Readback: A more realistic defense spending assessment

0:00This episode is presented by JP Morgan Chase Bank, NA member FDIC. More than 7 million small businesses choose JP Morgan Chase. Toronto Baking Company is one of them. For 26 years, JP Morgan Chase has provided capital, business tools, advice, and connections that help the family-owned Chicago bakery grow into a nationwide operation. It's all part of the firm's American Dream Initiative, which aims to power 10 million small businesses. Hi, welcome to the ReBack podcast. I'm Robert Oshanasey, filling in for Max Cohen. This week, we have Punchbowl News Defense reporter Brianna Riley joining us. Brianna, welcome to the show. Hey, Robert. It's Grisby here. Awesome. So, both chambers were out of town this week. So you had to get a little creative to break some news. Go across town to the DC Convention Center for the NDIA Emerging Technology Conference. So it sounds like a thrilling venue.

1:02So talk to me about it. What's the vibe? What is the vibe at a defense-focused technology conference in the heart of the nation's capital? Here's the thing, Robert. I felt like I was returning to my roots this week, right? I began my career in defense reporting as a defense trade publication reporter and going to defense conferences all across the nation was my bread and butter. So in a way, it felt like a full circle moment, right? I love going to these. I especially love when they're scheduled during a non-session week so I can actually go and spend time and meet up with all of these great industry sources and have the opportunity to hear directly from Pentagon officials. And I will know it like given sort of the badge credential situation at the Pentagon, given that media have been more regularly excluded from Pentagon official Pentagon events, having the opportunity to hear from these people directly at an industry conference is even more valuable than it was in the past. So that's sort of the scene setter for this conference, of course.

2:04Of course, there's always like the great opportunities to like I mentioned, reconnect with industry sources. But really it's hearing from folks directly, right? Joint Chiefs of Staff Chairman Dan Cain was one of the keynote speakers. We got commentary from Pentagon Controller Jay Hurst. So it was a really stacked line up. A lot of great principles talking about sort of how they fit their priorities, or how they see their priorities in the emerging tech, you know, science and technology space. There were some interesting tidbits, I suppose, that came from there. Let's hear it. Sure. We'd love to do that. I think the most fascinating was, Jay Hurst, the Pentagon Com Controller, received an audience question sort of about this tension between reconciliation and the base defense budget. And of course, Anthony and I have reported on this incessantly for maybe six months, right? Ever since the Pentagon dropped its defense budget request. And that top line is $1.5 trillion, right?

3:05But the bulk of that increase, that 50% increase from FY26 relies on $350 billion in reconciliation funding, a party line process. And here's the thing, those the prospects for getting that across the finish line are getting dimmer by the day. And I think what has been really interesting to watch, though, is the Pentagon continuing to insist that it needs that top line and not really allowing any other dialogue to interfere with that space, right? Who cares about political reality? The message from the top has been, we need this money. We saw that echoed by Dan Kane, this week general Kane, the Joint Chiefs of Staff Chairman. But when it came to Jay Hurst, he was sort of posed this question about what reconciliation and game looks like, especially as we get towards year's end past the midterms. And he, for the first time publicly since the budget was rolled out, acknowledged that there will have to be a dialogue with appropriators about moving some of these reconciliation priorities

4:06from reconciliation into base. And that's, that is the net sort of turn of the screw of this story, which is, you know, we have money for Golden Dome, domestic, missile defense shield. We have $54 billion for drone warfare programs. We have tons and tons of money that's relying on this party line process. That's very likely not going to get through. At what points do appropriators start looking at that and taking that money and putting it into their base reconciliation bill? And Hurst is acknowledging this week for the first time, like, that is probably going to have to happen. And he said from his vantage point that the appropriators are well aware of D with the priorities in that space. And that, I mean, that the conversations will really begin in earnest in December. But still, it's a pretty interesting, not admission necessarily, but a very key acknowledgement from especially, especially from the Pentagon controller.

5:09Wow. That's a great news breaking. For a quiet week, you got a lot of stuff. It's not that, sorry, sorry, sorry, listeners, but it's really not that newsy. But when you cover sort of the exact same angle of this story for the last like four months, which is the odds are long, it's looking insurmountable. There's no way you can get through into $50 billion in reconciliation across the finish line in this political environment. Even that slight turn of the screen, that slight shift in dialogue from the Pentagon is really critical. And I think, especially from a conference where industry is very heavily represented, and industry really cares about how this funding is going to come through. I mean, there are oftentimes relying on making production decisions based on government demand. And especially for munitions makers who are seeing a lot of money in this reconciliation bill, and this strong push from the Pentagon to expand production, they're not going to

6:09start investing in that in a big way, some of them have, and I will give them credit there. But it's really hard to justify making expanded investments until that contract money comes through. And that contract money is stuck in reconciliation. So it was a very, very interesting sort of message to this audience. This segment is presented by JP Morgan Chase Bank, NA member FDIC. For more than 225 years, JP Morgan Chase has helped businesses start, grow, and hire. Toronto Baking Company is one example. For 26 years, JP Morgan Chase has provided capital, coaching, tools, and connections that helped the family own Chicago Bakery scale nationwide. It's all part of the firm's American Dream Initiative and planned to power 10 million small businesses. We'll read more about that in the read back newsletter, which is in your inbox, as you listen to this right now. But I'm curious what were the vendors at this conference talking about?

7:15A previous life, I was a web producer at a federal workforce trade publication. And what I know is that big defense, the defense industrial complex hates continuing resolutions. That was probably the biggest takeaway. And so we're in one, or we're about to be in one, what's going on? What are they saying? Yeah, I think it's a very interesting environment, right? Because it's like, for the first time in a long time, we are approaching September 30th, but we already know what funding past that looks like, right? So, yeah. Yeah. It's like December 11th is the new date of anxiety for all of these vendors. I promise I'll personally, because I'm like, oh, that's going to be healthy, okay? It's going to be great. Right before Christmas, it's going to be the lame duck. It's going to be awesome. Exactly. All of it. The components of all of these things. Yeah, exactly. Exactly. Holiday Miracle. So I think what's really interesting is that it's sort of the questions that industry asks of these high ranking Pentagon officials at these conferences is so revealing, right?

8:18Because it's oftentimes like trying to flesh out what the demand signal looks like now and what that sustaining message will be in the future. As they try to make investment decisions, as they try to make, try to do strategic planning for the future, especially at a time where we're on the cusp of like a midterm election cycle that could see Democrats regain control of both the House and the Senate. So an end potentially, right, to Republicans governmental trifecta. And we've seen a lot of changes under this administration, particularly as it relates to the defense sector, right? We've seen a lot of tough dialogue directed at the prime contractors. We've seen sort of efforts to expand the defense industrial base to attract more non-traditional vendors. We've seen an influx of VC backed firms sort of entering the defense ecosystem. So with all of these changes happening, of course, equity stakes. I mean, OSC is growing role. We've seen the greater leveraging of DPA. I mean, all of these things are happening right now. I think contractors are trying to get a sense of like, what do things look like beyond

9:24November? So you're seeing questions like that hinted at when they're sort of posing these questions to these DOD principles. Nice. And I'm not going to let you off the hook without hearing what's, what are you hearing about funding the ongoing war in Iran? Obviously, that's a big question mark. I feel like, over and over everyone's head right now. Is it what's going on? Are you hearing anything about that? Are we still just in a shrug phase of that? Yeah, the Pentagon has had to rely because efforts to get a supplemental bill passed through Congress have stalled, right? This Senate Republican defense talks are still trying to argue. And we'll see this happen really in earnest in the next week when both chambers return. Senate Republican defense talks are still trying to settle on a number that they're comfortable with in the budget resolution, right? The House passed a $60 billion top line for defense in response to the administration's

10:28supplemental request. Republican defense talks in the Senate want to raise that to as much as $350 billion, which is the original reconciliation number. So the things are kind of stalled, right? It's unclear how we're going to proceed. So that has left the Pentagon to sort of look internally and try to figure out where it can shift funding resources within its own accounts to cover these immediate shortfalls, particularly in the personnel accounts. You got to pay troops. I mean, there's a lot of troops in theater. You got to pay them, right? And there's hazard pay, right? There's a lot of like pay increases because of the deployments that are currently ongoing. And then also the operations and maintenance accounts, right? The O&M accounts in particular are strained too. So we've seen some movement of funds there to try to make up for those immediate term shortfalls. And a senior defense official talks to Anthony and me last week and basically said, we are fine in the near term. We are able to sort of do these, make these funding patches and enable the continuation

11:35of operations. We'd like to see more funding, but truly financially we're going to be fine. However, the reality though, as Republican appropriators, especially in the House see it, is we are sort of moving around money that we would like to invest in other priorities to cover this war. So we do need more funding. There is still a need for a supplemental. We talk a lot about munitions shortfalls, right? The munitions that have been expended in the Middle East. At some point, the US will need to refill at stockpiles and there will need to be more money for that. So there's this tension, right, where the Department has to project power and project confidence in its ability to continue sustaining the war efforts. But there is going to become a point where additional funds are needed. And it's like at what point will Congress answer that call? Will they finally be able to muster the support to answer that call?

12:39Awesome. And lastly, I max asks this every week, so I will follow in his footsteps. What is in your media diet right now? What are you watching? We're reading or listening to. I am all US open all the time. Nice. I mean, you've got to be right. It's such an exciting time to be an American tennis fan because it's like the men's and the women's brackets are just so stacked, right? We've got incredible talents in both. I mean, yeah, it's been a really fun week for tennis. I'm not going to, the problem is we're recording a Santa Friday morning. This is going to come out Saturday, right? Yes. And it's going to be a recording. Exactly. So we're recording this before the Shelton Tiafo match tonight. So I mean, that's going to be, that could be like five hours of content right there. It could be like a four and a half hour long match. I spit this off into a tennis podcast. Not to be confused with the tennis podcast, which you shout out in the feedback.

13:39Thank you. It's a great podcast. I would highly recommend it. So yeah, I've just been really enjoying my time out of work, of course. Watching tennis. Yes. Consuming tennis podcasts. Having a really great time with that. But it's been a lot of fun. That's awesome. I recently learned about the signature cocktail over at Arthur Ashe. It's called, what's it called? The, the, oh my god. The double, the double, what? I thought, I thought, you was open cocktail. What are you going to do? I'm going to look us over now. The gray goose. Honey. Honey goose. Yes. That's it. I was like, do something. It's the thing that everyone's taking a photo of when they're there. It's like, it's a social media sensation. I guess it's every 10, like I know Wimbledon has like this strawberry cocktail thing that's like big there. And so I obviously don't follow tennis as you can tell, but I do follow the cocktail seed for the Tour of the States. That's my, that's how I engage with it.

14:41I mean, there's something, there's something for everyone in tennis, right? It's like you've got like celebrity showing up to matches, especially at the US Open. You've got like, yeah, you've got like great fashion on display. I mean, it's just, there's a lot. There's a lot to see. And yeah, this is the best time to dive in, you know, because it's okay. Really. It's a time to invent phyllo cell high, get into tennis. Okay. Well, here's the thing. In the men's bracket and in American will be in the final. So that's pretty cool. That's good. I have an unfortunate history of getting into, I got really into Nationals baseball the year after they won the World Series. So I bought very high and it is, they have just crashed. So maybe tennis, I need to get in low and then it'll take off. Who's the big, so who are you saying the, who's the big American tennis star? You got to follow? Who's that? So Ben Shelton and Frances Tiafo are the two Americans who are going head to head Friday.

15:42Tonight. Yes. Or you get last night when you're listed at, yeah. Time doesn't exist right now. We're in a world-based. Before going head to head tonight for a place in the final championship. So either of them, I mean, they're both great. Okay. I'll throw it on. I'm not doing anything. Did I throw it on the TV and see what's going on? And listeners to you, you'll know how that turned out, which is very exciting and being. And also listeners, if you're not subscribed to Punch World News Premium Defense, I don't know what you're doing. This is every Sunday, you'll get insights for Brietta and our other Defense Reporter, Anthony, a Dragna, who we mentioned in today's episode. In your inbox, I can say, every Sunday and throughout the week, the Punch World News Premium editions in mid-Amp. So please check that out at punchworld.news. And other than that, have a great weekend and stay safe, everyone. Thanks for listening.