Stock Market


By David Stockman  |  January 27, 2020

Throughout recorded history, the most powerful leveling invariably resulted from the most powerful shocks. Four different kinds of violent ruptures have flattened inequality: mass mobilization warfare, transformative revolution, state failure, and lethal pandemics. I call these the Four Horsemen of Leveling. Just like their biblical counterparts, they went forth to “take peace from the earth” and “kill with sword, and with hunger, and with death, and with the beasts of the earth.” Sometimes acting individually and sometimes in concert with one another, they produced outcomes that to contemporaries often seemed nothing short of apocalyptic.

– Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century (2017)

By David Stockman

Editor’s Note: I hope by now you’ve had an opportunity to take in Michael Coolbaugh’s Delta Profit Summit. Click here to view the archived version. It’s well worth your time. – DAS

One of the strangest Sundays in recent American history, with the tragic passing of a sports-and-culture icon and the all-too-predictable preening of a national security state ghoul, gave way to the first major market crack of the new year.

Down as many as 550 points from its Friday close, the Dow Jones Industrial Average has recovered some of that ground but is still off 1.25% as of midday. The S&P 500 Index is down 1.24%, the Nasdaq Composite 1.53%.

The proximate cause is neither Kobe Bryant’s death nor John Bolton’s oh-so-timely Impeachment Kabuki cameo. No, today’s mini-panic is about China and the coronavirus.

Last week, as Craig Noland of Credit Bubble Bulletin noted, the Bloomberg Commodities Index was down 3.1%. West Texas Intermediate crude oil (-7.4%), copper (-5.7%), nickel (-6.9%), tin (-5.4%), and zinc (-3.6%) were also down for the week. China’s renminbi lost 1.2% versus the dollar.

The number of reported cases climbed toward 3,000 over the weekend, as reported deaths passed 80. A region holding a population equivalent to New York City and Chicago combined is under quarantine.

Indeed, not many “chief market strategists had ‘a virus caused by people eating bats and snakes’ in their 2020 Outlook notes this December.”

But this is still a major crash just waiting for a sufficient catalyst. The collapse of the Red Ponzi certainly qualifies, though foundations have been undermined to such a degree and for so long that it won’t take a global pandemic to get it done…

When the fools in the Eccles Building pumped nearly $500 billion of newly minted credit into the bond pits with their “not QE” program, it was inevitable that the final blow-off phase of the third great stock market bubble of this century would incept.

And, so, it did. And it was symbolized by Tesla’s (TSLA) absurd crossing of the $500 per share mark after having doubled over the preceding three months.

For want of doubt, I suggest that proper stock price for TSLA is $0. That’s because Elon’s pleasure toy is hopelessly sub-scale among the giants of the global auto industry. Nor does he have any real proprietary technology to speak of. And sales are falling in its largest market, the good old U.S. of A.

On a scale of “1” to “10,” it’s a “1” when it comes to an efficient parts and components supply chain and proficiency in manufacturing and assembly at the demanding level of quality and reliability that’s par for the course in the global auto industry.

In short, Tesla is the poster child for the kind of stupendous malinvestment attending the tops of central-bank-inflated financial bubbles.

It would have been dismembered – if not liquidated – in bankruptcy court years ago if not for the massive flow of speculative capital. The latter enabled it to fund its continuous multibillion-dollar annual negative cash flows with upwards of $10 billion in new junk debt and equity.

Tesla gave the concept of a “burn baby” a wholly new definition. And it also helped to explain why today’s unhinged financial markets are so riven with dangerous speculation while Main Street struggles to stay above the flatline.

In a healthy system, equity markets function as a growth nursery by mobilizing long-term risk capital to fund productive expansion and efficient innovation.

By contrast, in today’s environment of falsified financial asset prices, equity markets are speculative casinos, a devil’s workshop were capital is massively misallocated.

An economy does not thrive and grow wealthier by destroying capital. At the same time, in honest financial markets, capitalists who make errors or get way over their skies on a failing bet find the tap is quickly shut off.

That’s why the saga of Tesla is so hideous. Its cumulative losses since 2009 total $6.7 billion. Of course, in the age of Bubble Finance, net income is apparently a discretionary attribute.

Consider that TSLA sports a market cap north of $100 billion – more than that of Ford Motor Company (F) and General Motors Company (GM) combined.

On a one-to-one basis, TSLA’s actually pretty close to Volkswagen AG (VWAGY), which is valued at $103 billion.

Alas, the latter sold nearly 11 million vehicles worldwide during the last 12 months. That’s 30 times more cars than Tesla. And Volkswagen’s revenue of $229 billion produced $15.5 billion of net income. That’s about $1,400 per vehicle of profit.

By contrast, Tesla posted $24 billion of trailing-12-month sales and generated a net loss of $828 million. That’s a loss of $2,240 per vehicle.

The fact is, Tesla does not have a profitable business model, period. And it has no hope of attaining one, even if today’s tiny electric vehicle market survives the removal of deep government subsidies in the U.S., China, Netherlands, Norway, and elsewhere, and the company also gains a meaningful share of the 80-million-unit annual global auto market.

So, here’s the thing…

Tesla is no aberration.

Like much else in the so-called “growth” and technology sectors of the stock market especially, it’s being valued on ludicrous assumptions about a perfect future world that ignores virtually every headwind imaginable.

And we were only talking about the inevitable business cycle downturn that lies just around the corner.

Anomalies – like viruses caused by people eating bats and snakes – threaten to accelerate and exacerbate the consequences and scope of the eventual collapse.

How to Immunize Your Portfolio

The 2020 election has replaced the Trade War as the primary risk for investors. That’s because, as we’ve been saying for some time now, this is the most politicized market in history.

And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.

It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.

And it seems as if the whole world has, indeed, gone mad.

Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.

Here’s where I usually say, “Well, The Stockman Letter is made for times like these”…

And I can say that because we brought aboard Michael Coolbaugh to update our design to help us better navigate to not only the safest harbors but also the most promising opportunities.

And he’s doing that. He’s also launched a complementary investment newsletter, Delta Profit Trader, that promises “higher frequency” engagement with markets.

Click here to view the “Delta Profit Summit,” where Michael explains his whole approach to investing in this environment.

The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.

The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.

It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.

You’ve got to be nimble to win in this market… and Michael’s here to help you do that.

To common sense.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR