December 4, 2020 | No, the World Economy Will Not Return to “Normal”

WEST RIVER, MARYLAND – What have we learned this week?

In his weekly update to our Bonner-Denning Letter readers, Dan Denning addresses the peculiarity of the economy.

When you add them all up – regular state claims, extended benefits, pandemic emergency claims, and pandemic unemployment claims – there are still over 20 million Americans claiming some sort of unemployment benefit. That’s despite initial job claims declining from 787,000 last week to 712,000 this week, according to data from the Labor Department.

By means fair and foul… but mostly foolish and downright stupid… the feds are still pumping money into the economy. Though real output is down, incomes and sales are up.

Where does the money come from? The Federal Reserve, of course, which is printing it at a rate of $30 billion per week.

Another Bailout

So what happens? Here’s Business Insider:

Global stocks rose on Friday after Democrat House Speaker Nancy Pelosi and Republican Senate Leader Mitch McConnell raised fresh hopes for a stimulus package to protect the U.S. economy from the impact of a resurgence of the COVID-19 virus.

Both leaders embraced a $908 billion coronavirus relief plan on Wednesday. They spoke for the first time since the presidential election, with McConnell saying they’re both interested in getting an outcome on two issues: federal relief and spending bills required to prevent a government shutdown, according to the New York Times.

Dan elaborates…

Naturally, Wall Street has rallied. The Dow went back over 30,000 and the S&P 500 and Nasdaq both made new intra-day all-time highs. Robert Shiller’s valuation metric – the cyclically adjusted price-earnings ratio – sits at 33.59. That’s higher than Black Tuesday in 1929, but still below the dot-com peak in 2000.

Investors believe – correctly – that more money is on the way. And though the bailout is meant to fill nearly all the glasses at the bar, stock market investors expect to get especially sloshed.

No Return to Normal

The other reason (if the word can be used in such a loony context) stock prices are so high is that investors expect a vaccine will soon bring the coronavirus to heel, allowing the world economy to return to “normal.”

This is extremely unlikely. Normal is not on the menu. Debt has reached such high levels that any return to normal interest rates will be disastrous.

So vaccine or no vaccine, the feds have to keep printing more and more money, just to keep interest rates low (they use it to buy bonds, thereby driving up bond prices… and driving down interest rates).

This will create more distortions, crises, crashes… and ultimately, a total collapse of the U.S. economy.

But the debacle will take years to fully express itself.

“Normal,” we predict, will not return during our lifetimes.

Stock Watch

But let us keep our eyes on the stock market this morning. When the money gets out of whack, so do prices. In the 1999 bubble, it was dot-com stocks. In the 2007 bubble, it was the mortgage finance companies.

And now?

Several sectors – pharmaceuticals and internet-based services – lead the way.

But let us focus on one particularly eye-catching company – Tesla… This week, the automaker sprouted wings.

Tesla produces electric cars. Its margins are determined by the difference between the cost of making the cars and the money it brings in from sales and service – now about 6 cents per dollar of revenue. And its future depends, mostly, on how many cars it can sell.

Today’s stock market valuation suggests (with an average-ish multiple of 12) that the company would have to generate $600 billion in sales in order to justify the current share price.

And let’s see… there are about 90 million vehicles sold, worldwide, each year… for about $1.8 trillion in sales revenue.

Is Tesla really going to sell a third of all the cars in the world? Is it really worth more than half a trillion dollars – more than all the other major car companies combined? Has Elon Musk really earned a $139 billion fortune?

Goldman Sachs is setting a new price target for Tesla – over $700 billion. At that price, an investor relying on current net income to make himself whole will wait more than 1,000 years!

Worrying News

But wait…

It’s not as if Tesla has a monopoly on making electric vehicles (EVs). Other companies make them, too. And they have wider networks of vendors… more service and repair shops… and deeper pockets.

Tesla has the “first mover” advantage. What is that worth in the very competitive world of auto sales? We don’t know.

But from Europe comes worrying news on that front. The big automakers are already taking Tesla’s parking spaces. Here’s Forbes:

Volkswagen’s ID.3 hatch blew by both Tesla and Renault to become the best selling electric car (EV) in Europe in October.

It even surged to become the best selling car overall in Norway, The Netherlands and Ireland, taking more than 19 percent overall market share in Norway.

While Renault’s Zoe hatch has lead the sales charts for EVs for most of 2020, it was swamped by the surging ID.3 Volkswagen as the Zwickau plant’s production ramp hit full swing.

The shock news was that the darling of EV investors, Tesla, dropped out of Europe’s EV Top 10 entirely for the month.

Cuckoo Land

One month does not a year make. But the leading EV sellers didn’t just pass Tesla in Europe in October. They blew by… with 35 times more sales than TSLA.

But Tesla is just one of many stocks that are trading in cuckoo land. The averages are at their highest levels since… well, since they were last in cuckoo land, in 1999 and 2007.

And it seems unlikely that Mr. Market would take prices back to the cuckoo land of 1999 and 2007… without wanting a rerun of the crashes of 2000 and 2008, too.

What will Tesla be worth then?

Regards,

Bill

Bill Bonner December 4th, 2020

Posted In: Bill Bonner's Diary

Next: Trading Desk Notes For December 5, 2020 »