ASH BENNINGTON: It's Monday, July 13th, 2020, just after market close in New York. This is the Real Vision Daily Briefing. I'm Ash Bennington in New York, joined shortly by Ed Harrison from Washington DC, but first, Jack Farley with today's stories.
JACK FARLEY: Thanks, Ash. The US is heading straight for a fiscal cliff. Congress is deadlocked on the scale of the next stimulus package, and even if there will be a next stimulus package, time is quickly running out. The stimulus has been a critical factor in keeping everything afloat. It's injected about $18 billion per week into the economy, but some think that this could be too much of a good thing. Economists at the University of Chicago and Ember released a study that found that 68% of workers on unemployment insurance were making more than they would then if they were working at their old job and a fit of all workers were making double than what they would make at their old job.
The PPP was extended, but only for eight weeks more as it expires on August 8th, and no additional money was added to the pot. Democrats and Republicans are debating whether enhanced benefits should be continued past July, and if so, what size of those benefits should be? They're also debating whether they should issue another round of stimulus checks and who should get them so more stimulus could be within reach, but what shape it will take and who benefits from it is still up in the air. We just know that if Congress hesitates to act, the economic horrors that we witnessed in April will not hesitate to resurface.
In other news, Tesla had a spasmodic day jumping nearly 7% pre-market and then skyrocketing 16% into mid-morning, its market cap briefly breathing that rare air over $300 billion before crashing in the afternoon and ultimately ending down 3% for the day. The price to earnings ratio for Tesla now stands at over 10,000 and price to book is 33, price to sales, 11, and for forward earnings, the price to earnings ratio is 180. By comparison, Toyota sells for 61% of sales and 91% of its book value. Tesla eclipsed Toyota as the world's biggest automaker by market cap in late June, but it didn't end there. Tesla has since added over 100 billion dollars to its market cap since that happened two weeks ago.
Tesla's rally has coincided with a faltering auto sector worldwide. That's why Tesla is now worth more than Ford, GM, Fiat Chrysler, Daimler, Ferrari, Honda, Hyundai and BMW combined. What could possibly justify this sky high multiple? Well, as Tesla bulls repeatedly say you can't value this as a car company, Teslas aren't cars, they're computers on wheels. Perhaps the exalted valuation implies that investors are anticipating Tesla to be an effective monopoly like the Fang stocks. How do investors reconcile the competitors in the space such as Ford, GM, as well as the new speculative players in the EV space, such as Nicola and Workhorse? Tesla has a head start for sure but is a first mover advantage really worth a PE multiple of 10,000?
The epic rally in Tesla shares occurred as it reported over 90,000 deliveries for Q2. Deliveries is one of Tesla's favorite metrics. It's based on the premise that demand is not the problem, that there's always going to be a lot of consumers clamoring for Tesla cars, and that the real constraint is production. That's why they report how many cars that they've produced and delivered, but then Tesla just announced that it's cutting the price on its model Y by $3,000. Maybe the demand for computers on wheels during a pandemic is not so inexorable after all.
I know one historical analogy Ed is thinking about the 2000 dot-com bubble. The question is, is Tesla like an Amazon, a company that is swept up in speculative fervor, but one that nevertheless delivers the goods, or is it more like a Cisco, a high flyer that didn't live up to its rich valuation and lofty expectation? It's probably not a pets.com, but Tesla could be a Cisco. As Ed points out, even though Amazon was a darling then and is certainly a darling now, it declined a full 90% peak to trough. The parallel that I'm thinking about is the 2008 short squeeze on Volkswagen, the biggest short squeeze of all time so far that temporarily made the German automaker the biggest company in the world by market cap. The short position on Tesla is almost $20 billion, a record, meaning that the market cap of all the money betting against Tesla exceeds the money betting on a company like Hyundai, really is remarkable. With that, I'll turn it over to Ash and Ed.
ASH BENNINGTON: Welcome back, Ed. How was your weekend?
ED HARRISON: It was good. How about yourself?
ASH BENNINGTON: Never had enough sleep.
ED HARRISON: What's on your mind today?
ASH BENNINGTON: I don't know. What do you think about these equity markets? Pretty crazy last hour of trading.
ED HARRISON: Yeah, what's on my mind is definitely a Tesla which is what Jack was talking about, and the fact that it was at 1800, which is a record high, ended up just below the 1500 mark the last I saw it was settling down just as we started in for taping, but a massive rally in Tesla.
ASH BENNINGTON: Yeah. Let's zoom the camera lens out for a minute and talk about that more broadly. What are your thoughts about what's happening in Tesla, not just today, but big picture?
ED HARRISON: I'm going to wax a little philosophical here about Tesla in general, I don't want to talk about the share price or how it compares to Amazon as a company, which was unprofitable back in 2001, or talk about Toyota. I want to talk about shares and why people are speculating in the market, why they're speculating on companies like Tesla anyway. Something that hit me because I was watching the Mark Blyth and Eric Lonergan interview, and they were talking about what I would call the social psychology of economics, not economics, not finance, but social psychology, sociology, if you will.
One of the things that came to mind to me-- I thought it was a great interview, by the way, is that they were talking a lot about control, taking back control. It occurred to me that a lot of what we're seeing now is not just a mania necessarily perpetrated by the Fed, it's actually people getting some control of their lives, doing something that they know that they are actually responsible for. They're doing it at a time when they have no control, absolutely no control. That's how I'm thinking about this first and foremost.
ASH BENNINGTON: How does that manifest itself specifically with regard to Tesla, in this case?
ED HARRISON: Yeah, and by the way, Ash, I definitely want to get your thoughts. I want to make this like a conversation, not me waxing poetically here, but I think that with a company like Tesla, it's a field of dreams type of company. I made the comparison to Amazon, you had other sorts of Amazons back in 2001, only Amazon has emerged as the winner. Maybe there were one or two other winners from 1999 like, for instance, eBay, and actually, I don't even know if eBay went public after the crash. Nonetheless, Tesla allows you to say, I see something, I understand it. I'm not doing incredibly well, I'm putting my money to use in a way that I control, I'm in control of this. It's my destiny. I'm making money, and there you go. That's it.
ASH BENNINGTON: Well, at risk of violating your foundational precept and not comparing it to Toyota. Toyota, Volkswagen, Honda, are the two, three and four largest auto companies by market cap in the world right now, and Tesla is now bigger than all three combined.
ED HARRISON: That speaks to the bubble, obviously. Everyone's looking at it from the perspective of a bubble and the Fed fomenting that bubble, but what's really happening here? What's happening in the economy? What's happening right now? What's happening is that we're in the middle of a pandemic, we're in the middle of a potential depression in terms of the loss of jobs, etc., the loss of control, you can't even go out without wearing a mask.
There's so many different things that you can't do. It's at the end of something that Lonergan and Blyth were talking about with regard to two decades, three decades of a loss of control, where people felt like technology was taking over, that neoliberalism was making their world unstable. I think that what people seek, they seek control, they seek stability, they seek something that is safe, and they're not getting it in the world today and they're trying to in many different ways, in many different countries to take back control to use a phrase from the UK.
ASH BENNINGTON: Well, but it's almost paradoxical in the sense that the stock price of Tesla has been run up. The first time that Tesla was profitable on a quarterly basis GAAP compliant numbers was Q1 2020, first profit on a GAAP compliant basis that Tesla has turned. It's interesting, it seems if the desires take more control, people are going out further in terms of risk, in terms of US equities, at least, in terms of risk. Clearly a company that hadn't been profitable until recently, I think $16 million or something, when they do their GAAP compliant numbers. It's not a tremendous profit. At the same time, you talk about losing control, people are buying into a concept that is heavily laden with technology. You think about it. Tesla is the first major brand of automobile that can come and pick you up from the parking lot.
You're literally ceding control to the driverless car, you're ceding control to technology. You're ceding your control by buying a company that hasn't been profitable in the past, that doesn't have a track record of delivering net income quarter after quarter after quarter. Now, I'm not saying I'm bearish on the stock. I don't actually have an opinion on it, but it's interesting, this paradox of people reaching for greater lift into the future when they feel least in control in the present.
ED HARRISON: Yeah, it is fascinating in terms of the human psyche and that's why I say it goes back to Blyth and Lonergan and what they're talking about and the solutions that they came up with. The way that I was thinking about it from the beginning is we had this world, let's call it 1945 to '73, where you had a structure which gave people a sense that everything was stable. I think Blyth was talking about the fact that he was married to an East German woman and she was saying, what happened? It used to be that I used to go to school. I get my trade. I'd be at work for 40 years, and I'd retire. It was all good.
There was that stability. That was the world that we lived in from '45 to '73. Somewhere along the lines in the late '60s, that all blew apart because of inflation in particular, and it steamrolled us into stagflation in the '70s. In the '70s, we put together a new model, we threw out the old model, we put a new model in and that model was one that said globalization, it said free markets, and there was a lot of change, but with that change came opportunity, prosperity, etc. At some point, and I would call it zero rates, we reach the end of the line because I would call this the monetarist model.
The monetarism ended in 2008. We tried to put Humpty Dumpty back together again over a 12-year period, and here we are now with this pandemic. I think that this model is ending in the exact same way the old model from '45 to '73 ended with the stagflation of the '70s in a turbulent, very difficult period of time. I think that we're going through that same turbulence that we went through some 50 years ago.
ASH BENNINGTON: Yeah. It's also interesting because this could be one-- if you're taking a look at it along that time horizon, the third such event that one could cite to as an end of the cycle, 911, obviously, and certainly the 2008 period as one that could have potentially been seen as an end and yet it's managed to keep it going. Now, the conventional wisdom is no, but the cycle is really over, this pandemic really harkens a new age.
ED HARRISON: I'm not saying that it harkens a new age. I'm saying that we can call it like-- I think that there's the fourth turning metaphor that people talk about but I'm thinking about it in terms of the turbulent '60s moving into the stagflation of '70s. It's a cycle that happens over time. What is your thinking? As I said, I want it to be a conversation. I'm not at a talking head. I'm just thinking outside the box in terms of it's an incredible time that markets are going to incredible highs in the midst of a depression. It's something that is unprecedented, and I have no explanation for it.
ASH BENNINGTON: Yeah, it does feel as though we are at an inflection point. I tend to think of the cycle's maybe on a slightly shorter time horizon. We grew up during this period of tremendous optimism, figures say 1945, the end of the Second World War until the fall of the Berlin Wall in 1991, the year I graduated from high school, and we've been beset by a fair number of crises, shocks, turbulence, as I said, that all had the suggestion that perhaps a longer term cycle was going to an end. It's very difficult to tell when you're actually standing in the middle of an inflection point, what might be happening, but there does seem to be a sense that things are about to change.
Look, you point out the 12-year cycle from the 2008 financial crisis until the present, this consistent drop in interest rates starting if you do the chart from 1980 until today, it is one rather long downward slope, down into the right. It does feel as though that there is this coalescence of events, but it's just so close and so hard to see what happens. Raoul has talked about the dollar and the consistent march upward in the dollar, the primacy of the dollar. Effectively in Raoul's view, eventually the dollar has broken all of its competitors and will eventually break itself.
In times of crisis, we saw this in 2008, we saw this with the COVID crisis, there is a tremendous flight to quality of US dollar denominated assets. If you want exposure to equity markets globally, the market of choice is clearly the US. It's not clear to me what the next period is going to be, but there's obviously turbulence right now.
ED HARRISON: I would put it more simply, people, they're sick of the bullshit, and they want their lives back, that's how I would put it. They're sick and to death of being sold a bill of goods that this is change, and it's going to be positive and the world is going to be better. Then actually, it's not. We're getting to that point, the crescendo of that point with the pandemic. The pandemic has brought it all home for people that it's not coming back, that there's no reason to hope that the current system is going to give them what they want.
They're ready to overthrow that system by whatever means necessary, and so they're looking around for a way to get some control, whether it be through stocks, whether it be through supporting different policies, whether it be supporting nationalism, supporting different ideologies, etc. Somehow they feel whatever it takes, I want to have that sense of security, I want to have that sense of stability back. I think that we're at an inflection point with regard to that.
ASH BENNINGTON: I would probably add to that mix digital assets as well. Bitcoin, cryptocurrency and blockchain technology as being another reach for that type of control or stability, the desire to be anchored in something outside of a nation state perhaps that is a store of value in a very neutral objective way that cannot be tampered with by central banks.
ED HARRISON: I feel as if we're at a point where we're going to find out very soon whether or not they can do it one more time, put it back together again. We got to near zero rates in 2001 after the equity bubble, we got to zero rates in QE after 2008-2009. Now here we are again, zero rates almost throughout the entire cycle but now, even more buying up junk bonds even but certainly corporate bonds and then we're in the middle of a pandemic. I think that this is as far as it's going to go. This is as difficult as it's going to get for the system, that present system that we have. There has to be some definable change in terms of the economic policy so that people feel a sense of security in their lives before we can get it back together again. That's the sense that I get.
ASH BENNINGTON: Well, let me present a counter case, Ed. What if the COVID crisis, we continue to muddle along in the current state that we've been in, and then things improve, we have new treatments, the mortality rate has dropped not substantially. We have gotten better at treating it. There's the potential at least, for vaccines on the horizon. In the US, US dollar denominated assets are still the global flight to quality choice. US equity markets have been strong, one might say it's a bubble. I suppose you could make that argument. You could also make the argument that it's driven by the strength and the innovation of the American economy.
What happens if we continue to find ourselves a year or two from now without a substantial rupture from the current regime? Let's say the Fed manages to get interest rates even marginally higher off the zero bound, they begin to slow the rate or actually roll off on the balance sheet some of the assets they've taken on and things look a bit rosier, is that a scenario that could not happen?
ED HARRISON: I think that's too narrow scenario to think about. I'm looking at it globally. When I talk about the political economy, I'm thinking about ruptures that are happening all over the place. I'm thinking about Hungary where you basically have an authoritarian regime. I'm thinking about the EU where you have populace who are springing up, whether it be left or right everywhere, where you're having the Frugal 4 against the southern states in terms of a Battle Royale over the structure of the EU in terms of bailouts versus a deficits. I'm thinking about all over the developed economies, where it seems that there is this angst about what the future holds for ordinary people. The technocrats are telling you that they can put it together again. That's what you were saying is that the technocrats can give us some sense of normalcy, but--
ASH BENNINGTON: That's the argument.
ED HARRISON: Yeah, but I don't believe that that's going to be enough for people to quell the quiescence, people that really want some change that is tangible in terms of their lives being more stable, and more secure than it has been since who can remember. Certainly, when you think about Gen Z, that's a