Tesla’s Monster Musk Incentive. Plus, Deutsche Bank’s Jim Reid on Stocks

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It is tempting to kind of, you know, hide away in cash, but I think you have to respect the kind of history of financial markets and respect the kind of history of intervention to believe that you probably do have to kind of close your eyes and invest in assets that probably protect you from inflation, really.

Hello and welcome to the Barron's Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Jim Reid. He's the global head of macro and thematic investing at the Deutsche Bank Research Institute, and he's talking about long-term investing. In fact, he just published a study titled The Ultimate Guide— probably put some echo on a title like this— The Ultimate Guide to Long-Term Investing. That sounds like something that could help. In a moment, we'll hear from Jim about what hundreds of years of returns for stocks and bonds tell him about what's next for investors. Now, before that, I'll say a few words about Tesla and Elon Musk and his trillion-dollar incentive package that comes up for a vote in the week ahead. Spoiler alert, it's going to pass. Listening in is our audio producer Alexis Moore. Hi Alexis.

Hey Jack.

Where is your personal Muskometer? I feel like we haven't heard as much from Elon Musk. I don't want to say he's been quiet, but he's been quieter. I guess the big reason Musk seems quieter is that he left government back in May. He stepped down from that Department of Government Efficiency, or DOGE. There was kind of a backlash back then from investors, including longtime bulls. I'm looking at a report from back in April from Dan Ives at Wedbush Securities. It's titled Musk Facing a Code Red Situation if He Stays at DOGE. That sounds bad. Just looking at the bullets here, it says Tesla has now unfortunately become a political symbol globally of the Trump administration slash Doge. Tesla stock has been crushed since Trump stepped back into the White House. Brand damage to Musk slash Tesla resulted in a terrible first quarter delivery number, and so on. It talks about 25% auto tariffs. It talks about potentially 15 to 20% permanent demand destruction for future Tesla buyers due to the brand damage Musk has created, and so on and so on. Different people have different views on the matter, but we're speaking here specifically about Tesla sales. And Tesla historically has sold electric vehicles to customers who are concerned about the environment and global warming. That's not the only reason people buy, but it's one of them. And that gave the customer base a little bit of a leftward tilt. And since Musk made a rightward move in his politics, The concern was that that would hurt sales, but Musk stepped down from Doge at the end of May, and Tesla stock has actually outperformed the S&P 500 since then by about 10 percentage points. The man just seems to have a knack for sending his stock price higher when he's present and focused, I guess. In fact, its production and profits peaked 2 years ago. Its latest quarterly results were solid, but that was mostly because of the expiration of a big tax credit for EV buyers. There were customers who rushed to get their orders in ahead of the expiration. For October, last quarter's results ran through September. In October, JD Power estimates that sales of electric vehicles will decline 43% year over year. Ouch. You could make a case. I'm not taking sides on this. I'm just saying I have seen this case made that Elon Musk played a part in the Trump campaign. He made generous contributions. And that one of the things that Trump has done with his one big beautiful bill is to bring about the end of those EV tax credits. In other words, maybe Musk helped bring about something that's not great for Tesla, at least in the short term. And so why then are shareholders on the cusp of approving an unprecedented pay package for Musk over the next 10 years? I'll give you a few reasons. One is that Tesla is not just a 23-year-old carmaker whose profits peaked 2 years ago. It's also, as it says, a physical AI company. What I mean by that is it's an early contender in two artificial intelligence businesses, robotaxis and humanoid helper robots, that are as theoretically massive as they are barely existent now. These businesses account for almost none of Tesla's current income and most of its stock market value. I've seen estimates that today's car business accounts for only about 12% of the stock market value. That makes Tesla, even though it's an up-and-running car business with plenty of free cash flow, still a story stock, a stock whose value is based on the seemingly open-ended potential of these futuristic businesses. And if Tesla is a story stock, you need the storyteller-in-chief. Musk is the one who defied the odds for so many years in the electric vehicle business. Musk has said he needs the new pay package to feel comfortable building what he calls his robot army at Tesla. During Tesla's third quarter earnings call, Musk said, my fundamental concern with regard to how much voting control I have at Tesla is if I go ahead and build this enormous robot army, can I just be ousted at some point in the future? That is really the only thing I'm trying to address with this so-called compensation, but it's not like I'm going to go spend the money. It's just if we build this robot army, Um, do I have at least, uh, a strong influence over that robot only? Not control, but a strong influence. I think if you're a Tesla shareholder and you're aware of how much of the current stock price is based on future hopes for robots, you have to be concerned about Musk leaving and whether that would make Tesla just a car company. The second reason I think the shareholders will approve Musk's pay package is because That's what they've done in the past. There was a 2018 package. It was overturned by a Delaware court. Tesla shareholders had a chance to vote to replace it, and they did, and the court rejected that package too. And the matter is still in legal proceedings, and Tesla has since moved from Delaware to Texas. So shareholders have voted with Musk in the past on pay. Betting markets see a high chance of the new package passing. One key investor, Gary Black, says there's a, quote, near-zero chance of rejection. Dan Ives at Wedbush said he has a better chance of starting for the New York Yankees than the comp package not being approved. I have not personally seen Ives swing, but I'm going to assume that his chances with the Yankees aren't great. So what does the new pay package mean? If it's fully earned, it would double Musk's ownership from a current 13% to around 25%. There are certain milestones that need to be hit. One involves a rising stock market value, not the stock price, but the market value, which can rise faster than the stock if there are more shares issued. Along with that are operational milestones. For example, a million robot deliveries or a million robo-taxis in operation. Later targets involve levels of EBITDA, a measure of earnings. So to make all this money, Musk has to put a lot of robots in operation, earn plenty of money from them, and orchestrate a spectacular rise in the market value of Tesla. I suppose you could call that a long shot. I imagine it will be fun to watch. Analysts are fairly divided on the stock on Wall Street. 43% say buy, 35% hold, and the rest sell. I will note that the stock price has shot well ahead of the average target price. When that happens, analysts who are sitting at hold or buy have to figure out whether to adjust their price targets or change their ratings. B of A Securities, who is at neutral on the stock, raised its price target to $471 a share from $341, but it also wrote that the valuation is stretched. It based its price target on a sum-of-the-parts analysis. It mentioned a discounted cash flow analysis built out until 2040. It's got to be difficult to calculate the present value of projected cash flows a dozen years from now on theoretical robots. It estimates that the car business is around 12% of the company's total value today, while robotaxi hopes are 45%. FSD services— that's full self-driving for car owners— that's worth 17%. Energy generation and storage, in other words, solar panels and batteries, That's 6%. And Optimus, those are the humanoid robots, 19%. Alexis, do you have a favorite humanoid robot from fiction or movies or TV? And this is not just a setup to get you to ask me who mine is, but if you want to, you can do that.

Um, I guess CP-30?

No. Oh my.

So tired. Sorry.

Star Wars fans are slapping their foreheads right now. Did you not— you didn't grow up on the, uh, the older Star Wars movies?

Uh, no, you caught me. Um, I definitely just said the first robot that came to mind.

Yeah. Well, those of us in the know call them CP-3O. I mean, C-3PO. Now you've got me doing it. I guess we'll have to both wear that shame. My favorite is definitely Tweaky. From an old TV show called Buck Rogers in the 25th Century. And it was really a robot suit with a 3-foot, 11-inch actor inside. And the voice early on came from Mel Blanc, as in the Bugs Bunny cartoons.

Someone isn't gonna like that.

B of A says that one of the changes to its model that led to the higher price target was a higher valuation for Optimus to account for the potential entrance into international markets. Okay. B of A writes, for Optimus, we use an 11.7% weighted average cost of capital. So specific. And assume a 40% long-term penetration rate in US manufacturing and 20% in US households. I think that means 1 out of 5 of us get an Optimus humanoid robot helper at home. I personally am in if the price is right. I don't know what I have the thing do. Probably a lot of high-fiving at first just to keep spirits up. That's pretty much all I can tell you for now about Tesla and Musk and the pay package. I can't make a call on a stock whose value is based so much on theoretical future robots. I do think Musk has a gift for making the stock price go up. I definitely wouldn't count him out. I don't want to give the impression that I think robots are pie-in-the-sky stuff. They're not. Melius Research writes, there aren't that many investments anymore where you can take Peter Lynch's advice and invest in what you know as a user. Everyone has walked into a Starbucks. But the feeling of watching a Waymo pull up with no one inside is really quite stunning. And most people have not tried it. It may take a decade, but the era of driving your own car is ending in a shift that is in some ways as profound as seeing the first engine-powered vehicles. I'm one of those people who has watched a Waymo pull up with no one inside. Many of them, in fact. If you take a flight to Phoenix and you step outside to the stand where the Uber drivers come, you're going to see a lot of Waymos mixed in, and there's no one driving, and it is quite stunning to see. This is one of a handful of test markets now. I have no doubt that it will become a bigger phenomenon in the years ahead. It's just hard to say how soon, and how much will it cost, and which competitors will pull ahead. But it's not just those details that will make Tesla stock go up, it's excitement about the future possibility for those details. And if that's what you're after, I suppose you do need Musk robo-steering the ship. I don't know if that makes this trillion-dollar deal an incentive package or a ransom, but I think it'll pass and I'll be interested to see how much of the package Musk goes on to earn. Alexis, I want to get to our conversation with Jim Reed. Should we take a quick break?

Yeah, let's take a quick break.

All right, I'm going to hold my breath until we come back. Let me take my inhaler first. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks. Welcome back. Let's turn to the ultimate guide to long-term investing. Can it tell us what the S&P 500 will do in November?

No, it can't quite do that, but it can give us some things to think about if you're worried about the market right now. The— ah, you had a word for it that you said a while back on the podcast, Jack, that sounded like It was a disease, like the bubble, AI bubble disease or something like that.

If you or a loved one has ABD, talk to Jim Reid at Deutsche Bank. Well, Jim can't tell us what stocks are going to do in November, but as I had hoped, there are insights to be gleaned from his study of investment returns going back to the 18th century that have to do with which markets and asset classes investors should favor today. Let's get to part of that conversation now. I think the question on everyone's mind right now is, can this continue what they're seeing? You know, here in the US, I think investors are quite pleased with their stock accounts pushing higher. And I see that overseas for the first time in a long time that the non-US developed markets have actually outperformed this year. So, I wonder, what do you think of those trends given the outlook for growth, given where we are on valuations? Can we continue to push higher in the US? And do you think that ex-US, other developed markets can continue to outperform the US?

If I purely look at the historical data here, I would say that it would expect returns in the highly valued markets like the US to be below their long-term trend. Obviously, what this historical data set can't tell you is whether we're about to see a productivity miracle from the likes of AI. And look, I probably would err on the side of productivity should go up because of AI, because it's probably one of the few things I've seen in my 30-year career that I actually look at and say that could actually add to productivity. But I suppose my concern would be that a country like the US has been the winner on an investment horizon for, you know, 150, 200 years, really. And through that period, you've not really had many paradigm shifts. You've had a steady but really continued progression in earnings, progression in the market. And I think valuations today almost expect there to be a step up, if that makes sense. So from a country that's won spectacularly over time, current valuations almost ask there to be an even bigger step up than you have in the past. But look, the US isn't the only market in the world. In our report, there's 56 countries. So if you do think valuations are high, there are plenty of other countries where valuations are less onerous that could give you decent returns. But if you look at collectively over every country in our data, the one thing that resonates through it is that valuations matter enormously. And without giving away the secret sauce for free, The secret sauce is basically buy low, sell high. That's the kind of foolproof way of making money over the longer term. You buy markets that are fundamentally cheap and just run with them, and you kind of be a bit more circumspect for markets that are expensive. It won't work necessarily on a 12-month basis, even a 3-year basis, but the longer you go out, that mantra of buy low, sell high just spectacularly works over the long term.

I just wonder, in addition to advising the world on investing, you must be an investor yourself. You're putting money away for some future date. How do you feel? How do you feel in terms of your level of optimism, confidence, lack thereof, concern? How do you feel about your, you know, about putting money away over the next let's say decade or two?

I think if you had a financial system that didn't have much intervention and kind of pure capitalism was allowed to run its natural course, I'd probably be a lot more worried about the next 10 or 15, 20 years because we have accumulated a huge amount of debt. Nominal GDP and real GDP are fairly low. But I suppose the lesson from history is that the authorities have got no incentive to let natural markets find their own natural kind of equilibrium. And the kind of pain threshold for intervention and expanding the money supply, expanding fiscal spending, it's still a fairly low pain threshold. The authorities will intervene fairly early. And I suppose the good thing about that is that the longer you intervene and keep the system rolling, the more likely you are to find a pocket of higher productivity for whatever reason. And therefore, it is tough even if you feel bearish and even if you feel that things look a bit overvalued or things look dangerous. It is tempting to kind of, you know, hide away in cash. But I think you have to respect the kind of history of financial markets and respect the kind of history of intervention to believe that you probably do have to to kind of close your eyes and invest in assets that probably protect you from inflation really.

You managed to make that equal parts comforting and worrisome. I mean, we should stay invested because policymakers will not let us fail, but then they can't get away with that forever, you think. And so you wonder where it leads. I don't know. Is there anything in the 200-year record of returns that tells you that this can go on indefinitely or this might end badly? Sort of ongoing intervention in financial markets?

I think for individual countries, it can end badly. I mean, obviously, in a 200-year history, there are examples of countries that have seen you wiped out of your returns, but mostly in bonds, mostly in government bonds, mostly because of wars, to be fair. And I suppose over a 200-year period, you can't rule out there being a few occurrences like that. I suppose it's very rare for equities to be wiped out completely. So you take some comfort there. I just think, look, the lesson that I would probably kind of like people to take away from this report is that it really makes a difference if you buy low valuation markets. Now, obviously, if you buy one low valuation market, you might be unlucky because there might be a particular reason why it's lowly valued and it never actually performs. But I think if you buy a basket of low valuation markets, and avoid those baskets of higher valuation markets, I think you'll be very thankful in 10 or 15 years' time.

When you look across various asset classes and all around the world, is there anything to you that looks particularly attractive and tempting right now where you say this is the place where we should really be overweighting investment dollars for the next decade?

I think when you combine valuations and demographics, I think the emerging market world is probably the best risk-reward. And I'd throw in debt as well to that. So I suppose the problem with the developed market is they've got high debt, bad demographics, and relatively expensive markets, whereas emerging markets have got much better demographic, probably slightly lower debt, and have generally got lower valuations. And I suppose as a long-term investor, you can ride out the inevitable volatility that investing in emerging markets would bring. But I think emerging markets probably does look a better long-term asset class from here than the developed world.

What about bonds? What do you think the outlook is for bonds? I mean, I tend to think you look at your starting yield and that's your best guess about what your returns might look like. Is that too simplistic? What does the data tell you?

I would like to say that there's a very secret, very complicated formula that tells you what bond returns are going to be. To be honest, it's even more certain than the valuations on equities and that the starting yield is very, very, very key in determining what your returns are going to be. And actually, to be honest, if you look at where bond yields are today, they've normalized a long way in the last 5 years. I mean, actually, the last 5 years have been the worst 5 years on record for government bonds. They've normalized, but they're mostly below average. A long-term history. And if you look at the starting point today, our study shows that you'd probably expect a very, very small positive real return from this starting point for kind of developed market global bonds. So it's not spectacular in the slightest. And I suppose that's where equities do offer a little bit of extra kind of bonus return. Even if you thought they were expensive, they're probably still cheaper than bonds on a historical basis.

Any thoughts on gold from here? Once in a while I see, I get your emails and once in a while I see a note on gold. What do you think is next for gold?

That's a very good question. I've always had a soft spot for gold because I'm an inflationist. I believe that the fiat money system we live in since we abandoned the Bretton Woods system in 1971, is very pro-inflationary. Doesn't mean to say every year you're going to get inflation, but I think when you have a fiat money system and a democracy at the same time, then the stars align to politicians and the authorities, central bankers being forced to expand the money supply, forced to expand fiscal spending when times get tough, as they inevitably do, either through a recession or a crisis. So I think there's a pro-inflationary bias to the kind of global system that we, we live in.

We used to hear from people talking about modern monetary theory and talking about how you don't have to be constrained by deficits and things like that, and I don't hear about that as much anymore. I wonder if it's because we're doing it. We just, you know, we're, we're just spending without regard for deficits each year, it seems like.

Yeah, we're kind of living in the MMT world as we speak. But look, I think that tells me, as much as you problems with the financial system, you probably have to have a bias to own real assets if you think you're in an inflationary world. I've always liked gold, but I must admit I've never seen the kind of year we've seen this year where it's up well over 50%. And that's an astonishing climb for what is essentially an inflation hedge. It doesn't pay a coupon, doesn't pay a dividend. So while I've always had a soft spot for gold, I would say that the valuations we have now probably mean a globally diversified equity portfolio will probably have a superior return from this starting point.

Thank you, Jim. And thank all of you for listening. I also want to thank Tweaky from Buck Rogers and Felix Silla, that's the actor inside the suit, and of course, Mel Blanc, the voice.

Imbebebebebe.

All right, that wasn't great. If you have a question you'd like played and answered on the podcast, you can send it in. It could be in a future episode. Just use a voice memo app on your phone, send it to jack.hough@barons.com. Alexis Moore is our producer, huge fan of CP30, loves his work. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. But if you listen on Apple, you can write us a review. See you next week. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.