Friday, February 20, 2015

Tesla: Bonfire Of The Money Printers’ Vanities

By David Stockman

The trouble with the money printing madness in the Eccles Building is that it generates huge deformations, misallocations and speculative excesses in the financial markets. Eventually these bubbles splatter, as they have twice this century.  The resulting carnage, needless to say, is not
small. Combined financial and real estate asset markdowns totaled about $7 trillion after the dotcom bust and $15 trillion during the 2008-2009 financial crisis.

Yes, the Fed has managed to reflate this cheap money bubble for the third time now, but the certainty that it will splatter once again is not the issue at hand. What gets lost in the serial bubble-making process of modern central banking is that vast real resources—labor,capital and materials—- are misallocated owing to mispricing of stock, bonds and real estate during the bubble inflation phase.
During the bust phase, of course, these excesses are written-down on financial statements and often liquidated entirely on an operational basis. But that’s just the problem. These bust-phase corrections amount to deadweight losses to the economy—-a permanent setback to growth and societal prosperity.

The Wall Street casino is now festooned with giant deadweight losses waiting to happen. But perhaps none is more egregious than Tesla—–a crony capitalist con job that has long been insolvent, and has survived only by dint of prodigious taxpayer subsidies and billions of free money from the Fed’s Wall Street casino.

Not surprisingly, the speculative mania on Wall Street has reached such absurd lengths that Telsa is being heralded and valued as the second coming of Apple and its circus barker CEO, Elon Musk, as the next Henry Ford. Indeed, so raptured were the day traders and gamblers that in the short span of 33 months between early 2012 and September 2014 they ramped up Tesla’s market cap from $2.5 billion to a peak of $35 billion.

That’s a 14X gain in virtually no time—-and its not due to the invention of a revolutionary new product like the I-Pad. Instead, we’re talking about 3,000 bounds of sheet metal, plastic, rubber and glass equipped with an electric battery power pack that has been around for decades, and which is not remotely economic without deep government subsidies.

Beyond that, the various Tesla models currently in the market carry price tags of $75k to more than $100k. So they are essentially vanity toys for the wealthy—–a form of conspicuous consumption for the “all things green” crowd.

TSLA Chart
TSLA data by YCharts

During the LTM period coinciding with Telsa’s $35 billion peak market cap, its financials certainly didn’t warrant all the excitement in the casino. Net sales amounted to $2.9 billion, meaning that speculators were putting a silicon valley style multiple of 12X sales on a 100-year old industrial product; and one sold by a fly-by-night company distinguished from its auto company peers, which trade at 0.5X sales, only by marketing hype and a high cost power plant that could be made by any of two dozen global car companies if there was actually a mass market demand for it.

Needless to say, Tesla’s meager LTM sales were not accompanied by any sign of profits or positive cash flow. Net income clocked in at negative $200 million, and operating cash flow of $150 million was dwarfed by CapEx of $700 million.

Unless you are imbibing in the hallucination-inducing Cool Aid dispensed by Goldman Sachs, which took this red-ink machine public in 2009 and has milked it via underwritings, advisories and early stage investments for billions, Tesla’s valuation was patently absurd. Yet the gamblers piled on based on the utterly improbable assumption that oil would remain at $115 per barrel for ever; that a mass market for electric battery autos would soon develop; and that none of the powerhouse marketing and engineering companies like BMW, Toyota or even Ford would contest Tesla for market share at standard industry profit margins.

The truth is, there is massive excess capacity in the global auto industry owing to government subsidies and bailouts and to union protectionism that keep uncompetitive capacity alive; and that is now especially the case due to the wildly soaring growth of unused production capacity in China. This means that the global economy is literally saturated with expert resources for auto engineering, design, assembly, machining and component supply.

Consequently, if a mass market were to develop for battery powered vehicles these incumbent industry resources would literally swarm into Tesla’s backyard. So doing, they would eventually drive margins to normal levels, sending Elon Musk’s razzmatazz up in the same cloud of smoke that has afflicted many of his vehicles.

These is no reason to think that any long-term mass market player in the auto industry could beat Toyota’s sustained performance metrics. In the most recent period, its net profits amounted to 7.5% of sales and it traded at 11X LTM net income. So even if you take as granted the far-fetched notion that in a world of $2-3 per gallon gasoline——-which is likely here for a sustained duration—-that a mass market will develop for electric battery vehicles, Telsa would still need upwards of $50 billion of sales at Toyota profit rates and valuation multiples to justify last September’s peak market cap.

So let’s see. Tesla’ LTM sales totaled $3.2 billion, meaning that you would need to bet on a 16X gain in sales over the next few years and that today’s rag tag start-up manufacturing operation could achieve levels of efficiency, quality and reliability that it has taken Toyota 60 years to perfect. Yet take one hard look at Tesla’s historical financials and it is blindingly evident that there is no reason for such an assumption whatsoever.

In fact, Tesla is not a Toyota in the making; it is a Wall Street scam in plain sight. It has been a public filer for seven years now, and here are the horrific figures from its financial statements.
Since 2007 it has booked cumulative sales of just $6.1 billion, and that ain’t much in autoland; it amounts to about one week of sales by Toyota and two weeks by Ford. Its cumulative bottom line has been a net loss of $1.4 billion, and the losses are not shrinking—-having totaled nearly $300 million for 2014 alone.

More significantly, during its entire seven years as a public filer, Tesla has failed to generate any net operating cash flow (OCF) at all, and has, in fact, posted red ink of $500 million on the OCF line.  During the same 7-year span ending in 2014, its CapEx amounted to a cumulative $ 1.8 billion.
So go figure. Combining OCF and CapEx you get a balance sheet hemorrhage of nearly $2.4 billion. Why wasn’t Telsa bankrupt long ago?

The answer is that it was and should be now. Tesla would not have even made it to its Goldman-led IPO without a $500 million bailout by Uncle Sam. That the hard-pressed taxpayers of America were called upon to underwrite a vanity toy for the wealthy—–and one peddled by a serial milker of the public till—is surely a measure of how deeply crony capitalist corruption has penetrated into the business system of America.

But even these egregious windfalls do not begin to compare with the gifts showered on Elon Musk by the money printers in the Eccles building. Tesla has stayed alive only because it has been able to raise billions of convertible debt in the Wall Street casino at yields which are the next best thing to free. In short, it has been burning cash for years and replenishing itself periodically in capital markets which are rife with momo speculators.

During the spring of 2014, for instance, it raised $2.3 billion of 5- and 7-year  money at interest rates ranging between 25bps and 125bps.  On an after tax basis, that’s virtually free money for the Telsa bonfire of the vanities.

True enough, these miniscule interest rates were attached to convertible bonds—-so supposedly the “upside” justified giving a proven red ink machine free money. Yes, and the strike price on those converts implied a market cap of about $50 billion!

In truth, Tesla’s true losses are even greater than its accounting statement suggests. For instance, it has booked upwards of $500 million of revenue and profits owing to ZEV credits. The latter were invented by Al Gore after he finished inventing the internet, and amounted to nothing more than bottled air—-clean or not.

Also, Tesla affluent customers pocket about $10,000 per vehicle of Federal and state tax credits, meaning that taxpayers have fronted another $500 million or so to stimulate Tesla sales.
Finally, Tesla’s marketing machine has even converted itself into  a repo man for the wealthy. That is, Tesla guarantees a large share of its customers that it will buy back their vehicles at no loss after three years.

So how does it possibly make a profit deploying this blatant free rent-a-car gimmick? Ask its accountants. In their wisdom and clairvoyance, the have undoubtedly assumed that the residual value of these vehicles will be levitated by the same juice which fuels Tesla’s stock price.
Yes, Tesla is a bonfire of the vanities. In due course, the bubble will collapse and billions will have been wasted—-much of it with taxpayer money—on things like its imaginary gigafactory in Nevada. But that’s what happens when central bankers destroy honest price discovery and turn capital markets into a gambling casino.

Oh, yes, and the whole “green” story is a crock, too. Eric Peters lays that out in chapter and verse below.

By Eric Peters 
There is an episode of the TV show Top Gear involving a Prius hybrid and automatic weapons. God, I wish I could afford to do the same to a Tesla.

Unfortunately, I (and thee) are too poor to afford a Tesla. But that doesn’t mean we won’t continue to be forced to “help” Elon Musk build these mobile – just barely (and briefly) monuments to crony capitalism.

This is a company that bleeds money like a machine-gunned hemophiliac, yet doesn’t die because fresh transfusions are always available. Just last week it wasannounced the company lost another $100 million and change while delivering fewer than 10,000 cars. Tesla has yet to earn – properly speaking – a single honest dollar. The money it takes in (a very different thing) is obtained chiefly via carbon tax credits ($130 million from the state of California alone; that is to say, from the pockets of the taxpayers of the state of California) and everyone knows all about the $7,500 per car subsidy Uncle dangles in front of prospects to lure them into buying one of these flashy, yet functionally useless, electric Edsels. There are in addition state-level subsidies (in 23 states) ranging from $1,000 to $5,000 per “sale.”carbon tax image
Do you know what a “carbon tax credit” is? It’s a tax, first of all – only one paid to an entity (I won’t call it a company, as companies are businesses and Tesla is neither) like Tesla rather than to the government. Here’s how it works. I own a business that makes things people are actually willing to buy without being coerced or subsidized. But, alas, my manufacture of this product results in “greenhouse gasses” – carbon dioxide having been decreed the primary one (even though it far less of one than several other gasses, such as methane and also water vapor; but we’ll leave that aside for now).

socialism pic
Well, I want to make the thing and you want to buy the thing, but in order for me to be allowed to make it, I must send money to an entity like Tesla as a kind of (no, an actual) kickback. Because Tesla is “green” while I am not – except of course as regards the color of the money that’s been transferred to Elon Musk’s ever-growing bank account – which is very green indeed.

The argument is that each Tesla built with these kickback dollars amounts to “x” quantity of carbon dioxide negated overall. I’m allowed to build my economically viable product, so long as I “help” Tesla manufacture his not-economically viable products.

But they are “green,” right?

chinese factory
Certainly. In the same way that an outhouse is clean… before youuse it. Only with Tesla, it’s the reverse. The finished car may not produce any noxious emissions, but it took a lot of noxious emissions tobuild the thing. Do American haters of internal combustion ever stop to wonder why Tesla is building its “Gigafactory” in… China?

Where there is no EPA?
Do you know what goes into making a Tesla’s lithium-ion electric battery pack? Caustic, highly reactive solvents and cobalt oxide, a nasty compound that is uberpoisonous and carcinogenic. Carbon dioxide and water vapor have been accused of triggering “global warming” (oops, “climate change” now) but breathing either will not give you cancer or neurological problems.
Cobalt, on the other hand… . cobalt mining 2
And how do you get cobalt? By mining other materials such as nickel and copper. Then, using various noxious processes to separate out the cobalt, such as “froth flotation,” “roasting” and “leaching” with sulfuric acid.

Mmmm mmmmmgood!

This form of Gaia-rape is ok, though, because it does not occur within sight of Al Gore’s house. Most of the cobalt needed to make Tesla and other electric batteries is located in places like China, Afghanistan and Africa. Those parts of the earth are ok to fist and finger.

Battery production (like sausage making) is an aspect of EVs that is routinely overlooked – deliberately. Because the picture isn’t pretty. In addition to the environmental nastiness of the materials, it takes a great deal of un-green energy to transform those materials into the finished product (a battery). Nearlytwice the energy that goes into making a conventional (internal combustion engined) car, as it turns out.cobalt rape 2
Where does this energy come from? Like mountain oysters, you really don’t want to know. But maybe you should. Coal and oil. Which are used to run the heavy industry plants that make the damned things. And which also make most of the electricity that powers the damned things. Did you know that electric cars that depend on coal and electric utilities are actually 17-26 percent worse, in terms of their total “carbon footprint, than a gas or diesel-engined car? (Those interested in more will find this study worth a look.)

Captain Planet, phone your office.

Meanwhile, Elon Musk continues to suckle the teat of Uncle. Which he must, because his operation is fundamentally a con. Without the force of government backing him, he’d have to bankroll this epic failure himself – which a smart guy like Musk would be unlikely to do. If we had a free market, he’d have no choice but to do that… or shut down.Tesla lead
Instead, he does thecorporatist thing.
Which would less obnoxious if he didn’t constantly preen about the virtues of lightening the wallets of millions of average people so as to further fatten the wallets of millionaires and billionaires, who are the only people buying Teslas and profiting from their existence.
Throw ‘em in the Woods.

David Stockman was the Director of the Office of Management and Budget during part of the Reagan Administration, from 1981 to 1985. He is the author of The Great Deformation: The Corruption of Capitaism in America and The Triumph of Politics: Why the Reagan Revolution Failed.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission. 


  1. Yeah but...
    Well, only ONE has ever caught fire (that I know of). Turn on your scanner. Gas fires every day.
    My ex has a model S. Has had it for 3 years. Maintenance costs? Zero. No oil, no tranny.
    0-60 : 4 secs!! Whooopee!!!
    Range: 200 miles. BFD. She drives 20 miles to work and has a charger there.
    She took it to Tahoe from Santa Cruz last winter at 17 degrees F.
    A 1/2 hour stop for recharge at Vacaville to also visit In-n-Out for lunch.
    So... LOTS of car companies suck the public teat. Walter Block would agree I think, that if Leviathan offers you something back, TAKE IT. I'm sure that Elon Musk pays some hefty taxes.
    As far as "Save the Planet", I agree = B.S.
    But, as a piece of technology, the Tesla is beyond cool. And it shows the way to the future. I love Eric Peters, and what he stands for, BUT he's just got a hard-on for Tesla and it distorts his thinking.

    1. its $70k worth of car. any car at 70k is going to be pretty damn fine

    2. "She drives 20 miles to work and has a charger there"

      I think one of the most irksome aspects of the whole electric car mania is the unspoken assumption/sense of entitlement that SOMEONE ELSE (the employer/business/hotel/taxpayer) should provide charging stations and electricity to power up these toys for free.

      Traveling on business recently, I stayed at a hotel that had free charging points for electric vehicle users. I couldn't help but ask the lady at the desk "Since Mr. Tesla there gets to fuel up for free and the cost is likely reflected in everyone else's room bills, how about some free gas for my Infiniti?"

      To her credit, she laughed - but no free gas...

    3. "But, as a piece of technology, the Tesla is beyond cool. And it shows the way to the future."

      Mike, take a step back for a moment and think about your beliefs in the context of your quoted statement.

      The basic Austrian premise suggests that capital misallocation & distorted markets are the end result of money printing.

      How do you know that what Tesla is doing is the "way to the future" when you take into consideration distorted market & capital allocation?

      It is not up for debate that Tesla would have already been gone/dead/buried if not for a $500 million dollar DOE loan.

      So Mike, they've already failed, suggesting your comment doesn't reflect reality.

      That's aside from the implications surrounding the investment money flooding the stock market, & specifically Tesla stock(and as RW points out, Silicon Valley in general), which makes it all look like another dotcom bubble.

      How many busted dotcom's were labeled "way to the future" during the first tech bubble?

    4. CapnMike, Santa Cruz, eh? Do you or wife "work" at banana slug U?
      Drive to Tahoe in 17deg weather? To your cabin in the woods? Do you write that off as well or is the hotel an expense? Just asking.

    5. To my new friends.:)
      You seem to confuse my feelings on ECONOMICS, POLITICS, CORPORATIONS with my feelings about electric motors. A little critical thinking can sort that out.
      As to the way to the future, listen, I've been working with lasers for 30 years. Those puppies were the original "solution looking for a problem" for their first 25 years of existence.
      Now it's hard to find a commercial gizmo that doesn't have one someplace within. Fiber optics, anyone?
      As for my ex, don't start ad hominum, ok, you're on the edge, but not quite.
      So, I'll tell ya.
      She don't work at the U. She's a self made millionairess (no, no SBC loan), who built a $30,000,000/yr business out of her garage.
      And WOW I detect a little class resentment here. What's with the inequality socialism?

    6. Don't lump us all "anonymous" in on "social inequity" causes(from Anon @ 6:44)


      Also, my "critical thinking" hasn't been able to deduce an actual response to my statement/response to yours, so if you disagree with any of my post I'd appreciate you specifically & directly answering what and why.

    7. To anon 2:17
      I can't reply singly with this interface. THAT's why the lumping.
      As for my "fail" You're claiming I failed at something I never even attempted!!
      I only said the tech was cool. I stand by that. I ALSO specifically denounced the business model, the funding, the crony capitalism. You need to separate the two issues. THAT's what I meant by critical thinking.
      BTW, I also think drones are cool. Using them to slaughter innocents is NOT cool. Do you not see the difference???

  2. And another thing. If the market thinks that Tesla is worth an obscene amount per share, so be it. Don't blame Musk. Valuation is subjective. The market has spoken. See Mises.

    1. "The market has spoken. See Mises."

      Just like it spoke after the first dotcom bust....

    2. I agree! I didn't say "buy Tesla stock", I said aside from the politics, it's a pretty cool car. That's the extent of it.

    3. " I said aside from the politics, it's a pretty cool car. That's the extent of it."

      Actually, no, the "extent" of it was your suggestions that Tesla's model represents the "way to the future", which is why I responded to this statement and the one above(via 6:44)

  3. Tell your wife that she is welcome. Signed: a poor sap taxpayer. Also, you may want to check out Mises' minor writings on the business cycle.

    1. I never said I agreed with crony capitalism. And I've read a lot of Mises. I consider myself as Austrian as I know how to be.
      And please re-read my comments on Walter Block. If a thief drops a dollar, pick it up.
      And trust me, she pays a LOT more in taxes than that subsidy. (Maybe a reflection on Bastiat would fit here)
      But, yes, you and I get the short end of this particular stick. I sympathize.

    2. And tell every GM car owner (or really any user of public roads) the same.

    3. Amen!! Again refer to Block. Thanks for the backup.

    4. "And tell every GM car owner (or really any user of public roads) the same."

      The only problem with that sentiment is that people have a choice when it comes to picking a car manufacturer, not so with roads-there is no choice.

      Mike's statment in regard to "If a thief drops a dollar, pick it up." is interesting(credit to Dr. Block I suppose?) and has merit.

      HOWEVER, at what point in time does a decision to support a crony business become explicit or implicit support of their continued business model? (raping the taxpayer in this case)

      Here is the nuanced difference:

      I can aquire a theifs money one of two was to show the difference:

      1. I can pick up the money laying there, the money he dropped- AND IT'S NO IMPLICIT OR EXPLICIT ENDORSEMENT OF HIS THEFT.

      2. I can go to the thief, & say "Tell you what, you find a way to steal some product/value from that guy over there and I'll take some of what you steal at a reduced cost to me, so we both profit from your theft."

      You see the difference there? It's quite important to think about....

      I decided right away when GM sought out a taxpayer bailout(instead of bankruptcy) that they mad themselves thieves...and it's quite obviously why, just like Tesla's model involves that of thievery.

      There is a difference between tax avoidance and taxpayer funded subsidies, if I Block disagrees, so be it.

  4. My opinion of Stockman crashed and burned while reading this article.

  5. The numbers dont lie tesla is a shit investment.

    1. Yep, this is the bottom line. In that regard I think I've just decided to "short" them.

  6. Oh, Mike, while a Tesler might not have spontaneously combusted, tell me what I can expect when one is T-boned by an uninsured motorist

    1. The same as any car. Or less. Something tells me that that battery won't explode like a tank of gas.

  7. Until an entire electric charging infrastructure is built to replace the gasoline infrastructure, electric cars aren't gonna be worth a thing. They will remain toys for those who can afford them. When I see someone with one, I always ask, "How's your life-size RC car treating you?" And boy I hope they aren't the future... I prefer an engine roaring behind me when I put the pedal to the metal, not a high pitched whizz from an electric one. SNORE

    1. We'll install a soundtrack. :)
      To their credit, Tesla are building fast-charging stations as fast as they can.
      BTW, I think subsidized (free) public charging stations SUCK. I don't want to pay for some rich guy's transport any more than you do.