January 29, 2024 | Premium Service | In this issue of The Institutional Risk Analyst, we revisit some of our earlier comments to benchmark our prognostications with the actuals. Banks, China, fintech and crypto – you know the list. All share a common thread in that the collective investment mania of the 2020-2022 period has now ebbed.
Let’s start with China, a country we have studied for decades and is now sinking into an economic crisis engineered by the Chinese Community Party and paramount leader Xi Jinping. In China, only politics matters. When the father-leader totally screws up the economy, nobody says a word. Sad to say, command economics as practiced by the CCP under Xi or the Biden Administration in the US does not seem to deliver positive results.
A Hong Kong Court has ordered the wind-up of what remains of isolvent China Evergrande, one of the largest real estate developers with over $330 billion in debt. The Chinese government has announced a rescue of the financial markets, but it is unlikely to be sufficient. We wrote last August (“China's Debt Crisis Accelerates”):
“Markets and media are fussing about an active ‘defense’ of the yuan mounted by the People’s Bank of China, but the Chinese currency is as stable as a cold dead corpse lying in Tiananmen Square. Compared with the Japanese yen or the dollar, the yuan is an irrelevancy. And there seems little question that the yuan and China are greatly overvalued.”
The collapse of China's property sector coincides with mounting debt and falling population, both part of a narrative of accelerating deflation. It is notable that China has just prohibited securities lending for short-selling of domestic securities. Meanwhile, some bold foreign investors are deploying long positions in China to take advantage of an eventual rebound. Charlie McElligott at Nomura writes:
"We’ve seen persistently large Buyside positioning for the China / EM “Right Tail” trade in the recent trade on PBoC “stimulus / easing” expectations paired with looser R.O.W. policy / “Short USD” outlook, occurring with even more rigor now that China PMI’s “triple-dip” below 50 into contractionary territory yet again to start the year on enhanced risk / reward profile."
The property sector is not the only source of deflation in China. The implosion of the market for electric vehicles is going to add big losses to the ledger for Chinese companies. China’s cities are littered with thousands of unwanted EVs, as Bloomberg reported last year. But the biggest story is the turn away from EVs in many western economies.
In 2021, President Joe Biden heralded the arrival of the EVs as the start of a new era. Now Ford Motor (F) is cutting production of its loss-leading F-150 Lightning pickup. Ford lost $36,000 for every F-150 EV sold in Q4. Was Toyota Motor Corp (TM) leadership right about EVs? Yes they are. The green progressives in the Biden Administration are wrong. Shame on Ford for allowing themselves to be bullied into wasting billions in shareholder funds on EV mania.
The political push for electric vehicles (EVs) is collapsing as subsidies for these lithium battery-powered toys ebbs. Most of the G-20 nations are up to their ears in public debt. There's no spare cash around to subsidize the infrastructure needed to support widespread adoption of EVs. Yet none of the nations that pushed for private production of EVs ever asked if doing so was possible.
In our 2010 book “Ford Men: From Inspiration to Enterprise,” we noted that Henry Ford, Thomas Edison and many other 19th Century inventors wanted to build electric electric cars. Such were the obstacles to using batteries, however, that Edison ultimately advised Ford to use gasoline as an energy source. The rest of the industry followed.
Not much has changed in the intervening 120 years since that conversation except greater efficiency of devices. Of note, the giants of electrification a century ago were working in Detroit years before Henry Ford built his first car. Edison created the Edison Electric Company in 1889. And all shared a vision of a fully electric world. Yet the technology remains lacking.
TM Chairman Akio Toyoda, speaking at the Tokyo Auto Salon, noted that people are “finally seeing reality” on EVs. No surprise to readers of The Institutional Risk Analyst, the auto executive repeated his bearish forecast for EVs, predicting that just three in 10 cars on the road will be powered by a battery. And Dr. Toyoda is probably being kind.
We own TM and have followed Japan’s premier automaker for decades. TM moves very slowly and with deliberation and purpose, two qualities that are alien to many American business leaders. Dr. Toyoda knows that EVs never made sense commercially.
EVs are not particularly practical (a/k/a safe & reliable) for consumers, they are very expensive to manufacture to minimum safety standards (forget China EVs), and EVs are not particularly green. Notice in the chart below that the explosion of Tesla Motors (TSLA) coincides with the manic market volatility in 2020. Yet the company went public in 2010.
Source: Google Finance (1/26/24)
Watch the migration of TSLA from techology novelty to automotive manufacturer as the stock sinks below 50% of its all-time high. Part of the challenge facing TSLA and Elon Musk is that all of the makers of EVs are becoming familiar. TSLA was once highly differentiated and desirable, to borrow the branding measure of Young & Rubicam, but today it is increasingly valued by investors for being a car maker.
Leaving aside the vicious economics of the global auto business, the legacy environmental cost of mitigating the pollution from electric vehicles and lithium batteries makes EV manufacture even less attractive. In fairness, we must add this cost to the larger electronics waste heap of solar panels, PCs, displays and smartphones, and other complex silicon devices.
As described in the 2017 Denis Villeneuve film Blade Runner 2049, the remediation of human waste is the growth industry of the future. Recycling one solar panel costs $15 to $45—significantly more than the $1 to $5 per-panel cost of just sending it to a landfill, according to a US Department of Energy. Many states are considering stiff taxes on electronic manufacturers to compensate for the cost of remediating the waste from their products.
Now let’s take a look at how some members of the banking and fintech sector are doing in the first month of 2024. Just as nouvelle firms like TSLA are migrating from technology plays to mere automotive manufacturers, the tech stocks of yesterday are now becoming, well, commonplace.