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Tuesday, Dec 15

What happens when the prevailing myth of an infinite zero rate time horizon meets a company with a good story to tell? Infinite risk tolerance. In today’s Briefing, Epsilon Theory explains why Tesla is the poster boy for this new phenomenon and why, for the time being at least, no valuation is too extreme for the company as investors buy into the green wave narrative and –literally –shoot for the stars. Meanwhile, Ollari Consulting explains why the company ticks all the boxes for the next generation of investors and how its imminent inclusion in the S&P 500 is set to produce a surge of equity volatility amid unseen rebalancing that saw authorities consider splitting its debut on the index not just over two days, but two quarters. Elsewhere, Longview Economics outlines why a pattern stretching back to 1800 is good news for the medium-term prospects for the US economy, SouthBay Research gives its usually-prescient forecast for US payrolls in December, and Pantheon Macro describes why a no-deal Brexit may not be as damaging for sterling as some may think.
  1. Platform stories Tesla ZIRP Epsilon Theory

    1. The ZIRP paradox

    Rusty Guinn at Epsilon Theory has always liked Tesla’s cars, but not the stock. Simply put, he thought the company’s fast and loose approach to accounting and operations would see it run out of sources of money to build factories, pay people and design those cars. Guinn has been converted, however. Tesla, he says, has created a narrative that people want to believe in, and thanks to a ZIRP mantra that means investors now believe the discount rate will be functionally zero over any time horizon that matters, there is an audience willing to bet that there is no price or no valuation for the car/rocket maker that is too ridiculous. Guinn explores a range of other so-called platform stories, which when combined with the infinite risk indifference of ZIRP are the enemy of long-term investing.
  2. rebalancing indices US equities Ollari Consulting

    2. Tesla -the mother of all rebalancing

    Tesla is the icon of the emerging green wave and its inclusion in the S&P 500 is going to cause anything but a ripple says Christophe Ollari at Ollari Consulting. He makes no attempt to debate whether the company itself is overvalued, but puts numbers on its impact on the stock index on Monday, in what he describes as the “mother of all the S&P 500’s rebalancing”. As Ollari notes, most new entrants come in around 400-500th place and make little difference, but Tesla is coming in with a bang – likely shooting into 7th place in terms of market capitalisation. Investors should prepare for a bumpy ride, he warns, as the low market depth of December, coupled with options expiry and the inclusion of a volatile stock like Tesla could see upwards of $80billion-worth of stock change hands.
  3. US economic recovery US Real Estate Longview Economics

    3. The 18-year land cycle and the US recovery

    Longview Economics has set out the central question of 2021: will the much anticipated economic boom following the administration of the coronavirus vaccine have any legs, or will it peter out late next year or in early 2022? In other words, says the firm, is it a short –term stimulus sugar high or will it kick start multiplier effects in the economy? To that end, Longview explains why the key multiplier effect is likely to come via the real estate channel, and why if a historic pattern that has held since the US started selling off its real estate in 1800 holds, the country is moving towards an economic peak in the mid-2020s which should see strong economic growth continuing until at least 2024.
  4. US economy US employment SouthBay Research

    4. Hiring retreating in December

    SouthBay Research has built up a formidable record as one of the top forecasters on US economic activity, consistently beating consensus forecasts on Bloomberg and ranking in the Top 3 forecasters on for US employment data. The key to this success is the way in which they collate data from the real economy, which differentiates them from most other forecasters. On labour for instance, they’ve developed a proprietary database that tracks US hiring in real-time at the individual company level.

    SouthBay’s latest report is particularly salient, taking an early look at US non-farm payrolls ahead of the Christmas break, where payrolls will be one of the first data hits in the New Year. The firm sees a major retreat in hiring, particularly in metro areas that are re-imposing Covid-19 restrictions, with the US economy heading past the big rebound seen in October and November, which should see payrolls settle at around 350k.The news is mixed, however, with supply chain centred areas surging.

  5. Brexit GBP UK Pantheon Macro

    5. How far would sterling fall in the event of a no-deal?

    Attempting to forecast the likely level of sterling in the event of a no-deal Brexit is more of an art than a science, says Samuel Tombs at Pantheon Macroeconomics, given that it is impossible to know the extent to which this act of economic vandalism is already priced in by markets. Still, he explains why the pound is less vulnerable now than after the shock referendum verdict in 2016, and why investors shouldn’t take comments from Boris Johnson or Ursula van der Leyen at face value as they posture to extract last-minute concessions.