DETROIT VS. TESLA
The United Auto Workers called for a strike after it was unable to reach a deal on wage increases with US auto companies GM, Ford and Stellantis. The union is seeking a 30% wage increase over four years and other benefits. The legacy producers already pay their workers more than Tesla pays its own. Analysts estimate current average hourly labor costs at GM/Ford at $67 vs. $47 at Tesla (includes pensions and profit sharing but not stock options). This has been a big advantage for Tesla and it has allowed it to cut prices aggressively while remaining profitable. Gene Munster believes that the Big 3 will settle for an increase that will take hourly costs to $105, extending Tesla’s cost advantage.
Tesla is not unionized and is able to pay its workers lower wages because it supplements their pay with stock options. The flip side is that the present configuration and wage discount are viable only so long as Tesla stock rises sufficiently to make stock options profitable. It is up 116% so far in 2023 but is essentially flat over the past two years, after a huge run in 2020-21.
Like everything else concerning Tesla’s future, a lot is riding on optimism and faith in Elon Musk’s ability to realize feats that are beyond the reach of mere mortals. This positive élan worked like a dream until about two years ago but it now faces an existential test in the form of Tesla’s full self-driving (FSD). Is it, as critics claim, forever compromised, for lack of using LiDAR technology? Or is it on the cusp of delivering on its promise of complete driverless autonomy? We shall see.
Should Tesla’s stock go nowhere or should it crater again as it did in late 2022, there will be demands from its workers for higher wages to close the gap vs. the Big 3. There may be a movement to unionize. This would all compound Tesla’s troubles and further squeeze its margins, leading to more stock declines. All in therefore, it is too soon in our view to see Musk and Tesla as the winners in the UAW strike. In the past three years, the market has given Tesla a generous valuation based on visions and promises. Perhaps Musk will perform magic once again. Otherwise, as Peter Atwater says, “reality will trade at lower multiples”.
AFTER THE WORLD ORDER
When Russian troops invaded Ukraine in February 2022, Russian leaders declared the American-led world order to be over. Since then, there has been frenzied activity in many parts of the world to prove this prediction right. Leaders from all major and middling powers seem to be staking their grounds. There are here and there communiqués about the transition to multipolarity and de-dollarization. The BRIC are on the case, and expanding to other countries while also evaluating applications from dozens of others. There is China’s Belt and Road and India’s IMEC (see below) initiative. There is also a Proposal of the People’s Republic of China on the Reform and Development of Global Governance. Its introduction is straight in marking a global future that differs from the past:
“Today, changes in the world, in our times and in history are unfolding in ways like never before. The deficits in peace, development, security and governance are growing. Humanity is once again at a crossroads, and facing a consequential choice on its future. Meanwhile, world multi-polarity and economic globalization keep evolving. Peace, development and win-win cooperation are the unstoppable trends of the times. Solidarity, cooperation and progress remain the aspiration of people around the world.”
Empirically speaking, today’s near-term reality is at odds with these aspirations. Against the backdrop of a promised new harmony, tensions have noticeably intensified in several parts of the globe: in the Taiwan Strait, in the Southern Sea (aka the South China Sea or West Philippine Sea), in the Sahel and south of it, in the Caucasus in Nagorno-Karabakh, on the China-India border etc.
The revived mood for war leads to the following question: if we are in the early days of a new order, or at the beginning of the end of the former world order, who really wants it? Contrary to popular lore, the world order that prevailed in 1990-2010 benefited emerging economies more than it benefited the developed world. Yes, western companies and western society became more prosperous because global trade expanded corporate margins while keeping inflation down. But the gains made by developing countries, most obviously China, were immeasurably greater in relative terms. The West also has to contend with greater inequality and with the economic dislocation of many communities, both of which resulted from globalization.
One theory, promoted by some commentators, holds that de-dollarization and multipolarity would in fact benefit the US the most. For example, if the new world reverses offshoring, the US will correct its imbalances and fiscal deficits, and reduce its internal tensions. The new new world would look like the period preceding 1990. For most of the world, that is not an attractive proposition.
INDIA-MIDDLE EAST-EUROPE ECONOMIC CORRIDOR (IMEC)
It does not have the Goldman Sachs imprimatur (as in Jim O’Neill’s BRICS) or the catchy name (as in Belt and Road) but the newly signed India-Middle East-EU Economic Corridor (IMEC) is also oriented at multinational trade and cooperation. At the recent G20 summit, India, the United States, the United Arab Emirates, Saudi Arabia, the European Union, France, Italy and Germany signed a memorandum of understanding to establish IMEC. It resembles the China-led Belt and Road Initiative (BRI) but stands out for its inclusion of the US and its allies and its de facto exclusion of China. India has long been proud of its neutrality and non-alignment with other major powers. But China’s new assertiveness coupled with tensions on the China-India border are pushing India towards the US. India is unenthusiastic about the creation of a BRIC currency and seems increasingly ill at ease within the BRIC.
IMEC seeks to connect India, Europe and points in between, through new and existing rail lines and ports. Currently, all trade between the European Union and India is carried by maritime container shipping through the Suez Canal. The new initiative would create an alternative by land through the Arabian peninsula to the port of Haifa in Israel, onward by sea to Greece and other European destinations. IMEC falls squarely within India’s vision and ambition to become the next rising power and manufacturing hub. India’s ports are closer to Europe than China’s, and its trade volumes stand to gain from supplementing existing sea routes with the new IMEC routes.
Other countries will be interested in joining. Turkey has already voiced its interest. And Egypt, which derives large revenues from the Suez Canal, will want its concerns addressed. Regarding China, The Hindu notes:
“While IMEC has been proposed to counter the Belt and Road Initiative proposed by China, Chinese presence cannot be wished away along the IMEC route… This is because Piraeus port is controlled by China Ocean Shipping (Group) Company which is a Chinese state-owned company. Also, Chinese companies like PowerChina, China State Construction Engineering Corporation and so on have qualified for multiple packages for Phase one and two of Etihad Rail [one of the rail links within IMEC]”.
LATEST UNIVERSITY RANKINGS
US News & World Report’s 2024 Best Colleges Ranking is out this week. No spoiler alert is needed when it comes to the top 5 national universities since they are the same as last year’s: Princeton, MIT, Harvard, Stanford and Yale. No one is challenging the untouchables.
Bedlam and fury erupt at number 6 with the University of Chicago suddenly demoted from 6th last year to 12th this year. What affront did Chicago commit in the span of a mere twelve months to deserve this? You’ll have to read the report to find out, or inquire elsewhere. But while mighty Chicago has fallen, Brown has risen in its place. It jumped from 13th last year to 9th this year.
Looking at universities ranked 11-20, Columbia was deemed more respectable this year than last (18th in 2023 to 12th in 2024), as were UC-Berkeley and UCLA (both 20th to 15th), and Cornell (17th to 12th). They displaced others that fell a few rungs, notably Dartmouth (12th to 18th), Vanderbilt (13th to 18th) and Washington University in St. Louis (15th to 24th). All of the above are fine universities but some of these ranking changes seem too rapid over a single year.
US News says that it has made changes to its methodology, a decision that sheds some doubt on the entire exercise. The value of these rankings must rest on criteria that are timeless. The section on methodology states:
“U.S. News & World Report made refinements to this year’s rankings formula by dropping five longstanding factors, modifying the weights of several other factors, and introducing a few new ones.”
From the table below, the five longstanding factors that were dropped are “class size, terminal degree faculty, alumni giving average, graduate debt proportion borrowing, and high school class standing”. There were seven new factors that were introduced: “first generation graduation rates, first generation graduation rate performance, college grads earning more than a high school grad, citations per publication, field weighted citation impact, publications cited in top 5% of journals, and publications cited in top 25% of journals.” Except for class size (a discontinued factor), there were no significant weighting changes. The largest weightings are graduation rates (16%), graduation rate performance (10%) and peer assessment (20%) and they add up to nearly 50%. (click table to enlarge)
It is possible to quibble with any of the above. For example, graduation rates may be more related to the socioeconomic level of students before they enroll at a university rather than to the quality of the institution itself. And peer assessment may be influenced by groupthink or brand strength. On the other hand, conspicuously absent from the criteria are the hard tangibles of a college education and its aftermath: teaching quality, teacher-student mentoring, relevance of a degree to one’s career, alumni networking, return on investment, student satisfaction, etc.
READ MORE (or have your children read) >>> Your Mentor is Your Booster Rocket.
S&P SECTORS UPDATE
The major indices retreated in the past week, but only by modest amounts. Nonetheless, if we measure from the highs of late July, the S&P 500 is down 3.5%, the Nasdaq Composite is down 5.3% and the Nasdaq 100 is down 4.6%. Among sectors, the only meaningful movers in the week were Utilities XLU up 1.6%, Consumer Discretionary XLC down 1.5%, and Energy down 1.1%. The last is surprising because the price of oil was up 3.2% in the week. Investors seem unwilling to concede that the price of WTI crude can remain above $90 for a while.
We published the editors’ fifth weekly selection of the best articles on geopolitics and world events. Click the image to access the list.
TWEETS AND CHARTS
We are reposting our old chart about TWITTER CHARGING USERS, now that Elon Musk is floating the idea of doing exactly that. The chart is from a few years ago. Many bloggers are now in the green box. The x-axis is the frequency of posting. The y-axis is how important is posting to the user’s job/business. We have long held the view that tweets are digital billboards and should charge the most prominent users, just as billboards in the most prominent locations charge advertisers.
The S&P 500 is within 3% of its 2023 high, but the CBOE VOLATILITY INDEX has dropped to a level not seen in over three years. In the past, a low VIX has been a warning for investors to be cautious. However, the VIX does not capture the action in 0DTE (zero date to expiration) options that have dominated the options market this year.
The PRICE OF URANIUM has been boosted by the renewed acceptance of nuclear as a viable energy source and by the coup d’état in Niger. It remains well below its 2007 spike however.
Speaking of commodities, there are NOT ENOUGH FRESH INVESTMENTS going into natural resource exploration (in this chart, energy) while technology is receiving plenty of fresh outlays. All other things being equal, this could prolong the period of more expensive oil, diesel and gasoline.
The PERFORMANCE OF ENERGY STOCKS relative to the rest of the market has been detriorating for years. See here energy vs. the S&P 500. ESG mandates and the fast growth of technology have made investors divest their energy holdings.
SMALL COMPANY STOCKS (small caps) still don’t get much respect. The Russell 2000 index is only up 4% in 2023, vs. 16% for the S&P 500 and 31% for the Nasdaq Composite. The Russell is still well below its November 2021 high. This chart shows the performance of small-cap stocks vs. large-cap.
THE MARKET IN LATE SEPTEMBER: If you believe in this chart as an indicator, things could turn south for the stock market, starting… tomorrow. Predictions based on technicals (such as this) are not intrinsically reliable, but they could become self-fulfilling prophecies if enough people believe.
Japan is clearly concerned with CHINA’S EXPANSION INTO THE SOUTHERN SEA (aka South China Sea, West Philippine Sea etc.) if we judge by this graphic from the Ministry of Defense.
V-Dem measures DEMOCRACY AROUND THE GLOBE and classifies countries into four categories. The drop in this chart is due to V-Dem’s reclassification of India, Turkey, Nigeria and the Philippines from “electoral democracies” to “electoral autocracies”. Not everyone has to agree in each case.
OLIGOPOLIES AND MONOPOLIES outperform the market. Here is a good thread of twenty such companies. Click the image or here to go to the thread.
The Wednesday Letter is not investment advice. Please do your own work and discuss with professional advisors before committing capital.
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