SpaceX Is Breaking The Rules, Siri AI & Ron Santella (HEDG)

26:02So some of the industries that historically reviewed as being cyclical, for example, semiconductors, we now talk about, are they possibly in a super cycle? And that may be true. And it probably speaks to why we've seen the kind of appreciation in that sector and that segment of the market this year. Where do you think, because today's the day, SpaceX IPOs, where do you think SpaceX fits in super cycles, secular growth trends? We were just talking about it before, space exploration, AI hardware infrastructure, defense. It seems like they're doing a really good job of getting investors excited about touching all the hot narratives at the moment right now.

26:41Do you think these are durable trends? I think SpaceX is the classic poster child for go big or go home. Something that really stands out in their filing, their S1 filing, is the size of their addressable market. The number's 28 and a half trillion that they list in that document. So they're aiming to really go after some very large markets. For me, I think SpaceX is representative of maybe something much more important, which is innovation is really the key to growth. And we're living in a time that I've never experienced in my 40 years in the market, where none of us have, where whether it's AI, robotics, autonomous driving, medical technology, biotechnology, defense technology, the advances are unbelievable.

27:26And the rate of growth is even improving over time. SpaceX to me is right in the middle of that, what it's going after. And by definition, there'll be risk in that. They all won't be winners in that portfolio. Right. But I think SpaceX is a company that's coming public at slightly less than two trillion dollars. And I think the people who believe are going to see a company much bigger than that a decade from now. I like that take. Yeah, I think so, too. But I also want to say Austin and I both have SpaceX exposure through our venture portfolios. But how does this one point seven five trillion dollar public valuation, how does that change the math for these early private investors?

28:06and then also touch on what that looks like at IPO for people that are trying to get a piece. Because I've been saying all along, and Austin mentioned it earlier in this episode, a lot of this valuation, and it's going to go up dramatically, I feel is already baked in. And I feel like he has to get a lot of things right for SpaceX for it to really be worth this. But touch on that a little bit of how this works for this valuation for the early private investors. I think there's a couple of things to address there, Robert. Number one, there's a Musk premium here for sure. And I think we would all agree, and your listeners know, that Musk is a unicorn.

28:42Using traditional metrics and valuation tools to value Tesla or SpaceX probably fall down at some level. So you're banking on who Jamie Dimon called the Thomas Edison of our age to deliver many future promises. I think for the early investors, it puts you in an interesting spot because it depends how early you were, of course. But this is going to be probably the greatest wealth creation IPO ever. Going to create millionaires and billionaires. And so there'll be some people who never had that kind of money before to say, what do I do? Do I want to continue to have the bulk of my net worth in a single stock?

29:19Or do I want to diversify? So I don't have a clear answer on what that means for the individual because it's a very personal choice. What I do know is there's an army of wealth advisors who are very excited to go meet some of these SpaceX shareholders. And I can tell you, just from our own experience, we talk to dozens of advisors a week, branch managers, senior management of Wall Street firms. Uniformly, they tell me they've never seen something like this before. Yeah, that's interesting. So I wonder, because I think I might have seen an article with like the Wall Street Journal or somewhere else where this like girl in her mid to late 20s is going to become a millionaire because she's worked at SpaceX for the last half decade.

29:58And, you know, she was doing some engineer work and, you know, she's doing her thing and she decided to take 10 percent of her salary in stock. And so she's just been, you know, kind of piling it up there. And because of this IPO, she's going to be a millionaire in her 20s, which like congratulations. I think that's incredible. I love it when companies, that's one thing I really appreciate about SpaceX is I love it when companies are willing and able and happy to give equity to their employees and give them some liquidity when they want it as well with these sort of tender offerings. But I didn't really think about that, Robert, in the sense of like, I think it'd be foolish for this woman to keep, I would imagine it's probably 90 % of her net worth here, just in SpaceX stock.

30:38Like she's probably going to, you know, thoughtfully diversify into index funds and other different things. Do you have any perspective on maybe like who some of the biggest beneficiaries of that maybe capital reallocation might be? That story is interesting, Austin, because it just hits me on something I've noticed over my career, which is real wealth is created through concentration. Preserving wealth is usually done through diversification. I think that's going to be the challenge for people that are paper wealthy overnight, is when do they make that leap from having that concentrated bet to diversifying their wealth, right?

31:13And again, that's a very personal choice, depending on one's age, risk tolerance, their liquidity, things of that nature. I think by definition, people in SpaceX are looking for new frontiers. I think they're looking for emerging technologies. I wouldn't be surprised if some of that money finds its way into some of the IPOs we see coming the rest of this year. Anthropic has filed for an IPO. Chad GBT's parent has filed for an IPO. We'll have other AI support infrastructure companies come to the market. I would make a bet that you'll see a portion and perhaps a large portion of those proceeds go into those type of companies.

31:51That makes sense. So staying on SpaceX, you take all these early investors, all these employees that are now going to be multimillionaires, you factor in the lockup period for most of these people, which I'm guessing is going to be six months probably. So when you look and factor all that in after the IPO, after what we believe will be some volatility because people are going to take profits, where do you see it going in the future? because I believe there is a world down the road. I don't know what that timeline is based on how much he pulls off of all of these lofty expectations. But do you see SpaceX, whatever it turns into, being a$6,$8 trillion company in the next two to three years, or is it much further out?

32:36I think it's easier for me, Robert, to make a prediction about what the value can be. I think the pieces are there for SpaceX to be a 6, 7, 8, and perhaps a$10 trillion plus company over time. And part of that is that Elon Musk has a demonstrated history of providing value to his shareholders. So this is not completely pie in the sky. I think trying to pinpoint that time is difficult. And if somebody said, Ron, do you expect this to happen in three years, take the over or under? I'll take the over on that. I think there will be bumps in the road. I think some of these businesses are going to be capital intensive, very capital intensive.

33:16They tend to take longer than one thinks. So without giving an exact date, for me, it's more than three years. Okay, that's fair. Yeah, I appreciate it. And I was just curious where your head's at because I do believe we see it get to$8 trillion in years, not in a couple years, five, six, seven years maybe. So I think long term, it's going to be a really good investment. I've just been very wary of telling people to try and jump in at the IPO because I just think that a lot of the value is already baked in. So that's my take on it. And I'm glad you kind of agree in the timeline and the later valuation down the road.

33:54I think two technical sides of the IPO, which one has been talked about and one not so much, is we will see demand coming from the index funds. The Qs will be the first at it. They've gone out, they've waived their normal mandatory waiting time. But this will be added to the other indices over time. So there will be buyers of that. For those that put value on corporate governance, I don't believe SpaceX meets the test for that. As we know, Elon Musk is controlling over 80 % of the vote for the company. It's not unprecedented. We saw that in the case of Facebook. We saw it in the case of Google.

34:35But the market is not usually a fan of super voting dual share classes. I think that speaks to his following. And frankly, the trust that people have in Elon Musk to deliver value over time. Now, talking about things that have also doubled, inflation just printed 4.2 % on Wednesday. What's your take on that? It's a three-year high. You know, how is the Fed going to have to respond to this, especially now, as it's very clear that the inflation we've experienced with energy specifically is not a demand side, but more of a supply side? So inflation numbers are too high. And while the recent numbers may have been in line with expectations, expectations are too high.

35:21And that's what the Fed is going to be looking at next week. Now, for those who are looking at those numbers, we've talked about this several times in the show. We have the headline number. We have the core number. So one looks at inflation, X energy and food. It's a little bit of a different picture there, right? I think Kevin Warsh has an interesting situation ahead of him when it comes to inflation because it's recent history when Jerome Powell talked about the transitory nature of inflation back during the pandemic. and it's why they did not act that aggressively in 21, which in 22 led to the highest rate of inflation in 40 years.

35:58And so as we're sitting here with inflation that have been elevated now for quite a while, Fed has to look at that carefully and what their steps are going to be. Something we discussed on the last episode that I was on, Austin and Robert, is the Fed has a dual mandate. Their job is to help support full employment and also to help support price stability. I believe the recent labor numbers have given the Fed cover to really focus more on controlling inflation. Yeah, I know you're right. They certainly have. And I guess the real question is, are these labor numbers real? Because I feel like a lot of 2022 and 2023, we saw all these exciting big labor numbers and they were revised lower to essentially net zero growth.

36:43And so it's like, when it comes to these labor numbers, yes, that's really cool to see. But we'll see how that continues to shake out. Something I want to share my screen real quick and get your take on this, Ron, is this really cool chart that I had found. I think I saw it on X. But it's the market performance during the initial first year, whenever a new chair or a Fed chairman jumps in here, chairperson rather. And so during Jerome Powell's first year, right, 12 months, the stock market was about four and a half percent. But during that same period of time, the markets fell about 19 percent max drawdown.

37:19And so the median drawdown in that first 12 months is 13 and a half percent, despite about a 10 percent return in the markets. And so I think this is important for us to talk about here because it sort of sets expectations for some of these investors. You know, you get like a new Fed chairman or chairperson, whatever you want to say there, is rocking and rolling. Like, we should all get excited or things are going to change or whatever. But the market doesn't like uncertainty. The market doesn't like knowing that someone who's not been making decisions for the last couple of years now, you know, someone's news coming in.

37:51They get to make different decisions. And who knows what the type of decisions are. And, you know, June 16, June 17, it's going to be a great time for us to get some insight into Kevin Walsh's perspective on what he thinks these rates are going to be. I think I saw in Polymarket, there's a 60, 70 % chance now of a rate hike in 2026. So it's all over the place. But I want to get your reaction to this chart on screen. We actually spoke about this this morning internally. We had a discussion. We actually had a panel discussion with some wealth advisors regarding this. It raises a bigger question to me, actually, Austin, because I think you're right.

38:26When a new Fed chair comes in, it presents some uncertainty about policy. I do think Warsh is a little bit different in that he was a governor for a while. He's written white papers on how he stands, so he's not coming as a completely unknown commodity. What's not known is how the overall committee will come together with him and how they'll work together. Some dissents recently, as you know, with some of the recent votes. But for us, the larger question is not just the Fed, but when you look at the second half of the year, which starts next month, what type of risks are out there for the investor?

38:59The Fed is one of them. The midterm elections are another that's coming out. Expectations for earnings growth. We're coming off a very solid start to the year for earnings growth. People will be looking to see, will that continue, right? And so I think when you look at the Fed, you should now earn as a yes. This may create some uncertainty, but one should also think about what other things are out there the rest of the year that could create some volatility in this market. And how do you protect yourself in those volatile periods? I love this, Ron, and I want to bring up something you led right into it, actually.

39:32The 10-year just hit 4.53%, and Fidelity said yields have broken out of their established trading range. So, in your opinion, what is the bond market telling us that the stock market isn't given all of these conditions? I've never seen, you mentioned this earlier, I've never seen a market with so much knee-jerk reaction because of headlines day-to-day. What are your thoughts on this with the 10-year being at 4.53 %? The bond market is looking at what we're talking about, Robert. They're seeing the inflation numbers. And we look at the stock market and some of these dramatic moves we had. Yesterday, the Dow was down 900 points plus.

40:12Today, it's rallying back strong. But when one looks at Friday's bond market action, you look at the two-year jump, 11 basis points, that's a big move. And so to me, the two-year is as important as the 10-year, which is something we discussed in the past, because the two-year is essentially that forward funds rate. And I believe the Fed focuses on that. But I think when it comes to the 10-year, the bond market and stock market are saying they're not quite aligned right now. Something has to give there in terms of that yield or level of the stock market. Yeah, I really like that take, Ron. I believe and agree with you 100 % here that, you know, they're just not acting in alignment.

40:50And I think that's okay right now until the markets settle down a little bit more. I want to go back to earnings, though, because you had shared that earnings are really important. What's been your take on Q1 earnings so far? And do you think that this earnings momentum is going to continue in the back half of 2026? And the reason I asked specifically, I'm going to share my screen again for all you guys listening. you should go pick up your phone and look at it or watch us on YouTube or Spotify. But this chart does a really good job. It illustrates that since 1995, there have only been six calendar years where the S &P 500 grew earnings by over 20%, right?

41:3195, 03, 04, 2010, 2018, and 2021, all of those years. But 2018 ended up with the S &P up double digit returns. I think 2026 is going to be another year of that here. You know, S &P is up 8 % plus year to date. So how important is earnings right now as it relates to driving a lot of this stock market appreciation? Because to me, I think it's everything. I mean, yeah, we've seen some volatility, right? Last Friday, we saw the NASDAQ have the worst day in not knowing how many years. I think it was like, you know, October or something last year, maybe 14 months, actually. It was the worst day in like 14 months.

42:08And then the S &P had the worst day since like October of 25. But a lot of that had to do with the Fed's expectations and rate cuts and jobs and things like that. And of course, a little bit of broadcom here and there. But I have a feeling that the markets are kind of shrugging off the war. I got a feeling the markets are really trying to say like, okay, I don't care about that. We care about earnings. And what's your take on that? To me, earnings are everything. I think ultimately, a strong economy creates the backstrap for strong earnings and earnings drive stocks. It's not much more complicated.

42:40But I do think we're at a market where there's been a record amount of dispersion. So when you look at the market, one has to find what is that market for them. If you're in energy this year, you've done well. If you're in semiconductors, you've done even better. If you're in financials, you could be down for the year. So one has to look at how their portfolio was allocated. But ultimately, earnings drive stock prices for sure. I think the next derivative is the earnings momentum. We've been in the market where the momentum of earnings itself has increased. I think in the future, people will look to see how that momentum is going.

43:16Can the market continue to grow at that pace? I think two interesting stories with earnings are two well-known companies. If you look at Dell Computers' recent earnings, they blew through the numbers at a pace I haven't seen for company covered that well by analysts in a long time. Stock was up, I believe, 35 % on the news. But to me, it was interesting. Even their legacy business did extraordinary. And this is a company that I was investing in back in 1993. And I'm watching it just, it's like a growth company. And then I watched Oracle yesterday come out, and they beat their numbers. At least, they beat their headline numbers.

43:53But the market looked at their CapEx and looked at their additional financing needs, at least for a day, it doesn't like the news. And so I think it's easier that earnings drive stocks. But I also think for investors, you have to really know what you're invested in and make sure you follow those individual stories. Now, something, an observation we've seen on WallStreetFavorites.com recently is that, and we just did this back test over the last, I think, like four months or five months, companies that have market caps above$100 billion returned 13.5 % over the last four or five months compared to companies sub 100 billion all the way down to like 10 billion market cap have been basically flat.

44:32And so do you think this mega cap mega market cap momentum concentration is a feature of this current market we're in or is it a warning sign or like how should investors be thinking about the mega cap companies driving a lot of these returns right now? Two things come to me through yesterday the equal weight index was actually slightly had the S &P 500. So we are seeing some breadth to the market. And even on a day like Friday, which was a notable down day, we saw some stocks like consumer staples actually rally that day. So market concentration in these names that are grown that are in excess of$100 billion, I think it's both.

45:14I think one has to recognize over the short term that these are momentum stocks. These are crowded trades. And by definition, there will be volatility. So when you see the semiconductor index up close to 90 % for the year and then drop 12 % in a week, that should be expected. On the other hand, if you have conviction in the theme and you have conviction in the investment you made, you ride through those periods. And as long as the fundamentals stay strong and support that, these companies should continue to grow. So I think two things can be true at the same time. You had mentioned the equal weight S &P.

45:50I'm sure there's people listening to the show right now that has RSP, that have VOO and QQQ, and they're looking at the volatility we experienced last Friday and at the start of this week. And now, you know, it's Thursday when we filmed this and the markets just jumped one and a half percent because of what happened with Trump. And so you pair that with Fed uncertainty, whatever, IPOs all over the place. Walk us through how HEDG is built to handle exactly this type of environment. We think HEDG is designed to handle any environment. I think this type of environment does shine a brighter light on what we do.

46:27But this should be part of a portfolio in this environment, in any environment. I'll walk you through the reasons why. A, we're a big believer in not timing the market. Stay invested in the market. Something we've discussed on this show more than once is you can miss a handful of days over the last 10 years, 20 years, and you can lose a large percentage of your gains. So when one chooses to invest in high growth names, and one is, we're talking about SpaceX today, this is how you create wealth. But to ride through those periods when you have market declines of 10%, 12%, 15%, hedge is going to be a bright spot in those periods.

47:07So for example, if one looked through yesterday, you would say the S &P 500 was down about 4 % month to date. Hedge was unchanged for the month. So that gives one a little bit more stability in the portfolio. And I think it allows you to ride that emotional roller coaster that may come from some of those moves that go like this in other parts of your portfolio. To me, that's just having an intelligent long-term investment plan. I also want to point out that when markets do rise, we've delivered double-digit returns. In 23, 24, 25, the S &P was up double digits. All three of those years, hedge was up double digits.

47:44So we think it's suitable for any investor. It should be part of an overall portfolio allocation plan. I completely agree. I have it in my portfolio. Robert has it in his. And as we think about, you know, percent allocation, talk to me a little bit more. I'm not trying to put you on the spot of like put this exact amount, like whatever. But I want to just like get your perspective on like how a new investor that might be saying, OK, maybe I'm not cut out for this 4.2 percent decline in the NASDAQ on a whim. or maybe I'm not cut out for this, you know, two and a half percent decline that we experienced earlier this week and the jump up and all this stuff.

48:16And, you know, how should they be thinking about portfolio allocation? We've heard about the Trinity study, the 60-40 when it comes to retirement. How does this maybe compare to that? Is that something that is just completely separate? Like how should someone that's brand new thinking about allocating to some HEDG kind of construct a portfolio knowing that this is a core component of it? Well, in one construction portfolio, I think I think two things are important. I think one should be looking long term. And to me, long term is three to five years plus. That should be the starting point. I think the second thing is one should anticipate there will be volatility in the market.

48:53And you're going to have drawdowns of 10, 20, and sometimes more than that, 30 % in the market. So you want to make sure when that happens, A, you can ride through that. And B, you probably want some liquidity so you can take advantage to buy additional securities if you want to. So when we look at a hedge, we believe that a hedge should be at least 10 % of one's allocation, really up to 20 % or 25%. And the reason is, let's just take this month, the month of June. We're outperforming the market by quite a bit. If you're less than 10%, that's not really going to be meaningful in the overall scheme of what you're trying to accomplish.

49:28So without knowing the rest of somebody's portfolio, Austin, because it'll be different for each portfolio. For us, that zone is sort of more than 10 % and probably up to 20 or 25 % for a hedging strategy in your portfolio. In this case, HEDG, our ETF. No, I think that's a great, great breakdown. And again, when people think hedging, they don't only think about like buying put options, but the difference is buying put options eventually go to zero. Like the value of those disappear. And sure, if you time the markets correctly and you're able to buy your puts and do things like that, right? Shorting a stock, able to do that correctly.

50:02Yeah, it works, right? But I can't do it correctly. I can't time the markets. 99 % of people can't. You mentioned timing the markets doesn't make sense. Dollar cost averaging, spending more time in the markets than anything is what does make sense. And so HEDG, in my opinion, solves that problem of having a hedge in a portfolio that you don't have to move in and out of or try and time or do anything. It's just that permanent thing. And it does its job right. I mean, you just mentioned here, month to date in the month of June, you guys are out performing the S &P dramatically. And when the markets are up and when your puts are going to zero, right?

50:34HEDG is going up with it. And so that's what you guys have built. And so I really appreciate you walking us through that again. Just a follow-up on what you just said, Austin, because I hit on something that's been important to me in my career. I started trading options on the Chicago Board Option Exchange back in the mid-80s. Over the last couple of decades, I still cannot figure out how to time when to buy puts and when not to buy puts or when to buy costs. Timing is very difficult for investors. That's why when we structured this product, we did not want people just to buy puts and watch the premium erode.

51:03Instead, when you buy a hedge, our static rate of return, if the market doesn't move, tends to be double digits, north of 10%. So you'll get paid to wait in a fund like this, in hedge, versus going and buying puts. I love it. We talk all the time, and we can end on this, time in the market versus trying to time the market, I think is one of the best phrases in finance to get people to understand nobody can time it. Not AI, not the best funds. It's just all about being in the market long term. So Ron, thank you for stopping by. You always bring so much wisdom to our audience and we really appreciate it.

51:39Make sure all of you guys check out HEDG. Very, very cool for your portfolio. Ron, thank you for stopping by. Great to be here. Thank you, Robert. Thank you, Austin. Another top tier conversation with a top tier Wall Street veteran, Ron Santella. Again, Go check out HEDG. Really, really cool product that they built over there. And we're super glad and just proud to have Ron on the show to give his take on all things, stock market, economy, bond market, SpaceX, IPO, everything. It's so cool to have someone like that that wants to join us on these episodes. And, you know, it's conversations we're already having with people.

52:13I think that's what's so fun about the show, Robert, is we have these conversations with these industry experts, but the show, the Rich Habits Podcast and now the Rich Habits Radar has allowed us to take those conversations that we have behind closed doors or over email or over the phone or over a zoom call and now publish them online for everyone to see and so that we're super grateful to have awesome people like ron joining us if you enjoyed this episode of the rich habits radar please go check out wallstreetfavorites.com that is the nicest thing you can do for us at the moment showing us some support over there would be incredible and of course consider joining the rich habits network which is our community for our biggest fans we just uploaded our ninth video course in there Robert?

52:48Ninth video course. It's like 9, 10, 12 hours of video coursework all about investing and personal finance and small business ownership and automating your money and retirement and taxes, like all these really fun things. They're all over there. Seven-day free trial, literally completely free. Go trial the Rich Habits Network. Stick around if you like it. And we're so grateful to have 100 ,000 of you come back every week. Thank you so much. And we'll see you on Monday.

53:41We'll see you next time.

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