12:12
So, let's start with the mania. And I think a good place to start is the IPOs because what we're seeing in terms of AI IPOs this year is extraordinary. What are the big ones, Josh? So far this year, we've had about 110 120 billion dollars raised on the US equity market from IPOs. Uh the biggest one by far is SpaceX. A couple of weeks ago, uh SpaceX raised $86 billion. But to get numbers anything like that total, you have to go back to the boom that we had in 2021. There's been a bit of a drought] over the past few years. The key difference between now and then is in 2021
it was kind of dozens or hundreds of companies raising this much money. As I say, this year so far, the vast majority of the capital raise that we've had so far has come from just one firm, SpaceX. Um, and we've got other kind of giga IPOs coming down the line as well. We've got Anthropic, we've got Open AI. Those are two of the leading artificial intelligence labs. Although we've heard in recent days maybe OpenAI is going to be kind of putting off its IPO until next year. But those are expected to be kind of similar sizes to SpaceX. Um, and any of these on their own would have been
the biggest IPO in history. That's probably going to go to SpaceX. Um but yeah, it's just it's a really long time since we've seen investors this enthusiastic about shoveling money at companies in the equity market and much of it direct much of it retail investors. Right. Exactly. So one of the interesting things about the SpaceX IPO was that 20% of the capital was raised from retail investors. That was actually lower than expected. Elon Musk, SpaceX's founders wanted a proportion of around 30%. But, you know, even the 20% that retail investors got, that's much
higher than you would usually see in an IPO. You would usually see these things dominated by big institutional investors, by hedge funds. Um, in a way, the participation of retail investors is the classic sign that stock markets are shifting from optimism to a kind of more manic phase. Let's talk about the general context of the stock market boom into which these IPOs are happening. And we've got a chart that shows the AI shares uh AI company shares of total uh market capitalization, how that's uh shot up since the launch of uh chat GPT and now you know flirting with 40% of the S&P 500
I is AI or AI related companies. Uh Mike, what do you make of that degree of uh increasing degree of concentration in AI stocks in the stock market? Well, concentration like the retail mania that Josh is talking about is one of the things that uh equity investors worry about. So they look at a market that is ever more dominated by a smaller handful of companies. And I think if you see this chart, you see a fairly large runup in the share of AI companies. This is almost underplaying it to some degree this year. If you had paid attention to equity markets last year, the year before,
you would have heard people talk about the magnificent seven, the big seven tech companies in the US, this is now woefully out of date. Those uh seven companies have been joined by three others, not just SpaceX, which is already worth over a trillion dollars, but Micron and Broadcom as well, which chip makers that are vital to AI supply chains. Micron is up 286% this year into a trillion-dollar valuation. It is nuts how much of the increase in markets this year that the broad increase has been down to this small handful of names especially companies that people hadn't
really previously priced as important to the AI boom or as crucial as they are now. So it's not just the IPO market. The underlying equity market I think is being completely reshaped by this. you are seeing concentration back to levels close to uh the ones seen at the time of the 2001.com bust. So there is an obvious source of worry there as well. So is this all completely crazy Josh? Has everyone gone mad? Well, actually for the most for the biggest signs of people going mad, you can look beyond the equity market, you can look at uh the sort of the casino version,
which is the options market. Options are they're often talked about as insurance, but maybe the best way to think about options is they are leveraged bets that you can buy on the direction stocks are going to go in. A call option gives you the right to buy a stock at a set price on a set date in the future, but it's basically just a bet on stocks going up that you don't have to put a big outlay for. You see trading in options explode when markets have manic periods. We're seeing something quite interesting in the options market at the moment.
Usually options are used as insurance by big institutions. So a put option is a contract that gives you the right to sell a stock at a certain price on a set date in the future. In that way, it can ensure you against big drops in the stock market. So the result is that usually put options are more expensive than call options. Bets the market will go down are more expensive than bets the market will go up. At the moment, call options are a lot more expensive than put options. And what that tells you is that the activity of these whales, of these massive institutional investors
is actually being dominated by people who are just taking a punt on stock markets going up. That's extremely unusual. It's hard to emphasize how unusual that is. And it tells you an awful lot about the kind of mood that investors in general are in. So we have uh so we have I giga IPOs, we have euphoric uh stock markets, we have the options market uh sending signals that uh investors are bulliant. Mike, we've also got now these companies issuing increasing amounts of debt to finance their investments. So if you were paying attention to US tech companies
maybe a decade ago, you would be familiar with a particular line of attack which was that these companies generated an enormous amount of cash. They're very profitable. They returned a lot of that to investors either in the shape of capital gains or in the shape of share buybacks but they didn't do any real investment. And this was a big worry uh in the US for a long time. And people freted about the fact that there was no hard investment, business investment by big companies, especially the big new tech companies was relatively low. That feels like an extraordinarily
long time ago. Now, if you look at a chart of free cash flow, the amount of company uh money many of these companies are making, um it's it's basically a line straight up for several years, uh more than a decade, and then it's collapsed now. And it's because they're having to invest so heavily in uh the AI infrastructure boom in things like data centers in power supply in everything that's needed to actually uh power this sort of technological revolution. And to do that they are having to borrow. Again these companies don't have long histories of borrowing.
Many of them if you look at companies like Apple they're actually relatively recent borrowers. They're relatively reluctant borrowers. This year they become major players uh in uh corporate borrowing markets. They've issued bonds not just in the US but in lots of different markets and they're becoming an increasing share of investment-grade debt in lots of places.
