Chevy Volt a Failure - GM to Layoff 1,300

Yeah. They missed yet another forecast yesterday. I didn't bother posting (I didn't want to feed another "fiction!" "proven wrong" "nail in your coffin!" post. ... too bad it came anyhow). But thanks.

 

It's not "the media." It's the environment we are in, in general. There are lots of crazy things that have been rewarded the last few years due to a ridiculous environment in which money has been made cheap and credit has been allowed to flow to a ridiculous extreme. We are in a debt mess, and Tesla is a poster child for it. That is the actual story. Musk is the poster child for debt and handouts -- and that world is coming to an end. He has made promises that would cost billions upon billions of dollars -- with no realistic prospect of ever getting a return on that investment. In a normal environment he'd get laughed at. But we slipped into in bizarro world -- a temporary, but one that lasted several years and allowed people to get sucked in by the hype.

We got ourselves into a temporary world in which crony capitalism handouts and cheap financing due to manipulated interest rates (every developed economy debasing their currencies) has created all kinds of misallocation of capital (it is to all of our detriment way more than the average person realizes). ... and this is what Elon Musk is an expert at. He is not a technology visionary. He is an expert at buying political favors to the tune of billions of dollars to throw shit at the wall. ... and as importantly, availing himself fully of the money available in a temporary environment (that people will look back at and shake their heads at and wonder how this ever happened -- we have destroyed years of our future for things like Tesla and Solar City) where risk is drastically mispriced due to central bank manipulation of interest rates. He is riding it for all it is worth -- as much as anyone is, and we are swimming in trillions upon trillions of dollars of asset bubbles right now of which he is a tiny piece. There have been others able to borrow to ridiculous extremes too thanks to the Federal Reserve and the PBOC and ECB and BOJ, but he is particularly visible because he is colorful. And because it is cloaked in "technology," there are way too many people who got seduced by what was absolute nonsense, so the equity in the company got to silly valuations.

I don't know if you know who Jim Chanos is. ... He is a legendary short seller. He has been shorting Tesla stock hard -- he was talking about it at the Sohn Conference last week. He's able to, because he can ride out all of the hype and watch it turn into a mania for as long as it goes against him (he has billions of dollars at his disposal), knowing that eventually fundamentals are going to win out and he is going to make a boatload of money on the trade -- Tesla is a fantasy and this is a no brainer for him. I don't think there is much longer before the stock goes poof (along with a lot of other things), but we'll see. Manias can last longer than people who see reality can ever believe. But Tesla stock has been rolling over the last few weeks, actually (along with a lot of other stocks), so maybe we are close. What happens from here depends on the endless central bank bullshit that has kept a credit bubble they created alive a little longer. But it all ends with a crash and burn. And when that crash comes, the silly credit dries up and Musk can't bullshit his way to the endless financing he needs to keep this fantasy alive.And we can finally stop talking about Tesla. Tesla has zero to do with electric cars or Elon Musk's ability to execute (he has zero credibility when it comes to execution, anyhow). It has everything to do with needing to be able to borrow money endlessly on bullshit promises. That works as long as risk is being mispriced and the lenders are there -- thank the Federal Reserve. Don't count on that lasting any more than the housing bubble they created lasted. I think the handwriting is on the wall -- not just with regard to Tesla, but looking across macro factors in general.

For what it is worth, a flood of senior executives have been leaving the company the last few weeks. That is often a negative sign for a company -- people trying to grab whatever lifeboats there are.

 

BTW. ... I mentioned the Sohn Conference in that post. It's a conference in which the presenters are supposed to talk about their best investment ideas. Stanley Druckenmiller gave a jawdropping presentation. For anyone who has scratched their heads at my posts, you might want to read this carefully and take note of who the presenter was:

http://www.valuewalk.com/wp-content/uploads/2016/05/The_Endgame_Sohn.pdf

Keep in mind that this is the guy who made a billion dollars breaking the bank of England when they tried to artificially peg their currency (he was short the British pound and beat a central bank). ... and the guy who called the subprime crisis and made about $275 million on it. His biggest position right now. ... gold. He thinks the stock market in general is ridiculously overvalued on the back of a giant credit-induced splurge. He could be wrong. I could be all wrong. But at least read the basis for what he has to say.

 

It isn't that generic with "bank and financial people" supporting Tesla -- like they randomly stuff money into Elon Musk's pocket for no reason. It is a high-yield debt market (i.e. -- the ability of the riskiest ventures being able to borrow) that has been thrown out of whack by central banks around the world (with the Federal Reserve leading the way). What are known as junk bonds. That, and Musk's ability to dilute the existing pool of equity with new issuances of stock (because there is only so much debt issuance the market will bear -- even in an environment in which risk has been skewed by manipulation, so he did a secondary stock offering the last time he needed money. ... something that worked well in a stock market bubble because his inflated stock price allowed him to raise a heap of cash that way. .. it is all wing and a prayer stuff).

That high-yield debt market got ridiculously silly, because of what I am trying to point out -- interest rates have been manipulated to the zero bound (they are negative in 40 percent of the world), which makes it impossible for investors and savers to find safe yield anywhere. It's what Stan Druckenmiller was talking about in that presentation I linked to.

Central banks have pushed money looking for a return into riskier and riskier investments by necessity, and that is how you end up with asset bubbles courtesy of the market manipulation they used to create a bigger and bigger mess. People who actually have money to gamble with that way love it when it is producing a "wealth effect,"in which people get into a mania and think they are getting richer because on paper their assets are appreciating in value. For what it is worth, very few people are participating in this bubble world, because most people don't own stocks or high-end real estate or participate in art auctions. ... even the way they did 10 years ago. And it certainly doesn't help the greater economy. It makes wealthy people wealthier and sets up some wannabe wealthy people for a huge fall when an inevitable crash comes.

In any case, it has all been artificial and it isn't productive investment on the back of the debt. The debt chases stupid things because investors can no longer calibrate risk on their own. That is what the manipulation does. It creates massive misallocations of capital.

The Teslas of the world have been the beneficiaries -- to put it simplistically. This is NOT just a Tesla story. Tesla is just a very visible, sexy company. In reality, a lot of things have been the beneficiary of ridiculous malinvestment. A lot of it has been companies borrowing money and using it to buy back their stock, which drives up their stock price (it creates an artificial buyer of the stock; borrow cheaply and then use it to buy your own stock -- leaving you with the debt, which isn't as a problem as long as rates are being manipulated to stay low), even though their earnings are declining -- something Druckenmiller was talking about in that presentation and that I have posted about on here for several years now while this has been building up. Essentially companies have borrowed trillions of dollars and rather than investing that money in plant or equipment or R&D or other productive uses that would occur if an actual market were calibrating the borrowing, they have used it to financially engineer higher stock prices. It isn't economically productive, of course. It's smoke and mirrors that makes the people with the money to gamble with richer while it last. And what it does do is leave a shitload of debt in its wake, which is a mess that is waiting to burst. Until then, it all "works" as long as a central planner (i.e. -- the Federal Reserve) can subvert the market and keep rates from rising (via monetary manipulation). When they can no longer do that, we are staring down defaults and credit events -- scary things.

In this case, it means Elon Musk can raise endless money even though he has shown no ability to produce a return on investment for everything he has borrowed. His bullshit actually flies in that environment.

A lot of things that normally would never be able to borrow (and would have to have gone out of business) have found cheap capital.
They are essentially able to borrow cheaply whereas in a normal environment (the way things were before central banks fucked up our markets starting with the Greenspan Fed in the 1990s) they would have never gotten a sniff, except maybe from a loan shark with a leg breaker on hand if they can't keep making payments.

You can't have capitalism without failure. But we are now saddled with a central authority that is in the business of trying to prevent that failure. And the things they have done to try to prevent that failure have left us overly indebted. Without failure, even stupid things can just keep borrowing and running up more and more debt. Tesla is a microcosm of that story. My point is that EVENTUALLY that ends badly. And it is likely sooner rather than later at this point.

If you are betting on Tesla, you are betting on the Federal Reserve being able to permanently manipulate the lending markets -- putting a price floor on interest rates, a la Soviet style economic management of our interest rate market. And them being able to do it without the market eventually correcting the excesses they created in the process, the way the market did in 2008 after years of excess (toxic debt) caused by rate manipulation that was quaint compared to what they have done since to try to prevent the necessary pain of the toxic debt they created in the first place being written off. They took a horrible problem and made it worse. And the typical person won't realize it until we are dealing with the fallout.

After 2008, they doubled down on what they were doing and put our economy on a treadmill in which it only survives on more and more debt. They lowered rates to zero (much of the world has gone to NEGATIVE interest rates) and expanded their balance sheet by trillions of dollars with outright intervention in the debt markets. It has put us into a depression, for what it is worth. Low growth during a period that should have been a typical economic recovery. And that low growth was predicated on trillions of dollars of borrowing -- not demand-driven economic activity. That borrowing has fueled things like Tesla.

Tesla is just a poster child for the bigger picture. Aside from the crony capitalism that has given Tesla billions of dollars that we are all now on the hook for, it only survives if it can raise more and more money -- it needs more and more debt on top of the billions it already owes. Musk has been preparing markets for the fact that he needs to hit the debt markets again, by the way. That is not a sustainable strategy -- for Tesla or for the global economy, which is now swimming in trillions of dollars of debt, which predictably has not gone to productive use (because the markets can no longer calibrate risk for themselves). Again, what Druckemiller was pointing out in that presentation I linked to. There are some serious credit events on the horizon and we are FINALLY seeing signs that markets are fighting back against the manipulation. That is why I said it may be coming to an end finally.

There is only so much debt you can create before you crash. And we are swimming in debt -- sovereign debt, consumer debt, corporate debt. We have created trillions of dollars of unproductively used debt over the last decade to try to prevent what was necessary in 2007/2008. In the case of Tesla, it coming to an end means that its ability to borrow goes away, and i it will have to deal with all of the debt it already has put itself in. If rates were normalized (i.e. -- a market determining their levels, not a central authority) Tesla wouldn't even be able to service the billions in debt it already has and it would be bankrupt. The company doesn't make any money and has a product that it can't sell profitably, let alone at margins great enough to service a massive amount of debt! Take away the fantasy world they created with interest rate manipulation and it is a matter of whether Tesla can survive the way ANY entity survives in an ACTUAL market -- by producing a product profitably for which there is demand. Tesla has obviously shown no ability to do that and Elon Musk has no realistic plan for ever doing it.

One other thing, what I am pointing out about Musk being full of shit and living on crony capitalism and borrowing isn't just true of Tesla. It just so happens someone revived this thread today. SolarCity (which is even more ridiculous than Tesla) stock is getting hammered right now -- down 24 percent on the day. It reported earnings yesterday and it was maybe the worst earnings phone call I have ever heard. They tried the usual bullshit to try to soothe investors in the face of all of the money they are losing while they run up more and more debt, but in this environment, it isn't flying the way it has the last few years. That is why I am saying the lunacy seems to finally be coming to an end -- we'll see. Central banks are losing control and that is why these markets have been buckling rather than buying the bullshit the way they did for several years. People are FINALLY questioning the end game (why Druckenmiller called his presentation "the endgame"). Unless they can come up with new schemes to be able to keep up the false world they created, all we have is a lot of toxic debt. Tesla is a tiny part of that, but it is the story of Tesla as much as it is the story of a bigger picture economy they fucked up.