When Tesla was added to the S&P 500, those inclined to fret about market integrity suggested inclusion could affect aggregate valuations, volatility and performance.
Concerns were mostly overblown, as they usually are, but they weren’t unfounded. The only thing more erratic than Tesla is the brain behind it, and a subsequent foray into balance-sheet Bitcoin seemed to validate critics’ contention that one way or another, Elon Musk would end up embedding new risks into a market that was already trading on an extreme multiple and overly dependent on a handful of tech heavyweights vulnerable to regulation and, perhaps more importantly, rising yields.
As it turns out (and this was predictable) the real risk resided in Tesla as a magnet for speculation and a vehicle (no pun intended) for generalized mania.
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Options activity in the stock is amplifying the “tail-wagging-the-dog” character of modern markets. “The insidious impact of the ‘weaponized Gamma’ dynamics from the latent, persistent, perpetual Call buying in TSLA is again showing us what a dysfunctional mess market structure has become,” Nomura’s Charlie McElligott wrote late last week, in the course of reiterating that “spot Equities are left as a derivative of the Options market and its flows.”
Tesla’s exploding market cap and the knock-on effect from what McElligott went on to describe as “raging at the options casino,” is spilling over into index vol.
It’s against that backdrop that Elon Musk “proposed” selling 10% of his Tesla shares, ostensibly to pacify critics who say unrealized gains are a means of tax avoidance for the rich.
He turned it into a Twitter referendum, in which more than 3.5 million people cast a vote. 58% said he should sell ~$21 billion worth of shares. After the poll closed, Musk said he was “prepared to accept either outcome.”
Simple math suggests such a sale wouldn’t materially impact the supply/demand (im)balance for Tesla, and a generous interpretation of Musk’s poll-the-audience approach is that the inherent transparency would help mute the kind of knee-jerk reaction that might otherwise be associated with unexpected news of a Musk share sale.
However, given how embedded Tesla now is in the fabric of modern markets and the extent to which the dynamics briefly mentioned above can amplify moves in either direction, it’s at least worth mentioning the possibility that Musk could inadvertently tip dominoes.
That’s not a near-term prediction, by the way. And it’s not an attempt to quantify anything. Rather, it’s just a brief comment aimed at drawing attention to how modern market structure and socioeconomic issues (in this case spiraling inequality and the debate over redistribution) are now inextricably bound up with one another.
In “Gods” and also in “Elon Musk And Our Future In Irrelevance,” I wrote that “because much of this wealth is tied up in stock, society benefits not via compulsory redistribution, but rather through discretionary benevolence (i.e., charity) or else via the extent to which billionaires and their businesses have improved everyone else’s quality of life.” That’s certainly true of Musk.
I went on to caution that “when one combines the exponential nature of wealth creation in a capitalist system with modern market structure and embeds that self-feeding loop in a world that’s becoming more dependent on technology every day, the read-through is that these fortunes will become very large, very fast.”
It’s unquestionably the case that the “weaponized gamma” effect (which, since summer 2020, has gone pseudo-mainstream thanks to the Reddit crowd’s apparent adoption of the tactic), has contributed to the parabolic rise in Musk’s paper fortune.
Now, he’s polling the “tired, poor, huddled masses” (whose participation is crucial when it comes to creating the self-feeding loops in part responsible for the exponential increase in Musk’s wealth) on whether he should realize some of his gains so he can pay taxes on them and, presumably, brag about fulfilling an obligation to society,
Tesla’s shares were down sharply in pre-market trading Monday. Late last week, McElligott wrote that “looking back at TSLA’s Call options, the mega OI on the $1200 and $1300 lines are in play, due to of course how many of said Calls were for Friday’s expiration, so there is mechanically going to be Delta to unwind (long TSLA shares as hedge for short Calls) which should most likely pause the melt-up for at least today.” He continued: “Lord knows if we were to somehow see TSLA spot drop below $1200, we could then just as easily see dynamics reverse and contribute to an acceleration lower.”
Again, that commentary is from last week. I quote it only to underscore the “tinderbox” character of modern markets. (And that characterization doesn’t just apply to Tesla.)
“The crowd-sourcing exercise is the latest example of Musk’s long history of using Twitter and his legions of fans on the platform to stoke interest in his company, sometimes pushing the envelope with tongue-in-cheek tweets,” Bloomberg wrote, of Musk’s Twitter referendum. “Musk in 2018 agreed to get approval from a Tesla attorney prior to communicating material information to investors as part of a settlement with US securities regulators,” the same article said. “It wasn’t clear whether that official previewed Musk’s poll.”
The overarching point is that we’re witnessing the realization of the pseudo-prediction from the linked “Gods” article, published here just 15 months ago.
In February, Musk made it clear that he could single-handedly influence the price of cryptocurrencies, including Bitcoin. He briefly made a hobby of it, going so far as to (jokingly) call it a “hustle” while hosting Saturday Night Live.
Fast forward just eight months, and the circumstances are such that he can effectively tinker with the entire US equities market.
Musk surely didn’t consider the universe of possible unintended market outcomes when he decided to ask taxpayers whether he should effectively self-impose and otherwise pull forward a tax on his fortune.
Discussions about playing God (regardless of the context) invariably come with an ominous caveat about unintended consequences. I suppose God (with a capital “g”) is omnipotent and can therefore consider, ahead of time, all ramifications associated with a given decision. When you’re a god (with a lowercase “g”), you may not fully grasp all permutations of the butterfly effect.
I am not a trader, however, if I were- I definitely would have voted yes. It seems like it would be better to have a known significant event in the near term you could trade around.
There is definitely a culture of religiously fervor going on at Tesla. A young relative of mine (under 30), is an engineer there- who could sell the Tesla interest, pay taxes, and still be a multi-millionaire.
Religious fervor, not religiously fervor. I need a bigger screen.
Maybe Elon’s financial advisor suggested he should diversify …
“‘… spot Equities are left as a derivative of the Options market and its flows.’” When you introduced this quote a couple of days ago your post excluded comments. That day I wanted to say that, imo, this conclusion is dead on. One reason I read this blog is that you, H, add clarity to the ‘real market,’ the amazingly complex shadow market that has made the other markets that are actually connected to corporate and government finance, into a casino of derivatives markets composed of the afterthoughts we call stocks and bonds. In many ways the current market structure reminds me of modern physics. The things we touch and feel and use are made of atoms, an analog to stocks and bonds that supply capital to the economy’s machines. Now we find that underneath those atoms is an astonishingly complex web of sub-particles and forces that actually run the show. Atoms, like stocks and bonds, are almost passe in the grand scheme of things.
I’ve read that Musk has a huge amount of very much in-the-money Tesla stock options that expire next year and he is likely to have a very large tax bill associated with these options (a CNBC article estimates a tax bill as high as $15 billion). As such, he was going to need to sell a large number of shares anyhow to pay this tax bill. And asking the Twitter universe if he should sell or not sell 10% of his shares was all for show …