The Market Is Rewarding Foolish Investors

Wow…what a week!

There must have been a full moon…a lunatic new high in the NASDAQ…and an all-time monthly record in federal deficits. If monthly deficits were to continue at June’s rate, the deficit for the year would be a sizzling $7.6 trillion.

It is the best of times and the worst of times.

Stock market investors went howling mad…the last quarter was the best for the Dow Jones in 33 years. But for the economy, it was the worst quarter in history!

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Dizzying highs

Last week also brought Donald Trump to claim that Joe Biden had ‘plagiarised’ his economic program, after Biden unveiled his ‘Buy American’ plan.

The Donald said it with characteristic pride…flattered that someone would want to imitate him. Apparently, now, both parties are going to make America great again.

A more thoughtful man might have wondered why the big spending dumbbells on the other side of the aisle would think his program was just fine for them, too.

When the tone deaf fellow in the church choir is hitting the same notes you are…maybe it’s time to change your tune.

But wait…there’s more…

Mary Trump (Donald’s niece) says the president paid someone to take his SATs…and Kanye West announced that he’s running for president too. (Surely to boost brand awareness for his clothing line, Yeezy. We had never heard of it.)

And Tesla flew to such a dizzy high last week that we practically broke our neck looking at it. Here’s money-manager extraordinaire Chris Mayer:

Tesla is now worth more than Toyota, GM, Ford and Fiat combined… and yet, still can’t deliver 500,000 vehicles annually, can’t make a profit, sales haven’t grown much since 2018, they have a CEO who openly taunts the SEC saying they suck his you-know-what, and they have at best doctored up financials (at worst, fraudulent).

Tesla stock is up 270% so far this year. It trades at 288 times free cash flow.

Wow. What a great company, right? Or what?

The ‘or what’ is what interests us today. And we have a feeling that it concerns much more than Tesla…

$20 billion countertrade

Tesla is so obviously overpriced that it has created a whole ‘or what’ $20 billion countertrade. That is the value of the shares that are now ‘short’ TSLA.

Bloomberg columnist Matt Levine:

Let’s call it Anti-Tesla … is apparently the biggest synthetic company ever, the largest pool of shares ever manufactured by people betting against a company. It’s no Toyota, but Anti-Tesla is bigger than Fiat Chrysler Automobiles NV; the market value of Tesla stock produced by short sellers is larger than the market value of an entire real car company.

That’s … something. I don’t know. It’s easy to scoff that Tesla, a young and still-niche company that has not produced a lot of profits, is more valuable than these big mature car companies; but even that scoffing itself is more valuable than some of those companies. Finance is weird.

Weird? Yes. And so far this year, the scoffers have lost (on paper, at least) some $18 billion. Tesla has gone up. Their short positions have gone down.

But that’s the problem with ‘or what’?

What’s going on is insane. But if you can keep your head when all around you are losing theirs, you will probably lose a lot of money.

Real-world damage

A sane, sensible, and sober investor should stay away from US stocks.

After all, stocks represent real businesses. And real businesses operate in the real world…which, measured by GDP, may have slumped 38% last quarter.

Those businesses will probably never again be worth as much as they were a year ago.

And now, we can expect a ‘recovery’. But losses are losses. They are permanent, like a summer spent indoors.

Time passes; it never comes back. And when the economy eventually goes back outside — with pasty skin, wasted muscles, and trillions more in heavy debt to lug around — it is unlikely to regain its old vigour.

Stocks should reflect the real-world damage, in other words, not ignore it.

In February 2020, the stock market was on the ropes, and getting pummelled by the COVID-19 shutdown.

There was no reason to think the economy would come out of the ring intact. But investors who took the anti-stock bet missed a 35% rebound.

Now, the economy is still black and blue, and walking with a limp. But the market averages are back to where they were when The Donald could claim it was ‘the best economy ever’.

Measuring insanity

But the averages, too, are nutty.

Take out the top 10 tech stocks — Apple, Facebook, etc. — and you wipe out half the NASDAQ.

On the S&P 500, the top 10 stocks represent 80% of the index. With the exception of Berkshire Hathaway and Johnson & Johnson, they, too, are all tech or finance companies.

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But do these entertainment, time wasting, and money-spinning companies really account for half or more of the US’ real wealth?

Of course not. Like Tesla, what they measure is insanity, counted out in the Federal Reserve’s paper wealth…and speculators’ enthusiasm for casino-like gains.

Take US bonds, for example.

What is a bond worth that is issued by a 244-year-old company that is (in the month of June) spending four times as much as it earns?

What is it worth when the company also controls the currency in which the bond is payable…and when it is covering its deficits by printing more of it?

And what if it had no plans to stop losing money…or to stop printing the money to pay its losses?

The short answer: Its bonds wouldn’t be worth very much. But US bonds have actually gone up. If you’d dumped US Treasuries three years ago, you would have missed a total return of about 50%.

In short, it’s been a rough time for people who aren’t insane.

Only one anti-insanity bet has really paid off…

More to come…


Bill Bonner,
For The Rum Rebellion

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion