The stock price of up to $1,000 and the accompanying valuation of $1 trillion sparked many comments about Tesla’s valuation, Elon Musk’s behavior, and the nature of the stock and crypto markets. Ironically, this is unlikely to lead to a wider debate about the dangers of climate change and the urgent need for clean energy.
I won’t say whether Tesla is buying or selling, but I will briefly describe two factors associated with it. Both agree that Tesla, like all major bull markets, is a total asset and a unleashed phenomenon. Identify multiple stories and ages of investment – ups and downs.
There is little discussion about climate change
First, Tesla demonstrated the emergence of several new ecosystems. Right now they are very connected.
One of these is the battery/electric vehicle industry, where Tesla’s share capital is still growing relative to its competitors (despite the Hertz company order, Tesla has $4 billion in orders. It has a $100 billion market cap).
The other is the growing pandemic and, ironically, the options market, which generally moves the stock market, especially some stocks like Tesla. For example, Tesla’s 5.1 billion call option contracts recently changed, reducing activity on all other stock options. It is widely believed that this enthusiastic option is the driving force behind Tesla’s share price.
The third is the cryptocurrency market, to which Tesla is now neatly connected via its balance sheet. In fact, the prices of Tesla and Bitcoin have been increasing simultaneously over the past few weeks.
With the merger of this financial-centric ecosystem, many believe that we are in an era of financial democratization. Platforms, tools and products have been set up to give men and women access to the financial opportunities they enjoy. From a billionaire hedge fund manager.
It’s not like this. We are in an era of risky democratization, not financial democratization. The scope of risk is primarily esoteric risk in financial markets and is becoming increasingly diverse for individual investors. The problem is, the man or woman on the street is not prepared to take this risk. Another finer detail is that dislocation occurs when multiple people across a population realize that they are at “the same” risk and that they are all reacting to it at the same time.
This is a financial story. Good guide here. Amsterdam, for example, has become a center of financial innovation, particularly in options trading (William Gotzman’s book The Origin of Value).
Such financial innovations worked very well for investors and early pioneers (especially those with infrastructure), resulting in a parabolic rise in asset prices that attracted more investors (democratization). It follows a pattern (rate of democratization), breakdown or scandal. The supervisory authority arrived late at the scene.
The derivatization of the US real estate market in the early 2000s is a good example. Cheap funding means people can buy more and bigger houses until the entire market collapses.
This leads to the second point. Tesla, options markets and cryptocurrencies do not yet pose a systemic threat to the financial system, but they can weigh on investment strategies and exaggerate rising sentiment.
My short-term concern is that various indicators such as volatility, option prices, risk appetite, and flow indicators will go much higher. Deviations in investor sentiment, such as low corporate returns and rising bond yields, can trigger attacks on stock market volatility.