Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: If you look back at the entire Ukraine story now, what are the main things that you've observed or learned — your main takeaways from watching the whole thing unfold?
· Darren Farber, Patrick O'Shaughnessy
[00:00:00] S1: The rate of technological change in the commercial world becomes this direct input into the capabilities that you can project for mass. Drones have been used since the Vietnam War, but you wouldn't think that. Drones became commercially viable and cheap, and by virtue of that became a new article of war because they were so inexpensive. The cost of losing one is low. They gave you a lot of signals intelligence at the end of the day. You could deliver some lethality through the weakness of some of these systems, but it was the commercial viability and the commercial pervasiveness of that product that made it a great input into a military for mass. The commercial world has so much influence on the rate of change that will happen in warfare because it's about your ability to produce and your ability to sustain and withstand. These wars work faster than markets sometimes. The evolution of a Ukrainian drone from three years ago to today is unbelievable. There's 50 iterations. There's all these new capabilities, and that's because you can sit in your garage through commercial supply chains and build the capability. We think of war in this Top Gun style way, and you don't think about something that you could buy at Best Buy as being important into the projection of force. But things that become permissive and inexpensive in a commercial world have these enormously valuable inputs into fighting asymmetric war. [00:00:00] S0: What does this whole last six months do to the likelihood or impact of something happening in Taiwan, do you think?
· Darren Farber
[00:00:00] S1: The likes of Kevin Rudd and the scholars of the area — Kevin Rudd used to be the Australian prime minister, is fluent in Mandarin by the way, has a PhD in Mandarin, is really a Xi watcher. He said that Xi's a risk-taker. If you've gotten to a certain age and you view it as the apotheosis of your life's achievement in order to complete the journey, which is to say imperial China is what Taiwan is, and the takeover by the CCP is not complete until Taiwan falls, until that counter-narrative of how a Chinese society can be run. I don't think Xi needs to go if KMT wins the election coming up. KMT almost won last time, and that is a rapprochement party to the CCP. It's clearly like, "We don't want war, we want peace." It's an accommodation party. I believe a bullet may never need to be fired in order for China to get what they want. That's the more likely outcome. It keeps with their strategy. Why go? That terrain is hard. It will ostracize them in the world. I don't see it strategically. If they were running out of options and they felt they had to do it and Xi was near the end of his life, the likelihood would increase, but the appetite grows with the eating. If Taiwan is overtaken in a military exercise, is there any doubt that these other countries that have real historical beefs will be next? That's why Japan has been so vociferous at advocating for strong defense now under this new prime minister. She's a tough lady. She knows what happens. There's a real historical beef between China and Japan. I think that would be exercised. It would not stop at Taiwan, most likely.
· Patrick O'Shaughnessy
[00:00:00] S0: There's been this thousand-flowers-blooming thing happening on the entrepreneurial side of defense companies here in the US. Lots of appetite after a long, long drought of basically no new companies. Anduril is, of course, the most famous, but tons of companies doing something — drone-specific companies, submarine boats, missiles, basically everything. It's 10 years from now, a whole bevy of neoprimes have been hugely successful. Their stuff is great in the sense that it's used, and it's the thing we rely on more so than the old primes, which from my understanding is still the vast, vast, vast majority of what gets used in war. These new companies have won, and that's a good thing. What do you think has to happen for that to be true?
· Darren Farber
[00:00:00] S1: We have to exercise so much of this. There's a part here where you only really know what's really good until you go to war with it. That's why the Warthog keeps on being reused. It's just so mission-capable. We were supposed to kill this thing like 30 separate times. We remobilized it for the Iranian contingency. Theaters of war are the laboratories for these products. To a certain extent, we don't really know how good these things are until we have the contingent environment in order to exercise the capability. We run exercises in training and equipment missions, but the proof in the pudding is when we actually fight. That's why drones have had this huge iteration — because they're being used in an actual contingent environment. That's why we've had so much iteration, so much improvement, and now they will clearly be this important part of the fulcrum of war. So these other things are going to have to be used to really know the limit of the capability in the cat-and-mouse game. My advice for Congress is — we have a $1.5 trillion designed FY27 budget. I don't think we're going to get all that money, but in that enormous surface area of a budget, you can continually allocate a lot more towards the concept of risk in order to maintain technological superiority. The FFRDC budget — a portion needs to be repointed towards industry so we can encourage the iteration of these commercial developments to see how good they can get and exercise them in our own way to simulate war, to see how good we can get them. We need to allocate a portion of the budget, and it needs to be more coordinated, so it can't be spread out. We federate the research and development portion of the budget in so many different ways. We're going to have to take a concerted effort here for these legs of future power, and we're going to have to continually reinvest in them, even if we don't get a great business out of it. We may not get a war in order to test all this stuff. Obviously, you don't want the tail to wag the dog for the purposes of just exercising the equipment. So we need to allocate a more meaningful amount to try. And then Congress needs to create multi-year authorities across the stack.
· Darren Farber, Patrick O'Shaughnessy
These continuing resolutions kill industry, and that is something I consistently worry about because we are going to lose these companies through CRs and through the absence of multi-year authority. Right now the capital markets are working for these businesses, and they're able to outpace the innovation of the department and the Congress in order to move faster. But capital markets aren't unlimited. Trees don't grow to the sky, and so there has to be return and exit at some point. If you get that and you get that flywheel, then great, maybe capitalism can be the exclusive solution. But we're going to need Congress to make more multi-year authority money available, and then we're going to have to allocate the budget as a percentage for higher risk and reward. The Manhattan Project was 1% of GDP. We're going to have to have our own couple of hundred bips of GDP levels of effort in these certain areas. We're going to have to make those kinds of investments and have a multi-year worldview as to how we get there. [00:00:00] S0: Some of these companies have been around. Is any of the stuff produced by these places being used, and if not, why not? If we only know if it works in actual battle, there's a lot of battles in the world right now, a lot of military equipment being used. Is the neoprime stuff being used?