The gambling goes on. The stakes get higher.
You’ll recall that ‘inflation’ refers to additions to the money supply. When you have a gold-backed system, you can’t really inflate the money supply, because you can’t easily get your hands on more gold.
Typically, the amount of gold above ground increases at about the same rate as the goods and services it is meant to represent. That’s why prices today — in gold terms — are not so different from those 1,000 years ago (with a generous and elastic allowance for technological improvements).
Paper money offers more flexibility — which is to say, it makes it easier to get into trouble.
This was the trouble Thomas Jefferson foresaw, warning that a central bank would emit more and more paper money, and thus bend the nation’s economy away from useful industry towards various ‘species of gambling’.
That has now happened. Since the beginning of the last financial crisis, in 2008, the Federal Reserve’s paper money creation has exceeded GDP growth by some 15 times. And today, on the floor of the Nasdaq stock exchange, the jokers have never had it better.
Classic monetary inflation
We are still in the early stages of ‘inflation’. The Fed creates new money by buying Treasury bonds. Most regular Americans do not own bonds. They are owned by Wall Street…and the rich, in general.
That is, after all, how the rich got so rich. The feds made them rich by jacking up their asset prices. It has nothing to do with them being especially greedy…or with a failure of capitalism.
Instead, it’s classic monetary inflation…as understood by Richard Cantillon, about a hundred years before Jefferson.
Cantillon, an Irishman, was an early investor in Scottish economist John Law’s Mississippi scheme. Law’s Mississippi company was granted a concession to develop France’s colony in North America. This he used as backing for new, paper money emitted by the Banque de France, which he also controlled.
Cantillon, and later Jefferson, saw through the fraud.
The first in line to get the new money are always the rich and powerful. By the time the common man gets it, it is already losing value — fast.
Ahead of the crowd
But for the moment, in the US, the new money is still mostly in the financial markets, where it is making investors dizzy.
Here at the Diary, we tend to be early. We began warning about the dotcom bubble as soon as we began writing our daily blog — in 1998, two years before it burst.
As for the blow up in the mortgage finance industry, we were writing about that as early as 2005 — three years before Lehman Brothers went broke.
Are we now years ahead of ourselves sounding the alarm over the danger of runaway consumer price inflation?
‘You’re way too early to be worried about [consumer price] inflation,’ comments a dear reader.
But we’re not worried about it. We’re just anticipating it. And even looking forward to it, in a cynical kinda way.
Because when the inflation comes, we’ll rest easy. ‘The world still works the way it should,’ we’ll say to ourselves. ‘God is in his heaven. The queen is on her throne. People still get what they deserve. And all is right with the world.’
Right now, much of the stimmy cheque money is going into the Wall Street economy, not the Main Street economy. Robinhood and other online trading platforms opened new accounts at a feverish pace last year.
This is easy come, easy go money…might as well exchange it for gambling chips.
More fun than a casino — where gamblers at least understand the odds, more or less — the stock market has turned into a sort of bingo game for dyslexic lunatics. Neither words nor numbers need to make any sense.
Here’s Matt Levine, commenting in Bloomberg on one of the lunatics’ favourite stocks:
‘Now Nikola has released the results of the internal investigation and they are…oh, you know. Did Nikola’s founder lie about whether Nikola had produced a zero-emissions truck? Yes, say Nikola’s own lawyers in Nikola’s own annual report to the U.S. Securities and Exchange Commission. Did he lie about whether the truck worked? Yes. Did he lie when he said that all the major components for the truck were made in-house? Yes. Did he lie when he said that trucks were coming off the assembly line? Of course. Did Nikola produce a video to make it seem like the truck could be driven, when in fact it was only moving because it was rolling down a hill? Yes, that is also a real thing that this company really did.’
Used to be, Levine notes, that investors bought companies based on their past performance. Not anymore. The game has changed. Words are dreams…or lies. And the numbers don’t add up.
Investors buy stocks in companies that they think might have a product someday that people might buy and that they might make a profit on…if all goes well.
It’s all a huge gamble, in other words, betting that no matter how big a fool you are, there is always a bigger fool out there somewhere.
And thanks to the public school system and the Federal Reserve — it’s a good bet!
Get this — even though Nikola, the electric truck company, has no electric trucks…and even though it lied about its ability to produce one…
…and even though it faces nine lawsuits, six of which have been wrapped into a single class-action suit…
…it is nevertheless deemed to be worth $7.5 billion.
Bingo! You win.
Of course, the big winner of our time is the company run by the world’s second-richest man…which does have a product. And sales.
What it doesn’t have, though, is enough profits to plausibly justify its price — presently just under $660 billion…
Let’s do the math. At its current profit-per-car, TSLA would have to sell more than 25 million of them to make enough profit to meet a modest 12 times price-to-earnings (P/E) ratio. (We’ll ignore the fact that the company lost $775 million in 2019.)
If the total world auto market were about 80 million vehicles, that means one out of every three or four cars sold would have to be a Tesla.
Not going to happen.
All the majors are getting in on the electric vehicle (EV) game. Some are bound to score successes and eat some of Tesla’s lunch.
And then, there’s Lucid Motors. It’s the company that made the batteries for all the competitors in the 2014 EV Formula E race in Beijing. Batteries, it believes, are the key to success in the EV world. And it knows batteries.
Last week, Lucid filed for a $24 billion public listing — peanuts compared to Tesla. But now, it’s decided to go into making electric cars, not just the batteries for them. So it will be running around the same track as TSLA.
Typical of the casino stage, Lucid has no cars to sell. Not yet. It’s all hope and estimations.
In an earlier age, when investors had their feet on the ground, that would have gotten Lucid nowhere. Investors wanted to see actual results — products, sales, profits — before turning over their hard-earned money.
Before they reached that stage, the start-ups had to rely on tougher sources of finance — family money, venture capital, and loans.
But Lucid couldn’t wait. And the markets welcomed them with a SPAC (special purpose acquisition company…a slick way of going public without an IPO) deal that brought them $4.4 billion to get going.
And — unless it is lying — its not-quite-ready-for-prime-time automobile gets more than 500 miles out of a single battery charge, compared to only about 400 for Tesla’s 2020 Long Range model.
TSLA was a groundbreaker. It realised early on not only that you could make a good electric vehicle — everybody knew that — but that investors are no shrewder now than they were in the Mississippi Bubble 300 years ago.
But eventually, they wise up.
When inflation moves from the rich to the common man…from Wall Street to Main Street…and from delightful to obnoxious…
…it will be a whole new game.
Suddenly, investors will learn to spell. And count.
For The Rum Rebellion
P.S: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.