The Breakdown - Is Tesla a Stock for Suckers?

Episode Date: September 5, 2020

On this episode of The Breakdown Weekly Recap, NLW looks at the full story the stock markets are telling us about the economy, including: SoftBank unmasked as the “Nasdaq whale” playing the same options game with stocks as r/WallStreetBets The Tesla stock split game: Does this just mean it’s for n00bs and rubes?  The VIX shows November nervousness Can you hear it? As stocks slide, the money printer is revving again

You can feel the palpable money printer get revved energy on Twitter right now. And I would not be surprised if we see some new announcement about additional pressure on Congress to act or some new narrative from the Fed or something, right? The stock market is the great political scoreboard, and there is no way that that thing is going to be allowed to stay down for long. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Saturday, September 5th, and that means it's time for the weekly recap. This week, I'm going to be looking at the stock market. I think that we learned a lot about how to

interpret the stock market this week, and frankly, what happens next as it relates to the stock market probably is going to have a pretty dramatic impact on not just stock prices, but also on a bunch of different areas like Bitcoin as well. So I'm going to go through four stories that I think tell this complete story. And first up is SoftBanks-Balsy Beth. Over the last few months, a quote, NASDAQ whale has been pumping huge amounts into tax. stock options. Basically, this has been piling on top of the Davy Day Trader trade and in that way accelerating the valuation bubble, which has become really pronounced. The Financial Times has unmasked this NASDAQ whale as SoftBank, the firm behind the $100 billion Vision Fund, which has been

hugely credited with ramping up and inflating to the moon the price and valuation of private Silicon Valley tech companies before they go public. They've basically been playing the same game as the Wall Street Betts crowd. As the Wall Street Journal put it, investors buy options contracts tied to individual stocks and or to broad indexes such as the S&P 500 or the NASDAQ composite. When banks and brokerages arrange options for investors, they are left with their own exposure to the markets. To zero that exposure out, options dealers buy derivatives and stocks.

In the case of call options, this can give stocks and indexes another boost higher. As shares jump, they need to hedge more, adding fuel to the fire. Such hedging activity can also intensify moves when markets head lower. So why is this relevant? Well, I think it's a good reminder that narratives are almost always BS, or at least they are something that you have to understand as tools that people are using to try to drive the market one way or another. Put it differently in the context of the Robin Hood and Davy Day Trader narratives we've seen,

SoftBank basically saw an opportunity that those narratives were going to increase, accelerate, and they could use some of the same mechanics and some of the same game theory, frankly, behind what was going on with Robin Hood to amplify that story in the media and potentially profit from it on the other side. And of course, when it comes to this Robin Hood crowd who may or may not have any influence on the actual markets, there's no stock that's more at the center of that in some ways than Tesla. Tesla, of course, began the week with its 5-1 stock split, and many people thought that this was going to mean an increase in price for Tesla. Not obviously because that it was increasing the value.

Stock splits don't increase the value of a company, but because they thought that some amount of retail players would see the stock as somewhat more accessible because of the cheaper sticker price and thus pile in. Ben Hunt wrote a great piece in Market Watch about this, and I'm going to actually quote a little section of it. There's an old saying in poker, don't just play the cards, play the players. It's the same thing in markets. You can't just focus on the cards you're dealt, i.e. the fundamentals of this stock or that stock. You also have to focus on the other players who are playing these same cards, and that means understanding the behavior of a crowd of buyers and sellers in the stock market. Just like in poker, sometimes the cards or fundamentals don't matter at all. Sometimes poker players will think they have an edge in understanding the other players sitting around the table. And before you know it,

there's a huge pot in the middle of the table, regardless of what cards have been dealt. That's exactly what has happened with Tesla stock over the past few months. There's a huge pot of money in the middle of the table in the form of enormous market cap for Tesla as the stock keeps getting bid up, and none of it has anything to do with fundamentals of the company. The feeding frenzy on Tesla has nothing to do with that handful of rubes buying the stock because it's more affordable after the split. It has something to do with traders buying the stock because they believe the story that there will be more robs buying the stock because it's more affordable after the split. And it has everything to do with traders buying the stock because they believe that other traders believe the story,

that there will be robs buying the stock because it's more affordable after the split. This is the common knowledge game in action. It is the power of the crowd watching the crowd. It is the power of not what you think is true and not what you think the crowd thinks is true, but of what the crowd thinks the crowd thinks is true. How does the game end? When you stop reading stories about the idiot friend of a friend buying cheap Tesla shares for the first time, not because there were ever enough of these nobs and robs to actually make a difference in Tesla price action, but because the story that these nobs and robs are out there will be broken. But you know who understands this game really well? Elon Musk, Tim Cook too. That's why Tesla is selling up to

5 billion worth of fresh stock while the price is so high. Think of it as the house taking their rake from the overinflated pot of money now sitting in the middle of the poker table. Again, it's another reminder about how we should treat those narratives. We should dissect them, but not so that we can find the best one, but to understand that underneath them all, it's a game of self-fulfilling prophecy. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and

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In 1876, Samuel Tilden v. Rutherford B. Hayes, the election wasn't actually resolved until early March. Between November and March, stock prices drop 10%, although it's not totally clear how tight the correlation was. A much more contemporary example of this is George W. Bush versus Al Gore in 2000. By the end of November, the S&P 500 was down 10% and NASDAQ was down 19%. Put differently, in the only two examples we have of an election that didn't resolve right away in the last 150 years, it was not a good time for markets. Now, there is some indication that investors are starting to price this in, or at least price this possibility in. Robin Wigglesworth in the Financial Times, and yes, that's their

actual name, looked at the VIX on August 26th in the last five election cycles, and found that the biggest VIX premium was this year. It was significantly higher than previous years. That suggests that investors are in fact wondering if there won't be some disruption to markets because of election-related chaos in November. Lastly, rev the engines. Markets are down for the last two days, and we are seeing immediate response. You have the Fed's Bostick who said the Fed is willing to be more stimulative than it has been in the past and saying that he will be far more patient on tightening policy. You have President Trump who's planning an address today,

just a couple days after saying that we should be so glad to have him because the stock market would crash if it was for Joe Biden. I think Sven Henrik put this really well on Twitter. He said, as NASDAQ drops 5%, probabilities for a congressional stimulus deal jump tenfold. You can feel the palpable money printer get revved energy on Twitter right now, and I would not be surprised if we see some new announcement about additional pressure on Congress to act or some new narrative from the Fed or something, right? The stock market is the great political scoreboard,

and there is no way that that thing is going to be allowed to stay down for long. Anyways, guys, that's it for today. I hope you're having a great long weekend, and until tomorrow, be safe and take care of each other. Peace.