SpaceX Stock Just Crashed — Here’s Why

Ed Elson is joined by Gil Luria to discuss the global tech selloff and how SpaceX is fueling AI fears. Then, Arin Dube joins the show to break down his research on minimum wage increases and what it reveals about the path towards raising the federal minimum wage. Finally, Ed checks in on his SpaceX prediction. Gil Luria is the Head of Technology Research at D. A. Davidson. Arin Dube is the Provost Professor of Economics at the University of Massachusetts Amherst and author of The Wage Standard: What’s Wrong in the Labor Market and How to Fix It. Subscribe to the Prof G Markets Youtube Channel Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [email protected] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 1:44Ed Elson?

  Welcome to Prof G Markets. I'm Ed Elson. It is June 24th. Let's check in on yesterday's market vitals. The major indices declined as tech stocks dropped around the world. More on that in a moment. Meanwhile, oil continued its decline, and finally, the dollar hit its highest level since November on growing expectations for rate hikes this year.

• 2:08Ed Elson?

  Okay, what's happening? Tech stocks are selling off and the pain is hard to ignore. So far this week, the Nasdaq 100 is down roughly 4%, meaning that the index has shed over a trillion dollars in the last two days alone. Chipmakers are among the hardest hit with an index of semiconductor companies dropping 8% yesterday. The route has gone global too, with Asian stocks taking a steeper dive. South Korea's Kospi is down 10% from near record highs. But the biggest drop we've seen was SpaceX. The company issued a $25 billion bond offering to finance its AI operations. And over the past three days, the stock has fallen around 20%.

• 2:53Ed Elson?

  So for more on this latest drawdown in the tech market, we're speaking with Gil Luria, Head of Technology Research at DA Davidson. Gil, good to see you. A lot of pain in the tech sector, the chip stocks especially. AMD is down 5% this week. Nvidia is down 5.5%. TSMC and Broadcom down 8%. What is going on here? Why are investors so concerned right now?

• 3:22Gil Luria?

  I characterize it as a lot of volatility. The dispersion in outcomes for next year is bigger than it's been in a while. If you think about it, if AI goes well, GDP in the US may grow 5% next year. If AI rolls over and the cycle is over, GDP may only increase by 1 or 2% next year. Usually, we're trying to figure out if GDP is going to go 2.8 or 3.2. Right now, the range of outcomes is really big. So anytime something happens in AI that makes people more optimistic, these semi-stocks continue to run. And anytime there's a sense in the market of maybe we're close to the top, then we get these big corrections. So most of what we're seeing right now is just tremendous volatility.

• 4:06Ed Elson?

  What do you make of what's happened with SpaceX here? I mean, we talked about it last time. I think we talked before it went public, or at least maybe in the first few days. And it's been kind of a stunning drawdown. I'm not personally that surprised by it because, I mean, I kind of thought this had to happen eventually. But what do you mean?

• 4:27Gil Luria?

  You were very vocal about that. You were very vocal and I think that was very helpful to investors going in. That you spent a few days preparing investors that there's going to be a first A pop, which happened. And then the stock may come down from there. And that's happened without all those things that we talked about last week, which is there's going to be shares unlocked and there's going to be a lot of activity around index inclusion and no non-index inclusion. So another place where we're going to see even more volatility, but thankfully you did prepare at least your viewers and listeners for this outcome.

• 5:04Ed Elson?

  On that point, we haven't seen those lockup expirations yet. I mean, this is, as you say, it seems to be just pure volatility and it seems to be triggered by this $20 billion bond offering to, I guess, finance the AI build out. I mean, if we were to sort of draw that to its logical conclusion, I assume that means something like investors are worried about the fact that they need to raise more money, to spend more money on AI. Where is the return going to come from? Which goes back to AI bubble concerns. Where is the ROI on this technology? Do you think that that is sort of fueling the anxiety here? Is that what is ultimately triggering people's decision to sell?

• 5:47Gil Luria?

  Yeah, all these things are contributors to this. I mean, they just went out and raised $85 billion in equity capital. And now they're raising another 25 of debt. Now, some of it is to pay other loans, some of it may not be. Either way, they need to invest very substantially in this AI compute. Now, to be fair to them, this is a business that's in tremendous transformation right in front of our eyes, right? From a business that had most of its revenue from Starlink and then a About a quarter of the revenue from space exploration. Now, with the Anthropic, Google and Reflection contracts, most of their revenue is coming from a NeoCloud business,

• 6:28Gil Luria?

  from any on data center capacity to AI labs. So their business is completely different than it was a year ago. This business, the business that is now their biggest business, this NeoCloud business is incredibly capital intensive. So they do need a tremendous amount of capital. Now, my part of this is they're monetizing existing data centers, but they also want to build a lot more data centers. Not to mention, they want to build some of them in space.

• 6:54Ed Elson?

  What do you make of what's happened to big tech in the sell-off as well? Because they've really been dragged into this. Alphabet had a pretty significant sell-off. That was maybe a different story because a couple of their AI researchers left the company and then went over to a competitor, which got a lot of investors concerned. But also, Amazon's down 3% this week. Meta down 2%, Microsoft down as well. What do you make of big tech valuations? And what is their role in this in this story?

• 7:23Gil Luria?

  So the sentiment around those companies is they're spending too much money. They're not going to get the return. We would rather invest in the companies that they're spending on. So mostly chip companies as opposed to the companies that are spending their cash flow on those chips. And that's what the market is reacting to now. But I wouldn't, I would say that the Google changes are actually very important. The two people that left Google for the Frontier Labs are two of the only people in the world that can understand AI right now. You can really count the people in the world that can figure out how to develop a better model is probably less than 100 people globally. And the two that left Google are probably top 10. So the fact that they said Google is so bureaucratic

• 8:08Gil Luria?

  that Google DeepMind will not lead us to superintelligence. We should go to OpenAI and Anthropic is actually a sign that there's maybe cracks in this notion that Google is the AI winner, which is how it got from a stock at 180 to a stock over 350. So that's specific to Google. But broadly speaking, investors don't believe the returns are coming. It doesn't matter that Amazon, Microsoft and Google are telling us, of course, the returns are coming. We've already sold this data center capacity. We know where it costs. We know we have a markup. We know I have a return. Investors are just not buying that right now.

• 8:45Ed Elson?

  How do you sort of justify or explain what's going on in terms of just the delta between some of the valuations that we're seeing in AI, which are certainly overpriced? I mean SpaceX would be sort of ground zero, the perfect example, trading at, you know, 100 times revenue, last year's revenue. But then there are also companies like Microsoft, like Meta, and their price to earnings multiples are historically quite low right now. I mean, how do we sort of make sense of this market if you have this massive difference between all of these different players in AI?

• 9:19Gil Luria?

  The market is being inconsistent. The valuation of Nvidia, Microsoft, Micron, and to some extent, Amazon, is a valuation that implies that this AI thing isn't going to work out and we're at the peak of the cycle and it's going to roll over next year. The valuation of Cerebras and Oclo and all these optical companies implies that, and Intel implies that the cycle will continue through 2030. So the market is being inconsistent right now because the people that don't believe that in AI are unwilling to buy those big companies, but then the people that do believe in AI are only buying the marginal AI participants.

• 10:01Gil Luria?

  We see that as an opportunity to buy great companies like Microsoft, like Nvidia, like Micron at attractive valuations because if this isn't peak cycle, if this AI thing actually works out, those stocks will be a lot higher in a year or two.

• 10:16Ed Elson?

  Do you have any concerns about what we're seeing in the macro environment specifically? I mean, it's kind of amazing and remarkable, the fact that what's happening in Iran does ultimately affect a lot of these names because ultimately it could mean higher interest rates if we do see rate hikes, which is probably one of the biggest anxieties for investors on Wall Street right now, and no one seems able to agree. Are you looking at interest rates? Are you concerned about interest rates, especially as it relates to those names and whether or not they are buying opportunities?

• 10:49Gil Luria?

  Oh, absolutely. And right now, again, the market is of the mind that Iran will not be an issue. Going forward, therefore, oil prices will remain low, inflation will remain low, and we will not need to increase interest rates. But that obviously, as we've noticed over the last four months, can change very quickly. And so we absolutely have to keep an eye on that because that would be the major impact at a cyclical level. And then the AI trend we're talking about is a secular trend, but overlaid on all that is a cyclical aspect of it, which is very much impacted by inflation and the need to raise interest rates possibly.

• 11:25Ed Elson?

  Gil Luria is Head of Technology Research at DA Davidson. Gil, really appreciate your time. Thank you.

• 11:31Gil Luria?

  Thank you.

• 11:35Ed Elson?

  After the break, a closer look at the minimum wage. And for even more markets insights, you can subscribe to my weekly newsletter, Simply Put, at simplyput.profgmedia.com.

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• 13:30Ed Elson?

  We're back with Prof G Markets. It's been 17 years since the US last raised the minimum wage. But while Washington stood still, much of the country moved forward. 30 states have increased their minimum wage, while 20 still use the federal floor of $7.25. Our guest today realized that a natural experiment was going on across the country. So he asked what happened to pay, employment and local economies where wages went up? And what can those real world experiments tell us about whether and how the federal government should raise the minimum wage today? Joining us to discuss his findings, we're speaking with Aaron Dubay, Provost Professor of Economics at the University of Massachusetts Amherst

• 14:14Ed Elson?

  and author of The Wage Standard: What's Wrong in the Labor Market and How to Fix It? Aaron, thank you so much for joining us on the show. You have been studying minimum wage policies across the country. You pointed out a simple and important point, which is that we've experimented with this at the state level. What were your findings?

• 14:38Speaker 12

  You know, as I like to sometimes say, the silver lining of dysfunctional policymaking is that they provide us with natural experiments. So it's not a great way to set federal minimum wage to let it not...

• 14:53Speaker 12

  You know, change for over seventeen years, but it did mean that thirty states now have raised their minimum wage. On average today, those thirty states have something a little like little over fourteen dollars an hour minimum wages. In contrast, the other twenty states, the minimum wage remains seven twenty-five. That is so low, by the way, that it's essentially like not having a minimum wage because very few people actually get paid that little. So we're basically, for the first time since the nineteen thirties, when we first introduced the minimum wage, we have like a little less than half the country with no minimum wage versus the other half, sometimes with fairly strong minimum wage, maybe even the levels of close to UK or France.

• 15:38Speaker 12

  So this is a contrast. And so what I did is to look to see, this is really simple, you know, sometimes getting causal evidence of any policy or anything like that, which we economists, you know, spend a lot of time trying to figure out. It's hard. It's hard work and people disagree, etc. But this is one of those cases where it's actually pretty straightforward. You just look and look at these thirty states, look at these twenty states, just plot what happens to their wages, plot what happens to their share of people who are working. And it turns out that tells us a pretty compelling story.

• 16:11Ed Elson?

  So one of the things that we hear a lot about on why we shouldn't raise the minimum wage is that it's going to be a problem for employment, that if you if you've basically forced employers to pay employees more, then fewer people will be employed. What did your data find on that front?

• 16:31Speaker 12

  Yeah, so just as a as a way of thinking about this, if we have a really well functioning market, labor market, where companies are, you know, really competing hard for for workers, if suddenly the government comes in and sets wages even higher than what companies are paying, some jobs will be lost because companies are just not going to be willing to hire those individuals. At the same time, if the market is not quite working that way, and the market has, here's a funny word that economists use, manapsany power, which means that employers have some degree of choice. Should I pay a higher wage and have lower quits and easier recruitment? Or should I pay a lower wage and save on labor costs, but then have higher quits and

• 17:15Speaker 12

  higher, you know, harder time recruiting? In such a market, a higher federal or higher minimum wage could end up not killing jobs, but killing vacancies and reducing turnover. So then it becomes an empirical question. And so here's what we found. So when I look at this, 2010 to 2025, okay, a broad set of 15 year period, in the states that raised their minimum wage, if you take the most impacted sector, that's restaurants, okay, this is the low wage sector, a sizable portion of the minimum wage workforce work at restaurants. Restaurant pay in these 30

• 17:55Speaker 12

  states today is maybe about, on average, like eight or nine percent higher than in the other 20 states, okay, than that, than it was, say, compared to 2013, before this gap emerged. So very clear wage growth in these 30 raised states compared to the 20 states that stayed put. What happened to jobs? We can look at restaurant jobs per capita, it is virtually the same today as it was in 2013 in these two states. So, clear increase in wage, pretty much sideways change in jobs in the most highly impacted sector, restaurants.

• 18:37Ed Elson?

  In other words, the main argument against the minimum wage, which is that it causes lower employment, we have evidence that is actually not true, at least in the states that we have looked at, which makes me

• 18:53Speaker 12

  That's right.

• 18:53Ed Elson?

  Yeah. It makes me wonder, is there any valid argument against raising the minimum wage? And it doesn't seem to be the case.

• 19:03Speaker 12

  There's a number of things to think about. So one thing I will say is that, by the way, this is the simplest comparison, but of course, we can make Fancier comparisons and other work that I have done. I've said, well, maybe there are different things going on. We can compare just neighboring counties, just one side of the border raised it, another didn't. So very similar otherwise. And I show this in the, in the Substack post. You can compare the neighboring counties across the state line. Again, clear change in wage, absolutely no change in relative employment in the two sides. And there are other things you could do. You could look at broader set of industries of low wages, et cetera. And the story doesn't change. Now, what, so how do employers actually absorb this? And, and that actually gets to an important thing to recognize.

• 19:48Speaker 12

  And so I, I talk about this in the book called the three Ps. So first of all, there's some productivity offset. Higher wage does increase productivity in a couple of different ways. And that doesn't pay for itself, but it does offset some of the costs in, in higher wages. Then there's some reduction in profits, but then the final piece is prices. And here it is true that a higher minimum wage does lead to somewhat higher prices for particular goods and services, particularly like a burger may cost a bit more. If you look at the overall cost of living in a state, it is not visibly affected by a minimum wage, but particular things may cost a bit more in order for lower wage workers to have a higher pay.

• 20:31Speaker 12

  So that's kind of the way we can think about how the minimum wage actually gets absorbed. You know, most people are intent to sort of support having a higher minimum wage when understanding these are some of the, you know, trade offs that we may face.

• 20:47Ed Elson?

  What do you think is the next step here? Because it seems like we have a solid body of evidence demonstrating that all of the fears that we had, that some may have had around the minimum wage being raised are not actually true. And now, I mean, we have clearly a cost of living crisis in the country, increasingly an affordability crisis. It seems like this might solve a lot of those problems. Simply raise the federal minimum wage and therefore we would see more wage growth as, as demonstrated in the evidence that you've. Laid out, especially among the the lowest earners. And perhaps it might solve to solve our problems. I mean, is the next step? Taking this to the federal government and raising the federal minimum wage?

• 21:31Speaker 12

  It's certainly the case that there's that lack of wage growth is a big part of the affordability crisis. And so finding ways of raising wages is key. And that's why sort of I wrote the book. And one of the pillars that I argue is exactly raising the minimum wage. The other one, by the way, is full employment, which also plays a very important role in helping giving more leverage to workers. But when we think about raising the minimum wage, at this point, the federal minimum wage has been stagnant, like we said, for seventeen years. So it is absolutely critical that we do raise it. You know, it's actually, it's something that there's a broad base of support in this country

• 22:14Speaker 12

  for for doing this. And the problem is really in Washington. And so, of course, we can keep raising more state minimums. That that is something that, you know, I think we'll probably continue to see efforts. But at the end of the day, not all states, you can actually put this on the ballot. And sometimes there's, you know, different factors that affect what kind of what legislatures are going to do. And this is why it's really critical for the federal government to do its job and actually have a minimum wage. And and the key thing will be the next time we raise the federal minimum wage, we should make sure we do not let this happen again, where we go for over a generation. And there's a really simple fix, which is you index the minimum wage, which many states increasingly do.

• 22:59Speaker 12

  So every year, it's automatically raised. It doesn't require us to debate this ad nauseam, you know, over and over again. And it just let it let it do its job. And so I think we have the tools. I think we have the evidence. I think it's a matter of having the political will.

• 23:19Ed Elson?

  Aaron Dubay is Provost Professor of Economics at the University of Massachusetts Amherst and author of The Wage Standard: What's Wrong in the Labor Market and How to Fix It. Professor Dubay, we really appreciate your time and I'm I'm in full support and full agreement. So thank you.

• 23:34Speaker 12

  Thanks for having me. Great to be here.

• 23:38Ed Elson?

  As we end this episode, a quick check in on my SpaceX prediction. Two weeks ago, before SpaceX went public, I predicted that the stock would rise at least 25% on the first day of trading. That it did. The stock hit $176 on day one, up almost 30%, and then continued to rise the following week, hitting a high of nearly $220 per share. So, check. Part two of my prediction, however, was that over the next six months, the stock would get cut in half. Why? Because I believed and still believe that the valuation makes no sense, and also because

• 24:20Ed Elson?

  billions of dollars' worth of lockups would soon expire, thus allowing early investors to sell their shares, thus putting downward pressure on the stock. That hasn't happened yet. However, we are starting to see warning signs. The stock has already fallen as much as 30% in just a few days. It also shed $400 billion in market cap in a single day, which was the second largest one-day wipeout in stock market history. And while it did recover some losses yesterday, it's still 22% off of its highs. Now, keep in mind, this is all happening before any of the lockups have even expired,

• 25:01Ed Elson?

  which means that the stock has yet to go through the real test, which is when thousands of investors will choose whether to hold the stock at an unreasonable valuation or sell it and then go buy themselves a house, or a boat, or perhaps even a plane. I know what my money's on. Having said that, there is one bright spot ahead for SpaceX, and that is when it will be officially included in the NASDAQ 100 index. That means that roughly $8 billion worth of SpaceX shares will be automatically purchased by passive investors, thus temporarily increasing demand, and that is set to happen in about two weeks. So, that's the good news for SpaceX.

• 25:44Ed Elson?

  Aside from that, though, there's not much to be excited about here. SpaceX is about to undergo some of the greatest selling pressures in history. We've already seen how a simple bond offering was enough to make investors nervous. Now just imagine how nervous they will be when the insiders start to sell.

• 26:05Ed Elson?

  Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams, our research team is Dan Shalane, Isabella Kinsel, Kristin Adonahue and Mia Silverio, and our social producer is Jake MacPherson. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.

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