The largest company ever floated fell below its own price and, asked to light its engines, refused; a television tip detonated the very stock it praised; and a week of genuine record profits was sold for the crime of being merely wonderful. A note on what happens when a market that has spent two years paying for the future is finally handed the bill.
For two years now this market has been, at bottom, an advance payment. Investors have handed over real money today for a future that has not yet happened: a decade of earnings collected up front, a story about robots and rockets and bottomless demand, priced as though it had already been delivered and banked. Last week in this column I wrote that the market had begun to punish good news, and called it a symptom. This week supplied the diagnosis. The future, presented at last with its own invoice, began sending pieces of it back marked not yet. And there is no spectacle in finance quite so instructive as a promise being asked, courteously, to keep itself.
A Rocket That Wouldn’t Ignite
Begin where the year has been heading all along. On the twelfth of June, SpaceX came to market at a hundred and thirty-five dollars a share, vaulted to close its first day near a hundred and sixty-one, and within days carried a value close to two and a half trillion dollars, one of the largest companies ever to draw breath on a public exchange. It was, in the purest sense, a share of the future: almost none of that price rested on what the company earns today, and almost all of it on what a believer trusts it will earn once the rockets are routine, the satellites uncountable and Mars a suburb. A month later the future sent its first invoice. The stock has fallen back through its own issue price, trading first at a hundred and thirty-one and then below a hundred and twenty-five, and something on the order of a trillion dollars of value, a sum larger than all but a tiny handful of companies on the planet are worth in their entirety, has simply gone. And in the same week that its first rocket since the listing was due to fly, the engines did not light, the launch aborted itself, and the machine sat on the pad, declining to perform the one act the whole valuation is a wager upon.
The parable pretty much writes itself, so I’ll stay out of it. You can pay any price for the future, on one condition: that the future arrives on the promised day. The moment it refuses to even get off the ground, the price realizes it has been built on thin air all along. There’s one more detail, and it’s no small one. A lock-up period expires in early August, and some nine hundred million insider shares could be sold into a market that’s already breaking a sweat. The only buyer who never flinches, Cathie Wood, naturally buys more when prices fall, because certain rituals are immutable – which is either deeply reassuring or exactly the opposite, depending on how much of your own money is on the line.
The Rise and Fall
SpaceX is only the grandest example of a shape the whole speculative year keeps tracing, the same short arc drawn again and again in different keys. Call it the pop and the fizzle: up like a rocket, down like the stick. In late June a tired hamburger chain, Wendy’s, was adopted by the online crowd as the meme of the fortnight, chased skyward on a Reddit chant and a rumour of an activist at the door, and ran out of air before it had even climbed back to its own high from May. In the spring a geothermal energy company, Fervo with the two magic words artificial intelligence and the two more magic words data centre, leapt about a third on its first day as a public company and has been quietly deflating ever since. The meme, the thematic newcomer, the trillion-dollar blue-chip of tomorrow: every register of enthusiasm has been inflated on the same fuse and let go with the same small, apologetic fizzle. The crowd has relearned how to blow up a balloon and forgotten, once again, that a balloon is almost entirely air.
Records, returned to the sender
If only the cases of fraud and the inflated figures were reduced, one could call it a cleanup. What deserves your attention this week is that even the original was returned. Taiwan Semiconductor, the semiconductor foundry that produces chips for virtually every major manufacturer, reported a quarter that can only be described as extraordinary: Net income rose by seventy-seven percent over three months to approximately twenty-two billion dollars, with a gross margin of over sixty-seven percent – a figure that would flatter even a software company, let alone a firm that pours concrete and etches silicon – an increased investment plan for the year and an additional one hundred billion dollars pledged to Arizona, as well as the promise that the next quarter would be even better.
The market reacted with a drop in the stock price of about five percent. That same evening, Netflix reported a revenue increase of about 13 percent, rising profits, an advertising division that is finally gaining momentum, and a performance that even the harshest critic would find hard to fault, and was rewarded for it with a nearly 10 percent drop in its stock price and a 52-week low, all because of the “sin” of a forecast that was merely good and not exactly miraculous. The rule that now governs this market should be stated without the usual sugarcoating: Excellence has become the entry fee, not the prize. If you deliver nothing but greatness, you’ll be treated as if you’d tacitly failed.
The week even provided a joke that fits this rule. The most famous stock market pundit on American television used his airtime to promote International Business Machines – the venerable IB, and steer the audience in that direction. The next day, the stock plummeted by about twenty-five percent, marking the worst single-day loss in its hundred-year stock market history, crushed by a grim profit warning. There’s an old ritual on the trading floors known as the “reverse tip”: Whatever the loudest guy on the screen recommends you buy, you sell, and in doing so, you’ll catch most of the pros off guard. I’m not mentioning this to mock a forecaster for being wrong (which happens to every forecaster from time to time), but because there’s a real rule hidden behind this joke. By the time a buy recommendation is shouted out on TV, everyone who ever wanted to own that stock already has it. Trading is at its peak, the last buyer is in, and the applause isn’t the opening chord – it’s the closing one. Loudly proclaimed enthusiasm is a sell signal dressed up in a fancy suit.
The average obscures the autopsy
You wouldn’t be able to tell any of this just by looking at the index interface, and that’s exactly the point. Viewed from a distance, the U.S. market appears calm: Eight of the eleven sectors in the S&P 500 gained ground over the course of the week; the equally weighted version – where a bank counts just as much as a chipmaker – actually gained ground; financial stocks set one record after another; and the benchmark index was just a hair’s breadth away from its all-time high. But an index is an average, and an average is a wonderfully clever way to hide a corpse or two. Lift the sheet, and the picture changes. The Philadelphia Semiconductor Index- the “Trade of the Year” that was supposed to take us all to Mars – has slipped into a full-blown bear market and now stands about one-fifth below the record high it reached on June 22. The memory chip sector has undergone a development that goes far beyond the polite term “correction”: Micron is down about 30 percent from that peak, SK Hynix is leading the sell-off, and in Tokyo, memory chip maker Kioxia has lost nearly half its value in just one month. This is not a market that is simply falling. It is a market that is conducting triage, rolling one patient into the ballroom while another is quietly taken off life support.
Two figures – neither of which made the headlines – illustrate the immense pressure this index is under. The gap between the sharp price swings of individual stocks and the calm of the index has just reached its highest level on record, and the measure of this volatility is at its highest since the spring of 2020, when the world briefly came to a standstill. Meanwhile, the basket that tracks the market’s momentum trading – the herd’s favorites – has fallen apart at a pace last seen in a year that the old hands at every desk would rather not mention out loud: that year at the turn of the century, when another group of companies that had supposedly rewritten the rules discovered that this was not the case after all. On the surface, calm prevails. One floor below, a word rhymes with a season that no one wants to hear rhyming.
When the customer protects themselves against the seller
If you want to know the one detail that made me put down my coffee cup, here it is: CoreWeave, one of the world’s largest buyers of memory chips and the epitome of expansion in the field of artificial intelligence, is reportedly considering derivatives, put options, and similar instruments to hedge against a slump in memory prices. A put option—for anyone who, thankfully, has never had to use that term – is nothing more exotic than an insurance policy: You pay a small amount today for the right to sell something later at a price set now, so you’re protected in case the market goes haywire. Just as fire insurance only pays out if the house actually burns down. So imagine the scene. The man who’s ordered the most champagne in the room is simultaneously and quietly taking out insurance against falling champagne prices. That’s not the behavior of someone who believes the party is still in its infancy. It’s a bet, placed discreetly and in advance, that the boom he embodies is closer to the end than to the middle.
Behind this gesture lies a calculation that the industry would rather people didn’t make. The largest investors in artificial intelligence are on track to burn through well over $700 billion this year, and Taiwan Semiconductor’s bloated budget is a symptom of this trend, not an exception. The factories are running around the clock, and there’s no doubt – for now – about the demand. The question – the only one that ultimately matters – is who reaps the returns from all of this: from the concrete, the cabling, and the servers crammed with chips that will be obsolete within a few months and cost a fortune over their lifetime. A boom in which suppliers post record profits while buyers hedge against their own purchases is not a stable situation. It’s a game of “musical chairs” in which everyone is watching the pianist’s hands.
The power goes out
Hovering over all of this is the shift that this column has argued is more important than any single profit figure. Both consumer and producer prices came in moderately this week, and for forty-eight hours, the market clung to the hope that the pressure would ease. Then Lorie Logan, president of the Federal Reserve Bank of Dallas and a voting member this year, took the floor and explained that slightly higher interest rates would better balance the risks, and that very same day, the market shifted from wondering when the Fed would cut rates to pricing in a rate hike before December. Read that slowly, because it encapsulates the entire system in a single sentence. The safety net that an entire generation of investors assumed was permanently stretched out beneath them – the belief that any serious decline in stock prices would trigger cheaper money to cushion the fall – was dismantled and set aside without much fanfare. On “Planet Finance,” the force that acts as gravity is the price of money, and this force shows no signs of letting up; it’s running at full speed.
You can see it in the less-watched markets: The yen has fallen to about 162 per dollar, a low it hasn’t reached in four decades, and gold has just had its worst week in months, despite an open war in the Gulf, because persistently higher interest rates are simply poison for anything that doesn’t yield interest, war or no war.
The war we agreed not to notice
After all, the war is still raging, even if you wouldn’t think so from watching the news. This week, the United States launched its sixth consecutive wave of attacks against Iran; the Strait of Hormuz is effectively blocked, and maritime traffic through the strait has come to a standstill. About one-fifth of the world’s oil is said to flow through this strait, and Brent rose by double digits this week, as expected, while crude oil tested levels it hadn’t reached since the spring, and the market’s fear index, the VIX, remained dormant the entire time below its own long-term average, as if one-fifth of the world’s oil being held behind a locked door were a moderately interesting story on page nine. The market has been bombarded with the word “war” so often this year that it now perceives it the same way one listens to a traffic report: information—noted, then forgotten.
There is a colder version of this indifference, and it deserves to be called by its name, because I suspect that it is the true one. The market assumes that the war will be resolved because it assumes that politics will require it. The next major event on the American calendar is the midterm elections in November, and a government that wants to retain its majority wants low gas prices at the pump and a foreign policy success it can point to, while Tehran, for its part, is demanding the return of the funds frozen in its name. The bet – which is tacitly priced into stock prices – is that these two interests will meet somewhere in the middle and lead to an agreement before the start of fall. Perhaps that is how it will play out: Bets on de-escalation have usually paid off in the past. But a fifth of the world’s oil, trapped behind a blocked strait, does not adhere to an election calendar, and the convenient assumption that major powers always back down on command – conveniently just in time for an election – is exactly the kind of neat narrative this column is skeptical of. A market that prices in the certainty of a war usually prices in the last war.
The Bill and the Waiter
So let me sum up the week in a single receipt. The greatest promise ever put into circulation fell below its own price and then refused to fire up its engines. The memes and the hot new IPOs fizzled out one after another. Even genuine, record-breaking success was sent back to the sender as not miraculous enough. A celebrated TV tipster caused the stock he touched to skyrocket. The safety net beneath the entire structure was quietly folded away. People betting on the boom have begun to hedge against it, and a war that has paralyzed one-fifth of the world’s oil supply is dismissed as background noise. Amid all this, the instruments that measure the gap between the market’s composed face and its feverish body are registering higher readings than ever before – the market’s own admission that it is taking a great deal of effort to maintain this calm.
I won’t name the day when the bill is due in full, because the graveyard of this business is overflowing with people who got in early and were told, for all their efforts, that they’d been mistaken. But the bills have quite obviously already arrived; the biggest one on the horizon is dated for November, and the temperature in the room is now rising in a way that can be measured rather than just felt. Caution this week does not mean fear. It simply means reading the bill while the rest of the table is still admiring the menu, and noticing sooner than the others that the waiter has been standing behind you for some time. As they say, it’s slowly getting warm in here.
Eric Lefebvre
See also: Punished for Success
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