Euphoria Has Taken Over The Markets

SUMMARY

Scott Galloway and Ed Elson are joined by Barry Ritholtz to examine the market's exuberant reaction to the SpaceX IPO, discussing the implications of its valuation, float, and broader market sentiment. The conversation covers historical comparisons, the role of artificial scarcity, circular revenue in AI, and strategies for hedging and diversification in today's market.

MAIN POINTS

• Scott Galloway and Ed Elson discuss personal wealth goals and the societal impact of hoarding capital. [3:00]
• Barry Ritholtz joins to analyze SpaceX’s historic IPO and its unprecedented valuation. [6:01]
• The conversation focuses on SpaceX’s artificially small public float and its impact on price discovery. [8:01]
• Discussion turns to insider lockups and the potential effects of insider selling on SpaceX’s share price. [10:01]
• Comparison is made between SpaceX’s index inclusion and Tesla’s previous experience, highlighting artificial price movements. [16:01]
• Ritholtz describes the unprecedented retail and institutional interest in the SpaceX IPO and questions the sustainability of the hype. [19:00]
• The group debates whether the current market euphoria resembles previous bubbles, particularly the dot-com era. [22:00]
• Concerns are raised about circular revenue in AI and the reliability of current profitability metrics. [29:00]
• The impact of large IPOs like SpaceX on Big Tech and overall market capital flows is discussed, with data on new issuances. [36:02]
• Ritholtz explains his approach to identifying market tops and the art versus science of timing hedges. [41:01]
• He details personal hedging strategies, including asset allocation and monitoring macroeconomic risks. [45:00]
• The discussion shifts to the distinction between diversification and hedging, using historical examples like Mark Cuban’s Yahoo trade. [51:00]
• The hosts reflect on the psychological challenges of market timing and the risks of missing recoveries after downturns. [56:02]
• The episode concludes with advice to remain invested for the long term and the behavioral benefits of maintaining a small speculative account. [1:03:01]

DETAILED ANALYSIS

The episode opens with a discussion about the psychological and societal aspects of wealth accumulation, with Scott Galloway emphasizing the importance of setting a personal financial threshold and warning against the societal harms of excessive capital hoarding. He argues that after a certain level of wealth, additional accumulation does not increase happiness and may even diminish it, suggesting that surplus wealth should be spent or given away. This philosophical framing sets the stage for a deeper exploration of current market dynamics and investor behavior.

Attention then shifts to the extraordinary performance of the S&P 500, which has achieved a 25% gain over the past year and recorded 23 new all-time highs. This optimism has spilled over into the IPO market, exemplified by SpaceX’s record-breaking public debut at a $1.75 trillion valuation, which quickly surged to over $2.5 trillion, briefly making it one of the most valuable companies globally. Barry Ritholtz, a seasoned investor and financial commentator, joins to dissect the implications of this event, focusing on the unique characteristics of the SpaceX IPO.

Ritholtz highlights that, unlike established tech giants such as Amazon and Microsoft, SpaceX’s public float is exceptionally small—only about 4% of its shares are available for trading, compared to the typical 10% required for NASDAQ inclusion. This artificial scarcity, he argues, is a deliberate financial engineering tactic designed to inflate demand and sustain high valuations. He draws parallels to luxury goods markets, such as Rolex watches, where limited supply maintains elevated prices and desirability.

The small float means that the current market price may not accurately reflect SpaceX’s true value, and genuine price discovery will only occur once more shares become available over the next year or so.

The conversation then addresses the upcoming expiration of insider lockups, which will allow early investors and employees to sell their shares. Ritholtz predicts that many insiders will take the opportunity to realize significant gains, potentially increasing supply and exerting downward pressure on the stock price. He references historical cases, such as the dot-com boom and subsequent bust, where insiders who failed to sell at opportune moments lost out on generational wealth.

The inclusion of SpaceX in major indices like the NASDAQ 100 has also created a surge in passive demand, but Ritholtz notes that the real test will come when the S&P 500 considers its eligibility, given its stricter requirements for profitability and trading history.

Drawing historical comparisons, Ritholtz cautions against equating the current AI-driven market enthusiasm with the dot-com bubble. He points out that today’s leading companies, particularly in AI, are generating substantial revenues and real profits from enterprise-level contracts, unlike the speculative, non-revenue models of the late 1990s. However, he acknowledges that some of the revenue figures are inflated by circular deals, where investors in AI companies also serve as their largest customers, raising questions about the sustainability of these income streams.

He contrasts this with the late-1990s practice of companies like Cisco financing their own sales, which ultimately proved unsustainable and led to dramatic share price collapses.

Ritholtz also addresses concerns about high market valuations, noting that the Shiller price-to-earnings ratio is at its second-highest level ever, comparable to the peak of the dot-com era. While he recognizes this as a warning sign, he cautions that the Shiller PE is a poor timing tool and is better suited for setting long-term return expectations. He emphasizes that many tech companies remain unprofitable by choice, reinvesting heavily in growth, much like Amazon did for decades.

The discussion moves to the broader impact of large IPOs like SpaceX, OpenAI, and Anthropic on the rest of the market, particularly Big Tech. Ritholtz cites data showing that new issuances currently represent a small fraction of total market capitalization, far below previous peaks, suggesting that the influx of capital into high-profile IPOs is unlikely to significantly harm established giants like Apple, Amazon, and Google. He introduces the concept of the “relentless bid,” where continual inflows into mutual funds and retirement accounts sustain demand for existing holdings, diluting the impact of new entrants.

When considering how to identify market tops and manage risk, Ritholtz stresses that market timing is more art than science. He recounts the only two occasions in his career when he advocated moving entirely to cash or short positions: January 2000, ahead of the dot-com crash, and January 2008, before the financial crisis. Both instances required a combination of data analysis and intuition, and even then, timing was imperfect.

He notes that most investors are reluctant to pay for portfolio hedges, as the cost can feel wasted if markets continue to rise, despite the protection it offers against severe downturns.

Ritholtz outlines his current approach to hedging, which includes maintaining exposure to emerging markets and Japan, shorting silver, and monitoring macroeconomic risks such as geopolitical instability, tariffs, and consumer sentiment. He argues that true diversification is distinct from hedging; while diversification can mitigate sector- or geography-specific risks, it offers limited protection during systemic crises when correlations spike and all assets decline together. He uses Mark Cuban’s use of a zero-cost collar to lock in gains from Yahoo stock as an example of effective hedging, contrasting it with broader diversification strategies.

The psychological challenges of market timing are explored, particularly the risk of missing out on recoveries after downturns. Ritholtz warns that many investors who exit during crashes never re-enter the market, missing out on subsequent gains. He advocates for long-term investing, especially for younger investors with multi-decade horizons, emphasizing the benefits of dollar-cost averaging through both bull and bear markets.

For those seeking to satisfy the urge to act, he recommends maintaining a small “cowboy account” for speculative trades, while keeping the core portfolio invested for the long term.

In closing, the hosts and Ritholtz agree that while market corrections are inevitable, the prudent strategy for most investors is to remain invested, avoid panic selling, and focus on long-term wealth accumulation. The episode underscores the importance of understanding market mechanics, the limitations of timing tools, and the behavioral biases that can undermine investment success.

LINKS

• Prof G Markets newsletter subscription page
• Order 'Notes On Being A Man' book
• Scott Galloway's Instagram profile
• Ed Elson's Instagram profile
• Ed Elson's X (Twitter) profile
• Ed Elson's Substack newsletter
• Prof G Markets on Spotify
• Prof G Markets TikTok Q&A
• Prof G Markets homepage and resources
• Aaven home equity line of credit information
• VCX by Fundrise, public ticker for private tech

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