Comment by augstein

> 7. Index fund managers are not incentivized to exclude a SpaceX from their indexes. (?)

Correction: index funds don't have a choice. They must follow the index, and so must buy the stock.

side effect: they'll have to sell other stocks, pushing their prices and weighting in market cap weighted indexes down.

> Passive investors are unable to rapidly respond to these types of changes because liquidating portfolios will incur capital gains taxes. (?)

For some active investors, yes. For passive investors (say you through your employer's pension fund), the tax isn't the problem. It's that the market has such a short time to adjust the price of these companies before indexes are forced to include them--and so might buy them at wildly inflated prices. Then, not too long after, the early investors can sell at still-high prices as soon as their lockup periods end. It's a massive transfer of wealth from pension funds and index investors to the early investors in those companies.

The twitter debt is a negligible portion of the money at stake here. It’s a footnote compared to the trillions of dollars in wealth that are moving around. We are only talking about it because the internet commentariat has special interest in twitter. Not worth wasting time thinking about it if you are deciding how to allocate your portfolio.

Nevertheless it is part of a pattern of weird deals in Elon’s companies. He’ll do anything to move the goalposts and turn his failures into successes. There is no norm he won’t violate, no boundary he won’t cross.

We Uncovered a Hidden Wealth Transfer in the SpaceX IPO. You're Holding the Bag.

https://youtu.be/sYA-z0Y8WRQ

There is video explaining the process

> Index funds are largely held by passive investors such as pension funds.

Pension operators are not typically passive. It's a different story to say that maybe they should be given that their returns don't always match up with index funds.

All the big banking players are in on this IPO

Morgan Stanley, Goldman Sachs, JPMorgan, Bank of America, and Citigroup

They all know how idiotic Tesla investors are, and they all want those idiots to pick up their bags.

Also: Musk's shares have 10x voting power, he can not be overruled by anybody (he will retain ~80% of the votes).

Also: SpaceX debt is $20 billion.

[dead]

The ability to short stocks in public markets also helps.

As of January, TSLA was somewhere around 2.3% of the S&P [1]. Because SpaceX will have so little float available, it would be somewhere around 0.7% if included.

[1] https://en.wikipedia.org/wiki/S%26P_500

Assuming $75B float for SpaceX

* S&P500: 0.08% – 0.12%

* NASDAQ-100: 0.47% – 0.70%

* Russell 1000: 0.1%

I read "AI Capone", fittingly

Definitely not.

What Spacex/Elon are doing is sketchy as hell. But the numbers involved here are not terribly meaningful for your portfolio.

At IPO, $75B of Spacex shares will be bought/sold. The S&P 500 uses float-adjusted weightings, and the current float-adjusted total is $54T. If you are 100% invested in SPY, then about 0.14% of your holdings will be spacex on IPO day (75B/54T~=0.14%).

Obviously Musk and friends will start dumping some of the locked up float (~1.65T) when they can. But they definitely will not be doing so in a way that crashes the price or the market. That's in nobody's interest.

If you assume that half of the shares end up as float eventually (post-lockup), you'd end up owning around 1.6% of spacex in your S&P 500 etf (875B/~55T~=1.6%). That's not nothing but it's not significant enough that you should consider liquidating your 401k.

I'm picking on Spacex specifically because they are the biggest and imo, have the sketchiest/worst finances of the 3.

In general you should never "sell your 401k." Period. (Short of using it for income during retirement.)

What you should do is have an Investor Policy Statement[0].

This should contain at least two things:

- your desired Asset Allocation (e.g. 30% U.S. stocks, 30% International stocks, 20% U.S. bonds, 20% International bonds) which should be decided upon based on specific, personal goals and risk tolerance

- your strict policy rules for if and when to do anything, if ever, e.g. (don't sell anything ever, or... rebalance your portfolio if one of your allocations is more than 2% from the desired goal)

Now... if say U.S. stocks took a big dump in the next 6 months (while other asset classes either grew, held steady, or simply didn't drop as much), when it would drop below 28% of your allocation, and you'd open a spreadsheet and figure out which other asset classes to sell a few percentage of, to buy the reduced price U.S. stock funds. (This is a policy-driven buy low, sell high strategy.)

[0] https://www.bogleheads.org/wiki/Investment_policy_statement

"Be fearful when others are greedy". Greed is at an all-time high, so be careful. Whether that means buying or selling or staying put is for you to decide.

401ks probably have limited control, but in proportion to their share of your index funds, you could short these stocks or use options or buy an inverse ETF (if one will exist).

this is not an option for the majority of people

I don’t have the fucking money for lawfare in this economy.

I don't know about your country, but in Sweden you can choose where part of your investment money (I think 40%) gets allocated. On top of that you can choose where 100% of your private pensions are allocated.

Also some EU pension funds are already in the process of divesting from US markets...

No, it's wrong.

Amazon is worth $2.81T right now and only represents 4.03% of the S&P500.

So a $1T share would represent less than 2% of the S&P500. This is significant for a single company, and 6% for 3 shit-tier companies (SpaceX, OpenAI and Anthropic) is even more significant, but we're far from "losing retirement if they go bust"-levels.

The reason they're doing that is because traditional European ponzi scheme pension systems don't work with shrinking populations, so actually we're working till we die in either case unless automation taxes pay for it.

The gamble is that you either succeed or fail. If you try nothing you'll work until you die regardless.

Current system: Work until you die.

New system collapses: Work until you die.

New system lucks out: Probably get returns (pension).

Because nothing about the IPO price has any resemblance to a fair market valuation, and if it's being propped up by this forced inclusion, even less so? The rules existed to fundamentally protect against a Potemkin village situation where an underwriter and some early round investors whip the valuation into a froth and raise against a rabid corps of retail investors who don't necessarily care about a PE ratio of 1,000+ because they're buying the hype.

More importantly, it allowed organic price discovery to occur. This eschews that process because the indexes are _forced_ to participate essentially at _any_ price, so rather than the market writ large having the opportunity to reward or punish the underwriter pricing of the IPO and determine any true idea of price, they're forced to buy the banker's narrative, which will intrinsically prop up the stock to some degree, but at what cost, and based on what underlying?

Index funds are largely synonymous with passive, long term, buy-and-hold investors. That kind of investors are best served by slower changes to the index, especially since index funds are intended to piggy back on the price discovery that happens in public trading. An IPO price, which is the result of a private negotiation, is exactly what you don't want to buy stocks at if you're a passive, long term investor.

Because it's a scam by the richest people in the world to steal from the retirement accounts of everyone else.

Why does SpaceX warrant a change of existing trading rules?

Because 5 days is not enough for the market to discover the price of SpaceX. And the rules were changed so the float is weighted as if it was much much larger than it is.

SpaceX financials are a mess outside of the actual SpaceX part. xAI is losing money hand over fist, other random bits in there are doing the same. The valuation makes no sense.

It's basically a money transfer from the average person to the poor richest person on the planet.

The true Great Filter is mental illness, apparently.

they should wait for the major lockups to pass, there by skipping some of the inevitable volatility they will likely cause.

Ask yourself this question: Why were the rules there in the first place? SpaceX being big doesn't make this okay, it actually makes it more dangerous since more and significant money could be funneled.

You shouldn't be downvoted because your point is completely valid. Matt Levine made the same point in the last Money Stuff podcast. These indexes are supposed to contain the largest, most significant, and in some cases all companies so people shouldn't be mad at the indexes for pulling in a company that's going to have a 1.5T market cap at IPO. Given the market cap, it would actually be weird to not have it in an index like the S&P500 or QQQ.

Instead blame the bankers and market who are putting buying in at 1.5T valuation.

If people really don't want SpaceX in their S&P 500 tracking ETF, we should see a S&P-ex SpaceX in short order.

> SpaceX will certainly be in the top few companies.

I'd argue that it certainly isn't.

Which, again, benefits the wealthy and well-informed and well-connected.

The suckers who have their retirement savings in some kind of index fund because all the experts have been saying, "Buy index ETFs and forget about it" for decades are gonna get fleeced, and the wealthiest get wealthier.

That's not what arbitrage means

> Do you think it’s more or less likely that they will make the same change as the other benchmarks?

S&P has historically been more conservative. My personal guess is they won't adopt all of the proposals.

> Are you actually optimistic?

Not particularly. When I posted the request for comment to HN it got crickets [1].

Not enough people care about this. And the "safe" option has kind of shifted with the other index providers having moved first. That said, there were a lot of proposals and I'm not expecting all of them to be adopted.

[1] https://news.ycombinator.com/item?id=48054324

A: posted a fact

B: but what about your emotions

Very glad to see HN stereotype being upended :)

Well, they changed that rule as well. If the float is less than a set percentage, then it is weighted as a much higher percentage. Something like the minimum for weighting is 12% where SpaceX's float will be below 5% (those are the numbers I recall, but I don't have a lot of confidence in them.) That means they will be weighted as if the float was 12%.

I think that's the point the parent comment was making.

> The only major cliff will be Elons shares

You can’t imagine a scenario where he goes lunatic and does something wild (again)?

Steadily starting about 60 days (Q2 earnings) after the IPO.

    > The only major cliff will be Elons shares

Do you really think he would see a large portion of his shares on his unlock date? If so, why? What would he do with the capital?

I broadly agree. Though I'm less pessimistic: lots of people will pay lots of attention to SpaceX and friends, and with short selling in public markets being possible, an accurate price will be established very quickly.

Remember also: index funds are some of the participants most keen to lend out their shares to short sellers. It's one of the rare ways they can boost returns above the raw index they follow.

That ignores the actual issue here, which is the change in rules. Index funds already seek to own the entire market, and when most people chose these index funds there were rules about when newly listed stocks get purchased by the funds. And now those rules are being changed.

The problem is I'm already in a S&P500-tracking ETF, for a decently large amount of money. Selling it off would be a big taxable event for me, something I don't want to do.

Index funds don't represent "the entire market" anyway. They are a diversified selection of stocks choosen according to some rules.

However they are literally changing the rules of what "the entire market" means to include those companies sooner that they would have been when people bought those indices.

That’ll do precisely zero to protect against the effect described. In fact the opposite - the dividend paying stocks will by mathematically necessity be among those ETFs sell down to buy these IPOs

Moving investments usually means taxable events, which we like to avoid if possible.

The problem is people equating S&P 500 with "set and forget" investment when that's never what it was. It's an index. You're not paying anyone to balance it with a particular risk profile.

There are indexes that invest equal amounts of money into all companies, so Nvidia doesn't dominate. Or you can pick low growth high dividend indexes to insulate against AI. Or just grab Vanguard LifeStrategy if you don't want to think.

The current situation is unusual. No index can handle all situations. Either adapt or use a fund that does the thinking for you, right?

Makes you think how he got so rich in the first place…

https://www.slickcharts.com/sp500

At .1% they'll have the same weight as something like DoorDash.

Tesla’s market cap is entirely about Optimus vaporware hopium.

Similarly Space-X’s IPO valuation is about “data centers in space” vaporware hopium and “timeshare all the GPU time that Grok isn’t using”.

There’s a trend with Musk’s companies.

AI in space, for all that sweet sweet latency.

It's not only Grok, but also the robotics applications.

Explain to me how crashes work then, isn't it when there is an inconsistency on supply vs. demand?

It just takes a narrative shift to tumble it - ex: quantum to break crypto security.

yeah, trillion. 30m isn't even a vapor droplet.

Seems bizarre to have a Shariah-compliant index fund comprising companies that are all levered with huge amounts of debt financing.

Why? Was space exploration incompatible with Sharia? Is it the pornography bit of xAI?

Looking at their exclusion criteria, which one do you believe it falls under?

Why would a Shariah index fund have to exclude SpaceX?

According to https://www.etf.com/sections/news/launching-etf-no-cheap-end...

People can surely sue the index publishers for removing the safeguards, or the index funds to take more risks than they were mandated.

When money is lost in the order of billions, someone is getting sued.

This is optimistic about binding arbitration providing protection from more traditional remedies

Indeed. Everyone should be moving their funds out of target date funds right now and into medium and small cap stock funds.

It's quite sad that the pillar of American life that is the 401k is given to shady fund managers. The law should be that if you manage a 401k you must be a fiduciary. If that were the case then no one would be bag holding these fake valuations because they'd be liable for negligence. Right now they're just in on the scam.

You can't sell these ETFs without incurring capital gains, potentially large. So it isn't really a choice.

Sure, the problem is trust.

Regular people want to invest so they can make money and companies want people to invest so that they can raise money. So pretty much everybody wants the 401k money to be invested in the stock market.

But the issue is that investing in the stock market is very technical, so some smart asses invented the index funds to make it easy for daddy and mummy to put their retirement accounts to work.

The index has safeguards in place to try and reduce its volatilty. So people are happy, cause they are investing in stock without having to look closely at what it is they bought.

But if suddenly some people change the safeguard rule, so that their buddy can dump their overvalued stock over people who think they are investing relatively safely, then it can be argued that there is foul play.

People are not finance specialists and they are heavily incentivized to buy index funds, so they need to trust that the people who are telling them to invest are not hiding things from them. If that trust is broken, lawsuits will follow.

It’s like: imagine you own a Toyota and have a maintenance contract with Toyota, and one day you have your car serviced and they tell you they changed the brakes. They tell you the brand of the new brakes and they tell you it’s fine while in fact, they put some cheap garbage that fail after 100 km of driving.

When the brakes fail and your car falls off a cliff, you go and see them and they tell you: “yeah those brakes were bad, but we told you we put them in, you could have looked up that these were bad, it’s all over the internet, so that’s on you”.

Can you please summarize his argument?

You mean "Listen to [someone who started on Wall Street at Lehman Brothers, joined PayPal in its earliest days and worked alongside Peter Thiel and Elon Musk, and eventually became a venture capitalist in Silicon Valley] argue why AI probably isn't a bubble".

Funny how this different framing of the exact same person provides a completely opposite expectation of their incentives behind commenting on whether AI valuations are a bubble.

It looks less like capitalism and more like socialism for the rich, marketed as free markets.

Print money. Push most of it into cheap credit for giant corporations and asset owners. Let a little trickle into the real economy so ordinary people feel temporary relief. Then let inflation quietly do the dirty work.

The public pays through higher prices, weaker savings, and future debt.

The powerful collect the upside.

That is the game: privatize the profits, socialize the losses, and call it capitalism.

And all of this is legal under the disguise of "protecting the economy for regular folks", and they can keep doing it repeatedly.

except the last bubble pop hit fast and hard with post covid inflation.

Irrational exuberance rarely transitions to a rational drawn down. The minute the first selfish-actor flood-liquidates, everyone else will too. That's now runs work.

Because it is deliberately extracting cash from Mom and Pop into the robber baron's wallets?

I mean, isn't the definition of a bubble that it pops quickly? If it slowly loses value over time, its not really a bubble.

Ask Warren Buffet how concerned he was of "missing" on bubbles... He got richer than pretty much everybody else by just avoiding bubbles and then buying assets at fire sale prices when they inevitably popped.

> If everyone is in the bubble and it pops, everyone is in the same boat, so you’re not really going to be poorer than your peers by comparison.

> If it’s not a bubble and you are wrong, you will fall way behind everyone else and just watch people get richer and richer doing the exact same thing you should have done.

I don't get? First scenario, you get richer vs. the average and in the second you gt poorer. So in total you average out? I don't see how not participating makes you poorer in average.

> Sometimes bubbles expand and then just get diffused.

That's not what a bubble is. A financial bubble is defined by the "burst" at the end.

There is literally nothing creative about circumventing existing regulations. By definition of there already being rules in place to prevent them, the pump methods being used are already a known quantity. That those safeguards are being bypassed is just boring old corruption.

The wrong lessons were were learnt in 2008 after no individual suffered any negative consequences for their part in causing horrible losses for a lot of people.

The opposition you're talking of will hold no significant power in 2029. They currently hold a minuscule amount of power and this isn't going to skyrocket within 4 years. A meteor causing an extinction event is more likely and I don't think you're expecting that.

They're just as on the take as anyone.

Think about it: you have hundreds of thousands of pages of evidence that the hyper-wealthy may have trafficked minors across state and international borders. Only one person is in prison over it, and her cell gets upgrades.

35 years ago this would have been a slam dunk for the opposition party of any republic. Instead of standing ten toes down on it, opposition leaders are doing... what exactly? Going on with business-as-usual, for the most part. They should be attempting to add language to every single bill that comes across the floor to see more done. They aren't.

I think stock trading shenanigans are far lower on the list of moral outrages, particularly given Congress' predilection for insider trading.

He called Social Security a Ponzi scheme, not 401(k)s.

Yeah, right.