Vox Populi, Vox Dei

Risky Business 

Political risk is one of the big themes this year – so many elections…Trump is waltzing to the Republican nomination after winning in New Hampshire. Haley says she will fight on but it’s Trump’s now, but will the never Trumpers rally? I think not. In Britain, Sunak may not be the leader of the Conservatives for much longer – the Tory party faces oblivion under his feeble, imported tenure. In Germany the AfD is polling strongly. The media focuses on why this is so bad and dangerous, spending time on the protests against the right instead of asking why people might feel this way. The elite want control and they have spent 70 years constructing a system of patronage and dependency cultures upon which their existence depends. Populism is just the expression of the will of the people, called democracy; vox populi, vox Dei. 

Rally-oop 

Chinese stocks led a rally in Asia ex-Japan as the country’s central bank announced easing measures. The reserve ratio requirements (RRR) for banks will be cut by 50 basis points from Feb 5th, injecting around one trillion yuan in stimulus. THe PBOC said there is room for further monetary policy easing. The FTSE 100 rallied back above 7,500, whilst the DAX notched stronger gains early doors. The Dow fell on Tuesday to snap a three-day win streak, pressured by a heavy fall for 3M, but the rest of Wall Street continued to rally. The S&P 500 rose by 0.29% to 4,865, a fresh all-time closing high, while the Nasdaq Composite added 0.43% to 15,426.  Netflix jumped in after-hours trading, sending the NDX futures higher, after a record quarter. The company added 13.1m subscribers in the fourth quarter, easily beating the 8-9m anticipated. Streaming wars victor saw its shares rise almost 9% after-hours.  

Tesla  

Tesla reports later...key questions over price cuts and margins and growth! Redburn intiates with a sell rating and $170 PT – trades at $210 this morning. The thesis: “Tesla innovates in already best-in-class technology, keeping it years ahead of most competitors. Its centralised e/e architecture unlocks myriad vehicle functionality and cost efficiencies. However, we identify a widening gap between expectations and the margin and FCF challenges faced by slowing near-term growth. Pricing – amid increasingly oversupplied EVs – will dominate any margin benefit from lower commodity prices in the coming quarters, in our estimation. We expect Tesla to prioritise volumes over price, but with the monetisation of its growing fleet only beginning from 2025. Meanwhile, to support its leadership position Tesla will invest significantly in AI and in building EV capacity ahead of new vehicle launches. This higher investment intensity may further pressure FCF, where our estimates sit materially below consensus. We launch with a Sell recommendation, flagging that our call is most at risk if Tesla introduces a compelling next-generation model with a viable start of production within 18 months of announcement. However, we find such an outcome challenged by new production technology (including battery cells) and a difficult Cybertruck ramp-up.”  

On that risk to the call – This morning it’s being reported that Tesla wants to start production of a new electric vehicle codenamed "Redwood" in mid-2025. According to Reuters this could be a compact crossover. Today, revenues are seen up 6.5% to $26bn. The key though is margins - last quarter the company reported gross margin of 17.9% with operating margin dipping to 7.6%.  

Euro Bouncing Back? 

The euro was firming up against the dollar after hitting its lowest since before the December Fed meeting. EURUSD fell to 1.0821, its weakest since Dec 13th, before rallying overnight to 1.0880. French PMI data was soft though, underlining the problem facing the ECB at this stage in maintaining an overly-hawkish stance, with the services survey this morning dropping to a four-month low. German data also weak.  

Money Supply 

Interesting comments from the Inflation Guy here relating to the correlation between mortgage originations and money supply...bear with me. Here’s the key bit.  

• It is going to be difficult for the Fed to keep the money supply shrinking, if origination of new mortgages rises even a little bit. This doesn’t mean M2 is going to skyrocket, just that it is going to stop shrinking (in fact, it has risen each of the last two months). 
• If M2 rises at even a sober 5% pace, combined with money velocity that still has some normalization left, it will be extremely difficult for the Fed to hit its inflation target on a sustainable basis for some time. 

Elsewhere…crude prices biding time