SpaceX Goes Public Tomorrow — Look Out Below

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1:23When I scraped my car in that parking garage,

1:25Mark Zandi:I was worried that it could be a long process to take care of it. Like a landscaper's first day trimming a hedgeman. I have definitely already been here. Now, was it left, right, or right, left? Well, maybe I'll cut a path out and find my way back later. But it wasn't like that. I filed a claim in under two minutes on the GEICO app, and they handled it from there. It was taken care of almost as quickly as it happened. It feels good to get help quick. It feels good to Geico.

1:57Money market matters. If money is evil, then that building is hell.

2:07Mark Zandi:Welcome to Prof G Markets. I'm Ed Elson. It is June 11th. Let's check in on yesterday's market vitals. The major indices all tumbled more than one and a half percent after President Trump expressed frustration that negotiations with Iran were taking too long. The S &P 500 hit a five-week low. And then, after hours, the US began striking multiple targets in Iran, at which point the price of Brent crude climbed. Meanwhile, the yield on 10-year treasuries was mostly stable, despite the hottest inflation report in three years. More on that later. Okay, what else is happening? It is a monumental week for the AI industry.

2:52Mark Zandi:SpaceX is expected to price tonight and will begin trading on the Nasdaq tomorrow in what will be the largest IPO of all time. Currently, shares for SpaceX are more than four times oversubscribed, implying at least $300 billion in investor demand. Meanwhile, OpenAI filed confidentially for its IPO earlier this week, hot on the tail of Anthropic. So very soon, the public markets are going to get an unprecedented look into the business of AI. In the meantime, we got a preview of investor sentiment on AI from Oracle's earnings last night, which sent the stock plummeting 8%. For more on what is next for the AI trade and also his thoughts on the SpaceX IPO, we are speaking with Gil Luria, head of technology research at DA Davidson.

3:40Mark Zandi:Gil, it's good to see you. An unbelievably important week for the markets here. And I think we've got to start with SpaceX. $1.77 trillion valuation. It's priced at 95 times sales. I've made my opinion on the matter quite known to our audience. I think it's overvalued, but I'd love to hear your views. My view is going to be more descriptive than prescriptive. I've been following Elon Musk companies for more than a decade. and they rarely trade on fundamentals. They rarely trade on the same valuation metrics as other companies. And I've thought about why that is. And I think the answer is that Elon has this trick that he plays.

4:24He has the business that he has today, the business that's on the come, and then the big dream business. So for Tesla, the business he has today is selling cars. The business that's on the come is RoboTaxi. And then somewhere down the line, there's Optimus robots running around. The equivalence for SpaceX is right now we have Starlink. Soon we'll have orbital data centers. And then eventually we're putting a million people on Mars. And that allows him to get away from having his companies valued on the fundamentals of what he has today. Because there's always something bigger coming near term and then something even bigger coming long term.

5:06And that's how he does it with Tesla. and he's been successful doing it with Tesla for a long time. And now it seems to be working for SpaceX. Having said all that, I think it's great that you're cautioning people ahead of tomorrow. Buyer beware.

5:22Mark Zandi:I'm skeptical how many people will actually believe in that story. And the putting people on Mars, I mean, it's one thing to say we're going to put these humanoid robots into the world, which, by the way, at least they've shown some models of how it would look. But putting people on Mars, to me, it starts to go from optimism to delusion. And I'm skeptical of how many people actually believe this thing is actually going to happen. And I guess my thought is that we're going to see a lot of selling activity, at least when these lockups start to expire. So how do you think the stock will trade over the course of the day and, I guess, in the next weeks and months as well?

6:06I think it'll be very volatile. And I think that's going to add a lot of volatility to the market. Because when you don't have a valuation backdrop, when you don't have comparables, then to your point, it can trade at 95 times revenue. It can trade at 50 times. It can trade at 150 times. There's no rhyme or reason. It really is about how many people buy into that vision and continue to hold on to that vision. And there's the excitement that we're going to have tomorrow. There's going to be the lockups, very significant lockups after that. There's going to be index inclusions. There's going to be index non-inclusions.

6:42We should expect more volatility in this stock than anything we've seen in a stock of this size. And again, it's going to also have a big impact on the market. It already has. We've seen a lot of capital taken out of a lot of other technology stocks, the rest of the AI trade, in order to fund this. Because if they're issuing $75 billion and it's four times oversubscribed, that means investors have$300 billion ready to invest. They're not going to get their full allocation, but they have to have it in cash just in case they do. So a lot of capital has already been pulled out of the market, and we're going to have to see what happens in order to perpetuate this.

7:24Mark Zandi:Plus, you've got OpenAI coming up. You've got Anthropic coming up. You've got Google's$85 billion equity offering. You've got Meta supposedly considering a similar thing. You've got Oracle, which we could get into, which just announced a$20 billion equity offering, I believe,$20 billion in debt as well. It's starting to get to the point where there is so much stock being issued into the markets, injected into the markets. I'm not totally sure if people even have the money to buy all of this stuff. And if they don't, then they're going to have to sell their existing positions. It sounds like you believe that that is what is already happening.

8:05Mark Zandi:And that might describe why we've seen some of the drawdowns in some of the larger tech names over the past few days. Is that what's going to happen? And do you think it could get, I guess, worse? Yeah, there's going to be a lot of sloshing around of capital. And the reason is, part of the reason, and this is going to happen even more so when OpenAI and Anthropic go public, because SpaceX is bigger than AI, right? It's about space exploration and expending consciousness into the stars, a literal quote from the S1. But OpenAI and Anthropic are the pure plays on AI, the big pure plays on AI. So if so far in the market, you've invested every other way in AI by buying semis and optical and nuclear and quantum and all these other ways to invest indirectly in AI.

8:51Now you're going to get a chance to invest directly in AI. And so again, a lot of capital is going to be pulled from the rest of the AI trade into open AI and anthropic. And part of this is a race because you mentioned the mega caps are going to the capital markets. These three IPOs are happening. Each of them wants tens of billions, maybe even$100 billion to raise. There's a finite amount of capital that can come out of everything else. And so to some extent this is a race. I think when we heard OpenAI, what OpenAI said when they filed confidentially is we'd rather stay private, but we understand that we may need to go public, which is code for we may need to beat Anthropic out or at least be soon after Anthropic because we don't want them to drive a narrative, to drive how disclosures happen, what metrics get reported.

9:43So a rush to capital right now from all these big players.

9:47Mark Zandi:Which implies something which seems to me to be quite important, which is if they're racing to sell now, that's because they believe if they sell later, there will be less available capital and they won't be able to command the prices at which they would like to sell today. So SpaceX seems to have timed it great. But the further you go down the line, it seems like these CEOs like Sam Altman believe there There might not be as much capital available later down the line, which makes me feel a little bit bearish, to be honest. It makes me think that maybe we're at the top. They think that now is the time to sell, clearly, because that's what they're doing.

10:28Mark Zandi:It makes me think maybe look out below. What do you think about that thesis that potentially this IPO race, this IPO mania could signal the top, at least for the tech sector? I'm a little bit more optimistic from the overall perspective because I actually think the AI models are very powerful and they're getting a lot better. The folks that have been using Fable from Anthropic over the last couple of days are saying that's another big leap forward. And we're already getting a lot of good usage from the other AI models. And at the end of the day, this is what matters. Are consumers going to pay subscriptions for AI?

11:05Are companies going to pay for the tokens coming from these AI models? As long as that happens, we're going to continue to see growth. What these companies are doing, they're racing to capital. It's not necessarily that they're saying that their valuations are peaking. They're saying what you said earlier, which is if I don't get the capital now, it may not be around later because everybody else will have stood in line first. This is a game of kings and queens. You can't participate in AI without tens of billions and hundreds of billions of dollars. And if you think that the capital is going to run out at some point, you want to be early.

11:39By the way, also compliments to Google for being early with the very big fundraise this week. And again, I wouldn't expect Amazon and Microsoft to linger in the background. They understand this is a race. They understand that they're starting to exhaust their operating cash flow, and they will need resources in order to keep building the AI compute data centers.

12:01Mark Zandi:Final question, and then we'll let you go. And I don't know if you're going to answer it because you didn't quite answer it before. Do you think SpaceX is overvalued or undervalued? I try not to do that with the Elon companies because I don't think their valuation has ever made sense. It's never had anything to do with fundamentals. So people are buying a dream and a story and hope. And sometimes that works out. It sure didn't work out for Tesla holders that bought the stock 15 years ago. It did indeed. All right. Gil Luria, Head of Technology Research at DA Davidson. Gil, thank you so much. Appreciate your time.

12:35Mark Zandi:Thank you.

12:45Mark Zandi:Inflation rose 4.2 % in May from a year earlier, the hottest reading in three years. Fuel oil is up nearly 60 % from a year earlier, and airfare is up 27%. And for the second straight month, real wages fell, meaning prices are rising faster than paychecks. The report has investors rethinking the Fed's path ahead. The odds of a rate hike before the end of the year are now around 50 % on Calci. Joining us to discuss this inflation report, we are speaking with our friend Mark Zandi, chief economist at Moody's Analytics. Mark, thank you for joining me on the show. It's always good to see you. I guess my first question here, 4.2%, I mean, this number is staggering to me.

13:34Mark Zandi:Seems like it's all Iran. Is that right? Ed, good to be with you. No, it's more than Iran. I mean, obviously, Iran's a big part of it. The bulk of the inflation acceleration is energy prices. But it goes to the tariffs. There's still some tariff pass through. It goes to the restrictive immigration policy, which is having an impact on different industries and causing sticky service price inflation. And also AI, artificial intelligence. The AI is juicing up demand, you know, the data center infrastructure build out, consumer spending because of the wealth effects. But it's not lifting supply, at least not yet to any significant degree.

14:12The productivity boost so far has been pretty small. So more demand, not as much supply that adds to inflation. You can see in electricity prices, you can see it on chip prices. So there's a lot of stuff going on here. Inflation is up for a lot of different reasons. But the bulk of it is the Iran war.

14:28Mark Zandi:I guess the next question is, how long is this going to last? I mean, it's been going up and up and up. If we stick around at 4.2 percent, I mean, we're over two percentage points above the Fed's target rate. This problem only seems to be getting worse. And I think the question on investors' minds is, how long is this going to persist? Well, it does depend on the war, right? I mean, if the war is kind of close to peaking, winding down here, and oil prices are not going any higher, they're going to run 100 bucks a barrel if that's where they stay, come in a little bit, then the worst of the inflation is behind us.

15:08But, you know, there's no going back to the kind of 2 % inflation rate that the Fed would consider to be appropriate, you know, comfortable for a long time. And when I say a long time, Ed, we'll be talking a year from now, inflation will still be above target, maybe two years from now, even if everything sticks to script, including the Iran war winding down. So this is, you know, we may be past the worst of it, but we're not getting back to where we were anytime soon.

15:33Mark Zandi:Do you think it will get worse? This is the thing that I'm not sure what to expect. I mean, we saw back in 22, we saw a similar thing of inflation kind of ripped back up. It went as high as 8%, 9%. It got really bad. I mean, how much worse do you expect it will get in this round of inflation? Well, I do expect the president to come to terms with the Iranians and open up the strait and get oil production ramping up back up again and oil prices moving south again. So I think that's the most likely scenario. But as you are alluding to, there's a gazillion different scenarios here, and almost all of them are worse than the baseline, inflation being higher for longer.

16:15The one thing I do think that we need to watch, though, to answer your question, is inflation expectations. I mean, if expectations continue to – for inflation continue to rise, particularly bond market expectations, then the risk is that this inflation becomes more persistent, more entrenched. and obviously has big implications for what the Fed's going to do. So, so far, the inflation expectations, they're on the high side of where I think the Fed would feel comfortable, but they haven't kind of breached up to the upside. But that's something to watch to answer your question.

16:44Mark Zandi:Just to game theory this out, like let's imagine a world where Trump does not figure out how to negotiate with Iran. The strait remains closed or the situation persists as it is. It's hard to tell whether it's closed or open or who's blockading what. Point is, it's not going great over there. That's all we know. If it remains as is, call it for the next six, nine, 12 months, does the number get worse and worse and worse? Or do you expect that it will plateau at some point? No, that's a pretty ugly scenario because we're running out of inventories. I mean, you know, global inventories of oil have been being significantly drawn down.

17:27I think you have to go back to the early 80s to find inventories as low as they are today. And compared to the size of the economy, you have to go back even further. So there's just no inventory. And if we don't see a resolution to the war, if the strait doesn't open, if production doesn't pick up, those inventories are going to get to a place where we're going to start seeing actual shortages, physical shortages, maybe not in the United States because we produce a lot of oil. We produce as much oil as we consume, but in other parts of the world. And I think at that point, traders and everyone else would come to the conclusion that, well, this isn't going to come to a quick end.

17:58We've got a problem here. We need much higher oil prices to equate demand with the reduced supply. And that means much higher prices, and that means much higher inflation. And that's a scenario where you do get inflation expectations breaching the upper limits of what the Fed would feel comfortable with. And that's a pretty dark scenario. But clearly, a scenario with a meaningful probability attached to it.

18:20Mark Zandi:In other words, it sounds like almost all of this rests on Trump's ability to negotiate a deal with Iran. It sounds like you are somewhat confident that he will pull that off in the near to medium term. I guess my question is, why do you feel that way? Well, you know, the president, you know, whatever you think of him, the one thing you can say is that, you know, he if things aren't working out in the way he wants them to, he'll pivot 180 degrees, declare victory and move on. At least that's been what he's done so far. So I'm applying the same kind of logic to my thinking around what he's going to do here.

18:58He's desperately, obviously, trying to figure out a way to wind this thing down to clear victory and move on. So hopefully he finds that sooner rather than later. Otherwise, we're going to be in a boatload of hurt. And, you know, the scenario where he doesn't come to terms in the next few weeks, next month or so, you know, that's a recession scenario, a stagflation recession scenario.

19:18Mark Zandi:I personally don't feel so optimistic about it. But part of it is something, some of the things that he said about he's not worried about it. And then he also said this thing about inflation yesterday. We have a clip of what he said. He was asked about this inflation report. I'm just going to play this clip and I'd love to get your reactions. No, I love it. The numbers were great. You know what I really love? I love the inflation. You know why? Because as soon as this war is over, you know, I can say it now. Something you didn't You know, we've been taking out millions of barrels of oil.

19:52Alex Heath:Nobody knows it. You know who doesn't know about it? Iran until right now.

19:57Mark Zandi:So Trump says he loves inflation because they're taking barrels out. I don't fully understand what he's saying. Is there any way to make sense of what he's saying? If you can make sense of it, and I don't think I could, I certainly can't. I'm not sure what he's talking about. I mean, I don't know. There's nothing worse than inflation on every level. I mean, you know, it's bad for consumers, bad for households. It's bad for businesses. It's bad for investors. It's bad for the Federal Reserve Board. It's a lose, lose, lose, lose. So I don't know. I don't get it. But I'm not sure. I don't know that I attach a whole lot of weight to that and, you know, and say that that's what he actually believes.

20:40You know, I'm not sure that's the case.