SpaceX, Europe's China Problem, and the Populist Backlash | Patrick Boyle

23:45But the thing about this is that there's all this money tracking indexes. And yeah, the whole purpose was to get it in. There's a story, I think Reuters published it, that said that Elon Musk made listing on NASDAQ conditional on this early inclusion. So the old idea was different indexes have different criteria. Like for S &P, they require, I think, I forget whether it's two years or two quarters, they require the business to be sort of steadily profitable for a while. For NASDAQ, they don't, but they did require a one-year seasoning period. it. And the reason for that is just that, well, we just discussed it, that when a company goes public, the truth is the investment bankers and those early buyers, they're kind of guessing at what they think is an okay price for this stock.

24:36That's the price they'll take it at. And then, you know, it pops 18%. It generally underperforms for a while as it sort of finds its level and it moves from the kind of people who just wanted it to get that IPO pop into the sort of steady hands that might hold it for a few years. And that is what they call seasoning, where it sort of sits out there for a while and it gets bought and sold and it finds a reasonable price. To do it 15 days after IPO, you've got to understand that everyone who took that IPO, it's how you get that high IPO price. Because basically, if you took it at 135, you knew you had three weeks to hold onto it.

25:18and everyone knew there was this huge forced buyer out there, the indexes that were going to take it off of your hands. And like I said, it's a whole trade on Wall Street, you know, where basically trading to, in fact, I forget like Millennium, it was in the news recently, how much money, like Millennium made billions of dollars just off of this index inclusion. But yeah, it's a big trade, but it essentially, by fast forwarding it, the kind of investor who said, well, I'm not going to pay 135 a share, that's too high. Well, if you said to them, but it'll be banged into the NASDAQ in three weeks and you can offload it.

25:56And also they changed the weighting rules as well. So normally stocks that had very low floats, that would be recognized. And so they'd have very little representation in the index. With this, they changed it. So it was basically set up that there was this huge buyer out there. And so then even if you looked it. And you said, well, I'm not paying 135 for that. It's like, yeah, but you're out of it in 15 days. It's into an index. And then after that, who cares? The owners then have to deal with it.

26:26Demetri Kofinas:So the float refers to the percentage of outstanding shares available for trading. Floats have also gotten smaller for these large companies over time. Yes, that's another thing. And there's a fellow, I think his name's Craig Cobham, who's written a couple of pieces in the FT over the years about this. But basically, usually when companies went public, they issued about 20 % of the shares to the public. And it's just gotten smaller and smaller. And there's a bit of an interesting thing because you also have key investors, right? So even when you say if SpaceX issued 5%, a bunch of those shares will have gone to people who have sort of agreed to hold on to their shares, right?

27:05So straight away, you know that a bunch of them will never sell that, right? And that That is how they're placed. If you say to the brokers, if you say, look, if you give me an IPO allocation, I'll promise to hold on for a year, you're more likely to get it than if you say, I'm going to flip it on the first day and make my 20 % return. And so there's a bunch of keyholder investors who are locked in to hold it. And so then even when 5 % goes out, what percentage of this trillion dollar company is trading? It's maybe less than 1%. And one of the comments in one of my videos was from a guy and he said, well, I've been trading crypto for years.

27:45This is a crypto game where you issue a tiny amount - You took the words out of my mouth.

27:50Demetri Kofinas:Yeah. Yeah. Well, you took the words out of my mouth. I mean, this is something that we saw in crypto. This is a common practice of putting out a very small percentage of shares or tokens, letting the price rise or pump significantly, getting liquidity into the market and then selling into it. And it feels like a lot of those practices have just now gone mainstream. That crypto was in some sense like a training ground or a place to experiment, kind of like the Ukraine war for innovative warfare. But in this case, it's in finance and it's in investing and we're seeing it now in the broader equity markets.

28:27Demetri Kofinas:So we're also seeing it in prediction markets. Well, in particular, it was also a way of doing stuff where there's no rules, right? And of course, stuff could happen in crypto that could never happen in American stock markets. But we've been recently, actually, I thought it was wild. I don't know if you've seen the news about the analyst coverage. All of the banks came out with coverage on SpaceX, which was possibly timed to match the index inclusion date, because they had 25 days while the index inclusion was 15 business days. And so they roughly lined up with each other and all of them came out with massive, massive, massive price targets, like$300 a share up to like$1 ,000 a share for a money burning business with a few rockets, a bit of satellite internet and grok, right?

29:20And let's be serious here. Elon Musk bought Twitter plus grok from those investors for I think$250 billion and then pinned the entire valuation of SpaceX essentially on this, which is kind of wild. That's alchemy. Yeah. Either those investors were ripped off or the new ones are being lied to. It's one of the two. But Wall Street fully agrees that this thing is worth an absolute fortune. And I was kind of shocked by this because it reminded me of the dot-com bubble, like the scandal around Henry Bludgett and all those analysts. But I thought like, gosh, it's kind of wild that this is happening again, because in 2002 under Sarbanes-Oxley, there was sort of, I forget what the rule exactly was called, like the truth in analysis rule or something like that, where analysts couldn't essentially say they think something is a great stock when they don't.

30:13Interestingly, I learned that that rule was repealed about six months ago. And also the SEC has largely been defunded by, what were those guys called? Doge. Do you remember Doge? Doge gutted the SEC. So all of the people who are sort of searching for frauds in markets are gone. And also a lot of rules have been rolled back. And frankly, it's a very ugly thing, I think. Because I think what happened in the dot-com bubble and what happened with things like Enron and WorldCom and whatever, these were huge disgraces. And I would make an argument that the reason that people pay up for American stocks is for rule of law, for good rules, good institutions.

30:56And you know when you put your money into an American stock that you'll be, you know, if something goes wrong, you've got the American court system to fall back. You've got like regulators who do not mess around. But, you know, it's questionable that you have that anymore. The whole reason, people said to me, oh, would you invest in Chinese stocks? And it's like, not really, because I just don't feel that the laws are on a foreign investor's side if this all goes wrong. While the whole argument for US stocks, and to be clear, what this does, this is good for business in America, because if people trust the US stock market, they'll invest demanding less of a return.

31:39So it sort of means that the cost of capital is lower for American businesses. And if American businesses can raise capital cheaper than global businesses can, they then have such an advantage in growing and so on. And it's very worrying to think that this stuff is being rolled back.

31:58Demetri Kofinas:Absolutely. I mean, trust in American laws and property rights and rules is a big part of what underpins the American financial system and even the value of the dollar. Yeah. Also, it feels like we're in an era where individuals have become increasingly powerful. Like the ability for Musk, for example, to strong arm the NASDAQ or Trump to do what he's able to do as president of the United States speaks to a new kind of populism that I think it's not just something that we see in politics, we see it across the board. What do you think contributes to that degradation in the power of institutions?

32:31Firstly, I have to tell you the way you said to me is almost like has a terrifying echo, because my friend Manoj Pradhan, who was on Hidden Forces a little while ago, he started out as an emerging markets analyst. And he has constantly said to me, when you kind of go, well, what exactly is an emerging market? How do you classify it? And he says, well, in emerging markets, institutions are weak and individuals are strong. You look at India, Modi is strong. He gets to say what happens, the institutions are weak. And so it's a very worrying idea when you sort of say like that in America, institutions are getting weak and individuals are getting strong because that possibly it turns it into a submerging market, which is not what you want as an investor.

33:18Demetri Kofinas:Yeah. Manoj is great. Both he and Charles Goodhart separately have been on the podcast. They wrote a book together, then Manoj wrote a second one. Actually, they co-authored the second one, but as I understand it, Manoj is the lead author. He was also at our recent London dinner, and you of course have been to many of those dinners. I think that if I were to pin it on anything, it would be an erosion of trust. The loss of trust, generally speaking by the public, it has been the primary driver of the eroding power of institutions. And what fills that gap, somewhere somebody has to fill that gap.

33:50Demetri Kofinas:Power fills gaps. And the powerful that are filling these gaps are individuals. Individuals with great oratory and who can compel audiences. Yeah, I think this is true. And I would argue that a lot of this, because also it's a global thing. We talk a lot about America because that's probably, you know, you and I live a lot in America and, you know, a lot of the audience are American, I would imagine. But around the world, we've seen this exact same thing happening. And I feel there's a good argument that a lot of this occurred in the global financial crisis in 2007, 2008, when there were bailouts that just distinctly didn't feel fair.

34:32And that's even when we saw the birth of things like crypto. It was all the Occupy Wall Street movement. I guess there were two things. There was Occupy and the other one was the Tea Party. And it was two versions of just really not trusting that the people in positions of power were exercising their power in a fair manner. And I do think that that's also very true. A lot of the way the bailouts worked, they were deeply unfair to individuals. People were losing their homes and the banks were being bailed out. It wasn't right.

35:07Demetri Kofinas:It's so interesting looking back at that time, another thing that happened concurrently was a rise in the self-awareness of the crowd. There were a lot of books that were being written at the time about the power of crowds, crowdsourcing was a thing, Bitcoin was supposed to be a decentralized currency. And so I feel like part of what's happened here is that the crowd became more powerful, but at the end of the day, someone had to lead it. And in the social media era and in this era of decentralized media, people like Musk and Trump who are very good at commanding that medium have been able to use it to exercise power.

35:45Demetri Kofinas:And by the way, it's not just those folks. I mean, I use those because they come easily top of mind, but actually you see this across the board. The people that are most successful in politics today are primarily influencers. Yes. And in some sense too, you wonder really, and Trump is another great example of this, so is Ocasio-Cortez. Are they primarily politicians or are they primarily social media mavens who are using political office to build the value of their brand, which they subsequently monetize. And in Trump's case, he's monetizing right in front of our face. I think I was reading something recently about some allocation that was made on the part of the UAE and that recently the UAE got some high level semiconductors.

36:25Demetri Kofinas:Yes. So the UAE, I think they put a load of money into one of Trump's stable coins. And at first you would say, oh, well, that's just my, I think they had to, they were agreed to invest in the United States, but instead of putting it in, in dollars or whatever, they put it in as Trump coin or, you know, the stable coin that's tried to, what's his business called? Liberty, world liberty financial or whatever. Now at the time that stable coin was tiny, like non-existent and they put a big chunk of money into it. But the thing is that is that valuable? It's hugely valuable because if you put it in and you leave it there, Liberty Financial get to put that money in treasury bonds and earn 4.5 % a year every year on billions of dollars.

37:10It's a massive, you could pretend that no transfer of value occurred. It's like, oh, it's a stable coin. It's like a bank deposit or whatever. And it's like, no, they get no interest. And the people running that stable coin bang it into treasury bonds or whatever they want to and get to earn a solid, steady return year after year on it. And then suddenly various approvals occur and so on. Yeah.

37:39Demetri Kofinas:Yeah. So one of the things that I wanted to ask you about before we get off the conversation about the IPOs is really how much money there is to fund all this stuff. So I think SpaceX is the largest IPO this year or ever maybe. Maybe. Google also raised an additional$85 billion in a new equity offering a few weeks earlier before the SpaceX IPO. How much money do you think there is actually out there to fund this stuff? Because of course, OpenAI and Anthropic eventually want to go public. There's a huge CapEx boom. You've highlighted the fact that... I think you've actually, your terminology as the stock market is no longer shrinking.

38:17Demetri Kofinas:We lived in this era of shrinking stock market for a variety of reasons. Fewer IPOs, private equity taking public companies private. We also had share buybacks and so taking stock off the market. But is there a limit to how much we can fund here? And is there a way to estimate when the money's going to run out or if it could run out? I think that there's probably plenty of capital, especially because even with SpaceX, like, you know, yeah, it's got this massive valuation, but they've lifted 5 % of the stock, right? So not too much money actually had to go into it. And I would imagine that Open AI and Anthropic will probably do a similar thing for no reason other than that's been the Silicon Valley game over the years.

39:02The only thing is that these businesses are very different to the typical Silicon Valley businesses. Because if you look at Facebook, Mark Zuckerberg actually didn't need to float Facebook, right? I think it might've been burning a bit of money at the time. I forget the detail. But in truth with Facebook, the reason to list it was just to have a public price on the stock that insiders could sell, right? Because if you've worked for years at Facebook, you've been paid in all of this stock, and eventually you want a liquidity event. And if you look at it, Facebook or Meta, as they're now called, have bought back more stock in dollar terms than they issued.

39:40So I forget what they issued, but they bought back maybe 10 times as much stock. This is because the stock price went up. But basically, they can pay people in stock. The people sell that stock. They do equity buybacks to reduce the dilution. But Meta was basically a hugely, hugely profitable business. It didn't require a huge amount of staff. You're not building factories or anything like that. It's a few people who write code that's really valuable. The same thing goes for Google and a lot of what we call big tech today. But AI is very different. They actually need the money, right? They're not issuing it just to put a price out there.

40:22They need the money to build massive, really expensive data centers. They possibly need to build power stations because there's not enough electricity to run these data centers. And so if they are to achieve even a percentage of the goals they've set in terms of building data centers and so on, they will be spending an absolute fortune. And that's actually another twist in markets is that forever people have looked at the stock market and said, well, all these big companies out there, they're just buying back stock. They don't reinvest in the business anymore. they just buy back stock. They're not building new things.

41:01Well, now they're really building new things. We're seeing more spending from American businesses than, I don't know, than we've seen in my career anyhow. It's massive, the planned spending goals.

41:16Demetri Kofinas:So you mentioned Meta. Whatever happened to their Metaverse? Oh, so that, I think they actually might've wrapped it up entirely recently. They burned $88 billion on that. Doing what? Where was the money spent? I think it was all just spent on coding up all of the nonsense stuff. It's kind of wild to think through how you spend$88 billion. I feel like this is one of those projects where Mark came up with it. He was super passionate about it and no one told him no, or no one felt comfortable telling him no. And he had to burn a certain amount before he figured out that he couldn't keep doing it?

41:51Yeah, I think there just is a point at which no one turns up to play your game and you have to wrap it up. But the funny thing about that is that it's once again, Facebook was a bit of a scandal at the time they went public because they didn't give votes. They gave Zuckerberg the super voting shares. They didn't give votes to regular investors and it made Zuckerberg unfireable. And then we saw like with a normal CEO, the shareholders might've stepped in and said, look, we've got to stop this. You're overspending. No one's interested in this. It's not working. No one wants to wear VR headsets. Like this is madness.

42:32But Zuckerberg got to build his Cybertruck.

42:35Demetri Kofinas:Well, it goes back to what we were talking about with the empowerment of individuals. Some of this is warranted. I mean, I had Sebastian Maliby on the show, I think three times now, the first time to talk about his biography of Alan Greenspan, the second time to talk about his history of the venture capital industry, and the most recent time for his biography of Demis Hassabis, the founder of DeepMind. But in his history of Silicon Valley and the venture industry, he talks about this turn that happened with Founders Fund and guys like Peter Thiel, recognizing that there's an opportunity here to better empower founders.

43:08Demetri Kofinas:And so I think to some degree this was warranted, but it feels like, again, there's another example where it's gone off the reservation. And now you have these situations with Musk where he has, what does he have, like 85 % of the voting rights associated with SpaceX's stock? Yeah. And as he sells that stock, it loses its voting rights. So he'll always have full control of the business pretty much. Yeah. It's an interesting thing because for years, there's been this sort of corporate governance argument that if you, sure, you can take rights or benefits away from shareholders, but now you have to issue the stock cheaper.

43:45And that was kind of the big question when Facebook went public with Zuckerberg's super voting shares, because there had just been this general move towards better and better corporate governance where shareholders were treated really well. And Zuckerberg sort of turned the corner with that. And now we're seeing it, you know, taken to, and I don't think even SpaceX isn't even the worst example. Like I think there's companies out there where as the CEO sells his shares or as the founder sells their shares, their other shares gain in voting rights. You can set this up however you want, but historically, investors would have just said no to this, just say, I'm not getting involved in this business because it's not being run in a fair manner.

44:31But the thing is, Facebook was just an IPO that people really wanted to buy. They wanted involvement in it, and so they would choke it down. And once again, with SpaceX, it was hard enough that people would just say, yeah, whatever Elon says, take it. Just take it. I need to be involved.

44:50Demetri Kofinas:So one more topic I want to cover here in this first hour before we move it to the premium feed, and that has to do with prediction markets. How closely have you been tracking this stuff? Because it feels like we've seen an explosion in interest and participation in prediction markets since since COVID really. And COVID really was a demarcation line for a lot of this stuff. Yeah. Well, it is something that I've paid attention to it for years. I often talk to my students about it and whatever, but it was always a tiny, tiny little thing. It was kind of a quirky experiment. I forget the initial rules.

45:23There were prediction markets around for ages, but they weren't allowed to get too big and whatever. I think they were often even tied in with universities or whatever. And it was sort of a market experiment. And then a few years ago, I guess, one was the sort of crypto explosion. And I think Polymarket is kind of a decentralized, like it's outside the rule of law in the way that crypto is. And then you saw Calci just sort of push it to the limits and see if anyone would come back again.

45:53Demetri Kofinas:Calci is another one of these companies. Yeah, but Calci is US regulated and bizarrely enough regulated by the CFTC because suddenly betting on a sports game is a commodity now. And wildly, the CFTC, because there are states in which gambling is illegal, and this is of course sports betting, right? It's gambling. And the CFTC has sued states saying, no, we get to control this. You don't. Largely, I just think it's because the guy running the CFTC is very much aligned with certain directors of both of those firms and so on. What do you think has been the primary driver of investor interest in these markets?

46:34Oh, I mean, it's just gambling, right? Because you've got to remember, when these guys talk about it, like Calci and Polymarket, they sort of talk about a prediction market's betting on events and it sort of allows, will say even better polls on elections or whatever, but something like 90 % of it is just sports betting, right? But they sort of have to talk this game because they have to pretend that there's a social value in there. I kind of tied it back to your idea, the financial nihilism idea. I think that we've moved into a world, well, it's your whole argument that there's a lot of young people who feel priced out of the economy in general, and they equally are sort of flooded with social media, showing them Andrew Tate with his collection of Lamborghinis and so on.

47:25And they just say, I need to reach escape velocity. I can't be an incel in my mom's basement. I need to... Earning a normal living isn't good enough. And so then you turn to making the wildest bets. And we saw that with the meme stock Wall Street bets thing. And we saw it with crypto. And I think now we're seeing it with prediction markets. And it's just sort of levering into a crazy, I 10X my wealth or I zero myself out. And because I don't have much, I don't care if I zero myself out. Yeah.

48:00Demetri Kofinas:And a lot of that energy that was in crypto got sucked out into AI and similarly has gotten sucked out into prediction markets, which shows you that it wasn't, or for much of it, most of it, I would argue, it really had nothing to do with the underlying technology or any specific conviction about, quote, decentralization, but something else that was getting channeled through. Yeah. It's the volatile thing to bet. I also even think it's sort of slightly, seems exciting. Like five, 10 years ago, if you told people you were a crypto investor, you sounded like kind of an exciting badass outsider. It's slightly illegal.

48:38We don't know. And that was cool. Well, today, if you look at Bitcoin, it's basically over the last five years, it's underperformed the S &P, right? So your grandfather's more of a badass than you in terms of returns. And then it's also no longer an outsider product, right? You've got the government.

48:56Demetri Kofinas:Your leaders are guys like Michael Saylor. Yeah. It's even funny. I think there's a bunch of things that over in prior years, there's a bunch of people and ideas that pitch themselves as anti-establishment. An example that amuses me is Joe Rogan. Joe Rogan was the outsider anti-establishment guy. Now you turn on the Joe Rogan podcast and he's got Mark Andreessen, Elon Musk, a bunch of Silicon Valley guys. yesterday, a bunch of politicians, you know, Nigel Farage or whatever. And it's like, I think he's kind of wondering, like, why are people no longer excited by my podcast? And it's like, well, because you're, you're no longer an outsider.

49:40Like you're an insider. This is the establishment like, and he's pitching himself as anti-establishment, but how could you be more establishment than to be friends with like the biggest business leaders in the world and interviewing the biggest politicians in the world.

49:56Demetri Kofinas:Yeah. He's become even more obsequious than Meet the Press or any of these Sunday talk show programs have been traditionally to mainstream politicians where they would go on the program. And the quality of the politicians today is significantly worse and then more corrupt. This isn't your grandfather's corruption of Joe Biden putting his kid on the board of Ukrainian oil and gas company. This is Don Jr. and Eric and their whole freaking family making billions of dollars spinning up crypto tokens and slush funds. Well, and not even hiding it. The thing was that a few years ago, this would have to be hidden.

50:35It was a great shame. I grew up in Ireland. There was loads of corruption in Ireland in the 80s, but they kind of hid it a bit. They didn't rub your face in it. Well, now they're just like - Yeah, this is really bad, Patrick.

50:46Demetri Kofinas:This is really bad because the backlash is going to be really bad and it's going to come in a political form and it's most likely going to come from the American left and the US. And I don't know to what degree this is going to be an issue in Europe. Europe isn't experiencing anything like this. Europe has a whole bunch of other problems that we're going to talk about in the second hour, which is this long slow motion economic car wreck. And it's happening not just in EVs, but other places as well. So in fact, I think this is a good opportunity to move us there. I want to talk about, as I said, Europe, Europe's economy, it's slow motion economic train wreck.

51:19Demetri Kofinas:I want to talk about the Russia-Ukraine war and really what is going on there, because you've talked about this in your videos. And it's really interesting to me to juxtapose Putin's decision to invade Ukraine in 2022 with Trump's decision to begin bombing Iran with seemingly no plan in 2026. Although some argue he has a plan, we can talk about that. I also want to talk about home prices and the generational wealth gap, which is something you've written about, and we've talked about on this podcast, as well as fiscal dominance and the end of the disinflationary tailwind. Manoj Pradhan, of course, and Charles Gard have written about that.

51:51Demetri Kofinas:And also this data center revolt and the larger populist revolt against large corporations and big tech, which I think is here and it is a harbinger of things to come. For anyone who is new to the program, Hidden Forces is listener supportive. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second hour of today's conversation with Patrick, head over to hiddenforces.io slash subscribe and sign up to one of our three content tiers. All subscribers get access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

52:35Demetri Kofinas:Patrick, stick around. We're going to move the second hour of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io slash subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io.

53:15Demetri Kofinas:As always, thanks for listening. We'll see you next time.