SpaceX IPO and market volatility

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Hello and welcome to The Intelligence fromrom the Economist, I'm Rosie Blor Today on the show, how the value of SpaceX affects you and me and remembering Alan Greenspan, the maestro of monetary pololicy First Last week, after Ukraine suffered a particularly massive overnight bombardment President Volodymyr Zelensky issued a warning If Ukraine burns, your Moscow will burn too. Since then, the intensity of Ukrainian strikes on Russian territory has been stepped up Smoke obscured Moscow's skyline as oil refineries were set ablaze The Crimean Peninsula, which has been under Russian occupation since twenty fourteen, has also been attacked The campaign aims to bring war to Russia's doorstep The question is whether it will alter the course of the conflict or simply provoke further escalation Crimea has been under attack from Ukrainian drones for months now Steinlass is our Europe editor Most recently drones have hit power lines, causing blackouts. The Ukrainians blew up an oil terminal in Kerch And they have repeatedly hit ferries, which served as one of the peninsula's main arteries of supply. Lorries are having a lot of trouble getting through. they have to take a long highway That highway is also vulnerable to Ukrainian drones. It's littered now with the hulks of burnt out cars and trucks And last week, Mihailo Fjorov, Ukraine's defense minister, said that Crimea could in effect, become an island That's what he's trying to accomplish. Why is it that Crimea has been so heavily targeted? Crimea is an extremely significant place for both countries. The military conflict between Ukraine and Russia really got started back in twenty fourteen when Vladimir Putin launched an invasion of Crimea. The reason why Putin was so eager to get Crimea was partly military. It served as a huge naval base for the Black Sea fleet But it was also spiritual. Crimea is a place that Russians claim was the site of an important conversion to Christianity a thousand years ago, which they see as a civilizational marker. It was also a region that they tried for hundreds of years to seize from the Ottoman Turks, hence the Crimean War in the eighteen fifties against England and France And it became sort of a jewel of the empire, both for the Russian Empire and for the Soviet Empire It boasts absolutely beautiful beaches and became a resort area under the Soviet Union. It still has a resort area Putin thinks of it as the spiritual source of the Russian nation. So it is no surprise that he has been very reluctant to talk about the latest Ukrainian campaigns to make it all but unlivable. You say that Putin's been reluctant to talk about the campaigns. How much do Russian people actually know of what's happening in Crimea then One reason why the Ukrainians are eager to attack Crimea is because when you attack resort area that many Russians are familiar with, it registers more deeply in the Russian consciousness than if you just attack random areas of regions that border around Ukraine. Russians are starting to get the news that you can't travel easily to Crimea, that you can't buy fuel there anymore. They shut down all fuel sales at petrol stations last week because they can't effectively petrol into the peninsula. And that's extremely important for the Ukrainians because Vladimir Putin's control over his country's media system is so tight That it has not been clear until now just how much Russians understand about how badly the war is going at the front and about the costs that Ukraine is imposing. Now, Crimea iss not the only area where fuel is rationed. About half of Russian's regions now have rationed petrol because Ukraine's drone strikes on refineries have been so effective. But nevertheless, Crimea is a very good place to hit if you want Russians to understand that there really is a war going on And Matt, do we know how people in Crimea itself are responding to these attacks We've had reporting from inside Crimea and the reports that we're getting vary substantially depending on who you're talking to. If you talk to were members of Crimea's indigenous population, the Crimean Tatarars They were very reluctant to embrace the Russian takeover. This is their ancestral land. under Stalin. they were banned from the region and deported and only returned decades later Their attitude is that they have to stay and tough it out through the Ukrainian attacks because they are insistent on remaining in their ancestral homeland. Russians in the Peninsula, people who consider themselves Russian and back the Russian takeover find it increasingly difficult to live there Many of them are becoming pessimistic about the region's future. We heard from business owners in Sevastopol, for example, that whereas ten years ago, when Sevastopol was taken by Russia, there were a lot of plans for modernizing the city, turning it into more of a commercial port rather than just a naval base, maybe going into wineemaking And now no one sees a future there. and people with money are trying to find places to buy in Russia proper and moving away. We did not hear that the allegiance of people who back Russia was shifting at all People are anxious in many cases about the idea of Ukrainian return to the peninsula Some Ukrainian officials have vowed there willll be retribution for people who they consider traitors. peopleople are tired, they're exhausted by the war And the overwhelming sentiment is they just want it all to be over You talk about strikes on Crimea as one way to bring the war home to Russian people. What about attacks on the rest of the country Ukraine's ability to strike in places very far from its own borders has changed the level of awareness that Russians have about how the war is going. And it's certainly It' strategically useful for Ukraine to hit refineries and port terminals in places as far away as Staint Petersburg, or I think they hit UFA this week, which is fif five hundred kilometers from Ukraine's borders. But it's also very important to blow up things that are visible to Russians and that show them that they Televisions are not telling them the whole truth about the war. So a few days ago, when Ukrainian drones hit a big refinery and oil storage area in a neighborhood of Moscow and blew the lid off of an oil tank in this incredibly striking sort of science fiction looking way, that makes a big impression. There are huge towers of smoke rising over the city, if their television is telling them that everything is going great and they're gradually conquering Ukraine. And meanwhile, things are blowing up in neighborhoods in their city, then they know that they are not being told the whole truth. And that creates a sense of doubt and hopefully eventually some pressure to end the war. Ukraine's attacks on Russia are strategic then and as you say, psychological. are they also having an economic impact Ukraine's attacks are having an economic impact, but it is not doing the kind of damage to the economy that you would expect So initially, for example, at the start of the war, Russia's GDP rose quite quickly because the government was spending enormous amounts of money to recruit soldiers to buy more military equipment and so forth Meanwhile, just in recent months, the war in Iran bumped up the oil price and because Russia is a huge exporter of oil, that's beneficial to them Inflation was running at ten percent. It's now about half that Wages are stagnating recently, but overall since twenty nineteen, they're up by about twenty five percent. All that means that Russia's government can continue to finance the war for as long as it wants So where does all of that leave Russian support for the war It's very hard to get clear sense of public opinion or meaningful opinion inside a country like Russia What's more meaningful is sentiment among elites, both very wealthy oligarchs or people placed high in the government' administration Reports emerged in May that Mr. Putin's political party, United Russia, had conducted some secret focus groups and that most of the participants in the focus groups said they just wanted the war to end regardless of whether Russia salvaged anything that looked like a victory from it One would think Putin would be looking for an off ramp at this point The risk that he runs is of being seen to fail it would be wise for him to figure out a way to do what Donald Trump did in Iran E the war and declare victory Matt, thank you so much for talking to me. Thank you, Rosy Before we go on, I want to tell you about the Economist Insider, our video series, where our senior editors take you into our newsroom to debate one of the big stories of the moment This week, we look at the trumpification of Latin America Just a few years ago, the region was known for its left leaning leaders. Now the right are surging back into power, driven by voters demanding a crackdown on crime This weekend, Colombia elected a new president, who could be the trrumpiest of the lot Zanny Mintonbedo, the economist's editor in chief The panel of my brilliant colleagues chew over the risks and potential rewards of this political shift If you're a digital subscriber, you've already got access to Insider, there's nothing extra to sign up for And if you're listening free, you can watch extended clips from Inider via a link I've put in the show notes You want to get your backyard summer ready, but you don't want to break the bank? Wayfair gets it, planning on dining Alfresco or relaxing poolside Wayfair has everything you need to prep your space. Shop now and save up to seventy percent off during Wayfare's Fourth of July clearance. sccore huge deals on outdoor furniture, area rugs, and more. We're talking thousands of products for every style and budget. Plus, surprise Flash deals July sixth. Don't wait. Shop Wayfare's Fourth of July clearance now through july sixth at wayfare dot com d air everyle every home For investors at the highest level of sophistication, those with strong advisory support, the natural outcome is two distinct portfolios. onene public, one private. Each plays a different role in the overall strategy. Uncover new investment opportunities for you at creativeplanning dot com slash new Two weeks ago, SpaceX went public with the biggest stock market listing in history Josh Roberts is our Capital Markets correspondent It valued the company at nearly two trillion dollars. and it's been on a wild ride since at one point, its share price had rocketed so far that it was worth nearly three trillion dollars. At one point it had fallen by about a third Since then it's been all over the place All of this is a sign that investors' enthusiasm for artificial intelligence is really hitting a manic phase in markets You say it's been a wild ride, but those are wild numbers. Who's actually making money out of this? A lot of people, just after the IPO, Elon Musk, Face' founder became the world's first trillionaire The investors who bought the newly issued shares on the IPO date saw a massive pop, so it popped by twenty percent on its first day of trading, another twenty percent the next day. At one point it was trading at over sixty percent above its IPO price. So obviously, if you had sold then, you would have immediately made a lot of money having just bought those shares A lot of investors buy when it's issued and then sell after that first pop On day three of SpaceX's trading, there were stories about investors who regretted having sold on day one or two because it popped up even further. But since that peak, at one point it had fallen by nearly a third. So investors who had bought at that peak would have actually lost quite a lot of money. When you have a massive IPO like this, what effect does it have on the stock market more generally, or those of us normal people who really aren't doing anything to do with SpaceX? A lot of normal people actually did buy this stock, so unusually for SpaceX, twenty percent of the shares that were issued in its IPO were issued to what the industry calls retail investors. That means ordinary investors like youri individuals, not fund managers or institutional investors So some of them would be involved For the stock market as a whole, there are a few things this means. SpaceX almost immediately followed up its share issuance with a debt issuance. It raised twenty five billion dollars by issuing bonds. The supply of new assets, shares and bonds is increasing. The amount of money that companies are asking for from their investors is increasing So a stock market that previously threw off lots of cash as these big tech giants made lots of money is increasingly sucking in cash instead. And that's a kind of sea change for markets problem that people are investing in inherently risky stocks, that you talk about a mania, we don't know where all this is going Yeah, well, markets are there to price risk, so in a way, It's a good thing that investors are taking risks in general. That doesn't mean that every risk that investors are taking is going to pay off or is necessarily wise. One of the weirdest things about this SpaceX IPO is SpaceX has actually never made a profit. Last year, it made revenues of twenty billion dollars. It lost five billion dollars Obviously, investors are betting that's going to change. you wouldn't bet on the company that you expected to lose money forever. But a lot of what SpaceX is doing is untested stuff that, as you say, is very risky. It's got XAI, an artificial intelligence company under it. That's expecting to make money In as yet semi unknown ways from deploying artificial intelligence, data centers in space is another big spaceX thing. We don't know whether that's going to work. We certainly don't know whether it's going to be commercially viable or how profitable it might be. And obviously the big one, how you make money from launching rockets and potentially taking people to Mars, I think you'd have to be pretty bullish to not describe that as very risky. So where does the three trillion dollar valuation come from? That feels almost plucked out of thin air Usually the way an IPO works is that the company and its bankers go out and do a road show. They go in front of lots of institutional investors, show the company plan, test appetite for its shares, and work out by asking investors what they'd be willing to pay, roughly where the shares should price. This one didn't work like that. It involved Elon Musk essentially saying few weeks in advance These shares are going to sell for one hundred and thirty five dollars each, which gave you the valuation The even weirder thing is that the market then digested that, that is the price that they were sold at and even popped afterwards. So there are a couple of interpretations of that. You could say this was all showmanship The real secret road show did happen. Elon Musk tested what the appetite was. It was one hundred and thirty five dollars, and so that's what he sold it for. That could well have happened. I prefer the Elon Musk distorting markets theory, which seems to be that this unique individual can kind of make markets work as he wants them to work. And we've certainly seen that in this case Isn't there something of a disconnect though, because Musk is not the same as SpaceX, the whole company, and he cannot lead it forever. So then how do you value what's actually there? Nobody can forecast a company's earnings more than a few years into the future. So a lot of the time what investors are really doing is trying to figure out short term whether it's going to go down or up. And you need to take way more into account to work that out than just what the company's future earnings will be chararisma and reality distortion feel around Mr. Musk is key for this, because it determines whether People are going to be buying those shares a few days down the line, a few weeks down the line. Now, none of this is to say that there aren't fundamentals, they don't matter trying to pass the confusing, sometimes seemingly irrational behaviour of other investors is a key part of what valuing a company means these days So what you're saying is it is more sophisticated than witchcraft It's not a science. At what point do we say that the markets know actually how much this is valued at? At what point can we say after this current volatility, this is where it's at? I would hesitate to pick a point if I'm honest, but for example, the big index providers that decide when to include a newly issued stock in their indices, they tend to allow for a seasoning period to allow this sort of thing to happen. For a couple of the indices for including SpaceX, for example, the seasoning period is only five trading days or fifteen trading days. So right now or very soon it's getting included in some indices We have to say the very biggest and most tracked index the S and P five hundred index of American shares, they're going to wait a year before they include newly issued stocks in their index. So If you want to take the most conservative view, maybe wait for about a year before you think investors really have a firm handle on this. And if we're thinking about those big indexes, then if we're thinking about pension funds, things we may not think we're investing in SpaceX, but actually all of us will be, is that right? Eventually pretty much, yes. So once SpaceX is included in all of the indices, especially as I say, the S andP five hundred, which is very widely tracked. Index funds will automatically begin to buy it. It's important to say they won't buy massive amounts of it at first because not many of its shares have been sold to the public so far. So at the moment, we're talking about fractions of a percent. in a year's time, we might be talking about a few percent of the index Index funds are invested by enormous amounts of people. Lots of people put their savings in index funds. I certainly do. Even if you don't do it consciously, your pension is likely invested in lots of index funds. It's not quite true that people are forced to buy shares like SpaceX But in practice, unless you go to quite a great effort to avoid it, most of us will be buying shares in SpaceX So we're all invested in Musk's vision. We all need to take a view on whether it's really going to Mars. Josh, thank you very much. Thank you, Rosie. No worry Hangens San always lik to go by the numbers Ro is the economist obbituaries editor As a boy, he poured over the statistics. of his favorite New York Yankees When he was a bit older, he played saxophone in the Henry Jerome Orchestra. In between the sets when his colleagues were smoking a little reefer, what he was doing was sitting reading a book on fininance or JP Morgan keeping up all the time with the data, the economy, the business cycle All these things that also interested him a good deal He went on to New York University. He enrolled in nineteen forty five And when he went there, it was the era of Maynard Kes the great economist who had advised America on how to come out of the Great Depression Kainnes's vision was all about government spending State intervention generally a good amount of heavy spending in order to make the economy grow And gradually Alan Greenspan fell out of sorts with that. He was actually becoming a friend of a thinker called Ane Rand, who had completely different ideas, who thought the economy should not be interfered with by the government too much It should be left to its own devices and what was most important was the free will of the individual And this friendship gradually led Alan Greenspan towards the Republican Party He wasn't really a political cacher much at this stage, but obviously his philosophy was aligning with that one becausecause he had become a sort of Republican He joined Gerald Ford and actually became the chairman of his Council of Economic Advisors, advising the president on what to do economically, which suited him very nicely With a deep awareness of the responsibility conferred by your trust I accept your nomination. for the presresidency of the United States It was actually Ronald Reagan who gave him the plumg job in his life, which was to be the chairman of the Fed This made him immediately the most important economic figure in the world And he was extremely aware of his own importance and the Fed's importance, which meant that he would always defend the Fed against any sort of political interference The central bankking system absolutely had to keep its independence from the politicians. That was easier said than done because politicians always wanted easy money or they wanted him to lower rates Well they wanted it to raise rates for various political reasons But he held his own, and in fact, he insisted that president should take his advice He consulted weekly with Pidents and the Treasury Secretary just to put forward his idea for how the economy ought to be managed. and of course he was always going acccording to the data and the numbers and not, in order to please the electorate in any way When Reagan appointed him He got off to a rather rocky start was only two months into the job O october nineteenth nineteen eighty seven came black Monday When the stock market crashed and lost twenty percent of its value in a single day The worst crash had ever been in a single day. He managed to handle it And he suggested to the government that it ought to cut the deficit and that that would inspire confidence in the economy. seemed to work, so he steadied the ship w Clinton became president, the economy of was really beginning to boom And he was in charge of it He made very sure that he consulted weekly even daily sometimes with President and with the Secretary of the Treasury And he kept the boom goingo along for more or less the whole of that decade. If people thought it was overheating, He would simply tell them to be cool. He believed there would be productivity miracle that would manage to keep the economy thriving as it was without risking inflation He was right for much of that decade, but then By the end of it, he was beginning to let it get away from him. It seemed, after all, that the boom was becoming inflationary. He warned of irrational exuberance The stock market getting a little too excited And eventually of course, it crashed. There was a recession. There was then a jobless recovery. And there was then a dangerous looking housing boom So the economy was going all sorts of different ways that were perplexing even to him But he had to somehow keep command over it but no longer quite so surely as he had before By the time he left his job He had extremely good reputation and left it to great applause. But he got out just before the global financial crisis He still defended the Fed when people came and asked him what he might have done otherwise He defended the low interest rates which have sparked growth And he was blaming the bad economic conditions in America at that time On the failure of the Obama administration as he saw it to stimulate growth. In fact, he thought it was blocking growth But all the same, when he produced his memoirs, it was clear that he was beginning to wonder whether he had