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No, the World Economy Will Not Return to “Normal” What have we learned this week? In his weekly update to our Bonner-Denning Letter readers, Dan Denning addresses the peculiarity of the economy.
By means fair and foul… but mostly foolish and downright stupid… the feds are still pumping money into the economy. Though real output is down, incomes and sales are up. Where does the money come from? The Federal Reserve, of course, which is printing it at a rate of $30 billion per week. Another Bailout So what happens? Here’s Business Insider:
Dan elaborates…
Investors believe – correctly – that more money is on the way. And though the bailout is meant to fill nearly all the glasses at the bar, stock market investors expect to get especially sloshed. No Return to Normal The other reason (if the word can be used in such a loony context) stock prices are so high is that investors expect a vaccine will soon bring the coronavirus to heel, allowing the world economy to return to “normal.” This is extremely unlikely. Normal is not on the menu. Debt has reached such high levels that any return to normal interest rates will be disastrous. So vaccine or no vaccine, the feds have to keep printing more and more money, just to keep interest rates low (they use it to buy bonds, thereby driving up bond prices… and driving down interest rates). This will create more distortions, crises, crashes… and ultimately, a total collapse of the U.S. economy. But the debacle will take years to fully express itself. “Normal,” we predict, will not return during our lifetimes. Stock Watch But let us keep our eyes on the stock market this morning. When the money gets out of whack, so do prices. In the 1999 bubble, it was dot-com stocks. In the 2007 bubble, it was the mortgage finance companies. And now? Several sectors – pharmaceuticals and internet-based services – lead the way. But let us focus on one particularly eye-catching company – Tesla… This week, the automaker sprouted wings. Tesla produces electric cars. Its margins are determined by the difference between the cost of making the cars and the money it brings in from sales and service – now about 6 cents per dollar of revenue. And its future depends, mostly, on how many cars it can sell. Today’s stock market valuation suggests (with an average-ish multiple of 12) that the company would have to generate $600 billion in sales in order to justify the current share price. And let’s see… there are about 90 million vehicles sold, worldwide, each year… for about $1.8 trillion in sales revenue. Is Tesla really going to sell a third of all the cars in the world? Is it really worth more than half a trillion dollars – more than all the other major car companies combined? Has Elon Musk really earned a $139 billion fortune? Goldman Sachs is setting a new price target for Tesla – over $700 billion. At that price, an investor relying on current net income to make himself whole will wait more than 1,000 years! Worrying News But wait… It’s not as if Tesla has a monopoly on making electric vehicles (EVs). Other companies make them, too. And they have wider networks of vendors… more service and repair shops… and deeper pockets. Tesla has the “first mover” advantage. What is that worth in the very competitive world of auto sales? We don’t know. But from Europe comes worrying news on that front. The big automakers are already taking Tesla’s parking spaces. Here’s Forbes:
Cuckoo Land One month does not a year make. But the leading EV sellers didn’t just pass Tesla in Europe in October. They blew by… with 35 times more sales than TSLA. But Tesla is just one of many stocks that are trading in cuckoo land. The averages are at their highest levels since… well, since they were last in cuckoo land, in 1999 and 2007. And it seems unlikely that Mr. Market would take prices back to the cuckoo land of 1999 and 2007… without wanting a rerun of the crashes of 2000 and 2008, too. What will Tesla be worth then? Regards, Bill P.S. Stocks, bonds, jobs, pensions, real estate, life insurance – the whole capital structure is likely to go up in flames. And when the blaze takes off, things happen fast. People panic. The exits clog. Then, it’s too late. Whatever you intended to use to protect yourself is quickly out of reach. That’s why Dan Denning and I want to show you what you need to do now to protect your wealth from the inferno to come. Like what you’re reading? Send your thoughts to [email protected].
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