Week #43 Tesla’s Exponential Earnings Ebb; Harvard’s Politically Incorrect Nobel Prize; Techno Optimist Manifesto

Stock Pickers RIP; “Money Money Money, It’s a Rich Man’s World”

Today at a Glance:

One Quote: No, Tesla will not exceed the mass of the universe

• One Prize: Harvard’s Politically Incorrect Nobel Prize

• One Manifesto: Silicon Valley’s Tech Optimist

• One Death: Stock Pickers RIP

• One Chart: “Money Money Money It’s a Rich Man’s World”

One Quote

"It is not possible to have a compound growth rate of 50% forever, or you will exceed the mass of the known universe."

                                                                     Elon Musk, Oct 18, 2023

Elon Musk is no stranger to capturing headlines. But it's usually the product of an exaggeration of Trumpian scale.

 “Full self-driving will arrive next year” is a promise Musk has repeated annually since 2016.

All that made Musk’s admissions on Tesla’s recent earnings call a stunner.

In contrast to his usual man-child persona, Musk’s tone was positively melancholy.

Musk laid bare the enormous challenges Tesla confronts to sustain its meteoric growth.

Musk spearheaded Tesla's improbable success through sheer force of will.

But those days of unchecked exponential growth are gone.

First, demand for Teslas is softening.

Tesla has relied on endless market appetite to fuel its meteoric rise. But higher interest rates are eating into demand. The early adopters have adopted.

To stoke further growth, Tesla has turned to deep price cuts. These have boosted sales volumes. But they have warped the company's economics. Tesla's automotive gross margins have collapsed.

Second, competition is catching up. Tesla's vehicle lineup is looking stale. Last week, my 9-year-old noted that Teslas "look like they are from the olden times." The company last launched a new passenger vehicle in 2020.

Old-guard carmakers like V.W. and G.M. are pouring billions into their own E.V.s. In a recent two-month test of E.V.s conducted by The Wall Street Journal, the Ford Mustang beat out a Tesla. In China, BYD outsold Tesla in October for the first time.

That leaves Tesla leaning on a single, aging model to drive revenue growth.

Good luck with that.

Third, Tesla is banking too much on its delayed Cybertruck to spur its next growth phase. Musk revealed that the Cybertruck won't make a "significant" contribution to Tesla's bottom line until 2025. The Cybertruck’s delay highlights the steep manufacturing challenges Tesla faces through excessive complexity and feature creep.  

“We dug our own grave with Cybertruck,” Musk told analysts,

Yes, Tesla has sparked a profound shift, irreversibly moving the auto industry toward electrification.

But its dominance is no longer guaranteed.

Tesla's stock has roughly doubled in 2023. Still, it remains below its highs from two years ago.

In the past week alone, Tesla shed an eye-popping $100 billion. But its market cap of $675 billion still makes it the equivalent of roughly the top 9 global carmakers combined.

Meanwhile, its trailing 12-month profit is down $1.8 billion. Its rolling P/E is 56

The bottom line?

The Tesla’s best days are behind it

As I predicted, Tesla is turning into the next Cisco.

One Prize

Harvard’s Politically Incorrect Nobel Prize

“Everyone knows” that women get paid less than men for the same work, right?

Not so fast.

The pay gap is not the bogeyman partisan rhetoric claims.

Newly minted Nobel laureate and Harvard professor and University of Chicago Ph.D. Claudia Goldin's empirical research reveals a far more nuanced reality.

Her work is more the product of rigorous empirical research demanded from University of Chicago-educated economists like Goldin than their more ideologically driven Harvard counterparts.

This bias was evident in the lukewarm congratulation the Harvard Crimson extended to Goldin. Completely missing the point of Goldin's research, the Crimson descended into predictable tripe about how women are underrepresented by Harvard's economics department. (And I say that as a disappointed Harvard grad.)

As the University of Chicago’s economic department teaches, hard data dissolves dogma.

Three salient insights emerge from Goldin's meticulous, non-ideological analysis as popularized in her most recent book “Career & Family: Women’s Century-Long Journey toward Equity” (2021).

First, Goldin documented parity for young male and female Chicago MBA grads. No, Goldman Sachs and McKinsey don't pay women recruits less than their male counterparts. But a pay gap ensues with age. Motherhood, not bias, explains later gaps as women temporarily reduce hours or leave the workforce.  

Second, pay gaps vary dramatically by occupation. Jobs with nonlinear, escalating rewards for long hours and round-the-clock availability exhibit more significant gaps. Many women aren't willing to accept the B.S. of being a partner at a law firm. (I didn't either, and I'm a mere man.) In jobs offering linear pay and schedule flexibility- that is, most office careers, the gaps are negligible

Finally, Goldin resists well-intentioned policy intervention. Closing gaps requires nuance, not government fiat. Firms providing flexibility and remote work reduce gaps without mandates, benefiting both sexes. Heavy-handed policies risk unintended consequences and forfeit private experimentation. 

In sum, Goldin's meticulous scholarship belies pay gap hyperbole. Gaps reflect life cycle choices, not blanket bias. They manifest differently across occupations based on incentives. Hard truths trump ideological zeal. That's a welcome change from the norm.

And it’s yet another tip of the hat toward a product of the University of Chicago’s Department of Economics.

One Manifesto

Silicon Valley’s Techno Optimist

Marc Andreesen brought us the web browser and helped launch the Internet Boom with Netscape’s IPO in 1995.

Today, he is a venture capitalist in Silicon Valley. He has also morphed into Silicon Valley’s techno philosopher.

Andreesen recently published a recent update of his Techno Optimist Manifesto. It's a combination of surprising erudition with rational optimism. He admirably steers clear of the current debate around "wokism” that has come to dominate the Valley’s corporate ethos.

Andreesen makes a compelling case that technology paired with free markets can unlock immense human potential. 

First, innovation is the engine of progress. The most potent force for bettering lives is the human capacity to create new tools and knowledge. Scientific inquiry, entrepreneurial spirit, and technological innovation have generated unprecedented prosperity. Societies stagnate when they stop pioneering.

Second, free markets efficiently direct talent and capital toward meeting human needs. Hayek argued in the 1930s that no central planner could match the distributed intelligence of billions. Markets reward those who identify underserved desires. Entrepreneurs then compete to deliver better and cheaper solutions. This evolutionary process leaves everyone better off.

Finally, achievement demands an optimistic mindset. Technological advancement depends on individuals boldly venturing into the unknown. Dystopian fretting stifles initiative. Problems once deemed intractable often yield to human ingenuity. With faith in progress, determined tinkering can overcome imposed limits.

In sum, embracing progress through technology and markets provides the surest path to broad prosperity and flourishing.

Do you think Andreesen is correct, quixotic- or just plain ridiculous?

The Financial Times and its readers think it’s the latter.

https://on.ft.com/3tBirT6

But that’s precisely why the next Google- whose first URL was www.google.stanford.edu -is not coming out of Oxford or Cambridge.

One Death

Stock pickers RIP

The bells are tolling the death knell for stock pickers. Plagued by over $600 billion in outflows and squeezed by passive competitors, venerable active managers face an existential crisis. Their lucrative bull run is over. This stark reality confronts firms like T. Rowe Price and Franklin Resources.

Here’s why.

First, the stellar returns these stock pickers enjoyed stemmed almost entirely from rising markets, not skill. Since 2006, over 90% of their additional revenue came from buoyant markets lifting all boats. Now, with markets turning bearish, their hollow revenue growth stands exposed. Feeble stock picking won't save them.

Second, their tactics to stop outflows and lift fees - mergers, jumping on bandwagons like ESG - have failed. These desperate moves did little beyond burning cash. The bottom line is passive strategies keep conquering market share regardless of market conditions.

Finally, their forays into private markets and alternatives may temporarily juice fees. But these stopgap measures won't reverse the long-term decline in assets and margins. Most of these firms face a slow descent into irrelevance as revenues and AUM inevitably shrink. The future for active management's middle tier looks grim.

In sum, the existential plight confronting these once dominant active managers stems from secular industry shifts, not temporary headwinds.

They must transform to survive. For most, it is likely too little, too late. The end of an era beckons.

One Chart

“Money Money Money It’s a Rich Man’s World”

- Swedish pop music sensation ABBA

The U.S. may be the wealthiest country in the world.

However, the wealth disparities are enormous.

Recent data from UBS confirms this.

Median wealth (50^th percentile) often diverges drastically from average wealth in many countries.

UBS offered three major insights.

First, countries with the highest average wealth per adult are not the most equal. The U.S. is the greatest offender. It boasts the second-highest average wealth globally. But its median wealth ranks much lower. Wealth is unequally distributed.

Second, some countries, like Belgium, fare surprisingly well. Belgium boasts no New York City, Silicon Valley, or world-beating brands. But Belgium's high median income means the average Belgian is more prosperous than his American counterpart. Median wealth proves more informative than averages distorted by the fortunes of Bill Gates and Elon Musk.

Finally, the extraordinary gaps between median and average wealth in countries like the U.S. and India highlight impaired economic mobility. In the U.S., wealth is concentrated among the ultra-rich. Middle-income earners are increasingly left behind.

Here’s the challenge:

Identifying an issue is one thing. Whether or not it requires a “solution” is another.

Often, “the solution” is worse than the problem.

As Thomas Sowell observes: “There are no solutions only trade-offs.”