Jul 16, 2020

Axios Capital

Felix Salmon

Situational awareness: China's economy came roaring back in the second quarter. Chinese GDP was 3.2% higher in Q2 than it was in the same quarter of 2019 — and the growth rate from Q1 was an eye-popping 11.5%.

  • America's Q2 GDP report comes out on July 30. It's going to be one for the record books — in a bad way.
  • Also in data points: June retail sales were back to pre-pandemic levels; the interest rate on 30-year mortgages is now 2.98%.

I'll be on a 2-week vacation when the U.S. GDP report comes out. In fact, this is the last-ever edition of Axios Edge. When I return on Aug. 6, this newsletter will have a new name — Axios Capital. The sign-up link still works, though!

In this week's edition: Economic pessimism, bank profits, consumer debt, a key Senate vote, and lots about Tesla. All in 1,645 words, a 6-minute read.

1 big thing: Tesla as synecdoche

Illustration: Sarah Grillo/Axios

Tesla is the company of the moment — the prime exemplar of just about any big and important trend that you might care about.

Why it matters: Almost every reader of this newsletter will have at least one strongly-held opinion about Tesla. What you might not realize is just how widely those opinions range, and the degree to which they map onto much broader views of the world.

Climate

Tesla, especially after its merger with Solar City, sometimes feels like a Utopian project — an attempt to populate a carbon-neutral future with fast, efficient vehicles that don't contribute to global warming.

  • Tesla stands to be a primary beneficiary of Joe Biden's economic policy, should it be enacted. Biden has promised to spend $2 trillion over four years on a plan that includes: creating 1 million new jobs in the American auto industry; generating clean, American-made electricity; and investing in battery technology.
  • Separately, Biden has pledged to buy "tens of billions of dollars of clean vehicles and products."
U.S. economic policy

Tesla has already benefited from the Fed's zero-interest rate policy following the global financial crisis — a policy designed to incentivize capital-intensive investment.

  • Tesla has raised more than $20 billion in debt and equity since inception, almost entirely in years when it was losing money. Easy-money policies made such fundraising possible.
  • $465 million of that debt came in the form of a direct loan from the federal government.
  • Tax breaks for electric vehicles helped drive many of the company's early sales. Tesla also received tax breaks when building its old and new factories.
The product

Capitalists love and fear natural monopolies. Tesla's flagship product — its cars, powered by its batteries, its home-built software, and its network of charging stations — is years ahead of the competition, and is synonymous with "electric vehicle" for many.

  • Tesla has inspired a host of copycats. But so far none of the EV entrepreneurs, nor even the powerful global automakers, has penetrated Tesla's competitive moat.
  • That could change as EV adoption approaches a tipping point in the next few years, says Axios' Joann Muller, but for now, Tesla is the undisputed king of EVs.

The one thing Tesla hasn't made, despite many years' worth of promises that it was just around the corner, is a self-driving car. That hasn't stopped the company from advertising a feature called "autopilot."

The billionaire economy

Depending on whom you talk to, Tesla CEO Elon Musk is the archetypal cartoon-villain billionaire — or else he's the archetypal planet-saving billionaire.

  • Musk is crude, obnoxious, and worth $70 billion; journalists cross him at their peril. He delights in his status as provocateur, and has never encountered a rule he didn't want to break. All of this makes him very popular among would-be disrupters.
2. From electric vehicle to gambling vehicle
Data: Factset, Yahoo Finance; Chart: Andrew Witherspoon/Axios

For millions of traders and CNBC addicts, the word "Tesla" doesn't mean cars — it means TSLA, one of the wildest large-cap stocks the world has ever seen.

  • On Monday alone, Tesla opened $114 higher than its previous close, then gained another $136 within 15 minutes, then dropped by $324 before the market closed. (Even during the drop there was a half-hour period where the stock rose another $100.)
  • Each dollar of Tesla's share price corresponds to a market capitalization of $185 million, which means that Tesla lost more than $60 billion of value intraday. That's more than the market cap of Ford and Fiat Chrysler combined.

Large-caps aren't supposed to be this volatile. Tesla's Monday peak was 89% higher than the low point two weeks earlier — on no real news.

  • The rise was partly due to small retail investors rushing in, and partly due to short sellers getting squeezed. But ultimately looking for reasons is a fool's errand. (Can a short squeeze really last seven years?)
  • The one known known is that Tesla stock is highly volatile. Looking at the implied volatility suggested by options pricing, there's roughly a 15% chance that when the first Axios Capital newsletter arrives in your inbox on Aug. 6, Tesla stock will either be trading below $900 or above $4,000.

By the numbers: Tesla stock is popular among day-traders who don't like to hold any kind of position overnight. Partly as a result, it opened higher than its previous close every day this month up to yesterday.

  • If you bought one share of Tesla at the closing price each day in July and sold it immediately at the open the following morning, you would have made more than $450 between July 1 and July 15.*

Don't look to Wall Street analysts for clarity. Their price targets range from $87 (Gordon Johnson of GLJ Research) to $2,322 (Alex Potter of Piper Sandler).

  • Coming up: Tesla's second-quarter earnings arrive on July 22. If Musk can manage to eke out a profit, no matter how small, then that will mean four successive quarters of profitability — which in turn means that Tesla will be eligible to join the S&P 500, and index funds with trillions of dollars under management will be forced to buy the stock.

The bottom line: Cars and carmakers have had mythic status for decades. But for the time being it often seems that there's only one game in town.

3. Pessimistic banks

Illustration: Aïda Amer/Axios

America's biggest banks gave us an ominous signal about the economy this week, writes Axios' Courtenay Brown.

By the numbers: The big banks collectively set aside a whopping $24 billion in Q1 for loan loss provisions. With the stock market plunging and coronavirus increasing exponentially around the world, it was only prudent to prepare for the worst.

  • This quarter, they revisited their assumptions from three months ago — and decided that they weren't nearly pessimistic enough. So they provisioned another $33 billion against loan losses.

What they're saying: "The length and severity of the economic downturn has deteriorated considerably," Wells Fargo CEO Charlie Scharf said, relative to the assumptions he made about the economy’s path in the first quarter.

  • JPMorgan said in its earnings presentation that it had increased its forecast for year-end unemployment to 10.9% from 6.6%, and that GDP won't recover to pre-pandemic levels before the end of 2021.

The bottom line: The banks' deteriorating economic forecasts fly in the face of stock-market bullishness. But the stock market is not the economy.

4. Banks' risk-taking pays off ...
Data: FactSet; Chart: Andrew Witherspoon/Axios

Record loan-loss provisions notwithstanding, bank earnings were generally healthy in Q2 — especially among the banks able to capitalize on market volatility.

By the numbers: JPMorgan Chase's investment bank blew away all previous revenue records, both on the trading side and on the investment-banking side.

Why it matters: Trading is inherently risky. Remember that in 2012, a single trader — the so-called "London Whale" — cost JPMorgan some $2 billion.

What they're saying: "This proves that the Volcker Rule limiting Wall Street's banks' speculative principal trading worked until Trump's deregulators gutted it with loopholes," says Dennis Kelleher, founder and CEO of Better Markets. "Just like before the 2008 crash, traders' bonuses will now likely skyrocket, but so will the risk to taxpayers and financial stability from Wall Street's most dangerous too-big-to-fail banks."

  • "That this is happening at the same time as the country is dealing with the most devastating and unpredictable economic crisis since the Great Depression adds insult to injury."
5. ... while consumers derisk
Note: Indexed to 100 = tax-season daily peak. Data: TrueAccord; Chart: Axios Visuals

2020 has been a banner year for debt collectors.

Why it matters: For all that some unemployed Americans are falling behind on their housing and other payments, others have been using stimulus and unemployment benefits to pay down past-due debts.

How it works: Digital debt collection agency TrueAccord has years' worth of data on the behavior of some 12 million American debtors. Those debtors tend to pay more when they can — which always means a spike in debt repayments around the end of February and early March when tax refund checks arrive.

What changed: This year there was an even bigger spike in April, after the $1,200 stimulus checks went out. And debt repayment rates have remained well above normal ever since.

  • What they're saying: "For many people, the stimulus check represented their path to a clean financial slate," write TrueAccord analysts in a recent report. "For some households, the combination of a tax refund, stimulus check, and additional unemployment benefits provided unprecedented liquidity."

The bottom line: When money is used to pay down debts, that's good for individual households' finances, but does almost nothing to stimulate the economy.

6. Coming up: A Senate vote on Trump's Fed picks

Illustration: Sarah Grillo/Axios

Judy Shelton's nomination to the board of governors of the Federal Reserve is the most contentious in recent memory, writes Axios' Courtenay Brown — and it's coming up for a vote on Tuesday.

  • Background: Shelton and her much less controversial fellow nominee Christopher Waller appeared before a Senate committee in February. Now, five months later, those senators will vote on whether or not they should be appointed.
  • Shelton's fringe views, like advocating to return to the gold standard, would have disqualified her from consideration under any other president.

How it works: The Washington Post notes that one Republican vote against Shelton would be enough to derail her nomination.

  • If Shelton and Waller are cleared, the nomination advances to a full Senate vote.
  • Of note: Democrats on the panel — all of whom oppose Shelton — are calling for another hearing before a vote. They argue the testimony earlier this year is now stale, given the swift change in economic conditions.
7. Building of the week: New White Hart Lane

Photo: Jacques Feeney/MI News/NurPhoto via Getty Images

This photograph of one of Britain's newest soccer stadiums was taken during a Spurs-Arsenal derby — one of the most anticipated fixtures in the English footballing calendar.

  • The two North London teams — Tottenham Hotspur and Arsenal — have a long and deep rivalry that always brings out their most vocal fans.
  • Tottenham Hotspur Stadium — the name is a placeholder, pending some massive corporate sponsorship deal — was designed by Populous to generate a deafening "wall of sound" on the inside.
  • The team has been playing on this site — known as White Hart Lane — since 1899. (The White Hart was a local pub.)

The capacity of the stadium is 62,303. This week, it was empty but for the players and a handful of staff.

  • Spurs won, 2-1.

Go deeper: Alternative uses for sports stadiums during the pandemic

Felix Salmon

*The streak broke this morning, when Tesla stock opened $69 below Wednesday's close.