It's abundantly clear, that the macros, or the FED, have taken the drivers seat with
Tesla's stock price, for the time being.
The S and P was experiencing overly high market p/e ratios, obviously due to the low rates,
and then all the government spending.
So rates increase and the markets react accordingly.
The banks offer an improved return on your money with higher interest rates, so people
sell their stocks, and invest in bonds or cash.
Except these are just nominal returns, not real returns.
So I just wanted to go over a view of the global economy as far as Tesla should be concerned.
HEADWINDS We have two headwinds against us in these
sorts of times, there is the opportunity cost of higher interest on cash, but not only that,
these higher rates effect the economy in other ways too.
The cost of money has risen.
For example when I financed my Teslas, I locked in a rate of 4.5%, it has now risen to just
over 7%.
That's quite a big difference.
That obviously puts off a lot of consumers, as it appears more expensive.
Although in reality even 7% is struggling to keep up with inflation, so it's almost
0% real rates.
In other words, if in a perfectly efficient economy, your pay is increasing as much with
inflation, then higher rates are still affordable.
INFLATION But inflation doesn't increase equally across
the board, I mean just look at commodity prices, some are up 200% over the year, others are
down.
If you worked in the industry that is seeing the larger increases, then there's a possibility
you might have received a pay rise higher than inflation.
It's also the reason why some items in the supermarket have increased more than others.
Inflation is not spread evenly across the board.
So some people have experienced some great pay raises, and some people have seen their
assets increase more than others too.
Meaning there are people doing well in this economy.
Meaning there are people with enough money to buy a new Tesla, despite a lot of people
suffering too.
But are they losing their jobs?
I remember in Global Financial Crisis, when it was so bad, I had friends losing their
jobs through downsizing.
But right now we are seeing a relatively low unemployment rate, and sure I understand that
this is manipulated to a degree, and there are other factors in play too.
However, I also like to observe.
When I go out to restaurants, and talk to the staff, or visit other businesses too,
I generally ask them how business is, or if they are short staffed, and generally they
tend to say they struggle to get more staff in.
I like going out for dinner with friends, especially during the week, when it's quieter,
but these days I often have to make a reservation, and they are packed, and these are the top
restaurants in my city.
I just like to observe first hand what is happening, and it looks like people are still
spending money, likely hence the inflation we are experiencing.
I do the same looking for Teslas.
I recall in LA at the start of 2019, being driven down the freeways, I was counting all
the Teslas I could see, and trying to count them relative to Toyotas, and I couldn't believe
how many I saw.
This was pre Model Y time too.
And sure, Teslas are more popular in LA, but still.
I did the same thing in 2015 when I was in Seattle, counting the Model S's I saw.
And right now in my city, I have never seen so many new cars ever, new Teslas of course,
especially now the Model Y has arrived, and there is still a waiting list until November.
This is not a particularly rich city or nation, yet there are so many.
And this is with the high interest rates.
On top of that there is the demography, of the largest generation in history going into
retirement, freeing up a lot of jobs.
Someone needs to replace these workers, and generation X was not a large enough generation
to fill in the all these positions.
A lot of the baby boomer generation also have assets that have appreciated well over the
last couple of years, improving their retirement too.
And as a result they can thus afford Teslas.
DOWN MARKET Anyway, essentially we are seeing p/e ratios
squeezed by these rising rates from the FED, hence the lower p/e ratios.
It also has an effect on property prices too, suddenly mortgages cost more, and people can
afford less to buy a house.
Therefore people have also lost equity in their homes, and are either less able to borrow
more on their property, to buy a Tesla for example, or simply don't feel as wealthy due
to losing 20% or so of value on what is likely their largest asset.
That isn't 20% of their home equity either, that's 20% of the asset, so possibly closer
to 40% of their equity if they have 50% mortgage.
On the other hand a lot of people are still way up on the price of their properties from
just a couple of years ago too.
And perhaps their house was previously at 25% equity, and even now due to the increase
in the asset, they are now at 40% equity of a more expensive house, and have thus more
than doubled their actual equity.
Of course there are the unfortunate people who were not in the property market, and thus
suffer, which is why the poor really do suffer with inflation, and we see more disparity
with equality.
TESLA SALES Now what about when Texas is operational,
Tesla may hit a run rate of around 2 million vehicles towards the end of next year, just
in the US.
That is just over 1/2 a percent of the US population.
In other words Tesla only need about 1/2 a percent of America to buy a Tesla next year,
to sell all the cars they make.
Oh wait no, that would be the rate at the end of the year, so even less over the entire
year, and hopefully by the time we are at the end of the year, we have seen the worst
part of this recession and inflation, and are starting to see the recovery.
Oh, and don't forget that's with a $7,500 discount too.
Now even if sales for new cars drop significantly, there are still going to be likely at least
10 million car sales a year in the US.
But if the overall US car market took a 30% hit, then that doesn't mean Tesla will.
The EV market is still growing, and its growing as fast as supply can deliver, not demand.
DEMAND If Tesla needed more demand, then there are
two very easy things they can do.
One of course is simply drop prices.
Tesla can drop prices a massive amount and still make incredible margins.
A lot of commodity prices have dropped now too, which means Tesla's margins will increase
even more.
So Tesla could easily drop their prices and still make amazing margins.
Not to mention when Texas gets going the cost of producing a Y there will be unbelievable,
allowing even more room to move on price whilst still maintaining profits, and again the $7,500
tax credit, I know I just said that before, but it's such a big deal, its worth saying
again, because it barely seems to be priced in.
In other words, Tesla don't need to drop their prices, they can probably raise them if anything,
that's how crazy it is.
WORLD That's just America though, the rest of the
world may not be looking as promising.
On top of that the US dollar has strengthened significantly, reducing overseas sales ASPs,
it doesn't however affect margins.
As Tesla have done everything they can to source locally as much as possible.
I don't know how clever Tesla have been in hedging the US dollar with overseas currencies,
but it's likely to have some effect.
And given that over half of Tesla's sales come from the Giga Shanghai, it will be noticeable.
Then there are the actual economies in Europe and China to consider too.
Euroasia is a huge market though, and Tesla are really only selling the low cost LFP versions
of their vehicles there.
On top of that Tesla did raise their prices on these models not too long ago, and they
have reduced their production costs significantly with this latest production line improvements.
So I think they have quite a bit of wiggle room when it comes to margins.
There should still be plenty of demand for that car in this market, despite what some
people are saying.
Remember this is the most popular car for sale today, and despite China ramping up so
much, we still aren't close to meeting total demand.
The Model Y RWD is at a lower price point than the Long Range, and if the price drops
just a little, due to being in that lower price segment, the demand will increase exponentially
more than compared to dropping the price of the Long Range by the same amount.
There are so many more people that can afford a lower cost vehicle.
Dropping the price to say, 45,000 euros would be a massive difference.
Not to mention all the other associated cost savings and potential subsidies available.
ADVERTISING The other thing Tesla can do to increase demand,
is start advertising.
I know people seem to object whenever I suggest this, as if it's not in Tesla's ethos to advertise.
But it's more just about the fact that Tesla has never needed to advertise, it doesn't
mean they never will.
Elon has on numerous occasions mentioned the possibility.
He has also said it would be more informative, and educational, rather than just clever advertising
that cajole you to covet a vehicle.
And perhaps it will be a great way to provide consumers of little understanding, truly how
amazing a Tesla is.
We are in echo chambers, but often when I talk to a lot of people about Teslas, they
don't have a clue.
Now to be clear too, before you comment, I am not suggesting that I want them to advertise,
I am just saying it's another avenue to increase demand.
I believe Tesla and Elon will make the right decision as to whether they will or not.
It is however an option for them.
SUMMARY Sorry if this was a little over the place,
I was just trying to articulate some thoughts about this all, I'm not trying to say that
the economy is going to be great or anything, I am just trying to think this through a Tesla
perspective.
On the other hand I also have to hope that I am not trying to just manipulate all these
factors for my own confirmation bias.
Remember I have my money supporting my beliefs.
Although there is a chance there is too much Tesla bull in me, so please comment as to
how you see things, and where I am potentially too bullish.
At the end of the day, there is always the fact that if its this hard for Tesla, then
its that much harder for the competition, and if they don't make it, then there is more
potential demand pointing to Tesla.