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Excess Returns
Andy Constan on the SpaceX IPO, AI CapEx, and the End of the Buyback Tailwind
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- [00:01]
Andy Conston
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Andy Conston
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Podcast Host - Justin
limited time, college students get the best of both worlds. Get the unreal college deal everything you need to study and play with select Windows 11 PCs. Eligible students get a year of Microsoft 365 Premium and a year of Xbox Game Pass ultimate with a custom color Xbox wireless controller. Learn more@windows.com studentoffer law supplies last ends June 30th terms at aka mscollegepc we are excited to announce the launch of a new podcast, First Principles with Andy Conston. There are a lot of shows out there that give you opinions on what is going on in markets, but the goal of this show is to go deeper. We want to focus on the lessons and frameworks behind what is happening so we can all develop a better understanding of what actually drives markets and the economy. In this episode we discuss the SpaceX IPO and what the rise of new issuance and IPOs means for markets. We also get Andy's take on AI and the economy. If you would like to continue receiving new episodes of First Principles, you can subscribe on all major podcast platforms using the links in this episode. Description thank you for listening. We hope you enjoy the new show
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Andy Conston
that's you know, 6, 700 billion dollars of shift from share reduction to no share reduction. So that that's a big deal. That's a question which is is the the are the tokens going to create disinflationary productivity growth meaning more output for the same costs? If so, nobody loses their job and so they can buy the they can buy the output and the output can be worth the token spent on it. If oil comes down that will increase consumption on other goods which is inflationary of those goods. While so core will go up relative to headline which will come down, there's no sign that the bubble is about to pop so consumer desaving still has room to go. Now the thing is the saving can only go so far.
- [02:29]
Podcast Host - Justin
Welcome back to another First Principles episode with Andy Conston. You can learn more about Andy and his research on his damp spring substack and also on his personal or the company's website, damspring.com Today, Andy, we're going to work through a wide variety of topics with you, including the recent wave of IPOs or at least the SpaceX IPO and the future IPOs that are in the pipeline and sort of how investors should be thinking about that and how you think about it. I think we'll get into AI and its impact on growth in corporate earnings and then just generally kind of wrap up with some of your thoughts on sort of the current macro backdrop and how you're viewing these major asset classes today. One of the interesting pieces that you wrote recently was this piece on IPOs where you were kind of making the point or the argument that in the IPO machine, you know, you were sort of, I guess a little bit tongue in cheek, but maybe not saying, you know, every, everybody lies. All the players in the system are sort of in there, you know, from the issuers to the banks to the founders to the institution to retail investors. Like, everybody wants the deal to happen. People want to raise money, they want to see the stocks rally afterward. But I thought it'd just be interesting to hear your view as sort of set up this idea, you know, of what happens in this IPO process and why all the players want this to work for them.
- [03:57]
Andy Conston
Sure. So, I mean, I think the big takeaway on IPOs is it really, it reaches the core reason for why markets exist. There's nothing more important. We talk, you know, we all enjoy talking about trading, and as investors, we're constantly thinking about all the possible securities we could own. But when it comes right down to it, the purpose of markets is to connect those who need money to those who have money. And so in particular, the ability for a company to raise equity capital when they have historically been private has been a critical aspect of the company being able to realize its potential. Without equity capital. Private companies just have limited access, historically limited access to investors. So the IPO stands as the sort of the essential aspect of markets.
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Podcast Host - Jack
And
- [05:17]
Andy Conston
so it becomes an important thing to watch. Things have changed a lot since then, obviously, in terms of what gets IPO'd and how the private markets work. But at the base point, that's what the markets are for. And so you have to start to ask yourself, so what is a good IPO look like? And there are so many constituents that matter.
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Podcast Host - Justin
How would you score or read the SpaceX IPO? Do you think it went relatively well or what was your assessment of that?
- [05:52]
Andy Conston
Well, again, I think it has to be, you have to look at the various interests of the various characters that are involved in any transaction. The buyer and the seller meet at a price. And in general, the ideal price is the price that neither the buyer nor the seller gets a good deal. They meet at a very fair price. No one gets taken advantage of in that transaction. And so every transaction we do is like that. Not just IPOs, but literally every transaction we do is like that. And so you want the market price to be something that the buyers and sellers agree is a very fair price. IPOs are really not like that in that it's just one transaction that a corporation is doing of potentially many future transactions that they do. And so it's not one and done transaction where you have to get a fair price. It's what I'm really looking for as the issuer is to be able to access the capital markets for an extended period of time for me to be able to reward my employees with shares that they can then freely sell in the marketplace as restricted stock compensation that they think is valuable, that companies that we then use our equity to buy in a merger transaction. They think the equity is valuable. So the IPO is just the first transaction in a set of transactions that will, you know, really define the life of a corporation. And so it doesn't have to necessarily go so well for the corporation. On the other hand, no corporation wants to get ripped off. And when they do sell, often third party investors raise money. So employees, venture capital firms, all manner of people who were early investors, either through their labor, their contribution in terms of intellectual property, invention, their money. In the case of venture capital, they may be selling too. And so they have a slightly different interest than the corporation who's selling because it may be a significant portion of their wealth, it may be all of their wealth that's tied up in that company. And so they want the best price. They're just like anybody else who meets in the market. They want to. So you can see how their interests and the corporation's interests may not be perfectly aligned. Those are the sellers, the buyers. They want a good price. They're pretty straightforward. They want a good price. And so there are a whole series of buyers that want a good price. But each of them compete and their leverage in the competition to get an allocation varies. And so there are lots of interests on the buy side. And then of course there's the intermediaries, the underwriter, the lead underwriter, the co lead underwriter, and the syndicate. And they are trying to get their clients allocations to the deal and they're trying to get the best price for the sellers who themselves have different interests. So their job is to sort of manage that.
- [10:06]
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- [10:35]
Andy Conston
When you finally find your thing, you want the whole world to know about that thing. So you use a thing called Canva to make it an even bigger and better thing. Whether you want to create flyers for that thing, make presentations for that thing, or design merch for that thing. You can do anything so people can see your thing, feel your thing, love your thing. The next thing you know, it's a thing Canva, the thing that makes anything a thing. And then of course, there's the the underwriters have an interest in making sure a deal goes well for all parties involved because they get a fee that's good. But more importantly, they get the next deal because they've done a good deal well. The next IPO goes to them. So they're very long term incented to make the deal work. The regulators, they don't want investors disappointed, they don't want the company disappointed. They don't want anything illegal to happen. But they policymakers in general really want successful IPOs that solve the issue and are, as I said, the essential aspect of capital raising in this country and the world. So they want it to go well. And of course they also want to have the company succeed because that's good for economic growth. Like a good investment company gets the money they need. They invested in the real economy. It works. It gets jobs, it gets new output, the stock rallies. All those things are very healthy and good. So those are all the various interests that are at play. And so a good deal is one in which that set of various and diverse interests are all relatively satisfied with how it went. And frankly, in this case, I think it went very, very well. It was the. I don't know if it was the biggest ipo. I think it was the biggest ipo. Aramco might be close, but it was very.
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Podcast Host - Jack
It was bigger. Yeah, it was bigger.
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Andy Conston
It was bigger than Aramco. Yeah, it's the biggest IPO in history. That's a big deal. Now it tells you that the, the capital markets have evolved to the point where a $2 trillion company is going, is going public with an $85 billion float. They don't, they didn't need the money. They were funded plenty by the private market. So it's a very different dynamic but versus the traditional ipo which was again a small part of the float typically which is similar but, but nowhere near as big a market cap as the, as this particular deal. But all deals look the same in terms of them trying to achieve those goals. And so one of the. So then you say okay, what does it mean for a deal to go well? Well, I think the first thing it means is that the shares distributed to the public are kept such that the deal trades above and there's follow on interest such that the deal trades above its issuance price. Google did a secondary offering which is quite a bit different in that there's pre. That you can, you can sell the stock short ahead of a deal you can buy. There's a slight different dynamic than an IPO in a secondary. They issued stock at 155 which was down, this is last, the week before that was down, you know, 5, 6% from where it had been. So pretty significant market impact. But the deal did trade up and then it traded through the deal. That's not, that's not a great outcome. You want the deal to be well placed with investors and there to be enough aftermarket demand such that the deal trades up. In this case, the deal was priced at $135. It opened at 150. It traded into the 1 70s. I think it's trading there now. That's a good deal. The certainly the investors are happy. Some investors didn't get as much as they wanted, but maybe they were buying at 150 and they increased. Other investors got what they wanted and flipped it, which is they bought at 135 and immediately sold at 150 for a riskless profit. That's all the nature of the IPO market is what happens in that thing. But at the high level the deal went well.
- [15:28]
Podcast Host - Jack
I had this. One of the most interesting things about your piece to me is I had this feeling that like the, and it's probably from some tech companies talking about this over the years, but that the issuer kind of gets mad if it goes up a lot because they feel like they left money on the table. But you were making the opposite point. You were making the point that even though they've left money on the table, the issuer wants the thing to go up.
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Podcast Host - Justin
Right.
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Podcast Host - Jack
From a perception standpoint, right?
- [15:47]
Andy Conston
So if you think about the outstanding, they sold $85 billion of stock, call it 80 billion, just to make the numbers round and they had $2 trillion of market cap. That means they issued 4% of the total company. I got to tell you, I don't care if, if I'm a seller of 90, 100% of the company, the first 4%, if it is a bad trade, but it also makes investors think that this is a high quality company that is hot, I'm happy to sell it a little, you know, give a little bit of money away. Now as I mentioned, there sometimes are third party selling shareholders and those guys don't want it to trade up because it's literally their money and it may be a significant portion of their money that is getting sold. So their interests tend not to be aligned with the company. Now the company doesn't want to get ripped off. There have been times when deals have been priced, you know, using these numbers at 135 and boom, it opens up 100% higher and then stays up. That's a bad deal and the issuer is going to be pissed and you are not going to get the next deal. So at some level your interests are aligned with them. You don't want to make a mistake either and, and allow it to trade up to price it at such a level that it doesn't trade up. In this case and I, you know, I wasn't in any of the rooms by any stretch of the imagination. In this case it seems that SpaceX had a very clear price. Like there wasn't much wiggle room. They said it's 135. It happened to be low enough to attract enough interest. Would have been more interesting if they couldn't get the deal done at 135, if then SpaceX would have said, hey, let's do it lower or the underwriters would have stepped. In this case, SpaceX did very, was very aggressive in its involvement in the setting of the IPO price.
- [18:05]
Podcast Host - Justin
I think one of the statistics is at least on paper, after the IPO there was over 4,000 millionaires that were either employees or contractors that had stock in SpaceX and I think over roughly 400 are worth over 100 million at least on paper.
- [18:22]
Andy Conston
I'm trying to find a colleague of mine worked at Bridgewater who is now the director of all NASA space missions for SpaceX. She's been there 12 years. I think she's got a pretty good job talk to her. But I'm hoping for a big number for her.
- [18:42]
Podcast Host - Justin
I'm sure that's great. One of the sort of things that's changing here in the markets is and the SpaceX is the first of looks like many large IPOs that are coming to market. You have anthropic, you have OpenAI. And we've been in a period over the last 10 or 15 years where there hasn't been a lot of IPOs and there's been a lot of stock buyback. So you had sort of a shrinkage of stock in the market. But over the next year, you know, you cat, there's a lot of insight into, you know, this new stock coming online. And so how do you kind of view this difference now, this divergence between what going from like a net shrinkage of stocks in the market to what looks like it's going to be, you know, a pretty big supply of new issuance?
- [19:33]
Andy Conston
Yeah. I've published on Twitter, you guys can put it attach it to this episode, our analysis of the net supply of shares. And it's a fairly radical shift. So I think it's first important to recognize that when a company buys back their stock, what happens is they take cash out of their bank account and give it to a shareholder who gives them their shares. And now the shareholder has cash and could deposit it back in their bank account. And so the banking system doesn't really even change. But what happens is there's less stock for the aggregate private investor to hold. And the corporation has less cash, somebody else has the cash. What typically happens is the person who sells their Apple shares into the buyback buys spy or buys more any other stock, any other stock that Apple, because chances are they're selling their Apple, they're not simultaneously buying it, so they buy other stocks. And so the share buyback not only reduces the shares held by in Apple, but at the macro level reduces the total number of shares available for investors to invest while their cash grows because the company has moved Cash issuance works the opposite way. More shares for the investors in the world to invest in less cash that the investors hold to make investments. And so that supply demand matters a lot. Now, is it a fast moving signal? No, no, it doesn't. You know, you're not gonna, you're not gonna know when this thing but makes a difference. For instance, the last time there was net supply of shares was late 2021. Well, the climate in late 2021 still was pretty good for another, you know, three to six months before 2022 happened. And arguably it may not have had anything to do with that supply and demand of stocks. It had to do with lots of other things. But that is what's happening. What's happening is, so how do, how do shares get created and disappear? So they get issued, they get issued as secondaries. They get issued when the company buys another company, another public company with common stock, they get a convert. May come an equity link deal, may come some other type of deal like a SPAC may occur. Each of these are offering shares to the public. Share buyback reduces those shares. So we've looked at how that changes. And during 2023 and 2024, share repurchases were roughly 2% of the GDP. The net of all those things was roughly 2% of GDP reduction in share values, in count and values. And it's flipped. And based on all the announced IPOs. Based on all. What's also happening is share repurchases are being canceled. Nvidia is increasing its share repurchase, but Google and Meta are decreasing, eliminating their share repurchase. Google obviously canceled their share repurchase and then issued $80 billion of common stock. So they've shifted in aggregate. Now supply is greater than what's retired looking forward in 2026. And so that's a big number, that's six, $700 billion of shift from share reduction to no share reduction. So that's a big deal. Will it cause the stock market to crash? No, not at all. Will it change through time? Well, that's an interesting question. What else is going on? I mentioned Nvidia's increasing its share repurchase. Why? Because they're getting tons of money when they sell their chips. Why are they increasing their share repurchase? It's not because they love their share price. It's because they're simultaneously increasing their employee stock restricted unit units award, which means they're issuing stock to employees who are then selling them. So Nvidia increased their buyback, but also increased their restricted stock awards, which means they net didn't change. So if you look at that down at the micro level to each of the companies and then you add it all up, there's been a massive switch. Why do companies need the money? Capex entirely. Capex. The reason why there are less share repurchases, more restricted stock unit sales and more equity issuance. And by the way, also corporate bond issuance. Why are all those things happen? Because they need the money to buy chips. And so when I look forward on the CapEx promises that are built into the economy and built into semiconductor earnings, storage company earnings, energy companies, construction companies, anybody, cable makers, anybody that's supplying compute infrastructure that is being bought by the hyperscalers and data centers. The forward looking numbers are enormous. And the companies that are doing the buying have gone through all of their free cash flow, have reduced their cash holdings on their balance sheet which is accumulate. These companies were all capital light. Now they're capital intensive so they're not holding as much cash on their balance sheet. Canceled their share repurchase, begun issuing corporate bonds and begun issuing common stock and increased their restricted stock unit compensation awards. All of those things are to fuel capex. Now capex may turn out to be worth it. And in that case all these, all this equity issuance will easily get absorbed because the returns of holding these equities will be so attractive that they'll spin off returns either dividends or is unlikely more share repurchases going back to that. But right now we're in the phase in which the supply demand has radically shifted. And so that's a negative factor for asset prices. Now is that enough to hold the stock market down? No, not for now. Zootopia 2 has come home to Disney Plus. Let's go get ready for a new case.
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- [27:14]
Andy Conston
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- [27:25]
Podcast Host - Justin
You're clearly worse working at Zootopia 2.
- [27:29]
Andy Conston
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- [27:46]
Podcast Host - Justin
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- [27:47]
Andy Conston
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- [28:04]
Podcast Host - Jack
so you look at this more like as a long term headwind. I mean if you think about we might have $3 trillion IPOs this year like you talked about. It won't crash the stock market. I mean do you think like all of that coming online is maybe just like a longer term headwind that we'll have now as we go forward? If you Reverse buybacks into like all this issuance.
- [28:21]
Andy Conston
I mean, I think it's a factor. I think as long as, so what is clear is as long as CapEx is running at a trillion a year and growing, they got to come up with the money, so they're going to have to keep selling. So does that mean that this is just the beginning? Sure, sure. I'm sure. You guys know of the famous who album who's Next? I've been using that as a meme every week. We're going to get a who's Next issuing something. Today it was Nvidia, who you wouldn't think needs any money, but they issued $28 billion worth of corporate bonds today. Meta, they're coming. Microsoft, they're still repurchasing their shares, so they're not coming this month. Amazon doesn't repurchase their shares. They're coming, they're, they're, they're already issuing corporate bonds. So it's just when they start to issue equity. So I look at it as a significant wall of supply being offered in equities that for them to succeed, the compute has to pay off. And so how do markets work? There are going to be periods of time where people say, yes, the compute's definitely going to pay off, and there are going to be periods of time where there's some uncertainty on that. And during periods of uncertainty, those stocks that have been offering a lot of supply are going to trade down.
- [29:57]
Podcast Host - Jack
Yeah, it's interesting. I mean, all this seems to come back to this idea of is this Capex all going to be worth it? And I guess none of us know that right now, but I mean, so many topics we've talked about in the podcast seem to come down to that. Like, is this going to be worth it in the long run? And we don't know it yet.
- [30:10]
Andy Conston
Yeah, I certainly don't. The way I look at it is it has to come from somewhere, like somebody has to buy the stuff. So just, just call them tokens, because that's what they tend to be called. Somebody has to buy the tokens, they have to get value out of the tokens so that the price of the token matters. The value is what they can do with it, and the value is, okay, what can we do with it? We can really do one of two things. At the macro level, we can make more output for the same number, same cost, which includes the cost of the tokens, which is an important thing, but we can make more output for the same cost. That's what we call disinflationary growth. Or we could make the same amount of output at lower cost. So let's listen to that. How do we lower costs? We have to fire people. There's no other way. If we fire people, how are they going to spend on tokens? So that's a question which is are the tokens going to create disinflationary productivity growth, meaning more output for the same costs? If so, nobody loses their job and so they can buy the output and the output can be worth the token spent on it. Okay, that'll work. So if you get truly useful things that don't aren't useful because they reduce labor, it can work out fine. It can work out fine. If they do reduce labor, you have to say what's going to happen? Who's going to buy all this stuff? And so that becomes a question of what does all this mean? And so at the macro level, the way I think about it is pretty straightforward. All of the corporate output and the profits they make on them are added up in gdp. Amongst all the other things that we do every year when we go to the grocery store and buy dinner, ingredients for dinner, when we then cook them, we have dinner. That's gdp. When we buy a token, that's gdp. Gdp, real GDP depends on the population and how much they can make, meaning how what they can produce. If they can produce more GDP can grow because they have smarter tools. And so I consider that the pie which we all eat from, which includes the corporations that eat profits from it, we literally eat pie. In as human beings, real goods and services are what we eat of the GDP pie and we contribute to that GDP pie based on our labor. Corporations manage people to generate output and keep a share of the GDP as profits. If the GDP pie grows, that can be very healthy because of people being able to be more productive. That can be extremely healthy. And so that's one way that we can that the AI miracle can manifest itself. The other way is a little more difficult. If we cut workers, the a corporation can eat more of the GDP pie, meaning it can take profits from the private sector labor that can be good for their stocks, but it isn't necessarily good for gdp. So when I think about this whole thing, there's the corporations currently depend on productive growth, which again we don't know if it's going to be productive productive growth to create a disinflationary relatively jobless, meaning no jobs get lost economy where top line GDP can outright grow and they can take a share of that GDP and Perhaps take more of a share than they normally take in of GDP because of the extra value they're producing. And in that way that's how these AI investments pay off. A combination of productivity and how much the pie grows and what share of the pie the corporations get.
- [35:37]
Podcast Host - Jack
Do you have any feelings on how realistic that disinflationary growth is? I mean, if you talk to the tech guys and they're talking about their world of abundance, that's how we get there, I think, is we need the disinflationary growth. But you've studied a lot of economic history. I mean, how realistic do you think it is that that's possible?
- [35:53]
Andy Conston
So I mean, there's two phases. One is the initial productivity and then two is the ongoing productivity. So when you have a productivity miracle, I like to think of it in the, in the China example, when you take your citizenry and move them from subsistence farms in which they literally only produce for their own subsistence, to cities where they're factories in which they can produce for three of themselves with the same amount of labor and the same potentially relatively similar wages, you have an immediate productivity miracle. All of a sudden the economy had been producing 100 widgets, it now produces 103 widgets. And that's fantastic. But then you've moved everybody to the city. There's nobody left to move to the city. The tool has, is now fully implemented across the economy and the output is 103 widgets. But next year it's still 103 widgets. You don't have any GDP growth at all. So firstly, we're in the midst of what I think is likely to be a short term productivity GA boost because all this spending is going into all this. And so you look at the MA at the overall economy, all this spending is going into real gdp, which is going to boost real gdp, boosts inflation, lots of spending, lots of building, building stuff that's going to appear to be a productivity because at the same time you're not going to see anybody losing jobs because the, the tools have yet to be deployed. And then there's going to be a period of time in which the tools are deployed. And I don't know how that plays out. You know, there are people that think this is the end of humanity and there are people who think it's the beginning of another golden age. And I have no idea how it's going to play out. What I do know is it's going to be messy. And I'll explain why briefly. But before I do that the productivity boom is going to have some legs as we figure out what to do with these tools, assuming they're useful. But at some point it stops being the tools are fully deployed and the productivity miracle ends. So that's the way it happens through time, through history. And this comes back to the bigger point. Through history there have been productivity miracles. There have been coal in the energy space, in the assembly line space, railroads, even the Internet have been huge productivity boosters for society. And what happens is there's initially some fear that human beings will never have jobs again. It's happened every time. The thing about human beings, and I think this is timeless and universal, maybe it isn't, but I think it's timeless and universal is humans want to have agency to improve their personal standard of living and their family standard of living. If they're given a job or given a certain amount of money as a universal basic income, most are still going to try to make a personal effort to improve their situation in life and improve it in a relative way, like beating the Joneses. It's just a natural thing. And frankly even not even in the competitive sense, just in an absolute sense, you want more, people want more and they're willing to work for it. So what does that mean? We're going to find a way, we're going to find a way to contribute even in the, you know, the most doomsayer type world. We're going to try to figure a way to. We're not going to be like that Wall E movie where we're going to be sitting on our spaceship drinking, you know, obese, drinking our sodas. We may already be doing that, I admit that, but full on like living in a Matrix sort of environment. It's possible, I guess, but my view is that human nature is such that we still will over time find new things to do. The fact is it won't be us, it won't be me for sure. Like by the time this matters, I'm already pretty old and in my dotage. By the time it really matters, you know, I'll be drooling. So my job, if it gets displaced, that's it, I'm gonna die. It'll be fine. The 30 year old who's getting displaced has time to recreate their themselves. And the 15 year old who is staring out into a place where they may never have the sort of jobs there parents had is already retooling themselves. So that's my point. It'll be messy. And when it's messy, that'll create societal challenges that'll create policymaker challenges. I suspect all of the. And all of those things have happened before and so they will happen again.
- [41:38]
Podcast Host - Jack
I want to shift to the current economy and markets and it sort of ties into this because in terms of getting your, your view on the current economy, like a lot of people have said, this is the current economy right now, like this new era spending this capex, like this is the only thing holding up the economy. And the rest of it is kind of, you know, just kind of middling along, doing nothing right now. So can you just talk about that and maybe talk about your view of where the economy is right now?
- [42:00]
Andy Conston
Sure. The economy is pretty good. We as there's a significant portion of the economy, the gdp, that is
- [42:11]
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- [42:11]
Andy Conston
direct beneficiary of large capex. And so that shows up in the numbers and it's supportive of it's moving faster than trend gdp. Consumption's doing okay, though. And that's really the big thing. Like when you think about share of GDP, the share of GDP that's personal consumption is, you know, 2/3 to 3/4 of the economy. Huge, Huge. It's all that matters. It's doing what we do. It's 350 million people going out and doing stuff every day. Some of us are using AI a little bit. Very few of us are actually in the business of building a data center. And very few of us work in tech. We're teachers, we're firemen, we're construction workers, we're lawyers and doctors and healthcare professionals. We're doing all sorts of things that have nothing to do with this topic. And so how's that going? It's going pretty well. It's going pretty well. And why is it going pretty well?
- [43:15]
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- [43:58]
Andy Conston
So far, our job market is doing okay. And part of the reason our job market's doing okay is because no one can get into this country to take our jobs. The job pool is flat, static. So you don't lose a lot of jobs when the job pool is not growing very fast. There's some demographics in that besides immigration so that's keeping us in our jobs. And this new age capex is being built, it isn't displacing any of us yet. People may not be hiring as aggressively, but no one's getting fired because of AI because frankly we don't know how much it's going to cost. You're seeing a fair amount of token price subsidies while also hearing a lot about people replacing one worker with three workers worth of token purchases. So there's, you know, there's some dynamics that have to be worked out and people don't know how reliable it is yet, what types of missions they can reduce workers. So employment's okay, but employers don't, employees don't have a lot of wage leverage because of the pending doom of their jobs. And so unfortunately real wages are not keeping up with real growth and so that's not good, that's not a good thing. So you ask how are the consumers able to continue to consume? The answer is extreme wealth effect. Asset prices, homes, everything that people own, mostly people who have assets. So it doesn't affect the whole economy in the same way but a lot of us have assets and so we can dissave that means we can sell our assets to somebody else who's happy to buy our assets with some of their cash because they have an appetite for assets. But in aggregate if we disave that allows us to consume above our means to replace the consumption we would have been unable to buy because of our flat wage, real wages with asset sales. So that's been supportive of the consumer for pretty much since, you know, for the last three or four years. And so it's an important aspect of the economy and you know, equities are about to probably go through all time highs on the S and P today. Bond market is solid crypto gold, commodities pretty much they're all doing okay. And so, and, and houses are doing okay because no one wants to sell their house. So there's just not enough housing supply. So you look at all those things and there's some weak areas of the economy. Don't get me wrong, not everything's hunky dory but the big thing, the consumer and this very strong influx of capex doing okay and that's keeping inflation uncomfortably high but also keeping real growth fairly strong. The question is how long can it persist? And that's, that's unknown. You know, in policymakers matter, animal spirits matter. We're in the midst of what I call a bubble in tech stocks that supports deep, that supports desaving big rallies in asset markets. So it can go on for a long time. So yeah, I think you just have to ask how can it end? And usually when it ends is policymakers are act because they can't handle the inflation. Doesn't we have the FOMC on Friday? On Wednesday I don't think, I don't think Warsh is going to make news at all. He's certainly not going to start hiking, particularly now that oil prices are falling with the relatively good news from the war. So that's not going to kill a bubble. Issuance is something to keep your eye on that can offset a lot of investment frenzy. And so I'm paying attention to that. But there's no sign that the bubble is about to pop. So consumer saving still has room to go. Now the thing is the saving can only go so far. You, this is a real life thing that when you are selling assets because your cost, your annual budget is above your income, particularly if you're elderly, but also if you're just anybody, you tend to get to a point where geez, for one you're not shrinks, right? How much assets you own shrinks as you sell them. And two, you start to say maybe I should change my behavior, maybe I should look to get a better job. If I can't do that, maybe if, or if I'm already retired, maybe it just maybe you consume less. And so that can, the dis. Saving can go pretty far, but it can't go infinitely far. Savings on the other hand can go very, very high. People can not consume a lot. And so currently we're in a pretty low savings environment. And so at some point there could be a squeeze. But I don't see anything that's worrisome right now.
- [50:02]
Podcast Host - Jack
Just one more thing before I hand it back to Justin. You mentioned the war. How do we think about the lasting impact of that? I mean you've got some people who say all right, oil prices went up, now they're coming back down. The war seems resolved, not too much of a problem. Other people are saying though this is going to have lasting impact. Inflation is probably going to keep going for a little bit here. Like how do you think about the lasting impact of the war now that it's, it appears to be resolved?
- [50:21]
Andy Conston
I've never been a big, I Think oil prices matter at the margin. But I've never been a big fear monger or euphoria for the direction of any wars. I mean, I mean listen, there have been some wars that you should probably have paid attention to. The Ukraine was not one of them. If you made your energy thesis based on the Ukraine, you're long oil at much much higher prices. Maybe you got out on this war, but if you made any sort of stock or bond bet based on what happened in Ukraine, you got crushed. Similarly, people make bets based on the war. But there's wars that matter. A war that mattered was World War II. That mattered for Germany particularly, but also for the UK anywhere where the war was a physical thing, ruining your means of production and directing production to non productive goods that can have lasting century long impacts. But that's not what we have here. We've had an Iraq war, two of them. We've had the war on terrorism in Afghanistan. That region has been lit up for as long as I've been alive basically and just doesn't matter to the United States economy. Just doesn't matter. Sure we can pay a little bit more, we're paying a little bit more at the pump. That could hurt demand for other goods. At least we were. But those are small issues, tiny issues. And so listen, I think it's good if, if oil comes down that will increase consumption on other goods which is inflationary of those goods. While so core will go up relative to headline which will come down. Okay, we're still got inflation. The oil inflation will just be replaced with some other inflation. As long as we continue to spend and the consumer dissaves because of very easy financial conditions and very robust economy. Inflation isn't going to go away. It's just going to shift from oil inflation to some other kind of inflation. As oil prices fall again, it's difference between headline and core. We had headline, the war caused headline to go up and core to stay flat. Headline's going to come down and core is going to go back up. And so that's just how you measure it. And so for me I think we've been in an inflationary environment for five years, six years and there's no sign that the central banks are willing to do anything about it. That's bullish assets and bullish the economy. It's not good for people who actually have to buy stuff.
- [53:16]
Podcast Host - Justin
But I gotta read this post on X because it's such an awesome point. Jalen Brunson and Andy, this is on your account. Jalen Brunson took 113 million less by signing for four instead of five years, which enabled the Knicks to sign talent, which helped them win the championship. Given the outcome, my question is, if he stays healthy, which is a gamble, is he ahead by more than 113 million as of today in expected lifetime earnings? Then he wrote, I don't know, I'll just use the word crap, but I'm a huge Knicks of Nova fan. I thought that that's just like, so, so awesome.
- [53:54]
Andy Conston
Yeah, I mean, I have, Listen, I have four kids. Three of them went to my alma mater, Penn, and one went to Villanova. And arguably Penn's a sort of more prestigious school, but holy moly. My daughter had a great experience at Villanova. She was on the dance team. The dance team is like the Nick City Dancers, but it's Villanova, so, I mean, it's a Catholic school. They're not. They're not the Nick City Dancers, but they're on the floor the whole game. And when did she start? Mikhail Bridges and Jalen Brunson were freshmen when she started. She became good friends with them. And Dante and Ryan, I can never. Ryan Arch and Chris Jenkins, who made that wonderful final basket in the first NCAA championship, and Josh Hart. And so I got to see those kids play many, many times and follow the team. Just great kids. Jay Wright, Unbelievable coach. And it's, you know, I'm not a New York basketball fan, but I'm a Celtics, Red Sox, Patriots, Bruins fan. But you gotta love these guys and you gotta love the Villanova team. And so it's been a fun run.
- [55:35]
Podcast Host - Justin
Yeah. And Brunson was so just, I, he appears to me just like a humble, humble character. Such a team player. Jack, I know you're, you're a big Knicks fan, so you.
- [55:44]
Podcast Host - Jack
Yeah, I've been a lifelong Knicks fan, so, yeah, this, this is, this is a great team to do it too, because they do seem like, like good guys for the most part. Like, their team is easy to root for, I think.
- [55:53]
Andy Conston
Yeah, it sure was. I mean, even cat. Cat 2 I, I. It's a shame Dante wasn't on the team. He was really a fun. The fun guy. He played for the Knicks for a period of time, but they needed to trade them to get Cat, I guess.
- [56:08]
Podcast Host - Justin
So I guess. As we wrap up Andy and Jack, feel free to sort of chime in here. What are you paying most attention to, sort of as we head into the summer months here? I mean, the market's up on this Iran news now, but of course, a lot could change Change. It's just a day, but it seems to be reacting positively to the, you know, some type of deal taking shape here. What's on your, you know, what's on your punch list in terms of what you're paying attention to?
- [56:34]
Andy Conston
Well, I mean, the same things I always care about the, I think the, the central bank is in. Well, it's a big deal. We got a new Fed chair. I think the new Fed chair is going to be a serious guy and he has the luxury of really not having to do anything right now so he can build his credibility. And I think he will without having to act. So that'll be the summer. He'll kick it off on Wednesday and then he'll follow up in July and he'll start guiding the big things the Fed does without having to actually pull any of the levers. But if he pulls a lever, that could be interesting if he cuts, and he shouldn't be, I don't think he will. I think he's a serious guy, but I'm going to make sure he doesn't do anything wild. On the fiscal side, there's very little limited room. There was a period of time where it looked like there could be another reconciliation bill that's stimulative, that seems to be passed with the skinny stimulus bill, the skinny bill reconciliation bill, which just authorized the DHS stuff. So I don't expect fiscal stimulus. On the other hand, and this is just not even being discussed, tariffs
- [58:05]
Podcast Host - Justin
need
- [58:06]
Andy Conston
to be replaced by July 24th or else they go away, just disappear. Now, there's been tariffs announced and there's been all manner of future tariffs that are likely to be announced. But as of the moment, the administration is not particularly doing much to slow the market or slow growth by reinstituting tariffs. So I'm paying attention to that. And then I guess the big thing, as I said, I don't think we're going to get any answers whatsoever on CapEx and its return to, on investment or. And it's just going to keep flowing. They're going to keep buying chips and storage and cables and building data centers. And they'll need to fund it. They will fund it. They'll do the IPOs that supply that I talked about will flow from and have its impact. Most will likely be absorbed, but then it'll continue. But I don't think we'll get any resolution of any, any manner whatsoever on the big issues around AI and ITS and its return on investment in the near term. I don't think we'll get it in 2026, we will get real feedback on how the issuance goes and so I'm paying a lot of attention to that and then what's left?
- [59:45]
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- [60:46]
Podcast Host - Jack
do you have a I'm just curious on war. You know, I know he's people have talked about him having a very different view on the balance sheet with the Fed. Like do you expect anything to change there with him with respect to QT or how they handle the balance sheet?
- [61:00]
Andy Conston
I hope so. I hope so. I've been a pretty strong advocate that the part one of the major reasons why inflation is persistent is the what is the Fed has blown its balance sheet management from the beginning and even still and so I would hope they do something to change their balance sheet policy. He said he's interested I know from personal contact that there are a number of people in the Fed that simply don't want to change the balance sheet policy. They they've resisted it and in fact gone back and increased the balance sheet. So I think there's a constituent there that's really against any tweaking lower of the balance sheet or changing in its composition. And so he's going to have to work pretty hard to get that done and he may not be able to do it. So I'm paying attention to see what he said. He seems to be going in the right direction and that direction is he thinks that short term interest rates could be easier lower while any easing that created could be impacted by running more of the balance sheet off and changing its composition. He said those things. Besant agrees with those things. That guy Steve Myron, who, the stooge from the administration, says all these things and has written all these things, but there's no, no movement. And part of that is because the Fed as an institution is resistant to changing its balance sheet because they seem to not understand or think somehow that inflation is supply shock oriented and it doesn't have anything to do with them and they're just completely wrong about them. And so yes, I hope he will. If he does, it'll be years of tweaks. It won't be. We're reducing the balance sheet 500 billion in 2027. That's just not going to happen. It's just not going to happen. It's going to be tweaks. And so like the supply issue, it creates a headwind. And when the tailwinds of speculative frenzy, bubble dynamics, AI investment, all those sort of things turn, those headwinds can overwhelm. But there's no sign of it right now. It's just an, it's just a, it's just a slight breeze that may get a little stronger.
- [63:52]
Podcast Host - Justin
Thank you very much, Andy. Always very thoughtful and I know our audience appreciates it. We will see you next month.
- [63:58]
Andy Conston
Thanks guys. Go Nix.
- [64:01]
Podcast Host - Justin
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast
- [64:21]
Sponsor Announcer
should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts.
- [64:28]
Andy Conston
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- [64:57]
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