Stephen Burke discussed the current economic uncertainty, noting a potential double bottom in the US market and the impact of global trade fragmentation. He highlighted the rise in defense spending globally, including the US, Europe, and China, and the challenges of developing new defense programs. Energy demand is increasing, with a 2.2% growth in 2024. Infrastructure needs in the US are significant, with a $3.7 trillion gap by 2033. The discussion also covered the impact of tariffs on inflation, the rule of law, and the potential for recession due to policy uncertainties.
Stephen Burke discussed the current economic uncertainty, noting a potential double bottom in the US market and the impact of global trade fragmentation. He highlighted the rise in defense spending globally, including in the US, Europe, and China, and the challenges of developing new defense programs. Energy demand is increasing, with a 2.2% growth in 2024. Infrastructure needs in the US are significant, with a $3.7 trillion gap by 2033. The discussion also covered the impact of tariffs on inflation, the rule of law, and the potential for recession due to policy uncertainties.
Issues & Risks
Uncertainty in global trade and tariffs
Potential for stagflation
Challenges in defense spending and program effectiveness
Increased energy demand and its impact
Infrastructure needs and funding gaps
Concerns about the U.S. upholding the rule of law
Potential impact on U.S. exceptionalism and global leadership
Next steps
Stephen Burke mentioned an upcoming Zoom call on April 22nd with Dr. Ed Yardeni to discuss Trump's first 90 days and economic outlook
Mark Sanor mentioned several upcoming events, including one in Vegas, a Palo Alto event with Eric Schmidt speaking, and events in Riyadh, DC, and Seattle
Questions discussed
"Have we reached max uncertainty?"
"What can the administration be doing that it's not doing to avert, avoid, slow down and decimate or extinguish rising costs?"
"Do you see any policies in this administration that is second Trump, big spending administration? Do you see any policies whatsoever that would lead to deficit reaction reduction?"
"What do you think about this idea that is the US, not opportunity for all?"
Timeline
April 22nd: Zoom call with Dr. Ed Yardeni to discuss Trump's first 90 days and economic outlook
June 16-18: Upcoming event mentioned by Mark Sanor, described as potentially one of their best events
2029: IMF projection for global GDP to reach 130-140 trillion dollars
361Firm Briefing 260 “Investing and Uncertainty” April 1, 2025
Transcript by Otter.ai
SUMMARY KEYWORDS
Investing uncertainty, US market, globalization, trade fragmentation, inflation risks, defense spending, energy security, infrastructure needs, tariffs impact, recession risks, global disorder, productivity spend, healthcare investment, AI spending, rule of law.
SPEAKERS
Anthony Gordon, Andrew Fisch, Wanda Lopuch, Speaker 6, Duncan Reifler, Parth Vakil, Tim Gallabrant, Speaker 4, J.P. Keating, Speaker 2, Lenny Colson, Michael Hammer, Rob Colorina, Mark Sanor, Speaker 10, Stephen Burke, Matthew Friedman, Adam Blanco
Stephen Burke 00:02
now. Stephen Burke, thank you. So the question is, have we reached max uncertainty? And I think probably not yet, but I think we're getting closer to it. From a technical perspective on the US market, technical analysis would suggest that we are getting closer to the bottom, or actually they're suggesting that we're having a double bottom, which would give you some sense that we're getting closer to the end of the volatility that we've seen and to the degree that we've seen it, and maybe on to better footing as we get clarity on how the world economy is going to operate, but I've shown this chart the last couple weeks, and not sure I haven't done a disservice by it, because we do have big shifts going on, really from globalization and fragmentation around trade, and I think that's what we're going to be dealing with for some time. But I think we have to start thinking about this a little bit differently. This is a quote from Christine legard, and I think this really highlights part of the challenge that central bankers have. And this goes back to one of the presentations we did last month mark on the risk of becoming more two sided on inflation for central bankers and the view that they can cut rates aggressively this year is calling into question. The ECB will probably do a couple rate cuts, but they may start doing a little bit of a pause for the reasons that the two side of risk that we talked about, trade, fragmentation, higher defense spending could push up inflation, but lower demand and stagflation could bring it down. So we actually have a little bit of a push and pull going on right now that is creating some problems for investors, but I think we'll get past that. But right now we are seeing sentiment driving behaviors, and it's creating concerns about a pullback from spending, whether it's on the retail consumer or whether it's on business. And I think we're it's gotten to the point where the uncertainty has heighten the inflation expectations, maybe beyond where they should be, but this is the behavioral part of finance, as opposed to fundamental. And right now we're having behavioral winning over fundamentals. But I think in these periods, there are areas you can invest. And for us, when we think about times of uncertainty or think about investing all time, the first place we look to is invest in the areas of required spending. And it's hard to argue that more money is not flown to national security in the US and in Europe and around the world, whether it's our allies or adversaries. And I use those terms a lot more loosely than I would have couple months ago, but I think that the defense spending is going up. Energy security becomes a bigger issue, but also the need for more energy has obviously become even more apparent with deep seek and AI and other areas, productivity spend is going to be required, because when you have inflationary pressures, the need to substitute capital for labor, and you also have demographic issues, we need to push productivity up around the world, infrastructure spend, whether it's through Climate or whether it's through just where and under investment another area. And obviously health care is big area. So you can look at these areas and then say, Can I invest in these areas based on the fundamentals, given the uncertainty that exists? And we think there are opportunities, but you have to obviously get your math right as well. And I think this is a time you can take advantage of some of the dislocations that we've seen. So I'm going to go through a couple of those areas. Obviously, defense spending on the rise in the US as a percent of GDP has come down a lot over the years, but we are starting to pick that up again. You're starting to see it in European nations and other areas in the g7 as well. We know that China, Russia, India and the Saudis are also increasing their defense spend, so it will go up. But the problem is, wanting to spend more and having it work immediately is a challenge, because most of these programs can take years to develop, and defense spending covers a lot of areas that you have to keep in mind, operations and maintenance being a big one, but you have personnel in other areas. But R and D is not that big, and that is going to be an area that has to grow, because the type of wars we're fighting have been changed considerably in the art of war is being redefined in Ukraine and in other areas around the world, but Ukraine leading the way for what the future or might be, and that means a lot of the old programs that we've invested a lot of money in will have less efficacy, and that money will be shifted to some other areas, which means that the spending may be years out before. See the effectiveness of it as those in the defense complex. Michael Hammer and others will tell you, creating a new program is one thing, getting it operational and working and approved and functional is another. So I think this is an area that while there is increase in defense spending, it does take time for these programs come through, which means the ability to reduce your reliance on existing providers is much more difficult, even if it's your greatest desire, and we are seeing some of that coming out of the talk out of Europe versus the US suppliers. Energy demand continues to go up. We know that this is a big topic with the data centers and other areas in AI, but I thought this number is really pretty fascinating. In 24 we grew 2.2% the average for the last 10, previous 10 years was only 1.3% so it's shifting where the sources of energy are coming from, but the demand continues to rise, and I think that will be the case for some time. So it's just owning the right areas, at the right times and and dealing with the fact that we had a big ideological bent towards where investments were going around clean energy that's getting more practical, and balance between fossils and renewables, that I think will be a part of how you make money going forward, is getting that balance right. It's not one or the other. It's how you balance both. Obviously, it spend has to go up. The question right now in the near term is that does deep seek lower increase future tech spending? And you're getting announcements like that out of Microsoft that are kind of throwing the market for a loop, because Microsoft is talking about $80 billion of spending this year, but they're reducing spend on new data centers. Some of those new data center plans have been picked up by other companies like Google and meta. So are we seeing a shift in spend or reduction, or is it just how companies are playing it? I think over the long term, what the Gartner is saying is spending supposed to go up 9% this year over last year, after a 7% growth rate, I think you will see spending rise. It may get a little bit of a short term hair cut, but I believe that deep sea will increase the need, not reduce the need protect because it will democratize it in a way that opens it up to more people, not less, more companies rather than fewer, and that will pave the way for better productivity growth from small and medium sized businesses and allow for a broading out of the market globally. So shifting gears to infrastructure so global infrastructure needs, and this is a snapshot of a recently brand new released report card for the American side society of civil engineers on the US infrastructure grade, and we have moved up, finally, to a C. I think this report has been going on since around the late 90s. This is the highest grade we've received overall since that time. The report credits the infrastructure act under the Biden administration for a big boost. But we still have problems. And just put the global infrastructure needs in perspective, McKenzie did a report, I think, in 2017 that suggested at that time that the needs for the global spending on infrastructure were 77 trillion and they believe we had a 15 trillion short fall at that time, the needs continue to grow. The spending has not kept up with it. That's part of what German is doing in their new fiscal stimulus initiative. Is half the spend is going to defense, another half going to infrastructure. But it takes time to turn these boats around, and we've seen improvements in some of these areas. But in the US, we have problems with transportation, we have problems with water, and we have problems with energy. Would be among the biggest needs. But the US still has a big gap for all the spending that we have. If you look at the gap between 2024 and 2033 we need to spend about 9 trillion. We are funded at a level of about 5.4 trillion right now for a gap of 3.7 my concern with this and what's going on with Doge is Doge is taking money from the federal government and pushing that spending down onto the states. Can the states afford that with all the other needs that they have. The more the federal government cuts, the more the states have to pick up. As we know, many states are not in particularly good shape, and those that are might be going through a slowing growth period where their tax revenues come down. And can they afford to do this? And one of the challenges that we have in the United States, and you see this with the cost of neglect, is the gap back in 2001 was only about half a trillion dollars. So by not meeting the spending needs immediately, we keep growing the spending gap. And where we going to get this when we have such big demands on the government, and now we're doing it a time with higher interest rates. So I. Interesting dynamic there. And here's where you can see the big area, surface transportation. We know we have a water problem, not only in water transportation, but in drinking water, waste water and storm water. And how we handling that. You can get into the levies and how that plays into it, another big issue, particularly as we've seen in country, in cities like New Orleans and other areas where we are not meeting the needs and have not made kept up with the investments. So this is a big area for opportunity, but the shifts that are going on in the changes that are that are going on in global trade and the tariffs may make it harder to do the spend that you need to do, because you might have trouble getting the materials that you need to do it. So we have this issue. We know we need spending needs to go there. It is an area of required spend. But again, this another area. We have to be careful how you play it, because valuations and the growth opportunity in the near term could be under some pressure. So in this environment, we're in a period of global disorder that's really moving from globalization to fragmentation. We think that in the short term, you're seeing the Street analysts lowering growth expectations, raising recession odds, and that will have an impact on the mindset of business owners and consumers. That will lead to a slow down in the near term, the question for a lot of people will be, where the US is actually executing austerity and the EU and China are stimulating will that completely redirect flows, or will it temporarily redirect redirect flows? What you're seeing in those markets already is the European the deck and the Chinese market, after a big move on, the hopes for stimulus have actually rolled over and have starting to come in a bit as hopes meet reality. I think when we're looking at these recession risks and the odds, I think it all comes down to the question of, What is the degree, when do we get clarity on the tariffs. What is the degree of the of the increase the street is hoping for, about 15% tariffs that are put on in relatively short order, as opposed to a string of tariffs that are uncertain because you can't make business decisions, as Matthew highlighted earlier, very difficult for business owners like Matthew serving the auto industry to make investments, and you've seen a lot of front loading, where people were pulling in inventories to get ahead of the tariffs. What that's going to create some distortions in the numbers that we see for a quarter or two. So I think those are big changes that we have to adjust to. I think the other thing, and don't discount what US austerity means versus other countries, stimulating and what it will mean for capital flows, the dollar and currencies and interest rates. I think the other thing is, we are seeing alternatives to equity, US equities. For the first time in a while, there's about 17 trillion of foreign investments in US equities. And as there become better alternatives, that does create a shift, and markets move on incremental buying, and that will slow it down. I think we're in a period where the US will do okay in the second half. I think we're going to be treading water for a bit of time because the uncertainty. I don't think the Fed is going to be able to step in support the market, as has in the past. So the question is, will there be a Trump put and I think the issue on that is, how does he view tariffs? Are they something to change the balance of trade, or are they something to fund his tax cuts? If there something to fund his tax cuts, they'll be higher and more permanent. If they're to rebalance trade, that can be more temporary. I think that's creating the uncertainty, but we're seeing shifts, not just in where you're putting money in on a country basis, but asset allocations are changing too. Bill is going to talk about this in the allocator session tomorrow, but I think you're going to see some things occur in that area. What I would say, though, is be careful about over adjusting allocations right now, because the easy money has been made in some of the moves that have already occurred. And now that we have the announcements look staring us tomorrow, we have to see what the announcements are going to be, what the responses are going to be. How much is this the great negotiation, or is it something else? And will we be liberal? Yep. So let me give you one last, two, last thoughts. We talk about uncertainty, and I feel like, use my code. I feel like I'm doing a bit of a disservice to the community. I saw this quote from Warren Buffet. I think it's really fascinating to step back and think about one of the greatest investors suggesting that uncertainty is always present. We just don't know it. We didn't know it on, you know, seven. We didn't know it on September 10. We didn't know it on October 18 and 87 we didn't know it on October six of last year. We won't know it right now until we have better clarity. That said, there are opportunities and through all this uncertainty, keep in mind. If you go back to 1980 global GDP was at about 11 point 5 trillion. The IMF is projecting that by 2029 we'll have global GDP moving up from about 110 trillion today to 130 100 and 40 trillion. The US GDP in 1980 was 2.9 trillion versus 29 almost 30 trillion today. That was year end of 24 and the S P closed in 1980 at a price of at a at a level of 118.71 versus 561, 1.85 today. So for all the uncertainty, all the negativity, stepping back and having a longer term view about earnings, about the businesses that you're owning, and not getting up and caught up in the short term, I think is prudent, and we often get caught up doing these weekly calls. One of the challenges I have is balancing the news off with how we fundamentally think about investing and owning businesses, because businesses aren't reacting. They're reacting some to the changes, but they don't make the same reactions that we're seeing in the market. And the market is a discounting mechanism that may be getting ahead of things. So Mark, I'm going to stop there and open up for conversation. Very good.
Mark Sanor 16:30
So of course, questions, comments,
Tim Gallabrant 16:33
one. Steve, sorry, go ahead. Hey, maybe I think about this, Rob, but you know, those are huge numbers, but, but how much, if you talk about in terms of real or constant dollars, how much is that growth, and how much of that is just this ridiculous inflation with all the money that's been created over
Stephen Burke 16:50
the years? Actually, I can't give it to you on the GDP, but I can give it to you on the S P. I think from 1980 to today, the S P returns was about 12% and inflation adjusted, it would be about three about 3% less. So, yeah, you're still looking at a pretty healthy return on the S, P for that time after inflation. Tim,
17:15
thank you.
Adam Blanco 17:18
Adam, good morning. Thank you, Stephen, two quick questions. The first is, there's a lot of talk about stagflation. What's your thought on that? The second question, you mentioned alternatives to us, equities. I'm assuming you're talking about investments in Europe or emerging markets and fixed income, those are my two questions. Thank you, Stephen.
Stephen Burke 17:45
I'm sorry I already blanked on the first question, stagflation. I think it's a TOS up right now. I think the policies will determine whether we actually get to that level or not, and the reactions. So that's why the one of the recent presentations was actions and reactions. So President Trump's actions and how does everyone else respond? You don't know until you know, yesterday I saw that China, India and South Korea put together a plan to counter the US tariffs that starts the negotiation. So we really don't know the the the outcome yet, and you have to have better clarity on that. I think that will determine what, how far we go. I also think it's, it's how long this drags on a tariff input increase that's, uh, one and done, allows the price adjustment to occur. And then you know what the value of things are, and you can make your decisions going forward. If you have this long, drawn out staggering of you know, we're going to her key, jerk everyone around and play the game that I know and you don't, then it'll be hard. Then you will increase the odds of that, and you will get what, what economists refer to as the paradox of thrift, where people pull in spending in an anticipation of a slowdown, and therefore you create the slowdown. So that's the risk that we run. So I think that's how I look at stagflation. On the second part, I think the clearly, Europe is created with their stimulus, new opportunities to invest. I think the question is, how effective can they move from announcing what they want to do to implementing what they want to do? And I think it's much more difficult, particularly in the area of defense. As Michael Hammer, if he's on, can speak to programs take a long time to get in and improve and executed, even in times of great need. I don't think Europe has acted like the there has been an emergency here when it has been an emergency for 10 years. So will they act like it's an emergency now? And will it change behavior enough? I think that's where the politics of Europe start to slow things down. Yeah, and that's where the rubber hits the road when you have reality facing the desire for spend. So I think that's where you have to be a little careful. And I think you've seen big moves, and a lot of the easy money is made. I think it's that's the point you have to step back and decide how you want to play it. But I do think there will be a shift, and there are better opportunities globally, but I would just allocate with care. And I think Bill is going to talk about this more tomorrow.
Matthew Friedman 20:24
Hey, I just want to add one thing. This is Matthew jumping in, as you said. So I will tell you that we have seen many more inquiries about other companies seeing what our manufacturing capabilities are because of the effect of imports on foreign vehicles and trying to reshore more manufacturing into the US than I even through all the talk and the the China tariffs in years before, the inquiries that we're getting are increasing at such an incredible rate because of the overall cost of import from China in the EU, EU that we have never seen before. That's definitely
Stephen Burke 20:58
that which is an interesting dynamic in South Carolina, where BMW and Mercedes have big plans, but those plans produce, I understand, with only about 15% of the materials are produced in the US, and that is a one of the big voting areas that supported the president. And how that plays out will actually be a very interesting example of how this policy impacts the voter base and what that means for his core voters, and how that plays out. So I think it's gonna be really interesting to see how companies adapt to that, but also how voters adapt if their prices go up in areas or jobs are lost in places that have been big supporters, interesting, dynamic
21:45
Andy fish,
Andrew Fisch 21:49
yeah, Stephen, I have a question, but just a quick statement. First, just, you know, one of these sort of broad tariff things is that we threw these tariffs on Columbia, and we get most of our coffee from there. We don't produce one bean of coffee United States. Yet, we employ millions of people in the United States, all related to coffee. But Stephen, my question was, maybe you remember better than I don't remember when there was a significant tax cut that pushed a lot of burden on to the states a number of years ago, I believe, and I think that's literally never been resolved, to the point where you mentioned how much stress the states are under and and I think that's where it really started. If your memory might be better than mine, I think it was the Trump tax cuts the first time. I think was even before that, maybe. But yeah, I think it was. It was sometime right before that. This has been going on a long time. I know that Stephen because at a meeting with the state of Illinois about a decade ago, and there, you know, they were, they're a mess.
Stephen Burke 23:07
So actually, our biggest states are a mess, right? Yeah, most populous states are struggling with that. Yeah.
Mark Sanor 23:13
So what's the question? No,
Andrew Fisch 23:16
the question was whether he remembered pushing birds to the state the impact that, I think, is a hangover they still have. And could they, could they even take it again?
Stephen Burke 23:27
Yeah, I'm not sure that much more the states can take on. And they are, we are pushing more down to them. And it's it does, it will impact the midterms. And I think it's a question of how soon the midterms start to start to weigh on the GOP up for election, and you did see yesterday that there are so starting to be some pushback on some of the tariffs and some other policies that some of the members of the GOP are working with the Democrats now. So it'll be interesting to see how that plays out. Mike, it's alright, because
Mark Sanor 24:01
we're going to have a third term.
Michael Hammer 24:04
Stephen, I'm faster than betel juice. You don't have to say my name twice three times in a session. I will respond when you say it twice. So with regard to defense spending programs and whatnot. I think one of the interesting things we've seen, based on what happened in Ukraine, but also with the Houthis, is are do the investments that we make in large scale programs, aircraft carriers, whatnot. How efficient are they and how deployable Are they as a use of force in various scenarios, and so things like drones, the US has been focusing on drones, but they. Tend to be higher cost weapons systems, as opposed to what we see in Ukraine, where very low cost drones are very effective at taking out very high cost armor, artillery and whatnot. So I have a feeling that regardless of how much money we put into defense, or the Europeans put into defense, there's a good chance that we'll get it wrong.
Stephen Burke 25:33
Fully agree, I think the big programs are I think the sucking sound you're going to hear out of Washington DC, is the wasted spend on some of the big programs that we thought were going to save us, and you'll find that they won't work in the future war. So I'm I'm with you on that and and then you also have the cyber defense area that we haven't figured out how to prevent a takedown of the grid yet. In other areas, I think you're right, Michael, I think the future war is going to be very different the past, and getting those programs right is going to be key. And you know, the I didn't get through the national threat assessment report yet, but a lot of that, what I did see was around the vulnerability of our infrastructure to attacks that are already in the system, embedded in the system, already with sleep or problems. We
Michael Hammer 26:26
are a target rich environment. And if I may, mark a few years back, I was at a an event that the Air Force put on in Vegas. And Verizon was pushing 5g for military use. And one of the things that they were saying is, well, you know, software defined network, right? It's not just the wireless to the phone kind of thing. And my response was, Well, then I would just be attacking the systems that do the software defined network, and now you're taking out civilian infrastructure as well as the military infrastructure, and it is a legitimate target. And they just kind of looked at me a lot of times, when I get in those discussions with folks, they'll throw title 10 and title 50 at me. We can't do this, or we can't do that. It gets very, very interesting discussions,
Mark Sanor 27:38
by the way, Michael on the May 9 and might switch, but we are going to have an event in DC with a former Secretary of Defense. So some of these questions can be lot
Michael Hammer 27:52
will be inside the beltway or outside the beltway. It'll
Mark Sanor 27:56
be on K Street for good or for bad, I will let you know. Other questions.
28:13
Hey, Mark, I got a question for Stephen sure you know, for if people with
Mark Sanor 28:21
suggestion you're looking really 10
Duncan Reifler 28:23
like the way it is. If anybody has a couple hours spare, I really suggest you listen to these all in podcast with an interview with Scott Besson and with Howard LUT Nick because they articulate what the administration is trying to do better than the mouth piece does. And then secondly, my question that came out of that is, I've never, I haven't really seen any analysis. Do we really pay more tariffs than we charge, you know? And is there really objective, ly, an unfair balance on the collective global tariffs. And I guess before that's my question, Stephen, maybe you can answer that first, and then I have another follow up. I
Stephen Burke 29:13
would say depend. I would say it depends on how you define tariffs, because the administration's defining it, not just the actual tariffs, but also potentially value added taxes. And I'm not sure how you would calculate all that to come up with the actual number or not. When you add that in, it looks like it's IMB balance, but those tariff Value Added Tax is on all goods sold in most countries. So that's not really a tariff because they're they're in in country companies are paying this or charge the same. So I don't think that's necessarily the right way to do it, but it is part of the way the administration is looking at it, yeah. Oh, I think it just depends on how you define it. Duncan, okay, well. So
Duncan Reifler 30:00
then my other thing here is, if you look at the impact of the tariffs, this is basically a non legislative tax, and it's contractionary, and it's also progressive, because I can go out and pay $10,000 more and still buy the Audi, but there's a lot of people that can So therefore, if I have a choice, I may still buy my Audi,
Rob Colorina 30:30
but a lot of people are just going to find the thing that they can afford. There's no monetary, money supply offset to what's going on, and the Fed's already told you they're not going to lead this. So what I'm sort of surprised at here is you're taxing corporate profitability, and you are.
Duncan Reifler 30:50
You are taxing wealthier people with a consumption tax. And correct me if I'm wrong, but weren't those type two pillars of a different party's, you know, sort of election campaign, you know, a year ago, I'm just surprised there isn't more support for the policy of this, right? I mean, it's like shrink the deficit. The legislative branch has failed for 3040, years to do anything about the deficit. So now the executive branch is coming in and doing something that may make a difference. I'm just surprised there. I'm surprised how how much lack of support we have, and how polarized the conversation is, and maybe it's just the people, but I
Stephen Burke 31:39
think it's economics. I think people, I think big part of the reason the President was elected was to lower because of inflation, not because of everyone's desire to reshore manufacturing back the United States. I don't think that was on most people's minds. I think having and seeing price increases, particularly after they went through with the pandemic, is going to be off putting to a lot of people. So I think that's part of the reason why the positives of the policies that the administration is putting out are not being as well received as they would like. I also think there's a view by half the country that there's a heavy handedness that is not necessary to achieve the same outcomes. And I think the approach may be part of the delivery of the message, may be clouding the message. Yeah,
Duncan Reifler 32:33
well, that that makes sense. But where's the inflation? I'm coming back to that inflation. You know, most economists will say it's a monetary phenomenon, and I see these polls, and you've seen them, and you cited them, that we've got this heightened in heightening of inflation expectations. But it's like, you know, the guy making $75,000 a year is still making $75,000 a year. He isn't all of a sudden, going to just pay 10% across the board for everything just going to shut down demand, isn't it mean, I don't see where the inflation piece comes from.
Stephen Burke 33:09
That is the inflation piece isn't coming from that. The inflation piece is coming from the distortions in trade that are going to create supply and demand imbalances in the short term. And how long does it take to work them out. And. JP, you can speak to this from the from the logistics perspective, but And Matt, Matthew Friedman, can speak to it from the being the user of it, but it's real where some of these issues are coming. So. JP, do you want to weigh in?
J.P. Keating 33:37
I Yeah, yeah. I mean, it's, everything is a mess. It's, I mean, it literally is. And I'm hosting another panel here in about three weeks, and we don't even know what to talk about on the panel, because there's nothing specific. I literally told everybody, look, we very well may be spit ball on this one, depending upon what happens. And thankfully, you know, everybody on there is dealing with this directly, and we'll just see where it goes. And you know I was going to make a comment earlier, on the defense side of things, there is a very fast, concentrated effort to be building out these much smaller, more nimble systems, because we have to. And I just, I've just looking here at a thing that's coming up around that, like scale AI solutions, kind of AI driven solutions. When you think of smaller systems during everybody use the term drone swarms, that kind of stuff. So it is, it is very much happening, but a quick comment on the big systems. So we, we benefited from a very, very nice development in St Louis last week when they announced the new six generation fighter aircraft is being built by. Own. So they have 47 I mean, that was they kick the can down the road until the new administration, and the new Administration approved it, and we're looking at like, $30 billion worth of injection into the company, and it's a $2 billion investment by Boeing, just in St Louis. So when you start, if anybody's flying into the st Louis airport, you're going to see all of that being built over the next year or two. So there's, I think there's going to be a real mix of things here, both on the commercial and the military side. We're still going to need some of those super big, advanced systems, but we're going to need a lot of the little, the little nimble things to be able to to adapt to potentially engaging in multiple geographies, in in the world at the same time. So again, that as we talked when, when I presented a long time ago, was that affects commercial, commercial supply chains and logistics, because that's who servicing all of that. So it is good. It's a again. Everything is sort of chaos right now, and it's just guessing until, like you said, Stephen, you know, you don't know, until you know, and then it's readjusting again and trying to figure out what to do. So I wish, I wish my crystal ball worked better right now to be able to provide some some guidance, all I know is, stay stay awake.
Speaker 4 36:25
Isn't that even I actually scrapped
Stephen Burke 36:28
our newsletter that I was writing for the last two weeks and said it doesn't matter what I said until tomorrow. Isn't
Duncan Reifler 36:34
that even more contractionary, though? I mean, besides what's going on, the uncertainty, what's going on. I mean, nobody can make a decision. So what's to stop a recession here?
Stephen Burke 36:51
It's a great question, Duncan, I think it's, it's, it will be start with sentiment, because if everyone's pulling in, you could create the recession by the lack of spending, so they have to get clarities, to have confidence, to make decisions, and if the federal government's not spending, then the private sector has to step up. And the question is that, do they have the rules of the road to be able to do that or not? And right now, the answer is maybe, and that's not an investment environment that people get one
J.P. Keating 37:21
one quick comment to around DoD spending that's not really going anywhere. All the indications that we're getting from everybody is that there's plenty of capital going into the DOD, especially for new, new advanced systems through anything coming through, like the diu special operations, but that's not slowing down. It just sort of depends on where you're going. But anyway, go ahead, Mark, I'm
Mark Sanor 37:51
sorry, as a place marker, we have a new client who's a has a private credit platform for the last four or five years. He has security clearance. They basically fund. They do debt financing on these purchase orders. I'm curious what you think about that just I'll run this by
J.P. Keating 38:06
you. Yeah, I think it's great. I think there's needs to be a hell of a lot more flexibility and funding into this type of work. And so like the Office of Strategic capital has done a lot of good things, except their investments are going into small things where we're talking about building the military industrial base back up. This needs to be going into the big legacy providers as well to be able to create the huge, you know, the huge amounts of tooling and capacity that need to build these gigantic systems out and I had this conversation with a group of a group of aerospace and defense CBC units two weeks ago. Specifically around this, they love everything that's going on, but the big providers out there are struggling with getting any kind of injections where they can do major, major investments into that into that capacity.
Mark Sanor 39:02
Sorry to take you off. We have four hands up, Michael Andy, Andrew and Anthony and Adam.
Michael Hammer 39:09
So I just wanted to respond to what Duncan was saying. And he also posted along these lines on LinkedIn and said that it's actually a progressive tax. The tariffs are a progressive tax. I disagree. It's regressive in the sense that, for example, a tax on fruits and vegetables from Mexico or food imports from Canada. It's those who have less economically more than the very wealthy. You know, and it's not clear to me that the tariffs will actually be as effective in raising. Uh, revenue. I forget the exact numbers thrown out by the Trump administration, but it's like, how could you ever get there based on these tariffs? And really, what it's going to do is convince people other countries to trade around us, it will hurt in the short term for those countries, but in the long term, I believe it's going to hurt the US more the secondary tariffs that he proposed on those buying Iranian oil. Yeah, it might hurt China, because they're a big consumer of Iranian oil, they're not going to change their policy or behavior because of that threat. And as I've stated before, just like with sanctions, the over use of tariffs to affect policy decisions by other countries has diminishing returns. The more that you do it, the less effective it is.
41:10
Great. Andy,
Andrew Fisch 41:15
yeah, an inflation really simple example. Because this happened, it was studied. The Koreans started importing washers and dryers and getting into our market that we had dominated. So we put a big tariff on and what ended up happening was that our manufacturers, because Korean washer dryers got expensive, our manufacturers just raised prices and and didn't really make more washers and dryers or get more competitive. And by the way, go search for a very short, good Ronald Reagan talk. He's in a flannel shirt, and it's short on the impact of tariffs. And it's really quite good. It
Stephen Burke 41:56
is a great that's a great presentation. If you haven't, if you haven't listened to it, it's, it's very good. He's not as positive on tariffs as the current President put it that way.
Speaker 6 42:09
Anthony, yeah. Anthony, hi. What can,
Anthony Gordon 42:15
what can the administration be doing that it's not doing to avert, avoid, slow down and decimate or extinguish rising costs. So it's kind of a simple, dumb question, but I didn't hear a particular address to that. If you could comment on that?
Stephen Burke 42:34
Actually, I think it's the it's the being a little too clever on gaming. What your plans are for tariffs, instead of just coming out and and giving the world a sense of what is, what's the playing field, until you have a until you know what the rules the game are, it's hard to play the game, and that's where the slow down is generating from. So I think, I think the the the administration needs to be clear on what their goals are and what their outcome is, and if the outcome is to Michael's point that they're trying to raise tax revenues with it, I think that could be problematic, because I don't know that they'll get the numbers that they need to get to to to promote the tax increase that They're putting forward. But I think it's the, it's the Herky jerky nature of it. It's the it's the on again, off again, that sort of thing where there's no clarity. You don't know how to if you're another country, you don't know what you're trying to solve for, and until you know that you're gonna, you're gonna be in this state of of limbo. So that's why I step back and say, Forget about the short term. Where does capital have to flow and invest in the areas that need because you can do that if you can find good values in there. And the market pull back that we've had has created some things that were well over valued, that become much more attractive investment opportunities going forward, but you have to be confident that you're looking for the next, you know, 12 to 18 months or longer, that you can stay with it, because it'll be bouncy in the interim. But I think it's clarity is the real issue.
44:21
Anyone else,
Adam Blanco 44:23
yeah. So I have a quick question for JP, when we were talking about the changes in defense industry, um, what did you mean by small things? Investment in small things? Yeah,
J.P. Keating 44:34
yeah, I was just, I was just writing you a note back here, so the opposite of big things. So when we start talking about ships, planes, tanks, you know, the traditional kind of things everybody thinks about when you're looking at defense. So when you start looking at like,
Speaker 2 44:50
like, the materials that go into it, the or so
J.P. Keating 44:53
it Yes. So when you know, everybody sort of thinks about defense they're thinking about, we need to. Like the silly argument that continues on, like we don't have we have fewer ships than than somebody else. We don't need more ships. We need more things that can execute missions. So that's the key here. Is who? It doesn't matter if we build another 1000 ships, it it doesn't support the the the mission. But what is going to support the mission is now the lot of things you hearing about, a lot of unmanned systems, a lot of advanced electronic warfare, a lot of control systems, communications, so, and I like a lot of like Gap Filler technology that's out there. So there's some new kind of smaller vehicles that are able to execute missions in the different regions we're going to be operating, whereas traditional stuff doesn't work. But they're not going to be there's they don't need to be these 100 billion dollar programs. And so we're going to continue to see those things coming along. And with that, you still got like so the chart that we showed earlier with the with the O and M piece. The O and M piece doesn't go away. That continues. So that's incredibly important. So another thing that you're looking at investment in is all of that OEM for these sort of hundreds and hundreds of new systems, versus for a smaller group of pieces that are out there. So you've got to be able to, you can scale out the smaller things, but you still need to support them. So there's, there's money going into all of that as well. So you kind of have to think about just outside the traditional we're going to build more ships, more fight or aircraft do these things. You've got all these new little bits and pieces out there that are going to be solving for specific missions that still need to be built, supported and operated in the future.
Stephen Burke 46:47
Wanda is up next.
Mark Sanor 46:49
Yeah. One is up next. Hi, WA
Wanda Lopuch 46:51
Stephen, we know that you are not, not only you are very concerned about deficit, national deficit, we haven't talked about the deficit in quite some time. Wharton school, when they try to run the scenario about the economy based on the current economy, their computers crashed. They couldn't figure it out. So my question is, when we are, you know, debating tariffs and all of that. Do you see any policies in this administration that is second Trump, big spending administration? Do you see any policies whatsoever that would lead to deficit reaction reduction. Thank you.
Stephen Burke 47:45
Yeah. And if Doge works, lead to deficit reduction, if it works without cutting growth too much, I think that's the that's the balance that you have to figure out is, can you find efficiencies? Will the RE shoring pick up again, that will create enough economic activity to create enough jobs to off, to create more revenues, more tax revenues, to upset it. So I think that's the that's the offset to it, whether they can get there or not. I think lower energy costs do help if we can get lower energy costs down. I think simplifying, you know, a lot of things in our in in our government, our purchasing can can matter. We're not there yet, but I don't know that you're going to get there. I think first you have the pain, and then you have the solutions, if we can do it right. But there are positives coming out. It's lower taxes to create more spending. So it's a question of, can they pull it off or not? I'm skeptical that tariffs can replace the taxes or offset the needs for tax cuts, but I actually am shocked that one of the big issues that I think is called into question for the US right now and will impact us going forward, is how committed are we to uphold in the rule of law. You know, it's, it's one of those things that we, you know, have always people could always count on us for at least to a great degree, since World War Two, and now that's being called into question, and that does have a big impact on all the stuff we're talking about, because will capital flow? Will people invest in that environment if you can't be confident in the rule of law, I think is a real issue, and I think that requires more pushback, like the Supreme Court had about their comments about you don't impeach judges because you don't like the rulings or and how we treat other countries, all that stuff the rule of law applies international and domestic. And I think that is an area that people are waiting to see what the US stands for in that area. I just think that's one of the ones that. Keeps me up at night.
50:03
Thank you. You're welcome. When
Lenny Colson 50:05
you say rural law of law, do you mean like buying elections or buying judge? I'm sorry, Lenny, such things. When you say rural rule of law, are you referring sort of activities like buying judge, elections, those types of
Stephen Burke 50:19
things I'm talking about the that, you know, the post World War Two, we've created a kind of a standard for how people should behave in the world order that's generally followed, although many countries have violated it. I think if they view of the US is we don't stand for what we've always stood for, and and rule of law being one of them. You know, free trade was another one. Now, promoting democracy around the world, all those things, I think that falls into question, the US and the US standing and and that gets to the confidence that people have to trade and invest with you and and sign deals on and follow peace treaties and things like that. So I think it's all that that goes into the view of the rule of law. I'm not saying we've lost it yet, but that is the risk to us exceptionalism, that can we be counted on as dependable leader or not? So yeah, that said, I'm not negative on that. So I think with, I think as Warren Buffet says, Don't, don't bet against the US. And I think that's right. I think we have mid terms not too far off, and I think that'll change some of the behaviors of Republicans are afraid of losing their seat, and I think you'll see maybe a little bit more balance coming back to how things operate. But I think in the near term, it's going to be choppy. Mark. We do have one list, one new question so far. Yeah,
Parth Vakil 52:02
just to, just a quick comment. Stephen, to your point on, on, you know, rule of law and you know, irrespective of whether or not that's a threat to American exceptionalism, one thing I'm noticing is that, at least from an India perspective, you know, even though I genuinely believe that we are the one indispensable nation, headlines and these uncertainties and the perceptions around things like rule of law, maybe some of the more subjective issues certainly do matter, right in terms of how other countries I can only speak to India from my perspective, but capital flows and generally, the way the wealthy population is thinking about our markets has certainly changed drastically over the past, you know, even three weeks. So just an observation I wanted to point out,
Stephen Burke 53:01
yeah, I think when, when I think about the rule of love, I think of it more. I think it's part of how people perceive the US. I think it's are we? Are we viewed as a depend can we be viewed as dependable partner today? And I think people are questioning that now, particularly allies. And I think the treatment of Canada, the treatment of green Lynn, are not the best look for the US, whether the national security issues that are posed around that are not necessarily the wrong ones, because I think the Arctic is going to be a big part of the future of defense. But I also think that, particularly for mineral rights and the like. But I think the perceptions can become realities if they go on too long, right?
Parth Vakil 53:48
It's like, while I might counter some of those claims made by the folks I speak to in India with well, what's the alternative in terms of a global super power? Whether we agree or not, those perceptions in my mind do matter, right, will show up to some degree in the markets, at least over the short term.
Stephen Burke 54:10
And the history of Global Leadership isn't that it drops on a day. It's a it's a degradation of that role because of behaviors that are become not what it was that got you the leadership. And if you look at all the other countries that have had the role and lost it, it's because they went too far and and lost, lost their some of their compass. And I think that is a question, can we get or we have we gotten that point? Or will we get there? And I think we'll know over time. Thank you. Stephen Anthony, great quote in the chat. Stephen, lovely
Anthony Gordon 54:49
talk call today. What do you think about this idea that is the US, not opportunity for all? This idea of exceptionalism is does it not? It is opportunity for all, not sort of founding mantra of why immigrants come here and then what they can do. And so what is the administration doing now to or not to promote that? Because without opportunity for in my mind, you don't have United States, you have something else, which is not why most people came here or will want to come here. They come here because there's an opportunity for all. If you disagree, tell me, and if you agree, maybe you could comment,
Stephen Burke 55:33
I don't disagree. That that's why people come here. I don't think. I think what the administration is trying to do. And one of the one of the things that I think Trump campaign was brilliant at, is he saw that the middle was wide open for the taking. That was the Democratic base, that they weren't taking care of the workers or the middle class. And it used to be the Republicans got blamed for that, but they he saw an opening, and he is trying to whether you agree with the policies or not. The platform is designed to increase the middle class again and to help the workers by bring jobs back to the US. You could argue whether that's a good economic theory or not, but I think that that premise is, was the premise the administration he saw a wide open gap, that that group felt they were being abandoned by both parties, and he could step in and fill that. I still think that people come here for the right reasons. I don't think we have a legal immigration problem other than we don't have enough. And I think people believe that there is an American Dream that can be felt here. I just think it's it's being called into question because of the approach that's being taken right now and and how heavy handed it feels. But I also think part of the administration's game plan was to affect change, you had to create an unsettled environment that people would respond in a way that's different than they normally would, and I think that's what we're dealing with right now. I think how we behave going forward, and how we how we treat immigrants coming in Legally, will determine whether that exceptionalism from that part goes away, and I don't believe it will. I think the businesses grow because I think immigrants come in and they create a lot of small businesses, and that is the backbone of the US. I think they can see opportunities here when they come legally to do it well. And I think it's a question of increasing the numbers that more can come legally to do it the right way. So I think there's some conflicting goals here that go against some of the traditional values, but not in a way that everyone thinks and maybe getting distorted by the negativity that's surrounding the approach.
Mark Sanor 57:54
So just making a plug 60 seconds, just if you could fill out that that poll, because I want to close it and show everybody what these results are,
Stephen Burke 58:04
and mark if we can do that tomorrow, for the three questions that Bill has, we should spend some time on that. Yeah,
Mark Sanor 58:11
I could load that in. I'm surprised by no interest in one thing. Oh, we just gotta hope for it. Excuse me,
58:20
and
Mark Sanor 58:24
interesting. I have tech bio. We just did it last week. People want to do it again. Apparently.
Stephen Burke 58:32
I think it's I think it's not as surprising. I should think Mark because of the rapid change in valuations, and also the change in how people's perceptions of where capital spending is going to be in that area, and the big debate of, is it going to slow down, or is it going to continue? I think it's going to have people so wondering about that for some
Andrew Fisch 58:53
time. Bio tech. Bio is a C, G and drug discover.
Mark Sanor 58:58
So 10 seconds, I want to close this so we see what the results are.
Stephen Burke 59:04
Mark, while you doing that, I just want to say we've done what is it? 260, of these. Mark, when, when I'm sharing the views, it's based on what I think the highest probabilities are. Not with any certainty, because I can assure you, I'm not certain the the American Society of Civil Engineers, report card looks a lot like my report cards growing up. So I would just say that that number of CS is not unusual. The number of days might have been a little higher, but general, I don't think with certainty. I think in probabilities. What we're sharing is our highest probability views.
Mark Sanor 59:41
Fair enough. All right, so just I see so DC, Baltimore had zero now they have four. All of a sudden. La Tam, Adam. I think Adam voted 10 times
59:58
lane as well. Yeah. Yeah,
Mark Sanor 1:00:03
space, gaming, seating, merging, managers, more than I thought, energy by segments, okay, some like the credit Summit. It's tomorrow, so come Vegas. If you want Vegas, there's no cost, just you'll be a guest of 361 at the Jones trainings event. The Palo Alto event involves Eric Schmidt speaking. So it was with one of our clients that did this last year. So if you're interested, ping me. Yeah, Riyad is huge. We're doing a prep call tomorrow on it. And those who would be in milk and were got two different venues. And, yeah, DC, just two. I guess were there June 16. I think that the June 1618, is going to be our, one of our best events, again, amazing event, Berkeley, Stanford, and up to Boeing, speaking of Boeing in Seattle,
Stephen Burke 1:01:09
just a plug on that Mark last year. The content from those meetings was phenomenal, and people could look at the presentation on semi conductors by Daniel armbrus, and the presentations by de Kai and guy on chip on AI was phenomenal.
Mark Sanor 1:01:35
So you're, yeah, we're excited. And Berkeley's get to give us more of a tour. They want to. They want to do more of a Stanford style. And I, yeah, and love and the the Seattle crowd is really coming together too well. That's useful feedback for me. Thank you everyone. And if you want to have any other subjects or any other cities, we're trying to fit in Paris. We you heard earlier, we're trying to fit in Monaco. So I just need help to do it. So if you're interested in something, then lead, co lead
Stephen Burke 1:02:11
and Mark, just a reminder on I put into the chat at the top of the chat, a zoom. We're hosting on the 22nd with Dr Ed yard, any and about Trump's first 90 days, and when he sees the outcome outlook for the rest of the year and an intermediate term outlook and longer term, he's pulled in his expectations for earnings and multiples on the S P for the near term, And but stands by his 10,000 by 2030 so typo in there, but by 2030 so it would be an interesting call. So feel free to join then.
Mark Sanor 1:02:49
Yep, I'll put that also in the next digest. All right, then, I guess we'll say thank you, particularly Steven. Thanks everyone here in New York. We'll see you tonight at Spin flat iron, 23rd between Madison and park. Disappointed. Eddie,
1:03:15
yeah, you can be my part. Steven, hey, thank you. Everyone. Take care. Thank you.
Mark Sanor 1:03:40
Hi, Eli, we see you tonight.
Speaker 10 1:03:46
Mark, I hope you're doing well. I hope to come and see you tonight. Yes, sir, I'm hoping to and okay, just taking, just taking care of my mother, Bob, being listening and just to.