Musk Hits $400bn & Finance Meets Chicken Wings (and Shakira!)

Hello and welcome back to the trading floor. And I was trying to quickly go back, Piers, to see, I think it might have been maybe October time, something like that. You were like, yeah, 6,000 is top. That's the top. It's in. Here we go.

I see.

Yeah, I was just clocking in. 6,100 print yesterday in the S&P. So yeah, I thought we could talk a little bit about stocks being up.

Right. Yeah, you're going, you're going there, are you? All right. I actually, I think my call was, I don't know, it was way lower than 6,000, wasn't it?

I think that was when you were saying like, you know, the top's in. I think, can't remember when it was.

Well, that was back in, uh, August.

Okay.

And I was saying the top at 5,700 was in, but then the Fed cut 50 basis points. Which was not in my thesis, so that kind of changed the picture. And then obviously Trump, the Trump effect wasn't in the equation there either. Yeah, look, you know, I'm not perfect. You know, I'm gonna be wrong, I'm gonna get 'em wrong sometimes.

Yeah, you know, I know you get these things wrong on purpose just so you can humanize yourself to the average Joes like me, that you are indeed vulnerable at times to the market's ebb and flow. But look, in terms of what we're going to talk about today, there's kind of 3 topics. We've got Tesla obviously caught up in this move higher towards year-end, so we can talk a little bit about that and the Santa rally. I think Tesla shares rose 6% on Wednesday, and that indeed lifted the company's stock price passed its prior high reached in 2021. That does mean then that the world's richest man just got a little bit more richer. Uh, and indeed there's other things, a lot more richer. Um, he's actually the first individual in history to surpass a net worth of $400 billion. I think I saw Bezos was clocking second and he's a, he's a decent hundred bill off. the race at this present point in time. There's also SpaceX we can mention as well, uh, in a moment. So that's story number 1. We'll dive into that. Then we'll look at, uh, Wall Street's complex debt bonanza hits its fastest pace since 2007 as banks sell bonds backed by revenues from chicken wings, music catalogs, including your favorite Shakira, and oil wells. Uh, and all of this centers on the subject of structured finance. Transactions, which I thought, you know, it's a pretty, you know, the headline pops on the FT. It's quite an interesting one, lots of interesting images. But I thought actually there's probably more to this to understand. I know you're already great at explaining that. And then finally, we'll look at, we did have some inflation data out of the US this week. And what does that mean? Stocks actually rallied in response quite aggressively on Wednesday. And we'll look at the final Fed meeting that's coming next week, I think on the 18th. And so what's expected, does what's happened this week change the game as we come in towards year-end? So let's kick it off with, um, with Tesla then. And then just to kind of, as I said, it was up 6% on Wednesday. We're recording this Thursday morning. The stock, which doubled in value last year, is up 71% this year, with almost all of those gains coming post the Trump election. I was just having a quick look actually of some of the stats. The company shares, Tesla, were actually down nearly 30% in the first 3 months of the year.

Yeah.

Um, you know, not that this is investment advice, but I've learned through through the years that whenever my, whenever my combination of hatred, jealousy, whatever it is I feel towards Elon Musk, when that peaks in negativity, basically I buy. Yeah. So I was very lucky to, uh, yeah, get a slice of that when it was trading. I think it was like $200 or something at the time, or just under.

Wow. Less than that. I mean, the low of the year was on mid-April. $145. Yeah. Uh, it's tripled since.

Yeah. That's turned out, you know, Elon's not so bad in my book now.

At the end of the year, the family's gonna get some, uh, some extra special Christmas presents.

Yeah.

Courtesy of, um, yeah. So shout out to Elon. Um, yeah, look, it's been an amazing run. It was rally and Tesla were rallying Anyway, and particularly, I mean, yeah, so $145 was the April low, bounced to into the summer, it kind of went up to about $250 as a kind of top, right? So that in itself, $145 to $250, that was really recovering what I would describe as an oversold situation back in the spring. Okay, back to $250, okay, fine. There's a lot of, you know, there's a lot of Musk and therefore Tesla haters out there, and the media are probably negatively biased towards, um, Musk, you might say. And so look, that was driving the stock lower start of the year, and it got to the oversold situation, rebounded to around, you know, to kind of trade between $200 and $250, right? Then the Trump sort of leg of this story kind of kicked in, and as Elon got on the Trump bandwagon, and we've since discovered— I mean, I think, is it now that He's, he backed him to the tune of $180 million. Um, that's how much he donated, I think. Is that right?

It was actually the stat I've got is a touch more than that, $277 million. Wow. But I was gonna say that actually, I think Elon also gets the crown for the best trader of the year. Cause he basically spent, he put up $277 million, he's taken out $372 billion.

Yeah, that's a good, that's a good deal. And you know, you gotta love democracy, right? And you can just buy your president and, um, get him into the seat and then, um, be the person to lead the deregulation efforts that will then, you know, remove a lot of red tape barriers to pretty much all of his companies. And so Um, it's genius. Now, some might say it's not particularly, uh, uh, sort of democratic and the system's kind of broken. However, yeah, what a trade. I mean, look, he— when he— what, what you can say about him is when he has a plan, when he has a strategy, when he has an idea, he's all in. Then he just goes for it. And yeah, backing Trump to the tune of $270 mil, I mean, he could have lost, right? Trump could have lost, in which case that would have been a whole load of waste of money, and we'd be sat here talking about how Tesla's back down at the lows of the year. But he didn't lose. So, um, yeah, here we go. Tesla smashed $400 this week. And actually, what was really key was that November, um, end of October, start of November 2021, where you would say it was kind of a bubble, the 2021 sort of meme stock, uh, kind of tech, uh, IPO valuation bubble. Tesla got up to, I think it was $407, was the high in 2021, then collapsed. Um, and now it's back and it's broken that 2021 high, and, uh, Elon's a happy man.

Yeah, and talking a happy man, SpaceX this week and its investors agreed to buy $1.25 billion of insider shares that effectively valued the company at $350 billion. So that alone saw his net worth go up $50 billion. So he's actually worth $439 billion. We shouldn't skimp him for the $39 billion there on top of the $400. Um, but I was having a look of how much does he actually own in a lot of these companies. I've got a couple here. So Tesla, you probably know. Yeah, I do know.

12%, and he's trying to get that to 20, but Delaware, the court battle goes on and he's lost again. Delaware have again blocked the share award deal that was voted through by Tesla's board and shareholders, um, and that was linked to revenue growth targets, you know, between the years 2019 through till today, and he's hit all the targets and, but Delaware saying, well, you can't have your equity award. But if he did, if he— if, I don't know, he'll appeal obviously. And if he ends up getting that through, that would put him up at 20%. But for now he's at 12. Yeah.

Yeah. So SpaceX, which just got valued at $350 billion, which would mark as one of the world's largest companies in itself. Um, he has ownership of 42%.

Oh, wow.

Yeah. So 42%. And then he also owns 54% of xAI, his AI company founded in 2023. I just want to repeat that. He founded in 2023. It's now valued at $50 billion.

Yeah, I was going to say it's $50 billion. Yeah. So he owns what? How much of that? 54% did you say?

Yeah, 54%.

Yeah. Okay. All right. I mean, that's, that's actually higher than I, especially the SpaceX one. That's more than I was I would have thought, actually, but I guess he kind of got diluted on Tesla in the early days. Um, and look, Tesla almost failed. I mean, in the financial crisis, they were like days away from just going bankrupt, and he kept putting more money in. And I guess it was those periods where he was raising— he was desperately trying to raise capital to keep the company alive. And each time you raise capital, you're selling equity, you're getting diluted. Whereas I guess with SpaceX, he probably has never been quite in that such a desperate situation for external funding. And so yeah, that's why he's less diluted.

Yeah, and in the battle of the billionaires, uh, of course Musk, knowing this new fact, couldn't help himself. And he said on a tweet on Tuesday of this week that if Tesla does become the world's most valuable company by far, that short position will bankrupt even Bill Gates. And this, of course, all comes after— there's a conflict between the two stemming from Gates's undisclosed short position that apparently he has, uh, in the Tesla stock. There's some reports— I think it was a Musk book that was written They were saying that Gates got squeezed for about $1.5 billion at one point.

Wow. So yeah, if he's, if he's still in that short, that has been a painful couple of months.

Yeah, it's the big boys' table, that is.

Yeah.

So tell me a little bit though about what Wall Street thinks of this. So investment bank sell-side institutions are obviously analyzing these companies, Tesla being one. What are they thinking?

Well, It's a real divide. There's a split community on Tesla. It's very, uh, it's very sort of bipolar, this, this kind of which camp are you in. So the, the kind of bearish negative lot, and actually there's more of those because on average right now the average Wall Street equity research target, so these are right at all these banks, okay, you got these equity research division. And so you'll have desks that are specializing in different geographies, different sectors, right? So you're going to have people covering Tesla at all of these banks. So when we say Wall Street's average sort of price target, we mean, right, take all of the researchers covering Tesla from all of the big financial institutions, what are all of their individual price targets? And their price target is just saying, well, based on their individual valuation model, where the researcher has input a load of assumptions based on what they think into their model, and it spits out a valuation for the firm, right? And whatever that valuation is, well, okay, what does the share price need to be to equate to that valuation? And then, right, that's their price target. But then how does that compare to the actual share price trading on the exchange? And then you get this differential, and then the— if you're bearish, You're in the camp where you think that Tesla is an auto company and it makes cars, and you're valuing it compared to other auto businesses as comps, and you're thinking about Tesla's future revenues being driven by their ability to win more of the EV market share, their ability to scale up production of electric vehicles and sell those and sell them profitably. And what's the market share for electric vehicles, right? And if that's all you're basing your valuation on, well then yeah, $400 is way too expensive. And actually Wall Street average target at the moment is $290. $290! It's trading at $426, right? So look, there's a lot in the bear camp. Now if you flip over to the opposite end of that, that spectrum, then you have your analysts are saying, look, it's not— and actually this is what Musk always says, don't value us based on an auto company. Basically, the future of this business is self-drive. The future of this business is robo-taxis. We are going to disrupt how human beings use cars. And then secondly, it's robotics. And, you know, not only is that beneficial kind of in a second dimension for Tesla in terms of their profit margin, because, you know, Musk will tell you, in 5 years' time, there won't be any humans building the Model Y. It'll be built by robots. And so, right, profit margins could improve because you're not paying human beings' salaries and all the rest of it, right? So it's about the future, it's about robotics, and it's about, you know, his robo-taxi taking over the world. Now, if you're valuing it on those terms, well, sure, you know, that's— well, I guess it's very hard to imagine how big that becomes. And this is why there's huge differential in people's ideas ideas as to what the value of this business might be in the future.

Yeah, and Musk said during an earnings call— I had a look— in October that he intended— so this is pre-election— he intended to use his sway with Trump to establish a federal approval process for autonomous vehicles, because currently that happens on a state level. So surely if he was able to change that law, just that alone, the valuation of this company would significantly increase immediately.

Well, by— well, that's why it's increasing. So if Biden was blocking Tesla's— Tesla's self-drive technology, um, they call it Full Self-Driving, okay, FSD, all right? That's their technology. If you think about another comparison is Waymo, which is Google's version. They use LiDAR That's their technology, LIDAR, right? Now Biden approved LIDAR and they're away. He's been— Biden has been blocking the approval of FSD, right? The idea is now Trump will lift that and fine, Tesla are now away to the races. The main differences are that the Tesla Full Self-Drive thing is kind of more of a software-driven, more of a scalable way of doing things, whereas Waymo's is more of a hardware-driven, you know, this— so Waymo use LiDAR, it's a laser thing. So they— lots of lasers on the vehicle, send out laser shots, they rebound and come back, right? And the technology is measuring, well, how long is it taking to come back, therefore how far away are different objects, okay? So that's the Waymo style. And then they have to use high-definition, um, kind of roadmaps, right? And this is the problem with Waymo in terms of its scale, that there aren't that many high-definition enough kind of, you know, most of the world hasn't been high-definition mapped yet. And so there's a bit of a constraint there. Now with Tesla, it's more about using cameras so that the software can see, and essentially the software is trying to behave like a human being and can kind of drive everywhere, right? Um, it's thought that FSD is more scalable, but it's not quite as good as Waymo's version at the moment. But the idea is it'll get more intelligent with all the data that Tesla are pulling and the training that's going on. And the idea is that it can be much better and it can go everywhere and it's more scalable, and Tesla will win the fight, right? That's the idea if you're a Tesla bull. So yeah, stuff like deregulation, that's, that's right in— that's why this stock is rallying, is because the blocking of the Biden administration will be removed and this will be a huge benefit. And back to the kind of Wall Street analyst thing. So this week, another couple of reasons why the stock's been boosted and it's gone to new all-time highs is two, two of the big guns, Goldman Sachs and Morgan Stanley, have raised their price target for Tesla. Okay, Morgan Stanley, a guy called Adam Jonas, uh, he's been one of the more bullish. His, his price target before he's raised it now was $310, which was above the street average. Okay, he's raised it to $400. It's just quite funny that it's already trading above his price target. Um, but what's even more hilarious is Goldman Sachs. Because they, uh, the guy at Goldman Sachs had his target at $250. So he's in the kind of bearish camp. It's an auto company, it shouldn't be worth this much. Price target $250. He's basically caved and said, all right, I'm wrong, I'm raising it to $345. It's trading at $425, so you'd need a 20% sell-off to get to the Goldman's new raised price target. So yeah, the Goldman's analyst is You know, if you've been in the bear camp, at least at the moment, if you believe in this rally and you believe that, you know, Tesla will deliver on all of this future stuff, then yeah, Goldman's are looking a bit silly at the moment.

All right, well, let's, um, let's park Elon for now and let's move on to this other story which was talking about structured finance transactions. There's a lot here about parallels to the financial crisis, packaging up these different assets using as collateral. There's also things about buying annuities, income-producing investments, insurers. There's quite a bit here to explain. Perhaps we could start with the market size. One of the headlines that FT were reporting was that the global volume of structured finance transactions has hit $380 billion this year, and that figure is up by more than a fifth from the same period a year ago. So perhaps we could talk about what are structured finance transactions and then why have they been going up?

Um, there's a division in investment banks called structured products, and people work in that division, and their job is to come up with financial products, invent financial products that their clients would be interested in buying. So who are the clients? Well, you know, let's just make this simple. It could be a high net worth individual, all right? And right, what does that client want? Do they want income? Do they want just capital appreciation? Right? And this is— they're your kind of broadly your two types of clients when you're thinking about high net worth individuals. And it depends where they are in their life as to what they want, right? So if they're old, and retired and not earning a salary anymore, then you typically would need income-bearing, um, instruments so that that individual can invest in that, and that bears income, as in it pays them an income every whatever, 6 months, and then that income they can use obviously for their day-to-day life because they're not earning a salary anymore, right? If you're much younger, then you're not retired, you're still working, you still have a salary, you don't need income from your investments necessarily because of the the salary you've got. And so there is more about capital appreciation, which is, right, invest in stuff which— whose value is going to go up, and I want to make a profit from that value increasing, right? Um, so it's just kind of building and increasing your wealth. Now, the baby boomers, um, are retiring, and this is that kind of portion of the population, um, where we had a spike in the birth rate following the Second World War. And that spike in the birth rate, those people are now hitting retirement age. And so there's thought to be this kind of increase in demand for more income-bearing type instruments because they're now retiring and they want to park the wealth they've created through their working life in instruments that then bear income for them to live off for their retirement. Okay, so look, that's the kind of premise. Now, you know, as markets evolve, like any industry, you know, new stuff gets invented, you know, clever people coming up with new ways of trying to generate income. Okay, now with income-bearing instruments, you've got a range of risk that you can take, right? And the general rule, the more risk you take— and really, with an in— with a With an income-bearing instrument, it's like fixed income, right? So let's talk about a bond, which is a loan. So you're essentially loaning someone money, and then that borrower is paying you interest every year, right? So the risk there is the default risk. It's the risk that the company will go bankrupt. All right, now the higher the risk of bankruptcy, the higher the default risk, well then the higher the interest rate. So the lender is taking more risk because there's more chance you're going to go bust. For that risk, increased risk, the investor needs a higher interest rate. Okay, so there's a range, right? We can be super low risk, but that means we're going to get a low interest rate, or we can be super high risk and get a really high interest rate. Okay, now these clever people working at these banks in structured products, you know, come up with these kind of complex products. And actually, you mentioned that volume. So 2024, we're at $380 billion worth of these fancy complex products that have been sold by banks. Okay, that is the highest amount in any year since 2007. Um, so we broke the 2021 high this year. But in 2007, we were nearly $750 billion. We're $380 billion this year, and everyone's going, oh my God, new highs, new highs. It's nothing. We're literally half of what got done in 2007. What happened after 2007? The whole world collapsed, and we had the financial crisis, and that was driven by one of these in particular, one of these complex products called a CDO, okay, a collateralized debt obligation. So that's one of these fancy products. Basically, it's packaging together lots of different loans, okay, into one product. Now the product has different tranches, different layers. If you think about, if you think about pulling in all these loans and then you're categorizing them in terms of their risk, okay? And you have the kind of senior debt end of the, the tranches, which is your lowest risk that pays the lower interest. But then you get a whole range of risk factors, and then you get your junior debt tranche, which is your highest risk and the highest interest-bearing part of the package. But then you're packaging it all up as an investment bank, and then you're selling it to your clients. And your clients, what are they buying? Well, they're buying a range of loans. So you're not now— basically, it's diversifying your risk from the client's point of view because you're buying a product that's got a huge diversity of exposure across loads and loads of borrowers. Okay, and it's packaging it up in a way where, yes, there's some higher risk stuff in there, meaning that on average then the interest rate that you'll get for buying the package is higher than if you would just buy a normal, whatever, Apple corporate bond, which is super low risk and you don't get any interest from. So it's a way— essentially, it's a way of clients earning higher interest rates from lending money, but diversifying your exposure by spreading it over huge numbers of different loans.

It sounds like the perfect cocktail for, uh, immoral behavior in the pursuit of satisfying your client, in the pursuit of wealth creation and revenue, uh, targets. But yeah, I mean, one of the things here that was, um, that was— they were talking about then was what are these underlying assets.

Yeah.

And just to make sense of where this headline from the FT was coming from, uh, one of those things you hear a lot now is music back catalogs. I think that was a big thing about Bowie, wasn't there, a few years ago? And then Shakira was the one, because obviously I would imagine putting Shakira on any article probably increases a click rate, uh, by a considerable margin. Um, but the other one was spicy chicken wings. I think it was tied to franchise fee revenues out of US restaurant chain Wingstop. Some of our American listeners might have some Wingstop fans. Tuning in. But yeah, it was amazing because it talked about oil sales from ExxonMobil-backed wells. It talked about demand for compute power from data center operators. I mean, they're going to some far corners, um, to try and make these, these products, it seems.

Yeah, all they're doing is trying to find companies that want to raise capital, right? Because they want to invest in their business, or they don't want to invest in the business, or they want to pay themselves a dividend, or they want to buy back shares in their business, right? You can borrow money for all of this stuff, but what they're looking for are businesses that have stable kind of revenue streams. So the music back catalog thing is a perfect example, right? Bowie's music— people are not going to stop listening to that. It's stood the test of time already, and it's going to continue to stand the test of time for the next decade, 2 decades, 3 decades, who knows, 100 years, whatever. That's a very stable income-generating, uh, asset. Okay, so right, we'll lend you money, um, and then from that, you know, you the borrower, well, you're going to pay us an interest rate, right? So that just becomes then a loan. One of these many loans to your chicken wing producer, to your Shakiras, to your oil producers, whatever. Package them all up into one product and then shovel it out the door. Sell it to your clients. The best thing to do, The Big Short, the movie, one of the greatest of all time. Just Google Big Short, Ryan Gosling. He explains this perfectly. There's that clip where he's trying to sell a CDO to a hedge fund. He's a guy who works for Deutsche Bank, and he's out there, and he explained— it's such a good scene, just watch it. That tells you everything you want to know about CDOs and the dodgy side of the industry and the shit that got hidden in these packages, right? And then ultimately, this stuff got sold, $750 billion worth got sold, and in the end, it all collapsed because these tranches You know, defaulted, and then the loans defaulted and everyone lost all their money and, uh, we had a major crisis.

Yeah, that's such a great scene. And if anyone hasn't seen it, it's only about 5 minutes long. Yeah, but it has— yeah, it's absolutely brilliant. I was about to do some, some impressions about— can you smell that? Can you? I won't go there. I won't go there. I won't lean into the fact that I'm Chinese and I sit in meetings pretending I can't speak English. To increase my, my prowess in mathematics. But yeah, we won't, we won't go there. All right. Well, let's, let's move on and let's talk about the final topic, which was we did have some inflation data this week and it feels like I know you've talked about before, we've kind of moved to the labor market away from inflation. Inflation obviously still very important, but this seemed to just kind of come and go without too much mainstream interest, but the market did react yesterday. So how did it react? What were these numbers? And does it ultimately have any bearing for what the market's thinking going into the final Fed meeting of the year?

Yeah, I mean, so the market reacted positively and it got a boost to the upside. And, you know, NASDAQ all-time highs, Tesla all-time highs, we've spoken about, but, you know, everything was rising. The Mag 7 were up, generally a positive sentiment. And that's really because the inflation report landed and it was all in line with expected. There were no, there were no bad surprises in there. That's really the main takeaway. We had a bad surprise last time, which when in October, the October data, inflation data that was announced mid-November, saw a surprise, you know, surprisingly high uptick in inflation. It was like, oh no, inflation's coming back. Are the Fed going to be able are able to keep cutting, all that kind of stuff. And here it's not— there were no negative surprises. The core inflation rate actually remained unchanged compared to the month before at 3.7%— oh, sorry, 3.3%. So we've had 3 months in a row of 3.3%, meaning that people are less concerned that we've got another upturn in inflation. It's kind of ticked up one notch and then it's flat. So it's kind of, we're still flat, you would say, at the bottom of what's been a downtrend. And I'd say, why did the market go up? Because it's just about next week. You know, the final thing on the docket for 2024 is the Fed meeting. It's next week. They'll make an announcement, 18th of December, and they will tell us, are they going to cut rates again or not? And the thinking off the back of that inflation release yesterday is that there's nothing in that inflation report to stop them cutting. So the probability of a cut next week has gone up a bit. And so people are expecting that final little gift from Jerome, that little Christmas prezzie, just to keep this Santa rally going into year end.

Yeah, it's actually priced at 99%. For the 25 basis point cut. And I was just looking out that the next priced in cut beyond that would be March, which is the second meeting of the year where it's 54% at the moment.

So that's what— that's really what we want to know from Jerome next week is, I mean, he's going to cut and then it's like, what are you doing next year? And the thought now is they'll slow. They're not going to cut every meeting. And so they'll skip one, no cut in January, then they'll cut again in March is the current thinking. But we'll see where we are in March, right? But at the moment, I think there's 4 cuts next year that are kind of, uh, if you look at the dot plot matrix, there's 4 cuts. So that's one per quarter. Um, so March, June, September, December. So they'll, you know, one, they'll cut every other meeting is the current thought. And I don't think Jerome's going to say anything different next week. He'll cut, he'll keep the messaging the same, and then we'll kind of, you know, drift into year-end with these markets, you know, having completed what has been a remarkable, remarkable year for equities given where we were thinking. You know, we're nearly— the NASDAQ's nearly 30% up here. I mean, that's a good year.

All right. On that note, we'll leave it there for, for this week. I think we've got maybe one or two episodes left. I think the plan is, is that we're going to invite Stephen and have all three of us on to go through a couple of things to look out for in 2025. So yeah, we'll see you then.

That's my kind of three-way.

No comment. Okay, everyone take care. See you next time.

See you later.