SpaceX Just Got Fast-Tracked Into Your Portfolio

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1:35Welcome to Prof G Markets. I'm Ed Elson. It is July 7th. Let's check in on yesterday's market vitals. The major indices rose as chipmakers climbed out of last week's slump. The Dow closed above 53 ,000 for the first time. Oil was stable as Saudi Arabia cut its prices and OPEC increased its production target. And finally, Dell stock popped as much as 8 % after some comments from the president. More on that later. OK, what else is happening? It's official. So SpaceX is part of the NASDAQ 100. As of this morning, SpaceX's performance will influence the more than$1.4 trillion that is benchmarked to the index.

2:21The stock currently has a weight of about 1%, and now tens of millions of Americans invested in the NASDAQ 100. Index funds indirectly own it. SpaceX got in under new fast-track rules, which cut the required trading history to just 15 days and also got rid of the float requirements altogether. The Nasdaq's rapid inclusion of SpaceX leaves investors with many questions, one of them being, has this company proven itself enough to be included in one of the world's most followed stock indices? Here to discuss this question, we're speaking with Michael Green, Chief Strategist and Portfolio Manager for Simplify Asset Management.

3:06Michael, it's good to see you again. I think a lot of people were wondering if this company should really be a public company, if it was profitable enough, and also if the price made any sense. But now there's sort of another question, which is, should it be in passive index funds, specifically the Nasdaq 100, which a lot of passive investors own indirectly? directly, what do you make of it? Well, I mean, unfortunately, I think this is the logical conclusion of America's shift towards passive index investing. Rather than have a choice being made by an individual or by a portfolio manager, we now have choices that are being made simply by the index, which has an obvious incentive to get companies public, get them listed on the NASDAQ, offer NASDAQ inclusion as a component of that in order to get the listing on the NASDAQ index as compared to the New York Stock Exchange or other exchanges they could potentially have listed on.

4:11So we understand why this is occurring, or we have a very strong sense for why this is occurring. It is an opportunity to effectively exploit the index position to bring the company public, get it listed, drive the capacity for insiders to sell shares, and ultimately create liquidity for those inside investors. As to whether or not that's a good idea, obviously, I think it is not from the tone that I'm using. I think it is candidly quite manipulative. We have allowed index investing to receive special treatment under the law under which it does not have the same requirements that active management has for fiduciary standards or suitability standards.

4:54If I run a strategy that says I'm going to do X, when I suddenly, unexpectedly change that, my investors are allowed to sue me. We are by and large protected from that in the index world, as long as the index methodology has changed rather than simply the inclusion of a new stock. In this case, they published their intent to do this in advance of the listing, and it was open for comment period. My understanding is the comments were almost universally negative. I certainly contributed several of those myself. It was much like Chicago. I voted twice and often, even after I had died. But, you know, the simple reality is that they were intent on doing this.

5:37It's a profitable decision. It draws attention and gets us discussing the NASDAQ 100 or the QQQ ETF, which is part of the objective as well. And now we're confronted with a scenario in which funds can actually be invested in under the idea that they are passive, that they receive special treatment under the law, and yet they've exposed themselves as not at all being passive. It's the logical conclusion of what you would expect. Eventually, we'll figure out how to manipulate anything to generate profits. It seems as though, if we were to just sort of go through the winners and losers here, I think you and I both agree that the loser is the passive investor who doesn't really know what's happening and the rules are being changed basically for this specific company, for SpaceX, potentially for Elon Musk.

6:26Point being, it almost breaks down the whole point of past investing. As for the winners, clearly, it's kind of a win for NASDAQ. It's probably a win for some of the ETFs that track the NASDAQ, like, you know, Invesco, QQQ being the largest one. Probably a win for SpaceX too, because it means that you're getting all of this passive investment, which boosts your share price. Just specifically, this index from the NASDAQ 100, there was a question as to whether the S &P was going to include them. They were debating it. The S &P decided no. The NASDAQ is smaller than the S &P, but it has included it in the index.

7:10Tens of millions of Americans own an index that tracks the NASDAQ 100,$1.4 trillion in capital, as I suggested. What kind of upward pressure will this actually put on the stock? Like, how much of a win is it for SpaceX to be included in the NASDAQ 100? Well, when you highlight that it is in the neighborhood of$1.4 trillion that is tracking it, and it is roughly a 1 % weight, although it is receiving additional weight because of the float multiplier that is being used. You are talking several, you know, billions, tens of billions of dollars that are ultimately going to flow into these investments.

7:49The big winners there are those who are seeking liquidity, the insiders who are actually looking to sell shares, whether those are investors who invested during its private period, its extended private period, or whether those are employees who have waited for liquidity, the answer is it's the insiders. And that, unfortunately, I think contributes to the general perception that the stock markets are really not set up for the average investor at this point. Although we're thrilled to see them move higher, given our participation through things like 401ks, it's a little bit of a slap in the face to see somebody become the world's first trillionaire on the basis of manipulating an index that we were all told we could trust.

8:32What do you think this means for passive investing in the future? I mean, if we're getting rid of the float requirements, we're getting rid of the amount of time that you have to be listed before you're included, we're changing all of the rules. It feels like this is kind of just a race to the bottom. I mean, I don't see why you don't just get rid of all the rules. I think there's definitely some truth to that. I think, you know, what we need to remember is, is that passive was never passive by its own definition. The definition of a passive investor is somebody who never buys or sells. That makes sense to many individual investors who through their 401k are quote-unquote buy and hold, but that first step, the buy, actually is a really critical component because you are contributing cash to the portfolio that causes the portfolio to need to be rebalanced.

9:22That causes trading and influences prices. Over the last five to seven years, we've learned an extraordinary amount about the influence of passive investing. My work suggests that the impact of passive strategies is rising the S &P, increasing the S &P by nearly 18 % a year now. I know that sounds like an astonishing number given that the S &P was only up 15 % last year. So we're actually looking at an index that overall probably would have declined had we not chosen to invest this way. We decided to do this because we thought that it simplified the process. It did simplify the process for average investors.

10:02It also simplified the process of taking advantage of those investors as we have just seen. Do you think that passive investing is something that we should just be reconsidering altogether? Are you not a fan of passive investing in general, or is it only recently that your tune has changed? I've been doing research and reporting and writing on this for well over a decade now. sometime around 2016, the formative literature and the awareness began to grow that there was an impact from passive investing, which had always been presented as effectively a not meaningful impact on the market. Even today, you will hear Vanguard and others talk about the small fraction of trading that is involved in passive trading.

10:48Those are simply misrepresentations, unfortunately. What they consider is what's called the organic trading. It excludes all of the flow characteristics that I just walked you through. So when we look at what's happening in the markets today, we have about a trillion dollars that is flowing into index funds. We have somewhere in that neighborhood that is actually leaving the discretionary active community. My lament is not about the active community. It's about the impact that has on the markets. were destroying the process of price discovery. You asked, is it the right price for SpaceX? The reality is nobody knows and nobody bothered to look at it.

11:26And everyone who has has come to the conclusion that it's fantastically overvalued. In fact, it really shouldn't even be called SpaceX. It should be called XAI because three quarters of the expected value in most of the forecasts are tied to its money losing, non-profitable and lagging AI business. why that justifies such an extraordinary multiple in valuation is somewhat beyond me. But once you declare it into the index at those levels, the index accepts that the last price was right. And that's really the key of passive. It passively accepts the price. And so when you involve them in the process of listing in this manner, you are structurally changing outcomes.

12:07It's a tough one because, you know, a lot of the, I like the point that you bring up that there's no such thing really as passive investing. Someone has to buy at some point and someone has to be the one to make that decision. And the thing that seems to hold it all together, at least from my perspective, is trust in the rules and the regulations that sort of govern those passive index funds. I mean, if you trust that there is a framework in place that says we're only going to buy these types of companies that have proven themselves over the long term, that only make sense in these conditions, then it sort of makes me feel a little bit more comfortable to close my eyes and say, OK, you guys handle it.

12:51You at the NASDAQ, you at the S &P. And I'm down and I'll put it in. And to be fair, it's worked for a lot of investors who have just dollar cost averaged into the S &P and it's all been fine. It does seem that there will come a point, though, where if they continue to make these change requirements, that might not work out because SpaceX could implode over the next six to 12 months. We've got all of the lockups expiring over the next few months, which is going to put huge downward pressure on the stock. It could ultimately be a bad decision, which ultimately may lead to outflows. And I wonder if that's the next chapter in the story that people say, you know what, we don't trust these people managing our money anymore.

13:34I'm taking matters into my own hands. I'm going to choose exactly which stocks I'm going to buy personally. Is that the next chapter in your view? I don't think so. I think actually the next chapter is we will see more of this type of manipulation. There are many, many publicly privately held companies that would love to list under these types of conditions and to receive the multiplier. My hunch is, is that we will actually see that exploitation in a repeat of the late 1990s IPO boom before we see anything resembling the outflow type components that you're highlighting. Final question here on SpaceX.

14:11I think we both, sounds like we both agree on SpaceX, but many people wouldn't. Your views on the company, the valuation, the financials, and whether or not it is a sound investment. Ultimately, I want to be clear. For an investor into the NASDAQ 100 or into any index like the total market indices that have already included SpaceX because of its size in their indexes, ultimately, whether it turns out to be a good investment or a bad investment is not going to be all that material. It is relatively a small fraction of the index. So even if it went to zero, the ultimate impact on the index investor would be largely negligible.

14:52The downside is actually what's happening from a societal framework. This is an enrichment tool that allows corporate executives and insiders to dump shares onto an unsuspecting public. And the last thing I would highlight is that I think you're giving people, by and large, too much credit. I think this audience very well may be aware of what you're discussing. But the really critical changes were made in 2006 when we created what's called the Pension Protection Act, rolled people. We switched our retirement system of 401ks from what's called an opt-in framework in which they had to choose to participate into what's called an opt-out framework where they had to choose not to participate.

15:32That exploded the number of people who held 401ks, declined from around 25 percent to today it's around 65 percent. It radically reduced the investment choices that most people are exposed to. And candidly, I would argue that most people are sleepwalking through this process, not really aware of what they're investing in or why they're investing in it. They're simply doing as they are told. That can be a good thing. It can also be a bad thing. If everybody starts doing what they're told as we are seeing, it creates the distortions that we are experiencing as markets become increasingly disassociated from fundamentals.

16:11So should this be happening? No. But we made a choice to do it this way. And this is, I said at the very beginning, is likely the logical conclusion. We will figure out a way to exploit this phenomenon and turn it into profits for those who are highly incentivized to create those profits. Michael Green is Chief Strategist and Portfolio Manager for Simplify Asset Management. Michael, really appreciate your time. Thank you. My pleasure, Ed. After the break, worrying signs in the jobs report. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

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19:47We're back with Prof G Markets. The June jobs report came in weaker than expected. The economy added just 57 ,000 jobs in June, less than half the number economists were forecasting. April and May payrolls were also revised downwards. And while the unemployment rate actually fell to 4.2%, that was largely due to a sharp decline in the labor force participation rate rather than a surge in hiring. Roughly 720 ,000 people left the labor force between May and June, which dragged the participation rates down to its lowest level in about five years. So joining us to discuss the June jobs report, we're speaking with pod favorite Catherine Anne Edwards, PhD economist, economic policy consultant and columnist for Bloomberg News.

20:39Catherine, welcome back to the show. It's great to see you. This jobs report here doesn't seem great. And the labor force participation number doesn't seem great either. In fact, it seems quite concerning. But what's the truth? What's the reality? What should we make of it? I mean, I think in some ways this report really puts us in the place that we've been for about a year and a half, which is the labor market is treading water. And so many of the indicators that we look at so closely, I mean, it's almost like they're bouncing within their standard air. You know, just they're right around zero.

21:14They go up a little bit. They go down a little bit, but we're not seeing a trend that we can monitor over time. We're not seeing it just fall apart and just decline. We're not seeing it just take off and recover and become stronger. We're just seeing this almost like noise around the mean and the mean is treading water. I think it makes it hard to parse on a monthly level, but the upshot is this is a weak labor market. Because if it weren't weak, it'd be very obvious to see it growing, showing signs of strength, and we just don't see it. The strangest part to me is the labor force participation rate.

21:46And just to clarify what that means for people, this is the share of the working age population that is either working, obviously, or looking for work, which fell, which to me tells me that a lot of Americans are saying, I'm no longer going to look for work now. And we see that that rate was especially among the 25 to 54 year old demographic was especially pronounced. How do we make sense of that? Well, labor force in the U.S. this century, people tend to, not that you're doing this, but people tend to pick the rate that they want. If you look just at the overall rate for 16 and older, it's really low this century because it's reflecting the retirement of the baby boomers, right?

22:28It doesn't have an age cap on our overall labor force participation rate, which is why you're right to look at the prime age. It's not really taking into account those big demographic shifts, but how much are people who are really expected to be working, working? And the cutoff for leaving the labor force because you've gotten, because you're no longer looking for work is really tight. It's just four weeks. So it's basically since the last survey, have you looked for work in the past four weeks? If you say no, you fall off. So there could be people who have sent in, you know, like a lot of us have looked for a job.

23:00You're so frantic. You fill out 50 applications and then it's almost like trying to buy a house. You've got to wait for something else to come on the market. And that can push you kind of mechanically out of the labor force. You know, for interpreting the market's strength, what to get from the prime age labor force participation falling in a month, you can think of it as maybe it's just noise, like I said at the beginning, or it's a function of what we have seen to be true in the labor market for some time, which is it is not generating jobs for people who have been looking for some time. Hiring is slow.

23:32The share of unemployed workers who have been unemployed for six months or longer has been increasing for a year and a half. It has shown no signs of slowing, including in this report. So we have a lot of people who have been looking without much success for a long time. And even amongst prime age workers, that can result in them leaving the labor force in a month. Historically, prime age labor force participation is at a near high. but this particular time in the labor market has not shown as many opportunities for workers as it should, particularly for workers who don't have a job. One of the big themes that we have continued to discuss whenever we have you on is the fact that almost all of the job growth that we've seen is coming from healthcare and social assistance.

24:15That's been true. It continues to be true each report. Was it true in this report? Is that still kind of what's happening in the job market? Yes, we are still seeing that kind of the only sector that is very consistently and predictably adding jobs are health care and social assistance. I think a lot of people were hoping that this month would see a big boost to leisure and hospitality from the World Cup, but it actually shed jobs in June. Justin Wolf has also pointed out that since January 2025, 90 percent of all new non-farm payroll jobs have gone to women. Actually, women now hold a majority of all non-farm payroll jobs.

24:51how do we make sense of that statistic why is that happening do you think that trend will continue well men and women don't work the same jobs and if you're adding jobs in places like leisure and hospitality and in health care and social assistance those can often be dominated by women and so it's really it's it's not so much that the labor market is favoring women versus the labor market is giving opportunities that women are much more likely to take you know some of your typically male jobs especially something like manufacturing has seen a hit over the past year and a half construction has has been a little bit more you know stops and starts but has seen some growth but we just you know we have gender differences in employment which is natural but that means that men and women can fare differently based on how the economy is doing i mean the 2007 the great recession was notoriously very male i mean it was a cratering of construction and manufacturing employment the covid pandemic recession, that hit women so much harder because it hit health care and social assistance as well as leisure and hospitality.

25:54So I don't think these patterns spell, like shouldn't be over-interpreted because at the end of the day, it comes down to, are we pursuing policy that helps the labor market and helps workers? I think the answer is no. You can't look at the Warner-on. You can't look at tariffs, you can't look at deportation, you can't look at a deficit-financed tax cut that cut Medicaid and food stamps and say all of this is benefiting the worker. Who hurts from weak policy isn't going to be uniform. It's going to hit different people at different times. And right now we're just we're seeing male employment take a hit.

26:32I wanted to ask you about immigration as well, because that was one of the big themes in our previous conversation. It's timely because Trump just posted on his Truth Social, he said that there was a Federal Reserve paper that, according to Trump, showed that illegal immigration under Biden increased home prices by 30 percent. In reality, that's not what the paper said. It actually said that immigration had driven up prices by around 6 percent during the Biden administration. And then it also had some details about how actually wage growth had not been suppressed or taken a hit because of immigration and also employment actually increased.