Freedom to fly, freedom to flop

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MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat!

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. 

Good morning, David.

DAVID BAHNSEN: Good morning, Nick, good to be with you.

EICHER: Well, David, Elon Musk became the world’s first trillionaire this week, and the reaction from the progressive wing of the Democratic Party was immediate, it was certain, it was predictable. 

Sen. Elizabeth Warren, for example, pointed to inequality. Congresswoman Alexandria Ocasio-Cortez argued for wealth taxes. New York mayor Zohran Mamdani said it’s a reason to tax the rich even more heavily than we do now, and the Maine Senate candidate Graham Platner, newly minted last week, came onto Elon Musk's X site and said, “Let’s make sure that the first trillionaire is also the last.”

So that's where I'd like to begin: What happens, David, if politicians like this get their wish? What kind of economy do we get if public policy is aimed at making sure Elon Musk is the last trillionaire this economy ever creates?

BAHNSEN: One of the things, Nick, that I have done when I teach high school students economics who might feel that there is something excessive about the type of money that an Elon Musk or a Mark Zuckerberg or Jeff Bezos is worth, is ask them to tell me what is a way we can make them less rich without making everybody else less rich?

And I have never gotten an answer to that question.

Now, one could say someone has a trillion dollars, it’s a perverse amount of money, we’re just going to take $900 billion and give it away to everybody else, and then that person’s still going to have $100 billion. What in the world could be wrong with that?

And I have to explain that in taking away that money, taking away the business environment, the freedom, the property rights, the rule of law, the incentives, all of these things that exist for radical creativity and radical productivity, you most certainly do make a lot of people less rich. You don’t get that there’s this invisible consequence, the companies that don’t get started as a result of that.

This isn’t hypothetical, we have plenty of societies that have not created the robust innovation that we have because they have tried to do this very thing. Confiscation of wealth disincentivizes creating new businesses.

The tweets, the posts, the press conferences that went out lambasting Elon Musk’s wealth did not mention the hundreds upon hundreds of people that were line workers, that were assembly workers, that were engineers, that were blue-collar, that were administrative, that are now millionaires as a result of their being connected to SpaceX.

When people talk about Steve Jobs, and Tim Cook, and the Apple people, when people talk Bill Gates, they don't talk about the secretaries, the administrative folks. I mean, there's so many people you can't even count. They don't talk about the retirees whose pension funds and retirement accounts have been connected to this radical wealth creation, that was all a byproduct of production of new goods and services.

There is no money to be made with companies unless they’re meeting human needs. 

And then to suggest that there is a better way to administer the way that wealth is created than price discovery, than private property, than mutual cooperation, than the basic tenets of a market economy, of a free-enterprise society, to suggest there’s a better way to do it is to argue against history.

To say that Cambodia is a wealthier society or a more equitable society, that I’m sorry, excuse me very much, that the Soviet Union was a more equitable society—the notion that they’re talking about is not a concern with the numbers associated with Elon Musk. It is with the concept of freedom. It is with the concept of prosperity and wealth creation.

And I want to point out—you can say Elon Musk had a trillion-dollar net worth on Friday as the IPO was going higher, and on paper, if he had died that very second and we were going through and creating a balance sheet, it’s entirely possible that’d be true. But it’s true to the extent that there are businesses that can’t be sold that have a value that we’re ascribing to them.

If Elon Musk were to go sell all his shares in SpaceX, it would be worth about 90 percent less than it is. Same for Tesla. Same for the Boring Company. He has a lot of illiquid net worth. That’s true—the vast majority.

EICHER: Right, and David, let’s stay with the critics for a moment. The politicians are saying what they’re saying because it sounds plausible to a lot of people. A trillion dollars, a billion dollars—almost no one can relate to that. Almost no one knows anyone like that, or just knows them because they're a celebrity, right? So it’s easy to “other” the billionare, or the trillionaire, like Elon Musk. 

How do you answer the “should” question here? Why should we see the creation of extraordinary wealth as a sign of economic success and not see it as a sign of economic failure?

BAHNSEN: Well, first, even if people want to just say, “David, if Elon Musk had a trillion dollars of cash in his checking account,” and we get through all of the other issues I’m bringing up, the only thing I have to say to that is: Compared to what? 

It’s outrageous compared to what? 

Compared to Vladimir Putin’s economy? Compared to some society in which the government can decide what is too much and what isn’t?

What we want is a society where there are new Elon Musks creating new companies. And to say that he has too much wealth is envious, but to say he has too much power is outrageous. Elon Musk does not have too much power. He can’t legislate his way to new things. 

The people that have the power are the politicians. The people that have the power are third-world countries where the military is in charge.

What we need to have is a vigorous defense of our American system that has separation of powers, that doesn’t allow a concentration of power just because one has a lot of wealth.

I agree that the Zuckerbergs, Musks, and Bezoses have a lot of money, but I do not agree that they have a disproportionate amount of power unless we do the very thing these people are talking about, which is wed the state and the market together!

Let’s have a separate private-enterprise economy that is not in bed with the forces of Washington, D.C., where people like Bernie Sanders can say, “I want the government to take 50 percent of the new technology companies,” or whatnot.

This whole entire subject gives us a chance as Christians to vigorously defend the principles of creation, of productivity, to oppose an economy of covetousness and theft and confiscation and redistribution.

But it also gives us a chance to understand how wealth is created. And I’m sorry, but these examples people use—these are all people that did not start off wealthy. They did not start off born into an aristocracy. They’re folks that created and invented new things, and a lot of people are better off for it.

SpaceX may be way down in a couple years. The IPO value might be perversely too high, but my point is market forces get to adjudicate those things, not Bernie Sanders.

EICHER: Right. Well David, let’s turn from the political reaction to the investor reaction. 

SpaceX jumped 20 percent on day of trading. On Friday a lot of people start thinking "hey, free money here." And what happened is pretty much what you predicted would happen when you wrote your Dividend Cafe column the day before that Initial Public Offering became public. 

So what is it that people commonly misunderstand about Initial Public Offerings, and this idea that wealth can be created without risk?

BAHNSEN: Well, first of all, Nick, there were 555 million shares of SpaceX sold in the IPO. There were 517 million shares that traded on Friday.

Now, that doesn’t mean that every single person who got shares already sold them. It means that some people sold shares, to people who sold them, to people who sold them, so there was a high velocity and turnover.

I’m sure there are people who bought shares Friday morning that still own them as this is coming out Monday morning, but my point being that we just had a ton of people that were flipping out, that were trying to get free money out of a one-day trading activity.

And yet, at the end of the day, the reality of IPOs is that about half of them go down in a short period of time, and the vast majority over one, two, three years have a much lower return than the overall market.

There’s not free money in IPOs.

Now, SpaceX did something very, very unique: First of all, it was by far the largest amount of money ever raised in an IPO, combined with being by far the lowest percentage of the company being made available to the public—roughly about 3.8 percent.

So you have a very expensive company with a very small amount of shares, and obviously a whole lot of people who want shares, so you created a supply-demand imbalance, and that stuff gets netted out in the wash eventually. It could take a few days, you know, it was obviously priced pretty correctly, twenty percent one day wasn’t that big of a bump. 

But you are now talking about a company now worth over $2 trillion that loses a ton of money and is going to need to spend every penny they just raised.

Seventy-five billion dollars is more money than they could have raised privately, so that’s why they went into public markets, but they’re going to spend $75 billion on the capital expenditures that they need to try to go launch this wildly ambitious vision of a company they have.

My Dividend Café, and what I think is far more important for Moneybeat, is about the mentality of investors.

That anybody who believes there is such a thing as free money, first of all, I would argue, believes something that isn’t true. And second of all, they believe something that is wrong.

Aspiring to find free money—you can want good returns from your investments—but they’re a byproduct of risk-taking. There’s a symmetry between risk and reward. There’s productive activities. There’s patience. There’s a time value to money.

Just thinking, “I want to walk in a casino and have it all show up on black and walk out,” that’s not investing.

So there are people who put a lot of money into SpaceX many years ago that have ridden this thing out. 

People forget this company has been around for 20 years, okay? And there may be 20 more years of ups and downs along the way, but if people wanted a big return in 20 minutes, I think that there’s some stuff to maybe internally check there.

EICHER: All right. David Bahnsen—founder, managing partner, and chief investment officer of The Bahnsen Group. He writes at DividendCafe.com and at WORLD Opinions. 

And David, I hope you have a terrific week.

BAHNSEN: Well thanks so much, Nick, great to be with you.

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