K-Shaped Economy | Canada's Recession | SpaceX IPO

Markets are splitting into winners, worriers, and one very expensive rocket ship. 

In this episode of Forthlane’s Off the Charts podcast, Andrew Sarna breaks down three market-moving stories: the “K-shaped” U.S. economy, where wealthy households keep spending while lower-income consumers face shrinking savings and rising delinquencies; Canada’s technical recession, driven by weak productivity, housing dependence, trade uncertainty, and pressure on living standards; and the looming SpaceX IPO, which could become the biggest capital raise in history while testing just how far retail speculation, index demand, and Elon Musk’s story-stock power can go.

WHAT TO LISTEN FOR

00:03 What are the three biggest market stories this week?

01:56 Why are lower-income households struggling while markets hit records?

04:02 Is Canada officially in a technical recession?

08:36 Could the SpaceX IPO become the biggest IPO in history?

10:59 Why could index-rule changes force huge SpaceX buying?

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This podcast is for informational purposes only and does not constitute investment advice. Views expressed are those of the speakers and should not be relied upon for investment decisions.

Transcript

Andrew Sarna (00:03):

Welcome back to Forthlane's Off the Charts podcast where every two weeks we cover three headlines that matter. I'm Andrew Sarna, portfolio manager, and this week Vanessa is off. Markets continue to be driven by really two things, AI and the tail risk of oil markets. I've spoken about these things ad nauseam, so we'll cover something else today, but I think really if I were to boil things down, those are the two things that matter in markets. But the three big things we're going to cover this week are one, the K shaped economy, Canada's technical recession, and the SpaceX IPO. Jumping into the K shaped economy. So last week it was announced that April's personal savings rate dropped to its lowest level in four years, 2.6% versus 3.2% prior. On top of that, we can look at NY Fed data of 90 day plus delinquencies by loan type. Credit card delinquencies are at global financial crisis levels around 13%.

(01:04):

Auto loan delinquencies are now above global financial crisis levels. Mortgages are the real outlier. This kind of makes sense because mortgage payments and rates are typically fixed in the US for 30 years, so you're immune to rising interest rates. They are also the first thing that you pay. So you're going to skip your credit card and your auto payment prior to skipping your mortgage payment. Really the thing I'd be looking out for is if we saw increased job losses, then maybe you start seeing mortgage delinquencies increase, but this is the big difference from the global financial crisis when we look at the state of the consumer. The other thing to note is banks also increased lending standards versus autos post global financial crisis. So banks really tightened up who they were lending to when it came to a mortgage. But what I think is really happening is it's a cost of living crisis.

(01:56):

So the bottom decile, quartile, or even maybe half of income earners, they're just slowly drowning with the increased cost of living as those increases outpace wage increases and households are slowly running out of money. First, you dip into your savings, but once those savings are gone, there's nowhere really else to reach for. This might explain why University of Michigan household sentiment is at lows while the market is at all time highs. As much as this is unfortunate, I'm not sure exactly how it resolves. And maybe this is why Walmart trades at a 48 price to earnings ratio because the bottom half of Americans are going to end up shopping at discount retailers as wealth inequality becomes more and more of a problem. The other side of this is total household wealth is actually at a record. So home prices have risen post pandemic, pushing home equity to records.

(02:54):

The stock market is at a record. So the wealthy are in really good shape even though the bottom half of households are really, really struggling. And it's important to remember that these high income earners represent a disproportionate amount of total consumption, creating somewhat of a trade between haves versus have nots. Until earnings crack, you don't get layoffs and without the layoffs, the economy might be able to continue to muddle along even as the bottom 50% of households struggle. Additionally, I continue to question whether recessions are even possible when the US government is running a 7% deficit. So you know what? It's like a silent crisis where 50% of households are in terrible shape and are struggling just to get by. And then the rest of US households continue to act business as usual, benefiting from the wealth effect and continuing to spend. So from an overall economic perspective, things can continue as business as usual.

(04:02):

Now jumping into Canada's technical recession. So last week the Canadian economy officially fell into technical recession range to start the year. Real GDP unexpectedly fell by 0.1% on an annualized basis during the first quarter. That follows a 1% contraction in the fourth quarter, a downward revision from a 0.6% decrease. Now, the decrease is super, super small last quarter, 0.1% annualized. So it's very tiny, but it's still a technical recession. And I can't say I'm overly surprised. So when I think about the Canadian economy, it's housing, natural resources, financial services and manufacturing. Also, the Canadian economy for the past decade has really just been dependent on immigration to grow. So through immigration, you grow top line GDP and if you look at the data, GDP per capita struggles. So it's not real productivity growth and real GDP growth. It was just artificially boosted by immigration. And then we can look at the various different silos.

(05:15):

So when I look at residential construction and housing, well, home prices are down 28%, I believe was the number I last saw on a real basis. So Canada's economy is way too dependent on housing. It is one of the most dependent of all OECD economies on housing. Then I look at financial services. Well, this is also tied to a growing population and the housing market. So it's not a surprise to me that they are struggling, although the banking sector from an earnings perspective continues to perform well as the majority of banks reported last week. Then we look at natural resources. Well, this is the engine and bright spot of the economy due to elevated gold and energy prices. But while we are making political progress and at least we're starting to discuss building pipelines and developing our resources, this sector remains unloved by our politicians and the general public.

(06:16):

Then we can look at manufacturing. Well, the trade war makes this sector tough and it could get worse depending on how negotiations go this summer with the USMCA. And given all this, I've actually been surprised that Canada isn't in recession already because a lot of things are working against the Canadian economy and you know what? I think we have a similar thing going on in Canada, similar to some of the data I spoke about in the US where it's a silent depression. Canadian living standards in real terms, they're unfortunately declining, but I wouldn't call it a crisis. We haven't seen mass layoffs. Another thing that's been a surprise is the currency has held in pretty well. Currencies are a relative game, so maybe Canada's smaller budget deficit has benefited us versus the US dollar, but it's certainly not overly weak by any standards or has not weakened meaningfully over the past year.

(07:20):

The things I'll be watching as we move forward will be the upcoming USMCA negotiations. Canada also already threatened to cancel our F 35 orders from the US and the US responded this past week threatening to throw the book at Canadians. I think likely that is a concession that Canada will give as part of these negotiations, to reinstate those purchases. I mean, they're going to be forced to anyway, so I'm sure that they'll reverse course on that one. And the other thing you can really hope for is we've had a sort of elbows up confrontational rhetoric with the US and as much as the US hasn't been a good partner to us, I think we really are in a position where the US holds most of the power and if we can figure out a way to have constructive negotiations, that is the optimal path forward for both parties as the US is Canada's largest trading partner and whether it be the EU or China, we aren't able to replace the US anytime soon.

(08:28):

So I mean, hopefully we can just break bread and move forward.

(08:36):

The last topic we're going to discuss is the SpaceX IPO. On Monday, Anthropic actually joined the party as they confidentially filed their S 1 to prepare to go public. They're targeting a $1.5 trillion to $2 trillion market cap for the SpaceX IPO and raising $75 to over $100 billion of gross proceeds, making this the largest IPO in history in terms of capital raised that they will be targeting. And from a real market cap perspective, the second largest only behind Saudi Aramco. If we are to look at synthetic markets where SpaceX trades in secondary markets, the implied market cap is currently $2.4 trillion at a 37% premium. So this is either genuine enthusiasm for the IPO, which we could expect to pop depending on where the IPO prices, or it's just secondary noise and retail participation. And the reward for those participating in the IPO is a company valued at 94 times 2025 revenues but, hey, data centres in space.

(09:50):

You do get three distinct companies essentially in this corporate structure. You get the space launch business, Starlink, which is actually the cash flowing part of the business, and xAI, which includes the X platform, but there will be no shortage of narratives that can drive this stock higher and feed retail speculation. There's a lot that we're seeing already before this thing even goes public, which is expected June 11th or 12th. There are, I think, 21 synthetic ETFs already filed. So most of these are 2X, 3X leveraged ETFs. I saw on WallStreetBets people buying the wrong tickers. So someone bought over $100,000 of Virgin Galactic, which trades under a similar ticker to what SpaceX is going to go public under. And then some of the controversy around it is the index providers have changed some of their index inclusion rules. So FTSE Russell is expected to include SpaceX in the index within five days of going public.

(10:59):

They changed the rules just for SpaceX. This is potentially $50 billion of forced passive buying. And then NASDAQ, in order to win the listing, also changed their fast entry decision rules and SpaceX could be eligible, or is eligible, within 15 days. So there's some uproar around those changes as that is effectively forced retail buying. And then I think one of the last big questions is concerns around whether the market can absorb $75 billion of equity supply. So this money has to come from somewhere and you know what? I think people are likely going to be selling other speculative assets to fund their purchases of SpaceX. It's going to be a really interesting one depending on where the valuation does settle upon IPO. I wouldn't be surprised if this thing does trade up, but the thing is any rational fundamental buyer is going to have a lot of trouble buying this thing because of just how expensive it is at IPO and because of that richness, I think a lot of the institutional buyers may be on the sidelines.

(12:13):

With that being said, SpaceX is going to be the ultimate story stock and it's going to command all the retail participation. So while it doesn't make sense from a fundamental perspective, I'm not going to be shocked if this thing trades up, but it's going to be mostly speculation. And then the last thing is fortunately or unfortunately Elon has delivered and he's a hard person to bet against because every time he has figured out a way to make things possible, the only time he really has failed is DOGE in the US government where he was unable to really meaningfully cut costs. So just to wrap things up, the US economy remains in a funny spot where the top 10% of households are doing really well while the bottom 50% of households struggle. I don't think it really matters for the US economy just because deficits are so high, but you know what?

(13:15):

There was a time that this did matter. Canada has entered a technical recession and all eyes are going to be on the upcoming USMCA negotiations this summer. And lastly, this is going to be the year of the mega IPO. So SpaceX is first off the block, Anthropic will be soon after and then towards the end of the year, maybe OpenAI IPOs.

(13:43):

Thanks for tuning in. Please like and follow on your favourite podcast player. And if you enjoyed what you listened to today, please share it with someone who you think would also enjoy it. See you again in two weeks.