Yale’s economist Irving Fisher has the unfortunate distinction of being forever associated with his quote in early October 1929 by the New York Times that “Stock prices have reached what looks like a permanently high plateau.” By late October the stock market started the crash of 1929.
When the fifth largest US stock by capitalisation is exclusively written about in an article which declares that “If (the) Tesla Bubble Bursts, Catastrophe Won’t Follow” (sic) in the Wall Street Journal, is the author James MacKintosh tempting fate (https://www.wsj.com/articles/if-tesla-bubble-bursts-catastrophe-wont-follow-11613221203)? At the very least he needs to be utterly certain he understands market dynamics in a bubble. Given the 2008 financial crisis and its dismal reporting, one cannot help but wonder who exactly wanted such an optimistic article focused on the premier bubble company to be printed in a leading financial paper and why.
At least the article recognises that the fifth largest US company is in a bubble. This is an improvement from the uniformly ridiculous boosterism which has enabled TSLA’s rise in the face of deteriorating fundamentals. How reassuring that a company that exceeded $800B in market capitalisation is described thus: “Even if the electric-car maker vanished tomorrow, it would have an insignificant effect on the economy, as Tesla’s operations are tiny.” It is very GME to describe one of the largest bubbles in history as fundamentally “tiny.” Unfortunately, it just underscores how much of a bubble it actually is. No doubt every TSLA shareholder is comforted that they hold operations that are described by the WSJ as “tiny.”
So the tiny operations of TSLA being compared to the UK’s 1890 bicycle bubble should reassure us all as the overall market was not affected by the 1890 crash. Even if other highly valued technology and associated sectors crashed we are reassured it should not be that bad.
The author points to four risks: 1) the Fed is tapped out, 2) corporate debt is exceptionally high, 3) stock market crashes affect spending, 4) sentiment would be affected as a crash could create a mood of national gloom (setting aside the COVID disaster presumably).
So everything is contained (just like the housing bubble). If there were a bigger bubble the author would be more concerned (what planet are we on?).
And that’s it.
There are two questions that this article raises. First, why this article and why now? Why did Irving Fisher feel the need to make a statement of re-assurance to the public that stocks had reached a permanently high plateau in the midst of an epic bubble? Was that really the job of an economist? On the face of it, outside the mania of a bubble, such a statement was ridiculous. Any market participant has seen stocks rise and fall and has never seen stocks never go down, which is what Fisher was saying. As brilliant as that statement was, it was eagerly matched by the great SAT taker Ben Bernanke with his comments on the housing market 80 years later.
Put another way, was there great discussion amongst the big money readers of the WSJ that the TSLA bubble will burst and take down the entire US equity market, is that why such a Fisher-type article was needed?
Second, can the potential bursting of the fifth largest US stock, recently added to the S&P 500 index, being compared to a regional 1890 UK bicycle bubble really reassure the presumably sophisticated WSJ reader?
I think the answer to the first question is tied much more closely to the second than seems apparent. After all, what is a bubble? Rapid price increases far out of proportion to fundamental improvements that are driven by social contagion, very much like a pandemic (of which we have all had recent awareness). How does a bubble/pandemic break? When the virus fails to infect fast enough to make up for slippage due to recovery, slower transmission and other drags on growth. In the worst case it could be because everyone has already been infected so there is no one left to infect.
In the case of TSLA, probably the biggest bubble in hundreds of years, it very much seems like there is simply no one left to infect. All the GME type buyers are already filled to the gills with TSLA (or have passed it by for GME and pot stocks). Graham and Dodd type investors are not going to be buying. The disconnect with the fundamentals is so extreme, the short squeeze and stock split effects have been exhausted (and add no economic value or improvement in fundamentals), and now insiders are starting to sell, such as Musk’s brother for $25M. The S&P 500 index buyers have been exhausted and are no longer pushing the price up for the last 2 months. The China story buyers were over last year. EU market share collapse means that any hype over a German plant is beside the point. The India hype flopped because India is not China. US sales were flat for years and now the most important market, California, is falling hard.
Evaluating TSLA purely as a hype and story stock that is catalysed by tweets and social contagion it could be argued that the pandemic has crested. The fundamental unprofitability of the auto business (ex tax credits and other government handouts), the last in class quality and customer service, the toxic environmental impacts of cobalt mining and lack of responsible recycling of batteries, the constraints on utility infrastructure for a true contagion of EVs in the general auto market (as opposed to the tiny 2% market share currently in the US) tip the odds at some point toward an unwinding of the bubble.
Analysed not from the view of fundamentals but from the view of contagion it could be argued that the sale by Musk’s brother of $25M in TSLA shares, along with the collapse in GME (and maybe add the $1.5B in bitcoin as a bubble squared), marks the peak of the bubble. That such a connected insider sold a material amount of stock sends the clearest signal to any trader paying attention. The distraction with $1.5B in bitcoin (which increases financial risk and completely unmasks the so called environmental halo of TSLA which never really existed) in the face of China regulatory news points to the unwinding of the social contagion. That it was a distraction from bad news was discussed and highlighted quickly, meaning that the R factor from the move was negative, not positive. Furthermore, if the bitcoin bubble bursts, which after the Musk catalyst could well do given that there is unlikely to be a larger catalyst going forward (as bitcoin has negative fundamental value given its energy consumption), the negative R factor in bitcoin could well feedback to TSLA (and visa versa). This is not an issue of fundamentals or financial links but rather social contagion links. Expressed differently, if Musk has run out of real markets to “grow” sales, that is China is what it is and is not filling its factory, the India pump failed, there are no other geographies left really to move the stock, what other catalyst is left for Musk? Why not bitcoin as it is in a bubble. He may have been assuming that the same fanboys supporting TSLA support bitcoin and that buying bitcoin should be positive for TSLA. Again, it makes no sense from a financial perspective, it does not improve their operations, but it may have seemed attractive from a social contagion perspective. Except it flopped as well.
It makes perfect sense for insiders to be selling.
Not only would I be watching carefully the response by the cult to insider sales but I would be paying attention to the reaction by Chinese customers to the high handed and frankly insulting treatment by TSLA to their complaints. The numerous discounts to price in the face of falling demand has already sparked outrage amongst those unfortunate enough to have been early adopters in China. This was a mistake from the point of view of R factor social contagion analysis but presumably had to be done to meet financial sales goals for the stock price–it underscores just how short term focused management is. Viewing TSLA from the lens that nothing matters except the stock price it is clear that management believes financial metrics, the need to show growth, far outweighs customer concerns in China. But given that stock price moves have been due to social contagion and not fundamentals it points to the importance of US social contagion versus Chinese social contagion. As long as Chinese social contagion does not seep into the US the short term decision will benefit the price. But, and this is much more likely, over time the deflating of Chinese social contagion means that the hoped for sales growth will need more price cuts just to stay level. Curiously, we see this in Chinese EV data already with most local EV makers demonstrating materially higher growth rates than TSLA. It may well be that the R factor for China is too low to support their goals (hence the repeated price cuts and substitutions of batteries and computers to cut costs). Given the lack of demand needed to fully utilise the Shanghai factory (and the promises to government regarding volume), the exporting of Chinese made Teslas to other markets takes on a much more important note. If we start to see articles about Tesla failing in China then we will know that their social contagion R factor has failed to grow and that the stock price should follow.
The realisation that the China market battery is inferior in cold weather to the US battery and the complaints about inferior computer units compared to US units only adds to the social feeling of inferiority amongst Chinese TSLA cultists. Given the preference to support local champions I would expect on the whole that the R factor of TSLA cult infection in China would be much, much lower than in the US over time. Government action that has already made the news is actually a culmination of months of problems that finally resulted in action. Even that has not really affected the stock price but if China is the future of TSLA growth this disconnect in analysis cannot last forever.
So the biggest hope for growth right now is the Model Y. Social reaction has not been great: (The Tesla Model Y’s third row looks lethal if you’re not a hobbit : RealTesla (reddit.com)). Shorts always wondered where the tipping point would be with the cult. At some point the fundamental weakness of TSLA products might actually affect buying decisions. There does not seem to be a way of getting around such a massive design defect as the Model Y’s third row and social reaction has not been fawning, it is fair to say. Even for those outside the Musk cult this cannot be a product that sells at scale, surely?
Musk has been masterful in distracting his cult and keeping his R factor high by irrelevant activities and flashy promises that never seem to be fulfilled. But a stock that lives by the R factor could very well die by the R factor should the cult turn. After all, value investors would not likely be interested over $50 (pre-split). The Reddit diamond hands have not prevented GME from falling from $450 to $50. The reason, of course, is that small investors are irrelevant to moves of this size.
But this dynamic poses a bit of a trap for the ARK investors of the world. If they try to liquidate they may find there is no bid. Given the extreme concentration of ARK in TSLA this also poses a bit of a risk for ARK ETF holders. In other words, there is a reverse gamma hazard for TSLA as the cult depressed the cost of puts to such a degree that any sudden influx of put buying could spark the same GME type moves in TSLA, but in the other direction. If you start seeing articles urging members to short TSLA on r/Wallstreetbets with reverse gamma analysis you know that the social contagion of this bubble has peaked. Worse, if Bill Gates, Jeff Bezos, or more likely Softbank, felt like YOLO trading, they might try out this reverse gamma idea with a few billion. Should hedge funds become interested, they could point to this WSJ article as cover for the argument that people said a TSLA crash would not affect the market!
So, back to the premise of the WSJ article, if the TSLA bubble bursts: for the purposes of this entry let us assume that the social contagion in TSLA has burst and that the stock price follows. This directly affects ARK (which is not mentioned in the article, curiously enough), or the other outsized holders of TSLA. Going from $800 to $50, for example, would be rather rude to these holders and would have knock on effects. But alas, the wisdom of the S&P 500 committee reliably came through and added TSLA to the index at pretty much the worst possible time. The more interesting question that the WSJ needs to answer is what effect does a 10% drop in TSLA do to the index (not only mathematically but to all the related contagion stocks). After all, if TSLA is a social contagion, then the unwinding of it should be analysed the same way on the way down. Commentary has already been made about the linkage, for example, between a fall in TSLA and biotechnology firms held by ARK. How many other linkages exist?
Lehman was important not because it was the biggest bank but because they had a million linkages to other institutions. How can the WSJ be confident that the fifth largest US company cannot have a lot of exposure and linkage effects elsewhere in the market? Of course such a question would be beside the point were this WSJ article to serve as a hedge fund plant to politically justify a reverse gamma squeeze on TSLA. At any rate, this is one of the most unusual articles on TSLA that I have seen in years.
Felix qui nihil debet 