This is the time of year when everybody with an audience or a readership begins to produce reviews of the year just gone. And a pretty picture it has not been. Raging inflation, tightening monetary policy, a cost of living crisis, impending recession, strikes, more strikes, climate catastrophe and of course extremely volatile markets. You name it, we’ve had it. The 10 biblical plagues, all over again. In the Bible, the death of the firstborn was the tenth, the final and most devastating of all. And we are in the midst of something similar, albeit far more appropriate to our age. It is the crashing and burning of Sam Bankman-Fried on one hand and the news that hit the headlines this week that Elon Musk is no longer the world’s richest man.
Too much has been written on the subject of SBF for there to be much to be added which is new, so suffice to stick to the most obvious which is how the situation of FTX was explained by John J Ray III, the interim CEO of the bankrupt company when giving testimony on Wednesday on Capitol Hill. Ray, who had overseen the unravelling of Enron’s infamous corporate fraud, characterised FTX’s actions as “old fashioned embezzlement.” “This is just taking money from customers and using it for your own purpose,” Ray said. “Not sophisticated at all,” he added, pointing out that the only bit which might have been sophisticated about the scheme was how it had been hidden in plain sight. While all this was going on, SBF had been arrested in the Bahamas, charged, and no doubt he will soon appear in New York in handcuffs.
At about the same time, Tesla shares were under pressure, falling by just over 4 per cent on the day – they rallied slightly overnight – in the process of which, and according to Bloomberg’s Billionaires Index, Elon Musk handed his crown as the world’s richest man to Bernard Arnault, the power behind the Louis Vuitton, Moët-Hennessy empire. He is only the fifth man since the index’s inception in 2012 to hold that title following Carlos Slim, Bill Gates, Jeff Bezos and of course Musk. Some might be tempted to call this switch at the top “the rise of the dinosaurs” as Arnault has got there by owning businesses that do nothing other than make and sell things. Yes, he does own a stable full of some, though not all, of the world’s most highly prized luxury brands even though he did famously fail to add both Gucci and Hermes to his list. Not only does he not own Twitter, he doesn’t even tweet himself. He just quietly gets on with building his business and making money. Not a silicon chip or a coder in shorts in sight. A true dinosaur.
Please don’t get me wrong. Arnault might be a very stylish and intentionally understated Frenchman but he did not get to where he is today by being nice. He is as ruthless as the next guy at the top of the rich list but he neither tries to create an image as being anything else and sees no reason to be out there every minute sharing his opinions on whatever might have just passed through his brain.
Last night I once again had the pleasure of addressing a bunch of students at Reichman University in Herzliya, Israel. The course director was keen that I should shine a bit of the cold light of reality into the rarefied world of keen as mustard undergraduates who still believe that the easiest and quickest path to riches is paved with either silicon or cryptos. The central theme of my talk was the difference between price and value, a subject which resolutely refuses to leave me alone. Buy for value, sell for price. I agreed that there is nothing wrong with trading the greater fool theory – it doesn’t matter what an asset is worth as long as one can find a fool who will pay more for it than you did – as long as one is aware that that is what one is doing and that the actual value of the asset has no part to play. As long as one remains cognisant, all is fine. Problems creep in when one begins to confuse the two and to believe that the price of an asset always reflects its value. Trade crypto currencies if you like but please don’t try to construct fair value models. BTC has, so I continue to believe, a price but no value.
There is nothing wrong with students looking at their future with stars in their eyes. Innovation is the fruit of dreams. Although dreams only very rarely come true, our young must keep on dreaming them. At the same time they must learn, as many have had to the hard way, that the title of “disruptor” especially when self-assigned, is not a golden ticket any more than “dot.com” was 25 years ago.
Musk is without doubt an engineering genius, as was Nicola Tesla. But Tesla died in penury. The latter might have been much brighter than Thomas Edison who tried to sell the world the idea that the future was in direct current and not, as Tesla was arguing, in alternating current but he lacked Edison’s skills in marketing and self-promotion. Musk’s pitifully ill-conceived and painfully badly executed dive into social media has laid bare his unsuitability to run a business and his flagship business, Tesla, would be best advised to dump him off the board. Tesla is a car maker and a carbon credit trader. It Is not a tech company and the more cars it builds, especially given its dreadful build quality, the more it should lose the right to be priced with a tech stock premium.
Part of Musk’s genius, other than his technological vision and ability to make the impossible happen, has been to grasp the concept of driving the stock price by generating demand in excess of supply. And that is what he did with Tesla. Everybody wanted a piece and he made sure that the free float was always lower than popular demand. The less there was available for punters to buy, the better. They’d pay any price to own a piece of Musk’s dream. Unless my memory deceives me, the P/E ration at one point hit something in the region of 1,400 and Tesla was worth more than the world’s top 10 car companies put together. As at last night’s close the P/E is below 50. Same company, same technology but with Musk selling stock and unwinding the squeeze on demand over supply at a time when demand is already falling.
Cathy Wood, the principal of ARK, plays the same game. Buy a large chunk of a small and illiquid stock. Up it goes. Then tell the world what you’ve just bought and wait for the punters to jump on board in a scramble to grab a piece of the limited remaining free float. Lesson for the ages: check the share register to establish how much stock is in free float and formulate the strategy around either trading or investing and never, ever confuse the two.
In my closing comments to the students, I urged them to keep a keen eye on the Federal Reserve and on the FOMC’s actions and words today. If they are aged 22 now – they will all have come to university after their three or two years, respectively, of military service – they will have been born around the time of the dot.com bust and have been at elementary school during the GFC. They have never seen inflation and they have never seen a bond with a nominal return worth mentioning. Old bond dogs like myself who were in the London Eurobond market in the 1980s are generally agreed that the greatest issue ever to be to have been launched in that space, the “GOAT”, was the Canada 9% 2/1996. The “9s” as there were simply known – nothing more needed to be added for anyone to know which bond was talked about – had, by the way, followed the previous 10 year issue by sovereign Canada by just three months and that one had come with a 10% coupon. Heady days, indeed. Real coupons, real returns.
So the Fed is slated to tighten by 50bps to a target rate of 4.25% – 4.50%. That is less than the markets had had priced in just a couple weeks ago – inflation is definitely slowing – and it can now rely on the base effect to begin to bail it out of some of the inflationary pressures. Oil is at US$ 75.00/pbb, within striking distance of where it was at this time last year and well below the US$ 120+ it was at in both February and June. In sterling the graph looks f=different for the impact of the rising and now falling dollar distorts the picture. With the pound now at US$1.22, oil is at £61.00/pbb, significantly cheaper than it was in June when, with the strong dollar effect included, it traded up to just a tad below £92.00/pbb. That much of that, however, will be negated or even reversed by the effect of the falling dollar might be what is behind the “slower but higher” tightening trajectory which is now the received base case.
UK CPI was reported early this morning at 10.7%, down from October’s 11.1%. Not a lot to shout about although even the longest journey…and all that jazz. Natural gas is of course still hugely elevated but hard to track. There was a sharp spike in the Rotterdam price in December of last year when it was in fact higher than it is today although it did fall back sharply in January and ahead of the Ukraine invasion. At €135/MWh it will remain a troubling factor although less in the calculation of year over year inflation than in the pocketbooks of those who need to heat homes and to drive manufacturing facilities.
Although the Fed will surely reduce the speed at which it tightens policy and although both the Bank of England and the ECB are expected to lower their guidance for a possible terminal rate, there is certainly more pain ahead.
The strike situation here in the UK remains strange in that, as opposed to the 1970s, the public seems to be offering broad support to those on the picket line. How long it will last once Christmas has been spoilt by disrupted rail travel and intermittent postal services has to be seen. Where support is at its strongest is for nurses who are asking for 19.5%. The average wage for a nurse is estimated at £33,000 as opposed to their US counterparts who for insurance purposes are priced at US$ 65,000. No wonder US healthcare is so much more expensive. The argument is not over the headline figure which looks high but which according to the RCN amounts to no more than compensating for the decline in the real value of nurses’ pay over the past five years. That one cannot argue against although the hero worship in the aftermath of the pandemic is growing a bit tired.
The government stands accused of mishandling the NHS. That is not to be disputed. That said, however, it has appealed to the NHS itself to become more cost efficient and to cut some of the epic wastage. To do so, I assume, it will have created a bevy of committees filled with worthy individuals who won’t be doing the work pro bono and who will have in turn hired even more expensive change management consultants. And so on, and so forth. The nurses can wait for the next efficiency proposal which will have been paid for but not implemented.
I was made aware yesterday of a study of the cost to the taxpayer of EDI policies – equality, diversity and inclusivity – and some of the eye-watering nonsense on which money is now being spent, especially at local council level. It was estimated that 12,500 nursing jobs could be funded through the money which is being spent on EDI officers. And I can assure you there are nowhere near 12,500 EDI folks who’d need to be sent home to pay for the 12,500 nurses. The average pay of the two EDI officers who on average work for every local council is £67,000. I think the most egregious waste I came across was one Midland’s county council which now provides for its staff and out of public money “African drumming sessions”. Maybe higher band council tax payers should be going on strike too.
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