I was going to write about productivity growth and AI this week, but I saw this Paul Krugman piece, and I thought it was worth doing a detour back to Elon Musk. Just to remind everyone, I am not just arbitrarily picking on everyone’s favorite ketamine-addled trillionaire. SpaceX is first and foremost an AI company, according to its own registration statement. It sees more than 90 percent of its future market in AI. With SpaceX’s market capitalization hovering near $2 trillion, Elon Musk’s travails are very much relevant to the course of the AI bubble.
Musk was in the news for a number of reasons last week. He was angrily insisting his DOGE team’s destruction of USAID, feeding it into the wood chipper as he eloquently phrased it, didn’t lead to any deaths. Since the program had provided nutrition and essential medicines for millions of people, this seemed a tall tale even by Trumpian standards.
But the more immediate issue for the future of SpaceX is that the value of the $25 billion in bonds it sold the prior week fell by $305 million, or 1.2%. This raises two big questions. The first is why SpaceX feels the need to borrow money at all. It can and did raise an enormous amount of money by selling shares. Only a bit more than 4.0% of SpaceX’s shares are now public, which should mean in principle that it can raise a huge amount of money by selling off more shares. For some reason, it has apparently chosen not to go that route.
Even more noteworthy than Musk’s odd financing choice is the fact that the market seems to be souring on SpaceX bonds. While there is plenty of overlap between investors in stocks and bonds, they are not entirely the same people. Elon Musk groupies are far more likely to be found holding SpaceX stock than SpaceX bonds.
More importantly, the nature of the bet investors place in the bond market is qualitatively different than the bets they are placing in the stock market. The bet in the bond market is simply that the company will be able to pay its bills. If SpaceX’s $25 billion in bonds were issued at a 5% interest rate, bondholders are betting that it will be able to pay out $1,250 million a year for the life of the bonds and then pay back the bond in full at its expiration date. If the company becomes insanely profitable, the bondholder still only gets the contracted interest rate.
By contrast, the bet on SpaceX stock is that the company will become insanely profitable. As I pointed out in my earlier piece, its current market capitalization would imply that shareholders expect the company to have around 20% of all after-tax corporate earnings, based on current GDP growth projections.
I actually should qualify that comment slightly. Some SpaceX investors may actually believe that the company will become insanely profitable. However, many investors may have no confidence whatsoever in Elon Musk or SpaceX. They may just believe that there are enough Elon Musk groupies to continue to drive up the share price to ever more absurd levels, which will allow them to sell at a healthy profit before reality catches up with the company and its share price collapses.
But the betting in the bond market is a different story. For some reason, investors holding SpaceX bonds, or thinking of buying into them, became less confident last week that the company will be able to pay its bills for the duration of the bonds. I confess to not having studied SpaceX closely, but given that it currently is losing money hand over fist, that seems a reasonable concern.
Also, since Musk’s business model seems to depend on having a close political ally in power to steer government contracts in his direction, and override laws and regulations for his benefit, the ability of SpaceX to repay bonds will fall sharply if Trumpers lose control of Congress and the White House. For these reasons, it is understandable that investors in the bond market have concerns about SpaceX’s ability to pay its debt.
In any case, it is striking that on the one hand, there are investors in the stock market betting that SpaceX will be the most profitable company in the history of the world, while investors in the bond market are questioning whether it will be able to stay out of bankruptcy.
If there’s any wisdom in the present bond and stock markets, I’d go with the bond prediction.
Bond investors are a tell