Editor's Note: Below is an excerpt from an institutional research note written by Lt. Gen Emerson "Emo" Gardner USMC Ret. To read our institutional research email sales@hedgeye.com.
This weekend's annual invitation-only Reagan National Defense Forum At the Ronald Reagan Presidential Library just north of LA was the see and be seen event for America's national security cognoscenti and the businesses that earn a living from the Pentagon. Receptions, dinners and panel discussions were held under the wings of Air Force One and just above an Irish pub imported from the Great Communicator's ancestral village.
Current Pentagon and White House leaders discussed the macro aspects of US Defense and listened to critiques and commentary from past office holders, current CEOs and think tank experts. Here are ten things we saw and heard during the event:
1. Everyone believes that the Pentagon budget will see a significant (6-9% y/y) bump in FY18 compared to FY17 when we finally get past this current series of continuing resolutions. The Pentagon is counting on 3-5% of real growth over the long term but everyone is resigned to only really knowing the topline two years at a time. There were a lot head nods when one CEO said he'd be happy with a less than optimal Pentagon topline if it came in exchange for more certainty in the budget process.
3. Defense companies are big taxpayers and if the tax bill passes will be even more flush with cash than they already are. One company COO told me that current taxes have a 37% impact on his company's current profits.
7. No one thinks North Korea will give up their nascent nuclear capability without a lot more pressure than they're feeling now, if then. The path to a solution is through China and we'll know by this spring if they're really doing what our mercurial President thinks he has heard from Xi. My note, "War Probability in Korea Assessed as 7 on a 10 Scale" is still on target.
8. The Russians are doing well at US expense. They are turning Turkey and controlling events in Syria. There was even some speculation that North Korea's remarkable progress in rocketry may have some Russian roots.
9. Tools for a war in the Pacific theater will have to be dramatically different that what we have been using in the Central Command theater since 1991. The Pacific will be a "stressed" operating environment totally unlike the permissive environment in Iraq and AFG. Our unclassified UAVs, large command and control aircraft, e.g., JSTARS etc will be vulnerable. China is catching up technologically and the US is at risk of losing its traditional qualitative edge.
