Macroeconomic Risks and Future Outlook

skin The hands down best bet that any investor could have made in the past few years is to buy US tech stocks Winner winner Chicken dinner. Well The Majesty of Markets serves to give the people what they want, damnit. So guess what we have coming our way It's more tech stocks, a lot more. It's a feeding frenzy, people Some massive razzle, dazzle tech companies are lining up to hit the stock markets for the first time We've already chatt about one of them, SpaceX on the show, but we're also talking here about the likes of Open AI, which runs Chat GPT An anthropic, which Rob can't pronounce for some strange reason. Anthrop. I don't know what you're talking about. I don't even know what company you're referring to. Hese words are a mystery. Its Claud. Plus we have a bunch of other tech monsters that are already listed pumping out more of their stocks onto the markets. Today on the show Is this a golden opportunity for investors or a sign that the exuberance is getting out hand and a crash is coming This is Unhedged, The Markets and Finance podcast from the Fancial Times and Pushkin I'm Katie Martin, a marketetsetconist at FT Towers in a very soggy London. All the rain, finally Joining me through the Magic of teechnology in New York City is Rob Armstrong, my partner in crime on the unhedged newsletter Rob are you excited? Do you feel the buzz? the feeding frenzy? I'm still stinging from you making fun of how I pronounce company names. I'd just like to say that I'm a visual learner and that I learn from reading. And so I don't know how to pronounce a lot of things and I apologize.. Yeah. You live in a cave and you don't talk to people. But I do feel the buzz, Katie, to answer your real question. It's an exciting moment in markets. Buzz is real. It's all about Th three little letters, right? IPO. These are initial public offerings, which is a fancy way of saying new listings on stock markets. And they are back. Yeah ye We hit SpaceX about which we're a little bit skeptical because of the no profits problem, but that makes us Foty duddies, sticks in the mud, fun sponges. But there's others F sponges. Yeah. So the big picture before we come onto those specific others, the big picture is that stock market listings are like bad with a vengeance. So we've had four really slow years listings And now we've had forty deals in the US with a combined value of twenty eight billion dollars that have hit the market this year. So that's the highest tally to the end of May for any year since twenty twenty one and twenty twenty one was gangbusters. So we've had loads of these things probablyably by the time this year comes to an end, not going to have a super unusually large number of new companies on the stock market. But in dollar terms, these guys are really going for it, right? So Goldman Sachs is saying they reckon there's going to be two hundred twenty five billion dollars worth of new volume on the market And including all like other stuff, new like follow ons and other issuance from companies that are already listed, they reckon it's going to get to six hundred seventy five billion. It's a lot. It is a lot. I should note that total market cap of the US stock market is something like seventy five trillion. So adding less than a trillion to that doesn't sound like a lot. But these things are always quite finely balanced. You know, adding a couple of percent more supply to something that had had a bit of a fixed supply before make a difference at the margin, and I think we're going to feel that this year for sure. Yeah. And it's no coincidence that all the really kind of razzle dazzle, exciting new listings that are coming, they're all in tech, they're all in AI. And one interesting thing about that to me is that something that stock market investors like professionals winge about all the time is that companies stay private for ages now. They become like really massive companies while they're still sitting in private hands before they hit the stock market. So then there is a question around how much value has already been juiced out of them by private equity and whatever before they reach the public stock markets There has just been a really long wait for some of these companies. And now it's arri. You know. It was like for a long time, there was all this talk about, you know, why don't US companies invest heavily? Why don' they don't do capital expenditures And now we have like the heaviest capital expenditure cycle we've had in decades and investors are like, notot like that. That's not we meant. And similarly, it's like, where's all the IPOs? And I was like, whoa, whoa, whoa You know? It's a lot of IPOs. so yesterday, which was Monday as we record this Anthropic, Rob, S it aloud. and Anthropic think I have a house. It filed for its stock market listing. It's looking at a valuation of more than one trillion dollars. It submitted the paperwork. this thing is going to go ahead in the next few months. SpaceX, Elon Musk's AI space satellites. thing that we talked about on the show the other day. that should be coming also in the next few months. Open AI is the last really big one to come through. Each of these things are going to be something in the order of like ll trillion plus in market capitalization. That's a lot So we've got all this like hype and excitement about these new companies that are going to come to market and then Re randomly to my mind Alphabet comes along, Alphabet, which runs Google, of course, it's already listed. It's a four point something trillion dollars company already. Everyone knows alphabet, everyone knows Google They're already listed and they said, well, we're going to issue an additional eighty billion dollars worth of stock onto the market. That to me, like came from nowhere. Why do you think they're doing this I think they're doing it because it makes sense to do it. And there's a couple of ways to think about it Back in the bygone days of march twenty twenty five, when we were all so young and naive, the shares of alphabet were one hundred forty two dollars Now they are three hundred and sixty four. So that they have gone up a lot. And what that means is for every new share that Google offers, they get a lot of money from investors in return. And so basically there is as you put it Great demand out there and they're like, great demand. let's hit it with supply And this happens at a time when Alphabet is spending a lot of money on data centers. They're spending a lot more. The market is offering them money at a very attractive price And they said, sure, we'll take some of this money So they did the century bond. they're doing loads of other bonds. like the market is just lapping this stuff up. so they they can issue debt They can issue shares. invvestors love all of this stuff I wonder if there's a part of what Alphabet has done here, which is to say, listen these big all these big listings are coming from all the other guys. Why don't we just like get in ahead of that Yeah and absorb some of the demand there Yeah. whichich is like you know it's like quite annoying of them which I like. I like it when people are deliberately annoying. But the next day the market opened somewhat down for alphabetets. I wonder whether this is telling us, I don't know. I don't want to read too much into it, but I think it's saying that this isn't an infinite pot of money that No. So the stock opened down almost four percent and now I think it's at about two and a half as we record. So that is, you know, they're diluting the shareholders, meaning adding more to the If you're a current shareholder and a company sells more stocks, the value of each of the shares you hold goes down a little bit. That's called dilution and this will dilute Google shareholders by less than two percent. The stock is down two and a half percent So I think the market is saying, we don't love on first blush, we don't love the idea that you're just running around deluduting us and please don't go crazy with this stuff. Yes. But at these prices, I don't understand why more companies aren't doing it I think meta should be issuing equity. You know, go for it, you know, go while the go while the money is good. If you're going to spend all this money, fund some of it with equity So you're not saddled with debt for a million illion years. Do a nice healthy mix of the two. and I think Goog alphabet rather is doing the right thing here And I wonder if other tech companies will have the courage to follow in their footsteps No doubt Mark Zuckerberg is hanging on your everywhere. Follow the instructions. I'll wait for his call. Yes So we've got this feeding frenzy of exciting new AI flavoured companies that are about to hit the stock market. And look, there's just a little part of miserable people who are like This really rhymes with something and that thing that it rhymes with is that period before the dot com crash in the year two thousand, right? Then you had like a whole bunch of companies, some of which have died entirely and some of which are now just tiny and irrelevant. bunch of companies hit the stock market and in retrospect when you look back on that That was the top. When you get lots and lots of companies hitting the stock market, that is the top. Now You get lots of false positives here and just because you have new listings doesn't necessarily mean that something terrible is going to happen. But it does make people sort of sit back and say, hh. all these people who run these massive, very successful companies Why do they want to sell out now? What do they know that we don't? You know it does make you a bit suspicious, doesn't it? I think that is right and it is healthy to be suspicious. and that is why it is good there are people like Katie Martin in the world. professional suspicious person, Katie Martin. But you know, I think the other side is It does look like there is a lot of demand for this new technology, demand that wasn't there for to use the old cliche pets dot com or Webvan. We've talked on the last show about Anthropic's actual revenue growing by leaps and bounds in the billions No, I'm gonna pronounce it wrong every single time for the rest of my life just to annoy you kid. Fine. Anthropic is growing by leaps and bounds in terms of revenue. and we know that there is more demand for AI compute than the people who are supplying it can supply. It is an open question how much of that AI compute is being used to make videos of cats playing the piano O slop. Fair enough. Actually, that is a serious question for calculating the impact of AI on GDP, the slop problem I was talking to an economist about this just the other day and it's a serious open question. But we know there is demand here we know there is demand here in a way there wasn't demand for Webvan or pets dot com It is interesting, isn't it? how like the most advanced technology in human history is put into the hands of the general public and they're like Mll, I'm going to make a video of a cat playing the piano. Am I going to do something useful with this? am I going to be a more efficient person? No, I'm going to make a video of a cat playing the piano. But one other thing about these stock market listings and we Again, we spoke about this when we talked about SpaceX the other day is that SpaceX, for example says that it's worth one point seven five trillion dollars It is actually listing seventy five billion dollars. So it's listing four percent of itself on the stock market And then insiders in the company, a lot of them have what you call lock inss. So they've got shares in the company and they're not allowed to sell them for a certain period of time. So one thing that a bunch of people are talking about at the moment is When do they sell and how much more supply of shares is that going to mean is going to hit the market? So for example, going back to Goldman Sachs, they were saying If you look at history where you have companies where they only list a little bit of themselves O time, a lot more of those shares trickle onto the market. So they reckon we could be looking at an additional extra five hundred billion dollars worth of shares from lock upps that expire over the course of this year. So again, if you look back to that period of the boom and bust. It was the period at which a lot of those lock inss expired that at least coincides quite awkwardly with that period where the stock market started falling apart. It's really important to watch what the insiders are doing because if they really believe, if you're an insider at open AI or Anthropic or SpaceX or whatever it is, if you think that you own shares that o that cost a hundred dollars today and they could be worth two hundred dollars hundred tomorrow Why on earth would you sell them? Okay, I actually disagree with that I would like I would like to tell you why. If you if you are like emmployee number nine at anthropic, as I like to call it. The amount of shares you have You are so rich selling at the current price. Do you know what I mean And and it's like incremental return on more wealth than you would get selling your shares now is just like a second house in the south of France You know what I mean? It's like, oh, you know, and you don't really need, you know, the second flock of polo ponies or whatever. So you just say screw it and you sell and you diversify. So I don't think you can breed one to one desire of insiders to sell to their suspicions about the future of their company or their openness to the fact that it's a bubble etc I'm sorry to rein on your cynicism parade, Katie, but you know, that's part of my job It's not just me. It's not just me. It is not. But yeah, it is just a sort of little sort of tinkle in the back of your brain that says, I wonder why they are listing all listing now. and I have no doubt that the market will absorb this stuff really, really easily because the enthusiasm for AI is so high and because again, as we spoke about the other day, all these changes to the listing rules, which means that passive investment flows are going to be able to go pretty quickly into these companies, which is important. I would frame my general worry about this differently. You know, bubbles are always a concern They've been a concern for the last. fifteen or twenty years as the market has hit one new valuation high after the next I have a kind of macroeconomic worry, which is that The barinstorming American consumer economy is now on a gentle glide path down. It's still, you know, consumption is still growing in real terms It's weakening and real incomes are now kind of growing at kind of zero to slightly negative with inflation. And so that side of the economy is going direction and we have this kind of technology investment side of the economy growing in a totally different direction. And I just wonder if that contrast is healthy. You know, we don't want to be a purely investment driven economy or a largely investment driven economy. There is a country that has tried this. It's called China and it has a lot of unpleasant side effects. So I think that's not a trend to panic about right now, but I think There's a kind of macroeconomic tension that we should keep an eye on over the next couple of years at the very least. The other tension is that just as all these companies are planning to list, the way that they list is to say to investors or prospective investors, we're going to make shed loads of money but it's still not proven peopleople are going to be willing to pay for AI services on that sort of scale. So We still don't there's a lot of things we don't know about the business model of AI, whether that's on an enterprise level, so you sell it into companies or whether it's you know selling it into consumers. So we don't know how commoditized this stuff is. Do we really We don't know what the margin We don't know what the margin is going to be You know, right now, a lot of these companies are selling computer power basasically at a discount. and there's a lot of demand for it at a discount. But when you're selling it at a price that gets you a good margin, what happens to demand? You know, animal spirits, my favorite phrase. it calls to mind little ghost dogs and cats U animal spirits are very strong and that is always a source of fragility and you know, we're going to have to ride it out We are gonna see. Listen, we're gonna have to come back in just one second with long shorts Alrighty, it is time for long short that part of the show where we go long a thing we love or short a thing we hate. Rob, what you saying? I am long one of the absolute pillars of the modern world and the modern economy, which is the subversive cubicle dweller working for the huge soulless company. I think of this every man, every woman hero reading a story in the FT this week about how in response to Amazon's measuring how much its employees were using AI and posting a leaderboard of the biggest users Amazon employees invented programs that would do useless tasks on AI in order to drive up their score That just makes you want to stand up and cheer Whoever first thought up that idea, email us and we will buy you a round of beers at the bar of your choice Unhedgedft. comot I do enjoy that as just a middle finger raised aloft in the direction of. What else can many of us do in this life? Except annoying little crap like that. You know, that's is that is our shout against the infinite darkness of the universe. You know The man The man cancellled the program annoyingly. Yes, marking a massive victory for the common man I am L weather There's a lot there's a lot of it. There's like really a lot of it here at the moment.. Also We've got El Nino coming, a Godzilla El Nino Yes no less. So Lots of things have gone wrong for Food. So there's no fertilizer because of what's going on in and around Iran U and and now we're going to have Godzilla weather system. And now we've got this like Godzilla weather system coming along. So prices Watch out. The gods are unhappy. They're adding to food price inflation that's already in play It could get messy. So I'm long weather. Good one. Listeners're at whatever the weather, where you are, we're gonna be back in your ears on Tuesday, so listen up then Unhedged is produced by Jake Harper and edited by Brian Erstatt. Our executive producer is Jacob Goldstein. We had additional help from Topa Forehead. Special thanks to Laura Clark, Greta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free And a thirty day free trial is available to everyone else. Just go to ft d. com slash unhedged offer I'm Katie Martin. Thankks for listening