Latest / The Financial Exchange Show / How did Intel fall from global chip champion to takeover target?

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How did Intel fall from global chip champion to takeover target? · The Financial Exchange Show

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This is the Financial Exchange with Chuck Zada and Mike Armstrong.
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Speaker 2: Chuck, Mike and Tucker with you.
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Speaker 3: And I gotta tell you, we're right in the middle
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of just, you know, another week September in markets struggling
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to Oh no, wait, the S and P five hundred
1:31
is now up a couple percentage points for the month,
1:33
so uh yeah for the next.
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Speaker 4: What about how September is on average the worst month
1:38
of the year.
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Speaker 3: Well, I gotta tell you, I was told. I was
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told after the first four days that this was going
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to be another bad September, and so yeah, look, you're
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gonna be hearing from me every single day about this
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until the S and P turns negative for the month,
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which I'm not rooting for. But again, there there was
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a piece published like three days into September about how
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this was just gonna be another bad September. And that
2:05
was just like the piece that was published three days
2:07
into this year when the S and P five hundred
2:09
was down, saying, hey, when the start of January goes badly,
2:13
it can mean bad things for stocks and number go down.
2:16
And I'm sorry, but that's not how it works. That's
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not how any of this actually works. So the S
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and P five hundred remains in positive territory thus far.
2:29
For the month of September, the Dow Jones Industrial Average
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is flirting with all time highs as well. And we
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start today with a little bit of a chat about Intel.
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Speaker 4: Great Americon tech company.
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Speaker 3: And the reason why you know we're gonna talk about
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Intel is just because they're not doing very well right now,
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and it's something that's happened quickly. Intil, by the way,
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is one of the thirty Dow components you know that
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was reaching for all time highs even with Intel, you know,
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languishing rather badly. And when I say rather badly, this
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has been a catastrophic year for them, quite honestly, I
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think that's the only way that you can put it.
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Where the stock is down over fifty percent in a year,
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where the S and P five hundred is up, you know, seventeen, eighteen,
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nineteen percent, depending.
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Speaker 2: On the day of the week that it is.
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Speaker 3: And this was a company that when Pat Gelsinger, the
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current CEO, came on board, uh three years ago, there
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was a lot of optimism from Intel employees and analysts
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that hey, this was going to be the guy to
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kind of turn the company around because Intel stock, you know,
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had been kind of floating around for a couple of
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years before that. It was just kind of floating around,
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you know, fifty fifty five sixty bucks a share, just
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just languishing in.
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Speaker 2: That area for a few years.
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Speaker 3: And the thought was that Gelsinger, who is an engineer
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by trade, has spent and you know, forty years almost
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at Intel, knows the company inside. Now the thought was, hey,
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we're getting an engineer back in the c suite. This
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is going to be what turns us around and gets
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us moving. And in fact, aside from a brief run
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up to you know, fifty bucks a share at what
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was at the end of last year, very early this year,
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the company has just not had anything going for it
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since Gelsinger took over, and he's now forced to look for,
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you know, options as far as hey, do we want
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to restructure and spin off some of our units, can
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we figure out ways to take on outside money, Do
4:39
we want to potentially be acquired by someone else? These
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are things that really are signs that your tenure CEO
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have not gone well. And as such, you know, people
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are starting to look at Gelsinger's tenure and saying, Okay,
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you know, what do we make of this?
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Speaker 2: And where does this go from here?
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Speaker 3: And quite honestly, how much longer do you give him
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to try to turn around a company that he.
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Speaker 2: Doesn't seem to be having very much success with.
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Speaker 4: Yeah, and Intel's case, it's easy to maybe make comparisons
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to other big tech companies that have languished over the years.
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IBM comes to mind General Electric as another that Jenny
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g doesn't really fit into the tech space specifically, but
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engineering type companies that make hardware of one sort or another,
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and Intel's problems are rather unique in this space. IBM's
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problems were largely that, hey, they supported massive customers who
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slowly and steadily migrated to a different type of technology.
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But it was this slow bleed for IBM. Intel five
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years ago kind of occupied the dominant space where if
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you were buying semiconductors to go into personal computers or servers,
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Intel was the first place you called. And today they
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are so far behind all the conductions that they make
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that they're they're not getting put into the newest machines.
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Speaker 3: Well, I disagree. Their revenue was flat over the last
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ten years. Like it's not something where they're just you know,
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like they've lost that their core business.
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Speaker 2: Sure, it's just they're not growing well.
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Speaker 4: But my point would be, how much is the semiconductor
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spend across the world increased over the last ten.
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Speaker 3: Years ps It really has, Like no one buys PCs.
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That's the thing, Like they're Intel right now is digital
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equipment in my opinion, like that that is where they
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are and where they're heading unless they can turn this
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thing around. Digital back in sixty seventies and even into
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the early eighties, it was something where hey, they had
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these business lines. The mini computer market was what they controlled.
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And the problem was that wasn't that they stopped making
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good chips for many computers. It's that people stop buying
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many computers and started buying PCs, Like that's what people
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shifted to. And so Digital ended up basically dying out.
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They had to get blocked by I think Comcast or
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not Comcast, Compact or HP one of them. When when
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all that roll up of you know, all the PC
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makers was happening in the late nineties, and they were
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basically done from there at that point. And that's what's
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happening with Intel is look, you go and you buy
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a Dell computer or an HP computer, still got an
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Intel chip, still got an Intel chip. And it's not
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like they're losing those contracts. They lost the Apple contract,
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but Apple wanted to take all their hardware in house anyways,
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like that that was gonna happen to anyone that was
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doing that because Apple wants to control everything.
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Speaker 4: But I guess my point would be five years from now,
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how many PCs are being built without artificial intelligence native
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on the system. And does Intel have any experience whatsoever
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and showing that they can produce those chips.
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Speaker 2: No, but neither does anyone else.
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Speaker 3: There's no one right now that produces AI chips for PCs, right,
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you know, it's like that's no one does. I think
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Intel's problem is they are still fighting last year's like
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the previous war, not in terms of you know, AI,
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but just hey, they're a PC chip manufacturer that got
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caught completely flat footed on the AI stuff and that's
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why they're not doing well there. I mean, a m
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D is another semiconductor company that their standard business was
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building chips for PCs, same as Intel. And it's not
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that like they make better PC chips than Intel. Right now,
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they're like, what do you need a great chip for
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when you're writing, you know, doing word processing and stuff
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like that. I mean, it's well, I wrote the word
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the faster than I ever have, you know, like it's great,
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like wonderful. But a m D has at least been
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able to say, Okay, here's some lines of business that
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we've been you know, developing for AI and they've gotten
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a little bit of uptake there and that's been enough
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to help them Intel. The problem is is two really threefold.
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They completely whiffed on AI. At the same time, they've
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tried to start up this foundry business where they're trying
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to become kind of Taiwan Semiconductor what they do where
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it's hey, we're not going to necessarily, you know, you
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come to us with a chip that you design and
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we'll build it for you. And they're pouring a ton
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of money into it, but don't have a ton of
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uptake right now, Why would you.
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Speaker 4: Want to source your chip manufacturing out to a company
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that also does chip design.
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Speaker 3: In theory, you've got you know, a wall between the
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two divisions, and who knows. But right I mean, it
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seems like a barrier potentially. Yeah, I don't know. Maybe
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they have a better answer for that than I do.
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But they've embarked on spending all this money in this
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one area and all of the semi money has been
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moving into a different area, and that's the problem. And
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now they have a a financial issue that they're dealing with,
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not in that the company's you know, on the verge
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of going out of business. I don't want to make
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it sound like that, but hey, you are in a
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situation where profits have been drying up your free cash
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flow because you're spending so much on building these new
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fabs for this foundry business. Your free cash flow is
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quite negative at the moment, negative twelve and a half
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billion dollars over the last twelve months now through the
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second quarter, and you're sitting on about thirty billion dollars
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in cash. And so you do the math that and
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you're like, hey, we got to start really improving this
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free cash flow situation in the next couple of years.
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And they're saying, hey, yeah, it is going to get better.
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But they've kind of just been treading water in this
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range for the last three to four quarters.
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Speaker 4: Now, Chuck, there's reports that Apollo is considering a multi
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billion dollar investment in Intel, and you know they're not
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commenting on any of this, nor is Intel. But question
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for you, what comes to mind when you think of
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Apollo offering a big investment in a company just generally,
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like not even knowing that it's Intel.
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Speaker 3: I mean, I gotta say, that's a pretty big move
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for the Sun God, you know, making that kind of
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you know, move, like saying hey, like this is the techno.
11:15
No so Apollo, if you're not familiar with them, they
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are a private equity firm and they basically specialize in saying, hey,
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we see you running a business inefficiently. We want to
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improve the efficiency, and in doing so, we'll be able
11:32
to unlock some value that you know has not previously
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been there. Historically, PE firms have done this through big
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job cuts and spending cuts and things like that.
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Speaker 2: I don't know how.
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Speaker 3: Good of a fit that is for what pains Intel
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these days, which is not like what's the problem with
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Intel is that they just haven't allocated resources in the
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right direction. And if all you do is cut, I'm
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not sure that gets you to the direction they need
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to be going. Maybe Apollo is looking at this differently
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and saying okay, we just need to get you know,
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some people that are more tied into AI in there
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and this and that. But look, chip development in fab
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development is like a multi year process, like this is
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something that you can it takes like a decade. And
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on one hand, maybe that's not a bad fit for
12:26
private equity because PE firms generally like this, Yeah, we'll
12:29
take you private, improve you in seven to ten years,
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and then re release you into the wild and hopefully
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have made a bunch of money selling you for more
12:36
than we bought you for. It's it's a tough sector
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to do that in. It's it's a tough place. But
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when you start getting the vultures circling and make no mistake,
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like Apollo is a vulture, this is this is what
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they do is they look at companies that are kind
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of down on their luck and say, how do we
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figure out how to make you know, chicken salad out
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of chicken bleep. That's kind of what they do. And
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it's not a great position for Intel to be in.
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Like it tells you something about where they are. Right now,
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let's take a quick break. Right now, when we come back,
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we're gonna stick with semiconductors. We're talking about Taiwan, Semi
13:13
and Samsung talking about building some gigantic factories and where
13:18
those factories might be.
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Speaker 2: We'll fill you in right after.
13:20
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Speaker 3: Some news in a Wall Street Journal exclusive that Taiwan's
14:29
Semiconductor and Samsung are discussing projects in the UAE that
14:34
could be worth more than one hundred billion dollars in
14:37
capital spending in order to complete. These would be some
14:40
of the largest semiconductor factories in the world if actually completed.
14:46
But here's the thing that is a little bit problematic
14:51
when you talk about building semiconductors in the UAE. You
14:57
need a metric crap ton of water, clean water, fresh
15:02
water in order to produce semiconductors. If there's one thing
15:06
that I know about the UAE, it's generally not thought
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of as a place with a surplus of fresh water.
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Speaker 4: I would agree. I'm just having a tough time putting
15:16
all that together because where's the biggest investment of a
15:20
TSMC facility in the United States, Phoenix, Arizona.
15:26
Speaker 3: Well, yeah, but they take all the water from the
15:28
golf courses and redirect it to the facility, you know,
15:31
I mean look, I.
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Speaker 4: Mean, I guess that's what you do in the UAE too.
15:35
There's not a lot of water in a few of
15:37
these places that they are building.
15:38
Speaker 3: Well, there's even like here's the thing, I don't even
15:40
know if the UAE. Quite honestly, I don't even know
15:42
if there is a lake in the UAE. Yeah, is
15:46
there a lake in the UAE.
15:50
Speaker 2: Let's see tripond? Okay, here we go.
15:54
Speaker 3: Alcudra Lake is a man made lake on Alcudra Road
15:58
in Dubai. It covers ten hectares. Do you know that's
16:03
not that's not even a pond. That's a puddle. Get
16:09
your civic stuck in that, you know, Like what that's
16:12
that's the number one lake in the UAE.
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Speaker 2: Like, what what are we really doing? Here? Here we go?
16:16
It's a big puddle? Got another one? Love lake in Dubai.
16:19
Speaker 3: It's a human made lake in the form of two
16:21
hearts interlinked together. Are we gonna have like heart shaped semiconductors?
16:25
Is that what we're doing? Now?
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Speaker 4: Let's assume that they figure it out, so in no
16:29
small parts something like this would be happening because of
16:32
the UAE's money investment fund. They they you know, many
16:37
countries other than the United States have these big investment
16:41
funds that they invest retirees money in and and push
16:45
these types of projects, is it. I mean, look, I
16:49
know there's a massive growing demand for semiconductor chips, and
16:52
a lot of countries are seeing this as a strategic initiative.
16:55
But anytime I see countries across the globe all investing
17:00
in the same thing at one time, it just makes
17:03
me believe that a lot of them are going to
17:05
fail or you're going to end up with a market
17:08
that is vastly oversupplied. I know we're not there, right
17:12
We are vastly undersupplied with semiconductors right now, especially certain
17:15
types of them. But if every country is seeing this
17:18
as the next strategic industry to get, I mean, China's
17:23
investing heavily, the United States is investing massively UAE, and
17:28
I'm sure the Saudis are investing quite significantly. They've got
17:31
to be doing it in Europe. I'm guessing they're doing
17:33
it in India. The net result here is I think,
17:37
pretty cheap semiconductors down the road.
17:40
Speaker 3: Well not if you're talking about the kind of semis
17:43
that they're trying to build. For artificial intelligence. I mean
17:47
I I remain suspicious.
17:48
Speaker 4: I guess that you know, non market forces are going
17:52
to properly supply the market with semiconductors, because that's partly
17:55
what you have here, is non market forces behind these investments.
18:00
Speaker 3: But the piece to me that that I remain open
18:05
on as something that we need to consider here is
18:08
that each progressive iteration on artificial intelligence requires an order
18:15
of magnitude of further further compute capability right.
18:20
Speaker 4: Now, which also requires orders of magnitude more energy.
18:23
Speaker 3: Right And so look, if I get it, if I'm
18:27
Taiwan Semi or Samsung, and the UAE comes to me
18:31
is like, hey, money's no object.
18:33
Speaker 4: Oh yeah, if you're Taiwan Semi, build it all day
18:36
because you don't care about the future.
18:38
Speaker 3: And you sit there and you're like fine, Like I'm
18:41
not the one who's actually selling the chips. All I'm
18:43
doing is making them to and selling them you know,
18:45
to and video or whoever.
18:47
Speaker 2: It is.
18:48
Speaker 3: Okay, you guys figure out the water problem, like build
18:50
a giant desalinization plant for billions of dollars or whatever
18:54
it's gonna be, and you know, power it. However, you're
18:57
gonna power it and whatever, fine, like great, do that.
19:02
I just I remain open to the idea that while
19:08
this could just be and I suspect this is just
19:11
another CAPEC cycle in the semiconductor space, I remain open
19:16
to the idea that maybe it is different, because what
19:19
we're talking about trying to build here is completely different
19:23
from anything we've ever built before.
19:26
Speaker 2: Let's take a quick break.
19:27
Speaker 3: When we return, We've got Wall Street Watch right after this.
19:42
Speaker 1: Like us on Facebook and follow us on Twitter at
19:45
TFE show. Breaking business news is always first right here
19:49
on the Financial Exchange Radio Network. Time now for Wall
19:54
Street Watch, a complete look and what's moving market so
19:58
far today right here on the Financial Exchange Radio Network.
20:02
Speaker 5: After notching a winning week where the down SMP five
20:05
hundred saw fresh record highs markets are beginning this week
20:09
in narrowly positive territory as several key economic data points
20:13
are on tap in the coming days, like the core
20:16
PC index on Friday, and several Fed officials.
20:20
Speaker 2: Are also slated to speak throughout the week. Right now,
20:23
the Dow is.
20:23
Speaker 5: Up by fifty one points, SMP five hundred is up
20:27
by a quarter of a percent, Nasdaq also up by
20:30
nearly a quarter of a percent as well of forty
20:32
two points. We're ELSEO two thousands up by a third
20:35
of a percent, Tenure treas reeled is up by five
20:38
basis points now at three point seven to eight percent,
20:41
and crude oil up nearly one percent higher training at
20:44
seventy one dollars in sixty two cents a barrel. The
20:48
big news from the weekends rounds Intel, as the guys
20:51
have been discussing after the Wall Street Journal report of
20:53
that Qualcom recently approached the struggling chip maker about a
20:57
potential takeover. Bloomberg News also reports to that asset management
21:01
company Apollo Global Management offered to make an equity like
21:04
investment in as much as five billion dollars in Intel.
21:08
Intel shares currently up by over three and a half
21:11
percent ahead of their earnings. On Wednesday, JP Morgan reiterated
21:15
an overweight rating of Micron Technology, where the analyst anticipates
21:19
results in Ford guidance in line with recently lowered consensus
21:23
estimates and bolstered by strong AI demand. Micron shares are
21:28
up by over three and a half percent as well. Meanwhile,
21:31
City Group double upgraded networking software maker Siena to buy
21:34
from sell noting an improving landscape in the broader telecommunications
21:39
and cable industry, where the bank sees bookings growth heading
21:43
into next years. That stock up by four percent and
21:46
General Motors down by three percent after Bernstein downgraded the
21:50
Chevy and Cadillac maker to market perform from outperformed, citing
21:54
headwinds from a continued build up in US inventories and
21:58
challenges and GM's international business. I'm Tucker Silva and that's
22:02
Wall Street Watch.
22:04
Speaker 2: Let's talk a little bit about gold here.
22:06
Speaker 3: We don't really cover it too too often on the show,
22:10
just because.
22:12
Speaker 2: I don't have a specific reason. We just don't.
22:17
Speaker 4: I only wear silver jewelry.
22:18
Speaker 5: It's kind of on the boring side in terms of radio.
22:21
But you know, they're at all time highs.
22:23
Speaker 2: It's here, it's here.
22:24
Speaker 4: So here's the reason we don't cover it is because
22:26
I think neither of us have a thesis as to
22:28
which direction it should go.
22:32
Speaker 2: It's probably fair, Yeah, it's probably fair.
22:35
Speaker 4: Others purport to and they talk about it, But.
22:37
Speaker 3: In any case, gold is at or near an all
22:40
time high as we are speaking right now, and it's
22:44
something where, hey, depending on where you think rates and
22:47
inflation are going to go in the next six to
22:50
twelve months. You got the potential for more all time
22:53
highs or some pain. And I'll be entirely honest, I
22:56
don't have any good idea about what gold is going
22:59
to do here because the US economy is kind of
23:02
a divergent place either and not really offering any great
23:04
clues as to exactly what it's going to do either.
23:07
Speaker 4: So let's offer some theories as to you know, what
23:10
could be driving gold to all time highs recently. Maybe
23:13
you have some ideas, and I mean it's been discussed
23:16
as an inflation hedge, as a catastrophe hedge, It's been
23:20
you know, looked at as a you know, currency hedge.
23:23
I don't do any of those compel you to tell
23:26
you why it's at all time highs today or or
23:30
you know what might drive it forward or backwards.
23:33
Speaker 3: Well, I think what tends to move gold, in my
23:35
opinion the most is the relationship between gold and interest rates,
23:42
specifically real interest rates. And effectively, what I think gold
23:46
tries to price in is situations where the market thinks
23:51
it's going to get one thing as far as real
23:53
interest rates. In this case, you know, the market expecting Okay,
23:59
we're going to see you know, real interest rates falling
24:02
and maybe you end up with real interest rates actually rising.
24:05
When I say real interest rates, I'm saying interest rates
24:07
after accounting for inflation. Sure, And if you think it's
24:11
purely an inflation heads, well then you didn't really live
24:14
through twenty twenty one and twenty twenty two, where gold
24:18
in you know, late twenty twenty crossed two thousand ounce
24:21
and didn't get meaningfully above two thousand ounces again until
24:26
twenty twenty four. And so look, despite the fact that
24:30
you had you know, two and a half years of
24:32
pretty intense inflation, gold effectively didn't budget all during that inflation.
24:38
In fact, during most of twenty twenty two it went
24:40
down in value, which is not what you would expect
24:42
from an inflation edge. The reason why that happened was
24:47
because the FED was ratcheting up interest rates relative to inflation,
24:51
and so real interest rates were rising during that time,
24:54
rising from significantly negative you know, real interest rates, but
24:58
rising nonetheless. So if you're in a situation right now
25:01
where gold is taking off effectively, it's because well, if
25:04
you look at interest rates, not just what the FED controls,
25:07
but longer term rates and things like that. They've been
25:10
falling for the better part of this year. At the
25:12
same time, inflation is kind of floating around two and
25:15
a half three. It's it's kind of bottoming in that area.
25:19
That has the effect of real interest rates falling, and
25:23
so that's one of the things that has propelled gold
25:26
to these new all time highs. In order for it
25:28
to continue, in my opinion, need to have real rates
25:31
continue to fall, and that means that you need the
25:33
US economy to worsen more than has expected this. You know,
25:37
at this point in time, is the US economy going
25:40
to worse and more than is expected?
25:43
Speaker 2: I don't know, you know, I don't know.
25:48
Speaker 3: I'm not gonna sit here and tell you like, yeah,
25:50
recession is definitely gonna be bad or no, we're going
25:52
to avoid it. Like we're at a point in time
25:54
where we really don't know right now right and we're
25:58
gonna know more in.
25:58
Speaker 2: The next couple months.
25:59
Speaker 3: But the other thing that I will point out is, look,
26:02
I think there's a fairly narrow window for a recession
26:05
to happen here. Once housing starts to get a hold
26:07
of these lower rates and starts to take off, it
26:09
becomes hard for a recession to happen similar to what
26:13
we saw in twenty twenty three.
26:15
Speaker 2: And so I kind of.
26:16
Speaker 3: Sit here and I go, look, you could get a
26:18
recession maybe in the next three to four months, but
26:20
if it doesn't materialize by then, it's kind of hard
26:23
for me to see that. If you know, the thirty
26:26
year fixed rate mortgage is still floating around six percent
26:28
instead of the eight percent it was at this time
26:30
last year.
26:30
Speaker 4: Yeah, you say, once housing takes a hold, I'm gonna say,
26:34
if housing takes a hold, I mean, I'd be surprised
26:38
if it didn't with rates down here at six percent.
26:40
But frankly, you know, rates moved down this whole spring,
26:45
you saw no housing activity.
26:47
Speaker 2: They moved up first.
26:48
Speaker 3: They moved up back to seven and a quarter, right
26:50
as the spring housing season was like kicking off, And
26:52
I think that just scared a bunch of people away
26:54
to begin with.
26:55
Speaker 4: Yeah, the compelling argument for housing taking off, to me,
26:58
would be a lot lot of people not actually knowing
27:02
where rates were the fed when they when they moved
27:05
rates last week, thirty your mortage rates didn't move at all.
27:07
They might have moved up a little.
27:08
Speaker 3: Bit, but people hear the FED cut rates, and maybe
27:10
they start looking and say, oh gee, these aren't as
27:12
high as I thought.
27:13
Speaker 4: That would be the compelling case to me is how
27:14
many people stepped out of the market over the last
27:17
several months and said, this is crazy. Prices are outrageous
27:21
and I'm not going to take an eight percent mortgage.
27:23
That's what I keep hearing about seven percent mortgage, whatever
27:27
the number is, And they just kind of ignored it
27:29
for the last six months, and then all of a sudden,
27:31
they hear just about everywhere that the FED cut interest rates,
27:35
and it causes them to go and look. And I
27:39
have no idea that any of this is happening. There's
27:41
no evidence, there's no way for me to look at that.
27:44
We might see it soon, right If you see a
27:45
bunch of applications for pre approval on mortgages, then you
27:48
know that's a pretty good tell. But I have I
27:52
genuinely have no idea six point one five percent mortgage
27:55
thirty your mortgage rates will be enough to bring those
27:58
people back into the buyer's market.
27:59
Speaker 3: The other thing I do think we need to be
28:01
aware of, and this is data from Bill McBride. He
28:03
runs a finance blog called calculated risk.
28:07
Speaker 2: If you go back to.
28:07
Speaker 3: Twenty twenty two, when rates first started to spike, only
28:11
about seven percent of outstanding mortgages then had rates of
28:14
north of six percent. Believe it, I don't know who
28:17
these people were that were carrying seven percent mortgages for
28:20
the last twenty years before that, who never refinanced, But
28:24
the seven percent of outstanding mortgages in the second quarter
28:28
of twenty twenty two were north of six percent, and
28:31
in total, about fifteen percent of outstanding mortgages were greater
28:35
than five percent. So it's about one in six, one
28:39
in seven somewhere in that ballpark today at the end
28:43
of and by the way, we only had data for
28:45
twenty twenty four through Q one so far, but by
28:48
the end of Q one, you're up to twenty five
28:51
percent of mortgages were rates of five percent or higher.
28:55
And based on the rate that that had been moving,
28:57
you're probably like twenty seven to twenty eight percent of
28:59
mortgage outstanding now are five percent or higher. So the
29:03
number of people, the number of mortgages outstanding that are
29:07
over five percent has doubled in the last couple of years.
29:10
And so for me, that also means that hey, that's
29:13
a much bigger pool of people that when rates are
29:16
in the low sixes, can say, yeah, I can move
29:20
because I'm going from five to seven, five to six
29:22
and a quarter, or hey, maybe I'm even going from
29:24
seven in a quarter down to six point one or
29:26
something like that.
29:27
Speaker 2: There's a much.
29:28
Speaker 3: Bigger pool of people that's available to move right now.
29:32
The twenty percent of people that have, you know, a
29:34
mortgage under three percent, they're not going anywhere unless they
29:38
have to.
29:39
Speaker 2: And look, sometimes you still have to.
29:40
Speaker 3: Your boss says, hey, you're moving to you know, Omaha,
29:43
you're moving to Topeka.
29:45
Speaker 2: You're moving.
29:45
Speaker 3: I don't know why, I'm just naming random Midwest cities
29:48
and not like, hey, you're moving to San Francisco where Miami,
29:50
where people.
29:51
Speaker 4: Actually go has to move.
29:54
Speaker 3: Hey, and where was it on friends? Chandler got asked
29:56
to move to Tulsa.
29:57
Speaker 2: I don't know. I think it was Tulsa.
29:59
Speaker 4: But ask week's trivia question, shock come on?
30:02
Speaker 3: Which one all of them? That should be the question
30:06
every day next year? It was it was Tulsa.
30:08
Speaker 2: I knew it. Job, thank you, You're welcome. I don't
30:11
know why I said both of those.
30:14
Speaker 3: In any case, there's a much bigger pool of people
30:16
now that have the ability to move with these rates,
30:19
and that pool is only expanding because remember rates are
30:21
still above six percent. So every marginal person that moves
30:25
from four percent up to six hey, now that person
30:28
is freed from mortgage lock.
30:29
Speaker 2: And can move in the future as well.
30:31
Speaker 4: Well, you have that group, plus you have the older
30:34
homeowners who get closer and closer to mortgages paid off.
30:37
Speaker 2: Correct.
30:38
Speaker 3: The one thing that's gonna be kind of funny funky
30:40
to watch in this Let's say that you are a
30:43
person who right now has a four percent mortgage and
30:46
you say, you know.
30:47
Speaker 2: What I'm gonna I'm gonna make the leap.
30:50
Speaker 3: I'm gonna go and move, even if it means I'm
30:52
taking out a six percent mortgage.
30:53
Speaker 4: Yeah, I got a family member in that position right now,
30:55
need the space, just had the third kid.
30:57
Speaker 3: A couple things first, even assume the same size mortgage,
31:01
you're gonna be paying more on interest most of the
31:04
time of this market. You're probably paying more than you
31:06
did before, So your mortgage is getting a little bit
31:08
bigger as well. So the fascinating thing about this cycle,
31:12
if we do see like a big jump in housing
31:15
activity next year, It could actually be counterintuitive, and then
31:19
it might slow other parts of the US economy more
31:22
because the debt service required for those new mortgages is
31:27
still a step up in the aggregate. And that's something
31:31
fascinating to watch in that what if by accident, the
31:35
FED gets its soft landing because of all these different
31:38
kind of stabilizers that are built in, Like, hey, there's
31:40
gonna be more housing activity, but there's gonna be less
31:43
spending on other stuff because people's mortgage payments went up.
31:47
Like wouldn't this This has the potential to be one
31:49
of the most fascinating. It already is, but the extension
31:52
of this business cycle, like what if the FED lucked
31:56
into a soft landing.
31:57
Speaker 4: Then you claim skill and walk away.
32:01
Speaker 3: Right you do a focus stands interest. I'm out, Yeah,
32:04
I'm out.
32:05
Speaker 4: Yeah, Nope, we thought about all that, actually, Chuck, let's
32:08
take a quick break.
32:09
Speaker 3: When we return, we'll talk about whether or not the
32:13
FED can save us from a bear market after this.
32:15
Speaker 2: That should be fun.
32:17
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32:45
Speaker 3: All right, Mike, there's a piece in the Wall Street
32:48
Journal today. It's titled sorry the FED can't save us
32:54
from a bear markets?
32:57
Speaker 2: And man, just what an awful piece it is. So
33:04
here's the.
33:05
Speaker 3: Thing that sucks the most about it, Okay, is the
33:12
case that it lays out. And here's what it will say.
33:16
I want to find the exact quote that I'm trying
33:19
to get at right now. It basically talks about, okay,
33:22
you've had all these bear markets, like there have been
33:25
twenty two bear markets in the past century. Okay, and
33:28
it says, hey, in two thousand and seven, even rate
33:30
cutting couldn't stop you know, the market from correcting into
33:34
bear market territory. Well, okay, that sounds bad. But when
33:39
you look at and I'm not saying that the FED
33:42
is going to be able to do this or not,
33:46
but if we look at just one example that's out there,
33:50
and again this is I think a pretty good one here.
33:53
If you were to take a look at nineteen ninety
33:56
eight when long term capital management went puff during the
34:00
Asian currency crisis, the FED embarked on a series of
34:05
rate cuts, including an emergency rate, like a fifty basis
34:08
point emergency rate cut to say, hey, like, we have
34:11
a problem here, and the S and P five hundred
34:13
did correct over ten percent. Yeah, and then just kept
34:17
on partying until two thousand. So is that the norm?
34:22
Speaker 2: Is that not?
34:23
Speaker 3: I don't know, But that's just one example. Can I
34:26
can I throw out another one?
34:27
Speaker 2: Yes?
34:28
Speaker 4: March of twenty twenty. Granted, the FED was not acting alone.
34:32
They had the help of Congress on this one. But
34:34
would anyone look at twenty twenty and say that the
34:36
Fed had no responsibility in rescuing markets. They basically backstopped
34:42
the entire bond market and allowed for liquidity to re enter.
34:46
Did it prevent the markets from going down? No, but
34:49
they certainly had a role in it recovering. And what
34:52
was it like record time from a thirty percent market
34:54
crash a month and a half or something along those lines.
34:56
So one, there's no way to prove otherwise, right, Like
35:01
the argument that's being made here is, hey, if the
35:04
economy is heading for a downturn, then nothing the Fed
35:06
can do to there's nothing the FED can do to
35:09
prevent it. But there are several instances where the FED
35:12
didn't go The Fed cut rates and we didn't go
35:14
into a market downturn. But I guess the author's point
35:17
is that it wasn't predestined for the market to go
35:20
through that downturn in the first place.
35:21
Speaker 3: It's completely circular garbage logic. And this is the problem here,
35:27
is like, Okay, yeah, if sure, if the great financial
35:32
crisis is coming, then yeah, nothing that the FED does
35:35
is going to be able to stop it. On the
35:39
other hand, if it's not, then what the FED is
35:42
doing might in fact stop it. And just because it
35:45
stops it doesn't mean that the FED can't stop like
35:47
what was coming. It's just what was coming wasn't bigger
35:50
if your head turns into a pretzel the way you
35:53
have to think about this stuff.
35:54
Speaker 4: So if, for instance, the author is able to point
35:57
to every single rate cutting cycle and history and point
36:01
out that it coincided with a bear market, then I'd
36:04
be willing to say, Okay, yeah, there's some evidence here
36:06
that the FED can't prevent a bear market. Instead, they
36:10
seem to be coming up with this weird, Like I
36:14
don't even know what to like a destiny argument. I'm
36:17
not really sure what the point is that is trying
36:20
to be made here. But if your conclusion from reading
36:24
the headline, like I'm sure many people were that, hey, sorry,
36:28
the FED can't save us from a bear market and
36:30
we are heading for one because the FED is cutting rates,
36:33
that is not the conclusion you should come to. That
36:35
is not the argument that this piece puts out, and
36:39
there's no evidence to support it. And then finally, by
36:43
the way, there were actually.
36:44
Speaker 3: Two of these in the nineteen nineties, early like nineteen
36:46
ninety there was another one where the FED started cutting
36:49
and we were in a recession. Then the SNL crisis
36:52
had been hitting, and yeah we did fall eighteen percent,
36:56
but it wasn't twenty so that like again the FIT
37:00
averted another bear market there, Like these words do have meanings,
37:04
Like you can't just say, well, you know, the market
37:07
still fell, okay, like it fell eighteen percent, that's not twenty.
37:11
Speaker 4: And then finally, do you know how every time you
37:14
invest in anything, they send you a big booklet and
37:17
one of the big things in bold is all about
37:20
how historical performance is not any indication of future results.
37:24
Sure believe it or not. That is that is actually
37:27
like an important piece here to the overall puzzle. And
37:33
again history is all we have to go off of.
37:35
But just because something did or didn't play out in
37:38
a previous bear market based on what the Federal Reserve
37:40
did or did not do, has nothing to do with
37:43
what today will look like.
37:45
Speaker 3: No, and if there is one business cycle that is
37:49
destined to break as many quote rules as possible when
37:54
it comes to markets in the economy, it's this one.
37:56
Speaker 2: It's already broken like most of them.
37:59
Speaker 4: Yeah, So don't let single pieces that don't make any
38:04
sense sway your overall investment thesis.
38:08
Speaker 3: Yes, yes, And with that we conclude no one has
38:14
any idea whether or not the Fed is going to
38:16
be able to save us from a bear market.
38:20
Speaker 2: Take a quick break here. We get our two coming
38:22
up in just a little bit.