Weekly Digest: Is Tesla Headed for a Massive Crash?

Plus, Japan Embraces an Insane Economic Theory

Welcome to your Sunday digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.

This week’s edition is all about hubris.

In a world plagued by stock shortages, hubris is a commodity in distinctly abundant supply.

One need look no further for an example of this than the world’s most valuable automaker, Tesla.

Longtime readers will know that I have particular disdain for this company and its Twitter-troll leader, Elon Musk.

Tesla is a company built on three things: first-mover status in electric-car technology (that users regularly complain isn’t up to snuff), excellent marketing, and investor hysteria built around an unwarranted cult of personality.

The third factor is arguably the most important.

Trading Tesla stock is so popular among retail investors, and particularly uninformed young investors, that it has become a business onto itself. The Financial Times has called this the “Tesla financial complex.”

The company joined the S&P 500 in December 2020 with a weighting of 1.6%. Less than a year later, it was weighted at 2.5% and had contributed almost a quarter of the index’s returns.

In fact, investors have pumped the value of the company so high that it is now worth more than the next seven biggest automakers…combined. Those companies: Toyota, China’s BYD, Volkswagen, Mercedes, BMW, General Motors, and Ford.

But what has Tesla done to deserve all this investor cash and its lofty valuation?

The answer certainly isn’t: sell cars. In 2021, Tesla sold just under 1 million vehicles. Toyota alone sold 10.5 million.

Of course, investors will point to the rapid pace at which Tesla is scaling up production and say it’s only a matter of time before Tesla overtakes its rivals in terms of sales volume or profits.

But that’s not likely to happen. Ever. There’s way too much competition from all the other proven car companies of the world that are all building sporty electric vehicles with better technology.

That’s why Tesla remains a massively overvalued stock. It’s also a high-risk investment…as a recent news story highlights.

This week, we learned that U.S. auto-safety regulators have stepped up their investigation into crashes involving Tesla’s Autopilot system. The National Highway Traffic Safety Administration said it was upgrading an earlier investigation after identifying new crashes.

If the NHTSA identifies a fault with the Autopilot system, Tesla could potentially have to recall as many as 830,000 vehicles made from 2014 to 2021.

Autopilot is Tesla’s name for its driver-assistance system, which can help with changing lanes and keeping a safe distance from other vehicles.

Tesla says it instructs drivers using the Autopilot system to pay attention to the road and keep their hands on the wheel. But clearly many drivers are not doing this. And can you blame them?

I mean, the system is called Autopilot. Tesla named the system as something it is not. And then advises people not to use it in the way it is titled.

It’s like building a device to fry eggs, naming it Toaster, and then complaining when people try to stick bread in it. Like I said, hubris.

Maybe the NHTSA lets Tesla off the hook on this one. Then again, maybe Tesla has to recall hundreds of thousands of cars. The NHTSA did note in its filing that driver misuse of Autopilot doesn’t preclude the agency from determining that the technology is defective.

Either way, Tesla as a company promotes itself as more innovative than it actually is. Eventually, that’s going to come back to bite it.

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The next passenger on the Hubris Express is the nation of Japan, or at least a number of its political leaders.

Japan is one of the world’s most indebted countries. It owes $8.3 trillion, or around twice the size of its economy.

Previous Japanese governments have promised to reduce this massive national debt by 2025.

Now, however, the country’s new prime minister, Fumio Kishida, seems to be reversing course on that promise.

A powerful faction within the ruling Liberal Democratic Party has embraced an insane, fringe economic theory—something called Modern Monetary Theory. This theory can be summed up as such: debt doesn’t matter because countries can simply print more money.

Yeah, it’s actually as stupid as it sounds. I mean, that worked out great for Weimar Germany. And Venezuela. And Zimbabwe. I’m certain it will work just swimmingly for the Western countries now in its thrall.

Despite that, it seems Kishida is actually listening to this nonsense and promising massive new spending.

I share this story because there’s a real danger that MMT also gains a foothold in the U.S., with a number of prominent economists now promoting this idea in major publications.

To be clear, MMT would be a disaster.

There is one, simple inescapable fact we need to remember about national debt: Every dollar spent by a government must ultimately be recouped through taxes or other revenue. Debt does not vanish. Debt always wins…or extracts revenge. Period.

If Japan has truly embraced MMT, it’s headed for a massive default in the years ahead.

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The final statuette in today’s Hubris Awards goes to Japan’s East Asian neighbor, China.

China, as you likely know, is doggedly sticking to its zero-COVID policy…despite the fact that zero-COVID seems pretty impossible in the face of the highly contagious Omicron variant.

And yet, China will not relent.

This week, it ordered over half the residents of Shanghai—population: 25 million—to undergo COVID testing.

This order came just eight days after the city ended a weekslong lockdown that was one of the harshest experienced by any city throughout the entire pandemic.

Those who must undergo the new round of testing may have to remain confined at home until the results are in. And anyone who tests positive is likely facing an extended period of confinement, either at home or in a state-operated facility.

If a major outbreak is detected, it’s highly possible another mass lockdown will be imposed.

This new development makes you wonder what China’s endgame is with COVID. Clearly, this strain cannot be contained…so why persist with these restrictive measures?

Are China’s local leaders and health officials unwilling to change course for fear of embarrassing the country’s all-powerful president, Xi Jinping?

Are China’s homegrown vaccines so ineffective against Omicron that the government is worried about mass deaths if the disease runs wild?

Or are the lockdowns a massive social experiment to see how long people will endure them?

Whatever the answer, believing that the virus can be contained at this stage in the global outbreak is simply hubris.

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.

Enjoy the rest of your Sunday.