Darren Farber on Iran, China, and the Rise of Neoprimes - [Invest Like the Best, EP.474]

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2:24dot vc. My guest today is Darren Farber, and this is his second appearance on the show. Darren's the managing partner of Albion River, a defense-focused investment firm, and he previously served as a special advisor to the deputy undersecretary of defense. We recorded this conversation in the middle of the Iranian contingency, and we spent most of our time on what winning actually means in a theater like Iran. We discussed why magazine depth matters for the American industrial base, lessons from Ukraine, and what the rise of neoprime defense companies will require from Congress. Please enjoy my second conversation with Darren Farber.

2:59I think to begin, you have to define what it might mean for us to win some of these open theaters of war in the world right now. We came through this period where anyone that was a macro type person that I would have in that seat would talk about this multipolar world and the U.S. is retreating from the global stage and it's not going to be the world police any longer and we don't need the interaction with the rest of the world. It seems like we're in a very different world now. Everyone's wondering what winning would even mean in a theater like Iran. And I'm curious for you to just riff on that.

3:30So winning is politically defined. The Strait of Hormuz was open before this contingency at the end of the day. And so if all we get is the Strait of Hormuz back open, strategically maybe was the juice worth the squeeze, for lack of a better term. I would argue that you've degraded an enormous amount of Iranian military capability, which is what the department's internal frago, their order, was to do. And so you have degraded that. But the Strait of Hormuz as an economic choke point has to open back up in order for commerce to work. But we're sitting here today, the straits functionally closed.

4:04The economy is still ripping here. In the United States markets, you have high inflation. But I think the conventional wisdom is that America can withstand less pain than the counterparty. There's this hybridization that happened in certain parts of the Shia Muslim world through the works of Shiriati, which is a hybridization of Marxism and martyrdom together, which is kind of like an absolute control of an environment. And to say, if you martyr yourself, you're winning, you're ascending. It's such a satanical philosophy because it promotes internal destruction and sacrifice to the limit as evidence that you're winning.

4:46We were talking right before we sat down. Gaza has been leveled by any stretch of the imagination. There are still elements of Hamas operating, but have they won? Well, in their mind, in that Shiriati form of red Shiaism, they're winning. You can bring people to the precipice of their own destruction. And in that ideology, that form of religious ideology, they're winning. You're going to have to bring an enormous quantum of hurt. And the problem or the challenge with democracies are, how much of our moral rectitude will we compromise in order to achieve the political goal if we don't feel the existential threat sitting here today in New York?

5:26So that is tough. There's the Taylor view of flexible power, of this proportional response to threats, And then there's the Eisenhower School of Massive Retaliation. I love Kotkin because he talks about, if you don't know history, everything is unprecedented. The Japanese had a martyrdom culture that they memorialized into their force structure, right? Through kamikaze, they would chain people up in trees in Okinawa. Why did we drop two bombs on them? We dropped the first bomb. Enormous mass destruction. They refused to surrender. And they were prepared to fight to the death. we dropped the second bomb and it was only emperor hirohito that broke the tie if he didn't break that tie if he said continue they would have sacrificed themselves it's extremely hard with martyrdom culture to have regime change and then the question is what are you going to defect to you need an alternative power structure there to defect to you can defect from which is you leave but to defect to to get regime change even if 85 or 90 percent want the regime to change you need an alternative force structure to do it.

6:33And so the IRGC controls half of the economy and they have all the guns. They have all of these elements of power. They're very hard to replace. Can you co-opt them successfully between all the assets that they own in Western Europe? They own an enormous quantum of assets in Western Europe. What kind of assets? Homes in London, villas, billions of dollars that they've exfiltrated from the country. And Abbas Malani has documented this in voluminous detail. He's a wonderful scholar on the topic. But really, think of the average Iranian. The limit of the ATM is$7. That's how much you can pull out.

7:09You had the second largest bank fail about two months before this recent contingency. Milani calls it a mafia-style regime. And it's true. The quantum of corruption is absolutely enormous. Dictators are enormously strong and enormously weak at the same time. This is actually like a good frame for our entire conversation, which is to say, we have to be able to hold two competing ideas in the same vessel, and both can be true. A dictatorship can be enormously weak because they're illegitimate. They haven't been tested. They only have to be stronger than their strongest opposition, and opposition is outlawed.

7:42And so they're weak. And at the same time, they're strong because they control the apparatus of the state. This is the cauldron that you have in the people that you're fighting. And there is a growing body of evidence that suggests that Ayatollah Hominay martyred himself. He like allowed himself to be above ground and to be targeted to die to solve a whole series of problems. He killed potentially 30 or 40 ,000 of his own people. He was sick and succession was unclear. I think maybe there would be some infighting. And so martyrdom in the Shiri school of Reggism is like this beautiful solution.

8:16He was sick and ill. And so there's a growing body of evidence that suggests he wanted to be killed. These are the adversaries here. Winning at the limit. And the way we think of it in almost like a documentary for World War II is really hard. But we experienced that in World War II as well. The bombing of Dresden. There was this horror that we would firebomb a city and kill 30 ,000 people under the premise that they have to know that they lost. And this is what happens when you deal with fanaticism. It makes you question the kernel of your moral fiber as a democracy. And you have to go really far.

8:54I just think the analog with Israel and Hamas and Gaza is like a perfect example. Israel has annihilated Gaza. It has been leveled. You can't say that Gaza from a technological standpoint, that Hamas from a technological standpoint has any kind of military capability compared to the Israelis. It's like comparing a toaster oven to the sun. In order to win it, look how far that they've had to go. And I don't know if Netanyahu has the support in the Knesset for the purposes of doing this last leg in the groundwork, but it's what's necessary for his condition of winning. You have to have a design on a concept of positive propaganda.

9:35Propaganda has a bad connotation to it, but it's just... Marketing. It's marketing. It's your political worldview. Israel has just not spent the calories on it. And so the question is, should they? I believe the answer is yes. in a finite pie, how much of the pie should they spend on it? It's not immaterial. Their adversaries are spending enormously on it because it's working. But also the martyrdom culture has, because it's hybridized with religion to create a higher form of fanaticism, it allows you to run for so long. The design to co-opt American universities can be traced to a single hotel room in Philadelphia by the FBI, listening with laser microphones, where after the Oslo Accords, Palestinian Authority with Arafat is brought in and Hamas is considered left out in the cold.

10:27They go to Hamas to go, guess what? You're not in this deal. And so now this is a political organization with no home. They laid out in this single conversation that the FBI has transcripts of their plan to co-opt universities and co-opt university teaching and institutions for the express purposes of changing Western opinion over the course of 20 years. I think Bezos has attributed the quote that if you have a seven-year plan, you win because most people give up. These guys had a 20-year plan and it totally worked. But to make it seem like it was this natural formation out of the ether through moral will is to downband the sophistication of what these people in the Muslim Brotherhood and Hamas set out to do.

11:15They set out to do this. They were so committed to it and they saw it through. We're talking about people advocating for a society that brutalizes their own people and denies the rights. You have a series of people advocating for them that would be denied those same rights there. It was done with intent. It was by design. But this administration is moving the goalposts in the popular vernacular of what winning means. But my view is if you have a straight open and you have a degraded Iranian military capability that can't reconstitute itself very quickly through oil profits, then that will be a win.

11:53And if it can quickly reconstitute its export network of terror and the strait is closed, then strategically it will be a failure. What do you think will happen in the strait? How would you describe the state of things today and the options that the rest of the world has or we have going forward? What do you think will happen? In practical terms, the rest of the world were there. And then we have the Iranians and there are foreign flagged and commercial vessels there, but no one else is there in practical terms. It's just us. And the rest of the world is really to a large extent watching, save for the Gulf Arab states.

12:31The amazing thing is the Gulf Arab states have a much stronger will to fight. UAE has left OPEC. That's kind of big. And then they said they will participate in projecting force with their own forces. That's pretty big too. They are very concerned that we will lose our will to fight by virtue of the fact of whatever economic pain in the interim basis that it generates. But the concept of overcoming the blockade is going to need more magazine depth, more forces in the region. We're going to need an amphibious force on the shore for sure. That is a major escalation. And so that's where Taylor's theory and Eisenhower's theory begin to merge.

13:11Can you describe those two? It's such an interesting history. Maxwell Taylor is a four-star general, is Kennedy's chairman of the Joint Chiefs of Staff, is a great military leader, but also could be blamed for the escalation of the Vietnam War. Eisenhower's warning about the military defense industrial complex really came out of this concern of we now have this new super weapon. And so that should really work as the maximal deterrent for any of these things breaking out. And so why spend all the calories on building all of these proportional capabilities when through a chain of escalation, it's just ultimately going to lead to the big red button.

13:48Those are kind of the competing theories. Eisenhower's theory was maximal deterrence. if you do anything, we're going to use the really special stuff. Taylor's was, we're going to use proportional force. And he had viewed it as a deterrence gap because are we really going to go nuclear for small incursions, small foot faults? I think to an extent that was right, but all of it leads towards escalation. If you don't embark with this very clear directive internally of what you want to accomplish from a political standpoint, and you're not crisp about it, then you lose political will and then you lose the ability to do it.

14:25You lose Congress, you lose the budget, you ultimately lose the executive. So that becomes more and more important. But you have to paint the target of what you want to accomplish. And so all these things are political. So who is more right, do you think, between Eisenhower and Taylor? And apply those two lenses to today's stance for the U.S. What is the U.S. doing, not just in the Iranian theater, but in general with its military, with the Department of War? What are they doing? What should they be doing that they're not doing? What are they doing that they shouldn't be doing? I think it's fair to say you need both.

14:55If you took an exclusive maximalist view of Eisenhower of having this nuclear deterrent, your only response is nuclear deterrence. Can you imagine the world that we'd be living in? Now you'd say, there are some people that'd say, well, great, that would mean we wouldn't get involved in any of these contingencies and we wouldn't have gotten involved in Vietnam, wouldn't have gotten involved in Iraq, probably wouldn't have gotten involved in Afghanistan because we wouldn't have this flexible projection of force to correspondingly respond. And maybe we wouldn't have the temperament to drop a bomb on someone.

15:26Maybe we would, but the binary choice would be so stark. Flexible power has all these gradations of capability that Taylor outlined and that have been modernized for the new concepts of warfare. And that's how we build magazine depth in all of these things. Tamaq missile is not a nuclear weapon. Heimars This is not a nuclear weapon. It's the concept of being able to enforce the smaller infringements, if you will. You probably need both. I just think it would be a very scary world if all we had was a nuclear button in order to prevent a full-scale contingency. As your business scales up, everything gets more complex, especially your compliance and security needs.

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16:42and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgeline.ai. Hi. How would you compare the state of our military capability and prowess today to when you were in the Pentagon?

17:16We're the best, man. So someone asked me earlier today, they had said, what's the grade that you give it? And I said, it's not fair to do this huge compound grade because one, this is a government organ. So how great can a government organ be? But our ability to train and equip the forces and what they deliver, it's the best fighting force in the world that the world has ever known. You have to do some relative comparison to the rest of the militaries around the world. We are number one, but it is a body of government. And so because it's a body of government, it gets one year money from Congress.

17:50You have deck chairs that constantly change. You have these features of government that make it suboptimal. But as a grade, as a military and its capability, I give it a super high grade. Is the bureaucracy a problem? Yes. Do we have to modernize it? Yes. Do we go through it every 20 years? Yes. Because we recognize how important it is. But our ability to project force is so good. I think having a pacing threat unto itself is valuable to make sure that we are serious about maintaining capabilities. But I love the works of Dukater because he's so clear about how strong and weak China is at the same time.

18:28Who's Dukater? So Decatur is a well-regarded historian on China and has a theory on how China is not a superpower just by virtue of how illegitimate and how weak it is and how tense the plenary in the party is. He has good points. The Chinese equivalent of the chairman of Joint Chiefs of Staff has disappeared. He went to kindergarten with Xi Jinping. These guys are close. When you have power and you ascend to power in a fundamentally illegitimate structure, who do you trust? The answer is no one. You're constantly worried that someone's going to put a bullet in the back of your head. And then that form of illegitimacy cascades down through the immediate organs of that government to include its military.

19:11We've talked about their lack of jointness, the corruption internally within the force, the corruption in the missileer crew. They have turned over their senior military leadership three or four times in the last three years. That is not a high trust environment. High trust comes through esprit de corps and believing in the mission and legitimacy of what you're doing. That is one of our enormous strengths. But their magazine depth industrially is so enormous. So the calculus becomes, can the magazine depth overcome their institutional weakness? It's a good question. And that's why we as a country are embarking on this enormous effort to industrialize in order to add magazine depth to the capabilities we have.

19:53You wouldn't add magazine depth if you had the maximalist view of nuclear deterrent. You have magazine depth when you believe in the concept of flexible power. I talked to Sham from Palantir about this. He had just come out with his book. I think it was called Mobilize about this exact thing of increasing magazine depth. I don't think he used those words, but it's what he meant. How would you grade us on that specific thing? What is the state of it today? Are we doing a good job? Who is doing it? How's that going to unfold? we're in a democracy in a dictatorship if you don't build magazine depth and that's your job you're dead that mechanism of enforcement is pretty compelling here we balance things like will it be profitable will it have duration and congress is giving one year money and so there are new efforts to create multi-year contracts for ordinance which we've never done before you really need it it's great so we're changing the architecture to allow us to do more to add to magazine depth.

20:51We need to go faster for the purposes of filling the deterrence gap so we can stop small incursions on the margins, especially with the Southeast Asian nations that we have cooperative peacekeeping agreements with, these bilateral agreements where we have to protect them and they're being violated right now, like the Philippines, for example. So we have to do more there. It's getting better. And compare it to anyone else in the West, we're still the best. It's just your adversary has a political structure that allows them to bring people to the precipice. But the illegitimacy of the Chinese, fundamentally an illegitimate power, is also our advantage.

21:27And we are making enormous strides in the clandestine services of co-opting that environment. Say more about that. Xi doesn't know who's on our side in his standing committee or on his side. Every day he wakes up with the thought of, maybe I need to kill someone off. That is our edge. Our edge is that he is fundamentally illegitimate, the monopoly of power that is communism. Their form of Marxism, of communism is extremely powerful because the apparatus of an enormous economy to pay off all these kinds of people. But they are illegitimate. And our ability to recruit and retain and train, it had really degraded.

22:06And we have lost a lot of capability through a series of assets that were caught. We have rebuilt that in a very meaningful way. I don't think she sleeps well at night. Is that very recent, that change? No. These things are built brick by brick. We have these government agencies where everyone goes into work every day, Monday to Sunday, and their job is, how am I going to infiltrate this illegitimate political structure for the purposes of making it weak? We have people, they drive their car in and they have their sack lunch, and this is what they do every day. And ultimately, we break through.

22:40Why? Because every Chinese person in the standing committee has a relative somewhere in the United States, how many degrees removed, that owns a small business that is doing well, is able to say and do what they want, is able to fundamentally live free. We can't forget what makes us special and that we are the bug out point for the world, even for the people in the standing committee that are worried if they're on the outs. They have a plan to get here. We have weaknesses, but we also have enormous strengths. And their weaknesses are also enormous. It doesn't mean that they can't bring us to the precipice.

23:16Their mass is so much greater than us, their population size and what they can do industrially. But it is a dictatorship. It is a totalitarian regime. I don't even know how this is up for debate. I just think the threat of that is lost. That's what we're talking about here. They are fundamentally strong and weak at the same time. We can hold both of those in the same vessel. I believe in our lifetime, China will fall. I believe in our lifetime, Iran will fall. What does it mean for China to fall? I know what it means for Iran to fall. I believe it will be run like Taiwan. I believe it will fall.

23:50We grew up with this concept of the Soviet Union. It had this enormous technical capability. It's this monolith. It lasted several generations. And then all of a sudden it fell. It looked super strong right up until the last moment. There were planning documents circulating at the Pentagon about how strong they were two weeks before they fell because their constitution, their concept of a constitution is fundamentally corrupt. That monopoly of power saying that these people are going to permanently be in charge, you know it to be wrong. And so the question is, does it last 50 years? Does it last 100 years?

24:25It does fall because it's fundamentally illegitimate. The Chinese Communist Party is illegitimate. They are an illegitimate dictatorship. I believe in the natural order of humanity and freedom that at some point it's the natural state that ultimately prevails. But our enemies use our freedoms so successfully against us. And I think the real issue of our time will be as they use these freedoms against us, how will we have to fence them in to prevent them from being completely polluted? the psyop of social media on us, what they do against us in that, it's enormous. And we're kind of allowing it under the rubric of our freedoms.

25:12And so are we going to have to degrade a portion of our freedoms in order to protect ourselves? This is going to be the real hard part against a very motivated and sociopathic adversary that's illegitimate. What's an example of the degradation of our freedom for protection? This concept of when you're in the four walls of the country, there's the general expectation of a freedom of speech. That creates the freedom for disinformation. Now that you can amplify disinformation through the concept of freedom of speech, do you create this alternative world where people are disconnected from reality?