Ralph Nader isn’t just a legend in his field, he stands far above anyone else. His field of expertise is not the stock market, although that isn’t stopping him from speaking out.
You really had to be alive during Ralph Nader’s heyday to fully appreciate how big a force he was in consumer protectionism. He broke into the public eye when he published a book in 1965 called “Unsafe at Any Speed”, where he was widely critical of safety standards in the U.S. auto industry.
Consumer protectionism wasn’t even something that was paid much attention to back then, but Nader took it upon himself to be the voice of the people with these issues, and 55 years later, he still stands alone in this field by way of his contributions.
Nader has had a hand in the biggest legislation that we’ve passed in this area since, including the Consumer Product Safety Act, the Clean Water Act, the Freedom to Information Act, the National Traffic and Motor Safety Act, the Whistleblower Protection Act, and the Foreign Corrupt Practices Act.
He has also run for President of the United States as an independent candidate, and while these candidates have no chance of winning, this was just another chance for Nader to speak his mind on the issues as he loves to do, whether he is an expert on something or not.
He’s still around these days at age 85, and he’s still speaking out. The auto industry will always be near and dear to his heart, his first love, and he’s looking to leverage the work he did on the industry to speak out about what he perceives as a stock market racing out of control and getting ready to crash.
It might not have been thought as appropriate to have a lifelong consumer advocate sound off against the stock market cold, but he uses the explosion of Tesla stock to get his foot in the door, then seeks to take over the room and warn us about the stock market in general.
Somehow, in his mind, Tesla is about to cause a stock market implosion, and although how this is supposed to actually happen is left out, but perhaps if you already agree with him that stocks are wildly priced, he doesn’t need the connection.
Otherwise, it surely is puzzling to think that Tesla could in itself collapse the market or even influence it very much even if it does crash in flames as Nader imagines it will. His comments about Tesla does serve to show us how little he knows about stocks though, even though there are plenty of people who predict things for a living that share in his confusion.
What set him off is Tesla breaking the $100 billion market cap barrier and becoming the second largest automaker in the world by market capitalization, passing Volkswagen. That just happened, but Tesla has already sped off and left VW and everyone else in the dust since, especially after it added 2.5% more on Wednesday and another 12% in after-market trading after its latest earnings were announced. That’s an amazing 14.5% in a single day, but this is not your average car or stock.
Tesla is now up 362% since last June, and up 55% just from the start of 2020. Anything that moves that much so quickly is certainly prone to a correction from profit taking, but people have been expecting that for quite a while now and it still is speeding down the road at a frantic pace with no signs of slowing down.
Nader is far from alone in making the comparison between VW’s 10 million cars a year that they sell and Tesla’s paltry few hundred thousand, leaving many wondering how this could possibly make sense. This is a great test of people’s understanding of stocks though, where we could say that if you are confused about how this could happen, you are confused about how stocks work period.
The price of a company’s stock is not about what it may be making now, and not even about how much money it is making now. It tries to see the future, not the present.
Even future business expectations just serve as a proxy though, as there is absolutely no intrinsic link between business results and stock prices, now or ever. All we are betting on is how much people will pay for a stock in the future, and look to cash out if we are on the right side of this bet.
We know that this will be influenced by business results, but this influence is always forward looking, and we could characterize this particular influence as the future expectation of higher or lower stock prices, years down the road. When these years do pass, let’s say in 2030, stock prices won’t be about 2030 anymore, they will be about 2040 and beyond.
Stock Prices are Just Beliefs About the Future
It is therefore never about what a company is now or what they are doing now, it is always about where we expect the stock price will be in the future. People see great things for Tesla, and whether or not that even happens, the expectation is what speaks here.
There are various limits to this, where for instance a company may simply saturate its market so much that there just isn’t that much room left to grow in the future, and this will put a cap on the level of excitement.
If a stock or sector’s future is far less than exciting, such as the energy sector is, making plenty of money right now won’t even stop the bleeding. They may make big profits now but if the future is this dim, even though this darkness may be many years away, their stocks will just move down anyway. The SPDR Energy Sector ETF, the XOP, is down 20% year to date for instance, and just made another all-time low on Wednesday, and lots of money is still being made in the energy sector. The longer-term beliefs differ, and these beliefs are the ones that control stock prices, not just somewhat, but completely.
Stocks in the technology sector are moving the other way, and the SPDR Tech ETF is still up 6% in 2020 even after the hit that it took from the coronavirus concerns. This isn’t one of those pseudo worries, and with so many people in hiding from this in China, this will impact the global economy in a meaningful way, as Fed Chairman Powell mentioned in his address to the media on Wednesday.
This does bring us to another important principle that relates to the movement of stock prices, the fact that a lot of this does not have to do with the future and happens just from the market action itself. People get worried about the temporary impact of all this and they sell stocks in a manner that is completely out of sync with the future or even the present. Hundreds of billions of dollars are added and subtracted just from the changing mood of investors, including even brief lulls in their enthusiasm like this.
When this all passes, it will be business as usual. The minor impact on profits become initially dwarfed by losses in market capitalization that worrying about this causes, and when the worrying subsides, we go back to adding market cap in a way that does not make sense to if we just account for the present.
Tesla has a bigger market cap than VW not because they are making more money or more cars, this is purely due to our being willing to make bigger bets on Tesla. This isn’t even about Tesla making more cars or money at any point in the future, we are instead betting that Tesla’s stock will grow faster, a lot faster, and the bets themselves end up being self-fulfilling as long as this expectation continues.
If this enthusiasm subsides, we can end up with a much bigger move downward than the change in expectation would suggest, from people seeing the stock start to move down and wish to take some of their bets off the table. They may not be worried about it resuming its upward trend at some point, and if it does, they can get back in if they want, they are just looking to time the moves of the stock to their personal advantage.
They do this not because they go from such a positive belief to such a negative one, and while the numbers can change to inspire this, this is about wanting to make money from stock positions, and when the price is going up or down, and the market believes it will continue, it will just continue because this is plenty enough for this to happen all on its own.
If we don’t understand that stock prices are merely the sum of all side bets on companies, and not even on the companies themselves but on their stocks, which is an entirely different thing, we are going to be pretty confused indeed, as Nader is, when we try to make sense of all this. Comparing the number of cars made by WW and Tesla in 2019 and thinking that this has anything to do with their stock prices is actually hilarious, but only if you get the joke.
We don’t even need external points of reference at all with stocks and could just make up two fictional stocks like Tweedledum and Tweedledee and sell people some shares in them. People could buy and sell them just to speculate on where their price may be going in the future, and there isn’t anything else to know about them because there isn’t anything else period.
They would take on a life of their own and people would continue to trade them based upon their price movement alone. We could get some big price movements in both directions as they start to move up or down and people just pile on to these moves.
We could start by selling the shares to select clients and then open them to the market like with real stocks, and keep the number of shares small so that there would be more buying than selling interest initially among those curious enough, and the stocks may then take off. They may run up, and as they do, we’ll see a rise in upside interest as people see them move and want to get in on the fun.
Eventually, we’ll get to the point where this buying interest becomes expressed enough to reduce demand to the point where selling takes over. When the people who want in already get in, and those already in start itching to cash out their profits take over the hill, this will turn the tide, and once that happens, people see the price going down and want to sell as well.
Just like the price rising will encourage bullish speculation, as the price goes down, people are more and more willing to sell, until we reach a bottom where most of the investors who want to sell have left the building. The selling slows down and people then start to speculate on a rebound, seeing how far we’ve fallen and thinking that we may make another run up. Once the buyers take over, that’s exactly what happens.
Speculation Isn’t Just a Factor in Stock Prices, It’s the Only Deciding Factor
Speculation isn’t just some sort of anomaly that twists reality, it is the reality itself. It is not speculation taking its place among other factors, it is the only factor, it is what buying and selling stocks is, and what people actually do when they invest in stocks.
Meanwhile, our two fictional securities will be competing with not only cash but everything else we could put our money in, including other stocks, bonds, gold, or what have you. There may even be some interplay between our two stocks, as people may move from one to another because they think one is more overbought and oversold and as well as perceptions of relative value and risk. Tweedledum may run up faster and this may have people moving to Tweedledee because they see it as less risky for instance, because it is less prone to a correction.
This is not a far-out scenario, as this is actually how gold trades. Even though gold is an actual asset in the real world with a real market for it, this market does not play a meaningful role and price movements are instead due to the speculative forces that we are speaking of. Gold does have an intrinsic value but its prices are bid up so much higher than this that this drives its price exclusively unless we get to the point where we actually reach a price floor based upon its intrinsic value. This is where industrial users would start piling up cheap inventory, which can stabilize its price, but for it to go back up again, we’ll need the speculators to take the reins again.
Cybercurrency speculation takes this a step further, and they are purely synthetic like our two stocks, where we create something out of thin air that has no value other than the speculative value that traders create. Even more so than gold, cybercurrency trading offers people who pretend that speculative forces don’t exist or don’t have much of an impact the opportunity to get more educated, seeing just how powerful this force can be and what role this plays in all trading.
The difference between Bitcoin and Tesla is only at the level of belief though, which is the real lesson here and the one people don’t really get. We have some additional beliefs about Tesla’s future business potential, but it is these beliefs themselves that do the speaking, and every move a stock makes are all about beliefs, and purely so.
People are much more excited about Tesla than VW, and this excitement alone is all it takes to shoot the stock price up of Tesla from below $200 last June to $650 today. Who knows how far this move will go but it is only limited by belief, which can include things like future valuations but only to the degree that we decide to allow this to influence us. We don’t even need to care about these things if we do not want to, and can bid this stock right up to $20,000 a share if we want, like we did with Bitcoin.
We are still subject to selloffs though, and perhaps some mighty ones, but they occur when the beliefs themselves turn, when people do not believe that the price will continue to rise, and when it no longer does so, this will reinforce this belief in the same way that people continuing to bid it up reinforces the belief that it will go up more.
If, as investors or analysts, we do not understand the role of investor belief in asset prices, and instead hold some beliefs of our own that are not in harmony with the way things work, things like Tesla being overvalued based upon how many cars they make or their projected price to earnings ratios magically putting a cap on this beyond whatever influence that our beliefs place on this, we are simply going to end up being wrong.
The mistaken belief that stock prices are purely determined fundamentally, where we just ignore the effects of agency and belief, is one that is still firmly ingrained in the minds of many. Even among those who do get what actually happens to some degree, they may still think that things are intrinsically determined to some degree by these fundamentals. Because investors do pay attention to these things to some degree, that may appear to be true, but we need to get that all of this is artificial and this only affects stock prices because we choose for them to.
If we’re going to account for changes in fundamentals, we at least need to be looking at these things in the same time frame that the market does, instead of just looking at today and a year ahead and fool ourselves into this being all there is. Tesla is a great example of how much more there is, and how powerful our beliefs about the future can actually be, and we may not have seen the full force of this yet with this stock as who knows how much higher it could go over the next while.
People who are actually in the business may not understand the mechanisms behind stock price movement all that well, and many may scratch their heads about this latest move with Tesla, thinking that what they consider to be an appropriate price to earnings ratio may be so many years away if we ever get there at all. This can scare them and having them sitting outside while the partying just keeps going.
When someone like Ralph Nader steps up to the mic during amateur hour, apparently it is possible that he may misunderstand all this enough to think that Tesla could actually make the sky fall, taking us from the misinformed to the ridiculous.
Unlike Tesla, the market rise is moving up in a much more subdued manner, and for this to end and especially for the stock market to implode, we’re going to need a lot more than Tesla’s price correcting or people like Nader believing it will happen. It is indeed all about beliefs, but just not his.