A lot of sizzle…

  • ‘Peak Australia’
  • Getting poorer
  • Debt grows

You’ve got to give him an ‘A’ for PR skills.

We’re talking about Elon Musk, the chairman of Tesla Inc. [NASDAQ:TSLA].

Over the past few days, the world has gone gaga about Mr Musk’s plan to ‘solve’ South Australia’s energy crisis.

Musk tweeted:

Tesla will get the system installed and working 100 days from contract signature or it is free.

According to ABC News:

In response to South Australia’s power problems, Tesla has been talking about a battery array capable of storing somewhere between 100 and 300MWh. While that’s a measure of storage, the actual output of these batteries isn’t clear.

Sounds great. Then you look at the facts.

According to Australian energy regulator, the…erm…Australian Energy Regulator (AER), Australia’s current electricity capacity stands at a touch under 45,000 megawatts.

So if Mr Musk’s grand plan involves adding 100 to 300 megawatts to the capacity (we assume he’s talking about storage capacity), this number appears to be a rather small drop in the ocean.

And if we’re talking about output, according to the AER, Australia consumes an average of 22,000 megawatts per hour. So again, the 100­–300 MWh is hardly significant.

As a further comparison, the Snowy Hydro scheme, among its various assets (which includes hydro and gas), has 5,500 MW of capacity.

In short, our experience of the Tesla empire is that it has a wonderful history of PR spin, but a less than great history of being a profitable company.

As a footnote, consensus analyst opinion forecasts that Tesla will post a record high loss in 2017 of US$943.5 mln. That’s up from last year’s loss of US$674.9 mln.

We can’t argue with the performance of the share price (it’s up), but that doesn’t make it a great long-term investment.

Remember, Enron was a favourite among shareholders too…almost right to the end.

Markets

Overnight, the Dow Jones Industrial Average fell 21.5 points, or 0.1%.

The S&P 500 gained 0.87 points, or 0.04%.

In Europe, the Euro Stoxx 50 index dropped 0.78 points, for a 0.02% fall. Meanwhile, the FTSE 100 added 0.33%, and Germany’s DAX index gained 0.22%.

In Asian markets, Japan’s Nikkei 225 index is down 14.61 points, or 0.07%. China’s CSI 300 is up 0.01%.

In Australia, the S&P/ASX 200 is down 2.45 points, or 0.04%.

On the commodities markets, West Texas Intermediate crude oil is US$48.41 per barrel. Brent crude is US$51.40 per barrel.

Gold is trading for US$1,203.80 (AU$1,592.72) per troy ounce. Silver is US$16.98 (AU$22.47) per troy ounce.

The Aussie dollar is 75.58 US cents.

‘Peak Australia’

Colleague Vern Gowdie says ‘Peak Australia’ is fast approaching.

What does that mean?

What’s it all about?

Check your email inbox. You should find an important message regarding ‘Peak Australia’.

Don’t delay.

Getting poorer

We don’t know much, but what we do know (or think we know) is that ‘Peak Australia’ is fast approaching the Aussie housing market.

And we’re now not the lone voice screeching loudly about it.

From Bloomberg:

Australia could further curb mortgage lending to investors as the impact of earlier measures wanes and Sydney and Melbourne house prices keep surging, Reserve Bank Assistant Governor Michele Bullock said.

“There is no doubt that the actions did address some of the risks,” she said in a Bloomberg Address in Sydney. “While the resilience of both borrowers and lenders has no doubt improved, the initial effects on credit and some other indicators we use to assess risk may fade over time. We are continuing to monitor their ongoing effects and are prepared to do more if needed.”

Bullock, in her first speech since taking up oversight of the financial system, stressed that while individual decisions by banks may appear reasonable, regulators’ concern is that together they could lower overall lending standards. The backdrop is one where Sydney house prices have rocketed 105 percent since the start of 2009 and Melbourne’s have also soared.

To emphasise the growth in debt, you need look no further than the following chart. It shows household debt to income. It currently stands at 186.9%, up from 126.2% in 2000:



chart image

Source: Bloomberg
Click to enlarge


Yes, house prices have risen.

But while the mainstream often talks about the ‘wealth effect’ of rising house prices, this chart shows the opposite is occurring.

Rising house prices haven’t increased wealth on average. Rather, rising house prices have actually resulted in increased debt levels.

In other words, the ‘wealth effect’ is a misnomer, if it’s supposed to mean that wealth has grown, because it hasn’t.

Instead, Australians have been lulled into thinking that the secret to wealth involves buying an expensive property, hoping it becomes even more expensive, and then selling it to someone else.

Unfortunately, it gets worse. Because if rising house prices led to huge increases in wealth, you’d expect those who sold to cash out and bank the gains.

Again, that’s not how it works.

Having sold, the property buyer ‘trades up’. They take their profits and use the cash to buy something even more expensive, with an even bigger loan…in the hope of being able to sell that at a higher price in the future.

And so the mania continues.

It’s the only explanation for why house prices have soared since 2009, while the ratio of debt to income has also grown.

We know that folks like to say a bubble doesn’t exist in Aussie house prices, but, for us, there’s no other explanation.

The Reserve Bank of Australia (RBA) should be worried about what’s happening in the Aussie housing market.

And it should be worried about the fading impact of its previous measures.

But the RBA must surely realise that it’s at fault for the current situation. Its very presence ensures that house-price booms or busts are inevitable.

As we noted last week, the singular way that the RBA manipulates interest rates up and down adds to the boom and bust cycle.

The RBA made a decision in 2012. Faced with a slowing economy and soaring house prices, the RBA decided that stoking a house price boom was worth the risk of trying to stimulate business investment.

It also no doubt figured that, if house prices continued to rise, it would help with the so-called ‘wealth effect’ — that rising prices would encourage people to spend…perhaps even withdraw equity in order to spend.

Like all government and central bank decisions, rather than leaving interest rates where they were, and allowing house prices to fall, they preferred to meddle.

The result now is an even bigger bubble, caused by even higher debt levels.

At the end of this quarter, Australia will have broken the record for the longest period of continuous economic growth. It has all been due to the easy-money policies of the US and China, which have helped fuel the commodities boom.

And not content with letting external players wreck the Aussie economy, for good measure, the RBA has used easy money to fuel the housing boom.

If anybody really thinks this is going to end well, to quote Kerry Packer, ‘they need their heads read.

Reminder

Remember to check your email inbox for Vern Gowdie’s ‘Peak Australia’ analysis.

Debt grows

This week, the US Federal Reserve meets to discuss its next interest rate move.

According to the futures market, there is a 100% chance that the Fed will raise rates on Thursday morning Australian time.

Does that mean the markets will crash this year? Not necessarily. History shows that the markets crash after the end of the rate-rising cycle.

That’s when the bad financial decisions of previous years come back to haunt businesses. Especially those businesses that tried to grow on the back of debt during the period of low interest rates…and PR.

Who are we thinking of there?

Hmmm. Tesla springs to mind.

In 2007, Tesla had no meaningful short-term or long-term debt. By that, we mean, less than US$1 mln.

At the end of 2016, Tesla had short-term debt of US$984.2 mln, and long-term debt of US$5.87 billion.

The market still loves Tesla. But will it still love Tesla when interest rates are higher, and much of that debt rears its head?

We’re not kidding when we compare it to Enron.

Cheers,
Kris