We have explored in the past how Tesla may fair in a recession, and run through various
scenarios.
Now it looks very likely a recession may be just around the corner, or are we in it already,
I can't tell, perhaps I'll have to turn on some mainstream media to find out sometime.
We also have a better idea now of the causes of this recession, so we can perhaps try and
identify what Tesla will be like during this market downturn.
Some people like to tell me how much consumers will struggle to spend in excess of $60,000
on a vehicle in a market crash.
I thought we could explore some of the scenarios that we might expect, and see what different
it may make to Tesla, how Tesla might handle it, and how it may also affect the competition.
I think rather than just analyze a cliche
recession, if there is such a thing, we will try and explore it best as possible in how
inflation, debt and interest are influencing the economy.
What exactly is happening then?
Inflation is kicking in globally.
Personally, I think, the main cause for inflation is due to the inflation is all the government
spending.
Supply chain issues obviously aren't helping either.
Shipping prices are still through the roof, and thus still have to be felt somewhere along
the supply chain.
But the people who printed the money, will never take any blame.
But this wasn't some bubble that popped and left everyone broke, like the GFC.
We aren't going to witness something like a potential crypto bubble this time to pop
and cause the recession.
Nope, it would appear the governments likely did this one all by themselves.
When inflation runs high, the number one move
with monetary policy is increasing interest rates.
That's right, that's how you break the back of inflation, you increase rates.
And if we look back historically, and want to talk about high inflation, then it's hard
not to bring up the start of the 80s.
Inflation hit a peak of 13.5% in 1981.
Although that does seem higher than today, it was not measured quite the same, and today's
CPI figures have had a bit more fat trimmed from back 40 years ago.
I think this inflation was still a result of coming off the gold standard 10 years prior,
and then of course the oil crisis on top of that.
It was extreme times.
Either way, that was a big figure, and Paul Volcker, the Federal Reserve Chairman at the
time, rose rates as high as around 20%.
Wow, imagine if we had rates at 20% today?
How long would you last on your mortgage payments before you have to default?
Does this mean, we now have to brace ourselves for rate rises this high?
No, the world is changed since, we are an even larger debt based society.
We have been managing monetary policy thus far and society has remained in tact.
Can we manage it this time too?
The GFC was a really scary time, it took a long time to get out of, and a lot of people
lost their homes and life savings.
We don't want to go through that again.
Due to all this debt now, and not just from the GFC bail outs, but of course all the COVID
spending too.
In fact, especially the COVID spending.
This means that the FED don't have as strong a control over monetary policy now.
Their powers are somewhat limited.
The less debt to GDP ratio the government has, then the more effective monetary policy
can be.
But with debt where it is today, well they are running out of juice.
And its not just the government, but the population too, all living on debt, depending on low
rates.
And here we are today.
The dilemma the Fed face.
A big fire, and just a small fire extinguisher.
The Fed need to use what they have as effectively as possible.
Using scare tactics to reverse spending.
As if this gets more out of control, the Fed are going to be more limited as to what they
can do.
Meanwhile this inflation is wiping out people's life savings.
Biden needs to stand confident and look like he has a control on inflation.
Yet at the same time, he cant totally kill the markets either.
The way I see it currently, is there is a balance now between the level of inflation
we are going to see, and the level of recession we will see.
And I really don't know what will happen.
The best trading strategy might be to straddle right now, which is when you have puts and
calls.
Expect volatility, but in which direction yet, we aren't sure.
I think it's possible we might still see a further 15% correction to around a pre-covid
level.
With average SnP P/E's closer to 15, compared to 20.
On the other hand the markets could go up another 50% for all we know, before they actually
crash, and we see a real rout rather than just a correction.
Could the markets really go up?
Well in a sense, although it would possible be more the dollar going down, or inflating,
or even hyper inflating.
I am of the belief that this will be more likely to happen.
I don't think they have much of a chance keeping a lid on inflation.
Historically over the last couple of decades,
we see in each recession that they can only raise the rates so high each time.
This is due to the fact that governments also have to pay interest on their national debts.
Governments only have so much actual income to cover this interest.
Their only other way to pay for it, is borrow more.
Now if you are borrowing to pay interest on your debt, then the currency is going to keep
inflating.
It might be that this time, governments have borrowed so much, that they are not able to
raise the interest rates to a high enough level to break the inflation.
Which is going to be tough, hence perhaps economic scare tactics.
To get out of this, at least what will help,
would be some real leadership right now.
The governments should be doing everything they can to sort out supply chains, and reduce
the cost of oil.
Inflation isn't just about interest rates, but allowing commerce to flow freely, without
bottlenecks that can create inflation.
Alright, now lets try and look at historic
auto sales during similar times, to see if we can gather how bad this might be for Tesla
and perhaps the auto industry as a whole.
Now in the great recession, in the US auto sales dropped to as low as 10 million a year
in 2009, down from 16 million in 2007.
That is a big drop.
In fact from 2007, it took around 2017 until numbers were up that high again, but it had
mostly recovered by 2012.
Either way that is a big drop, but this was a big a recession.
In fact a lot of people think the next one we enter will also be some of the ongoing
side effects still from the previous global financial crisis.
Either way that is a 40% difference between the high and the low in the space of 2 years
for US auto sales.
Remember though, this is the mature ICE industry.
Tesla is in the rapidly growing EV industry.
It's possible that although the market size of autos in general is smaller in a down economy,
it's also possible that the EV industry itself is still growing.
Possible?
Well I hope very likely indeed.
Therefore Tesla is still in a growing industry, and likely when the 4680s ramp up, Tesla will
also be back to a growing market share in the industry.
And what about the competition?
Well if they lose demand, it means they may have to drop prices, which means they will
lose even more dollars on every EV they sell.
But I do think the EV industry should still grow.
I also think supply of ICE will dwindle anyway, and consumers will have less ICE available
to them to purchase anyway.
Yea, the legacy autos, might struggle a bit through this recession.
We will go into more detail in another video.
In the past luxury auto brands that sell a lot more vehicles than Tesla have made it
through many recessions, like Mercedes and BMW.
But Tesla is still in a growing industry and has a lot more profit margin than those other
companies, not to mention none of the debt.
I really cant express enough on how much better a position Tesla is in, than any other auto
company.
Over that same period average car prices in
the US went from a high of $28,000 in 2008, to a low of $23,000 in 2010, not adjusted
for inflation, but an 18% drop in price.
Bu it quickly recovered.
One thing about Tesla though, is that due to the vertical integration and level automation,
along with generating its own energy in the factories, as a result the business model
is not so susceptible to inflation as the others.
It also results in Tesla having larger margins which are a powerful weapon to use, if demand
is looking weaker.
But judging by what happened in the last recession
demand for autos could be down as much as 40%.
And prices for autos could be down a further 18%.
Now that doesn't mean prices of vehicles will be dropping, more so that consumers are moving
to lower cost models.
It would be great if Tesla could educate the consumer base better on the true cost of ownership
of a Tesla relative to an ICE vehicle, then it may change the consumer perception that
Tesla's are better value than people realize, even better value than the equivalent ICE.
Well you know, only if Tesla needed the extra demand.
I think Tesla will be alright in a recession.
People will still need to buy cars, and in my opinion Tesla is the most likely to be
the last one standing, if it ever came to that.
As in Tesla could outlast the worst recessions longer than any of them.
Tesla has so many tools left to get through a recession.
And I believe when it comes out the other side, it will be leaner and stronger, and
there may be fewer competitors around.