Insider Newsletter: Issue #331

SpaceX's legal accounting trick reveals how rocket company justifies $1.75 trillion valuation despite losing money on core business

The Most Honest Fraud in History

A rocket company that loses money on rockets wants $1.75 trillion. The accounting underneath it is legal, which is the scary part.

There is a particular kind of document that should make you sit up straight, and SpaceX just filed one.

When a company goes public, it files an S-1. Normally it reads like a sedative... pages of risk factors, revenue recognition policies, and the kind of prose that exists to be skimmed. SpaceX opened theirs with fourteen pages of rocket photography and a warning that investors should not want humans to share “the same fate as dinosaurs.” The word “AI” appears over two hundred times. The word “profit” appears rather less often. There is a reason for that.

We have spent the better part of two years on this Substack arguing that the market is long the story and short the math. We laid out the mechanics in The AI Bubble’s Smoking Gun. We watched the private-credit plumbing start to seize in No Cash, No Yield, No Exit. And we keep coming back to the same uncomfortable conclusion... the most spectacular numbers in this market are not coming from businesses. They are coming from accounting.

Issue #331 is where it all comes together. And I’ll be honest with you, this one was almost fun to write.

The trick is legal. That’s the warning.

Let’s start with the part that should be a national scandal and is instead a footnote.

Google reported an 81% profit surge last quarter. Amazon posted 77%. The financial press waved at “booming cloud businesses” and moved on. The reality is far more interesting, and once you see the mechanism you cannot unsee it.

Here is the shape of it without giving away the full anatomy, which sits below the paywall. A hyperscaler invests billions into an AI lab. The contract requires that money be spent on the hyperscaler’s own cloud. The hyperscaler books that spend as fresh revenue. The lab’s valuation then gets marked up... and the hyperscaler revalues its own stake to the new number and books the paper gain straight into profit. The same dollar does three laps and generates a headline each time around.

We gave it a name in the issue. I won’t spoil it here, but it rhymes with “incestuous.”

The part that matters for your portfolio is this. Strip out the equity mark-ups and the circular cloud revenue, and the underlying business is growing at something like 16%. A perfectly respectable number for a company that size. Not 81%. The gap between those two figures is the entire story of this market.

And you already know who ends up holding the bag when the music stops. Same as always. The pension fund. The 401(k). Joe Sixpack, whose retirement is being “managed” by some desk drone in a suit who has never once asked where the profit actually came from.

Meanwhile, the inventory runs out in July

While everyone stares at the AI carnival, the thing we have been pounding the table on for months is quietly reaching its moment.

Oil has stayed oddly calm in the $90 to $110 range despite the largest supply disruption in history. We explained the buffers absorbing the shock in Countdown to Shortages and the chokepoint mechanics in The Toll Booth. Those buffers are not permanent. They are borrowed.

In #331 we map the buffer-depletion timeline week by week, and it points at one cliff. The floating storage is nearly gone. The emergency reserve releases run dry around the start of July. After that, every temporary cushion is exhausted and the full shortfall... roughly 16% of global crude trade... hits a market with nothing left to absorb it.

This is not us spinning a yarn. An Exxon executive went off script at a Bernstein conference and said the quiet part out loud about where dated Brent goes once inventories hit the floor. We reproduce his exact words in the issue. The number he gave is the kind of number that reorganises a portfolio.

Markets have been buying time with borrowed inventory. That borrowing has a maturity date.

What else is in here

A lot, as it turns out. This is one of the meatier issues we have put out.

We get into the private-equity reckoning now landing on the dolts running Harvard’s endowment, and why a forced mark-to-market event in slow motion is the most predictable disaster in finance. We look at why we are not buying puts on semiconductors even though every instinct screams to... the option writers, it turns out, are not the idiots in this trade. We walk through resource nationalism arriving exactly on schedule, with the world’s largest coal exporter making our point for us. And we revisit the great parade of market caps over time, where once upon a time an oil services stock was the fourth biggest company on earth. Could it happen again? We romance with the idea.

Then there is The Big Five. Five deep-value, contrarian ideas with the potential to do 300% or more. Not recommendations... ideas to explore, sized small, held with patience. This month’s names sit right across the seam of everything above... energy, value, and a couple of things the market has left for dead.

We do not put the individual names out here above the paywall, and you would not want us to. That is the part you are paying for. The Insider Newsletter gives you the full analysis and the reasoning. The full Insider Service over at capitalistexploits.at gives you the actual portfolios... the Asymmetric, the Dividend, and the holdings we are buying with our own money, not just talking about.

The carnival will end. All manias do. The only question that has ever mattered is whether you are positioned before the lights come up or after.

The inventory runs out in July. The accounting runs out whenever someone finally asks where the cash is.

Scroll down. It’s all in here.

Sincerely,
Chris