Congress embarrassing.
- [54:59]
Eric
Yeah. Why does Congress have the time to day trade or podcasts? Podcasting is for us marginally unemployed people. And with that I have to actually go to my job. So I'll catch up the next time.
- [55:12]
Brian
He'S going to go get yelled at.
- [55:15]
Eric
I'm about to get yelled at.