The Illusion Of Value

I'm in the middle of a yet another round-the-world trip. Started two weeks ago in Europe for the Milan Bluetooth Member Summit, followed by the ultra dense in meeting Guangzhou International Lighting Exhibition in China. Next week I'll have a number of customer meetings in the USA. Luckily there is a short weekend pause in between, which I decided to spend in the "TikTok city" of Chongqing. It is a 6-hour high speed rail ride from the coast (the CR400 "Fuxing" at 350 km/h), which I spent almost entirely glued to the window, with my brain working in the background to aggregate and generalize the inrush of information of the past 14 days.

One of the puzzles I was trying to solve was the explosive SpaceX IPO, which, on the surface, has never made any sense to me. Everything I know about SpaceX, plus what I read in the S-1 filling, is a pure fiction (with the exception to the Falcon rockets that represent the solid part of the business). That is on the surface.

But thinking deeper, there is a quite rational explanation of what has actually happened. The key is the "Wall of Money" phenomena, that keeps inflating the valuation multiples.

Here is how it works: there is a massive expansion of global liquidity that lifts asset prices. A pyramid that would probably require an asteroid-like event to fall. There is the never ending supply of money that has nowhere else to go: quantitative easing, the TINA phenomenon (There Is No Alternative to equities, if you want to outpace inflation), the institutional mandates (pension funds, sovereign wealth funds, endowments) that are structurally required to deploy cash. Additionally there is a boom of corporate buybacks and - last but not least - the retail participation and wealth. A self-fulfilling loop of expanding multiples.

[Workers get paid] -> [Automated 401k/Pension deductions] -> [Inflows automatically buy index funds] -> [Asset prices and P/E multiples rise] -> [Attracts more momentum/FOMO capital] -> (loop repeats)

As long as the global workforce grows, population demographics keep money flowing into retirement accounts, and central banks ensure liquidity expands faster than the economy, this automated bid remains intact.

An then there is the "Hotel California" effect of capital: the reinvestment loop. The cash changes seats, but stays inside the casino. Additionally locked in by tax penalties, designed to keep capital trapped inside the market for decades.

Finally we have the illusion of "Total Value". No, SpaceX is not worth $2T. There is no $2T physical cash anywhere. It just raised $75B for exchange of a small amount of equity, AS IF it was valued at $2T. But again: TINA - Elon is considered one of the most effective man to multiply capital, so people are willing to donate their money to him. Yes, this is a donation, not an investment, but the stock still may rise. And as the S-1 clearly indicates, the P/C (Price-to-Cosmos) ratio indicates it still may be very attractive - terrestrial valuations don’t apply when it comes to Elon.