Transcript
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. This week we’re doing something a little different. We’re giving the full episode to our quarterly Scholar Big Picture conversation with Dr. Deon Strickland. Listener questions will be back next week.
Deon is a financial advisor at Scholar Advising, our in-house economist, and a finance professor at Wake Forest University. This time we get into the SpaceX IPO and what it says about how investors are pricing AI, along with the growing concentration risk as the Magnificent Ten approaches forty percent of the S&P 500. We also talk about the disconnect between a strong stock market and rising credit card defaults, and the case for gold and bonds as shock absorbers in a portfolio that’s been spoiled by a long run of equity gains.
Let’s get into it.
Scholar Big Picture – SpaceX, Market Concentration, and What the Economy Is Actually Telling Us
Stephan Shipe: Deon, welcome back. What has been going on on the economic front, the big picture of things?
Deon Strickland: I think if you’re not talking about SpaceX and the current environment, you’re not talking about a lot of stuff. They put out their S-1, and then they announced they were going to go public at — I think the offer price was going to be $135 a share, they were going to sell $500 million worth of shares. Just an enormous number. And everybody was asking: does it make sense, how much is it going to be, is it going to make Elon a trillionaire? All that happened. And now we know it not only did successfully go public, but it’s gone from $1.75 trillion to being worth more than Amazon. I just can’t understand that other than as a pure call option on AI. That’s the way I view it.
Stephan Shipe: I agree. It’s the tail aspect that’s driving this whole thing. Even in the S-1, I was looking at some of the charts and going through their projections. I think one of the charts just said “more” at the end — like there was no number, no cap. But that’s the pitch, right? And I know that’s always the pitch of any IPO, you have to show the growth. But what’s interesting about this is there really is no quantifiable cap to what the addressable market is for SpaceX. You’re mixing in a lot of things that are very new and that no one knows what they’re actually going to be.
Deon Strickland: I think what’s most interesting to me is you look at SpaceX and they look really relatively disparate — you’ve got a launch company, you’ve got a connectivity company in Starlink, and you’ve got AI. And you look at them and say, how do those fit together? And they fit together in a really weird Rorschach pattern. But it might be the case that Starlink doesn’t exist without launch, right? Because the way they can put all those satellites into space so efficiently is they controlled launch. They didn’t have to go to anybody and ask, hey, we have some payload. They just did it.
And I think for AI, what’s most interesting to me is: is the AI play for SpaceX a play on the model, or is it a play on compute — i.e., energy? Because I think most people would argue SpaceX’s frontier model is behind Claude and ChatGPT. So I don’t know how to take that. Is it really a compute and power play, or is it still a model play? What are the relative weights of those things? And I don’t know the answer to that question.
Stephan Shipe: Yeah, the compute angle is interesting because launching rockets requires a lot of modeling — huge amounts of compute. So if we’re starting to see the flattening of the marginal benefit of some of these AI models, to where you may not need the best model and just need a ton of compute to run a lot of different simulations of something like a rocket launch — that could be a big factor.
Deon Strickland: I do think we’re at a point where for the first time I’ve seen reports that question token cost. Token cost is becoming part of the conversation. If we go back six months, I don’t think token cost was something people talked about — they talked about token maxing a lot. But I think we’ve finally turned a corner and firms are becoming cognizant of the cost of AI. That brings two things to the picture. Number one, are models going to become more computationally efficient? Do we use or need fewer tokens to accomplish the same thing? That’s a play on open-source models versus closed-source models, and I think that’s going to come to the fore.
So I think there are a lot of moving pieces that raise the question: how is SpaceX worth two and a half trillion dollars? And the answer is you have to make some really strong assumptions about the future, but at the same time it’s not clear you can stay on the sidelines.
Stephan Shipe: I was about to say — for it to be valued at that much, you have to assume that the tail scenario wins. Or the tail scenario is so large that even at a low probability, it comes back as a high valuation. And I’m finding myself pushed toward that argument more and more. Because being able to monetize space in a big way or to completely own AI is still a low-probability event. We don’t know what the market looks like or anything else. But if you were to do that, the value would be insane. And you take an insane value multiplied by a low probability and you still get a big number.
Deon Strickland: That’s exactly right. That’s exactly what I keep going back to. It’s like a time-value-of-money scenario. You put it way out there — well, it’s so far away, it’s not worth anything. Unless it’s a really big number. Then you throw it way out there and you still discount it back to today and you get trillions of dollars in valuation.
Stephan Shipe: I think it goes back to when you and I both looked at the S-1. One of the first things everybody does is go find the total addressable market, the TAM.
Deon Strickland: Exactly. And you look at the TAM for SpaceX — the TAM they listed was basically the U.S. economy. Something approaching the U.S. economy, $28 or $30 trillion worth of TAM. I’ve never seen that, and I’ve looked at a fair number of IPO documents. I’ve never seen that kind of thing. The closest one to me is I remember looking at Uber’s back in the day. And Uber’s TAM was transportation — that’s also a really aggressive take. And SpaceX’s take is that it’s not just transportation — it’s all of it.
Now, I do think the interesting thing there — one thing we haven’t talked about, and almost nobody talks about anymore — is that, accepted sort of as a byproduct, SpaceX still has this notion of colonization of Mars. It’s in the model. It’s part of the game plan.
Stephan Shipe: You’ve got to go get everything. Bases on the moon, and then you colonize Mars. It’s all part of the plan.
Deon Strickland: That one I’m not so sure about — the monetization of it, or how much profit there is in it.
Stephan Shipe: Zero regulation.
Deon Strickland: Zero regulation. I don’t think it’s worth that much.
Stephan Shipe: You can do whatever you want up there.
Deon Strickland: You certainly could. Anthropic is also almost certainly going to go public this year. They’ve got to figure out, like, Mythos and Fable and the model — so they’ve got a few hiccups that’s not clear. OpenAI has the same kind of thing — they have the for-profit, not-for-profit issue they’re trying to deal with. But if you take those in sum and add them up and say, okay, they’re likely to become public, you’re talking about four to five trillion dollars at least worth of market cap flowing in. And I’ve been very concerned for our clients. In general, I’ve been concerned about market concentration now for eighteen months.
Stephan Shipe: Absolutely.
Deon Strickland: And it’s getting worse, not better. So that means basically adding a bigger NVIDIA to the market. If an NVIDIA is eight to ten percent of growth, you’ve just made AI another additive eight to ten percent of growth. So do you want twenty percent of your growth portfolio embedded in one really narrow window? This isn’t just general growth — this isn’t Microsoft and Meta and others. This is literally AI models. And that’s a really — that’s a big number. And I’m not sure that people are — I’m not negative on it at all. I just look at it and go, twenty percent of your portfolio embedded in that narrow window should concern the diversified investor.
Stephan Shipe: Well, that was the concern. I think this was last year’s conference, where we had kind of the Magnificent Seven, and the risk there was, well, they’re all tech companies with a high concentration, and maybe they were fifteen, twenty percent or so. But now, to your point, you have less than seven that could make up the same twenty percent — maybe even more, depending on the S&P.
Deon Strickland: I think if you took the Magnificent Seven and added the next few in — call it the Magnificent Ten — I will bet you the Mag Ten of the S&P 500 will be well over forty percent of the index. When I gathered the data, the seven were above thirty percent. So I think you’ll go above forty.
Stephan Shipe: And that’s the problem, because before you could say technology and that was a risk of one sector of the S&P, but now it’s a subset of technology in there. So you’re starting to increase that idiosyncratic risk — it’s starting to creep in. Even though you’re diversified across portfolio numbers, you’re not diversified across value. And the concept of this addressable market — a lot of these other traditional tech companies, you look at how much they’re spending in AI to make sure they have the big model or are AI-adjacent, and they’re all looking at the same idea. Those bets only make sense if the total addressable market for AI in general is there. And if not, then you don’t only hit the NVIDIAs and the Anthropics and the OpenAIs of the world that fall hard — but then you hit all of these other companies that have dumped a significant amount of cash into capital expenditure, especially the amount of money going to data centers right now.
Deon Strickland: Right. If you go back to — harken back to SpaceX — I think the number in the S-1 is that the investment in SpaceX AI is fifty percent larger than the sum of the launch and the connectivity component. So it’s so much larger. That really concerns me because it’s not clear what you do, right? At the conference, what I recommended was that you overweight the value component — value being literally the PE ratio kind of thing. You overweight that relative to growth. But that —
Stephan Shipe: It may not be enough now.
Deon Strickland: It may not be enough. And I’m not sure what to do about that yet, but it concerns me. So much so that I’ve been thinking about it a lot. And the other thing that occurred to me — when you look forward, what do I worry about for my clients? One thing I worry about is that concentration. And the other thing, and this is a little weird, I also worry they don’t know what it is to take pain. It’s like your kids — if you’re constantly telling your kids, you’re so wonderful, and then all of a sudden one day they get a really bad grade, they’re like, I thought you said I was wonderful, but I got a really bad grade. I think the same thing is true of the market. The market has been telling equity investors that you’re wonderful for a really long time. SpaceX is up fifty percent, tech is up so much. So everybody looks wonderful, right? Everybody’s got a great side now. And the question is, what’s going to happen when invariably maybe we get a downturn?
Stephan Shipe: It has to be, right? You have to eventually hit it. Some of the other advisors here at Scholar — after our last podcast, they critiqued you and said, equities can never go down.
Deon Strickland: Right. Some of the other advisors here at Scholar, after our last podcast, critiqued me and said, Deon, stop being Doctor Doom. You’re Doctor Doom again, you overcompensate for it this time — just like everything’s great, the market’s going up, equities can never fall, it’s never going to fall. But when that happens, I don’t know, because psychologically we’ve told people forever, right, for fifty years — you get the positive reinforcement over and over and over again. And if we both would say a thirty percent reversal would be large but not unexpected —
Stephan Shipe: Totally agree. That would be in line with past movements.
Deon Strickland: Right. But I think right now, if you had a thirty percent correction, all the news stories would be bad. There might be — I’m not going to use the panic word. Oh, I just did, didn’t I? But you know what I mean — there would be some real concern.
Stephan Shipe: It’s going to be harder to just hold on when you’ve never had to experience a thirty percent drop. But also, if you go back to the dot-com crisis, the broad market was thirty or forty percent down, but the Nasdaq was down seventy or eighty percent at the time. Which is where all the overvaluation was. So the risk of that over-concentration in such a unique sector — I don’t know, maybe at the dot-com crisis, what was the percentage of internet stocks in the S&P 500 at that time?
Deon Strickland: That I do not know.
Stephan Shipe: I don’t remember. I don’t think it’s anywhere near where we’re at now.
Deon Strickland: That’s correct. Nowhere near.
Stephan Shipe: So that’s my bigger concern. It’s easy to look back at the dot-com crisis and say, we had thirty, forty percent, that’s normal. But if you were over there at the Nasdaq, that’s where the real pain was felt because those were all the overvalued companies. The problem now is that if the call that all these companies in the economy are making is not correct — of where the total addressable market is — I think thirty percent starts to become generous. If we saw a drop, that would be normal. When you talk about past drops and probabilities of drops and assuming normal distributions, thirty percent’s completely fine. We’d expect that every five to ten years in a normal market. And whether it goes to forty would be more rare.
Deon Strickland: That would be beyond a two standard deviation move.
Stephan Shipe: Exactly. And then I always get the question of when would I buy in. The best data we have on this is the historical data. A ten percent drop is not really anything to write home about, but maybe you do some rebalancing in your portfolio at that time. A twenty percent drop, things start getting interesting — if you wanted to start increasing weight to equities, you maybe could. At thirty percent, I think it would be difficult, if you were assuming complete rationality and looking only at the numbers in a vacuum, to say that if you had cash on the side and had stable income, you wouldn’t go deploy that to equities. If you popped me into a room today and said the market’s down thirty percent, I’d probably say that would be a decent entry point. Forty percent, absolutely, based on historical standards.
Deon Strickland: But it would depend, right? What if the client instead said, hey, Deon, QQQ is down forty percent, should I buy into QQQ?
Stephan Shipe: Exactly — this is exactly what I’m saying.
Deon Strickland: I don’t know the answer to that question.
Stephan Shipe: Bingo. That’s exactly right. Because you’re assuming a normal distribution only because you assume the future will act at least similarly to what we’ve seen historically. But with the way concentration is now, I don’t know that that’s a good assumption.
Deon Strickland: I think it’s a bad assumption.
Stephan Shipe: On both sides, right? I don’t think it’s a good assumption either way — where people say, well, the market can’t go up any further. I look at it and say I think we’re starting to see that kurtosis kick in, where you just have larger tails on both sides of that distribution.
The Disconnect: All-Time High Stock Market, All-Time High Credit Card Defaults
Deon Strickland: It’s going to be really interesting. Which plays in, to a certain extent — you look at that and say, how can this be going on, how can SpaceX be worth two and a half trillion? We talked about all this tail benefit, the notion that you take a super huge number, multiply it by one percent, and it’s still a super huge number. But it also got me thinking — the economy’s healthy, right? So it’s not shocking.
Stephan Shipe: Well, that’s what’s frustrating people.
Deon Strickland: For somebody like me — I’ve predicted the last two recessions five times. But if you look: the economy’s great, the job market has stabilized, the stock market is way up, yields have been sticky as all get out. Employment is stable. It’s like when you go to the doctor for your annual physical and they look in your ears — all that stuff looks really great. And yet I read a report noting that 90-day delinquencies in the credit card market are way up. And this goes back to the K-shaped economy discussion. You see credit card balances growing and interest rates going up on those accounts at the very same time everything else is doing really well. That seems like a discordant result. But I don’t think it is. I think it is partially because of the K-shaped economy — some of us are doing well and others, the affordability crisis is very real.
And sometimes clients might say, why do you worry about that in something like this conversation? And I’m like, well, I actually think that correlates with tax rates. Because one of the things I get questions about — and I know you do as well — is, how important are these Roth conversions and other things like that? Well, one of the things we point to, I think both of us point to, is that Roth conversions are extraordinarily valuable in a world where tax rates go up. Without tax rates going up, they’re meh — they’re okay, they save you the RMDs and other things. But in this case, I actually think the biggest issue is that this affordability crisis is real, and it produces, I think, political instability. Not in the Marie Antoinette political instability — I’m not hearkening back to the guillotine in the town square. But I am worried that it leads to instability in elections. And by that I mean, you know, when Clinton ran, “it’s the economy, stupid” is the famous quote. I think that was James Carville. And I think Carville’s quote today is weird, because the economy by everything you and I just talked about looks really good, right?
Stephan Shipe: Yep.
Deon Strickland: Well, it’s great to take over Mars if you actually own the company that takes over Mars.
Stephan Shipe: If not, then it’s a problem.
Deon Strickland: If not, it’s a problem, right? So his notion of “it’s the economy, stupid” — I think it’s changed a lot. I worry in some sense that this notion means it’s harder to predict the stability of economic policy, which matters to my portfolio. And I think I see that growing. This is one of those things — when I see credit card defaults rising. Let me put it this way: the stock market is at an all-time high, and yet credit card defaults are at their worst levels since 2008.
Stephan Shipe: Do you think that has anything to do with that kind of — not necessarily irrational exuberance, but also getting spoiled by high equity markets and not feeling pain? Because there’s a lot that would be said of generations that go through some sort of economic pain — they tend to be better with their finances, or at least more conservative, later on in life, and it definitely gets passed on to the next generation. But because we’re going so long now without much pain — I mean, we’re going on twenty years since the financial crisis.
Deon Strickland: That’s right.
Stephan Shipe: And so there’s a significant number of people who have never felt any type of crisis. Even retirees who experienced the financial crisis would have been at a point when their portfolio was significantly smaller. So the pain wouldn’t have been felt in the same way. Their human capital contributions were significantly higher than their financial capital contributions at that time. So does that lead to poor financial decisions, or maybe more lax habits? Like, I don’t keep a balance on the card because SpaceX is going to keep going up, so I don’t have much to worry about.
Deon Strickland: I will say I think it’s both, and I’ll tell you why. All the polls talk about the level of financial stress people are feeling — it’s a lot.
Stephan Shipe: But those aren’t mutually exclusive, right?
Deon Strickland: No, no, no. I agree with you 100 percent. They’re not mutually exclusive. You see it in how many car loans are underwater. You see it in credit card defaults. And yet the article I was reading, one of the persons had an income just under $200,000 a year. And you look back and say, wait a minute. And I’m not even critiquing that. I’m simply saying — if you went back and looked at somebody who went through the Great Depression, say someone who was in their prime earning years in the ’50s and ’60s, you’d look at it and say, you’re in the top ten percent of earners and yet you’re feeling the financial pressure. That would have been alien to them. So I think there are two things going on. One, the more modest income people are feeling the pressure. But I also think there’s — and when I’m teaching, I hate this word a lot — the YOLO phenomenon. I think there’s a bit of that going on as well.
Stephan Shipe: It’s almost like real-time seeing the idea that more money doesn’t solve all the stress in your life, which has always been the case. Like, oh, well, if I just had more money, then I’ll feel better about whatever problems I’m having. But generally it amplifies it. So this could be an economy-wide experience of that — everyone’s doing okay, yet they’re still super stressed about their finances, and their portfolio’s going up and they’re still employed.
Deon Strickland: Which leads to these outcomes. And if you look at the political landscape, you see there’s a lot of discussion about wealth taxes, increasing marginal tax rates and the like. And I just do not see that going away.
Stephan Shipe: No, I think it’s only going to get more enticing.
Deon Strickland: It’s going to get more enticing. And in fact, this fall we’re going to get the California vote, but it’s not the only one — we’ve seen this happen now in a few places. Whether it passes or not, that discussion is not going away. And I think we have to believe they’re going to show up. And at first it’s going to be, you know, the Elon Musks of the world are going to get hurt. But when you’re an N of one, I’m not sure how to take it.
Stephan Shipe: Well, that’s the problem with the math, right? He’s an N of one. Because whenever you start saying, well, we’re going to tax over a certain number — there’s not enough people there.
Deon Strickland: There’s not.
Stephan Shipe: As crazy as that is to say, when you look at the numbers, you can’t do it. You see lots of charts like, well, what could Bezos buy or Musk buy at certain times — but that’s one time. When you actually extrapolate that out to multiple years and an actual tax rate, it doesn’t work. And then year two comes around and they say, well, we already taxed that level, so let’s bring the bar down and do another tax at the next level of wealth. And you continue to trickle that down. That’s been the story of taxes forever.
The Case for Gold and Bonds as Shock Absorbers
Deon Strickland: And the thing that makes me think about this — four years ago, if we were having this conversation and a client wanted to ask me about gold, for example, I would have said no, no, no, gold is bad. Not sure I’m going to say the same thing today. I might be a little circumspect — the yield is zero and there are all the other classic issues with it. But as long as we’re on the topic — my wife yells at me about sugar. She says, Deon, you need to understand that sugar is bad for you. And my response is: yes it is, but it tastes so good. And I think we’re in the same place with all of this. The stock market is really high, so people are feeling wealthy. Fiscal policy is missing the mark — we’re running debt-to-GDP ratios of six percent or more, and most economists would say your deficit should be limited to something approaching your GDP growth rate to stay roughly constant. All those things go together to make the Doctor Doom scenario not entirely unreasonable. So I’m not sure how I feel about gold now. It’s one of those foods you don’t know if you love. I’m not sure I love it yet, but maybe when I come back and taste it again in a few months, I might like it. But I’m growing increasingly concerned that the combination of all these things — over-reliance on ten names in the stock market, over-reliance on fiscal policy to keep things afloat — makes me a little concerned about tax rates and the like going forward.
Stephan Shipe: When you think about gold or even bonds in a portfolio — because I’m getting flack left and right on bonds in portfolios, for the same scenario you’re talking about. If everyone loves their equities, equities have done great, why in the world would I put the things that never earn anything in a portfolio when I could go put my money over here? And I’ve had people argue with me that eight or nine percent equity return over a long time is too conservative, that it needs to be much higher, because look at the past ten years or the past twenty years. So we’re getting to a point where what you consider an average for a portfolio starts to get weird. But the same could be said for gold at this point. At what point do you think gold gets added — let’s say we’re three months in the future and you like the taste of gold now in a portfolio, and you’re building it out? I think there’s a wealth effect that goes into adding gold in a portfolio because of the lack of yield and everything else. Do you agree with that? In other words, if you have a portfolio set up to give you the cash flow you need for retirement every single month, and it is spot on, that seems to be more of a bond-equity mix portfolio. And then after a certain point, when you’re adding in other levels of safety nets, that’s when gold starts to be mixed in.
Deon Strickland: Yeah, no, I agree with that. I also would say, when we’re giving recommendations, we talk about insurance. For the vast majority of people, they’re going to have a big umbrella policy, fire insurance, all of this insurance — and Lord willing, they’re never going to use any of it. They’ve paid tens of thousands of dollars over their lifetime for all that insurance and never used it. I look at bonds and gold similarly. Bonds are the shock absorber. Yes, equity is the sugar — it tastes really good right now — but in the end you’re going to want a shock absorber. The whole point is to protect the downside of your wealth. I always tell a client: I understand equity looks really good right now, but having thirty percent of your portfolio — or whatever is consistent with your risk profile — in bonds is also a valid way to think about the world because you want to defend against almost catastrophic risk.
Stephan Shipe: That’s what insurance does. And one of the risks I hate the most and fight the most about in meetings is catastrophic risk. There is nothing worse than going from a pretty enriched retirement to having to work to survive.
Deon Strickland: I can’t imagine anything worse than that for a client. So gold, bonds — yes, it’s less than equity return, but that’s not the goal. That’s not their place. That’s not the wealth-maximization profile. What we’re trying to do is build retirement success, financial independence — not necessarily building the largest wealth portfolio possible. So as I develop a taste for gold — maybe one to three percent. That’s what I’m thinking about at least.
What to Watch Over the Next Quarter
Stephan Shipe: Yep. So going into the next quarter — since SpaceX is out of the way now, what are you watching? What are the concerns?
Deon Strickland: I think we have a new Fed chair. And the thing I think is going to be most interesting is that this Fed chair has made the point — and this harkens back to a prior conversation — that he thinks AI to a certain extent is going to be deflationary. So I think Fed policy over the next cycle is going to be really interesting. Looking at the PPI and the CPI — the producer price index and the consumer price index — the two things I’m paying the most attention to are: number one, is the Fed going to change its bias?
For the last several quarters, the Fed’s bias has been downward — while they haven’t cut rates, when you read the documents, the dot plot and other things, you see they have a negative bias, meaning they’re more likely to cut than raise. I think over the next window that’s going to change. At a minimum we go to neutral, and I think we could go to positive. And the second thing: the PPI print was really hot the last time — above five percent on the core. And you and I were actually talking about this the other day. We did some back-of-the-envelope calculations and we don’t really know how much of that hot PPI is going to flow into the CPI. So I’m going to be paying attention to whether we start to believe the energy issue is resolved. Everybody’s referring to the MOU now — does that memorandum of understanding transition to literal no worries about the Strait of Hormuz? If it does, those energy costs start to normalize and stop pushing the PPI, and as a consequence that historical movement from PPI to CPI doesn’t happen. I think the inflationary print is the thing I’m looking forward to most over the next sixty to ninety days.
Stephan Shipe: Perfect. Well, thank you very much, Deon. Always a pleasure.
Deon Strickland: Always. Thank you.
Stephan Shipe: That’s our show. Thanks for listening, and we’ll see you next week.
Outro
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.