TESLA BURNING CASH
Electric cars have been in existence for well over 120 years. They are not a modern invention or innovation. In 1899, 90 percent of New York City’s taxi cabs were electric vehicles. In 1900, electric cars outsold all other types of cars, such as gas and steam powered vehicles. The first electric cars with rechargeable batteries were built in 1842. In fact, electric cars were popular until Henry Ford built a mass produced car around 1915 that sold for one third of the price. That price differential and the much longer driving range of internal combustion driven cars resulted in the beginning of the end for the electric car. The first electric golf cart was custom-made in 1932, but did not gain widespread acceptance. That came in the 1950’s and 60’s in the USA and still persists today on most golf courses.
The electric car company, Tesla, was under the spotlight last week. The shares fell almost 14% during the 5 days of trading and they have fallen almost 40% over the last 5 months. The company is burning cash at an alarming rate. They still have about $ 2.2 Billion in cash but they lost $ 700 Million in the last 3 months. Four more quarters like that and life will become extremely difficult for Mr Elon Musk. Their free cash flow has dropped from almost $ 1 Billion positive to almost $ 1 Billion negative over the last 6 months. And the cash balance has dropped by half a Billion over the last 12 months. Tesla has a $ 1.8 Billion junk bond on issuance that has dropped in price significantly and is now yielding 8.42%. The coupon rate on that bond is 5.3%. So what happens next?
The answer to that question is that it is highly likely that the company will have to raise more capital via a further share issuance or bond issuance sometime in the next 2 years, depending upon sales growth. Who would buy such a new bond issuance while current bonds are falling in price? Who would buy new shares while current shares on issue are also falling in price? BOOM can’t answer that question. And the capital is not required just yet, especially if sales growth exceeds expectations.
Mid last year, an analyst in the US forecast Tesla’s stock price would rise to $ 4,000. It closed last week at $ 235 — just 6% of the target price. So is this stock 94% undervalued? Or is it 94% overvalued? This story has some way to go yet.
The good news is that the company has current revenues of $ 28 Billion annualized which is certainly a great achievement, of that there is no doubt. In fact, it is a remarkable achievement considering that the company was only founded 10 years ago. But when asked last week about the share price falls and the possible need to raise new capital, Elon Musk said — “It’s a bit of a distraction at times,” Musk replied, “but I’m not sure what to do about it.”
His biggest concern is the competition that will soon come from the likes of VW, Ford, Nissan, Toyota, Mercedes Benz and the Chinese. Those manufacturers are highly experienced in mass production and the fact remains that the car industry is one of scale. Ya gotta get big or ya gotta get out.
SOCIETE GENERALE 100 MILLION EURO BOND TOKEN
Huge news last week in the Security Token world. Societe Generale SFH, a subsidiary of the giant French parent bank, issued a covered Bond for $ 112 Million as a smart contract Token on an Ethereum Blockchain. Covered bonds are debt securities issued by a financial institution and backed by a separated group of assets. If the financial institution becomes insolvent, the bond is covered.
Media reports did not indicate that the bonds would trade on any external secondary market. Presumably, they will trade on we.trade which is Societe Generale’s shared platform available only to corporate clients of 13 European Partner Banks. The platform is private and runs on Hyper Ledger, the IBM blockchain technology which supports Ethereum smart contracts.
This is only a stepping stone, a conservative step along the way to global security tokenization of bonds but it is significant, nonetheless. Trusted, regulated, global online markets open to all investors that offer deep, liquid markets in smart contracts representing assets and that operate 7 days a week, 24 hours a day is the big step that will really change the world of capitalism.
SWEDEN RIKSBANK EXTENDS QE AND DROPS INTEREST RATE RISE
CURRENCY SLIDES AGAINST USD, INTEREST RATES ON HOLD
The Swedish Central Bank, the Riksbank, put its key interest rate on hold last week and adopted a bias towards lower rates in future. It also extended its bond purchasing Quantitative Easing program through to the end of 2020.
This is the latest central bank to indicate a future of lower interest rates and further “stimulation” of their economy by unconventional means. The central banks of Australia, Canada, Korea, Japan have all recently indicated that they are putting rates on hold for the time being and, of course, the US Federal Reserve has also done likewise. Meanwhile, China has flooded its banking sector with huge amounts of fresh liquidity aimed at creating increased credit expansion.
The Swedish currency, called the Krona, dropped immediately against the major benchmark currencies while the major settlement currency, the US Dollar, strengthened yet again against many other currencies. The US Dollar index finished the week strongly up 0.69%.
US Dollar strength globally translates into higher CPI inflation rates in other nations. It translates into lower levels of CPI inflation inside the USA. To BOOM, it appears obvious that the US will have to move towards lower official key interest rates later this year in order to remove this US Dollar strength. Even more drastic action will have to be taken if that is not sufficient to weaken the US Dollar. Why? Because if the principal global settlement currency and reserve currency simply rises and rises inexorably, then other nations will eventually find another currency (or basket of currencies) with which to settle international trades. And then the dominant reserve currency status will be lost.
AMERICA TIRED OF RESERVE CURRENCY STATUS?
Perhaps that is what the US wants? Perhaps they are tiring of their dominant reserve currency status? After all, being the dominant reserve currency is a double edged sword. It requires the nation holding that status to allow very large amounts of its currency to reside on the balance sheets of offshore commercial banks well out of its control. It also continually drives international demand for the currency, driving up its relative price which results in disinflation and even deflation inside the issuing nation.
The enemies of our modern credit based economies are disinflation and deflation which destabilize the financial sector.
The US government tries to combat these enemies by spending $ 2.6 Trillion annually on domestic welfare programs such as Social Security benefits, Medicare, and Medicaid. And they spend about $ 700 – 800 Billion on their defense budget & intelligence operations. In fact, the US defense budget is equal to the defense budgets of China, Russia, Saudi Arabia, India, France, the UK and Japan combined. Taken as whole, steady increases in US government spending are evidence of permanent, massive Keynesian stimulus and essentially a sign of a steady move away from being a capitalist economic system based upon productivity.
Logically, it will have to eventually allow its currency to weaken or force it to weaken. If it doesn’t, then it will find itself potentially heading towards a fall in productivity, persistent dis-inflation and stress in its financial sector. That may be some way off in the distant future but perhaps it may be not so distant.
As BOOM often says, in economics things work until they don’t. All dominant reserve currencies are ultimately caught in that exact same trap. Reserve currency dominance over the last 500 years of history has been held sequentially by Portugal, Spain, the Netherlands, France, Britain and now the US. BOOM thinks that dominance is not the way of the future. Hopefully, the US will also see this before it is too late. As Winston Churchill famously said of America — “They can be relied upon to do the right thing after they have exhausted all other options”.
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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