As the FT reports this morning:
The blockbuster listings of SpaceX, Anthropic and OpenAI are set to prompt an unprecedented wave of buying and selling as new “fast entry” rules thrust the stocks straight into Wall Street indices.
The rules, implemented this month by Nasdaq, mean billions of dollars of passive money will automatically flow to the three companies shortly after they go public, driving their share prices higher but forcing investors to sell other stocks.
Let me unpack this because what is being said is important in the current economic context, where an economic crisis appears almost inevitable, and a stock market adjustment is well overdue.
What this FT article notes is that the three companies it names are to be launched on the NASDAQ stock exchange in the USA, with potentially record-breaking valuations. I will address the issues around each company in a moment, but first, let me explain the FT's current point. This is that because a great deal of stock market trading is undertaken on the basis of “following the index”, which means that the investment funds selling products of this sort must hold share portfolios that as closely as possible replicate the proportionate value of shares in the market that they are tracking, the launch of three share issues of the mega size that each of these will represent will create significant short-term disruption to stock market values over the periods when they are issued because fund managers will have to sell some of their existing portfolios to acquire shares in these new companies.
Three things are likely as a result.
The first is that selling pressure on some existing companies will reduce their share valuations.
Secondly, because these new market entrants are, however, subject to excessive hype at present, the overall value of the market will probably increase, and we will see new stock market highs.
Thirdly, this just means that the amount by which the markets will fall in due course is even larger than I previously expected. The nature of stock market investment, coupled with the vast number of billions of dollars that will be invested in these companies, will guarantee that.
This, then, is the first stage in the process of rupture of late-stage AI market euphoria, which is coming.
The second stage in that rupture will occur when it is realised just how great the hype around these companies really is.
I am not disputing that, in the absence of government agencies willing to undertake the task, there is a market for commercial rockets sending satellites into Earth orbit. SpaceX is in that market, and a great deal of what now happens on the web is dependent upon those satellite systems.
In the late 1990s, I was a director of a company that built what we believed to be the first-ever truly spherical map of the world, so we could develop mapping technology for the internet. It worked. I could not have imagined how much the internet would change as a result.
But, and let me stress this, SpaceX is not being valued on this usefulness basis. The hype around it is all about missions to Mars and related ideas about space colonisation. Let me, then, add a sobering note for all of those who believe in this complete and utter pile of guff. There is no evidence that human beings could survive a journey to Mars and, if they did, the impacts of the journey, and in particular the prolonged period of limited gravity involved, would mean that they could never survive a return to Earth. I think there is pretty strong evidence to suggest that.
It is my belief, then, that the hype behind this narrative is completely misplaced. This looks like tulip mania, or the South Sea Bubble, to me. I would not go near this company, even if I could stomach providing funds to Elon Musk, which is what this share issue will deliver, as the governance of SpaceX provides him with near-total control of the company.
Let me then note the launches of OpenAI and Anthropic, treating them for these purposes as being similar because they both provide popular AI tools.
I should make a fair declaration. I subscribe to ChatGPT, which is an OpenAI product, and Claude AI, which is an Anthropic product. Both have roles in our workflow here now. I am not, then, suggesting that these companies are producing products which are not useful. My own experience proves that they are.
But, and I cannot make the point strongly enough, being useful is not the same as being fundamental, and I think that the valuations that will be attached to these companies imply that they will be fundamental to the future of the economy in a way that I think is, again, overhyped, although I accept that I may be wrong.
In this case, I think there are good reasons to differentiate these products from that other example in which I was involved in the late 1990s. The difference is that for OpenAI and Anthropic to deliver on their promise, they must absorb massive amounts of energy and water. That is deeply problematic when, as a matter of fact, we know that water is in increasingly short supply, with the resources that we have being necessary to ensure human survival, whilst the use of nuclear and fossil-fuel power to provide energy for these companies will imperil future life on Earth.
In that case, I think both these companies have growth prospects that are massively lower than is currently assumed.
As is apparent from the discussion that I am now witnessing about the impending economic crisis we are facing, there is an almost hopeless inability amongst economic commentators to grasp the consequences of absolute physical shortages in supply. Their belief that the world is an infinite resource that can deliver whatever we desire forever, without consequence, is quite extraordinary and utterly unjustified.
For that reason, I think any valuation that will be attributed to these companies is similarly unjustified.
So, to draw conclusions from these observations, at a time when we face economic meltdown, US stock markets are going to see the launch of three share placements at record-breaking levels that might push the value of the NASDAQ, and other exchanges, to levels previously unseen, from which they are then most likely to topple because the physical fundamentals underpinning the share offerings being made do not exist, and the economy is going to crash whatever they might offer.
I think that these offerings are based upon mythology and not fact, and that is now, as it always has been, a basis on which fools part with their money, and many are going to do so. The trouble is that the scale of the crisis to follow will topple stock exchanges and banks, and we will then be back in a full-blown financial crisis.
The FT might be excited about these launches, but I am, as is so often the case at present, left terrified by the incomprehension of so many supposedly clever financial observers who are unable to understand the reality of the world around them.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Ed Zitron, on his blog, is working hard to shine a light on the finances of the AI labs & data centre owners (Oracle).
https://bsky.app/profile/edzitron.com/post/3mma2oo4zsk23
In short, they’re in a big (no, gigantic) capex hole and it’s unclear where enough money would come from to fill it (eg Oracle is maxed out on debt). All the time they are unprofitable at an operating level, trading on hype, and with no obvious path to profitability.
It’s not impossible that they will run out of road in the next few months (IPOs or not), which could hole the S&P below the waterline.
I’m not doubting anything you say, but what I appear to be seeing here is the constant desire to bring forward what are perceived as future profits that may never actually be realised. A totally ‘sunny side up’ way to look at things in such a risky environment.
Are these today’s equivalent of The Golden Calf?
Have any of these companies yet made a real trading profit?
Can they meet their future repayment obligations based on the corporate bonds they have been issuing?
It just seems to be a way for the founders to exit with a pile of cash.
Hello Richard.
Not that it’s particularly important, given your limited time amongst the gazillion things you do each day, but would a video explanation of the interesting points John Fairhall raises, be of any use to people?
I certainly don’t understand how companies can be valued so highly, and executives paid so much, when they are not making a ‘real trading profit’ (whatever that is compared to ‘making a profit’).
Also, is it institutional investors that buy these corporate bonds, and if so, why do they if it’s unclear that the company can pay its future obligations? Is it not the institutional investors job to spot this risk and steer clear of it?
Similarly is it not the market’s job to be wary of founders trying to exit their businesses with a pile of cash?
I don’t get it.
Regards.
I was reading about colonising Mars and it seems virtually impossible what with the radiation ,awful dust and lack of gravity.It appears if people did stay there for some time and returned to Earth they would have problems with their bones and hearts and maybe not survive.Also how difficult would it be to transport supplies there and grow food?Maybe some of the loons involved in such ideas should spend time, effort and money improve things here on Earth.
All this guff made ne think that so much of our economic system seems to be based on rumour, hearsay and trite ; one rumour or prediction causes shares to rise, another causes them to drop.I did read some of the things Trump says may be said to intentionally cause shares to drop so speculators can buy them up at low prices and the system is open to corruption and fraud as a result.We talk of’The Market’ and ‘The Economy’ and ‘A company’ as if these are living things with minds of their own but behind them all there are people; faceless, annonymous, who seem to be unable or unwilling to work for the commom good.
Sorry I’m not able to express things as well as you.I wish you, Richard,were on TV and radio more .
I think Tony Benn once said we should base our economy [Stock Market etc] on the number of homeless and other such things.[Sorry; not an exact quotation of what he said.Maybe he had a point.
Thanks
Mark
“Fast entry” rules? What could possibly go wrong?!
Just published by Tim Morgan; chimes with you, Richard.
#324: The looming crash | Surplus Energy Economics
Good thoughts, Professor.
On water and energy use of AI installations.
Water is for closed systems, not used in an evaporative system. The water demand is much lower, not problematic, as the would be if they were evaporative systems.
Energy production via solar is continuing to accelerate, Wrght’s Law continues to drive costs down while the market expands. It has a huge amount of expansion still to come. Refer to Tony Seba ‘Stellar Energy’ analysis. His cost and production projections for disruptive technologies are eerily accurate. Musk’s ambition is to product 100GW/year of solar. That is a very large number, but in keeping with solar panel industry expansion in China. The US is lacking in energy, the market exists.
On space, Must is aiming to reduce launch cost per kg by two orders of magnitude. That would allow him to build an AI data centre in space, purely solar panel powered, and cooling direct to the temperature of space, which is a few degrees Kelvin. He has put forward dreamy business goals before, like creating a privately held rocket company, building a practical EV and so on. What appears dreamy to us seems to have enough strategic foundation to succeed.
@John Tolhurst, do you have links to follow up those observations about water use and Musk’s space solar plans? I’m trying in the midst of other busy-ness to get a wider view of these issues …
This is another scam like the big short surely? – Force pension finds everywhere to buy their stock. The ‘founders’ walk away with the cash, the pension funds make a massive loss. You’d think stock markets would have safeguards in place.
But stock markets want the boom….knowing somneone else will pick up the bust
Kirsten, that’s the very scenario I picked out of Richard’s piece. The locked in institutional dimension looks like another version of socialising private risk.
Interesting late afternoon meeting today with European Commission official. They have a box of money (6 figures) & were asking me (???) for advice. Money is now in some kind of fund (where the costs suck out the growth – sound familiar?). My advice, pull it out of the fund. Options then are to place it with a stockbroker (execution only) or with one of various banks who will charge for the combo of share placement and advice (natch). My advice: pull the money from the “fund” but invest in nothing for the moment – because probably the IT-sector will “unwind” & pull plenty of other stocks down with it.
SpaceX came up in conversation – we both laughed. I pointed the person in a DIY direction – the A.I. I pay to use can produce an analysis of quoted companies as good as anything produced by various merchant banks (I know cos I’ve seen ’em). As for Space-X is it asking the right question? Are there much much lower cost ways of getting something into low earth orbit? (asnwer – yes).
I have been involved with computers for about 60 years. I am not that interested in the technology but I have studied the functions and social impact of IT. In that 60 years that world has changed out of all recognition but every forecast of new technology has proved to be exaggerated. Each innovation has taken its place in the overall advance. AI will be exactly the same. It will not live up to its hype by its propagandists but it will change our world. For example Amazon has said that the introduction of robots into their operation have not reduced the workforce but altered its composition with more skilled technicians required. I also note that the enthusiasm for technology in education has not improved it and we are now witnessing a pushback.
Much to agree with