Will Trump Really Bail Out Intel?

Cold open

Austin Bowen: [Clip from later in the episode] I want the side that I vote for to understand that if they promise their voting base they're going to do something, they better effing do it.

Welcome and introductions

Hunter Hoffler: Welcome, everybody, to the Rule One Podcast, the number one investing podcast in the world. This week we are talking about Intel as a possible bailout baby for the U.S. government. They've done it before when we've got a little stress in the economy, and it seems like we're seeing some cracks forming. Maybe they're the next AIG or Bear Stearns. Who knows? And after that, we're going to get around to talking about the homebuilders. Berkshire Hathaway just put a fairly significant investment into the homebuilders Lennar and D.R. Horton, and we'll talk about what they might be thinking there, because that's a really interesting industry right now, with interest rates where they're at.

Intel, the CHIPS Act and the government's stake

Hunter: So let's get started talking a little bit about Intel. This is a massive story that's been evolving over the last couple of years, where Intel's trying to bring some of the chip manufacturing and fabs back onshore to the U.S., since right now we're really reliant on foreign manufacturing for those components, which are becoming increasingly important in national defense as well as our general economy.

Hunter: To bring them onshore, one thing the Biden administration did was actually give a bunch of incentives to Intel and other companies to start manufacturing onshore, and Trump followed up with the U.S. government actually taking a position in Intel, which has done really well over the past year. And in the future, we might see a situation where the government has to come in with some more money to bail them out, since Intel is still running net-income and cash-flow negative. So with that, I'm going to kick it off to Travis to talk a little bit about the nature of the chip fab industry, where it's all being manufactured right now, and what it might mean to bring some of that onshore.

Travis Parker: I think, just to start off here, you brought up a really good point in the intro, which is that chips are basically the oil of the information age, right? In the information age, everything is processed using chips. You think about AI, you think about just about everything we do: it's fundamental. We've had this conversation in the office before. Chips have basically become a national security issue, right? I remember we used to talk about energy independence being really important, for our country not to be dependent on other countries for oil. I think the same thing is true for chips, and maybe even more important in the long term.

Travis: When we look at Intel in particular, this is a company I looked at at least three independent times, and it was incredibly tempting to me because I understand chips. But at the end of the day, I could never actually put my toe in the water, because it was very difficult to see where they were going to be in 10 years, right? In this industry in particular, Intel's traditional business was really about trying to come up with the next best CPU. You had AMD and a lot of other companies in there basically competing on speed and processing power. So Intel was forced into creative destruction, which is a kind of business we don't like to be in. So we've passed on this company a few times, but we've watched them really closely in this industry.

Travis: The CHIPS Act that you mentioned was being used to incentivize bringing chip manufacturing back to the U.S. It had been gutted. You're looking at China, Singapore, Europe, a whole bunch of other places; chip manufacturing had moved to other countries. And the Trump administration actually took a stake of just shy of $9 billion, which was about 10% of Intel. The argument at the time was that this is one of the few U.S.-based manufacturers that could produce really high-end chips. They've got maybe the most capable fabs in the world, or maybe second only to TSMC. So they can make the best chips in the world, and they're a U.S.-based company.

Travis: So just from a manufacturing-base perspective and a national security perspective, you can see what the incentive was, right? You want to make sure that that business and those jobs stay in the U.S. I think Intel was trading at about $21 when they purchased the stake. The stock, I think, peaked at like $140, and recently, on earnings, they've slid like 30 or 40%, mainly because the PC market is really weak.

Travis: So this topic came up as: hey, when the music ultimately stops on the chip cycle and the AI cycle, Intel is going to be in big trouble. They've got negative free cash flow and net income. They're still trying to get their foundry business up and running. So the question is, does the government come in and bail these guys out? With a 10% stake, it feels like they don't have any other choice but to come in and keep Intel on its feet.

Travis: So it's a really interesting point of view when you look at this from an investment standpoint, right? On one hand, we don't really want Intel as a company, because it's hard to predict where they're going to be in 10 years. But if you believe that the government has their back no matter what, and you buy them at the right time, is there a reason why you would own this company long term? So it's an interesting discussion.

Travis: I'd love to hear your thoughts on this, Phil, because you've seen these things play out over time. The one thing that's unique about this to me is that the government actually owns shares in the company, and they actually have warrants that let them add another 5% of Intel if Intel sells over 50% of its foundry business to somebody else. In other words, they have sort of an indirect way of having Intel do what they want it to do, which is keep chip manufacturing in the U.S., onshore, and keep controlling at least 50% of it. I thought that was a really interesting little twist in how this works. How does this feel to you from a historical perspective? Where do you see this going?

Bailouts in history: GM and the banks

Phil Town: It feels to me like we're back with GM, having been managed badly. Managed for the short term, managed for the management team that wanted their country club dues paid and the big office, and they were going to be locked into the GM operations for maybe five years. They want to retire really, really rich. So they're fully willing to make a deal with the labor unions, who are not out there to find a mutually beneficial answer. They're out there like a litigator in a court case: you're just going to go smash the other side and get everything you can. That's sort of the history of labor relations since the 1930s.

Phil: And the combination of the management team, completely selfish, and the labor union, completely selfish, just destroyed one of the greatest companies in the world, and the United States government came in and bailed them out. I think we lost like $10 billion in the process, or something like that. I don't think we ever got it back; you'd have to check on that. OK, so that was a big deal at that point in time.

Phil: I don't think the United States had stepped in on any major company in quite that way. You guys can check this for me, but I don't remember anything on that scale, where it was like, "We need to save this company because we have all these people who work here, and it doesn't matter that they've been a complete screw-up for 40 years." Thirty years after Japan arrived with really good cars, they still didn't see Japan coming. There have been some great books written on how completely incompetent and complacent this company was. And so we have to come in and save them for all of the workers.

Phil: All right. So then we go along to 2008, and then we've got to save the banks, right? I've never quite figured out why we had to save the bad banks, because it's not like money isn't fungible. It can move over to somebody else, and the depositors were pretty well secured by the FDIC. So it was more like a good-old-boy thing in Washington, D.C., in my opinion, where the secretary of the Treasury had come from Goldman Sachs for, like, the last 800 years. It's just this good-old-boy network: you scratch my back, I'll scratch yours, and I can't let you go down. "You screwed up, but hey, we'll cover you. We wouldn't want the banks that didn't screw up to come in and take all of your business."

Phil: So we're just going to get in there and make all kinds of regulations. And as a result, they have managed to semi-destroy banking, particularly regional and local banking. I could say they've pretty well destroyed local banking. We had something like 9,000 banks before 2007, 2008, and now we have about 4,000, because they stuck in all these regulations that only the big banks could afford. And they basically consolidated everybody. So, hey, the government came in, saved these guys, good for them. And none of the bankers paid the price, as far as I could tell. There's been some good books written about that as well.

Phil: And so here we are with chip manufacturing, and we have outsourced the highest, most complex chips to essentially one company in the world, and they happen to be right off the shore of China. And they happen to have a huge part of their population that feels like they're Chinese and they really are part of that country. It's like, who could dream this up, that this would happen? And yet here we are, through the mechanism of capitalism and the self-interest of American companies that see themselves as international rather than American, and they just ship it overseas. So, OK, there we go. We've got Taiwan Semiconductor sitting there with about 90% of the really critical chips for our defense, right? And we've got Intel trying to catch up.

Travis: So yeah, to that exact point, I'll have to go check this, but I'm quite certain Intel is the only company on American soil that can make leading-edge chips like Taiwan Semiconductor. So that, right there, is the argument for why you do this. And when it happened, that was actually the reason why I was generally in support of it. But it's very short-term thinking, right? We know we have to do it right now, but what are the consequences of this, and where does it lead us? This is a very slippery slope.

Politics: a protest vote

Phil: And the first consequence is Austin voted all blue, because we're going to have to make some changes here. I mean, come on. Nobody figured out that we needed to get Taiwan Semiconductor manufacturing in the United States? Nobody figured that out? We're their biggest market. We can't force them to get their stuff over to the United States and manufactured here, because why? We don't have enough kids coming out of junior college?

Phil: What's going on is that America is being run by clowns in the CEO office and by clowns at the head of the government. And I think Austin's right. We should vote for the biggest clowns of all, absolutely, and have them take the whole thing down into a big rubble pile that it deserves to be in. And then maybe we can have some actual intelligent people who are pro-America coming in here. Or we can just all start learning Chinese. I don't know. I'm not bitter.

Travis: No. Clearly, you're not bitter at all. Yeah, I think this is an interesting point, because yeah, I think…

Phil: Voting blue, or what?

Hunter: Well, no, I think that's something we're going to have to take offline, because that's a more serious issue. We maybe could have a whole pod on that, actually. That'd be pretty interesting.

Austin: I'm not supporting blue. I'm protesting red. All right, let me be clear. It's a reasonable protest.

Hunter: Dude, you're… man, not voting was not an option for you.

Austin: Yeah. And it's like, I want the side that I vote for to understand that if they promise their voting base they're going to do something, they better effing do it. And particularly in this thing, I want them to understand that when they have the momentum going their way, they shouldn't completely sabotage all the momentum with these dumb, fringe, super-far-right ideas that just seem to happen all the time.

Austin: I think back to all the Republican momentum leading into the Roe v. Wade debacle, and it just completely sabotaged the midterms. They had all the momentum, and then they're like, "Because we've got this momentum, let's do this one thing that polls show 90% of Americans don't support on some level." If you ask people, should there be zero abortion in the States, 90% of people in polls like Pew Research say that should not be…

Phil: That was only four years ago.

Austin: I know, completely. They can't learn their lesson, and it's even bigger now. I mean, Trump literally ran on, "I'm not going to start wars in the Middle East. We're going to deport illegals," which I think they have done. "We're going to protect the blue-collar worker of America. We're going to bring back all this manufacturing." And the only thing that has happened in the past year is another almost-forever war breaking out in the Middle East that we're semi-involved in, and we don't have any of the appetite, I would say, to see it through.

Austin: I'm not saying that there's not a good reason. The justification they're giving is, "We don't want Iran to get a nuke." And it's like, well, if Iran was legitimately going to get a nuke and it's that big of an issue, then we should be boots on the ground stopping them from getting a nuke. And if there wasn't that level of conviction, then we shouldn't do it. That's my opinion. Either it's such an emergency that you can convince the American military and the American public that you have to do it, or… parking a carrier fleet off the coast and dropping a bunch of bombs on an ideologically driven regime does nothing.

Phil: OK, so we're in agreement here: go big or go home. And Trump wasn't going to go big. He was going to stay home. And what happened? What happened was the unintended consequence of oil prices going through the roof, which caused massive inflation. And now you've got all of these people really struggling to try to eat a meal, at a grocery store where a bag of groceries costs $200, you know? It's just like, come on, man. And so much of all these prices going up is oil-driven. So yeah, I agree with you. I think vote them out. Vote the bastards out, man. We'll get some other bastards in here.

Austin: Teach them a lesson, at the least. Maybe they'll learn. Maybe. I'm hopeful.

State-controlled capitalism, or fascism?

Hunter: Not to drag you guys back into the Intel side of this, but did your vote get influenced at all by the level of, you could argue, state-controlled capitalism that has happened?

Phil: No, this is fascism. It's fascism.

Travis: Is it fascism? By definition, fascism would be a non-democratic leader doing state-controlled capitalism, right? In our case, we still have a democratically elected leader.

Phil: Singapore is a full-on fascist country. They democratically elected…

Austin: Yeah, theoretically. Theoretically, China is… China was a little bit, you know, voting, not all the way from the people, but…

Phil: Deng kind of got elected, too.

Austin: Yeah. And he was…

Phil: They're running it top-down. So yeah, fascism is basically where you have the government involving itself more and more with a capitalistic base.

Austin: I think, elected or not, it's the ability to authoritatively make moves. I think that would be a good definition: you can elect a leader, but that leader isn't beholden to a Congress and a set of checks and balances.

Phil: Yeah. But that applies to socialism, communism, fascism and dictatorship.

Austin: Just from the… yeah. But then the other side of it is they allow private ownership of business…

Phil: Yeah. To flourish in capitalism.

Travis: I think that's the slippery slope we're on, guys, because when I was looking into this Intel thing, not only do they have the warrants that give them more control of the company if Intel chooses to sell over 51% of its foundry business, but they also have a U.S. Steel investment where, and we need to check the facts on this, they have veto power over major business decisions at U.S. Steel based on their stake. MP Materials: they have a guaranteed price floor, I think, where the government sets the minimum price. I think there's some other materials companies, like Westinghouse and Trilogy, where they all have some contingencies, some government control over the decisions that are made.

Travis: They're subtle, but to me it looks like a really slippery slope, right? It's not just that they're buying a stake in these companies, which you can argue is a really good thing for the United States, for our national security, and to make sure that we remain competitive. And don't…

Phil: You'd argue that it's critical.

Travis: Yeah, it's critical. Absolutely critical, which is a very short-term thing, and I actually agree with it on a very short-term basis. But when you step back and start asking yourself longer term, where does this lead us? This is where I start wondering, have we gone just a little too far? Because it'll slowly increment into the next thing and the next thing, until we find ourselves in a fascist…

Austin: Where does the line of "critical" get drawn? Is a critical company one that employs over 10,000 employees, suddenly?

Travis: Exactly.

Hunter: Yeah. It's such a concentrated market, and the problem with capitalism is that the onus is on the owner to apparently do what's best for national security interests, or for the owners of a business to do what's best. No, they're going to do what's best for their shareholders, and oftentimes that might mean selling a portion of the business to a foreign interest, right? And in that case, you've lost control of this really critical manufacturing for your country.

Hunter: In this case, I don't think we've even talked about the fact that a lot of the rationale behind buying into Intel and onshoring all of the chip manufacturing here was purely national-defense related. We have all these high-tech weapons now that need the next generation of really high-quality silicon, and we're basically relying on a Chinese proxy to get that, with this being one of our biggest geopolitical enemies right now. That's just a major issue.

Hunter: So this is a little bit difficult for me, because of course I believe in capitalism and in free markets, but then you have this rub, where you have such concentrated industries, or industries where the technology is so difficult to replicate, that you have to have some sort of national security interest in them. You have to have some sort of government intervention to make sure that we have access to these things. So I think it's worth talking about. Even Austin, you might be somebody that has some insight into the national security risks that are present if we're getting our chips and our computing from a different country.

National security and the offshoring of know-how

Austin: The big risk is that we get shut off from it. Bigger than anything. It's been a long time since I've seen an OPLAN, and most of that stuff is secret, so I can't talk about details on what would happen. When I was stationed in Japan, I got to see some of "here's what would happen if North Korea invaded." An operation plan is basically the plan you have for "if this scenario happens, how are we going to react to it?" So for every major scenario you can think of: China invading Taiwan, North Korea invading South Korea, Canada invading America. Obviously, that one isn't talked about very much.

Austin: Yeah, no, that one's low probability, low risk of happening. But there's all these plans, and you do exercises and everything around what we would do in a scenario where this happened. It's been a long time, but that is the biggest risk. So much of our economy is completely linked to China that if you were to just say, "OK, we're shutting off seaborne access and trade with China," we'd literally destroy our own economy in the process. It's mutually assured destruction. China can't sell their product to anybody, and suddenly we have shortages all over of product that people need, because we get so much stuff from China.

Travis: If I could add something really quick, I want to point out that part of the reason why we're in the position we're in now, in my view, is not that the people who made these decisions were bad guys, right? They were following their metrics. They needed to build these chips as fast and as cheap as possible, and if they didn't do it, the competitor was going to do it. So you ended up getting pushed offshore, right? Building it in places where you could build it tax-free or nearly tax-free, with lower wages and high-skilled labor, and moving your manufacturing there. And that goes to Hunter's point about how capitalism is very efficient, almost too efficient. What people weren't thinking about is the long-term implications of that.

Austin: Yeah. To that point, if you go back to the early '90s when this move happened, chips were a lot easier to build. There wasn't such a high bar of technical engineering needed to build them. So we basically farmed off 20 years of incremental know-how, of how to manufacture and engineer these increasingly complex chips, to Taiwan. You say it's easy to just train people in the U.S., but it is actually incredibly, incredibly difficult to go from not doing it to leap-stepping 20 years into the future and trying to do it. There's a lot of intellectual know-how over three decades of going from the chips back then to the chips today.

Phil: Think about our work with moats. It's so critical. Just think about that moat that gets developed over 20 years: those intellectual secrets that can't be easily transmitted to a junior college student. You have a workforce that knows how to do this stuff well, and it's an incredible moat, and so difficult that they haven't figured out how to get around it yet.

Travis: To that point, that's a really, really good point, Phil. It's part art, part science, right? Building chips is very technical, but there's also a bit of an art to it, because these things are sensitive to humidity, vibrations in the earth, temperature, and the specific design of the chip, and all these things. A lot of it's in a lot of people's heads, and they've dialed it in. It would even be hard for them to explain to you why they dialed a machine in to the level that they did, because it becomes an art form. So that's a really good point, and Austin made a really good point, too. There's all these years of tribal knowledge, or however you want to describe it, that has been passed off, and now we're trying to catch up. It is not easy.

Phil: I mean, are we basically saying that the system that we're in is really problematic in a global economy, where you have the option to have the labor force be outside your country? You do that at the initial stages of development; you move it out there because it's cheaper and you're dominated by price considerations. And that labor force then becomes its own moat, this giant moat of secrets and skill that you just can't replicate, and you've basically locked it in. There's no way you can get around it.

Phil: I'm thinking about when Tim Cook, at least as I understood it, talked Steve Jobs into putting Apple manufacturing in China. I just try to think what would have happened if they didn't do that. At those very early stages of manufacturing, presumably Americans could have learned this stuff in a way that we can't now. We just don't have the skill set. So for a small piece of profit, we gave away the farm.

Phil: And this is something Buffett's gone over again and again, talking about these two villages, one of which doesn't want to work hard. They don't want to deal with intellectual property, so they hire the other village to do it, and eventually the other village owns all of the first village. All of the wealth of the first village ends up in the second village. And it feels like that's what's happening, in large part, and I don't know how you stop it. How do you stop something like that?

Austin: Yeah, there's another big anchor on this, and that is that even as we're trying to onshore chips here, our best and brightest aren't going to college to do this. I don't want to say there's not some of them, but if you look at probably all of the smartest people who go to college, working in a fab is not, in America, the ideal, top peak job. Going to work as an engineer at SpaceX, going to work for Claude, or Anthropic, in these AI labs: that would be where the most talented people, I would think, are putting their resources and effort, going through college and learning.

Austin: Versus in Taiwan, it's the opposite. Going to work for TSMC in Taiwan is the premier peak job. If you get that job in Taiwan, that is like working for the Apple of the early 2000s under Steve Jobs, or something like that. So they're farming people that want to go into that world, versus we're trying to bring over, potentially, and I don't want to hurt anybody's feelings, but potentially our A-minus and B students, because all the A and A-plus, cream-of-the-crop students are going into areas where you don't have to put on the clean suit. And Travis, I know you've worn the clean suit, and you've talked about all the negative things that come with it. It's a job. It's not a desirable, fulfilling path to potentially millions, like working at an AI startup, potentially.

Travis: I'll have you know, I was a solid B student.

Austin: Yeah, I'm like a C student, so I hope I'm not offending anybody. I'm not even making it to one of these jobs. [laughter]

Travis: Yeah, I was a solid B student.

Phil: Yeah. Not saying a word.

Austin: Yeah. Travis got into college. I joined the military. [laughter]

Travis: Yeah. I can tell you for sure, and this is an interesting story you guys will find fascinating: there are people we would hire into the fab, and they would work in the fab for a week and quit, not because the work was hard, but because the environment was so strange. These were great jobs, and people wanted these jobs really badly, but they would have to come into weird lighting, wear a bunny suit, be in this building inside of a building. They couldn't do it. They would quit after literally a week and go, "I can't do this anymore," probably passing on one of the best jobs they could get in the whole town, the whole city.

Travis: So if you're used to that, if you're used to technology and you grow up in Taiwan, that's normal. It's not unusual. They're looking forward to it. Their parents probably worked there, or they know people who have worked there, and it's very prestigious. It doesn't have the same level of prestige in the U.S. as it does in other countries. So I think there's a cultural thing we have to bring back.

Can Intel catch up, and where's the bottom?

Phil: Well, are we saying that basically Intel is just money down the drain, you know?

Travis: I don't think so.

Phil: They're not going to be able to develop…

Travis: I think they can do it. I actually think they can do it. I would argue Intel is on par technically with Taiwan Semiconductor. All they need is an opportunity to fully utilize their factories, and they will figure it out. I am quite certain of that.

Phil: Well, man, they're back to 53 bucks a share, down from about 140. So there's a lot of that going on this week. Just look at the full chip space. It is blood in the water.

Austin: Yeah. With your YouTube video back in July, Phil, you almost timed the perfect tippy-top, which doesn't happen a lot. We weren't necessarily timing it, but I look at the peaks, and all the peaks of these companies were between June 18th and June 30th, and your video went out the third week of July. And here we are, November 5th: Western Digital down 66% as of today, SanDisk 64, ARM 63, Intel 62, Seagate 58.

Austin: Just look at the stock price going down on all these companies. You've got to imagine what's going on in the boardrooms and the CFO's office of all these chip makers, and also all the companies that are buying chips from them. Travis, you've lived this: specifically, when the cycle turns over, what happens to the orders? Do you want to describe that really quick from your perspective?

Travis: Yeah. I can tell you right now that the orders are going to disappear, right? I don't really know, but if I had to speculate, I would say 40 to 50% of the orders that are in the system right now are completely phantom orders, meaning the orders are there because there's a perceived shortage, and they know that parts are being allocated to them, and the only way they're going to get their allocation is to show that they need as much as the next guy, right? And so the gamesmanship begins, and it's very hard to manage that gamesmanship. Unless you've lived through it, it's really hard to wrap your head around.

Travis: But the moment they smell that the tide is turning, those orders will disappear. And as a manufacturer, where you thought you had maybe a soft landing, the landing is going to be very bumpy, because that demand just shrank, and now you're sitting on a bunch of parts you've started. The stuff that you started might take three to six months to finish, and you're probably going to force them to take it. Everything else is going to sit in inventory. Your utilization of your tools is going to drop, your unit cost is going to go up, and you're going to start laying people off. You're going to start renegotiating with your suppliers and with your partners to try to smooth things out. And the cycle is going to last about a year. Once the inventory burns off, things will start to heat back up, and it'll all start over again.

Phil: Short vision, man. They're going to bail when that starts happening, man.

Austin: Yeah, they're ahead of it. To that point, it's been said that Wall Street gets ahead of this. Even though all the earnings that have been coming through this quarter… Specifically, I think this whole fall started right off of Intel's earnings, or one of the others, and it was good. SK Hynix had like a 680% increase year over year in net income. So it's not that earnings are bad, but Wall Street is forward-looking. They're seeing all these guidance cuts start happening, and, just like Travis, they've got really smart analysts in there who have seen this cycle turn over before. They know what next quarter's guidance cut means: a Q4 guidance cut means Q1 of next year is even worse, and Q2 is even worse. So they're just getting ahead of it, and that's where you get a 50% drop in all these in literally a month. Intel is down 50% since the beginning of October.

Phil: So where's the bottom? If we're looking for the bottom here and trying not to catch a falling knife, we'd like to catch it after it hits. Where do you think that's going to be, Trav?

Travis: Well, we had this conversation a couple podcasts ago, but the thing that makes this complicated is the AI infrastructure buildout, right? It's still going to drive a lot of demand, and that cycle could last longer. But if we take it independent of AI, just put that aside for a moment, typically what you'd be looking for is the spot prices of memory and CPUs to start to increase again. It'll hit a bottom, and then you'll start seeing inventory drop. When inventory normalizes back to a normal level of supply and you start to see prices tick back up, that's usually when you're near a bottom.

Travis: So those would be the first signs we'd be looking at, and that's going to take some time. I would assume we'll be talking about that nine months to a year from now on the podcast. We'll be looking at the numbers and saying, "Hey, it looks like inventory has finally bled off, and we're starting to see the spot prices in the market tick back up," and we'll be on the hunt.

Travis: Spot for some stuff.

Hunter: Have spot prices for memory even rolled over yet?

Travis: I think, as of last I checked, they're sky-high. We're way out in front of this. Just like Austin said, they've been sniffing this out real early. Intel came out and said that they were seeing a 10% decline in PC sales, I think, is what they were forecasting, and that's going to drive CPU and memory. They're way in front of it, but I think it's probably going to happen in 2027.

Travis: And with AI, who knows how long that cycle can go? The infrastructure buildout could go another year, it could go another two years, and it could change the way the cycle looks. But man, I don't think we need to worry about that. We know what the value of these businesses is. So once the shock is over, I think we just go in and do our cyclical valuation and see where this stands. And the one thing I'm confident in is that chips, long term, are going to continue to grow. We will need more and more of them, especially with AI. It's the oil of the information age, guys. It's not going anywhere.

Phil: So, Intel: are we going to trade Intel?

Travis: To me, Intel would at best still be a risky business play, because even though a big part of their business is moving to that foundry business, competing with Taiwan Semiconductor, a big chunk of their business still depends on them coming up with the next best chip. I want to stick to the picks and shovels. I want to stick to the companies that are supplying these chip makers and don't have to come up with the next best chip. Yep: AMAT, Lam, ASML, KLA.

Should the government bail out Intel?

Hunter: Before we get off this topic, I don't want to miss the opportunity to get a round-table reaction. How do we feel about the proposition of bailing out Intel in the event of a total meltdown?

Phil: You've got your feelings, and then you've got reality.

Austin: Yeah, I think we have to. There's no alternatives out there. I think we have to.

Austin: Yeah. Unfortunately, if there were two or three others, I'd be saying no. Just like there's other car manufacturers; we didn't need to bail out GM to keep car production going. But in this case, there's one company in the U.S. that makes something mission-critical. I think we have to.

Travis: I tend to agree, I'll be real honest. From the outside looking in, I'd say don't do it. But I also know that if I was in the administration's seat, put in that position, that's a different place. It's real easy to sit back and say, "Oh no, you've got to let capitalism be pure." But I also know that if I was put in that position, I probably would make the decision to bail them out, because I do think it's legitimately a national security issue, and it would be a tragedy to let them crater.

Hunter: When we were prepping for this, I did a little bit of research into the TARP funds and the previous bailout in 2008, and the government's actually been fairly good about recovering its dollars, recovering its investments from these bailouts. I think the TARP funds totaled about $450 billion paid out, and all but about $30 billion of that was fully recovered. And that $30 billion was a housing-focused program, where they were literally just providing funds to help people refinance the loans on their homes, and they're expecting to get that paid back.

Hunter: So, what we started the conversation out with is the free-market capitalist side versus the practical national defense and national security side of things. Even from a taxpayer's perspective, the Fed's actually been pretty good about recovering these funds. That makes me feel a little bit better, especially with something like, to Austin's point, something that's actually completely mission-critical to your economy, not just another car manufacturer that probably didn't need a bailout. So that's where I stand.

Phil: Yeah. So we feel that way, even though one of the critical things that happens, an unintended consequence of supporting that particular company, the way we supported the particular banks and the particular car company, is that you are immediately disadvantaging a competitor, right? Somehow Tesla managed to become a successful car company despite the government focus on its competitors, right? And you just kind of wonder, OK, is this the one company in the country that we're going to support, or are we wiping out the rest of them with this support for this one company?

Phil: I don't actually know the answer to that, but it's always the unintended consequence of coming in there and helping the companies that have been struggling: you have this massive wipeout of competition. So in general, I'm against it. But I've got to say, in this particular case, I don't understand what we've been doing for the last 20 years to not solve this problem. It's so obvious. So maybe this is the answer. I guess I don't know.

Hunter: Yeah. I think bailouts in general can't just be a blank check. That's what we saw, especially with the bailout of the major banks in the financial crisis: those funds didn't really go where they needed to go to fix the problem. They usually ended up in the pockets of executives and shareholders at the end of the day. So in this case, any sort of bailout in this sector needs to be directed: "Hey, this is money that needs to be appropriated toward keeping your fab segment of your business online." That's my feeling there.

Travis: It's a slippery slope, isn't it, guys? There's no clean answer.

Austin: Not at all.

Hunter: Well, Austin has elected the great minds that'll figure it out. [sighs]

Hunter: At least he can rest assured knowing that… [laughter]

Austin: Listen, with or without me, it was going the way it went.

Phil: Moving down that road to Paris, boys.

Austin: It's kind of funny. It's so interesting that the market is selling so hard off of this, because you can look at all the prediction markets, all the betting markets, everything, with hundreds of millions, billions of dollars: this was a completely known outcome. It was going to take a miracle for this not to happen. So in my protest vote, I was looking at that. If I'd thought this was going to be some close thing, I probably would have paid a little more attention. But I was just like, ah, my vote in this case… it's so heavily skewed one way that, with or without me, this is going the way it's going. So yeah, that was my view this time. Like I said, I'm not supporting blue. I'm protesting red. It's different.

Hunter: You heard it here first. Austin does not back blue.

Travis: All right. [laughter] Man, you've got a career in politics. That was a good twist.

Austin: I know.

Hunter: Nicely done. [laughter]

Austin: Yep. Learning from our best.

Phil: I also know that the American flag somehow disappeared. Wasn't there one behind your desk? I don't know what happened back there.

Austin: No, you stop that. It's right there. [laughter] Don't you even start that.

Berkshire buys the homebuilders

Hunter: All right, guys. Well, hey, let's move on to chat a little bit about Berkshire Hathaway, which has purchased a position in both Lennar and D.R. Horton, homebuilders, in an economy and a real estate market that's a little bit puzzling right now. So it's worth chatting about. We've got really high interest rates, and we have inventory of new homes kind of piling up right now. So it looks like possibly one of these instances where Berkshire has been trading in and out of the homebuilders. They see that they're really just beaten down right now based on interest rate news.

Hunter: This is one of those situations where there's probably a little bit of a disconnect in the market, where a lot of these real estate companies, or real-estate-adjacent companies, are trading off of interest rates. As soon as there's any news that rates are going up or that inflation's increasing significantly, you have this negative effect on anything that's real estate related. In this case, it's because people are way less likely to want to take out a half-a-million-dollar loan at 7% as opposed to 5%. So it's a little bit puzzling timing here for Berkshire. What do you guys think? What's going on? What do you think the minds there at Berkshire Hathaway are thinking with the timing of these investments?

Travis: Specifically, if I was reading this right, Hunter, it looks like where they piled in was Lennar, right? They added to their Lennar position. Is that what you're seeing as well?

Hunter: And D.R. Horton. But yeah, it's a small position in D.R. Horton. I think it's a much larger position in Lennar.

Travis: Yeah. So this is what I found interesting: when I was looking at price-to-book on these, D.R. Horton is at like 1.7, but Lennar is at one, or just under one, price-to-book. And I listened to an interview where I think it was Abel who said, on CNBC, that he didn't envision a quick recovery for these companies. He said it was going to be kind of a bumpy road for these guys.

Travis: So my thought was, well, if they're piling into Lennar, he's looking at that price-to-book of one and saying, "Hey, I'm buying the farm when times are really bad. I know things are going to improve. I don't know when, but at that price I'm willing to sit on it for five years, or however long it takes." So my initial reaction was, this is classic Berkshire Hathaway: I can be patient for a really long period of time, deploy some cash in something that's at book value, ride it out and not have to time it. That was my takeaway.

Golden handcuffs and the housing market

Austin: Yeah. So, just stepping back and looking, it's almost like stagflation, but in housing, compared with what you would expect to normally happen. Just taking a step back: if you had two completely identical houses, and somebody bought one in 2021, or refinanced, at a 3% rate, and somebody else bought the other in 2024 or later at, let's say, a 7% interest rate, those two people are in massively different spots with any change in rates. If rates go up, it doesn't impact either one of them, because they're both staying put. But if rates drop, let's say from seven to five, that has a huge impact on the one that bought later, and it still has no impact at all on the person who bought in 2021.

Austin: So what happened was we had over a doubling of rates. They went from like 3.1% in 2021 to 7% by August of '26. And you would expect that as those rates go up, you'd see home prices drop across the board. I think the estimate would be around a 5 or 6% drop in home values across the U.S. What has actually happened across the U.S. is that home prices have gone up. And that's because 50% of homeowners today have a mortgage under 4%, and 25% of them have a mortgage under 3%. And that creates golden handcuffs for 50% of the people that own a home today.

Austin: Just to explain golden handcuffs, if you don't know: it's used in businesses when an employee has a super-great vesting stock program. They want to leave their company, but this package is so good that they stay. They're handcuffed to the gold, essentially; that's how it's used. Same thing: you've got a 3% mortgage, and that's gold. If you sell your house and move somewhere else and you have to go to seven, you're losing that benefit. So you're handcuffed to your house.

Austin: So what ultimately happened was, instead of rates increasing and dropping home prices, it froze what they're estimating to be about two and a half million homeowners, from the end of 2022 to about now, who would have sold and put their used home on the market but didn't. That created an environment where the only homes going on the market were from these homebuilders, new homes, essentially. And that still exists today.

Austin: So, looking at what's happening: if rates keep going up, we're going to continue to lock in the people who don't want a higher rate, which means the homebuilders are the only ones there to take advantage of any home selling that's going on. And Phil, you've lived through 15% mortgages in your life, and I think you can attest that people were still buying homes when mortgage rates were 15%. So the homebuilders are going to benefit from that. Even if it keeps slowing down, that increase in rates is just going to continue to lock out more and more people who would be selling, and leave the homebuilders as the only ones there.

Austin: And right now, homebuilders are offering all types of incentives that further advantage them over somebody selling their existing home. I've got my rental house in Florida from when I was in the Air Force, and if I try to sell it right now, I'm going up against D.R. Horton and Lennar, and they're basically offering interest rate buydowns, free upgrades, all these different incentives that make it much more attractive to buy that new home over my home.

Austin: I think in the U.S. right now it's something like four months of inventory for used homes, which is a very seller-friendly inventory level. I think under six months is a seller's market. You look at new homes, and I think it's at 10 months of inventory, massively favoring a buyer's market. And I just haven't found any real points where we've had such a split like this in the past 40 years that I have interest rate data for.

Austin: Now, on the other side of this, if rates go down, that benefits the homebuilders, because all of a sudden… it's not in any way impacting the 50% of Americans that have a 4% rate or under, but suddenly D.R. Horton doesn't have to offer as big of an incentive, and they start making more profit and things like that. So we're just in a really weird time. If rates go up, I think the homebuilders keep building and keep selling what they can. They have the disadvantage of having to turn inventory. So, absent a spike like 2008, they're probably going to do as well as, or slightly worse than, they're doing right now. But if rates fall from seven to, call it, 5%, that massively benefits all the homebuilders, and it doesn't start to free up the existing homeowner until we start getting closer to that 4% rate.

Austin: And so yeah, Buffett's looking long term, right? So absent a 2008 happening, I think these companies will come out ahead. And if a 2008 happens, I would expect Buffett, or Berkshire, sorry, Abel, would probably just be more of a buyer. They might buy one of these companies entirely, just like they bought Clayton Homes.

Lennar at book value

Phil: And there's the problem they've got, with whatever it is now, $400 billion sitting there. If you've got a company you can buy that you can project out into the future is going to do OK, and they're getting a return on invested capital of four, five, 6%, then you've got a lot of upside and you don't have a lot of downside, particularly at these price points.

Phil: And if you look at Lennar's earnings per share, they were running a pretty steady growth of earnings per share up until about 2019, when COVID hit, and then the thing just exploded with this sort of unnatural everything, right? A ton of cash flowing into the economy, to the tune of 14 or 15 trillion dollars being helicoptered in, and interest rates at zero, and people's homes becoming their castle, and people moving to find the right place where they could get away from the problems of living in an apartment. So you have all of this unnatural stuff happening for a period of years, and here we are, basically back at about 2019 earnings.

Phil: And if you thought about it and said, well, that's going to be the baseline, that's kind of where they used to be… People will get used to a 6% interest rate, 7%. There's nothing high about that in terms of the long-term view of interest rates. As Austin said, I sold a house in Del Mar, California, in 1985, and the guy who bought it went out and got a 14% mortgage. And I was doing a little bit of work for some friends of ours whose dad sold his medical office building and took back a second mortgage at 16% per year. [laughter] So people were buying stuff, and you just get used to it, I think, is basically what happens.

Phil: And I think we can forget ever being back in this 1%, 2% world. It's gone. It's not going to come back in our lifetime. What is going to happen in our lifetime is that they're going to struggle with the need to continue to provide social services in an interest rate environment that's going to be 6, 7, 8%. It's going to be tough, and I don't know that there's any way the federal government can do it short of continuing to bail out, right? Just like we're talking about with Intel, except now they've got to bail out the whole social welfare side of America and make sure that everybody gets paid, or we're going to have the streets burning like they are in Paris.

Phil: So I don't think we're going back to those days. I think we'll get used to these days. I think Lennar will continue to do well. I don't know if they're going to be a rocket ship, but I think from Berkshire's point of view, they're good enough to beat Treasuries, and that's good enough now, especially at book value, because I just looked, and it's at one. You don't find companies at that price very often.

Travis: I don't know if this math is right, guys. I was just doing it real quick here. The median new home is about $400,000, is what I'm finding, and at 3%, that's a $1,500 payment. Current rates are at about 7.3%, and that's a $2,400 or $2,500 payment. That's a big difference, right? That's $1,000 more, and a lot of people get priced out there. If you go to the peak in 1981, it was 18% interest rates. That's a $5,500 payment for a home, right? That is a humongous difference. But even that thousand-dollar move from 3% rates to where we're at now prices a lot of people out.

Travis: Yeah. Prices a lot of people out.

Hunter: Not to mention that housing prices have absolutely outpaced inflation over that period, too.

Austin: That was what I was just going to say.

Hunter: Yeah. I mean, you got a mortgage on a home that you were buying for 100 grand, you know?

Phil: Really good point, man. Back to the equity number on Lennar. It's a really good point. Accounting rules basically say that if you buy a chunk of land for $1,000, that's what goes on your books, right? And if you bought that land 30 years ago, it's still on your books at $1,000. So sometimes some really big bargains can happen in companies that are acquiring a lot of real estate over a long period of time. If you want to dig into it and actually go out and reprice some of the properties that they have, you might find that that book value of one… it wouldn't be crazy to find out it's 1.5. You're getting $1.50 in book value for every dollar you spend in market cap. I'm not saying that's the case here, but it's worth a look to see if that's what's going on there for Berkshire.

Travis: Yep. Yeah, good point. Interesting.

Austin: I also think that, whether this is Buffett or Greg, and it might be Greg, you've got to believe, without a doubt, that Greg is talking to the head of Clayton Homes. I think it's still the founder, or the founder's son, of Clayton Homes who's running it inside Berkshire. They've been through lots of these cycles, and I have to believe that that person is looking at these companies and saying, "Yeah, if we get a big downturn, these companies are set up. They're going to be fine. They're going to survive it." Whatever it is, it's somebody who's an expert in this industry and has lived and survived through some big ones.

Phil: And we saw that in 2008. We saw a couple of homebuilders acquiring properties at stunningly good prices as the bottom fell out of that market. They were way ahead of their stock price, which was in the toilet as well, but they were acquiring land at great prices. It'd be really interesting to see if these guys are doing the same thing when they get the opportunity.

Travis: Yep. So the other fact I was just looking at here is that months of supply of new homes is at eight and a half, and if you go back to 2008, it peaked at 12. It also looks like in 2023 it was at 10.3, and the market retraced. So I want to go back and run a back test on this, I guess, is what I'm thinking. I'm wondering what the correlation is between interest rates, the supply of new homes and the price of these stocks. I think it'd be an interesting back test to run, because these are interesting companies, right? We can put a value on them, but where do you enter? If you're interested in buying one of these businesses, can you look at interest rates and the supply of new homes and try to understand if there's an optimal entry point at the bottom of a housing cycle? That might be kind of an interesting little exercise to do, and maybe bring that back in another pod.

Austin: For a future pod. Yeah.

Hunter: Yeah. I think this conversation's definitely made me interested to go take a look at this, and I really like your point there, Phil. It's something that we've done in our analysis several times in the past. Howard Hughes comes to mind: looking at what the value of the real estate on the books really is, which takes figuring out where these parcels exist and going out and finding comps. That's not always the easiest thing, especially in a case like this, when you're dealing with probably thousands of different properties. But it's a really interesting point here, and I think something we should circle back on, for sure.

Travis: You were kind of the master of that, Hunter. I remember you had a spreadsheet about a mile long where you did comps on just about everything that was in their portfolio, didn't you?

Hunter: That was a good time, guys. You were really putting me to work there.

Phil: Yeah, we really took advantage of Hunter being an intern for us. We got some good mileage out of that, at a great price, by the way.

Travis: Yeah. [laughter] I know. I know. Fresh hot coffee every morning and comps to look at in the afternoon.

Phil: That's right. That's right. Beautiful.

Hunter: I didn't ever spit in your coffee, Travis. I promise.

Travis: As far as I know. [laughter]

Wrap-up

Hunter: All right, guys. Well, hey, with that, I think that's a good place to end up here. We've been a little long-winded. Thank you, everybody, for listening to this week's episode of the Rule One Podcast. We will get back with you next week, and maybe we'll catch up on this Lennar conversation. All right, chat later.