Watch US Bonds and Watch the Tesla Narrative
Blain’s Morning Porridge – April 29th 2024: Watch US Bonds and Watch the Tesla Narrative
“Blow the winds southerly, southerly, southerly….”
This week will be about US bonds – watch carefully how the arguments develop as we sit at a new cusp for markets. In stocks it’s about narrative and I can’t help but wonder if we’re about to see a corporate denouement as Tesla does a “deal” to map China to boost its FSD ambitions.
Lots going on in the markets this week as April wends its way to a sodden close. May is my favourite month – the sky turns blue, the days are long and bright, and the winds blow favourably… or so we hope. Experience teaches hope is never a strategy. No doubt the bolshy jet stream will continue to soak us, fuelled by warmer oceans and supersaturated clouds. Should I be investing in a brolly maker?
This week it’s all eyes on US bonds. Inflation is not yet tamed. We have a massive refunding coming up. 10-year T-Bond yields have risen towards 5%. Which will leave all the strategy desks who were telling clients to buy bonds earlier this year because rates are headed back lower – looking a bit silly. In bond yields there is truth – and that truth is simple: normalised interest rates are with us for the long-run… and that will have profound market consequences… The issue to watch is where bonds clear and how long it takes the market to fathom the new reality.
Fair is foul and foul is fair…
Last week made me giggle. Elon Musk’s Tesla produced the worst set of auto-results since Henry Ford predicted the Edsel would be best auto ever. Yet, Tesla stock bounced higher on the back of his promises to deliver the Robotaxi this year and a new small, cheap (ie limited margin) car next year! Yay!
In contrast, Meta Boss Mark Zuckerberg announced great expectation-beating numbers, but watched the stock tumble 15% when he added they were going to spend gazbillions on AI to see how it can best get Meta more customers using it. His mistake was schoolboy – the foolishness of it all, imagining he needs to spend money to “build inventory and then monetise it..”
Musk showed us how to do it. Ignore bad numbers and immediately tell the next big story. Zuckerberg – the fool – is not a salesman. People seem to forget how many times Musk has promised jam or autonomous driving tomorrow, yet the market will never forgive Zuckerberg for the MetaVerse. (I wonder if electronic tumble-weed blows down the Metaverse High-Street?)
One day I am going to get down to writing the definitive book about how Quantitative Easing (the whole ultra-low rate era) destroyed market capitalism. Amongst the many topics, it will deal with the rise of investor credulity, increasingly blurred lines between outright speculative gambling on improbabilities, and FOMO (Fear of Missing Out). The myth that incredible apparent wealth was easily achievable by investing in financial assets was fuelled by mispriced money – ultra low interest rates – pushing markets higher, but also by the power of the narrative.
Narratives, not rates or prices, are what drive markets. Some folk read the narratives that informs them from charts – the equivalent of ripping the gizzard out a chicken to my mind, though many disagree with me. I am willing to be proved wrong. Others take their narrative from options and clever maths (US Readers… its mathematics, not math!).
Most folk think they are clever, will listen carefully to a good story and make the decision on whether it sounds plausible or not. Optimists – and equity buyers tend to be optimists – will accentuate the positive and drive stock markets higher. Pessimists – and most bond buyers are pessimists – look for all the reasons the narrative won’t work and talk themselves out of it.
I like to think of myself as a realist. Although my day job is to find buyers for Alternative Capital Market products like PE and Private Credit, I try to maintain balance. I look at both sides, and factor probabilities into the equation, but also ask about issues such as the corporate governance to deliver, track-record, the background, and approach the whole thing with a degree of scepticism.
This morning, I read one of the UK’s largest venture capital trusts has taken substantial write-downs on 80 of the private companies it backs via its’ £1 bln Octopus Titan fund. The NAV on the fund is £470 million over 2 years. Oh well, that’s optimism for you. I’m going to spend some time going through the fund – there are lessons in there in high-risk bets like rocket companies, but I was working under an assumption that pet insurance provided dull, boring, predictable income streams – apparently not. The number of SPACS that now worth the square root of diddley-squat is another example of irrational optimism.
When it comes to my book, I can’t decide to write it as a tongue-in-cheek financial history, or maybe a thriller… where the baddies are eventually all hunted down and punished… but… Maybe, I can base it a round a single deeply flawed character..
I should take the current trend and success of TV “business” dramas as guidance. They highlight what is real… is real. If something isn’t real, eventually it gets found out. It makes for great TV Drama. Mr Bates vs the Post Office already merits a second series as the UK’s farcical Royal Mail management are shown up as imbecilic entitled fools. Dopesick tells the sordic tale of the Sackler family’s crimes against humanity, Dropout is the story of Elizabeth Holmes delusions at Theranos, while, We-Crashed deals with We-work confabulist Adam Nuemann and his simply awful wife (played brilliantly by Anne Hathaway!) When will see one on Sam Bankman-Fried?
Each of these shows shares a common thread. As the end phase approaches, and it becomes clear it’s impossible to sustain the multiple lies and contradictions at the heart of the narrative, the villain becomes more and more desperate to protect the narrative – sticking to and doubling up on the unlikely promises they have failed to deliver. When they are finally exposed, they are swift with the self-serving apologies and plead they were trying to do good, while being extremely bad.
How will it end for Thames Water? The Turd Dumpers are in serious trouble with around £15 billion of un-refinanceable debt, a regulator refusing to let them pass the massive costs onto innocent consumers, and in the background a whole set of evil hedge funds buying up their debt in the expectation Thames Polluters will be bailed out by Government. It will make great drama…
I made a comment on Radio 4 a few weeks ago that we should take careful note of the security pledged on water bonds – they may yet prove an expensive double whammy for the Conservative Government: not only has privatisation clearly failed, but the major beneficiaries of privatisation – investment banks, private equity funds and distressed hedge funds will have walked away from the sh*t-show that is our national infrastructure intact and in profit. In case you missed it, all the distressed debt buyers are hovering around Thames Water’s putrid corpse.
How will it all end at Tesla?
This week Musk is in China doing a deal with Baidu on its mapping and navigation functions, demonstrating to the Tesla fanboys and faithful how diligently he is going to deliver on his FSD promises. Really? The deal is to map China, a market where Tesla sales are now a rounding era compared to domestic EV firms. After the banning of TikTok by Congress, does Musk really expect US Legislators to accept a Chinese Tech firm’s involvement in US self-driving?
Musk is driving Tesla in ever decreasing circles…. I am watching in morbid fascination…
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge
Wind Shift Capital