Blain’s Morning Porridge – Dec 17th 2019

Yesterday I sent my first Christmas present – Blain’s Outlook for the Coming Decade. I’ve managed to condense my thoughts down to a about a dozen pages about the global themes and narratives likely to dominate the coming 10-years. My former colleague and great friend Martin Malone – who advises some very large and successful hedge funds – has condensed his outlook rather more succinctly. He has a single word to describe the next 10-years: “Boom!”

It proved the right strategy through 2019. Will it work again in 2020?

Today, let me suggest something else to read over the Christmas season – The Property Chronicle.  The website is full of fascinating articles by leading City Writers, while this is a link to the Winter 2019 print edition. I must warn, you might find a couple of articles by myself buried among the more interesting stuff! (Including a distraction all about sailing..)

Back in markets – Malone’s comments about Global Boom in coming years may not be so far off the mark. Recession risks are perceived to be lower, according to Absolute Strategy Research survey of leading fund managers. With bonds having performed so strongly through 2019, it’s no surprise they see a shift to stocks. Interesting quote in the FT about the survey – “without inflation, you won’t get a recession – so stay overweight stocks vs bonds”, said one respondent.

I’m intrigued by that comment. Does the absence of inflation protect investors from the application of common sense and history? I suspect not. There most definitely has been massive inflation since 2009 – it’s all in financial assets rather than the real economy. I’m told, by some, that doesn’t matter… bonds and stocks are up, so why worry? Check out last times markets were at unsustainable highs and no one realised: 1929 and 2007 jump to mind…. but hey ho! If everyone is happy, lets just keep buying…

What can possibly go wrong – lots, read my outlook!

The current pre-holiday positivity has been buoyed by the apparent trade-war truce, the Boris election win in the UK, and sense the global economy is repairing itself. Against that you have a host of no-see-ems to consider; including how dislocating the weather in Australia might prove for commodities. (Everyone will be familiar with the forest fires, but the next 10-days are likely to see 45-degree temperatures across the continent – making living conditions like the inside of an oven. Not so great for the youngest Blain who arrives back from OZ this morning after a short gap holiday morphed into a 2-year sojurn. I expect I’ll be buying her a winter wardrobe!)

But there is little point being an uber-bear the week before Christmas.

Changing tack slightly.. let’s talk about Tesla..

Over the last few days clients have been sending me increasingly bizarre stories out the US about reactions to the recent Morning Porridge I wrote about Telsa and Elon Musk’s erratic behaviour. In the wake of Elon Musk being found not guilty of libelling a cave rescuer whom he called a paedophile, I wrote the piece slamming Musk and questioning corporate governance at Tesla.

Let me share this You Tube takedown of my article. I have no idea who the guy is, but it’s a really extraordinary performance: https://www.youtube.com/watch?v=ToOADg-za2o&t=323s

The chap in the hat and t-shirt makes a lot about how I am ignoring Tesla’s fundamentals. To be fair, I didn’t have to mention fundamentals in a piece about Governance, but since he brings them up, lets go through them:

I have driven a Tesla, it’s a fine car.  Its old Model S and X consistently outperform new EVs from competitors – as Porsche as discovering. Tesla has a significant technological lead on other car makers in EV – forcing everyone to play catch-up. Tesla is now pumping out the basic and cheaper Model 3s in volume. It may be approaching real profit on covering the set-up costs. Its successfully ramped up production in the States after having to relearn how to make cars, the new Chinese Gigafactory will start churning our cars early next year, and the firm is going to open European production near Berlin. Its apparently received a quarter of a million orders for its new “cybertruck” – although these are only $100 up-front cash (and, apparently, it won’t be street legal in Europe because of some “fundamental” design flaws.) Excellent stuff – the numbers say Tesla is making and selling more cars. Lets say it sells a million next year…

On the other hand, Ford makes 6 mm vehicles per year and GM makes about 8 mm. The Germans, the French, the Japanese, and even the Italians all make lots of cars a year. And all of them are investing to compete with Telsa. None of these companies – which are largely profitable – are worth a fraction of the value ascribed to Tesla. That’s what I mean about fundamentals: what the firm is really worth.

In the video the chap in the hat tells me I’ve got the fundamentals of Tesla absolutely wrong.  Not so – it’s a car company selling cars. It makes a margin on these sales, which should make it consistently profitable. If it can do that, and sell more cars at a higher margin than other car makers, then that might justify a higher valuation. But everyone else is all over EV tech – Tesla’s competitive edge will not last forever in an increasingly competitive environment.

What else makes it unique? What makes it worth so much more? The inventiveness of its founder? This is a firm that tells us it’s going to be the world’s leading car company, and take automotive industries into a whole new multiverse of ride-sharing, self-driving and energy efficiency – yet its boss tweets disgraceful life-damaging insults about those who disagree with him (comments that would get any other CEO sacked), lies about plans to privatise the firm and his source of funds, and jokes about the regulators.

I don’t believe a company with a dubious corporate governance record has unlimited access to capital – as the chap in the hat claims. Unless Musk can convince real money he can deliver and, more importantly, focus – then he’s going to find cash and future success hard to come by.

I rest my case on Tesla – interesting EV company with a valuation that should exceed its simple ability to sell cars, but which is as much hampered by governance as it has ever benefitted from “inspired” leadership.

And, perhaps EV is not the way forward anyway… we’ve recently been looking a new tech for the storage of hydrogen and fuel cell technology that could see the whole EV revolution replaced with a new paradigm shift…

Five Stories to read today

BBerg – Airlines Scramble for Airbus Jets Made in America

BBerg – Fuzzy Math That Fuelled Junk Debt Boon is Sparking Jitters

WSJ – Boeing to Suspend 737 Max Production in January

FT – Goldman unveils Blackstone-like investments group

FT – Recession fears recede among global investors

Out of time and back to the day job…

Bill Blain

Shard Capital