The rush in Tesla’s
I am not going to pronounce on whether Tesla is a buy or sell, but simply to remark on two related factors – both of which are united by the sense that as in all great bull markets, Tesla is the totemic asset, the phenomenon that unties several narratives and defines an investment age – on the way up and also potentially on the way down.
Little debate on climate change
First, Tesla marks the advent of several new eco-systems, that are now intensely correlated.
One is the battery/electric car industry, which is increasingly and where, compared to its peers, Tesla’s stock market capitalization is still (notwithstanding a huge order from Hertz – Tesla gained USD 100bn in market cap for an order worth USD 4bn).
Another is the options market which since the pandemic has exploded in size and has to a certain extent, ironically, become the driver of the stock market in general, and specific stocks like Tesla in particular. For example, in recent days 5.1 billion dollars of call option contracts in Tesla have changed hands, dwarfing activity in all other stock options. The widely held view is that this frenetic options activity is the driver of the Tesla share price.
A third is the crypto currency market, to which Tesla is now umbilically linked through its balance sheet. Indeed, the price of Tesla and bitcoin have risen in tandem in recent weeks.
Democratisation of risk
The confluence of these finance centric eco-systems has led many people to hold that we are in an age of the democratization of finance – where platforms, tools and products are springing up that give the common man and woman access to the financial opportunities hitherto enjoyed by billionaire hedge fund managers.
This is not the case. Instead of the democratisation of finance, we are in an age of the democratisation of risk – where a range of risks, mostly arcane financial market ones, are increasingly distributed across retail investors. The issue is that the man or woman in the street, is unprepared for these risks. The other, finer point is that when many people across a population find they have the ‘same’ risk, and all react against it at the same time, dislocation occurs.
Financial history is. Good guide here. For instance Amsterdam was a centre of financial innovation (William Goetzman’s book ‘Origins of Value’), notably in options trading. Such innovations in finance follow a pattern where early investors and pioneers (especially those who own the infrastructure) do very well, asset prices rise in a parabolic way and this attracts the greater investing public (the democratisation phase), a crash or scandal ensues and regulators arrive late to the scene of the accident.
The derivatisation of the US housing market in the early 2000’s is a good example. Cheap financing meant people could afford more, and bigger houses, until the entire market collapsed.
This leads to the second point. Tesla, the options market and crypto are not yet systemic threats to the financial system, but they do create crowding in investment strategies and can exaggerate bullish sentiment.
Volatility ahead
My short term concern is that a range of measures – volatility, options pricing, risk appetite and flows indicators are all very stretched to the upside. A dent to investor sentiment from say poor corporate earnings or higher bond yields, could set off a bout of equity market volatility.
