David Stockman On Tesla, Trump, And ‘Crazy Time’

By David Stockman as originally published on Contra Corner and reprinted here with permission

The Orange Comb-Over has been getting himself all worked-up over the 1,500 or so desperate souls fleeing crime-ridden Honduras in a caravan of marchers heading north. Since the group is mostly comprised of mothers and children, who have already lost husbands, sons and brothers to the central American gangs, the threat of the thing is not exactly evident to the naked eye.


Then again, when it comes to the Mexican border it’s crazy time all of the time with POTUS. Thus, after slamming Mexico for not jailing what he claimed to be drug runners (as perhaps evidenced by the boy in the foreground carrying a plastic bag), the Donald threatened to shoot Mexico’s “cash cow” (NAFTA) and renewed his call for the WALL.

That tweet-burst occurred at about 10:25 AM just before his Easter morning round of golf. About 3 minutes later, however, Trump apparently had second thoughts about his evidence free drug runner charge, suggesting that the Caravan was just trying to sneak in under DACA .

But even that would have required a very nifty form of Time Travel. After all, to be DACA eligible participants in the Caravan would have needed to arrive in the United States before June 15, 2007—and by the looks of the photos many of them weren’t even born yet!

10:25 AM: Mexico is doing very little, if not NOTHING, at stopping people from flowing into Mexico through their Southern Border, and then into the U.S. They laugh at our dumb immigration laws. They must stop the big drug and people flows, or I will stop their cash cow, NAFTA. NEED WALL!

10:28AM: These big flows of people are all trying to take advantage of DACA. They want in on the act!

Of course, you could say that the man in the Oval Office is patently off his rocker and move on. But we’d say, not so fast. The truth is, the Donald has immense company when it comes to crazy time, and you can find it on both ends of the Acela Corridor.

For instance, just as Tesla was plunging by another $20 per share this morning—and gaining some well-deserved momentum on its ultimate path to zero—the company leaked an Elon Musk email that is so crazy that it makes the Donald sound sober by comparison.

To wit, Musk converted a couple of days of forced draft production at quarter end into a projected weekly run rate of 2,000 vehicles. That was obviously designed to obfuscate the fact that Tesla again blew its production target for Q1—-like it has for every other quarter for years on end.

Based on the bolded words in the quote below, perhaps Tesla actually assembled 1800 Model 3 cars—mostly by hand— during the last week of the quarter, if it was lucky.

Not only did it not come close to hitting its drastically lowered Q1 target (from 5,000 cars per week to 2,500) for the model 3, but Musk offered his statistical shenanigan as evidence that the whole Tesla production system is now on a “firm foundation” and that this feat amounted to “mind blowing progress”.

We’d call it desperate slight-of-hand. After $5 billion of cumulative losses since 2007 and a $9 billion cash burn just in the last 5 years, Musk is now hyping what apparently amounts to a 6-day run rate.

Having spent a few years in the real mass volume auto industry, we do recognize a Potemkin car company when we see one, and that’s just a polite name for what amounts to a rank fraud.

It has been extremely difficult to pass the 2,000 vehicles per week rate for Model 3, but we are finally there. If things go as planned today, we will comfortably exceed that number over a seven-day period!

Moreover, the whole Tesla production system is now on firm foundation for that output, which means we should be able to exceed a combined Model S, X and 3 production rate of 4,000 vehicles per week and climbing rapidly. This is already double the pace of 2017! By the end of this year, I believe we will be producing vehicles at least four times faster than last year.

It took five years to reach the 2,000/week production rate for S and X combined, but only nine months to achieve that output with Model 3. Mind-blowing progress!

As it happened, upon the leak of the above delusional memo from Musk, TSLA got a bid—at least for an hour or two. But when it comes to crazy, the cultists and momo-buyers in the TSLA stock make Elon Musk himself appear to be a paragon of sobriety.

That is to say, grant Musk his confected 2,000 weekly assembly rate for the Model 3 and 4,000vehicles per week overall (including the Model S and Model X), and ignore what Toyota proved long ago: Namely, when all the cars coming off the assembly line go to the re-work bays per TSLA’s current modus operandi you are guaranteed to loose money forever.

What’s really crazy is that at Musk’s currently claimed run rate of 200,000 vehicles per year, the company is loosing about $10,000 per vehicle sold. Still, at its recent peak market cap of $65 billion, the casino was valuing TSLA at $325,000 per car assembled; and at today’s sharply discounted price, its hideously inflated market cap still computes to $210,000 per assembly.

In the realm of real car companies, by contrast, Toyota is current valued at just $18k per annual vehicle sold even though it posted $2000 per vehicle of profit during 2017. Likewise, Ford is valued at just $6.5k per vehicle sold on $1,000 profit per unit.

The larger point is that a stock market that values a financial fraud like Tesla at $65 billion (or even $42 billion) based on the risible song and dance of a circus barker like Elon Musk has gone all-in on crazy time. There is simply no other way to describe it: Tesla’s market cap soared from $5 billion in early 2013 to $65 billion last fall—even as it free cash flow was plunging without relief, cumulating to the aforementioned $9 billion burn over 5 years.


Still, down on the Imperial City end of the Acela Corridor crazy screams out even louder. In its Trumpified stupor, Washington has lost all grasp of the fiscal calamity fast coming down upon its head. Thus, during the past 90 days the net public debt has increased by $508 billion, but that number is not only Yuuge, it’s flat-out crazy from a macroeconomic perspective.

To wit, there has been no tax-cut induced boom during the current quarter, and Q1 GDP will be lucky to post at 2.0% in real terms and 4% including inflation. Accordingly, the Q1 nominal GDP gain will amount to $200 billion at most—or just 40% of the net gain in the Federal debt during the quarter.

Needless to say, it is not going to get any better in the months ahead as the full impact of the tax cut hits the US Treasury’s cash flow. Already for February and March, Federal receipts are down from last year by nearly 3.5%.

Stated differently, Washington started with the heavy burden of a kick-the-can deficit that was projected under legacy policy at $700 billion for FY 2019. And that was at the very tippy-top of the business cycle, which at fiscal year-end in September 2019 would have marked month #124 of the current expansion—-making it the longest one in US history including the extended 119 month tech boom of the 1990s.

But the $3.7 trillion revenue baseline for FY 2019 was cut to $3.4 trillion, while the $4.4 trillionspending baseline has now been pumped-up to $4.6 trillion. In ratio terms, Washington managed to get the revenue baseline down to 16.5% of GDP, or to the lowest point in modern times—even as the spending level has now soared to 22.5% of GDP, or one of the higher rates ever recorded.

Needless to say, a 6% of GDP borrowing requirement in the face of the Fed’s planned bond dumping rate of $600 billion per year under QT amounts to a $1.8 trillion tsunami of debt paper in the bond pits.

In light of the thundering monetary/fiscal collision now baked into the cake, we can think of only one thing more crazy still. To wit, the jabber we heard on bubblevision this morning that it will soon be time to buy the dip again because Q1 earnings growth is looking to be “up” by 18% compared to an expectation of only 12% at the end of December.

Here’s the thing, however. Up from what?

Well, last year, of course. And on that basis the math would indeed pencil out—even if you credit the casino’s definition of “operating earnings” excluding write-offs, one-timers and all the other bad stuff.

Thus, Q1 operating earnings for the S&P 500 are now estimated at $131.34 per share, and that’s up by 18.2% from $111.11 per share in Q1 2017.

Then again, nearly four years ago in June 2014, LTM operating earnings for the S&P 500 also posted at $111.83 per share. And if you take the one-time impact of the 21% corporate rate and the share count reductions since June 2014, the gain works out to low single digits on an annualized basis.

In short, investors are supposed to pay 25X EPS for end of the cycle earnings—-earnings that have been round-tripping owing to the China generated global commodity and trade sub-cycles.


Apparently because after growing at 3.7% per annum since the prior cycle peak in June 2007, the Wall Street sell side now projects five-year ahead growth for the S&P 500 of 13.9% per year.

That right. The 5-year earnings growth rate is projected to triple relative to the last decade—even as Wall Street projects a recession free-world through 2022.

That amounts to 156 months without a recession in the face of a guaranteed bond shock that will take the 10-year benchmark yield to 4.00% and beyond.

Like we said. It’s crazy time all around.

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