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Things to Worry About (in the Stock Market)

It's hard to know what to worry about. So many options! I find it one of the most challenging questions in life. You want to be thorough, and yet not worry too much. Excessive worry diminishes quality of life.


Since my clients pay me to worry about their investments, I offer the following brief list.

7) October is just around the corner.

6) A presidential election approaches. Right now, Joe Biden enjoys a 10 point lead in the polls. A lot of the commentary which I read complacently takes his impending victory for granted. Maybe. I predict a closer result, and do not discount the possibility that the current incumbent will win re-election.

Whatever his other shortcomings, President Trump has been good for the stock market. It would celebrate his victory.

I've seen a bunch of elections, and I no longer believe that they make much difference economically. America will do well with either candidate. Look for a measure of chaos, however, if the election is very close, as candidates sling mud and cry foul on Twitter.

5) Coronavirus - no vaccine yet, and no exit to our economic lockdown. Even if we find a vaccine, produced on a rushed schedule and after abbreviated testing, who will try it first? Not me.

4) Unemployment - The employment situation is getting better. All of those lost jobs in restaurants and shopping malls turned out to be fluid. Jobless claims have begun to fall, although not to their previous lows levels, and unemployment has begun to decline. Amazon and Walmart have hired hundreds of thousands. The crisis which we anticipated when unemployment benefits run out (as they have not yet done; they were extended) may not materialize.

3) Civil Unrest - I worry about this more than most other things, perhaps unnecessarily. I have difficulty understanding the nihilistic urge to burn down the Mark Hatfield Federal Courthouse in Portland. It's a hideous, fascist-looking building, but still. There are courtrooms inside. These protestors attack the single best thing about America, which is the Bill of Rights.



The Mark Hatfield Federal Courthouse

The images of rioting which I see remind me just a touch of the storming of the Bastille by a rabble mob in 1789, with the difference that the French peasants lacked a Bill of Rights, and fought to have one. The Bastille was a royal prison in which the king could hold you without trial for the rest of your life, a far more appropriate target of protest. The rioters ushered in the worst period in French history. They got rid of their king, only to replace him with an Emperor, and shed buckets of blood. I greatly prefer the English model of constitutional reform, which they conduct very slowly and mostly peacefully, and without a formal constitution.

Impact on stock market - none, unless many more Americans join in, which I don't expect.

2) Interest rates. Nominally, interest rates are the opposite worry of point number 4. Rates usually go up when employment is strong and inflation threatens. Interest rates have been so low for so long, that it seems absurd to mention them.

Part of the bidding for stocks, I think, derives from an inability to earn a decent return anywhere else, because of super low interest rates. It's great for the formation of new enterprises, great for employment, but also great for the formation of investment bubbles. The current expectation that interest rates will remain near zero in perpetuity poses a risk to stocks, in my opinion. If inflation starts to creep back into the picture, and expectations of higher interest rates re-emerge, perhaps because we're spending $1 trillion per month on coronavirus relief which we don't have and must print, stocks will produce inferior returns for a long time.

But the biggest, most serious threat to the stock market... is...

1) Tesla. Perhaps you've read that Tesla's value in the market now exceeds Ford, GM, Volkswagen, Honda and Toyota put together. Those companies sell 40 million cars per year and eke out a small profit on all of them. Tesla runs at a rate of 360,000 cars per year, although it's growing, and loses money on all of them. Tesla is only able to report a tiny profit by selling "regulatory credits" to other car companies.

What are "regulatory credits"? I didn't know either. I quote from CNBC:

"In California, and at least 13 other states, any auto manufacturer who wants to sell their cars into that state must sell a certain amount of electric, hybrid electric or other zero emission vehicles (or ZEVs). Auto makers who are not selling these vehicles yet, or not selling many of them anyway, will buy credits from someone who is for compliance. Since Tesla only sells ZEVs, it doesn’t need to keep the credits that it earns and can sell them before they expire."[1]

In the most recent quarter, Tesla reported revenue of $6 billion, $428 million of which (7%) came from the sale of these credits. It did a deal with Fiat in March worth $1.1 billion over a few years.

Well and good. But the value of these credits will decline over time, as other car companies produce more electric cars and need fewer credits. (In fact, it's a government scheme to increase the number of electric vehicles beyond the true demand in the marketplace, hindering profitability and, arguably, slowing our transition to clean energy.) I think that competition will become fierce. To value Tesla at $380 billion, as the market does today, larger than all but the top ten or so firms in the country, in a fantastically competitive industry, is bananas.

I admire Elon Musk. He invented Paypal, and then moved on to SpaceX and Tesla. He has an extraordinary vision which he pursues with tenacity. He challenges all naysayers, so far successfully. He sues the health authorities in Alameda County over lockdown. He tweets heresies to the conventional wisdom with confidence bordering on a sense of power and control. I guess I'm a little jealous.

A crash in Tesla would have an impact on numerous overvalued stocks. Think of Apple, with its $2 trillion valuation. Think of Nikola, of which you may not have heard, with its $15 billion market cap, which has yet to sell one truck.

Think of what happened in the venture capital marketplace after WeWork imploded. People came to their senses. I see a serious risk that the same might happen with Tesla, with implications for a broader array of stocks.

In fairness, I've said this now for a while, and so far, I've been completely, 100% wrong. Still common sense is common sense, which looks conspicuously lacking in Tesla's valuation.

[1] https://www.cnbc.com/2020/07/23/teslas-sale-of-environmental-credits-help-drive-to-profitability.html

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