Headline/Summary:
(In order of oldest to most recent)
ELON IN LUDICROUS MODE ON TESLA’S Q3 CALL
- The Common Sense Sceptic rebuts Musk’s ridiculous and increasingly desperate assertions on Tesla’s Q3 earnings call, one by one, point by point.
FOR BUYOUT DEBT, TEN IS THE NEW FIVE
- Average interest rates for debt to fund US middle market buyouts have doubled in 18 months from 5% to 10%.
BEIJING MARCHES BACKWARD
- In desperate need of demand-side stimulus, China is spending 1 trillion Yuan ($137B) on more supply-side investment into infrastructure.
YOUR RETURNS MAY DIFFER
- About half of all dollars invested in venture capital have returned 10% or less over the last 10 years thru March, with over a quarter returning low single digit IRRs!
ETFs: TOO MUCH OF A GOOD THING?
- Index ETFs on broad asset classes have been a huge benefit for most investors, offering excellent diversification and liquidity for rock-bottom fees.
- Specialized ETFs on industries, themes, and style factors have generally been poor performers costing 5x as much. In other words, exactly what you’d expect.
ANOTHER SILICON VALLEY FANTASY
- Why do we keep falling for the hype and bullshit? Autonomous driving is going nowhere fast…
HIGH YIELD SPREADS SEEM TIGHT
- Credit conditions are likely to worsen whether we have a recession or not. The huge spike in the cost of credit will push many companies to the wall, even if GDP growth is positive. We can already see that happening as defaults have risen sharply while debt and coverage ratios have deteriorated despite a reasonably good economy.
US OFFICE MARKET: THIS IS GOING TO HURT
- The US office market has for some months been in a state of suspended animation, much like Wiley E. Coyote in that moment when he realizes there’s nothing but air between him and the ground, 10k feet below.
ENDOWMENTS CAN’T STOP LOVING PRIVATE EQUITY
- According to a just-published Morgan Stanley survey https://lnkd.in/eP2XDUx5 of US endowment and foundations, CIO’s remain hopelessly besotted with private investments. They scan a whole world of asset classes and continue to see none but their beloved private equity (and now private credit).
Full Posts:
ELON IN LUDICROUS MODE ON TESLA’S Q3 CALL
The Common Sense Sceptic rebuts Musk’s ridiculous and increasingly desperate assertions on Tesla’s Q3 earnings call, one by one, point by point.
It’s an epic takedown and must-viewing for those interested in facts and sick of unrelenting hype and bullsh*t.
https://www.youtube.com/watch?v=4QBt19hZyYI
The biggest, dumbest, most far-fetched Tesla myth? That Tesla is a leader in autonomous driving.
If that were true, someone forgot to tell Mercedes-Benz because they just announced level 3 autonomy – the very first automaker to do so – while Tesla is stuck at level 2. Tesla isn’t a leader, it’s a laggard.
And because Tesla removed lidar from their cars to lower the cost and now rely solely on cameras, they’re unlikely to ever be the leader in autonomous driving.
They do however remain the undisputed leader in hype and fantasy.
FOR BUYOUT DEBT, TEN IS THE NEW FIVE
Average interest rates for debt to fund US middle market buyouts have doubled in 18 months from 5% to 10%.
Higher rates reduce PE returns in several ways:
– Higher cost of debt directly reduces deal returns
– Higher rates will cause equity multiples to decline
– Many businesses that could do well with zero rates, will not be viable
The idea that PE is a uniquely wonderful asset class offering high returns with low vol — instead of simply a beneficiary of decades of falling interest rates and rising multiples — is unlikely to survive the next decade.
BEIJING MARCHES BACKWARD
In desperate need of demand-side stimulus, China is spending 1 trillion Yuan ($137B) on more supply-side investment into infrastructure.
If they’d simply deposited the money into the accounts of Chinese citizens, it would have made a huge difference. As it is, given that China is already soaked with excessive uneconomic infrastructure investment (see bottom chart), this money will be mostly wasted.
It is said that when you’re in a hole, the first thing to do is to stop digging but China, facing massive systemic issues, is doubling down on excavators.
EXACTLY what Japan did…
YOUR RETURNS MAY DIFFER
About half of all dollars invested in venture capital have returned 10% or less over the last 10 years thru March, with over a quarter returning low single digit IRRs!
Among the many unattractive attributes of VC (paying fees on uninvested capital, being short a call on your liquidity, 2 & 20 fees, and no liquidity) is DISPERSION: VC fund performance dispersion is gigantic compared to that for traditional asset classes.
PE is the same. About half of all $$ invested in PE (defined as buyout plus growth) returned less than 15% during the last 10 years – – what was supposedly a golden age for buyout and growth funds, with a quarter returning less than 10%.
These figures are for global VC and PE; US-only returns have been somewhat higher but the point is the same.
Of course, dispersion cuts both ways. For those able to identify the winners, the returns can be exceptional. But how many investors have the existing relationships, the resources, the expertise, and the institutional staying power to consistently invest with top managers? Many if not most of the best performing PE managers are now closed to new LPs. So new investors are choosing from a universe with the best managers excluded.
When making strategic asset allocation decisions, dispersion is not a minor or secondary issue. Dispersion will eat your returns in private equity unless you are super confident you can invest with managers that outperform the medians. Only one thing is certain: whatever you think PE and VC will do in the next 10 years, your returns will differ.
Chart from JPMAM’s Guide to Alternatives
ETFs: TOO MUCH OF A GOOD THING?
1. Index ETFs on broad asset classes have been a huge benefit for most investors, offering excellent diversification and liquidity for rock-bottom fees.
2. Specialized ETFs on industries, themes, and style factors have generally been poor performers costing 5x as much.
In other words, exactly what you’d expect.
According to a paper published in the Review of Financial Studies that looked at historical ETF returns for the 20 years through 2019, “specialist” ETFs lose 30% of their value during the first 5 years after being issued (top chart). Not surprising!
Does anyone think that people buying the Global X Lithium & Battery Tech ETF (LIT) will do well on average? Or might we suspect that the very excitement and interest in EV batteries that stimulated the issuance of this ETF, had likely already driven up the prices of the very stocks that the ETF owns?
If you come to the conclusion that surging demand for (insert hot theme) will lead to much higher prices of (inputs for hot theme) — it’s extremely likely that your thesis is already discounted in asset prices or that your thesis is simply wrong.
Factor ETFs (aka smart beta) are somewhat different. It’s a complex topic but the gist is that core style factors like size and value haven’t worked for decades but may in the future (I can think of worse times than now to shift in this direction). Other more esoteric factors should be treated with the same skepticism as thematic ETFs.
ETF index funds are great. Most of the rest are simply vehicles to make crowded tactical bets with a very low probability of success.
https://alphaarchitect.com/2023/10/the-democratization-of-investing-and-the-evolution-of-etfs/
ANOTHER SILICON VALLEY FANTASY
Why do we keep falling for the hype and bullshit?
So it seems Cruise and Waymo may not be on the verge of full self-driving robo taxis. How absolutely not shocking. After years of watching Elon lie through his teeth about FSD coming soon year after year after year, few (except for Morgan Stanley) believe the fantasy that Tesla is a leader in autonomy. So hopes turned to the GM-owned Cruise and the Google-owned Waymo as replacement fantasies for the coming tech utopia.
But now we learn that there’s more than a little bit of hype and bullshit going on with Cruise as well. In addition to hiding damaging information after a near fatal accident from San Francisco officials, Cruise requires 1.5 employees per car in order to keep their not ready for primetime technology continuing to operate. Autonomy this is not!
From Discord by Paris Marx:
“Since March 2018, when an Uber test vehicle killed a pedestrian in Arizona, there’s been a notable chill on the future of self-driving vehicles. Even Elon Musk’s claim that Tesla would have a million robotaxis on the road by the end of 2020 wasn’t enough to really move the needle — probably because most people knew it was complete bullshit the moment it escaped his lips.
But over the past year or so, there’s been a push to bring back some of that hype and have it surround Google’s Waymo and General Motors’ Cruise divisions. They’ve been broadening the scope of their supposed robotaxi services in San Francisco and slowly expanding them to a number of other cities around the United States. The suggestion was that their services had moved beyond the “move fast and break things” ethos exemplified by Uber and Tesla. Instead, they claimed to take their time, play it safe, and that the strategy was reaping dividends. Autonomous vehicles had arrived, or at least were on the cusp of it.
That narrative, backed by little evidence, not only got more cities to approve robotaxi services, but even convinced the California Public Utilities Commission to approve a deeply contested expansion in San Francisco as recently as August that even local officials spoke out against. Yet, in the past month it’s completely unraveled as the PR deceptions have been unable to hold back the flood of truth that the services are not ready and shouldn’t be operating on public roads.”
Continues here https://www.disconnect.blog/p/self-driving-cars-still-arent-the?utm_source=share&utm_medium=android&r=2jqrf
Credit conditions are likely to worsen whether we have a recession or not. The huge spike in the cost of credit will push many companies to the wall, even if GDP growth is positive. We can already see that happening as defaults have risen sharply while debt and coverage ratios have deteriorated despite a reasonably good economy.
US OFFICE MARKET: THIS IS GOING TO HURT
The US office market has for some months been in a state of suspended animation, much like Wiley E. Coyote in that moment when he realizes there’s nothing but air between him and the ground, 10k feet below.
Office REITS have been crushed, CMBS spreads have widened, defaults picking up and CRE office values are falling. But the severe deterioration in fundamentals has yet to turn into substantial transactions and loss realizations. But we knew it would come eventually.
Then this week WeWork went bust (again). And because of their giant footprint and ability to discharge leases in bankruptcy adding to already record levels of available space, it’s a body blow for a market already reeling from sharply higher interest rates, falling rents and occupancy.
[FT] Bill Moreland, who runs BankRegData, told clients that commercial real estate lending was “getting ugly fast”.
“It’s not a hiccup — it’s not Covid and then recover,” said Leo Huang, the head of commercial real estate debt at Ellington Management Group, an asset manager. “Property prices are going to come down and loan delinquencies are going to keep going up.”
Kevin Fagan, the head of commercial real estate economic analysis at Moody’s, said he expected delinquency rates to climb for at least the next 12 months. There was “pain to come, that’s for sure”, he said, but he added it would it take time for delinquencies to turn into losses. https://www.ft.com/content/7518fea2-b2f2-4cad-8b58-c524764614cd
[NYT] On Friday, the WeWork website listed 47 locations in New York, where at the end of March it leased 6.9 million square feet of office space, equivalent to more than 60 percent of all co-working space, according to Savills, a real estate services firm.
In New York, where a fifth of office space is unleased or being offered for the sublet, the highest amount in decades, the fallout from a WeWork bankruptcy would be felt most in older office buildings in Midtown and downtown Manhattan. Nearly two-thirds of WeWork’s leases in Manhattan were in these so-called Class B and Class C buildings, according to the real estate advisory firm Avison Young.
https://www.nytimes.com/2023/11/04/business/wework-bankrupcty-office-real-estate.html
WeWork’s filing will likely mark the beginning of a more intense period of transactions, price discovery and loss recognition that will continue through next year at least.
ENDOWMENTS CAN’T STOP LOVING PRIVATE EQUITY
According to a just-published Morgan Stanley survey (https://www.savvyinvestor.net/node/1977652) of US endowment and foundations, CIO’s remain hopelessly besotted with private investments. They scan a whole world of asset classes and continue to see none but their beloved private equity (and now private credit).