Elon Musk's Ego plus Other Christmas Crackers
Thoughts on market bubbles, peak Elon Musk, who's to blame for Britain's stagnation, how Trump can make Europe great again, and Masayoshi Son's latest bet
This week’s newsletter is a round-up of some of the key themes discussed in Wealth of Nations over the past year, all of which conveniently have been in the news this week. My sincere thanks to all subscribers for their interest over the past year, particularly paid subscribers whose support is what makes this worthwhile. If you’re stuck for a last-minute Christmas presents, how about giving someone the gift of a Wealth of Nations subscription? Or perhaps treat yourself? As a Christmas special, I am offering a 20 percent discount off annual subscriptions until January 1. One thing is for sure: next year will not be boring. In the meantime, a very Happy Christmas and Hanukkah to you all!
In this newsletter:
Animal Spirits: more evidence of America’s financial bubble
Peak Elon Musk: is the co-President a risk to financial stability?
Stagnant Britain: Don’t blame Rachel Reeves
Make Europe Great Again: Trump is just what Europe needs
Gambling Man: Masayoshi Son’s $100 billion bet
1. Animal Spirits
One of the recurring questions in Wealth of Nations this year is whether we are in the midst of an epic market bubble, not just in AI stocks, or Bitcoin but America itself. It is getting harder to resist that conclusion, even as America continues to suck in the world’s capital. Every day brings further signs. Here’s a snippet from Jason Zweig’s Intelligent Investor newsletter from the WSJ last week:
Last Thursday, on its earnings conference call, Broadcom's CEO declared that the company's opportunity in artificial intelligence over the next three years is "massive." The stock -- whose market value already exceeded $800 billion -- surged 24% the next day to a new all-time high.
Then there is the Tesla share price, which has more than doubled since the US presidential election. Or MicroStrategy, the Bitcoin hoarding company that I wrote about here. Here’s Zweig again:
And what about MicroStrategy, the software company that has amassed an immense trove of bitcoin? Its stock, valued at three or four times the market price of MicroStrategy's bitcoin holdings, is up well over 500% this year. That's nothing, though. Two ETFs that seek to double MicroStrategy's daily return are each up more than 440% in the past three months.
Another leading indicator comes via my friends David Bowers and Ian Harnett at Absolute Strategy Research. They note that media mentions of “animal spirits” has soared in recent weeks to unprecedented levels. As Ian says:
“Animal Spirits” tend to be what people rely on to explain markets when they are completely out of synch with the underlying fundamentals, valuations can no longer be justified, but people still expect the asset class to go higher!
The markets can, of course, famously stay irrational far longer than you can stay solvent, so who can say when this bubble will actually burst.
2. Peak Elon Musk?
But I do have an idea what might burst the bubble. Another theme of Wealth of Nations this year has been the dollar debasement trade, for example here, here and here. There has been lots of anxious chatter this year about dedollarisation and whether the greenback could lose its reserve currency status. My view has been that the main risk to dollar supremacy is not the creation of a BRICS currency or attempts to bypass the dollar in global trade, but America itself.
That’s what makes Elon Musk’s intervention last week so alarming. Indeed, it is not just Tesla’s share price that is exhibiting bubble-like properties, so too is its chief executive’s ego. Last week he took to social media to denounce a bipartisan budget bill that would have funded the federal government until March. That prompted Donald Trump to order House Republicans to reject the compromise and deliver a new budget bill that would have funded the government until 2027. But 38 House Republicans refused to do as they were told. In the end, a federal government shutdown over Christmas was only averted when the original agreement was passed with Democrat votes minutes before the deadline.
As the WSJ put it in an exasperated editorial:
This is how Congress works, and for all Mr. Musk’s brilliance, he hasn’t figured that out. He’s also supposed to be a math whiz, so he can probably count to 218, the votes needed for a House majority when everyone is present. Memorize it.
There is a school of thought, reflected in the booming US stock market, that Trump 2.0 will be more effective than Trump 1.0 because this time he knows what he wants, and how to deliver it and will not be constrained by the self-styled “adults in the room” who frustrated his agenda in his first term.
That analysis was always vulnerable on the grounds that his economic agenda is incoherent, contradictory and bound to attract the attention of the bond vigilantes. But last week’s Musk-driven fiasco raises the prospect that the second Trump administration could be just as chaotic and unpredictable as the first, only this time against a far more volatile economic and geopolitical backdrop.
3. Stagnating Britain
One place that is very definitely not in a bubble is Britain. Another recurring topic in Wealth of Nations this year has been the ever-deepening crisis in the London stock market. Indeed, the best-read piece this year was this essay on how Brexit killed the stock market. Sadly, the gloom has only got deeper in December, with the FTSE100 last week enduring its worst week in more than a year, while astonishingly London has sunk below even Oman and Malaysia in the global rankings for new listings this year.
Such is the scale of the disaster that even Toby Nangle, a respected former fund manager turned financial commentator, last week gave his backing in a column for the Financial Times to the growing campaign in the City for the government to force British pension funds to invest a proportion of their assets in British equities. I continue to think “mandation” is a thoroughly bad idea for the reasons I set out here. Far from increasing confidence in UK assets, I suspect forcing savers to buy British would be rightly seen as an act of desperation, a giant distress flare that Britain could no longer attract capital on its own merits.
Besides, such a move in any case assumes that the stock market is not an efficient market and that its prices are somehow driven by liquidity and not fundamentals, which I find implausible. The FTSE100 didn’t sink again last week because of a lack of home bias by pension funds but because the latest economic data coming out of Britain is dire, raising once again the spectre of stagflation.
Who is to blame for this stagflation is a subject of intense political debate. Parts of the media would have us believe that it is all entirely the fault of Rachel Reeves and her tax-raising budget. This is obvious nonsense. The Tories not only wrecked the economy, but deliberately salted the earth as they headed to deserved defeat. What is unfolding now is largely a reflection of Labour’s truly dire economic legacy, rather than decisions taken in the last five months.
It is certainly true that Reeves’s budget has contributed to uncertainty, as Andrew Bailey, the Bank of England governor, noted last week (in words twisted by The Times to suggest he blamed her for the stagnation). It is also true that Reeves’s decision to raise employer national insurance contribution rates is likely to lead to modestly higher inflation as companies pass on costs to consumers (although I suspect that what many businesses really object to was the decision to raise the minimum wage, but who wants to admit that they haven’t been paying their employees a living wage?). But by far the most important factor behind Britain’s persistently high inflation is a very tight labour market, as reflected in wage inflation that accelerated to 5.2 percent in October.
Yet these tight labour market conditions in turn stem in large part from Brexit, which deprived key sectors of the skills that used to be supplied by Europeans who came under free movement and who have not been replaced by record immigration since. Adam Posen, the former Bank of England ratesetter, now president of the Petersen Institute for International Economics, warned back in 2017 that Brexit would lead to stagflation and so it has proved.
Britain’s tragedy - and Labour’s problem - is that there are very few obvious levers that the government can pull to revive growth, as again frequently discussed in Wealth of Nations. One is to try to engineer a housing and infrastructure construction boom via determined supply side reforms including reform of the planning system. This Labour appears to be going about with impressive gusto, as it leads the march of the YIMBYs. The other is to repair the damage of Brexit, which Labour is also attempting via its reset of EU relations, but subject to red lines that mean any incremental growth is likely to be minimal.
Worse, neither of these growth levers are likely to deliver results in the near future - and certainly not in time to counter the narrative being pushed in the right-wing media that Sir Keir Starmer and Reeves are incompetents who are out of their depth. Given that Kemi Badenoch, the new Conservative party leader, really does look spectacularly out of her depth, that can only benefit Nigel Farage and his Reform party who have nothing constructive to offer at all. That leaves Britain and Labour hoping next year for a large dose of luck.
4. Make Europe Great Again
Could that lucky break come from Europe? Not in the form of a reversal of Brexit, sadly, but in the form of an upturn in a continental economy whose depressed state is adding to Britain’s woes. Again, the dire state of the European economy has been a core topic on Wealth of Nations, including its broken banking system, chronic risk aversion, its crippling loss of competitiveness, and dysfunctional politics. Investors are almost as down on Europe as they are on Britain.
But could the depth of the crisis in Europe’s political economy be, as so often in the past, the catalyst for the European Union to address its morbidities? In one sense, the most encouraging story of last week was a Financial Times scoop that Trump intends to demand that Europeans raise their defence spending to 5 percent of GDP but will settle for 3.5 percent. At one level, this is obviously preposterous. Only 23 out of 32 Nato members meet the current 2 percent target. Germany, as I noted in this piece on its half-baked zeitenwende, only meets it because of a special €100 billion defence fund that expires in 2026. Its core defence budget is just 1.3 percent of GDP.
Yet precisely because Trump’s proposed 3.5 percent target is so far out of reach, it offers the EU a way forward that could solve multiple problems at once. The only way that Germany can substantially increase its defence spending is to create another large special defence fund, or better still get rid of its ridiculous debt brake. Meanwhile, with so many other eurozone countries at their fiscal limits, the only way to raise spending across the bloc would be to create a large defence fund at the EU level funded by common borrowing.
A big fiscal injection is exactly what the eurozone needs to boost its growth rate. In a significant speech this week, Mario Draghi highlighted the extent to which much looser fiscal policy was a key factor in significantly stronger growth in America since the financial crisis.
From 2009 to 2019, the collective cyclically-adjusted fiscal stance in the euro area averaged 0.3%, compared with -3.9% in the US. And if we look at primary deficits in absolute terms, measured in the 2023 euros, the US government injected 14 times more funds into the economy, 7.8 trillion euros in the US and 560 billion in the euro area.
What’s more, the eurozone can certainly afford to borrow and spend more: while some member states are clearly over-indebted, the debt-to-GDP ratio for the eurozone as a whole is just 86 percent of GDP, well blow the 100 percent in Britain, 123 percent in America or 223 percent in Japan. The market has already demonstrated that it has a strong appetite for common eurozone debt having snapped up bonds issued to finance the NextGen Eu post-Covid recovery plans.
As Spyros Andreopoulos puts it in a typically smart post on his Thin Ice Macroeconomics substack, could Trump Make Europe Great Again?
5. Gambling Man
A final thought on bubbles. One of the most interesting books I read this year was Lionel Barber’s biography of Masayoshi Son, the Japanese billionaire technology investor. You might have seen him in news reports this week standing alongside Donald Trump promising to invest $100 billion in the US economy over four years. Son made his fortune buying stakes in tech companies often at what appeared to be absurdly over-inflated valuations and seemingly on the basis of next-to-no due diligence. Along the way he lost vast amounts of money, not least in the last dotcom bust and a spectacularly ill-judged investment in WeWork.
The question at the heart of Barber’s book, which I reviewed for the Literary Review, is whether Son is a genius with an uncanny ability to spot the next big thing or, as the title implies, simply a gambler. I don’t know the answer and I am not sure that Barber does either so it is impossible to say if Son’s latest intervention is a good or bad signal for markets and the world economy. But I found Barber’s book a fascinating insight into the last 50 years of financial history, as well as that of modern Japan. Recommended.
I keep reading about how the Tories allowed immigration rates of close to a million a year but you’re saying there is a labour shortage, is this because the ‘wrong’ million are coming in or does Britain need more than a million people net a year just to fill labour shortages (before even getting to funding pensions) because if that is the case somebody in UK political life needs to touch the third rail and start explaining the positives of immigration soon or they’re in real trouble
Always a worthwhile read. I think you let Reeves/Starmer off the hook. The reality of sucking money from the private to a bloated public sector and setting fiscal against monetary policy just a Britain try’s to escape a few years of stagflation. The 10 year gilt rates tell you who the market holds responsible for all this.