Updated: Feb 22, 2022
"Electricity is the thing. There are no whirring and grinding gears with their numerous levers to confuse. There is not that almost terrifying uncertain throb and whirr of the powerful combustion engine. There is no water-circulating system to get out of order -- no dangerous and evil-smelling gasoline and no noise."
February 21, 2022 | Updated | “An awful lot can happen in two months,” writes Spencer Jakab in his timely new book, “The Revolution that Wasn’t: Gamestop, Reddit, and the Fleecing of Small Investors.” He writes of the ambush of Melvin Capital:
“The Reddit revolutionaries despised short sellers more than the general investor population did, which is saying something… Hurting short sellers became something of a sport on WallStreetBets, and its members were about to learn how to aim for the kill shot.”
Jakab’s book is not just a fascinating history of short-selling in Gamestop (GME), but provides a canvas for understanding the behavior of investors over the past two years during the COVID mania. Hedge funds with a seemingly reasonable strategy to short GME were suddenly destroyed by social media gangs and the rising tide of liquidity from the Fed's growing balance sheet.
Assets from stocks to crypto tokens all soared in a generalized mania fueled by cheap credit and a natural human compulsion for personal gain. But there was no glorious revolution for investors, no enduring prosperity or jobs created, just a temporary high followed by equally rapid deflation in asset prices and inflation in living costs. The wreckage caused by the Fed’s largely speculative monetary policy is still being tallied, including billions in losses to retail investors.
GME rose during the period of extraordinary social experimentation by the Fed from 2020, even as other MEME stocks led by the likes of Tesla (TSLA) and Silvergate Capital (SI) soared. Less compelling stocks like Robinhood Markets (HOOD) languished, while other hopeful stories never got out at all. Aurora Acquisition Corp (AURC), for example, is still pondering the purchase of money-losing mortgage lender Better.com, a deal we wager never closes. Even AMC Entertainment (AMC), the original MEME stock, barely moved compared with TSLA, SI and GME.
Source: Google Finance
The general mania caused by the response to COVID is no better illustrated than with the case of Peloton Interactive (PTON). This maker of stationary exercise bikes “went to da moon” (in Reddit speak) for a while because of the techno hype around a socially enhanced spinning class. At the end of the day, PTON is a company that makes exercise equipment with a pricey proprietary social media channel. Have you noticed the full-page newspaper ads from the PTON cult this past weekend? Hmm?
In a delicious report in the FT Magazine, Peloton chief executive John Foley recounts how his board of directors told him to stop claiming that PTON would be a trillion dollar market cap company. Andrew Edgecliffe-Johnson and Patrick McGee of the FT quote Foley:
“Last year, I was talking to our board and I was like, I see this as clear as day: this thing is going to be one of the few $1tn companies in 15 years,” he recalled. “And they said, ‘Don’t say that again. It makes you sound like an idiot.’”
Of course, John Foley is not the only corporate executive that has seemed like an idiot since 2020. Perhaps our favorite MEME stock of all is TSLA, a company that received over $1.5 billion in public subsidies in 2021 and 2020. Driven by the general mania regarding global warming, this manufacturer of electric cars with lithium ion batteries benefitted more from QE than most other MEME stocks.
Indeed, in the most recent 10-K the company brags about the performance of TSLA as a stock as much as the company’s financial performance as a car maker. Sadly founder Elon Musk sold a large block of stock near the top to pay his 2021 federal income taxes. The components of TSLA revenue for the past three years is shown below from the latest 10-K. Note "Automotive regulatory credits."
The key takeaway regarding TSLA and the other automakers that have gone down the lithium battery bunny hole is that EV technology based upon lithium batteries is neither green not sustainable. The power of the progressive-ESG crowd forced an entire industry to abandon efforts to develop new, sustainable technologies based on fuel cells in favor of using lithium batteries, an antiquated technology with no future.
As we noted in “Ford Men: From Inspiration to Enterprise,” when Henry Ford wanted to build an electric car 120 years ago using nickel-ion batteries, Thomas Edison told him instead to use gasoline. Why? Because it is a more compact form of energy. Edison later denounced gasoline vehicles and worked with his lifelong friend on an electric car, but it was already too late to focus on alternatives to gasoline power.
Ford, Edison, Guglielmo Marconi and Nikola Tesla all saw electric vehicles as the future, but all were stymied by inferior energy storage options of that time. In 120 years since, the periodic table has not changed. Notice that tiny hydrogen is in the top left corner. There are a few elements in the table that are appropriate for batteries, but none are optimal for passenger vehicles.
In fact, nothing has really changed in the 120 years since Edison and Ford collaborated in Detroit except for the greater efficiency of electric devices. The only reason that companies like TSLA prosper is because of social engineering paid for by the US taxpayer and the zero interest rate policies of the Fed.
Everybody who bought a traditional car last year in the US, for example, gave Elon Musk's car company about $100 in subsidies ($1.5b Reg Credits/17m vehicles). In a world without subsidies for “green” energy, TSLA would not exist. But the biggest subsidies of all go not to TSLA directly, but instead incentivize consumers to buy EVs.
“When Denmark got rid of its tax credits for electric vehicles, Tesla's sales dropped by 94 percent,” writes Bill Wirtz of FEE. “In Hong Kong, the company saw a decline of 95 percent as the city got rid of comparable tax advantages for those buying electric cars.” What happens to TSLA and other EV makers as and when the public subsidies end?
The combination of the subsidy for capital costs provided by QE, added to the direct public subsidies for EV’s, literally launched TSLA to the moon. That is why TSLA, of all the MEME stocks, jumped more than just about every other name we track.
We believe that electric vehicles are the future, but we’re still waiting for a car with an internal power source and DC motors on all four wheels. Readers of The IRA who have not read "Ford Men" need to appreciate that when the gasoline-powered car was created by Henry Ford 120 years ago, the invention caused an immediate public sensation and without public subsidies. Dozens of car makers sprang up to meet the tidal wave of demand for affordable and reliable transportation. No social engineering by progressives was required.
But EVs with batteries are neither reliable nor affordable, especially when you consider the investment necessary to enable a battery-powered fleet and remediate the toxic waste left behind by millions of used lithium batteries. Like the batteries in your smartphone, a lithium battery in a car wears out in a couple of years. And when new developments in fuel cells eventually displace lithium batteries, the billions spent to enable EVs will be shown to have been wasted.
In the fog caused by the FOMC and global warming activists, such technical considerations have been barely noticed. Investors remain focused on the likes of Tesla and Revian Automotive (RIVN). We like the long-term prospects of more conservative players such as Toyota Motor Corp (TM), which continues to advance a broad agenda that includes battery powered vehicles, hybrids and fuel cells. TM is so conservative that they have missed whole cycles of EV hype from the global warming crowd.
In addition to being the largest car maker in North America, Toyota is one of the best managed manufacturers in the world. And they understand that vehicles with DC motors and internal hydrogen power, and not retrograde lithium battery technology, are the future of transportation. Of note, Thyssenkrupp AG (TKR) is pondering an IPO for its hydrogen unit later this year. The first deployment of a viable hydrogen fueled consumer vehicle will change this conversation about batteries forever. Then we'll all look like idiots.
Years from now, when tomorrow's children are driving past abandoned EV charging stations on America's interstate highways, they will recall the age of COVID, QE and the related hype around using lithium batteries to propel cars, and laugh. But human nature is always to chase the shinny object first and foremost.
Henry Ford went to market in the early 1900s with a gasoline engine design of necessity, even though he loved electric cars. Ford Motor Co was Ford's third business venture after two failures. He needed a win.
Elon Musk made EVs with batteries because it was the only viable commercial option. Given the demand created by the general mania behind electric vehicles, Musk astutely created the supply walking a path paved with public subsidies -- whether he likes them or not. Both men made the right choice at the particular point in time and profited as a result.
So here's the question: If Henry Ford lived today, would he build electric cars? With lithium batteries? Don't forget the shipload of Porsches in the Atlantic this AM, burning due to a lithium battery fire. Happy Presidents' Day.