The Unholy Trinity Of Speculative Madness, Part 1

Do the money-printing fools in the Eccles Building have any idea of the speculative mania they have  unleashed?

Charley Grant, scion of the stout linage of monetary sanity which has emanated from Grant’s Interest Rate Observer since 1983, and Barron’s prior to that (before the latter O/D’d on bullishness), surely does have an answer. Opined he in today’s WSJ Heard on the Street column:

GameStop mania was a wake-up call, but now the capital markets have truly reached ludicrous mode. Electric-car maker Tesla  said in a securities filing Monday that it has purchased $1.5 billion worth of bitcoin and that it expects to begin accepting payment in the cryptocurrency for its products in the future….

The announcement added roughly $100 billion to the combined market value of bitcoin and Tesla on Monday……That adds to the speculative fervor already gripping Tesla’s stock price in a feedback loop. Indeed, the manager of the most popular active fund recently, Cathie Wood of ARK Invest, has made big bets on both Tesla and a trust that owns bitcoin, fueling a record pace of inflows.

Indeed, Tesla, Bitcoin and Cathie Wood are the veritable unholy trinity of this era’s madness of the crowds. But unlike in matters of religion, the answer to the sophomore’s question as to who created these gods is perfectly clear: The Fed!


During the period beginning at the zero point in the above chart (March 2020), the Fed’s balance sheet has exploded by $3.25 trillion. That is, in just 11 months our unhinged central bankers have pumped more fiat credit and liquidity into the financial markets than they had during the first 99 years of the Fed’s existence.

Thaat’s right. On April 10, 2013 the Fed’s balance sheet reached $3.23 trillion for the first time after nigh on to a century of inseminating Wall Street with monetary goodness. By contrast, on February 5th one year ago, the Fed’s balance sheet was $4.17 trillion, which now stands $3.25 trillion higher at $7.41 trillion.

It should be obvious by now that all this prodigious monetary goodness never really leaves the canyons of Wall Street, despite the Fed heads’ endless gumming about stimulating moaaar inflation, jobs and growth on main street. That’s because–in brief—the so-called credit channel of monetary policy transmission is busted and done.

Households with $16.4 trillion of IOUs have long been at Peak Debt, while, on the margin, the explosion of business debt puts one in mind of the Ouroboros, the legendary snake that eats its own tail.

In this case, nonfinancial business debt in the US has risen from $10.0 trillion on the eve of the financial crisis in 2007 to $17.5 trillion presently. But the overwhelming share of that has been gulped down in the maws of Wall Street from whence it came—in the form of stock buybacks, recaps, LBOs and vastly inflated M&A deals, thereby fueling more and more stock buying in the face of less and less supply of shares and independently traded companies.

Fed Balance Sheet:99 Years of Prior Growth In Just 11 Months

So what has been inflated is stock prices, not the CPI or jobs. And surely Tesla is the poster boy for the raw, mindless asset speculation that has been triggered by upwards of $30 trillion of central bank bond buying since the turn of the century, a considerable portion of which has occurred in the last year alone.

After today’s Bitcoin-fueled rise, Tesla’s market cap weighed in at $817 billion, which compares to the rest of the industry at $600 billion. We will amplify on that bit of insanity in Part 2, but first recall the wobbly foundation on which Tesla’s towering market cap actually rests.

To wit, during the nine years 2012-2020, Tesla posted cumulative net losses of $5.8 billion, but save for the magic of “regulatory credits” the outcome would have been far worse. In its wisdom, the greenish socialist nirvana of California (and a few other fellow traveling jurisdictions) requires Tesla’s benighted competitors, who are still preponderantly in the combustion engine business, to purchase ZEV credits (zero emissions) from a company (Tesla) that purportedly generates no tailpipe emissions because said emissions happen upstream at the electrical power plants.

So the whole rigmarole is nonsense from an economic, energy and environmental viewpoint, but in the year just ended it did force Tesla’s competitors to cough up $1.580 billion of gifts to the EV maker that aspires (loudly) to put them out of business.

What that means, of course, is that Tesla did not have a big breakthrough into profitability in 2020 as ballyhooed by its cult followers. Without the regulatory credits, in fact, its $862 million of reported net income would have been a -$718 million loss.

Moreover, when its only year ever of profitability is adjusted for the regulatory credits, it turns out that Tesla’s actual net losses from selling cars and solar panels has been getting better only very slowly.

Tesla Net Income Less Regulatory Credits:

  • 2018: -$1,480 billion;
  • 2019: -$1,369 billion;
  • 2020: -$718 million.

In fact, for the 9 years as a whole, Tesla harvested $3.875 billion of regulatory credits from its competitors per the chart below, bringing its actual net loss from selling cars, batteries and solar panels to $9.7 billion over 2012-2020.

But here’s the thing. These regulatory credits are a double-bad wasting assets. The balance of the auto industry is scrambling to produce cars ordered by government regulators and the green energy mob to which they are responsive, if not the actual car-buying public.

Consequently, the auto industry has more than 400 EV auto models in the pipeline scheduled for launch by 2024. What this means is that—

  • Their green tribute payments to Tesla will dry-up by the middle of the decade;
  • An auto market flooded with competitive EV models from auto engineering and manufacturing powerhouses like BMW, Porsche/Audi/VW, Mercedes, Toyota and even the also-rans (Ford, GM et al) will keep prices capped and Tesla’s volume growth opportunities constrained, thereby causing current losses from actually making cars likely to be a permanent condition.

The bulls say that Telsa will grow its way out of its chronic losses and prodigious cash burn, but when you take the disappearing regulatory credits out of the mix, net losses per vehicle sold are still very large. And that’s before the flood of competitive EVs fully hits the market in the year just ahead.

Tesla Units Sold/Loss Per Vehicle Ex-Regulatory Credits, 2018-2020:

  • 2018: 246,000 sold/$6,025 loss per vehicle;
  • 2019: 367,000 sold/$3.370 loss per vehicle;’
  • 2020: 499,000 sold/$1,440 loss per vehicle;

Tesla annual regulatory credits revenue

This all raises the question as to how Telsa can be valued at $817 billion per today’s closing price based upon anything which resembles its financials. For instance, even on the reported 2020 net income of $862 million, the implied PE multiple is 947X!

But in reality, of course, the multiple is infinite because Tesla had negative net income of $718 million ex the phony green credits in 2020, and has never made a profit in any previous year, either.

Likewise, you don’t get much farther looking at operating free cash flow, which was reported at $2.8 billion for 2020 but was actually just $1.23 billion when you excise the $1.58 billion of green tribute payments from the competition.

So as Tesla soared by another 1% today upon its announcement that it is the proud owner of $1.5 billion of bitcoins, it was actually being valued at 663X the actual free cash flow from its auto and solar business.

This utterly stupid result at least does remind that Tesla is the greatest cash burn machine ever invented. During the last 9 years it reported negative free cash flows of $5.8 billion, but that actually amounts to just shy of $10 billion when you net out the regulatory credits.

So the question recurs, how did this prodigious cash burning machine have enough extra coin laying around its corporate coffers to wager a $1.5 billion bet on bitcoin, and then stiffly rebuke its critics by pointing to $19.4 billion of cash on its balance sheet, implying that it was only gambling with 8% of its purported ocean of liquidity.

We will amplify upon that further in Part 2 because it leads straight into the rest of the speculative trinity—Bitcoin and Cathie Woods. But suffice it here to say that the incredible speculative casino fostered by the Fed has been a fount of capital for the greatest circus barker in modern history.

That is to say, Elon Musk and his Wall Street confederates at Goldman and elsewhere on the street have gone to the well for nearly $40 billion of capital during the past 9 years.

That’s right. Here is what Tesla has raised, and in Part 2 we will explore the implications of a money-loosing and cash-burning trainwreck raising these kinds of funds to keep Chapter 11 at bay:

Funds Raised By Tesla in the Capital Market, 2012-2020:

  • Debt and converts: $23.6 billion;
  • Equity: $16.0 billion.