There is obviously no need to “go figure.” Combining OCF and CapEx you get a balance sheet hemorrhage of $5 billion. The real question, therefore, is not why Tesla was worth $35 billion at its recent peak, but why it wasn’t bankrupt long ago.
The answer is that it was and it should be now. Tesla would not have even made it to its Goldman-led IPO without a $500 million bailout by Uncle Sam.
That the hard-pressed taxpayers of America were called upon to underwrite a vanity toy for the wealthy—and one peddled by a serial milker of the public teat—is surely a measure of how deep crony-capitalist corruption has penetrated into the business system of America.
But even these egregious windfalls do not begin to compare with the gifts showered on Elon Musk by the money printers in the Eccles Building.
Tesla has stayed alive only because it has been able to raise billions of convertible debt in the Wall Street casino at yields that are the next-best thing to free money. In short, it has been burning massive dollops of cash for years and replenishing itself periodically in capital markets that are rife with momentum speculators flying high on cheap carry trades and the Fed’s buy-the-dip safety net.
In truth, Tesla’s true losses are even greater than its accounting statements suggest. For instance, it has booked upward of $500 million of revenue and profits owing to zero-emissions vehicle credits. The latter were invented by Al Gore after he finished inventing the internet, and amount to nothing more than bottled air—clean or not.
Also, Tesla’s affluent customers pocket about $10,000 per vehicle of federal and state tax credits, meaning that taxpayers have fronted another $800 million or so to stimulate Tesla sales.
Finally, Tesla’s marketing machine has even converted itself into a repo man for the wealthy. That is, Tesla guarantees a large share of its customers that it will buy back their vehicles at no loss after three years.
So how does it possibly make a profit deploying this blatant rent-a-car for free gimmick? Ask its accountants. In their wisdom and clairvoyance, they have undoubtedly assumed that the residual value of these vehicles will be levitated by the same juice that fuels Tesla’s stock price.
Yes, Tesla is a bonfire of the central bank vanities. In due course, the bubble will collapse and billions will have been wasted—much of it with taxpayer money—on things like its ballyhooed gigafactory in Nevada. But that’s what happens when central bankers destroy honest price discovery and turn capital markets into a gambling casino.
Yet the scam artist behind it has no compunctions at all, and will surely lead the punters in his stock straight over the cliff. Thus, after posting another wider-than-expected $293 million loss in its June 2016 quarter, which was 60% higher than last year’s red ink, Elon Musk doubled down on his snake oil offering.
His previous promise that Tesla would finally become cash flow positive in 2016, after burning through the above-mentioned $5 billion in cash since 2007, was abruptly declared inoperative in classic Nixonian fashion.
Instead, Tesla will do another giant dilutive capital raise in order to fund an acceleration of the Model 3 so that it can deliver 500,000 vehicles in 2018.
That’s a con job worthy of the seediest used-car lot in America. In auto-production land, today is already 2018 in the case of a mass-production vehicle that has barely been designed and that has not yet been production engineered, tooled, tested or sourced for components and materials.
Indeed, the idea that a company that produced only 57,000 vehicles in the last 12 months can scale up to 10X that volume virtually overnight on a production line and supply system that does not even exist is a laughable fiction.
But what isn’t laughable is that the Wall Street casino is so blinded by speculation, greed and Fed puts and liquidity pumping that it is enabling dozens of circus barkers like Elon Musk to inflate spectacular bubbles just like Tesla.
And these financial deformations will end up destroying the Main Street homegamers who fall for them just like the previous two times this century—even as they dissipate loads of scarce capital in the process.
AUGUST 2007 REDUX
Nearly everywhere on the planet the giant financial bubbles created by the central banks during the last two decades are fracturing. If this is beginning to sound like August 2007, that’s because it is. And the denials from the casino operators are coming in just as thick and fast.
Back then, the perma-bulls were out in full force peddling what can be called the “one-off” bromide. That is, evidence of a brewing storm was spun as just a few isolated mistakes that had no bearing on the broad market trends because the Goldilocks economy was purportedly rock solid.
Thus, the unexpected collapse of Countrywide Financial was blamed on the empire-building excesses of the Orange Man (Angelo Mozillo) and the collapse of the Bear Stearns mortgage funds was purportedly owing to a lapse in supervision.
So it boiled down to an injunction of “nothing to see here.” Just move along and keep buying.
In fact, after reaching a peak of 1,550 on July 18, 2007, the S&P 500 stumbled by about 9% during the August crisis, but the dip buyers kept coming back in force on the one-off assurances of the sell-side “experts.” By October 9 the index was back up to the pre-crisis peak at 1,565 and then drifted lower in sideways fashion until September 2008.
The bromides were false, of course. Upon the Lehman event the fractures exploded, and the hammer dropped on the stock market in violent fashion. During the next 160 days, the S&P 500 plunged by another 50%.
The supreme irony of the present moment is that the perma-bulls insist that there is no lesson to be learned from the Great Financial Crisis. That’s because the single greatest risk-asset liquidation of modern times, it turns out, was also, purportedly, a one-off event.
It can’t happen again, we are assured. After all, the major causes have been rectified, and 100-year floods don’t recur, anyway.
In that vein it is insisted that U.S. banks have all been fixed and now have “fortress” balance sheets. Likewise, the housing market has staged a healthy recovery, but remains lukewarm and stable without any signs of bubble excesses. And stock market PE multiples are purportedly within their historic range and fully warranted by current ultralow interest rates.
This is complete day traders’ nonsense, of course. During the past year, for example, the core CPI has increased by 2.20% while the 10-year Treasury recently penetrated its all-time low of 1.38%. The real yield is effectively -1%, and that’s ignoring taxes on interest payments.
The claim that you can capitalize the stock market at an unusually high PE multiple owing to ultralow interest rates, therefore, implies that deep negative real rates are a permanent condition, and that governments will be able to destroy savers until the end of time.
The truth of the matter is that interest rates have nowhere to go in the longer run except up, meaning that the current cap rates are just plain absurd. Indeed, at the end of this summer’s melt-up rally, as we indicated earlier, the S&P 500 was trading at 25.2X LTM reported earnings.
Moreover, the $87 per share reported for the period ending in June 2016 was actually down by 18% from the $106-per-share peak recorded in September 2014. So in the face of falling earnings and inexorably rising interest rates, the casino punters were being urged to close their eyes and buy the dip one more time.
And that’s not the half of it. This time is actually different, but not in a good way. Last time around during the post–August 2007 dead-cat bounce LTM reported earnings for the S&P 500 peaked at $85 per share, meaning that on the eve of the 2008 crash the trailing multiple was only 18.4X.
That’s right. After the near-death experience of 2008–9 and a recovery so halting and tepid as to literally scream out that the Main Street economy is impaired and broken, the casino gamblers have dramatically upped the valuation ante yet again.
There is a reason for such reckless obduracy, however, that goes well beyond the propensity of Wall Street punters and robo-traders t
o stay at the tables until they see blood on the floor.
Namely, it is their failure to understand that the current central banking regime of Bubble Finance inherently and inexorably generates financial boom-and-bust cycles that must, and always do, end in spectacular crashes.
THE BALEFUL LEGACY OF BUBBLES—ALAN GREENSPAN
And that brings us back to the father of Bubble Finance, former Fed Chairman Alan Greenspan. In a word, he systematically misused the power of the Fed to short-circuit every single attempt at old-fashioned financial-market corrections and bubble liquidations during his entire 19-year tenure in the Eccles Building.
That includes his inaugural panic in October 1987 when he flooded the market with liquidity after Black Monday. Worse still, he also sent the monetary gendarmes of the New York Fed out to demand that Wall Street houses trade with parties they knew to be insolvent and to prop up stock prices and other financial valuations that were wholly unwarranted by the fundamentals.
Greenspan went on to make a career of countermanding market forces and destroying the process of honest price discovery in the capital and money markets. Certainly, that’s what he did when he slashed interest rates in 1989–90, and when he crushed the justified revolt of the bond vigilantes in 1994 with a renewed burst of money printing.
The same was true when he bailed out Long-Term Capital and goosed the stock market in the fall of 1998—a maneuver that generated the speculative dot-com bubble and subsequent collapse.
And then he applied the coup de grace to what remained of honest price discovery on Wall Street. During the 30 months after December 2000, he slashed interest rates from 6.25% to 1.0% in a relentless flood of liquidity. The latter, in turn, ignited the most insane housing-market bubble the world had ever seen.
During the second quarter of 2003, for example, as rates were brought down to a previously unheard of 1.0%, the financial system generated mortgage financings at upward of a $5 trillion annual rate. Even a few years earlier, a $1 trillion rate of mortgage financing had been on the high side.
Needless to say, housing prices and housing-finance costs were systematically and radically distorted. The crash of 2008–9 was but the inexorable outcome of Greenspan’s policy of financial-asset price falsification—a policy that his successor, Bubbles Ben, doubled down upon when the brown stuff hit the fan.
So as we sit on the cusp of the third Bubble Finance crash of this century, now comes Alan Greenspan to explain once again that he knows nothing about financial bubbles at all. According to the unrepentant ex-maestro, it’s all due to the irrationalities of “human nature.”
Why, central banks have nothing to do with it at all!
The 2000 bubble collapsed. We barely could see a change in economic activity. On October 19, 1987, the Dow Jones went down 23% in one day. You will not find the slightest indication of that collapse of that bubble in the GDP number—or in industrial production or anything else.
So I think that you have to basically decide what is causing what. I think the major issue in the financial models has got to be to capture the bubble effect. Bubbles are essentially part of the fact that human nature is not wholly rational. And you can see it in the data very clearly.
No, you can’t!
As the astute student of 30 years of Bubble Finance, Doug Noland, recently observed:
Had the Greenspan Fed not backstopped the markets and flooded the system with liquidity post the ’87 Crash, Credit would have tightened and bursting Bubble effects would have been readily apparent throughout the data. Instead, late-eighties (“decade of greed”) excess ensured spectacular Bubbles in junk debt, M&A and coastal real estate. It’s been serial Bubbles ever since.
Noland is completely correct. During the early part of the Bubble Finance era, the Main Street economy was goosed time and again by cheap credit, which induced household and business spending from the proceeds of steadily higher leverage.
But now the households of Flyover America are stranded at Peak Debt. Yet the Fed keeps hammering their real incomes via its specious 2% inflation target and their savings by its lunatic adherence to ZIRP.
Accordingly, and as we have previously demonstrated, the massive liquidity emissions of the Fed and other central banks never get beyond the canyons of Wall Street—where they fuel ever more incendiary financial excesses and ever more traumatic crashes.
Now comes another.
PART 3
IMPERIAL WASHINGTON AND ITS GLOBAL DEPREDATIONS
CHAPTER 20
Imperial Washington—Why There is Still No Peace on Earth
AFTER THE BERLIN WALL FELL IN NOVEMBER 1989 AND THE DEATH OF the Soviet Union was confirmed two years later when Boris Yeltsin courageously stood down the Red Army tanks in front of Moscow’s White House, a dark era in human history came to an end.
The world had descended into a 77-year global war, incepting with the mobilization of the armies of old Europe in August 1914. If you want to count bodies, 150 million were killed by all the depredations that germinated in the Great War, its foolish aftermath at Versailles, and the march of history into World War II and the Cold War that followed inexorably thereupon.
Upward of 8% of the human race was wiped out during that span. The toll encompassed the madness of trench warfare during 1914–18; the murderous regimes of Soviet and Nazi totalitarianism that rose from the ashes of the Great War and Versailles; and then the carnage of WWII and all the lesser (unnecessary) wars and invasions of the Cold War including Korea and Vietnam.
At the end of the Cold War, therefore, the last embers of the fiery madness that had incepted with the guns of August 1914 had finally burned out. Peace was at hand. Yet 25 years later there is still no peace because Imperial Washington confounds it.
In fact, the War Party entrenched in the nation’s capital is dedicated to economic interests and ideological perversions that guarantee perpetual war. These forces ensure endless waste on armaments; they cause the inestimable death and human suffering that stems from 21st-century high-tech warfare; and they inherently generate terrorist blowback from those upon whom the War Party inflicts its violent hegemony.
So there was a virulent threat to peace still lurking on the Potomac after the 77-year war ended. The great general and President, Dwight Eisenhower, had called it the “military-industrial complex” in his farewell address. But that memorable phrase had been abbreviated by his speechwriters, who deleted the word “congressional” in a gesture of comity to the legislative branch.
So restore Ike’s deleted reference to the pork barrels and Sunday-afternoon warriors of Capitol Hill and toss in the legions of Beltway busybodies who constituted the civilian branches of the Cold War armada (CIA, State, AID and the rest) and the circle would have been complete. It constituted the most awesome machine of warfare and imperial hegemony since the Roman legions bestrode most of the civilized world.
In a word, the real threat to peace circa 1990 was that the American Imperium would not go away quietly in the night.
In fact, during the past 25 years Imperial Washington has lost all memory that peace was ever possible at the end of the Cold War. Today it is as feckless, misguided and bloodthirsty as were Berlin, Paris, St. Petersburg, Vienna and London in August 1914.
A few months after the slaughter had been unleashed 100 years ago, however, soldiers along the western front broke into spontaneous truces of Christmas celebration, song and even exchange of gifts. For a brief moment they wondered why they were juxtaposed in lethal combat along the jaws of hell.
The truthful answer is that there was no good reason. The world had stumbled into war based on false narratives and the institutional imperatives of military mobilization plans, alliances and treaties arrayed into a doomsday machine and petty short-term diplomatic maneuvers and political calculus. Yet it took more than three-quarters of a century for all the consequential impacts and evils to be purged from the life of the planet.
The peace that was lost last time has not been regain
ed this time, and for the same reasons. Historians can readily name the culprits from 100 years ago.
These include the German general staff’s plan for a lightning mobilization and strike on the western front called the Schlieffen Plan; the incompetence and intrigue in the court at St. Petersburg; French President Poincare’s anti-German irredentism owing to the 1871 loss of his home province, Alsace-Lorraine; and the bloodthirsty cabal around Winston Churchill who forced England into an unnecessary war, among countless others.
Since these casus belli of 1914 were criminally trivial in light of all that metastasized thereafter, it might do well to name the institutions and false narratives that block the return of peace today. The fact is, these impediments are even more contemptible than the forces that crushed the Christmas truces one century ago.
IMPERIAL WASHINGTON—THE NEW GLOBAL MENACE
There is no peace on earth today for reasons mainly rooted in Imperial Washington—not Moscow, Beijing, Tehran, Damascus, Mosul or even Raqqa. Imperial Washington has become a global menace owing to what didn’t happen in 1991.
At that crucial inflection point, Bush the Elder should have declared “mission accomplished”. So doing, he should have slashed the Pentagon budget from $600 billion to $200 billion (2015 $); demobilized the military-industrial complex by putting a moratorium on all new weapons development, procurement and export sales; dissolved NATO and dismantled the far-flung network of U.S. military bases; reduced the United States’ standing armed forces from 1.5 million to a few hundred thousand; and organized and led a world-disarmament and peace campaign, as did his Republican predecessors during the 1920s.
Unfortunately, George H. W. Bush was not a man of peace, vision or even middling intelligence. He was the malleable tool of the War Party, and it was he who single-handedly blew the peace when he plunged America into a petty argument between the impetuous dictator of Iraq and the gluttonous emir of Kuwait. But that argument was none of George Bush’s or America’s business.
Trumped! A Nation on the Brink of Ruin... And How to Bring It Back Page 38