Techstrong Gang Special Report – August 6, 2024

Hey everyone, it's Alan Shimmel, and you're watching a special episode of Textron Gang. In this special episode, I'm happy to have our chief content officer, Mike Baard, sitting here with me in our Textron Studio headquarters, and we're joined on the road from, uh, well, he's not yet in Las Vegas, but en route to Vegas shortly, our own, uh, editor extraordinaire, John Swartz. John, welcome.

Thanks. Good To see you, Dan, and joining us from another conference or another somewhere. He's always somewhere, uh, tech, uh, Futurum, CEO, founder analyst extraordinaire, Daniel Newman.

Hey, Daniel, thanks for jumping out to join us on this call. Great to be here. I wish it was under better circumstances, as they say at funerals, but, um, you know, we are seeing a bit of a meltdown in the market.

Of course, what we're seeing in the US markets today is kind of the tail of what we've seen, you know, wave across the world, starting in Japan, which I think Japan went down like 10 or 12%, or some crazy number Mm-Hmm. The, um, and that carried through all through Asia and through Europe and, and of course into our markets today, if you believe what they're saying, it's because of years of a downturn in the US economy. Let's start there.

It's funny, one day everything is all sunny, and the next day, um, it hits the Fed. Well, John, you've been around and you've seen these things before. Is this feel familiar Or is this one gonna be different?

This one came outta nowhere, really, but maybe it was, it was foreshadowed by the tech earnings. I don't know, I, I'll ask Daniel that question, but there seem to be three fears, right? We've got the worries about a recession in the us The Fed has failed that promptly enough, and a belief that all these AI big bets aren't paying off fast enough.

Um, it's, I think it's correctable. I'll, I'll leave that to Daniel. He's the expert.

But the one thing that does worry me is that the fear gauge, or the volatility index, or vix, whatever you wanna call it, is that it's highest level, sincerely, days of CID back in March, 2020. What do you think, Daniel? Yeah, look, uh, there's a lot to unpack here, and we only have so much time, so I'll, I'll do a, a sort of a quick, uh, recap for everyone out there.

And the beauty of being a tech show is we don't have to be extraordinarily in depth on the, on the, on the economic fundamentals here, but there's a lot of different things at play. First of all, 18 days peak to trough. So 18 days ago, market days ago, we were at all time highs.

Remember Jensen Wong was signing, signing t-shirts, we'll call it. Uh, the company was at valued over $3 trillion. And it literally looked like this tech run was going to just continue to go.

We were talking about four and $5 trillion valuations. But really what created this sell off is a little bit different. It's a carry trade that has been taking place, and I'm not sure how familiar everybody is, but in Japan, they've had ar artificially low yields for a long time, and that's been due to, um, slow growth in the economy.

Um, you know, different set of challenges in Japan with an aging population. And what was being done is these crafty traders right now that they couldn't, or, you know, now they're back doing it, but, you know, less mortgage default, uh, mortgage swaps. And they were on to, uh, a new, a new bet, which was borrowing at low interest from a place that had these artificially low rates, and then taking money to places with higher deals like Australia or even in the us cashing in that money, playing on the Forex, the spread trade, and then using money to buy tech stocks that were running up infinitely.

And so what ended up happening is tech started to pull back. Japan, uh, did a, a rate increase us is gonna do a rate decrease. And as all these things started to happen, they had to do this, this basically unwinding of a trade.

And this caused all of these sort of artificial asset, uh, this, this bubble that had been created in growth. All this money that poured into this up, up, up, up, up stock market in tech and in, in other, what you would call kind of higher risk assets, Bitcoin and Ethereum, I don't know if you saw last night, five minutes, Ethereum went down 20%. This isn't done.

This wasn't controlled spread. This was, you know, being done because traders got crafty. They, they worked in the system.

They were trading on currency, they were buying, uh, assets that seemed to only go up into the right and then all of a sudden, all at once, that had to be undone. Couple that with potential war in Iran and Israel, you couple that with, um, you know, uncertainty in the geopolitics in the United States. You got conflicts in China.

By the way, Nvidia had a bit of a collapse over the weekend with a potential delay on one of its most important parts Last week, Intel, uh, put out numbers that absolutely should have scared the crap outta anyone. And then the whole world's basically wondering, is this AI thing real, which I will continue to stand by the fact that it is what the ingestion, digestion, and implementation period is longer than most people wanna acknowledge. So John, I'm glad you asked.

It's been 30 minutes since I've started talking. I'll Sit back over to you. Well, the one thing you mentioned, uh, Daniel, you've written about it, is just this kind of long gestation period for AI from the chips to the, to the apps, actually.

And can I ask you a quick question and I'll, I'll leave then I'll pass it on. No such thing as a, a quick question with me, but yeah, you can try. Okay.

A quick answer, a quick question. So am I being presumptuous or Mike and I were talking about this earlier, but does the valuations as they tank, does this create a ripple effect where we might actually see a rise or increase in acquisitions and opportunity to take advantage of the situation by some, some companies that are in that position? Well, you have some companies that have very, very strong balance sheets.

Of course, these same companies are pouring mega CapEx dollars into investing in, in AI infrastructure and hardware. You've got a, you've got a, you know, a very, very restrictive sort of policy leader in terms of the, the trade commission right now with Lita Khan. So when you say, are there acquisitions being done, I don't know if big companies can do that.

That's I think why Microsoft did the inflection deal the way it did. That's why you're seeing a lot of these kind of, these investments and venture arms really going to work. I mean, you've seen small deals getting done.

So small deals do create the opportunity. So I, I'll keep the answer a little bit short here. I actually, um, first of all, if you actually look, the market bounced back pretty handsomely.

There was some better than expected data, uh, on some of the services. ISM data came in today. I think it was on manufacturing too.

Um, and it actually bounced back about half the losses came back. I think we're gonna get an emergency rate cut. I do.

I think that's gonna happen. We just saw with that vix, but by the way, the VIX came down halfway. So the VIX was all the way up at 65, uh, second highest it's ever been since the 2000 bubble meltdown.

And now it's back, I think about 32. So you could see there was this, this sort of snowball of fear. And by the way, that's what happens when information tra moves the way it does now in the social era is like, you know, I woke up, I don't know you, I texted Alan, I texted Alan, I'm like, Hey, it's, it's chaos Out five 30 this morning.

I texted Alan. And my point though is I'm texting him, he's texting me back. We all, but, and the point is, is we're all in our re-trade accounts and we're in Robin Hood and we're selling stuff.

We're like, we better get to cash quickly. And you know, by the way, if you just held, if you didn't sell during the panic, a lot of your, your, your investments like Microsoft was off 8%. Now it's off 2%, meaning you would've, it would've been just another day in the market.

You wouldn't have thought twice. So it's very odd, all these things that are happening. But you know what though?

So I've been through this a few times myself, my So Daniel, when I got your text this morning, my initial reaction at five 30 this morning was, let's let me log onto my account and get out of big tech and get outta big stocks in general, which I had wanted to do a week or 10 days ago when the Russell started running. And I, I did it, I said, you know what? Never sell.

Don't be a sheep, Alan, blah, blah, blah. Don't be a sheep. Sit it through.

You're not going anywhere, God willing today anyway, or tomorrow. See it through. And I'm glad I did do that, Daniel, and then it'll all be fine.

I think there's a couple things here. Look, I haven't heard of an emergency rate cut yet, but that would be, you know, heaven. Um, I really feel as it, as it applies to the US economy and the situation is, look, the Fed's always late to the party and they're like the last guest to leave.

They're always late. Mm-Hmm. They're laid in and laid out.

Um, had, had they announced something with rate cuts last week, I don't think we'd be in this position. Have we ever seen them do an emergency rate cut before? How common is that?

Well, It's not common, but they did do it in 2000, uh, during green spans. Uh, they did do it during covid. There were emergency meetings and emergency cuts done that did sort of buoy the market.

Like I said, the difference here is that the, the, there's some different fundamentals kind of conflicting economic data that are we growing or are we not? Um, you know, ex-government spending and ex-government hiring, we're definitely in a recession, but the government's real spending, that's real hiring and real spending. Those are real jobs and that's real, uh, you know, dollars going into the economy.

So that's not necessarily the case. Uh, we've seen, by the way, Jeremy Siegel, a very thoughtful professor from Wharton, uh, one of the leading economists and, and thinkers. Um, you know, he was on Squawk Box this morning, and I, I tracked that show.

It's usually my morning workout show. And, you know, he was talking about how they needed to be 150 basis points down from where they are today from an economic standpoint, that's about one point a half percent. And that was because the Fed had two basic target PO targets to, to change policy.

The first target was employment, and the second target was inflation. And the inflation's 90% of the way back to where they want it to be according to their data. I don't know that people really feel that in stores, which is, I think, been part of what Powell's been sort of sticking with, that the inflation maybe is still a little bit more sticky even than the numbers show.

But the other was the unemployment. 1% to show the trend line to have broken, to giving them a reason to make a rate cut. 3%.

Mm-Hmm. So one over one went past where it was supposed to go, the other was darn near where it was supposed to go to start cutting rates. And I think they were still kind of using that whole, we're gonna be data dependent thing.

And so now what we know, and I think Bill Ackman had a great quote, um, this morning, but basically we were late to, we were really late to start raising, and now we're gonna be late to start cutting. And to your point, I think, Alan, you said the same thing just now is, you know, the, the Fed could have done something, it could have stabilized, but I would ask like, does any of that stabilize war? Does it stabilize Ukraine?

Israel, Iran does stabilize issues in China, risks in Taiwan, has it stabilized, um, Nvidia, which holds a huge percentage of the overall SP value, missing a target key target date and dwelling precipitously or Intel not being able to get its business together and having an impact on the s and p. So there's a lot of external factors that are really companies and industry specific risks as well as macro risks. It's not just rates and employment right now, which is creating this, this just Petri dish of risk.

Um, having said that, you know, I didn't sell any, so I don't know about y'all, but I, I, you know, I I I'm gonna live and die by the sword. So let's talk about in, I'm sorry, John. I, Yeah, I was just gonna do the same thing.

I think let's, Let's talk about Intel though. Well, you know, I grew up in the Wintel monopoly world, and it, it's, I, I'll be honest, it pains me to see Intel fall on hard times like this. Daniel, I know you, you talked to Pat Inger pretty often.

You spoke to him recently. Yeah, Yeah. I mean, look, Pat's What's going on.

Yeah. And, and Johnna, I definitely wanna hear from you too, but Pat, um, you know, he was in as good a spirits as could be on, on the day of, of the results. I mean, you know, it, look, we've gotta, we gotta sort of bifurcate the what Pat inherited in terms of a situation versus what Pat has done, you know, kind of what I call controllable.

You know, they've had a few misses. Most of the misses that he's had during his tenure were things that were inherited prior to his arrival. So if you look at Sapphire Rapids, which is the biggest miss, um, that was, that was, you know, that was something that took place with, uh, BK and Bob Swan and during those eras, and they didn't, you know, they didn't get hit the fact they missed the GPU era as a whole.

That was also pre that predated Pat. So Pat came back and started working on Falcon Shores and has been working on their, their GPU. But it takes time.

I mean, everyone you know, that thinks that Jensen pulled this off overnight. I mean, Jensen spent two decades building this, uh, Lisa Sue has been working on this, uh, data center, GPU business for several years. And of course, they don't have to deal with the manufacturing by being, you know, fabulous design companies.

So different set of challenges for Pat. Um, but you know, he has had many quarters. The, the board has been supportive of him, you know, the people calling for his transition.

I mean, you know, rightfully so. I mean, if you bought this stock like two decades ago, you're in the same place. It's hard to imagine that in a world you would invest in a tech company two decades ago and your money could be worth the same or less hard to imagine that for employees.

Hard to imagine that for its investors. It's hard to imagine that for a board as of fiduciaries to be able to return. And now they've suspended the dividend.

They are, you know, in all kinds of challenging capital, you know, they, they, they, they indebted their assets. So they've done all these, these clever financing deals with private equity to raise money. Um, you know, they're, they're basically book value now.

And, and a lot of people were saying, yeah, I had Stacy Raskin on the ba on on on our, uh, six five pod and he said something along the lines of, um, they have a future, but I don't know what kind of future it's gonna be. I mean, look, they gotta get, they gotta get right on ai. They gotta get right on accelerators.

They gotta get right on AI PCs. They gotta put their head down and focus, um, and this boundary bet, I mean, they've gotta compel the people that there's a chance this can drive a return sooner than the end of the decade. I mean, gosh, what a hard place to put money when, you know, it's five to eight years before you might really see any return.

You know, it pains me to see what's happening to Intel. But you know, it happens, it's happened to other companies. To a lesser extent, it happened to IBM, it happens at hp, Cisco, we could even talk about that.

And the influence that Nvidia has had on these companies. I mean, pat, you're, you're right, Dan, he, he inherited a, like a three mile island situation and they were late on mobile, late on ai. Um, is there anything they can do to mitigate what's going on, especially when they have to compete with Nvidia and a MD?

Well, you know, they have a couple things working to their advantage. They have, um, you know, the historic strong channel. They have partners.

They've always had a very strong marketing, uh, partnership with the, the likes of Dell and hps. And they're very, very committed to their platforms. Of course, Qualcomm entering the race has added new complexities that now they have to, they have to cope with, you know, but having said that, like I said, I think it's focused, you know, look, ge, um, you know, isn't always a great example, but you know, companies like that, that had many different businesses that paired back and were able to focus even Microsoft.

I mean, if you look at Microsoft in the Nadella era, I mean that company coming out of Ballmer, I mean, Balmer did well for Ballmer. Yeah. But Ballmer didn't do particularly well for Microsoft.

And I mean, you know, Satya had to sort of reinvent the company had to refocus, the company had to zero in on, we're a cloud company. I think it's two things plus one. 'cause I think companies can really focus on three things.

Two things is they need to nail this a i PC movement, you know, they need to take advantage of the market share they have, grow it, these Meteor Lake yields and these low margins on Meteor Lake is a problem for them, but at least keep and protect that market near term. Second is they gotta get on this data center, AI play. They've got these accelerators in Gaudi, they've got Zar, Zon plus Gaudi could offer a low price alternative.

And right now with, with Nvidia fumbling a little bit, that's a moment for them to try to capitalize on that. And then the plus one for me is they've gone all in on Foundry. They've made a deal with the government.

They've taken $8 billion of money from the government. They gotta do this. Like, there is a chance that they, if they could show they can do this to get money from policy makers to really drive, um, more commitment to manufacturing here.

So they need to get a win from Qualcomm and a win from Nvidia. And they've announced some of these, but they need to start telling people what that means dollar wise. And when that means returns.

When are these fabs up? When are they gonna start bringing returns? Look, building fabs, isn't it?

It's not a fly by night business, Scott. So Should people be looking more towards Qualcomm and a MD and who knows the arm folks? Are they gonna become more of the leaders of this space?

Well, I mean, by, by leader, you have to define that. It can mean different things. But the by leader, um, you know, market share, I mean, Intel still has the largest market share in those two areas.

Uh, you know, Intel on the data center, but they've, they've significantly given up market share over the past, you know, three, four or five years since I think it peaked around 2018. I was doing the assessment. I mean, um, you know, the, the, the long story short here is they need to just buckle down and focus.

You know what I just said to you, Mike? Uh, they need to focus on those two or three things. They need to execute superbly.

They have no permission to make mistakes. The Nvidia can make a mistake and it could open a door, but they have permission to make one here and one there. When you've given 90% compounded returns for five years to your investors with very few slip ups, intel, it's been too many mistakes.

It's been too much change. There's been too many leadership role changes, too much, uh, uncertainty to its investors, too little return to its employees. They have to be almost perfect right now.

But the number one thing they can do, and you know this, Alan, and you and I have talked about it, and John, I'm sure you've worked, you've followed enough companies to see this is just focus on being the best intel it can be. It has 80%, 70% of some out of, of PC market. It has 60 some odd percent of data center, uh, CPU market.

It's got an endless growth opportunity with its AI accelerators, even if it can turn that into 2 billion, from half a billion dollars of revenue that meaningfully moves the the needle. So focus on yourself because you're not competing with Nvidia right now. You're Really not.

No. Yes. Nothing is ever impossible.

I always think back to 19 95, 19 96, I remember Apple under Gil Emilio, they were left for dead. They were supposedly gonna be bought by sun. I mean, it can't happen.

Although, I mean, in this case, I'm not so sure, but Microsoft invested to prop them up. Yeah, it did, it did. Just to have a competitor.

But look, let's hope for better days for Intel ahead. Certainly, we're about out time. Hey, you know what?

I think Daniel full circle to where we were coming in. Sometimes the best thing to do in these kinds of market market conditions is nothing at all. Right?

You just gotta wait it out. If you, you know, so someone much smarter than me once told me, you, you only have real losses when you sell and lock in your losses. If they're on paper, they, there's a chance they come back.

So I'm not giving advice. What the hell do I know? I'm still working.

But, um, that being said, you know, these, these things are cyclical and, and, uh, there's an old Italian saying, those eyes word me to cry forever. So let's hope we see better days soon. Gentlemen, Mike, last word, don't panic.

Okay, Daniel, enjoy your show. Thanks for Chop, you know, jumping out on this with us. John, I will see you in Las Vegas, God willing, as we I navigate around this.

Hurry. Good Luck. Good luck, the weather.

Yeah. Travels gents. See you soon.

Thanks guys. You're watching Techstrong tv.