Exit Liquidity

Exit Liquidity

SpaceX has proven to be a busted IPO less than a month after it launched. It used retail investor cash to fuel its exit liquidity. Investment banks like lead underwriter Goldman Sachs were only too eager to promote this issue, along with the usual suspects (Morgan Stanley, UBS, Bank of America, etc.) Those high fees to issue, paid by shareholders to the tune of $500M, could not be ignored. 

Ground Control to Major Tom, this should be a FLASHING RED PANEL to all retail investors. 

Big Tech is in cahoots with Big Banking looking to score more lucre. Coming down the pipeline with Trillion-Dollar Valuations include Anthropic and OpenAI. Retail investors need to take pause and consider what happened with SpaceX, as the gameplan Big Tech used with Big Banking is now transparent.

Traditionally the term "Escape Velocity" pertained to the speed at which something, a rocket or spaceship for example, needed to break free of the Earth's gravitational pull. For Earth that speed is 25,000 mph. "Exit Liquidity" is somewhat of a similar term in which at what price point can Big Banking, directed by Big Tech, unload a company on the retail investment world.

The goal here is obvious: founders, early employees, and especially venture capitalists are playing a very calculated game of brinkmanship trying to determine what pricing they can shear from the sheeple. All these Gulfstream 650s aren't paying for themselves. Nor is the absolute BOOM in San Francisco real estate (the epicenter of AI) a coincidence.

Here at ILAF we like new tech and game-changing advances just as much as the next robot, but the shell game being played at the "investment" houses is pretty transparent, especially after the busted SpaceX IPO. Retail investors should be very, very leery of new issues that are simply Exit Liquidity strategies pumped by Big Banking enriching themselves, VC firms, and wildly over-compensated founders.

To date, the biggest retail winners of the SpaceX IPO have been short sellers.

Escalator Yo-Yo

 Escalator Yo-Yo

One of the best analogies of the stock market is that it is a man riding an escalator up with a yo-yo in his hand spooling up and down constantly.

Now the escalator itself might represent inflation or productivity over time, perhaps both, while the yo-yo spinning up and down constantly represents the inherent day-to-day volatility of the stock market dipping down and bobbing up.

Short-term, from the man's perspective, the stock market is demonstrating extreme swings in movement, yet all the while the escalator is slowly, methodically, moving higher and higher raising the relative baseline. 

Yet as we have all experienced, an escalator can and does stall or break. That is rarely for long. Mechanics come and "fix it" (read Federal Reserve) and it is off to chugging along again, day-after-day.

What makes this analogy so interesting is the combination of both economic and physical law truisms; namely inflation acts as ever-increasing entropy, while man constantly seeks technological solutions to life's challenges.

Coupled together, inflation and productivity push markets higher in both notional and real values, while the day-to-day swings offer prices points for entry and exit to millions of market participants.

One of the inherent functions of a market is timing. Timing in the purchase and sale of assets relative to their perceived value at that price point in time.

As we have seen on a nearly every-other-day basis this summer, traders are actively probing entry and exit points for equities. In spite of high(er) oil prices, two global conflicts, and daily (re)evaluations of tech pricing the markets have continue to rally higher.

So while short-term traders are watching the Yo-Yo, readers of this blog who desire to Invest Like A Farmer (ILAF) are using sell-off timing to their advantage and riding the escalator higher and higher while being prudent not to find themselves the "exit liquidity" many VCs and Investment Banks so cravenly need.