Ep.96: 2023 Market Outlook & Tesla Zero or Hero?

Hello and welcome back to episode 96 of the Market Maker podcast, and a Happy New Year, Piers, to you.

Happy New Year.

Yeah, so is it a— was Christmas one of those times where you just kind of, you know, loosen the belt, let the good times roll, or are you a bit more disciplined than that?

There's no— there's no place for discipline over the festive period. You know that.

Well, I thought, I thought you had your, uh, your annual health check today.

Ah, no. Well, that, you know, yeah.

Didn't you want to prep up for that, getting in condition?

Well, what, once you get like, like ancient like me, um, you get a health check, free health check on the NHS once a year. Now you get this after you turn 40, right? I'm actually 45, as hard as that is to believe, but actually it's the first time I've actually gotten around to taking the NHS up on their offer. So yeah, it is true, today I went in for a bit of a checkup for the first time.

So was it like a, like an Arnie movie? They like put the mask on and strapped you up on the running machine with the weights?

You would have— you would hope so, right?

If they're doing—

but this is the NHS, so there's two steps. Step one was today, they just took some blood tests. Okay, they get sent off for analysis. Step two, I don't know, you go in and I think they just take your blood pressure, tell you what your blood test results are, send you on your way. This isn't, this isn't advanced 21st century stuff. Yeah.

Well, you look, you look fit and healthy, so it's good enough for me. So look, let's, um, let me give you an overview of what we're going to talk about in today's episode. And so it's obviously the first episode of 2023, so I have a bit of a recap on how 2022 finished. Quite a remarkable year, and I'm sure, Piers, you've got some stats to throw out there of just how remarkable it has been. And then we'll talk about the outlook for 2023. I did share a post with all the different bank research notes, which I'll share in the show notes actually, if you want to have a look at those specifically. But I just wanted to get a bit more of a top-level overview of what are going to be the major themes to look out for in 2023. So no doubt we'll talk about inflation, monetary policy, interest rates, these sorts of things, China, COVID, and so forth. But then look to go the next step and see then how does that and how will that influence stock sector selection, asset class performances. And I think timing is probably going to be the really crucial thing here about when will rates peak and subsequently start to decline, and how might that impact markets. Also want to throw in some black swans. I know you're a big fan of swan watching here, so, um, if you don't know what a black swan is, you're just gonna have to stay tuned. Um, but just know that Piers has got 3 of them. And then we'll talk a little bit about Tesla, and we have to talk Tesla of course because Elon Musk is still dominating the headlines. It kind of has just picked up where we left off last year. Their shares are down 10% on the week. I think they're actually— I've called to open lower again today. They're down about 40% in a month.

Just, just how much are you loving this?

Do you know what? Absolutely loving it.

But I love it.

I do love it. Absolutely.

Your smugness. I need to invent some kind of machine like the Smug-O-Meter has just gone off, you know, just pinged to the extreme right-hand side.

No, no, the extreme measure will not be hit until the bankruptcy filing. Then, then, then that will, that will come true. Um, but yeah, a lot of news for Tesla even just this week. Uh, their deliveries fell short of market estimates. The Tesla board's been taking some heat about CEO succession planning, but I don't really want to talk so much about that. I want to talk about Tesla. And you know, like you said, I am a huge bear, but I want to step out of that suit and just talk about it from a valuation perspective. And I know there's been some good interesting articles circulating this week on that that you can break down. Before we begin though and kick things off, don't forget to subscribe and leave us a rating for the show. Be much appreciated. It really does help kind of boost the Spotify, Apple algorithms to get this out there to as many people as possible. So be much appreciated. But Piers, let's kick it off and talk a little bit about how last year ended.

Yeah, well, it ended pretty much as it started, um, on the back foot. I mean, look, it definitely Yeah, my career, that's definitely, definitely one of the— uh, well, hang on, let me just very quickly think about it. Yeah, it's probably the second, second worst year ever in my career, which started in 2001. So the great financial crisis, and then last year, just— yeah, but it's unique. It was a unique year, um, obviously heavily negative for almost all markets, all asset classes. Very hard to make any money last year anywhere. Stocks and bonds, you know, basically pushing lower for the entire year. Obviously it was a story of inflation, which was the— out of the hangover of the COVID supply chain issues with then the big government stimulus pumped in, created this inflationary sort of storm, and then interest rates went up faster than they've ever gone up for like 40 years. And this basically, in the end, it heralded the end of cheap money. And it's the cheap money that really fueled the bubble of 2021. So 2022 is the cheap money era ending and the bubble that it created deflating. And that pretty much sums it up. I mean, very difficult to make any money last year. All in— pretty much every investor out there was very, very happy to watch those sort of New Year's Eve fireworks, midnight, 31st of December, and to say, uh, 2022, see ya. Uh, let's try and move on because that was a disaster.

Unless I was on the board of Saudi Aramco.

Well, yeah, well, that's true. Obviously, in amongst the general depression, um, there were a couple of highlights, I guess, bright spots. So energy, energy stocks. Yeah. And so obviously Aramco in amongst that benefiting from, from last year's black swan, which was the Russia-Ukraine conflict.

Well, actually, they're— the oil majors have probably got the reverse attitude that you have, because it's been announced today, in fact, that Shell expects a hit of almost $2.5 billion as a result of windfall levies coming from the EU and the UK. So now it's time to pay.

Yeah, yeah, it's, uh, and look, I think in that situation fair enough. You know, we've got massive bills to pay. I mean, governments particularly. And so, um, you know, tapping into some of these monster public company profits, profiting from, you know, conflict, um, you know, I think that's fair.

Okay, so let's— the fireworks have happened. So let's move into 2023 and let's just talk about, for you, what are the top themes that will influence the next 12 months?

Yeah, well, um, it's going to be a pretty boring answer because ultimately what dictated play last year was inflation, and ultimately what will dictate play this year is inflation. Because whilst it went up way faster than expected and got to levels we couldn't even fathom in 2022, you know, it's now— we're on the— well, we, we hope we've peaked and we're on the downside. And so absolutely key to the whole year is how quickly inflation comes back down. That, that's absolute top of everyone's list. If pretty much everything else that doesn't matter unless one of the big black swan risks come through, then fine, that might be different. But outside of any black swans, unknowns, then that, that's the story of the year ahead.

And just to be clear, when you say inflation come down, how is it best that people interpret that type of information? Because today eurozone inflation has returned to single digits for the first time since August. But that's not the entire story, right? So what is it that investors or students who are monitoring this should be more savvy to?

Well, looking at inflation data in January, or, or, well, I guess it's December inflation data that's being reported in January. And so we've had the Eurozone, as you've said, report their figures this morning. So they're the kind of first set of the kind of big developed economy inflation figures that we've seen for the month of December. Europe lags the US, so, but what we saw today from the European figures was that the headline inflation reading dropped, and it dropped by more than expected. And that's now 2 months of declines off the October peak. So in Europe, in October, 10.6% was what we hope is the peak, and November it was 10.1, and then December a drop to 9.2. Okay, so that puts it back at the same reading we had basically back in August, right? So it's looking— this print today was really a good, good news story. Another month of decline, and the decline was faster than expected. So fine, but inflation's really complex, and so what we need to do is kind of just move to what we call the core inflation data. And core inflation is looking at the price of goods not including food and energy, which are very volatile and you would say more supply-side impacted. So core inflation is a better measure as to where we are with the, you know, the overall inflationary conditions that impact our day-to-day lives. And core inflation in Europe hasn't peaked In fact, it made another new high. So that's continuing to rise. But as I've said, Europe lags the US. So in the US, um, we have seen core inflation, what we hope is peak, and it started to come down a couple of months in a row now. Core inflation dropping. So we would expect Europe to follow that, but you know, you never know, right? And these are the uncertainties. So when you look at the European core inflation chart, well then, actually, yeah, it's not But it does look a bit worrying as it again ticks to the uptrend continues. So that's one thing, just looking specifically at that data. But I think looking at the year broadly, there are two camps, broadly speaking, in terms of people's forecasts. I'm talking about big banks and economists and academics and how are they forecasting the year ahead. And I think broadly, You kind of fit into one or two camps. Um, camp number one are the doomsday guys. They're the ones who think that inflation will not drop fast. They believe inflation will remain stubbornly high, and this will have an ever more negative impact on consumption, and it will force central banks to continue to raise rates through the year, and rates will be marching higher. And that's your recipe for what we might describe a hard landing. So that's your recession where the recession is pretty deep, and then you're going to get painful kind of economic scenarios as a result. Okay, so deep hard recession is the pessimist's outlook with inflation staying stubbornly high. The optimists, like people like— and who's in the optimist camp? Like Goldman's, for example. They're actually in the US. Their base case prediction is no US recession. They literally don't think there'll be a recession at all. Um, and their idea is kind of around— well, again, always back to inflation. Okay, so it's, it's around the inflation situation, and they think that inflation will you know, continue to drop at a nice steady clip, which will mean that recession will be avoided. And I guess it's all— in some ways it's about the labor market when it comes to— and I think I mentioned this in the podcast before Christmas, where we've seen this situation where the labor market— because when it comes to inflation, right, one thing that drove inflation higher last year was wage growth. Companies were basically forced by a very tight labor market where there were— I think it got up to, in, in the U.S., 11 million job openings, um, which is like a record ever. And so that meant that it's a labor market where the employees are in control. Companies can't find staff, and so they're having to up wage offerings in order to kind of attract staff in, right? So this led to this this wage growth which drove people's incomes higher and then their spending higher, and this drove inflation, right? And the question is, what happens in, in 2023 with regards to wage growth? And what we have seen is that things like job hiring and quit rates, um, have begun to decline. Okay, that's always a good sign that employees are now less confident. If your, if your quit rate goes up, that means there's more people quitting. You only quit your job if you've got another one to go to, right? And so if quit rates go up, that's like a sign, okay, a lot of people are hopping onto a different company where the wage offering is higher, right? But what we've seen is the quit rates start to come back down. And actually, that's an indication that perhaps the wage growth part of the inflation story that drove things in 2022 is beginning to dampen. So that would lead to inflation dampening in 2023. This then plays into the whole story. If you think inflation will, um, steadily decline this year, then that takes the pressure off the central banks. and then that in turn enables, um, more confidence to come back into the system. And look, a lot of these banks think that there's a huge amount of capital on the sidelines, you know, both capital within, you know, from an investor's point of view, um, where they're just trying to sit on the sidelines waiting for strong enough evidence that the economic decline is turning, and then they're right, bang, let's go, let's get our money to work, let's start to to reinvest again, and this can kind of begin the next cycle, that recovery cycle. Um, so yeah, that's the other camp then, the optimists. And again, it's all about inflation, and they're the ones who think it will come back down.

Yeah, and fitting that narrative you described, the wage data included in the Nonfarm Payrolls report that's literally just come out for December kind of ratifies that notion of the fact that inflation in the US is dampening because the average hourly earnings figures both were below expectations month to month, year on year, and the prior months were revised down. So as you can imagine, the reaction here, just looking at the charts in front of me now, actually T-notes have started rallying quite aggressively and stocks are moving higher. So it's the complete opposite, even though this is a short-term intraday reaction, of course, as an example, it's the opposite of that 2022 move as a whole where bonds and stocks are going down. This is the opposite then. Inflation coming down, people moving down that conversation of when rates peak and so forth, and, uh, 100% is benefiting.

Any news that supports the idea inflation's going to continue to drop, that's your sort of, um, that's your sort of kryptonite for the stock markets, right? And indeed the bond markets. That's exactly what they want to hear. Um, and yeah, so you've seen a pretty sharp uptick on US stocks— well, global stocks, you know, off the back of this data, um, this afternoon. Yeah, so, so I guess here we are in the first week of the year, and I guess in terms of those two camps, the bulls and the bears, you definitely got, um, uh, 1-0 to the bulls here as that US labor market data supports the case that inflation's going to continue to drop.

Yeah, and that optimism from Goldman's is more broad. If it impacts the global economy, it impacts deal volume as well. And as you rightly said, big investors, they said, were sitting on piles of cash preparing to fund transactions. Large companies earning solid profits will look to diversify their business. But they're just basically waiting for a bit of that economic uncertainty to fade, was what they coined. And this came after a sizable decline in their fee generation from the IBD side of the, of the bank. And so they're talking it up, of course, as you would. Yeah, in that sense. Um, but what I thought was a, a good, um, analogy, their co-head of Banking and Markets. When you go through periods of volatility, you know it creates opportunity. Uh, so yeah, talking his book, of course, talking his book.

And it's such a clichéd line, of course, but a lot of people say that line. Very, very, very few people have got the, the bravery to actually do it. Um, but obviously these banks are hoping but investors have got the bravery. Yeah, I mean, the figure, just touching on those IBD, you know, investment banking divisions last year, what a shocker. I mean, um, the fees generated by the big boys. So JPMorgan, I've got the, I've got the stats here. JPMorgan's IBD fees in 2022 dropped 48%. Goldman's down 45% on the year before. This is Bank of America down 38%, Morgan Stanley down 51%. I think worst, and maybe not surprising, Credit Suisse fee generation down 53% last year compared to 2021. Now it was a tough comp because 2021 was a mega year, um, but even so, yeah, that was a bloodbath. And so of course, and obviously it's cyclical, um, and of course these banks are hoping— and look, yeah, I thought I referenced Goldman's 2023 outlook being positive, no US recession. You know, they talk their own book, right? They'd like nothing more for that to be the case because that would very much be the most positive scenario for their business. So you can go— I don't know how far you want to go down that path of them trying to shape people's opinion on the future. Therefore influence their confidence. So from a behavioral point of view, if Goldman says this is going to be a good year, how much does that move the dial of probability as to actually whether it will be a good year or not?

Um, yeah, and also just to kind of tie off the Goldman talk, a thing that was a big deal at Q4 of last year is about the radical restructuring again that they're going through. Through their business streams coming together. And I think that was clearly evident from those numbers you just said. They're so heavily tilted to banking, whereas I think it was Wells Fargo who crept into the investment banking top 10 leaderboard. Yeah, for the first time. And Wells Fargo is not a name that you would usually mention when you talk investment banking because they're just a loaner's company, right?

So that's a good example of brave companies. When times are bad, let's step it up because we can win market share. So just as you had the worst year for M&A in years, like this century, Wells Fargo went, aha, okay, let's do the op— let's, let's go against the tide and actually build and invest in the growth in that side of our business whilst everyone else is contracting and you know, bailing out. And, and so yeah, that's a great story. I think they're 8th on the table for 2022, and, and that's—

yeah, yeah, they were a key advisor in Broadcom VMware, which was the biggest deal of last year.

Yeah.

So, but yeah, well, look, let's talk about, um, given everything that you said then, inflation is key, that will influence then policy and market direction, but from a sector perspective, then energy was like the, the only shining light. What do you see as key sectors to watch, good and bad?

Yeah, I think, uh, so it obviously depends on which camp is right. Let's just go with the positive one. Look, I'm an optimist, I'm a glass half full, and— but everyone, it's such a, uh saturated opinion. It's such a common view now that everyone's going, look, the start of this year is going to be a bit rocky, a bit tough, then like second half is just gonna fly as we come out of the other side of this. Um, excuse me. Now if that were to be the case, then I think it is still fair to say a defensive setup going into the start of this year is probably, uh, a popular positioning, although that data we've just had from the US might question people's appetite for being defensive. But anyway, I think people have gone into this year very much defensively. So that means defensive sectors— so investors overweight defensive sectors like consumer staples. And actually, consumer staples is a good one because that plays into the whole food price inflation thing. So you could argue that margins for supermarkets are higher because they're selling goods at a higher price because of the inflationary situation, so they're more profitable. Um, so that's, and that's, that's what you call a consumer staple business because of course people are gonna have to buy food, doesn't matter what the economic situation is. So you could argue there's within the supermarket space, you, you've got opposite ends of the spectrum in terms of, I don't know, where you shop at, Waitrose and M&S, and then versus down the other side, which is whatever, Lidl and Asda, for example. Um, but generally speaking, defensive sectors would probably— and then energy sectors will probably stay strong. Obviously we've got an ongoing conflict situation, um, and so that energy costs remain incredibly elevated. But I think then you're going to probably see, if things play out with inflation continuing to drop, then you're going to see a real inflection point in the economic cycle where you're going to move— there's something else. Sorry, it's my watch— when you're going to move from recession into recovery. And that post-recession part of the cycle That's the, that's the sexy spot because that's where the economic growth rates are at their fastest. And what tends to happen is companies have streamlined in a recession, right? So they've laid people off, they've reduced inventories, okay, because sales are dropping. All right, so they're super lean, um, and then you start to see the sales growth ramp. And so that's where their profit margins are typically at their best. And so from a share price point of view, the early part of the cycle, the recovery phase, the, the part of the cycle immediately following the recession, is the best one in terms of, um, upside on share prices. So we— that is coming, and it's just a question of timing and how confident you are about this inflation thing. Because if you're confident, you basically need to go now. I would say you want to go right now. But there is real, real risk that inflation's going to stay high, and going now is going to be really painful. I actually think it's a weird year in so much as If you were to ask me what— where's the S&P going to be trading at the end of the year, I actually think both scenarios it'll end up at the same place. So I think that by the end of the year, scenario 1, inflation does fall, the Fed don't hike as much, less of a recession or no recession in the US, then I think the, the S&P can steady and move higher from here, right? I think if you get that hard— if you get inflation higher, hard recession, I think there's another big leg lower in the S&P. But we'll probably start the recovery phase by the end of the year, which means I think there'll be a big rebound. But you might just find we end up at a similar place, just with much more volatility.

So there's some hints dropped there. So, so have Google allowed you on the board yet, now that you've hit the 5— that you've gone over the 5% shareholder threshold, or—

I, I've, I've demanded a seat on the board. Yeah, my, my request hasn't been replied to just yet.

Okay, well, let's, um, let's talk black swans. Yeah, perhaps a little bit about what a black swan is and then, um, your best swans to look out for.

Well, Well, here, yeah, the whole thing— so a black swan, well, it's not— it's— so black swan's very rare, right? In reality now, I'm talking about a thing that kind of swims on a lake. They're very, very rare. So we kind of use that analogy about scenarios that occur that are incredibly rare. And I mean, technically speaking, from an economic point of view, this is a scenario that cannot be predicted. Okay, 2022, Russia invading Ukraine. So like with all of these things, when I say you cannot predict it now, okay, there were some— there was a tiny minority that were saying that's going to happen, but the vast, vast, vast majority, that was definitely not on anyone's radar. And so it occurred, and so it's a super surprising plus very, very economically significant scenario. So that's basically what we call a black swan, something that's unpredictable but really impactful. Okay, so on the agenda for 2023, and actually I liked MacroHive's description, Bilal Hafeez was saying that he prefers to call it a grey swan because he's referencing the fact there that you know, a black swan, well, by definition, you can't predict it. So if you are to ask me, what are my black swan predictions?

Right.

Well, technically, they are not black swan predictions because I'm predicting them.

Geez, such economist talk, that.

That's right. So my grey swan, so a nod to Bilal, my grey swan prediction.

Tottenham winning the— no, Tottenham winning the Premiership is a black swan.

No, no, no, that's, that's not a swan at all. Remember, it's got to be unexpected. Um, so I— for me, top of the list in terms of impact on the whole direction of the global economy is China and Taiwan. And this isn't a— it's, it's definitely not a black swan, and it's gray at best because obviously this has been on people's risk radar for a while. But it's just never been, and it still is on the risk radar, but far enough away that we don't really allow it to impact our behavior in terms of investment today. We just think it's, it's too far away. We'll worry about it if and when it might happen. So I think a surprise would be if it were to happen way sooner than people are currently sort of thinking. And so if it were to happen this year, And look, Xi Jinping had a big year last year, um, cemented power. Um, obviously now COVID is probably the top of his agenda as they try and now open up, but obviously that's going to cause a lot of turmoil in terms of case numbers spiking. We're already seeing it, right? So it would be classic Xi Jinping to deflect attention from all of that by going, you know what, let's go, let's act on our Taiwan. And he's been very upfront about bringing Taiwan back into the fold. This is absolutely an agenda of his. So just the timing— if it were to happen this year, way earlier than anybody thinks, and then the knock-on impact that would have, because globally You know, Taiwan is the semiconductor capital of the world, and so the— well, indeed, the Taiwan Semiconductor Manufacturing Company, um, are the largest producer of chips, and they're the 15th largest company in the world by market cap at $400 billion. But, you know, that would really alter the course of the global system. So that would be my number one. What are your thoughts on that?

Well, as a gray swan, I think it's fine. Okay. Because again, it's a case of probabilities, isn't it?

So what's your— what probability do you assign to that in '23?

Completely picking at random, I would say 1.5%.

Okay, so you're that low?

Yeah.

All right. Yeah, I'm hiring.

Where would you sit?

Yeah, as a—

yeah, I thought you're an optimist. You said I, I am.

Oh yeah, I'm not. It's definitely still a low probability event, but I'm like, I, I don't know, 5%. So still really low probability. But if it were to happen, then wow.

All the counter-argument I'd see with that is the deflection argument. I get the economic reaction from the global community toward China when they're economically not in good shape. I just don't think the Taiwanese acquisition is for now, basically. It's just later. He's got a long game to play and there's no point in it right now.

Okay, yeah, yeah, fair enough. Um, all right, moving on. Um, there's some stuff—

there was—

there's a guy called Kulkarni, um, who is, uh, from a company called MKM Partners, um, which is like an investment house. Rohit Kulkarni. The reason why I bring up his name is because Do you know what his black swan for 2022 was, or one of his black swans? Twitter would no longer be a public company. Yeah, he said that at the end of 2021, and lo and behold, uh, Twitter— no, that was way before Musk started. That whole thing started in March of 2022 when Musk started to buy shares in Twitter. So that was a genius call. Anyway, so what's he say about this year?

Yeah, exactly.

So he's saying Pinterest and Peloton, they're his two picks as the companies that will no longer be public companies by the end of the year. So that just means that they're going to get bought, right? So he thinks that they're both acquisition targets, um, and they would be taken private um, in a Musk-style scenario where someone or some entity buys up all the shares. So yeah, that— they're on his radar, Pinterest and Peloton. And given his track record from last year, um, not a bad shout. Um, the other big theme for this year, I think, and I'm not quite sure how it will necessarily play out from an economic point of view But it's the AI revolution is gathering pace.

I feel like— just gonna put it out there before you begin— I feel like we had the blockchain, you know, stick blockchain after any company name. It was this time last year, it was stick Web3 after anything. I feel like this year everyone's gone way too far again. This AI GPT Chat.

It's just ChatGPT.

Yeah, yeah, it's made everyone go stir crazy over that this is the next best thing, and I'm not saying it's not.

Shall I tell you why it's different?

Go on.

It's because it's hit the mainstream, and you can't say that about blockchain, and you can't say that about Web3. Um, ChatGPT, I think, will hit the mainstream. So I think this is the year where AI genuinely hits the mainstream. And, and as I said, I'm not quite sure what that really means at the moment. I think it's so early and so new that probably doesn't mean much, but I think longer term it could be a real pathway to efficiency and therefore productivity growth, which is something that developed economies have been really struggling with over the last couple of decades, or certainly post-financial crisis. Productivity growth has been— has taken a step change lower. And so it might take something like the AI revolution to kind of kick productivity higher. But I think it's too new though. Um, but yeah, I just think it's a— it's definitely a space that, that's gonna gather interest. What will be interesting— so ChatGPT, um, the creator of ChatGPT is a company called OpenAI. So one of the things people are talking about is, well, who's going to buy OpenAI? Um, so will it be one of the big guns, Google or Microsoft, for example?

We had a conversation probably this time last year about who our tech picks would be.

Yeah.

And I had Microsoft, and Microsoft backed OpenAI.

Yes, they did.

2019 for a billion dollars in funding. And it was this week that they reportedly are in works to launch a version of its search engine Bing using AI.

Um, right.

Behind the chat function that you were talking about. It's interesting, Google have been very aggressive talking it down for obvious reasons.

Yep, I think Microsoft are in pole position here, as you say, that they're a long-time stakeholder in OpenAI, and apparently they're looking at raising its investment, you know, further. So they're definitely in the, the driving seat if there were to be, uh, an acquisition. I mean, what the, what the valuation of that would be.

Well, I've got it here. Um, so they're in discussions to raise capital, evaluation of almost $30 billion according to two people familiar with the matter.

Okay.

Yeah, it's where it's at at the moment.

Yeah, well, you say like $30 billion, right? Well, whenever there's like an acquisition like this, I always think back to— always immediately something sticks in my mind, which is Facebook buying WhatsApp, um, for a billion. What if that was— no, that was for $19 billion, was it?

Oh, I'm thinking Instagram, aren't I?

You're thinking Instagram, that was $1 billion. They bought WhatsApp for $19 billion, and that's got to be at least 10 years ago. Now, would you buy— which would you rather, WhatsApp at $19 billion or OpenAI at $30 billion? You don't need to hesitate to answer that.

No, because with the— the OpenAI is going to be absolutely like monstrously huge.

Yeah. Absolutely. I'd say 30. I'd buy it for 30. Just, uh, well, you may call the bank manager now.

Why don't you sell like part of your Google shares and then you could take, take it private and don't let anyone else have it?

Okay, I'll get on it. Um, yeah, that's, that's really it. It's a bit dull as a kind of Black Swan list. I mean, the other The other things, the obvious things about— obviously inflation, does it stay high? Or I don't know, everyone's forgotten about the Russia-Ukraine situation, but does Vladimir hit the nuclear button in 2023? It probably doesn't look like it, does it? So, but he might do. So again, it's a low probability scenario that if it were to happen, then would certainly obviously you'd need to rethink your outlook.

Okay, well, final gray swan: Tesla goes bankrupt. So, so talk to me about some of the pieces that we're doing the rounds this week to conclude, uh, the, the episode about looking at the valuation of Tesla.

Yeah, right. I mean, so Tesla peaked— the share price I'm talking about now— and therefore its valuation and its market cap peaked in November 2021, and at the time it was above $1,000 per share. They then did a stock split. Um, can you remember what was it? Was it, uh, was it 3 to 1, 4 to 1? I can't remember now. Anyway, they did a stock split. Um, so that's just why— so the share price peak in November 2021 after you correct for the stock split— there was a 3-to-1 stock split, thanks— um, was just over $400, right? Back in that time it was over $1,000, but yeah, you gotta take into account the split. So $400, let's just call it, right? Uh, today it's trading at $110, okay? Um, so that's a 75— whatever that is— 75% drop, um, roughly. Um, so obviously it's been killed. The stock has been annihilated. All right, what I would say though is— well, I'll say that in a minute. So from a valuation point of view, so if you think about something called enterprise value— so enterprise value is the market cap plus its net debt, okay? And the enterprise value at its peak was $1.2 trillion. That at the time made Tesla more valuable than the next 4 most valuable car makers, who are Toyota, Volkswagen, Mercedes, and Ford. So Tesla were more valuable than those 4 put together. Now when you say it like that, it's like, well, obviously that's ridiculous. Okay, but we were saying that at the time and it was ridiculous. And actually people were saying, they were saying that, yeah, I don't know, at the start of 2021 you could have said this is wildly overvalued. And yet it ramped higher and it ramped higher and it ramped higher. And this is a bubble, right? The behavioral nature of bubbles, it's not rational, it's not based off fundamentals. And if the thing's going up but it's likely that it will continue to go up, right? And it's obviously— you get Musk in the equation here, and he, he's driving this sensationalist narrative on social media channels. And you get your hardcore fans and fanatics, and they're making loads of money. And then so you get FOMO coming in because your mate's just made 50% of his Tesla trade, right? I'm in then as well, I'm buying. And it just feeds this this bubble. Um, of course bubbles burst, and so the Tesla bubble has burst. And I don't really want to talk about the bubble and the bursting. There was a bubble, it has burst. What's a much more insightful conversation, I think, is, well, what's the value today? And is today's value worth it? Does— is today's value correct or not? What's really hard for, for people to move on to that conversation, that is next to impossible. If you bought Tesla stock, you did not sell Tesla stock, and now you're sat on a massive loss, those people will most likely fall into the classic behavioral trap where now I'm just going to disassociate myself from that. Trade. I'm going to keep it on because I'm not going to touch it until it gets back to where it was in 2021. What they fundamentally fail to understand is it is not going back to where it was in 2021. That was a bubble. It's not— you might have to wait 4 decades for it to get back there, right?

Well, Elon Musk thinks he'll be bigger than Saudi Aramco.

Whatever. What— that's what— is that because— is that after Saudi Aramco have collapsed when the world stops buying oil?

Yeah, basically.

Yeah. All right. But so— but I want to move on, right? What's the value today? So the enterprise value today, when it's obviously come off 75%. Okay. Um, and so the enterprise value today puts it at about— well, what is it? Uh, yeah, it puts it at about the same valuation as Toyota. All right, so that this make— this is now back into the realms of at least something that's not stupid. So Tesla are worth the same amount as Toyota, right? Two big what you think are both big giant kind of car manufacturers. Um, however, from a— obviously Tesla's a lot smaller, and in fact Tesla has just one-third of the revenue that Toyota have. So from a revenue point of view, Tesla are one-third the size, and yet they're valued at the same. Okay, which means that Tesla has a much higher multiple So it's price-to-earnings ratio multiple. It's 26 times profit equals the value of Tesla's company today. Toyota's PE ratio is 9. Okay, now there are some good reasons or some arguments to support that, and that's just because, you know, Tesla have got higher profit margins. Um, they've got better sort of capital efficiency. So their profit margins— operating margin, sorry, 16% for the sector, that's really high. Then they've got 18% return on capital. So both of those are much better than the other auto giants. So that supports the idea that they justifiably have a higher valuation. But is it justified that it's that much much higher. Well, here I guess now you're into the realms of trying to predict what happens in this space in the future. Obviously, to this point, Tesla have come along and they've pioneered the EV space, right? But now everyone's, everyone's going in that direction. And so it's a question of, can Tesla continue to dominate. And, and here's where the big kind of question marks come, especially when you get the figures that we saw, um, from Tesla this week, where their fourth quarter deliveries, um, were at 405,000. Again, missed consensus forecasts. So that's the third quarter in a row where Tesla's delivery numbers have missed forecasts, right? And the bigger news, and the much more important news when you're having a valuation conversation, and why the stock— Tesla stock dumped again this week even though it's already 70% off its high— is because in Q4 they made more cars than they sold. They had a 56,000 unit surplus. Now, if you're trying to spin the story that we are pioneers, we're winning market share, demand's off the scale, well, you, you know, you're selling every unit you make, right? Well, they're not.

So if you— and if you're in that situation, then what do you do? You cut prices, right? And that's what we've had. We're just Market's just about to open for final trading session of the week. Yes, they're set to open down 7% today, so they're getting close to $100 a share now, just about $102. So overnight, Tesla cut prices in China for the second time in less than 3 months.

Yep. I get— I mean, I own an electric vehicle and it's annoying. I'm on someone's, um, the company I bought it through, I'm on their their kind of database. So they send me emails whenever they've got surplus stock in any vehicles. And I got an email this morning—

me who sends those, by the way, they're just to you, no one else.

I got an email this morning and look, there's a whole range of stuff on here, but Tesla, the Tesla Model Y, they've got 50+ cars and for immediate delivery. These are cars you couldn't get. It was like a 12-month waiting list 12 months ago. Now they're just immediate delivery because there's an excess of supply. All the other manufacturers, the ones I've never heard of, fine, they've got stuff that's available. But like the Audi e-tron, which is one of the big new ones, there's only 5 of those available, um, and that's available in March. So that's your perfect example. Audi e-tron, 5 available by March. Tesla Model Y, 50+ available immediately. So I think that kind of tells quite an interesting story. Um, yeah, but no, I think Tesla are probably— that— I think it's a really important year for Tesla. One thing is they're quite— because they were so pioneering, they were so early right? It's actually— now some of their models are a bit, yeah, a bit like the Model 3 is 6 years old now and it needs a revamp, it needs a new, you know, a V2 or whatever. Um, the S and the X models, they haven't been updated for over 2 years now. And when you're getting the big gun manufacturers like the Audi e-tron where they're coming to market with their brand new versions, the Tesla stock's looking pretty old. And so competition has really ramped. The Tesla models are looking pretty old. You could say there's— there are macro issues obviously, um, as well, both on the supply chain side, and obviously we've got an inflation crisis and maybe a recession. So, you know, you've got to factor those in as well. But, you know, this 2020— well, you've already seen the stock collapse, right? But 2023, it is either this is the year where the valuation of this business is now reasonable and they consolidate and they go the next step, where in an industry where competition is now fierce Can they stay top dog? That's the big kind of question mark.

Well, the other interesting thing is that SpaceX is reportedly in talks on a share offering that could value it at $150 billion.

Wow.

I, I'd just be interested to know whether for Elon, it's just as we were saying early last year, has it already begun? He's leaving. Yeah, he's been cashing out, cashing out. He gets out 2023, he gets out. SpaceX seems so much more interesting for him. I think the challenge, an intellectual challenge of trying to flip Twitter is compelling for him. He's got Neuralink, he's got Boring Company. I think, yeah, he just ditches it. Tesla becomes a bit of a mid-level EV.

I think Tesla— well, the Tesla valuation now is $390 billion. I don't know how much he's exited. I mean, he got some great exits. I mean, he totally sold 10% at the end of 2021. That's looking genius now, but he's still got a massive holding. So, you know, he's, he's taking a big hit here on this share price decline. So whether, whether it's fallen too far now for him to go I can't leave it now. I need to stay to kind of make sure it rebounds, but I don't know, we'll see. Um, one, one guy— there's a quite a notable, um, New York University, NYU professor, um, who's quite, uh, notable, a guy called Aswath Damodaran. He came up with a valuation for Tesla when they were at their peak, when they were at $1.2 trillion. He said, look, this is insane. I value them at $640 billion. They're now down to $390, right? So on his valuation in 2021, they were double that. Now they're actually not far off 50% discount, right? His valuation is based off the prediction that by 2032, Tesla will be selling 10 million units a year. They're, they're trying to hit 1.9 million units in 2023, 10 million units by 2032. Okay, um, and he predicted an annual compound growth rate of 22%. That would see Tesla having 10% of the world's light vehicle market share. So if Tesla have 10% of the market share— I'm not talking EV share here, talking about the whole, all cars. But of course it's all moving towards EV, so that plays into their hands. But if they have, if they have 10% market share in 2032, a valuation of $640 billion is rational.

What is their current market share?

It's one, uh, I think it's definitely less than— I think it's 1.3%, I want to say. I'll have to fact-check that. Well, actually, electric vehicles— sorry, here's a stat that I do know. In 2021, electric vehicles in the United States only made up 3.2% of the vehicle sales.

Okay, so I got the stats here. So for 2020, Tesla vehicles accounted for 79% of new EVs in the US. 2021, that dropped to 69%. So we're talking of like coming from 70% down to 10%.

So 69% of 3.2, so let's just call it 2%. So they had 2% of the US market share. In 2021. 10% of the global market share in 9 years' time, that's a big ask. That is, that, that is rife with risk, that prediction, actually, now that I think about it more. So I think a lot of people are looking at the share price now and going, you know what— and these are people who don't own the stock, so they can be rational They're like, now it's about right.

Okay, all right. Well, to conclude, my other, um, two gray swans: Kanye runs for president and Harry divorces Meghan. And on that note, we'll close the episode, and I'll see you next week. Thanks very much, Piers.

All right, catch you later.

Take care.