This FT story reports that the market capitalisation of Tesla Motors has overtaken Toyota Motors.
The electric carmaker’s shares have climbed fivefold during the past year, from $230 about 12 months ago to $1,100 on Wednesday, taking the company’s market capitalisation to $205bn. Toyota, the world’s second-largest single carmaker measured by output with annual production of more than 10m vehicles, was worth about $200bn on Wednesday after its Japan-listed shares fell 1.5 per cent to ¥6,656 ($61).
The stock market treats Tesla as a technology company. Not that technology companies can, forever, defy market valuation. You should check out two of Jesse Felder’s blog posts, here and here. The first one links to “what were you thinking?” – a comment attributed to Scott McNealy, founder of Sun Micro Systems who was speaking on his own company’s valuation at the height of the dotcom boom.
Scott McNealy’s remarks are particularly relevant in these times:
At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking? [Link]
The second one links to his comment and a chart on the valuation of Nasdaq 100 stock index together with a chart of continuous jobless claims in the United States.
Nvidia has a market capitalisation of USD257.79bn compared to Intel’s USD252.05bn. Nvidia trades at 75 times earnings and has gone up eight-fold in the last five years and is up 72% this year! [Link]. Take that.
Well, such lofty (or, unsustainable or insane) optimism is not confined to single stocks. The top five stocks in S&P 500 represent a quarter of the index’ market capitalisation, first time in more than fifty years, according to this tweet by LizAnn Sonders, CIO of Charles Schwab.
The forward P/E of Nasdaq Composite index is nearing 40 times – highest since 2002 [Link] and the S&P 500 Information Technology Index is at its highest relative to the overall S&P 500 index, first time since pre-bust in 2000 [Link]. If you are not still convinced, Nasdaq 100 is trading above the Russell 2000 index for the first time since, well, April 2000! [Link]. Well, don’t you have enough warnings?
Much of the resilience one sees in US retail sales, etc., is linked to the stimulus cheques. Even then, nearly a third of Americans missed their housing payment in July. More than fifty million Americans filed for initial jobless claims in five months. [Link].
This long (or, big and free) read in Financial Times tells us that the bottom 90% of the American population has been spending (net) rather than saving (net). Further, in general, Americans’ share of non-housing debt as a % of their disposable income is at its highest in nearly two decades. This, at a time, when disposable income, is dependent entirely on government stimulus cheques.
This long article (free to read) is an eye-opener as to how the millennials feel . Millennials are those born between 1981 and 1996, according to the article. Not just how they feel but what they are enduring. One can understand how they feel about both the candidates for the American Presidential election in November 2020. It is a lot harder for Trump to persuade them to vote for him. They are not his natural constituency. It is relatively far less difficult for Biden to persuade them. All that he has to do is to pick a good VP candidate that they can relate to. He will be home. But, that is a digression. Let us come back to what it means for the American economy.
These millennials, Generation X and Generation Z – are hurting from the two recessions that have come within a decade of each other with huge job losses. One would not see it looking at asset prices. If anything, it has made their relative poverty even harsher. Homes have become more unaffordable for them. Student loan arrears are a big burden. The inflation in University tuition fees have been nothing short of criminal. That is one display of ‘malevolent incompetence’ – a phrase that Martin Wolf used to describe the American President. It should be applied to the administrators in American Universities and colleges.
The second set of folks to whom that phrase applies is the central bank chiefs at the Federal Reserve. At least two of the several charts in that long FT article show up the effects of monetary policy of the Federal Reserve. They have boosted the wealth of the wealthy and the elderly leaving the millennials (also the X-ers) and the Generation Z in the lurch. They have resorted to day trading in stocks and trading in the stocks of companies that have declared bankruptcy. One of them committed suicide.
Check out this tweet by Jim Bianco:
This podcast talked to a 19-yr UT student and a 24 yr frustrated sports gambler about pandemic day trading. My favorite part … the 19-year feel he is a “middle aged” trader because he knows a lot of 15/16 yr old gamers trading on their parents account. [Link]
I have not yet listened to the full podcast.
This article in Reuters tells us that American businesses are not rushing to rehire workers. Of course, it does talk about the rebound in American manufacturing activity, as reflected in the diffusion indices. That reveals a basic misunderstanding of how diffusion indices work. When everyone reports a contraction in activity as happened in March, the diffusion index plunges, as it did. Then, in the following month, if the respondents report a pick-up in activity over the ‘plunged’ previous month, the diffusion index would rise above 50. That does not mean that the economy is expanding. It is doing better than it did in the previous month, on net. Activity could be far below the pre-Covid levels. For example, despite the big jump in payrolls in May and in June, it is at least 15 million lower than the pre-Covid levels.
That is why expectation that corporate earnings would return to 2019 levels – when the economic expansion was peaking (or had just peaked) – seems like a pipe dream, prompting one to ask, as Scott McNeely did, ‘what were you thinking?’. But, back to the real economy.
Let us assume that they will continue to arrive into people’s mailboxes well into the third quarter. Quite what it does to the US fiscal deficit does not require much math. It will blow through the roof. With Americans not saving enough and being able to fund their government (it does make sense for the government to spend when the private sector is not), the US Treasury will eventually turn to the Federal Reserve to finance its deficit.
Then, let us say that it keeps the stimulus cheques flowing to American households. They will ramp up their spending. The sum of the two would send American current account deficit rising sharply. It does not augur well for the US dollar at all. Alternatively, other countries will have to ramp up their ‘money printing’ or also resort to monetisation.
Does not sound like a recipe for continued trust in fiat money. The stock market is oblivious of these risks.
It was very timely that I came across an article by Edward Chancellor (ht: Aru Arumugam) in Reuters. The article captures the tragedy that we are living through in financial markets thanks to central banks (hint: not about Covid) in a funny way. Please do read it. The title of the article is ‘Wall Street is firmly in wonderland’. I am not sure if the Street and investors are the only ones in wonderland. What about central bankers and their cheerleaders in mainstream media? They too are in la la land.
Risk management becomes a meaningful concept only if we are aware of risks. The signal disservice of the Federal Reserve and its counterparts elsewhere in the developed world has been to make investors around the world learn to ignore risks and forget the pricing to risk. It may not be malevolent incompetence but criminal incompetence, for sure.