Tesla’s goal has been to drive prices down and increase #EV adoption. At Investor Day (3/1), Elon could announce a step-function drop in pricing, much like he did for the Model 3, to ~$25,000 for the next gen EV. Gas-powered vehicles boomed at that price point.
Based on the historical demand response to a $25,000 price point in gas-powered vehicles, ARK’s forecast that EVs will scale from ~8.5 million in 2022 to 60 million units - 75% of the market - during the next five years could be too conservative.
Moreover, in our view, Tesla remains 3-4+ years ahead of the competition in battery costs and is in a world of its own in chip design and data assets for autonomous mobility: think Apple chip design for smart phones vis a vis Nokia, Motorola, Ericsson, and Blackberry. New world.
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The bond market seems to be signaling that the Fed is making a serious mistake. At -80 basis points (as measured by the 10 year vs 2 year Treasury yields), the yield curve is more inverted now than at any time since the early ‘80s when double-digit inflation was entrenched.
I am wondering why economists are not highlighting that an 80bp inversion in the Treasury yield curve today is much more of a red flag for the Fed today than it was in the early ‘80s. As a percent of the 3.5% 10 year Treasury yield, it is ~23% today vs ~5% of 15% in the ‘80s
Typically, an inverted yield curve is pointing to a recession and/or lower than expected inflation than expected. In our view, deflation is a much bigger risk than inflation. Commodity prices and massive retail discounts are corroborating this point of view.
If inflation is unwinding, as we believe, then we could be heading back to the future, the Roaring Twenties, the last time several general purpose technologies evolved at the same time: telephone, electricity, and the internal combustion engine. The setup is remarkably similar!
Prior to the Roaring Twenties, the world was at war - WWI - and suffering a pandemic - Spanish Flu. While both had a more serious impact on the global economy, today’s combination is a strong echo that could result in much lower than expected inflation and a boom in innovation.
During WWI and the Spanish Flu, supply chain and other shocks pushed inflation to 20%+. At its worst in June 1920, inflation peaked at 24% but then dropped precipitously in one year to -15% in June 1921. We would not be surprised to see broad-based inflation turn negative in 2023
.@Nancy__davis is highlighting a chart that is flagging the deflationary ramifications of current Fed policy. First, the yield curve has inverted to a level not seen since the early eighties, but -0.5% (50 basis points) on a 4% base is draconian compared to -0.5% on a 15% base.
Second, despite record-breaking monetary stimulus during COVID, the yield curve steepened only ~half as much in 2020 as “normal” during past crises: 150 basis points vs. 250-300. In other words, the long bond market seemed to be flagging a significant deflationary undertow.
The UK’s LDI crisis was the first rip in the global financial fabric caused by the Fed’s unprecedented 13-fold interest rate hike. As a result, the BOE has been forced to part company with the Fed and has resumed buying instead of selling gilts.
The yield curve “suggests” that US monetary policy has not been this restrictive since the ‘80s. As measured by the 2-year Treasury yield relative to the 10-year Treasury yield, it has inverted by 50 basis points, the 10-year yield at 3.75% compared to the two-year at 4.25%.
In @ARKInvest’s view, US monetary policy is significantly more restrictive than in the ‘80s when, to kill inflation, Fed Chair Volcker pushed the Fed funds rate up two-fold from 10% to 20%. Chair Powell and team have increased it 13-fold from 0.25% to 3.25% to slay the dragon.
Under Volcker, the increase in long Treasury yields was 1.6X, from 10% to 16%, compared to 7.4X, from 0.5% to 3.7% under Powell and team. Risk aversion is pummeling all assets except cash, but the Fed seems fixated on hiking rates another 100+ basis points to protect its legacy.
Deflation in the pipeline, heading for the PPI, CPI, PCE Deflator: from post-COVID price peaks, lumber -60%, copper -35%, oil -35%, iron ore -60%, DRAM -46%, corn -17%, Baltic freight rates -79%, gold -17%, and silver -39%.
As measured by the Manheim, used car prices dropped 4% in August (roughly 50% at an annual rate!), have dropped 10% since peaking in January, and if electric vehicles are as disruptive as we believe, could be cut in half, hitting lows last seen during the GFC in late 2008.
If residual auto values deteriorate accordingly, the $1+ trillion in US auto debt will be in harm’s way. Autos were the best credit in 2008-09, as individuals prioritized their auto loan payments at the expense of mortgages so they could get to work and stay employed.
The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation. Leading inflation indicators like gold and copper are flagging the risk of deflation. Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year.
At Jackson Hole, Chairman Powell invoked Volcker’s name twice directly, twice indirectly. Today’s COVID-supply-shock inflation is nothing like the ‘70s inflation that started with “guns and butter” in 1964, and accelerated after Nixon ended the gold-exchange standard in 1971.
Not ‘til Volcker took charge in 1979, 15 years after the Vietnam War and Great Society began, did the Fed attack inflation decisively. In contrast, faced with a two year supply-related inflation shock, Powell is using Volcker’s sledgehammer and, I believe, making a mistake.