Two things happened recently:
1. Jeff Bezos became the second-richest person in the world, passing Warren Buffett. He’s
worth about $76 billion.
2. Tesla’s market cap surpassed that of Ford. For what it’s worth, Ford sells a lot more
cars than Tesla. Here’s a picture of Elon Musk (who was seen taunting the shorts on
Twitter the other day).
These two events are related.
The Hardest Shorts in the World
Amazon would seem to be an easy short. It doesn’t make any money. Don’t companies have to make money?
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People also like to short Tesla, which also doesn’t make any money. It looks like it never will. Sure, Tesla is a bit of a cult stock: it’s hard not to root for a guy who builds actual spaceships and solar panels and runs three companies at the same time. But the Tesla shorts will also get carried out, for the same reason the Amazon shorts did.
I’ll give you a hint: it has to do with interest rates.
For both of these companies, the cost of capital is effectively zero. Would you be buying TSLA converts yielding 2.375% with a high strike if fed funds were 6%?
You would not.
If you have ever taken a finance class, anywhere, anytime, probably the first thing you learned is the time value of money. Future cash flows are worth less when they are discounted at a higher interest rate. Ergo, when interest rates are low, businesses with cash flows very far out into the future can survive.
For example, biotech:
These days, biotech trades with politics, but for years, it was considered an ultra-long duration instrument—and was correlated with the bond market.
Amazon, of course, has been around for a while, since the mid-‘90s. But it really took off when the Fed lowered interest rates to zero and began quantitative easing in 2008 (almost to the day).
I can tell you one thing. If interest rates were at 6%, Amazon and Tesla would not be where they are today. The cost of capital would be higher, and there would be more compelling opportunities elsewhere, with lower risk.
Tesla would still be a $30 stock. And it would be expensive.
So If You Think About It
A lot of people have observed that long periods of time with negative real interest rates cause, well, bubbles. It is happening in Canada as we speak, with housing. Everyone knows that negative real interest rates cause economic distortions over time.
But Amazon and Tesla are part of those distortions, too. And think about how harmful those distortions are—think of the capital that has been diverted away from traditional retailers to Amazon.
An Amazon bull would say that this is justified: Bezos is a genius, and Amazon is the greatest company in the world.
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Would we be denied Amazon with “normal” interest rates?
But here’s a broader, more philosophical question: Maybe this automation “problem” that we’re having, putting people out of work, wouldn’t even exist if it weren’t for the Fed.
It all comes back to the Fed. Everyone likes to beat up on the Fed—that gets old after awhile—but I have difficulty understanding how people like Neel Kashkari can’t see these distortions that arise from long periods of time with negative real interest rates.
Imagine a world without bubbles. It is actually possible. Just hike.
We will still get our Amazons and Teslas. Great companies will still come into existence. But people will have less patience. Which, perhaps, is a good thing.
That Is Not the World We Live In
But we continue to live in a world with very accommodative monetary policy. In this world, you can only trade TSLA and AMZN from the long side.
You can wait forever for profits when interest rates are zero. Not when they’re 6%.
You know when to short AMZN or TSLA? Maybe if the next Fed chairman’s last name begins with W and ends with “arsh.”
The Daily Dirtnap
I get a lot of positive feedback on The 10th Man, which I appreciate. But wouldn’t it be nice to get this kind of insight every single day?
I’ve been writing The Daily Dirtnap for about eight and a half years now. A lot of people have come to depend on it. I make market calls—sometimes successfully, sometimes not—though occasionally people tell me I am a little too humble about my forecasting ability.
But that’s not why people read it.
People read it because it gets them to think differently. A longtime client of mine has called it his “mind vitamin.”
And I view success in investing as a byproduct of having a rigorous thought process. So I spend more time on the thought process, and less on the investing.
I’m also a bit of a polymath, so it’s not like we’re just covering the same five football stocks every day. It’s a go-anywhere letter, and I really go anywhere. Oftentimes into stuff that you’d think has nothing to do with markets (but does).
I also tend to be more buttoned-up in 10th Man, since it’s for a wider audience. You’ll get a few good laugh-out-loud moments in The Daily Dirtnap every week.
Mauldin Economics offers a money back guarantee, which I dislike. So you might as well take advantage of it. Sign up for The Daily Dirtnap and give it a try. Nothing to lose.