Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter?
He takes the old-fashioned view, which I share, that fundamentals do matter. But we are in an era in which many people are happy to own assets with no fundamental value, based on confidence that someone else will pay at least as much for those assets. Call it The Bitcoin Era.
I don’t think that anyone can say which is less likely to hold its value: a $30,000 Bitcoin or a $100,000 ten-year Treasury bond.
Kessler blames the Fed for the distortions in asset markets. But I think that this credits the Fed with too much power. I think that in recent decades we have seen intangible assets increase in importance relative to tangible goods. So people have become conditioned to seeing value in things like reputation or corporate culture or regulatory advantage.
But I do think there is such a thing as going overboard in valuing intangible assets. Just as in the public intellectual space the angry partisan hacks have driven real thinkers to the margins, in financial markets the fools have driven the more sober investors to the sidelines.
You mean NFTs have no value?
BTW, there is a story about a lady who was trying to sell her house for some amount. Let’s say $350,000. But Banksy came along and did a small quick painting on her wall, and now her house is worth $5 million.
Oddly enough, gold falls into this same category. Gold is worth whatever people agree it is worth. The biggest markets for gold are Indian and Chinese jewelry markets, and central bank buyers.
If people come to think of gold as too gaudy for jewelry, and if central banks stop buying gold, its price would fall way down.
Some companies are overvalued. But that is always the case for start-ups, early early-stage companies.
Gold does not fall into the same category. Banksy can fall out of fashion without ART falling out of fashion. The mural could decrease the value of the house to $349,000 if no one wants it, but gold is a commodity. My maple leaf won’t fall out of fashion for a gold eagle, this is the difference between a commodity with value and a subjective value of something like art or an NFT.
Tesla – the ultimate Veblen good? You can virtue signal (to yourself and others) while driving a super exclusive automobile. Here’s the potential problem: the average car manufacturer does a new generation (major overhaul) about every 5 years. Tesla is way behind this. Are their models starting to look stale?
Beyond Meat – not a major improvement over the last generation of meat substitutes. It’s basically all marketing and endorsements from the environmental crowd.
I love the era of unreal assets. Get to watch our family’s portfolio leap ever upwards.
But, what about the fundamentals? Isn’t it all about net future cash flows at the end of the day?
Does anyone else make electric vehicles like Tesla at the same price point? A few years back I assumed that big automakers would be coming out with luxury electric vehicles that would be real competitors for folks wanting to buy a luxury electric vehicle, but so far as I know that has only happened in China. And Chinese automakers are starting to build their own version of really cheap electric vehicles, sort of the original VW bugs, which could well squeeze other automakers from the bottom. The point being that I would expect future cash flows of automakers, including the world’s largest, to be quite uncertain, and would expect that to weigh on their share prices. Whereas Tesla looks like it is going to be able to sell lots of cars to the wealthy in China.
That probably doesn’t justify the differences in market cap, but just to say that there are reasons to think that Tesla is better positioned for the future than many of the largest automakers. There is also of course their expertise in manufacturing batteries, which if they are far ahead of everyone else, means that they should for sometime have a very strong position as an automaker.
“but just to say that there are reasons to think that Tesla is better positioned for the future than many of the largest automakers.”
Please see the recent offerings from BMW, Audi and Volvo. Agree that the major luxury vehicle manufacturers are behind the curve vs. Tesla, but no one wants sedans anymore, which is the Tesla sweet spot. Tesla’s SUV is among the ugliest of anything out there…I literally lol every time I see one. You paid $85k+ for that thing?
My (admittedly ignorant) questions: why are electric cars the future? Is it pre-destined? Can Tesla really survive without the government subsidies? What precisely makes electric cars superior to traditional gasoline fired engines?
As for the future of vehicles being electric, I think that is just about cost, with electric vehicles being cheaper to manufacture and to own and operate. I think that in some places, like China, it is already the case that new EV’s are cheaper than new ICE vehicles, with the cheap EV’s costing between 4K and 5K USD, having a good market share already.
There are plenty of sober investors, and they are still investing—they are too smart to sit on the sidelines (= hold only cash).
As you note, “in recent decades we have seen intangible assets increase in importance relative to tangible goods.” Of course, “there is such a thing as going overboard in valuing intangible assets,” but you have not even tried to make the case that current holders of Bitcoin or Tesla stock are going overboard.
The problem is that fundamentals are not something that can be plugged into a model or even predicted over the long haul for growth bets. I remember reading articles in the dotcom era spouting from smug journalists and naysayers that Amazon was overvalued as it had a market cap of some multiple (1-2x?) of Walmart. Current market cap of Amazon is $1.69T and the current market cap of Walmart is $393B. Sure, you can argue Amazon is overvalued today or Walmart under-performed but the point is that tech is a long shot bet. Joby Aviation will likely fail but likely has much more upside than existing airlines. It’s easy to cry the market is overvalued but much harder to determine what is relatively undervalued in the long term. Growth will drive all of this and we don’t have a good handle on what growth will be. To the extent there is stronger or weaker growth, it will be driven by companies like Joby Aviation and Amazon not Lufthansa and Walmart.
Dividends have been my preferred measure of fundamentals. As of the end of first quarter by my quick count the S&P 500 had about 110 non-dividend stocks, including many with the largest market capitalization (Alphabet, Amazon, Tesla, Netflix ). Yet these non-dividend have tens of millions to throw away on Black Lives Matters (getting thousands more Blacks murdered) and give-away contracts to the politically connected. Interestingly BlackRock, the largest asset manager in the USA is more interested in forcing companies to blow money on leftist causes than on the welfare of the retirees assets whom they manage. When people find a reasonable investment alternative to index funds (real estate funds?) and the cash flow dries up, the whole house of cards is going to collapse and all the big brains will be scratching their heads wondering what went wrong just like they have in every previous crisis. To the extent that the Rubio bill might restore fiduciary duties and duty to shareholders as meaningful doctrines and not mere legal fictions, it is better than doing nothing.
Investing is future focused. For the Amazon Walmart comparison you could also replace Walmart with Kmart. That might be a better analogy for the car manufacturers. Anyone with understanding of machine learning gets the value importance of the data Tesla now has. They are way out engineering the competition and cars will go down in price instead of up in the near future.
Crypto streamlines finance. Idk about beyond meat but biomanufacturing of everything will be big over next decade.
The stock market is becoming more like the startup world. Bet on 100 and if one goes 100x you break even. Get a dozen 10x and you’re doing good.
But people can still invest in typewriter companies if they want to.
So Rubio now wants to restrict corporate speech? Not gonna fly with scotus.
Maybe not, but then shouldn’t pro-ESG regulations (proposed or implemented) be unconstitutional as well?
Sure. If any esg laws are passed I’m sure cases will end up at the SC eventually.
I don’t think this is that difficult to figure out:
In practice we have only one lever to stimulate the economy – pushing up the ratio of wealth:gdp. That can take the form of lower rates, bailouts, contingent guarantees, asset purchases, corporate tax cuts, etc. but it all ends up having the same outcome.
As financial wealth growth, expected returns get pushed down on all assets thus increasing the attractiveness of alternative assets. Cash flows are not strictly necessary (e.g., art, precious metals). Cash flows of traditional assets cannot “grow into” the valuations because the growth required to do so would cause overheating.
The answer is to develop better tools by which to manage economic fluctuations. But my guess is that anyone with any trace of power is pleased with the status quo as their portfolio looks fantastic.
The big question of course is if the day were to come (has already come?) where we have to choose between propping up asset values or accepting higher inflation, what will we do? My guess is we will happily saddle the average American with inflation before we let portfolio values meaningfully fall.
In my school days, the idea that you should buy an overvalued asset to sell to others was called “the bigger fool hypothesis” : you make money by finding a bigger fool than yourself. Bubbles always end when the supply of suckers disappears.
If you are really worried about inflation, buy a 10-year TIPS, not Bitcoin. Or inflation protected savings bonds.
As for a nominal 10-year, I am highly confident that I will get my $100,000 principal back; I just don’t know what the purchasing power of the dollar will be in ten years. But if you buy a $10,000 Bitcoin, are you confident you will get at least $10,000 back when you sell in ten years?
As for stock valuations, ten years ago I could not understand why Amazon had a market cap exceeding Barnes and Noble plus Borders. Mail order books didn’t strike me as a novel idea. Well, Borders went broke, and B&N contracted, and Amazon is a trillionaire. I wished I had bought Amazon. I learned not to think I am smarter than the market. The future is unknown, and don’t joke about market valuations.
Problem with TIPS is that the CPI doesn’t adequately capture inflation.
Over the last year, it appears that rent prices have gone up 10% and house prices 20%, but the housing component of CPI is only up 2-3%.
In 10 years time, a new Honda Accord will likely go up in starting price from $25,000 to $35,000, but the CPI will say that the actual price is the same because the car is now better. The car probably is better, but if I only have $25,000 to spend, I can’t buy a new Accord now, I have to buy a used one that may well be out of warranty.
Five years ago, if I wanted to buy the flagship iPhone, it was $649 or $749 for the big model. Today, it is $999 or $1,099 for the big model. The phones are better now, so the CPI will likely record 7-9% annual inflation in new phone prices as 10% annual deflation instead. Unfortunately, if my income doesn’t go up, I can no longer buy the flagship phone, but only the SE.
Going back longer, once upon a time all food used to be organic. Now organic food needs special labels and can be several times as expensive.
The Civic has been getting bigger and more luxurious so perhaps compare the 2021 Accord with the 2031 Civic, if the trend continues. Better yet, don’t do 10 year inflation measures this way. Just compound 10 inflation measures of 1 year each.
Likewise “flagship iPhone” is a category that probably should not be used for inflation measurement. The category should be comprised of a set of utility measures for the purpose of measuring inflation over a period of 1 year. Then retire that category and create a new one. Categories do not need to have a lifespan longer than 1 year. The weight of the category in the composite should also change every year.
Organic food in 2021 is much less costly measured in terms of labour than hundreds of years ago when high percentage of income was required to buy food.
If you have national mean rent data that show a 10% inflation rate please share the reference. I see national median data that hint at this (such as the Zumper blog post of September 27) but I haven’t seen mean data other than what I believe to be mean data in the FRED series CUSR0000SAH1. That series shows the “all urban” rate to be 2.8% as of the September 14 update. I would guess “all urban” to be close enough to “national”.
Can’t you go back to weirdly fascinating Rube Goldberg explanations of government overreach causing every economic failure in history? Things have gotten a lot less fun since you started emulating the partisan hack you let monopolize your old blog a decade or so ago.
In a low interest rate environment, story will predominate over numbers, the pricing of which might further get outline with what underlying growth suggests even under the most rosy scenario.
SNOW is a great company with a very high stock price that consistently rose far higher than any DCF like valuation might suggest. Rev growth, margins at one point suggested 50% rev growth for a good ten years to justify the stock price at that time of valuation.
Now , with market pricing coming down, discordance of market prices from underlying value based upon fundamentals is decreasing.
Lot of fin. lit. addresses how story and momo are supercharged in low interest rate environment.