HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

October 16, 2023

The Case for Occupying Mars

On,A,Spaceship,,An,Astronaut,,Sitting,Alongside,Extraterrestrial,Monsters,,Travel

It would be great to be born on Earth and die on Mars, but preferably not on impact. Elon Musk.

In the distant days of the first lockdown, as our financial governors layered us in the cotton wool of ZIRP, QE and helicopter money, the future powered towards us at warp speed. FANGS, online retailers, the metaverse, meme stocks, and digital assets dominated a rampant equity market powered by what we now know was the blowout top of an enormous duration bubble. What heights might Nvidia have scaled if OpenAI had launched ChatGPT two years earlier?

However, today, our investment gaze is sharply refocused on the present as the realities of inflation, rising rates and fracturing global trade (and worse) have conspired to make us reassess our value of time. The future’s sunny uplands became collateral damage of duration’s demise. Investors have swapped the fluffy concept of TAM with the existential notions of operational free cash flow and debt service ratios. The tangible has replaced the intangible, and our current problems obscure a clear view of our future.

Apart from the NASDAQ’s Magnificent Seven AI-inspired emergent bubble, today’s stock market has more than a passing resemblance to the 2001-2005 period, a period when the dot-com hangover was so profound Google and FaceBook slipped onto the stock market virtually unnoticed. Growth investing became a dirty word, and the surviving value investors ruled the roost again, albeit temporarily.

Of course, we now know that the post-dot-com period of value supremacy was short-lived. The best way for investors to navigate the post-GFC era was to go all in on Amazon, FB, Google, etc. (Or to invest in Scottish Mortgage, up 15x over the past 20 years, despite halving from its recent 2021 level).

As we move closer to peak interest rates and financial conditions above the equilibrium R*, we must start to consider the future again. Despite the higher-for-longer rhetoric, central bankers know there are precious few cases of successfully reducing rates in small increments into a duvet-like soft landing. The familiar pattern is that overtightening breaks things, policymakers panic, and rates are sharply lower before you know it.

Of course, it could be different this time, but the likelihood remains that we get a decisive rate pivot sometime in the foreseeable future. And if the post-dot-com bust period is any guide, investors should identify the companies that will be the 2030s equivalent of Amazon, Facebook, and Google. A sector that deserves closer scrutiny is the space economy, and a strong contender for inclusion is SpaceX.

Over the last few years, I have changed my position on Elon Musk from sceptic to fanboy. Via his privately held SpaceX vehicle, Musk is staking out a vision of our future that will make his disruption of the global automotive industry look like child’s play. Currently sitting on the launch pad at Boca Chica in Southern Texas, SpaceX has “restacked” its Starship space vehicle for its second launch attempt, and as Musk puts it, successfully getting this monster into Earth’s orbit is within the set of all possible outcomes.

So what, you might ask, another billionaire’s vanity project, why should I care? Well, let me take you on a flight of fancy into the version of the future in which Starship succeeds in its next milestone. Such an achievement would be comparable to (and more significant than) the development of the Google search engine. Both Google’s intent to organise the world’s information and SpaceX’s to colonise Mars lack clear and obvious revenue models. However, both contain such transformational ambition that multiple sustainable and compelling revenue cases become quickly feasible.

Musk set up SpaceX before he gained control of Tesla, with the express intent of creating a sustainable human colony on Mars, making humans a multi-planetary species. And he hasn’t waivered from this overarching strategy in the last two decades. Have you wondered why the Starship is so enormous (the International Space Station could fit inside its cargo bay) or why it is designed to be so rapidly reusable (the plan is to launch each rocket several times a day)?

Musk estimates he must land one million tons of cargo onto its surface to colonise Mars successfully. Thus, SpaceX must launch five million tons from Earth to achieve this objective. To do this, it must launch ten Starships per day for four years. However, an unintended consequence of this obsessional desire is that SpaceX-owned Starlink will first displace the internet into low-Earth orbit, build zero-gravity manufacturing facilities, and place a permanent base on the moon. The consequences are far-reaching and profound.

Is Musk a delusional fantasist? Well, his predictions have often proven unreliably optimistic. Take his predictions about autonomous driving, for example. However, the value of SpaceX is separate from its strategic aim of inhabiting Mars. Google IPO’d without a proven revenue model but the strategic desire to organise the world’s information and not be evil. SpaceX might do the same, but like Google (today as Alphabet), it has the prospect of multiple shots on goal with huge global markets to disrupt. A Starlink-powered direct-to-device satellite phone might be the first, but it won’t be the last of these moonshot, or should we say, Mars shot projects we will all benefit from.

Jeremy

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