The Breakdown - The Real Story Behind Tesla's Crazy Rally

Episode Date: July 14, 2020

Today on the Brief: Wall Street quarterly earnings season opens Investor flock to higher-yielding Chinese government bonds Bitcoin whales go down but other types of HODLers go up Our main conversation: What the hell is going on with $TSLA? Elon Musk is now richer than Warren Buffett. A year ago, Tesla wasn’t as valuable as Ford or GM. Now it’s more than 25% of the value of the auto market as a whole.  In this episode, NLW looks at a set of possible explanations: Elon as a Golden God/the cult of personality Tesla as an innovative tech company Better-than-expected vehicle delivery The mother of all short squeezes Robinhood effect Mr. FEDerico Narrative Market Machine In the end, NLW argues that in a world where 1) the new retail base is willing to engage in narrative and meme warfare and 2) where the Federal Reserve distorts prices, the narrative market machine becomes more of a driver of prices than ever before.

If you assume that there is this force that makes it harder to understand quote-unquote true value, then all of a sudden what are you left with? You're left with the narrative. You're left with the narrative machine. In some ways, it becomes your only choice to bet on the narrative machine because it's a fool's errand to try to properly value things in a world with this incredibly distorting force. Welcome back to the breakdown.

In everyday analysis, breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by CoinDes. And now, here's your host, NLW. Welcome back to The Breakdown. It is Monday, July 13th, and today we are talking about what all of Twitter is talking about. At least that's what it feels like, which is Tesla, and why this monster stock

rally just keeps going. First, though, let's do a really super quick version of the brief. First up, we are entering earnings seasons. This is the week that Wall Street starts providing guidance on earnings from quarter two. Well, at least some of Wall Street. Others have said that because of the insanity of coronavirus, they won't actually be giving guidance, which is obviously very out of the norm. Why it matters is that basically everyone is expecting all of these earnings to be absolute trash, right? Quarter two has been nearly universally written off as just a wash. And so in some ways, ironically, because it is lagging data or trailing data, any good news, any better than expected performance, any bright spots in what, again, people already assume and have written off

might actually have disproportionate impact in a positive way, right? If you expect things to be just horrendous and they're only mostly horrendous, all of a sudden that potentially becomes a narrative that you can seize upon for stock prices and stock gains. So we're seeing a little bit of that. The markets are up just a bit on the start of this sort of earnings week and some of these trickles of good news around snacks for PepsiCo and things like that. So just something to keep an eye on throughout this week, we'll return to it if and where it is relevant. Second on the brief today, big inflows into Chinese government bonds. This is from the Wall Street Journal. Foreign capital flowed into locally denominated Chinese government bonds in the second quarter

at the fastest pace since late 2018, according to data from CEIC and economic data provider. It surpassed 4.3 trillion yuan or 619 billion USD, which is the highest on record. So why is all this money going into Chinese bonds? Again, according to the Wall Street Journal, the yields are so much higher than other types of government debt, right? Chinese yields are are effectively at 3.118% for the 10-year bond compared to 0.597% in the U.S., 0.03% in Japan, and minus 5.15% in Germany. So just from a pure dollars and cents perspective, it's just a better opportunity. Why it matters and why it's worth noting, well, anytime there's sort of a big shift from one type of government debt to another or one

type of currency to another, I think it's worth paying attention to from just a general macro perspective. But in this case, obviously, there are serious implications as people try to assess whether China really is a contender to pick up the mantle that the U.S. withdrawing from the world is leaving. And this is one more example of a piece of evidence that suggests where they might or might not be. So I think it's important not just from the standpoint of a general macro perspective, but also the geopolitical tension in game between the U.S. and China. Last up on the brief today is Bitcoin hoddling decentralizing. So what's happening?

Well, GlassNode, which is a blockchain analytics firm, noticed that the number of addresses holding at least 10,000 Bitcoin, which is obviously a huge, huge amount, is down to 103, which is declined by about 8% since May 2019. On the one hand, this could suggest bad news. It could suggest that some of these big holders are moving out of Bitcoin. The flip side is that it actually could simply be an example of decentralization of the market. So, for example, there were 2155, 2,155 addresses that were holding at least 1,000 Bitcoin on Sunday,

which is up 3% from a low of 2097, which was observed in July. So, again, the number of 10,000 plus accounts is down. The number of 1,000 plus accounts is up. Meanwhile, the total number that are holding at least one Bitcoin just continues to reach all-time highs, same with addresses holding 0.1 BTC and 0.01BTC. All of this is to say the number of total market participants, at least in terms of addresses, is growing, and the number of total addresses at the top might be following slightly, but that doesn't necessarily say anything other than this market is decentralizing. I think these questions of wealth concentration

are really important, especially as people try to weigh Bitcoin's attractiveness as a true monetary system alternative. So it's really important that we watch these trends and understand what the data is saying. But to me, at least, I think that the growth in the number of smallholder accounts is significantly more important as a barometer of Bitcoin's health than the slight decline in the number of ultra whales. But with that, let's talk Tesla. So first of all, why are we talking Tesla. The reason is that I believe that sometimes individual stocks take on representative narrative power for the entire market. And really, in some ways, the argument over why Tesla is doing what it's doing right now in terms of this incredible price rally is as much a debate about the state

of the markets in general as it is about Tesla in Elon Musk specifically. For a little bit of context, Tesla has been on an absolute tear. And this goes back to last year. Last October, there was a major psychological moment when Tesla surpassed General Motors, but it's impossible to deny that the last couple weeks in particular have been just nutty. Over the first week in July, Tesla added the combined value of GM Ford Motor Company and Fiat Chrysler in just five trading days, averaging 14 billion in growth each day. Over the course of the last year, week, it just continued to go up, and on Friday night, it was reported that Elon Musk was now wealthier than Warren Buffett. This is from Bloomberg. Musk's fortune rose more than $6 billion

on Friday after Tesla stock searched 10.8% to a record $1,544 per share. Its market value stood at $286.5 billion. Musk owns 20.8% of Tesla's stock, making his stake worth just under $60 billion. Now, Tesla was up another 6% this morning, but let's focus on Friday for a second. Musk becomes wealthier than Warren Buffett, and my feed lights up, right? Twitter is just alive with this. And frankly, a lot of it is about the farce of this, right? The absurdity of Elon Musk being wealthier than Warren Buffett all of a sudden. And I, like an idiot on Friday night, decided to dip a toe into the conversation, and boy,

did I get a taste of Tesla Twitter. So I tweeted, I know Tesla is nutty, but like, shouldn't we be cheering when one of the best actual builders and generations exceeds the wealth of a specialist in financialization? There were a huge number of responses, something like 600 people liked the thing. Again, this is, I thought, a throwaway tweet, but I waited into the Tesla debate, which is vicious and intense in Twitter. And so this started to get me thinking, it would be worth exploring exactly why people are interpreting these moves and why people think that Tesla, is happening the way that it is in terms of this stock growth, right? So what I'm going to do now is go through a set of explanations for the growth in this stock price that we're going to start with sort of sincere people who are sort of think it's real, and then we'll go into some of the cynical

explanations as well. So first up in that sincere category, I guess it's actually a little cynical as well, but it's this idea of Elon as the golden god, right? It's a bit of a cult of personality, but the people who are in it are obviously hugely pro-Elon. Pete Pashel from CoinDesk called it the Elon distortion field. And basically, this has to do with this belief that Elon Musk is such a force of nature that you just don't bet against him. Stephanie Lewicki from TD Ameritrade says, apparently we don't fight the Fed or fight the Elon, which I think pretty much sums. it up. So this one is really divisive, right? Because you have people on the one hand saying it's a cult of personality. This is just because of Elon. And then you have people on the other side saying,

of course it's just because of Elon, and that's exactly why it's real. Next explanation has to do with comparative innovation relative to the rest of the auto field and I think really importantly, the tech company association, the idea that Tesla is a technology company first and an auto company On that tweet from Friday night, Anatoly Yakovenko, who's one of the founders of Solana, said, Tesla is valued correctly if you consider that all the other car manufacturers cannot take risk or innovate or optimize their labor without losing access to the money printer. Last week, when the price of Tesla was at 1370, Ivan Feinsteth of Tigris financial partners via Matt Levine, this is where the quote came from, wrote, Tesla's valuation doesn't make sense

by any traditional measure. However, it is not a traditional company. So how do you put a traditional measure to it? And then there is, of course, just the tail of two markets, which is the fact that the stock market gains as a whole are disguising what is the real scenario, which is tech is surging and everything else is kind of floundering around. Frankly, if people keep looking at Tesla like it's Apple, they're going to price it as such. So this is a combined sort of narrative placement, right, Tesla as a tech company, as well as just a recognition that the other auto manufacturers simply aren't as innovative. They don't have the ability to move as fast. They don't have the incentives to, in some cases, because of their restructuring deals over the last few years. Somewhat related to this,

and certainly related to this larger price move, is our third explanation, which has to do with execution and delivery. This all got started on July 2nd when Tesla said that it had delivered 90,650 cars, in the second quarter, which compared with an analyst's average estimate for about 83,000 units. So importantly, this is another example like we were talking about in the brief, of numbers beating expectations and that delta being really what the market is moving on. There was a Bloomberg piece last week that was exploring why Tesla's price is so high right now, and they were pointing out that although there were a lot of retail traders in it, which we'll get into in just a minute, there's also a lot of institutional investors.

So this Bloomberg piece said, still, a lot of big institutional investors now want a piece of Tesla and the electric vehicle market. Quote, in a COVID-19 pandemic and a dark macro environment, the company just put up a 90,000 delivery number, especially when other automakers are seeing Herculean challenges. Still, I don't want you to think everyone is so impressed with those numbers. Ramp Capital this morning wrote, Tesla plus 6% pre-market, they must have sold another car. BitStamp is the original global cryptocurrency exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors,

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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 grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20%. sent back. Download the crypto.com app today and enjoy these offers until the end of September. All right, we've been through the power of Elon, the association with a tech company and the capacity for innovation, and then their recent execution slash delivery. Those are kind of sincere

explanations for these price gains. Let's move to the more interesting cynical explanations. The first of these has to be explained around a short squeeze, right? So Ross Gerber on Friday wrote, is there Tesla news or is it the final capitulation of short sellers who are now buying back because they have to? So this is really, really important to understand the weirdness of Tesla right now in the markets. In addition to this incredibly fast-growing movement, right, where it's sweeping up and sweeping away huge parts of the rest of the auto industry when it comes to comparative valuation, it is also the most bet against company in history. There's 20 billion in short-selling against it right now. That said, Tesla shorts are down 18 billion.

billion year to date, and many of these short sellers are potentially having to buy stock to cover their bets, right? And that is hugely problematic for them, and it potentially has the sort of short squeeze effect of driving the price up because it creates another area of demand. Mike McDonald tweeted and really captured this, he said, I've been shorting Tesla for only a day, and my water has already been cut off. I have a hard time buying that a short squeeze could explain this entire movement, but it certainly seems like it might be part of it. it. Here's another cynical explanation, and you, I'm sure, we're predicting this one, the Robin Hood traders, right? The day traders, the day-by-day trader effect. Obviously, there's a lot of these folks

who are Elon stands and a lot of these folks who, for them, they see the stocks-only-go-up thing in Tesla as, well, Tesla is the greatest example of stocks-only-go-up. Now, interestingly, there is not that much discussion of Tesla on things like Wall Street bets. It's definitely there, but it's certainly not like the biggest thing that they're championing. So I think that people are potentially using Robin Hood to explain away anything they don't like and anything that doesn't really make sense to them from a traditional perspective. I think that this is actually consistent, though, with how Wall Street is trying to deal with this new retail influx right now.

Emily Stewart wrote an article for Vox last week that goes into the Robin Hood effect, and she adds this really important dimension, I think, which is why shouldn't people like these retail traders be able to make big bets and gamble when Wall Street already has been able to, right? Isn't there something about Wall Street's disinclination towards these traders that's just sort of exclusionary and they don't like their territory being infringed upon? So I want to quote a pretty significant paragraph from this piece. She said, yes, most speculators and day traders lose money, but the pros don't do infinitely better. Hedge funds and professional stock pickers consistently underperform the S&P 500. It's easy to chafe at Portnoy's attitude.

an approach, not to mention issues of toxicity and Barstool's culture, and at R-slash-WSB's tone. But what about private equity firms that buy up companies fleece them and sell them off for parts? Or hedge funds that scooped up troubled assets during the financial crisis to make billions? Or the market makers like Citadel Securities that are ultimately the ones making money off of Robin Hood's trades? Or the money Robin Hood itself is making pushing customers in a dangerous direction? Quote, I think Portnoy drives Wall Street crazy because he's exposing some of the fallacies that you see on Wall Street, says Jim Beyond.

who acknowledges he's a, quote, suit in Portnoy's world. Quote, he's making a mockery out of stock picking because we all know on Wall Street, the vast majority of stock pickers that run portfolios cannot beat the indexes. Again, the point for me here is that Robin Hood is becoming this easy narrative explanation for anyone who wants to dismiss what's going on in the markets, like something, I think a little bit for our next category of response, which is the Fed. I asked people this morning to explain Tesla's huge stock rally in three words. And the most common response that I got, which says at least as much about my followers, love you guys, as it does about

the actual answer, is you only need three letters, right? F-E-D. And so obviously the logic is that money is cheap right now. Everyone is speculating. The money printer is ensuring that asset prices just continue to go up. So why not go all in? And if you're going to go all in, why not go all in on the thing that has been just the absolute darling of that Fed warped world. I want to come back to the Fed in the context of narratives, though, and this really gets me to my next point and the most important one for me, which is sort of the memes and narratives explanation. Remember that question from Ivan Feinstein that was in Matt Levine's newsletter. Tesla's valuation doesn't make sense by any traditional measure, but it's not a traditional company, so how do you put a traditional measure to it?

Well, Matt Levine tried to answer that, and he says, The point of stock market valuation is exactly that it makes different things commensurable, that it allows you to take a bank and a social media company and a coal company and an electric car company and reduce them all to a set of cash flows and compare them on the same metric, which is money. Traditionally, the way this works is that investors all like money. And when they exchange their money for shares of stock, they are doing so because they expect to get back more money. You buy stock in banks or social media companies or coal companies or whatever, not because you love banks or social media or coal, but because you love money and think that banking

or social media or coal or whatever is the way to get more money. But I suppose it is not an iron law of nature that it has to work this way. You could buy stock in an electric car company just because you really love it. If you get some intrinsic joy from owning Tesla, if you buy Tesla because you have a quasi-religious faith in Elon Musk, or because it's a good way to fit in with your buddies on the message board. Then there is no reason that the price you pay should have to be constrained by your expectations for Tesla's future cash flows. Just pick a fun price instead. Effectively what Matt Levine is saying is that the narrative trade is getting more powerful. I want to go back now for a second to this 90K deliveries number on July 2nd and the analysis around that. Again from Bloomberg, in a report Thursday,

Joe Spack of RBC capital markets marveled at how the electric carmaker has managed to add about 48 billion of market capitalization by ginning up excitement about its quarterly vehicle delivery. Tesla Inc.'s cars may run on batteries, but its stock price is fueled by, quote, the power of the narrative. Raul Paul yesterday retweeted a thread about exactly this and said, There's this a super interesting thread, the rise of narrative-based investing in a zero-rates plus social media world. I responded and said, part of what makes the new Robin Hood retail a more powerful force is that they are really, really good at, and intentional about narrative warfare, basically forcing their plays. on the market as an act of self-fulfilling prophecy.

And here's what I want to add to that for now, and this is my major takeaway about Tesla. The narrative market machine is getting increasingly powerful. Why is that? It's because of two things, I think. The first is the amplifying power of the Robin Hood generation. And what I mean by that is exactly what I was saying on Raoul's thread, which is that when you have this huge group of retail investors, who are coordinated at least insofar as they're all paying attention to what each other are doing,

then you can actually drive a lot of attention around a narrative in a really intentional and forceful way. That creates an amplifying force that's different than just, even in some ways, the traditional mainstream media, especially because it then gets picked up and amplified again by mainstream media, right? So it looks like this. Retail gets really excited around a narrative or just decides to go all in on that narrative, whether they're excited about it or not in a fundamental way. Others start to notice it, and they notice it both in terms of implications of the actual money coming in and the strategies they're in and the data, or they become interested from a analysis standpoint, right, and it becomes amplified in mainstream media. So that's one.

The narrative marketing machine is getting more powerful because of the amplifying power of this new retail generation. But the second reason the narrative market machine is getting more powerful is the price distortion of the Fed. What I mean by that is that when there is this force for distorting prices, which even people who think that the Fed is doing what it's supposed to, tend not to argue too vociferously, at least, that there isn't some impact in sort of price distortion, right? When you have this major market actor, something that Sahel Bloom has called Mr. Federico in a number of threads on Twitter, it eventually and inevitably shapes the prices, right? When people don't think anything can fail that has a pretty warping impact on prices,

and this is to say nothing of just the general asset price inflation that comes from the Fed trade as well. If you assume that there is this force that makes it harder to understand quote-unquote true value, again, we go back to people like Ray Dalio saying that we don't actually have free and open markets anymore because of the Fed and central banks, then all of a sudden what are you left with. You're left with the narrative. You're left with the narrative machine. In some ways, it becomes your only choice to bet on the narrative machine because it's a fool's errand to try to properly value things in a world with this incredibly distorting force. So I think that what we're seeing with Tesla is a leading indicator of the growth and power of this narrative

market machine. And I don't think that this is going to be the last time we see it. So thanks for listening, I'm really interested to see what you think. I'm sure that I will have people go at me on Twitter for this, but that's fine. We love it. So anyways, guys, thanks for listening, and I appreciate you. Until tomorrow, be safe and take care of each other. Peace.