Who Let the DOGE Out? Post-Election NatSec Policy Tsunami

Roman Schweizer:
From DOD to Congress and from the White House to Wall Street, the NatSec Need to Know podcast, an unrehearsed podcast presenting insightful discussion and forecasts of the major national security and defense issues of the day. Welcome to the NatSec Need to Know. We're leading off with our Reporters Roundtable to discuss the top national security issues in Washington. Joining me is a murderer's row of experienced Washington editors and reporters. Tony Bertuca from Inside Defense, Joe Gould from Politico, Aaron Mehta from Breaking Defense, and Robert Wall from Aviation Week. They've each covered Washington and the Pentagon for years and are as well sourced as anyone. Thank you all for joining, let's get after it.
All right, thanks for joining us for the NatSec Need to Know. We have our murderer's row of reporters. We are going to get right into it. We've had an election. Donald J. Trump will be the 47th President of the United States. The Senate will have a Republican majority with 53 seats, we think, pending the outlook in Pennsylvania. And the House will have a narrow Republican majority, although President Trump seems to be plucking GOP House members to be in his cabinet, making that margin a little bit tighter. It will be a Republican Congress. What they will do with it, we shall see. We've got our folks here. We've had a number of nominations to include Pete Hegseth for Secretary of Defense, Senator Marco Rubio for Secretary of State, Tulsi Gabbard to be Director of National Intelligence, Former Congressman Matt Gaetz to be Attorney General, and others, they continue. Gentlemen, where are we at in terms of the Congressional outlook for nominations and what do we think the next, call it, two and a half months to look like?
Tony Bertuca:
Well, I'm going to take a big risk here, Roman, and I'm going to admit that I was completely surprised by the Hegseth nomination. I know a lot of people might find that controversial, but yeah, I was totally surprised. I had a lot of conversations on the hill with people about it and after about a conversations with people who were going to be involved in the confirmation process, the name of the Fox and Friends weekend host did not come up. Yeah, that one bowled me over and I think a lot of people on the hill are still adjusting to it and that's sucking a lot of the oxygen out of the room right now when it comes to a lot of the conversations I'm having regarding even the NDAA starting up maybe mid-month next month or finishing approves, right? Everybody's really focused on the Hegseth nomination and what it could mean, right?
Roman Schweizer:
And I think that's clearly one of the issues. I mean, you're going to have committees of jurisdiction. SASC will handle the Hegseth nom, Senate foreign relations, the Rubio, Senate Intel, the Gabbard, and so each one of those committees is going to have some meetings and vettings and all that cute questions and things like that to go through as they judge the fitness of these.
Tony Bertuca:
And one thing we should see is I had some conversations where people are like, we've absolutely got to do a confirmation hearing even if it's a recess appointment. But then I've had a couple other conversations where they're like, maybe we don't need a confirmation hearing for this. The fact that that's up in the air, could we have a SECDEF confirmed in recess without even a confirmation hearing? That would make things pretty wild and unusual. The fact that there's that much uncertainty about how they really want to proceed with this particular nomination, given some of the other ones that are out there too that have already drawn some heat from Democrats and some skepticism from Republicans. Yeah, it's going to be very interesting in the next couple of weeks.
Joe Gould:
Yeah, I would just say, just to put it out there, I mean this is an organization that's very complex. There's a million troops, 750,000 civilians. We're at a time when there are multiple ongoing hotspots. It's a pretty precarious time. And I think what we saw in the initial reaction is folks reacting to Hegseth as somebody who doesn't have any Pentagon experience. Sure he's led two different veterans organizations, he served. But I think we were expecting maybe to see more pushback from Democrats and we did see some, particularly from Elizabeth Warren and Tammy Duckworth. His comments about his opposition to women serving in combat roles, even saw some pushback from Joni Ernst who herself as a veteran, saying that he has to explain that comment. But I think we're really in the early days if there's going to be pushback against him.
I think it was my sense that lawmakers want to see what the vetting on him looks like, and we don't know what sort of vetting the administration did, but just the other day there was a report in Vanity Fair that there're sexual misconduct allegations against him. I think he's got a wealth of media appearances that they're going to have to dig into and there could well be a number of comments that might turn off Republicans. And as you pointed out, Roman, we're looking at maybe a 53 seat majority by Republicans. That's what I'm watching. Democrats could all unify and if they don't get four Republicans to decide that they're opposing him, then I think it doesn't really matter. He could get confirmed. I think it's a process that's going to be moving a little bit slowly while they gather information about him. But in terms of a shoot from the hip, a reaction, we're not seeing a lot of that.
Aaron Mehta:
Yeah. And I think it's notable that Roger Wicker, presumed SASC chairman I should say, didn't raise any red flags early on. I also think Democrats have to find four Republicans to oppose nominees with them. Hegseth might sail through because Republicans may not want to pick fights over multiple nominees. And I think you're going to find the more controversial ones are the Attorney General nomination for somebody who famously does not have a lot of friends, even among his own party. And then particularly I think Tulsi Gabbard for the DNI job who was seen by a lot of people in the national security community as far too close and supportive of Russian messaging. And I think you're going to see national security Republicans are maybe more opposed to Gabbard than Hegseth. And if they feel we can make a stand against our president who just brought us into power on one nominee, maybe two nominees, Hegseth's somebody who's going to sail through RFK for Health and Human Services, another one that could cause some problems. Hegseth might end up sailing through simply by the fact that Republicans may not want to buck their own president in any multiple front war there.
Robert Wall:
I mean, I find that interesting. I agree actually. It seems like some of the other ones are more controversial, but I do think the relationship between the administration and particularly SASC will be interesting. And I'm curious what you guys think about how it's going to go because if these reports about them firing generals outright are correct and you think about the efficiency efforts that are being talked about, I mean those go directly to things that SASC should really be on point, right? I mean they confirm three stars and four stars, and for them not to be fired by the administration without them getting any say and then wanting to appoint their own people seems at some point, and the same on some of these equipment things. If they want to start canceling programs that have gotten SASC backing. I mean, I do think that maybe not in the first two months, but over the first, certainly down the road here, it'll be very interesting to see whether SASC just basically takes it, basically.
Tony Bertuca:
Well, on that, I could tell you I expect a lot of trips to the White House, right? I wouldn't expect a lot of public statements or public stands pointing even at the nominations. What I'm hearing on the hill is, well, if he could be withdrawn before we even have to get into this, maybe we don't have to spend a lot of capital here on this, but when it comes to the SASC under what we assume is going to be Senator Roger Wicker, the relationship with the Trump administration, I would point to how it was when Jim Inoff was chairman, right? There were a lot of trips to the White House trying to do things back channel to try to smooth over some stuff that they wanted to get the president on their side of.
Roman Schweizer:
Well, I'll just chime in here. I mean, I think, look, I mean Secretary of Defense is one of the most important jobs in the world, right? And at the very top level interfacing with foreign defense chiefs, interfacing with all the four-star co-COMs, setting policy, hell, advising the president in terms of dramatic national security scenarios, but he's not necessarily involved in the day to day, right? The Dep Sec Def is going to play an important role. The comptroller is going to play an important role, service secretaries. I mean there are other people. I mean I have a question of will some people want to work for Pete Hegseth and take jobs? Probably. I mean maybe that's not a huge issue. But I've gotten this question from investors, what would he mean for defense or defense companies? I mean I don't really necessarily think there's much. I mean it seems like he's the culture warrior to roll back, I'm using air quotes, woke and DEI policies, which he is obviously well-spoken or outspoken and published on.
And then two, I think for Roger Wicker, it may come down to do you support more defense spending, Pete, right? Do you support the idea adding $50 billion to defense? I think that's something that gets Roger Wicker's vote. And I think that's probably might be the deciding factor for some other Republicans like a Mitch McConnell or some of the others that could be on the fence on his nom. And then I would also agree, I mean you're going to have the Gates and Gabbard duo. Those are obviously the big ones. And the question is, are there going to be recess appointments and then where do we go from there? I do want to change gears a little bit into some of the mechanics, the meat and potatoes. We've talked a little bit about this, but so much for getting fiscal 25 approaches done in the lame duck. It sounds like they're going to punt, maybe get the NDA done. I know you guys are digging in on that. Where are we at?
Joe Gould:
I think it's very interesting that ahead of the election we heard Mitch McConnell pushing ahead with the NDAA and after the election we're hearing Chuck Schumer pushing ahead with the NDAA. And the reason for that is that this is maybe the last train leaving the station for Democrats. The NDAA is the bill that we're focused on because of all of the many defense provisions in it. But there's oftentimes, because it's considered must pass legislation, there are other items that ride along on it. And so given the dynamics, the Democrats have leverage now, but they're not going to have leverage in the new year. But I just think it's interesting that you see Schumer doing that. And I don't know whether it's still a priority in the House. I'm going to go in in the next couple of days to just try to keep my eyes open about that. But as far as I know, if they wanted to get it done, it sounds like they're fairly close and they could get it done. The two chambers, the big four have been meeting over the last couple months, or their staffs anyway, and it sounds like they're pretty close on the bill.
Roman Schweizer:
Next question, would a CR run until March? Is that what we're thinking about in terms of appropriations?
Joe Gould:
I mean that's what I've been hearing as a CR into the new year. I mean, I think that we're likely to see them go through the motions. We did see Senate Democrats come out with a Homeland Security bill. Republicans aren't necessarily on board, but I think this is just going to be too hard to get done in the next few weeks. Also, you may have Republicans wanting to put their stamp on the bill when they control both chambers. I think what you're hearing is what I'm hearing too.
Tony Bertuca:
Yeah. And once you start to get too deep into the new year, if it does stretch till March, what I did hear was the discussion over anomalies, things that are exempt from the CR that are allowed to continue, different new starts and production increases, that discussion's going to get a lot more intense, right? Because once you get into the new year, the department, it starts to feel the bite of the CR and they've got some high profile things they want to do in the new year. I think, you guys can correct me, but I think CCA is supposed to be one of them, isn't it? I think a CR might mess with that.
Robert Wall:
Yes, though CCA should have happened by now, of course, if that had gone according to the original plan. But yes, certainly I think we can assume that the whole selection process there is somewhat hung up in what's happening right now, I think, not just on the budget side.
Roman Schweizer:
Well, and just to close it out on our probes, and I think that the thing that I worry about and we shall see is you're going to have, again, an extremely tight Republican majority in the house, or I'd say a thin majority in the house. And then you're still going to need seven Democrats in the Senate, assuming the filibuster stands, which it appears it will right now. And so what kind of budget are we going to get, right? I mean, we going to get the Fiscal responsibility Act at plus 1%? Are we going to get supplemental spending? Obviously there's going to be a big disaster relief bill. Maybe we'll get that cleared in a lame duck, but that's all going to be happening for '25. At the same time, you've got the Republicans drafting a budget to unlock reconciliation, a State of the Union and a skinny budget top line for '26. And then of course, again, I'm assuming, and anybody can certainly chime in and tell me different, but the last two defense budgets in presidential transition years have been reported out in May or sent to Congress in May. The winter and spring are going to be pretty spicy with just new stuff, right? Confirmations, the new administration getting settled, new budget, and then we got to close up business. I mean, I think it's going to be a mess. We all know that, right?
Tony Bertuca:
Yeah, I wouldn't anticipate it before May just given, I mean, those are the discussions I'm having with people. Nobody's really thinking anything prior to May.
Roman Schweizer:
Let's change gears a little bit and talk about everyone's favorite topic, certainly from an investor standpoint over the last couple of days in what I will call, Will This Doge Bite, meaning the Elon Musk and Vivek Ramaswari waste, fraud and abuse government bureaucracy slashing deep state trouncing efforts to reform the federal government. What do we know about Doge, what don't we know, and how big of an impact do we think it'll have?
Tony Bertuca:
I mean, I think we know very little, but one thing seems a pretty good bet is that the richest man in the world who's friends with the president is going to get something that he wants done, right? Just what that looks like, I don't know. But we have all seen these task forces before and these blue ribbon advisory groups before, which is really more what this is, right? It's not a new department, it's more of an advisory group. And we've seen a lot of these over the years trying to reform and cut costs and look where, well, there's certain third rails. You're never touched, you're not allowed to go at. There's things the administration's going to tell you no way on. And then you're going to try to aim all of your cuts at only 40% of the budget, and politically that's going to be uphill to do any of that stuff.
Robert Wall:
One thing I would say is, and it's obviously a bit risky to speculate on what is in Mr. Musk's head, but I mean just because he's familiar with arguably NASA, the FAA and DOD the most, I'm not sure that that necessarily means those are targets or the most obvious targets for him. I mean, I could imagine he's had a very hostile relationship with the SEC. You could easily see that becoming more of a target or departments that he doesn't see as very important because they don't fit into what his worldview is of what is important. And he's generally been relatively muted when it comes to how he's talked about DOD and NASA, for example. Again, could be completely wrong, but I'm just not convinced that the investment community we're talking to is the ones that needs to be the most nervous.
Joe Gould:
Yeah, I think I'm with Robert here. We don't know yet whether Elon Musk is going to take aim at the defense Department, and at the same time, to get back to Tony's point about the budget, maybe we see some move in the budget itself. Are we going to see a major program cancellation just through the regular budget process just to see the new team make a flex? I'm sure folks can think of a number of troubled programs that might come into the crosshairs, but yeah, I don't know. And there's a question of how long before Elon wears out his welcome. He's friends with the president now. Trump is famously mercurial. Does that relationship stay durable? And then the other thought I have about this is I had heard that they're due to come out with a report in 2026. Whatever's going to happen, maybe we get some indications along the way of what that's going to be. And it doesn't come as a total shock and surprise to the industry.
Aaron Mehta:
And I think to Joe's point about Elon and his relationship with Trump, you're already seeing articles coming out about how he's wearing out his welcome and he's big footing the president. And that's the thing if you think back to Trump one that we'd see when other parts of Trump world were mad at somebody, they start leaking stories like that. I think you're already seeing pushback internally towards Elon's role here. I do just want to share a little bit of information about this, let's call it a department situation. According to Elon, it is an 80 hour per week job that has no money. The only way to apply is to apply to a Twitter account that he's set up. And to apply to that account, you have to be a paid member of the paid X account. That's $84 a year. Just to give you a sense of how this is going off at the start in terms of how serious in terms of the applicants that they're looking for are, I just think this is going to end up being a situation where to Joe's point, if it's supposed to come out with a report in 2026, that's basically the DOA in terms of actual impact here.
Probably what I think will happen is honestly, Elon will get something out of this because of course he will. And what that looks like, we'll see. But the idea of this becoming a formal agency that can sit in and have life and death power over different programs, I just have a hard time seeing that ever actually happening given the personalities involved.
Roman Schweizer:
Yeah. I would like to note, I did get that comment that you do need to be a paid ex subscriber to float your CV to the Department of Government efficiency. And also that I like the idea that only super high IQ small government revolutionaries need apply. Not having a super high IQ, I will not be doing that. But I think that the two other issues, obviously, look, Elon has a ton of conflicts, whether that is with NASA or DOD or any of the other regulatory agencies that are overseeing his many, many businesses. I think that's certainly one potential conflict area. And then of course, the other one is this, which is what always happens is ultimately this sits with Congress. Congress appropriates dollars, and whether it's former Senator John McCain's annual spending festivus about where the waste, fraud and abuse was in DOD and government or Rand Paul or others, it is the collective will of Congress that plays a large role here. And again, the Republican president Trump and Republicans have said they're not going to adjust or tamper with Social Security and Medicaid. That's a huge part of the debt and deficit.
Tony Bertuca:
And does anybody remember the lasting impact of that defense business board report years ago that allegedly found $125 billion in DOD waste, right? Yeah, me neither.
Roman Schweizer:
Right?
Tony Bertuca:
Exactly. Exactly.
Joe Gould:
I just want to footstomp what you said, right? The president proposes that Congress disposes, right? We've seen it happens every year that the executive branch comes out with a budget and Congress can decide what to do with it. We don't know if Elon Musk makes a recommendation, how long does it take before that makes it into the budget cycle? If Elon Musk makes a recommendation in 2026, do Republicans still have both chambers of Congress? I don't know if there's a ton to be afraid of right now.
Roman Schweizer:
Well, no, and I certainly want to stipulate one, having worked in government, I mean there are clearly opportunities to curtail waste, fraud and abuse like any larger organization. And certainly there are opportunities for improvement. It's just we've all seen this movie before and a lot of smart people, equivalently smart people perhaps, maybe not at the super genius level, but have tried to do this tilted at this windmill before. Now, there certainly are adjustments that can be made however, but I think, Joe, to your point, are we going to have some congressional hearings? Does this work its way into the markup process for fiscal '26, I guess, fiscal '27, and then this commission, or I guess it will be a commission, reports out July 4th, which will be right before the midterms. Is Congress going to lay off thousands of voters and close departments and agencies that provide benefits for voters? I mean, again, it's always a tad skeptical, but there might be some opportunity here certainly I think, particularly on cutting regulations and some other things like that. We'll see.
I do want to shift gears a little bit to get in some of the other issues and topics we've talked about. One, just to bring this up, not to the surprise of anyone, I guess. The secretary of the Air Force, Frank Kendall was quoted earlier, I think probably in every single one of your publications or family of pubs that the Air Force doesn't have enough money and might not be able to buy everything it wants. Stunning revelation, I think, which all of us have known. Just any thoughts on subsequent discussions for service chiefs to be headed into a budget with a new administration and be clambering for more money is nothing new, but any ideas on how this might specifically impact the budget and the next Secretary of the Air Force?
Aaron Mehta:
I think this fits into what the messaging has been from Kendall over the last six months, specifically around NGAID, the sixth gen fighter, because we started to hear, initially they were supposed to give a data select this year. And then we started to hear, "Oh, well, we have to look at it. It's really expensive." And then we heard, "Oh, well, we're going to do a full relook at this." And then Kendall saying at AFA in September, "It has to be the same price as an F35," and all of us going, "Well, that's impossible." And now him saying, "Well, we just can't afford to do the next gen tanker, the next gen fighter and CCA." To me, this just fits into the pattern of, at least with this leadership group, NGAID is just going to keep getting kicked down the road. It's clear CCA is the higher priority of those three. And yeah, again, if the number they're setting has to be the same price as an F35, that's just not possible with the requirements that they seem to be going for as far as we know.
To me, this fits into, again, the messaging of let's just keep kicking NGAID down the road and hopefully figure it out in the future. Tony, tell me what you think
Tony Bertuca:
I mean, yeah, I completely agree. Just politically I think it certainly strengthens the hand of Senator Roger Wicker, who we all think is going to become Senate Armed Services Committee chairman, who is going to try his level best to boost defense spending by a lot when Trump gets to the White House. And you've heard, even Bill LaPlante just said it the other night at the Axios conference, he said, "What we've got is a problem of resourcing." You've got these, what we assume are outgoing Biden administration officials saying we need more money. Well, the Senate GOP is going to key in on that when they want to put more money into that budget.
Roman Schweizer:
I think it'll be interesting to see if this broader discussion changes any of the service priorities when the new secretaries come in and they start kicking around the budget and planning the next FITP. New presumed national security advisor Mike Waltz seems to be an advocate for higher spending, seems to have a big understanding about the China threat and where the strategic focus, I don't expect the DOD to shift the focus all that much. I think the priorities are still going to be the same. It's just going to be squeezing out some of those other areas and focusing attention on strategic priorities I guess. All right. And then as we round the horn, Navy Submarine League was this week. Always an interesting event for the Navy, particularly with the focus on what's going on in the submarine industrial base. I thought it was somewhat revealing and troubling that the senior leadership there talked about that the shipyards are still delivering 1.1 to 1.2 submarines per year. Obviously the goal is to get to two plus one, two Virginias and one Columbia. Again, there is a distinction between buying and delivering, but clearly there's an issue still within shipbuilding. Any thoughts on how you see this playing out either into the new administration or with Congress's interest of course with the states of Virginia and Connecticut?
Aaron Mehta:
I mean, the question that I think you heard suddenly a lot of talk about in the workforce and the question is I don't know how you can really boost this that much without doing something about the workforce. And nobody has a really good answer on that, aside from maybe dramatically increased salaries and hope you can bring a workforce in fairly quickly. I do think to your point about Waltz, the National Security Advisor, he has been a pretty big advocate of increasing shipbuilding. And actually it said in September that after the election he was going to cointroduce legislation with Mark Kelly, the Democrat from Arizona, to help increase shipbuilding and encourage shipbuilding both commercial and defense. Probably a clear thing we'll see from him is a continuation from Trump one of encouraging shipbuilding, want to get a bigger Navy. But again, how you actually do that seems to be the pretty big issue that nobody has a real handle on right now.
Tony Bertuca:
And I think Bill LaPlante, Pentagon Acquisition Chief, he got into it a little bit the other night when he was at the Axios conference, right? He's saying we were inside of a vicious circle here right now. Well, we don't want to give this extra money to industry because the defense industrial base is too small and they can't absorb it. Their backlog is huge anyway. And he's saying, "Well, yeah, they could if we just funded them to double their production line." But you end up with that circular argument and then production itself continues to be a bill payer, even now. Even saying we need more production, well, defense companies are happy because they have the backlog, they get their money. Pentagon budgeteers are happy 'cause they get to figure out where to put the money in the budget. You cut down production rates. Getting at that, the vicious circle that Bill LaPlante's talking about, whether it's workforce or expanding the facilities to be able to do production rate increases, that's what is going to be key to whether or not they get at that.
Joe Gould:
Yeah, and I would just, to bring it full circle, just swing it back around to nominees, right? I think you'd have some folks argue that not all of the nominees to national security roles in the Trump administration so far are serious. Does that trend continue? Do we get a serious Dep Sec Def, do we get a serious acquisition chief to replace LaPlante? As Tony and Aaron were saying, these are huge thorny problems that even some of the most serious and knowledgeable folks have struggled with over the Biden administration. Who is Trump going to get who's going to be able to tackle this stuff and are they going to be able to have the political capital to pull it off?
Robert Wall:
I think there's also just a basic economic problem here from the perspective of not necessarily the tier one suppliers that would have to jump to, but really the tier two and tier three and maybe even tier four who they're not necessarily sitting on a ton of cash, which would be required to do the CapEx to scale up, and then do you scale up when you're not sure that frankly three, four years down the road when the cash might be starting to come back in, that's still the policy of the land, right? I think we're seeing this certainly in other sectors of the industry, aerospace, which I obviously cover more closely, but it's really hard to get these smaller suppliers to make the CapEx even in cases where there's a pretty clear demand signal and here this demand signal where the sustainability at least is a lot more uncertain.
Roman Schweizer:
Deputy Secretary of Defense, Kath Hicks, this week announced some additional awards or inclusions into Replicator 1.2. We don't need to go into the details on those. Certainly you can, but just, I mean thematically, do you think replicator is something that survives or has continued in the next administration? Obviously there's a lot of research and development, production, experimentation. I think it's something durable, but I'm just curious as to what any of you might be hearing.
Tony Bertuca:
I think the programs will all survive, right? Because they're all attached to service level funding, right? The programs are all Army, Air Force, Navy programs. I think the programs that are being labeled replicator, which is really more their internal decision process that accelerates decision making up to the Dep Sec Def, the programs will all make it. Does the process by which they're trying to rapidly make these decisions about promising programs last if you don't have Kath Hicks there, because this was such an effort led by her and her office, I think that is the question that I've got is the programs will make it, but does this desire to get the Deputy Secretary of Defense green lighting the acceleration of various efforts? The trench one is drowns, right? Well, replicator two is going to be counter UAS. That's still going to be a priority for the department in the next administration, but will that accelerate a decision making process, which we still don't know that much about because a lot of it's classified. Is that going to make it?
Robert Wall:
Yeah. And just perhaps to add to that, I mean, I think if you think about it, a lot of this has been about inventory depth, and that's something actually that prior Trump administration also talked about. It is a concern that is bipartisan, but I guess I agree with Tony. It's just one of those where if they get someone in a number two position or even an acquisition job who neither of them is interested in this, then it could just die by neglect rather than because someone's necessarily gunning it for it.
Aaron Mehta:
I have so many questions about replicator and what actually makes a replicator program because these programs they announced this week as we have new replicator programs, they're all programs that we've written about and they've publicly talked about in the past. Tony's absolutely right, these programs are going to survive because they're not really "replicator driven programs." They're just programs we're buying that have been rebranded under this umbrella to give them a little more juice internally. And I think then this comes back to what Joe was saying earlier, which is it's going to come down to who they actually nominate and confirm and get into these deputy spots, the A&S spot, the R&D spot, the service level spots. I mean, we're going to have to see who these people are and how they want to handle it. My gut level is anything that was branded as being part of the Biden Pentagon team, something like replicator that name, that's going to go away because people want to put their own spin on it and not be associated with Biden era stuff under this new administration.
But functionally, I don't know, man, the whole replicator thing to me is an idea everyone agrees with and nobody you talk to seems particularly impressed by the execution of it. And ultimately we're going to just have to see if the person who comes into the deputy role wants to keep going or not, and if they delegate it down, if the person they delegate it to wants to keep going or not.
Roman Schweizer:
No, I think that's absolutely right. I mean, these are programs that are happening at the service level. And even conceptually, I mean that people agree that implementing lessons learned from Ukraine, whether it's unmanned surface vessels or first person view drones or the counter drone and implementing AI, I mean this stuff is happening. It's just a question of will it be at the Dep Sec Def level or at the ANS level or something like that. Where will the champion be? And I mean, I am again, also a little skeptical about whether CCAs are really going to happen and displace manned fighter aircraft. It was interesting or good to see that it does look like the Air Force is going to buy some more of them for experimentation purposes and test purposes. I got to be honest, I think for just a few billion dollars that you could find in the Pentagon's couch cushions, you could buy these things at scale and really go out and just turn them over and turn them over to servicemen and women and beat the crap out of them and make some light year advancements.
But hopefully they're doing that with, or will continue to do some of that even more. All right. I do want to, again, we've covered everything. We've covered a lot of ground. One thing I guess we'll close it out with, I am an old school guy. I don't like some of the newfangled terminology. There was a hearing this week on unidentified anomalous phenomenon or UAPs, I like to call them UFOs or UFOs, unidentified flying objects. But that is a real thing. And there was actually a congressional hearing about it. Now of course, this is a serious issue if you do track the amount of unidentified drones that have been buzzing around military installations. But anybody cover that this week or have any insights?
Tony Bertuca:
I didn't cover it, but I think having read the report and looking at what the Pentagon is saying, maybe it's just really hard to see in the dark when you're flying a jet. You know what I mean?
Roman Schweizer:
It sounds like Tony wants to believe.
Tony Bertuca:
I mean just no, no, not that I want to believe, but that if you see something flying around while you yourself are flying around and it's in the dark, maybe it's not a UFO. Maybe it's a balloon, right? Maybe it's something else. Yeah.
Roman Schweizer:
Actually I'll throw this out there. I always like to tease one thing that, what's something we should all look at? And so of course doing this to a table full of reporters is like Chief Brody chumming for sharks in Jaws. But I wonder if the Trump administration is going to declassify the Chinese spy balloon incidents. Remember that was a thing a couple of years ago and we haven't heard anything about it. It'd be interesting to see where that goes.
Tony Bertuca:
That's a really good question. I would be interested to see that too. And anything where politically you could make the argument that things that could potentially embarrass the previous administration and how they handled a national security event, maybe that gets declassified in the coming administration so they can discuss it.
Roman Schweizer:
All right, gentlemen. Thank you so much for your time, your insights, and giving us a little bit of a preview of what we can expect. It is an interesting time here in the beltway. In the swamp, and we will see what the next few months bring. Thank you so much for your time. Hi, everyone. Thanks for joining us. I'm with Cai von Rumohr and Gautam Khanna, my colleagues in equity research to discuss what's going on with their A&D coverage. We've got sort of post-earnings and we've got post-election, a lot going on thematically within the group as well as with their individual companies and coverage areas. We're going to get into it. And I guess first off, I'd just turn it over to Cai for his insights. After the quarter, what did you hear? What did you like? What's the good, bad and the ugly?
Cai von Rumohr:
Well, I think the big surprises on the positive side were in defense IT. I mean we had strong numbers, both results as well as book-to-bills out of booze, out of khaki, out of lidos. Stocks moved up and then they've come back down because I think there's concern about will the new administration basically hack away at their business in their desire to cut costs? And we can talk about that a little bit later. Boeing was inconclusive in the sense that they're in the midst of a strike and they are able to get off a $24 billion equity convert raise. I think they're positioned to get through, but there are lots of questions there in terms of which we can talk about in terms of the rate of recovery in terms of production. Why don't I leave it there and Gautam, you want to hit anything?
Gautam Khanna:
Happy to. Yeah. A couple things in defense Q3 results, very mixed. We saw HII with some pretty extreme execution issues that came to a head on submarine production. GD had alluded to that on their earnings call that preceded HII's and guided marine system margins down quite a bit in the fourth quarter. I don't think there's an easy or urgent way to resolve that problem. It could be something that continues to plague both companies in 2025. To Cai's broader thesis and your broader thesis, Roman, on foreign bookings in the defense space, they were pretty huge in the third quarter. Raytheon was a standout now with mid-forties percent of their defense backlog from foreign military sales. And that compares to only about 25% of the Raytheon defense sales. That mix is going to improve over the next couple years. I think that was interesting.
In aerospace, very mixed results. You saw surprisingly strong results out of Helmat, given what we're hearing in the engine channel about shipments being light, production challenges being persistent. We also saw very strong results out of one of their upstream suppliers, Carpenter. In contrast, we saw some execution challenges emerge again at API. And so there is no real trend. We're seeing mixed results, the engine OEMs coming up light in terms of shipments at GE and SAC obviously. Lots of reasons blamed for it, but the suppliers are impacted very differently. And I'll turn it back over to you.
Roman Schweizer:
Great stuff, guys. Let's dig into a little bit about this and we'll talk maybe post-election here in a second. The Navy announced that they're at 1.1 to 1.2 submarines. The shipbuilders are delivering 1.1 to 1.2 submarines right now with a goal of 1.3. That's clearly still a mess. And we don't have contracts yet for the big block of submarines. I think it's possible they might get two, but now we've got a new administration and I think you're going to have a new Pentagon, a new leadership, maybe even a sterner eye on contract overruns and things like that. I don't think it's all great for shipbuilding, although I think there's going to be a lot of positive look at spending and building more ships and the role of the Navy, etc. But it's still going to be some tough quarters I think as the companies get their arms around this labor and supply chain stuff. Would you guys think the same?
Gautam Khanna:
Absolutely. I thought it was quite interesting on both the GD and HII earnings calls. It was clear their audience was not just the equity investors, but also the customer when it came to Navy shipbuilding, both insisting upon some more dramatic funding support for the submarine industrial base. And to your point, the urgency around doing so is not clear. And because of that, this is a problem that's going to persist for a number of quarters before it can get better. I would agree with you.
Cai von Rumohr:
Yeah, I would too. And I think that you made the point about what's the new administration going to do? I think you were the one who said, Roman, they could be better for defense, it could be worse. And I think certainly your point about tougher on costs, that's what we had in the Reagan administration and the stocks really did poorly because they assumed that Reagan was coming in and Reagan was for a strong defense, which he was, but his strong defense was at the expense of the contractors. I think we're going to see exactly where everything comes out. I've had a lot of calls about defense IT, which has gotten really badly hit the last couple of days. Defense also has been hit, and we really just don't know what the policy is going to be. I think my feeling is that there may be more risk in the primes than there is in the defense services.
The concern I think, and the reason defense services are off more than the primes, is that people say, gee, we can cut all these programs and a lot of that would be fed civil. But I think when you think about it, what Doge is really thinking about is cutting people out of the established bureaucracy. The great thing about defense IT and about the services business is their contracts. If you want to stop things, you stop the contract and all the people go away. It's more difficult to get the people to go away if they're government employees. And the other thing is that I think now that AI and cyber and zero trust, et cetera, are much more of a focus and I think with Elon there that will continue, it's important to recognize that the companies for the most part have greater capability than the customers who are buying their services. And that's a situation that's really changed over the last eight years when if you went back eight years after Iraq Afghanistan, there was a situation where a lot of the work that had been done was in country and it was replacing service members and doing things that were being done that was a good portion of the work today. I think much more of it is really implementing the new technologies.
Roman Schweizer:
Yeah, I'll chime in there because I think you're absolutely right. And I think that one, I'm just maybe perhaps a natural skeptic. And we've seen this before. The Reagan administration had the Grace Commission, the Clinton administration had an effort led by Al Gore. We had the super committee that tried to cut 1.5 trillion. The best analogy I've heard, I guess I'll give a shout-out to the writers at Politico, basically said Doge was basically a meme filled Simpson-Bowles commission. And again, Congress makes all these decisions, right? It's up to Congress who appropriates, not Elon Musk and Vivek Ramaswari or OMB for that matter. Now, that's not to say that there isn't plenty of waste, fraud and abuse that can be pulled out of the federal government, but I think you're absolutely right. I mean, one, if you cut the federal bureaucracy by 50%, you're probably going to boost the head count, get rid of bureaucrats and fed civ.
25% of that is still going to go to government contractors to still do a number of these tasks. And I really think AI, cyber, quantum, all of the higher tech implementation stuff is definitely going to be outsourced to the services. I don't really think it's all bad. I think the one thing I would say, and again, this is going back to the Reagan years and tough love for the contractors. There's going to be a push for perhaps or a relook at fixed price contracting. That's something that the Palantir's and Anderil's of the world have called for. But again, if you're going to develop an NGAD, a next generation air dominance fighter or a future ballistic submarine or something like that, doing it under fixed price contract is extremely dangerous as the Boeing company will tell you. I think you're going to have that balance. I just don't see cost plus going away, but I'll throw it back to you guys for any comments.
Cai von Rumohr:
I'd certainly agree. I think one thing that's different right now is that the major contractors all have been gored. Boeing is the poster child there as you point out. But Lockheed's also had problems with their classified missile program. Northrop, the V21. We visited with them about a year and a half ago. They said the program was okay, now it's not. They got 1,600,000,000 loss. RTX has had problems. I think the industry itself is much, much more prepared to push back if the administration tries to jam fix price development down their throat.
Gautam Khanna:
Yeah, I was just going to remind people that there was an era, George W. Bush's two terms, when we saw a lot more outsourcing from the federal workforce to the government services contractors, it seems like a lifetime ago. But remember Northrop, Lockheed, they were the big players. GD still is big acquirers in the space and benefited from that long-term outsourcing trend because the thesis then was, hey, the private sector has a commercial interest in doing what the government cannot do efficiently on its own. It's not at all clear that the fundamental risk to the government services contractors from Doge is all bad. It might ultimately swing in their favor as the federal workforce is reduced, if that could ever happen. Now I know there's resistance to that from Congress and from federal civil service protections and the like, but there could be actually more opportunity than risk eventually. Obviously in the interim, the stocks, people will presume they're guilty until proven innocent. But there was an era when this happened before and it was a very fruitful era for the government services companies.
Roman Schweizer:
Yeah, I mean, just follow up. I want to say one thing. I mean this, if we all, again, think just a couple of years ago, which again, Gautam like you say, almost feels like a lifetime ago, four years ago, Biden wins, the Democrats take the house, it looks like the Senate, we have a Georgia runoff. Then the entire Congress goes Democrat and defense is dead, left for dead. Elizabeth Warren, Bernie Sanders going to cut 10%. And nobody wanted to be involved in defense or government services. It was the end of everything. And that basically lasted six months. I think that's the period where we're in right now, right? People make policy. Who's going to be Sec Def, who's going to be head of OMB? Obviously we've got a bunch of, some people would say controversial picks, off the board picks, off the wall picks, we'll see what the Senate does.
But really, I mean to me it's how is the FY '25 budget going to close out here with a very tight majority in Congress and a still tight majority next term as well. Are the Republicans going to be able to jam through their agenda or are they going to have to at least have a little bit of a bipartisan tinge? And then also what's the State of the Union? What's the longer term budget plan? And what are the Republicans going to propose for budgets next year in order to unlock budget reconciliation to get tax, which is going to be the big issue. And again, I would point out to folks, I mean it's been floating around the rim, but the R&D tax credit adjustment could come back and there's still people that are tilting at the windmill that it could be fully retroactive. There would be obviously an immediate benefit to the companies in terms of I would assume tax credits in that situation. All right. Let's turn, I mean, I guess as we think broadly, maybe just again into next year and not to talk about where companies are putting their guides or certainly to the degree you want to talk about how managements have foreshadowed. But maybe I guess Cai, to lead off with you more broadly, if you were thinking about aerospace, defense, government services, where do you land on those categories?
Cai von Rumohr:
Well, I think certainly, I think for the moment, I think defense services has been probably oversold, that basically this is a knee-jerk reaction to Doge. I think the defense bigs are a little more difficult. I mean, as Gautam has pointed out, they have this bow wave of FMS work. And as you pointed out Roman, NATO spending is up a lot. I think even if Trump is able to achieve peace for land, the Russians are paranoid about Putin. And if he's not focusing on the Ukraine, they're going to worry that he's going to focus elsewhere. There's very little chance I think that we see a retrenchment in NATO spending and their weapons spending is up, their budgets are up over 25% this year. It's a much stronger growth. You're seeing huge numbers out of companies like Rheinmetall and out of Kongsberg, and I think it's going to also be a big benefit for the US. But the issue is, at least in terms of the US, I think it's obviously the size of the budget, but historically what the stocks react to is with a new administration, are there going to be different priorities? What are the programs that people are going to want to take a closer look at? And it could be some of the older ones. Hard to pick out now exactly which ones they would go after, but I think that's definitely going to be an issue.
Gautam Khanna:
A couple of thoughts on that. We've had an extended aerospace aftermarket cycle, obviously aided by the OEs, specifically Boeing and the engine supply chain having difficulty ramping for a host of reasons. At some point that is going to reverse. I don't know that it reverses anytime soon, but we're coming off of very high comps, difficult comps on a three and four-year stack for the aerospace aftermarket-oriented names. The second derivative is slowing. Again, still very high levels, but slowing. And at some point you could see people transitioning into names that have not worked. For example, Boeing, which Cai has known for decades. That one has obviously gotten through the balance sheet challenges with the equity raise after sales weren't coming. You could see interest returning to that stock when they start to actually deliver planes again in real numbers. And so when I look at the stocks out there, we have very tightly wound consensus oriented names where you have high valuations in the aftermarket stocks.
You have a high valuation in one of the best run OE stocks, Helmat. And one of the things I'm watching for is when do people rotate? Sometimes that just happens at the beginning of a new calendar year as investors look to buy the losers of the prior year. But at some point, I wouldn't be surprised if we see folks try to pick up on the Boeing trade in defense. I concur with Cai. I mean, again, idiosyncratic challenges pre-exist any administration changeover and priority. What we were talking about earlier in the shipbuilding space with HII and GD, that is agnostic to the administration for some period of time. It's an execution challenge. And then there's the question on priorities of the new administration. One subtle point I thought was worth making is Elon Musk obviously understands NASA quite well, the budget's there.
And so to the extent that he may or may not, but let's say he does take a more careful interest in where NASA spends its money. There could be an impact to some of the contractors that are more oriented to NASA like KVR, for example, as maybe money gets reprioritized for actual space missions that advance technology. And then the other point is perhaps Elon Musk as a disruptor himself in the defense industry would be more prone to favoring competition and/or the likes of Anderol and other newer entrants to the market at the expense of the primes. Again, that could just be a perception issue. Who knows if it'll actually happen, but certainly with fresh eyes from a disruptor like Elon Musk, you can't rule that out completely.
Roman Schweizer:
I was just going to make one quick point. I mean, yes, in terms of Elon Musk and conflicts of interest in terms of recommending policy adjustments across the federal government with departments and agencies that are either his customers or regulator, that's going to be a huge issue that I think Congress, the administration and others are going to have to sort out, particularly if he's able to put his finger on the scale one way or the other. And to be quite honest, in certain ways, there needs to be, or there could be a very good case for some reforms or adjustments or whatever, but SpaceX has had a dominant role in launch, both NASA and defense as well as satellites and small SATs certainly going to be an issue. And I wholeheartedly agree. I mean in terms of the new defense era, new defense companies or the Silicon Valley defense tech companies, they are perfectly suited for this environment. And given whether it's existing relationships or perceived relationships, as well as a reformist bent in the Pentagon will probably do very well over the next four years with the policies that this administration may bring in. Cai, you were going to make a point.
Cai von Rumohr:
Well, I was going to. To follow up on what you just said, I think space has clearly been a priority. It's going to continue to be a priority. And if you look at a company like Rocket Lab, they're on track to getting Neutron, their new medium-sized launcher, having a first launch by about the middle of next year. If they make that target, they're going to be a candidate for the national security launch. And SDA desperately wants to have more folks beyond Elon. And so that could open up a big opportunity for them because I think space is still pretty much the Wild West. I mean, people talk about launch, but the only guys who have achieved launch are Elon has done a terrific job and dominates. And then in the US, it's Rocket lab. They've done 12 launches year to date, and the next closest guys are in the low single digit. I think we'll see who emerges out of all of this, but I think we're set up, we've already seen some shakeout in terms of providers. I think there's potential for more.
Roman Schweizer:
All right. Well, so as we bring it to a close, Cai, I guess the elephant in the room, although it was very kind and polite of a number of managements this quarter to acknowledge your retirement. I don't know if we have officially done that yet, but I guess you have discussed or disclosed your intent to retire at the end of the year after an amazing run in the business and that we have also started to transition some coverage to Gautam. Would you to maybe just comment about that a little bit?
Cai von Rumohr:
Well, I mean I think it's the right time, particularly because we have strong guys on the bench. I mean, Gautam has been with us for well over 20 years. He's very experienced, done all of these things. He clearly is positioned to step up on the big caps. Clearly the time is right. If it's ever going to be done, I think now is a good time to do it.
Roman Schweizer:
Gautam, anything you'd like to add or anything you can say?
Gautam Khanna:
Absolutely. A, it's been a pleasure working with Cai for about 24 years now. Learned a lot from him. He's very focused on what investors actually care about. I think he has done research the right way. Certainly taught me to do it the right way, which is to focus on what matters, to be intellectually honest, to do the work diligently, consistently, and with integrity. It's actually a very rare combination to be among someone who values those things and exemplifies it in his daily activities. Been a great mentor to me and to many others who are either still at this firm or who have left and gone on to the buy side or elsewhere and have great careers, all of whom I think would say the same thing. We're certainly going to miss Cai, I am. I'm very sad to see him leave, but I know he's only a phone call away and has been nothing but gracious in helping us on the team transition and Cowan transition. We're still going to have our conference in February. Cai's been actually instrumental behind the scenes and he doesn't need to be, but he has been. I think that just reflects his commitment to seeing us all succeed and continuing the tradition that he started 50 years ago.
Cai von Rumohr:
Actually mentioning the conference, if I can make a plug, we expect to have all the same big caps who we've had traditionally. And I think given this will be our third year in DC, Roman will be able to attract a stronger program and particularly at this crucial time when the administration is changing. And basically I've been working on setting up panel discussions on topics of interest. Those will include the emergence of strong growth in NATO and what that means for US and foreign companies, eVTOLs, where there have been a couple of positives that have happened. And so I would say that sector looks like it's getting prepared to do better over the next couple of years. Space, which obviously is a major topic and defense AI and I think those are all very edgy topics [foreign language 01:08:21] that investors should be very interested in.
Roman Schweizer:
Great. And one thing I just would like to say, it has been a tremendous honor and privilege to work with Cai, I guess, geez, over the last eight years. It doesn't seem that long at all. And as Gautam said, a true professional and gentleman. And the one analogy I would make, and I don't know, I mean hell, they do it with almost every Super Bowl winning NFL coach, but I think Bill Walsh was the original, maybe Bill Belichick, they always map through as this guy was an assistant coach for Walsh or Belichick and where they've gone. And certainly Cai has had that impact as he has had folks who have worked with him go into industry and go into the buy side and elsewhere. And he has had a prolific Bill Walsh-like impact through our coverage universe. It's been a great privilege to work with him. That gentlemen, thanks so much and we'll be doing it again soon I'm sure.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this recording was obtained from publicly available sources, has not been independently verified by TD Securities, may not be current, and TD Securities has no obligation to provide any updates or changes. All price references and market forecasts are as of the date of recording. The views and opinions expressed in this podcast are not necessarily those of TD Securities and may differ from the views and opinions of other departments or divisions of TD Securities and its affiliates. TD Securities is not providing any financial, economic, legal, accounting, or tax advice or recommendations in this podcast. The information contained in this podcast does not constitute investment advice or an offer to buy or sell securities or any other product and should not be relied upon to evaluate any potential transaction. Neither TD Securities nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed.