Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Darren Farber
[00:00:00] S1: Some of these companies are relatively new and haven't fielded systems of record, and the way we build our military and the promise we make to our GIs — soldiers, sailors, airmen, marines — is that we are going to train and equip you on these things for the express purposes of giving you the chance to win. It's part of our moral code and the way we train and equip the forces, and then we have to simulate it in the joint doctrine of warfare. Just because I make a new widget doesn't mean I can ingest it so easily. We have to exercise it and impute it into this joint concept of warfare with all these other things, so it's not easy. Clearly, on the targeting side, these technologies are being used. The signals intelligence — clearly that stuff is being used. The elements of projection of force outside of drones hasn't really gotten there yet. But targeting's pretty important. You think of World War II — we would carpet-bomb an entire environment, and so people are like, "Well, we produced so much mass in World War II." But look at the efficacy of the mass. It was super low. What we have now is highly precise, but we don't have the quantum of mass because of the precision and the sophistication. Now we're going to need to bring it back a little bit more to the center to increase the mass, and maybe these targeting networks and some of the software and the knowledge that we've built in signals intelligence can augment the cost of the precision that we have to have on board in order to make them cheaper. It's not a fair criticism to say, "Oh, the neoprime stuff's not being used at the limit in war" — it's because we have to integrate it into the joint concept of warfare.
· Patrick O'Shaughnessy
[00:00:00] S0: Back to where we started — what it means to win. The war in Iran is extremely unpopular in polls of US citizens. You said we live in a democracy, the will of the people matters. What can be done to win the percentage of the Iranian population — it's like 10 out of 90 million or something — that are loyal to the existing regime? Is there anything short of actual regime change that can cause a win to happen? How do we affect that outcome?