Beyond 60/40 Ep. 52: Geopolitics at a Tipping Point

Admiral James Stavridis, Vice Chair of Global Affairs at Carlyle and former NATO
Supreme Allied Commander, is back on Beyond 60/40 to discuss geopolitics. He
unpacks today's most pressing global risks—from escalating conflict in the Middle East and Ukraine to the rise of drone warfare, nuclear proliferation, and more—with iCapital's Chief Investment Strategist, Sonali Basak.

The conversation explores what investors should watch now, where defense and
technology are heading, and why geopolitics remains a critical input to long-term
portfolio construction.

Transcript

SPEAKER_02 0:04

Welcome to the latest episode of Beyond 6040. I'm Shonali Basick. I am the Chief Investment Strategist at iCapital, and today I am joined by Admiral James DeVritis. He is former NATO Supreme Allied Commander and Vice Chair at Carlisle. And of course, geopolitics has been on the top of investors' minds, Admiral. How do you think through the moment that we're in today, particularly in the wake of the conflict breaking out in Iran?

SPEAKER_01 0:30

Well, let's start with Iran, obviously. Here I think you you need to think in terms of two clocks that are kind of ticking at the same time. For the Trump administration, for the United States, it's the midterm elections, November. For the Iranians, it's how much of the destruction of their infrastructure are they willing to absorb. So two kind of ticking clocks. In a logical world, we would probably get to a settlement in four to six weeks. The world in war is not always logical. So what I'm telling investors is there's a chance, kind of two in three, that we'll get some kind of ceasefire and reopening of the strait in four to six weeks. But be prepared, one in three chance, for this thing to go on quite a bit longer.

SPEAKER_02 1:19

Can we scenario plan for a moment here? Because what brings you to the four to six week expectation and what could throw that off?

SPEAKER_01 1:26

The biggest thing is the pressure on both sides. Logically the United States would want to open the Strait of Hormuz, get the global economy moving again, and logically the Iranians would like to stop seeing their entire defense industrial base or military pummeled and destroyed. So you would think you could kind of bring that together, but unfortunately, there's uh real intransigence on the part of the Iranians, and then there's uh the Trump administration has had kind of shifting war aims. So I think it's it's possible this thing could go on longer. But when I look at the incentives that both sides are dealing with, I think four to six weeks from this conversation would be the soonest this thing could come to a better place.

SPEAKER_02 2:17

But even if you saw that soonest resolution, what are the chances that we see a flare-up of conflict again as early as this year?

SPEAKER_01 2:26

I think probably if we get to some kind of a resolution, resolution being defined as straight reopened, bombing stopped, and we take the nuclear issue and put it in a sidecar and negotiate it separately. Let's say for sake of argument, we get to that point in a month, four weeks from now, then I think the chances are slim that we would descend back into war simply because the United States doesn't want to dive back into a war in another straight closure, and the Iranians are gonna want to kind of reconstruct their defense industrial base. So I think we'd all have some breathing room for a couple of years, probably, if we could get to that first gate of some kind of resolution in the four to six week point. Let's hope I'm right that it's a 60%, 65% chance of getting there.

SPEAKER_02 3:24

When you think about four to six weeks and then a potential breathing room, really what happened this year, the tape can't be unwound now. So, how do you think about preparing for the next couple of years? Because we've kind of opened up a new era of conflict.

SPEAKER_01 3:38

We really have, and here I'm going to take you out of the Middle East into the war in Ukraine, where we effectively are seeing two wars occurring at the same time. One is a kind of a drone, AI, hypersonic cruise missile, special forces, kind of starship troopers war. The other war is World War I style, blood and guts, trenches, tanks, artillery. Those two different wars, over time we're gonna see that more modern one emerge. So to answer the question, how do we prepare? Everything from AI for military purposes to better stealth to laser beams to deal with incoming missiles. The current proposition, for example, Chanali, that we're gonna take a$3 million missile to shoot down a$40,000 drum, not supportable. For that, you're going to need laser beams because they're an inexhaustible inventory. They're simply light. And we're very close to that. You've heard of the iron dome the Israelis are building. We're working with the Israelis to build something called Iron Beam, as in a laser beam. So to answer the question, how do we prepare for the transition in warfare? It's to invest more in these uh starship trooper systems, recognizing we're gonna have an era where both are gonna be germane.

SPEAKER_02 5:10

When you think about the drone warfare we're seeing right now, a common thing that I hear is well, this the cost of war is going down because of it. And because you have these drones, and you tell me what you think of this, because in the Strait of Hormuz, really, if you use a couple of drones to impact a couple of tankers, you don't actually need to close everything to have a pretty meaningful impact.

SPEAKER_01 5:36

Indeed. So let's start with uh drone warfare. What you're seeing most play out in Ukraine right now is the Ukrainians ramping up the ability to build millions of very inexpensive drones. That's the model we need to understand. We need to be talking to the Ukrainians, they have deep experience in this. If we do that, then you can get to the point where counter-drone technology can help you with the the drone swarms that could come from Iran. So uh always in the history of warfare, it's offense, defense, offense, defense. And we're in a cycle right now, your point, where that barrier to entry to build really inexpensive drones is very low. We need to be prepared to counter that. Therefore, we need lasers, low-cost drones, experienced drone fighters like the Ukrainians. We need to put that package together.

SPEAKER_02 6:35

I have more practical questions about the war itself and how it's fought, but I also have a more philosophical question about this. If the cost of war goes down, does that make the world itself a less safe place?

SPEAKER_01 6:47

It does. And by the way, you're discussing, you and I are discussing drones and AI, and those are less expensive systems. But how about chemical weapons? How about uh biological weapons in an age of AI where the knowledge to put those kind of weapons of mass destruction on the table is profoundly accessible because of all the different AI systems? And then finally, partly what this war in Iran is over is the access to nuclear weapons. Even there, it's lower cost because of all the advances in metallurgy, AI, nuclear technology. So the answer is we have to create deterrent regimes to show those who would use these low barriers to entry that we can respond, we can overmatch them, and then finally, Shinali, we need intelligence, better, more refined, unblinking intelligence so that we can see these threats before they manifest.

SPEAKER_02 7:54

You mentioned nuclear war, or nuclear threats rather. When you think about not just Iran, but actually the global east, how do you think about the dynamics of how nuclear power might uh might might become very profound? There's no other way to put it.

SPEAKER_01 8:12

So, two aspects to this, one is good and one is bad. I'll start with the bad one. It's the proliferation of nuclear weapons, which I think unfortunately is going to expand. In an era in which the Europeans feel the United States is a less reliable partner, Germany will be more inclined to build a nuclear weapon. Germany will want to work with France and Great Britain who have nuclear weapons. Japan will feel a need for a nuclear weapon. I think the Kingdom of Saudi Arabia will want a nuclear weapon. So proliferation, because of this geopolitical turmoil, I think is a very dangerous aspect of what we're talking about. Here's the good news. When we talk about nukes, typically we're talking about nuclear weapons, there's another kind of nukes, of course, and that's benign civilian nuclear power. It's currently done with fission, but the possibility of nuclear fusion offers an opportunity for effectively boundless energy. That is not that far away. So in your technology conversations, people are so, would say in North Florida, people are so lickered up about artificial intelligence. They ought to be looking at two technologies. One is quantum computing and the other is nuclear fusion.

SPEAKER_02 9:40

Well, people forget if we see quantum computing anytime soon, we will. Correct.

SPEAKER_01 9:51

They particularly in cyber. Cyber security can be easily overmastered by a true quantum computing capability. How far away is that? Could be as soon as five years, more likely about ten years. But alongside fusion, those are the two technologies I'm watching. I think investors, you know, appropriately are very focused on AI. It's those next two that I think are more interesting.

SPEAKER_02 10:17

You know, when you talked about nuclear proliferation, you brought up many countries in Europe, the Middle East, and Asia. But when you think about the shifting winds of power and relationships across the world, what does this mean at the end of the day? What does this mean for NATO?

SPEAKER_01 10:32

NATO will, in my view, continue to be a force for good in the world. I'll tell you why. Despite the kind of creaking of the transatlantic bridge, the rumpus about Greenland and so forth, fundamentally, US and Europe together are just such a powerful capability. Here you have in NATO 32 countries in NATO. They represent about 50% of the world's gross domestic product, about half the United States and about half the European side. Number two, together their military capability is just profound. I commanded it as Supreme Allied Commander in NATO. I know it well. And then third and most importantly, both sides share values: democracy, liberty, freedom of speech, gender equality, racial equality. Look, we execute those values imperfectly. They are the right values. And over time, I think NATO will continue to be very important. The question for us, Chanali, is how do we take that value set and continue to expand our partnerships with Japan, Australia, New Zealand, Singapore, the Asian world. We're not going to have an Asian NATO, but we can certainly have a global appreciation for those values. I think NATO in many ways can continue to be at the center of that.

SPEAKER_02 11:57

So I want to go back to the comment you made a little earlier about artificial intelligence. Because the question I have is when you think about the forms of warfare that exists in the world, how do you think about the balance between physical warfare, between technological warfare, and between economic warfare?

SPEAKER_01 12:13

This is exactly what I meant when I said look at the war in Ukraine. Here you have this very high-tech piece, kind of Starship Troopers, but you also have World War I, All Quiet on the Western Front by Remarque, a novel about World War One. And they coexist. It's a mistake to think that you're going to flip a switch on a Tuesday morning and suddenly it's all Starship Troopers. It's a Rhea stat, you know, like the dimmer in your dining room. You're going to kind of dial it in. And I think from an investment perspective, we need to be mindful that that dial is turning toward those higher-end systems. And then final thought on artificial intelligence and war. It does a lot of very mundane things, but very important things. Logistics, transportation, maintenance. The predictive power of that is profound. And then, secondly, an AI can perch next to the commander, have complete knowledge of every battle ever fought, and then advise the commander on what kind of decision she should make about deploying the gun line on her destroyer. This is real and it's coming, and it's an investable opportunity, but it's also a profoundly important security opportunity.

SPEAKER_02 13:36

You know, the one thing we didn't talk about is really, I believe, the elephant in the room.

SPEAKER_01 13:40

Okay.

SPEAKER_02 13:40

Russia and China.

SPEAKER_01 13:42

Sure.

SPEAKER_02 13:43

Where do we start? I think China, right? Because when you think about the economic warfare that we've been seeing, or at least economic conflict, the natural question very easily becomes what about Taiwan?

SPEAKER_01 13:55

Yeah.

SPEAKER_02 13:55

What happens?

SPEAKER_01 13:56

Before we even get to Taiwan, I'll start with the bad news. There's a pretty rich basket of disagreement between the United States and China, certainly Taiwan. It's also strategic rare earths, minerals, it's fentanyl, it's ownership of the South China Sea, China's preposterous claims of owning the entire South China Sea. It's two fleets that are competing. So it's a rich basket of disagreements. Taiwan is kind of parked in the center of that. It gets a lot of airtime, it should. It's really that larger basket we ought to focus on. As investors, if you ask me, is it safe to invest in China? Can we overcome these differences? My answer is yes. The incentives that drive U.S. and China are bigger than that basket of disagreement.

SPEAKER_02 14:53

That's the good news.

SPEAKER_01 14:54

It is the good news. And so we'll know more when President Trump goes for his big visit to Beijing. It's been postponed, understandably, because of the war in the Middle East. But watch for President Trump to get the most epic welcome ever. And he loves that, right? I mean, it's Donald Trump on the Great Wall of China, Donald Trump in the Hall of the People, Donald Trump in the Emperor's Palace in the Forbidden City. Watch the body language. Watch Xi and Trump. Watch for the deliverables. Where are tariffs after that visit? I think we're going to ultimately find a modus vivendi, a way of working together. So at Carlisle, we continue to look for uh valuation, good deals in China, places to invest within the scope of policy and law of course.

SPEAKER_02 15:46

Do you think that Russia has been alarmingly quiet when it comes to the U.S. conflict of the Middle East?

SPEAKER_01 15:53

Yeah, that's a very smart question. And they are quiet because they just hope it goes on and on and on. Why? Because for Vladimir Putin, this is Deus Ex mocking us, suddenly dropping from heaven is$100 a barrel oil prices. Russia's just a gas station. And he was really running on fumes trying to fund that war with oil down at$50,$60 a barrel. So the oil prices are great. The distraction of the U.S. from the war is great for him. And uh we're using up a lot of our inventory of surface-to-air missiles to protect appropriately our allies in the Gulf. Guess who's not getting those missiles? Kyiv, Ukraine. So, yeah, Putin is just going to be very much off the radar. He'll quietly do everything he can to help the Iranians, but he wants to just stay below the radar in hopes this goes on a long time.

SPEAKER_02 16:55

So, the rest of the Middle East, how do you think that the relationships change? There has been a tremendous amount of infrastructure targeted in various countries, and it's it is already changing. The allegiances that have been formed over many, many years. What does it mean in terms of the relationship of some of the most important countries across the Middle East economically with the relationship of the United States and China for that matter? Do you see a shift?

SPEAKER_01 17:20

I do. Uh the particular shift is I think the Gulf Arabs are now going to be fully on board with the United States. I think they are no longer going to try and kind of play off with Iran. I think the Gulf states are going to now fulfill the promise of the Abraham Accords. I think the kingdom will recognize Israel. I think they'll draw closer to Israel. And all of that will occur because Iran will be viewed quite correctly as this kind of wounded entity, deeply angered, humiliated, but capable of rebuilding its weapon system. So the rest of the region are going to kind of, I think, work more closely together. And I think what you'll see, Chanali, is the emergence of call it the Triangle Alliance. So US, Israel, Gulf Arab States. And as you know, uh Egypt and Jordan, together the most populous Arab states, are already part of that. They recognize Israel. So this will kind of fulfill Arab world, Israel, United States. It'll help us contain Iran going forward.

SPEAKER_02 18:30

Finally, you mentioned it was a midterm year. It certainly is. You are starting to feel that energy in the United States in all sorts of directions. What do you think that this war is going to mean for the midterms ultimately?

SPEAKER_01 18:42

Well, certainly a very pragmatic effect is that Iran's military capability will have been significantly diminished, maybe 80 or 90 percent degraded. That's good news. It reduces their options in attacking Israel, attacking the Gulf states. Number two, a fundamental norm that will come out of this is the Strait of Hormuz has to be completely open to all. We are not going to permit Iran to become the toll master of it. Number three, Iran and its theocracy, that government will be even more at risk to their own people. And I don't know if the regime will be toppled a year from now or three years from now or five years from now, that regime is going to fail. So that means fundamental changes. And if I'm an investor, yeah, I'm worried about the present moment. I'm also excited about the potential for that regime to change in Iran. The investment opportunity in that reconstruction is going to be quite profound.

SPEAKER_02 19:53

Admiral James DeVritis, former NATO Supreme Allied Commander and Vice Chair at Carlisle. Thank you so much for joining us today at a very critical moment in the world, let alone the markets.

SPEAKER_00 20:14

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