Two Elections In The QE Economy

I am following two elections in the QE economy this November. The first election is the presidential election on November 8^th. The second election is the Tesla-Solar City merger. Both elections will affect the market in different ways. Both are also symbolic of the way our current economic system is set up. It rewards those well-connected to the government and screws the middle class worker who can’t make any money in his/her savings account. This is what I have coined the QE economy.

Trump

The fact that Republican primary voters and now independents in the general election are willing to put their faith in Donald Trump over experienced politicians and the media show how desperate they are to have the economy regain steam. The QE economy hasn’t worked and has run its course with stock barely rising over the past two years. Middle income citizens who have a 401K along with some money in a savings account have barely gotten any returns at all. This actually the best part of their situation. The number of full time jobs is dwindling as manufacturing and energy weaken while small businesses are being hurt by regulations and Obamacare.

The average American only has $5,000 in retirement savings as the QE economy helps the rich, but hurts the middle class and poor. Low interest rates are allowing the top management of big firms to buy back stock and then issue generous stock based compensation plans to themselves while the average Joe has almost no money saved for retirement and has a tough time growing that small savings unless he takes big risks and buys momentum stocks.

When you have to work several part time jobs and don’t have money saved, voting for Trump doesn’t sound like a bad idea even if he is crude. This is why we’ve seen citizens ignore all the top economists going against him. They know the economy isn’t working for them.

Tesla

On the other side of the spectrum, we have Elon Musk and Tesla who is one of the well-connected winners in this QE economy. He has been able to take government money and continue to issue stock by convincing shareholders the Model 3 will be one of the first mainstream electric cars. The bubble stock market buys into his money losing venture as TINA takes hold. Having one overvalued car company was not enough for Elon Musk. He also is involved with Solar City. This is where the recent problem for Tesla lies.

Elon Musk personally bought Solar City bonds which means he loses part of his recent $65 million investment if the company goes bankrupt. More importantly it hurts his gravitas if Solar City fails. This is why Tesla bought Solar City. It was a corporate bail out. Obviously it’s problematic for Elon Musk because Tesla is supposed to make business decisions which improve its cash flow, not tank it. As you can see in the chart below, Solar City almost doubles Tesla’s debt.

Even though Solar City is a noose around Tesla’s neck, if I was a shareholder I would vote in favor of the deal. My logic is that Elon Musk cannot let Solar City fail at all cost. Even if Solar City brings down Tesla’s share price it still will be able to get over the finish line to do one more secondary offering before the Model 3 ramps up production. While I don’t think the Model 3 will be profitable given Tesla’s inability to make money on luxury vehicles, I think buying Solar City at least allows Tesla to make it to next year when production begins.

The key for Elon Musk is to pitch Tesla’s purchase of Solar City as business deal because investors do not want to go through with a bailout. The pitch for voting for the deal had three parts. The first was the earnings report Tesla just delivered which it used tax credits to make it appear profitable. Appearing profitable makes it look like it can comfortably afford to buy Solar City.

Part two was to accelerate the date of the earnings report because it wanted the time between its report and Solar City’s to be elongated. Elon Musk is now encouraging shareholders to vote early on the deal before Solar City reports next Wednesday. Shareholders have plenty of time between next Wednesday and the final day of November 17^th to vote. The only reason why Musk is encouraging early voting is because he knows Solar City’s numbers will be terrible.

The final part of Elon Musk’s pitch was the solar roof which looks like a regular roof. It has the solar panels within the roof instead of on the outside. This is purely cosmetic and actually decreases the ability for the solar panels to receive the sun’s energy. Elon Musk offered little details about it would work. This concept was already tried by Dow Chemical in the past, but the plan was scrapped because it couldn’t work. Elon Musk’s desperation to make it look like Tesla can be integrated with Solar City is more transparent than the roof covering which houses the solar panels! The goal to generate electricity from solar power which then is stored in the Tesla Powerwall which is used to fuel cars is a dream which will not come true.

Conclusion

            Low interest rates and three rounds of quantitative easing created what I coined the QE economy. The QE economy doesn’t work for middle class Americans. This is evidenced by the widening gap between the rich and everyone else. On Election Day voters will likely vote for Trump which will take a chunk out of rich investor’s money as stocks fall.

This QE economy is what allows companies with no earnings to survive. Companies like Tesla are able to issue stock to fund growth which never leads to profitability. The amount of shenanigans that Elon Musk is allowed to get away with in order to get the Tesla-Solar City deal done shows how crazy things have gotten. Because of Elon Musk’s need for Solar City to survive, I would vote for the deal and I think investors will do the same. Solar City’s losses and Tesla’s inability to make a profit on the Model 3 are why I am long term bearish on the stock.