By Nuno Cordeiro
Over the past years the world economy has enjoyed one of the largest expansions in its history. I think, unfortunately, that is coming to an end. If you have money in the stock market, you should consider other options. I’m not telling you to sell everything: I’m keeping a small amount of GOOG stock I’ve held since 2011, deferring taxes, and betting on long-term growth. But if you’re leveraged, you shouldn’t be. And if you have derivatives, you should really know what you are doing.
What if you’re not a stockholder? Why should you care? Because higher inflation, higher interest rates, and higher unemployment are coming as well.
Over most of the past decade, a rare trifecta of low inflation, affordable loans, and soaring stock values has indirectly benefited almost all of us. These good times have also led to a boom in technology and forward-looking companies. High investor confidence and low borrowing costs can do that, allowing companies to spend a lot of cash hiring the best available people and building something great. There are many examples of this, but the most interesting ones are in biotech, space, energy, and IT.
Obama provided a steady hand that helped the global economy out of the great recession and into economic prosperity. But he failed at preventing future catastrophes. Banks are still too big to fail, the Arab Spring (especially Syria) evolved terribly and is now causing rising populism and social unrest in Europe, and sovereign debt was not lowered as it should be, as it *must* be, in fair-weather times.
There are now several factors leading to the end of this period of growth, but the main one is Trumpism. We’re facing global instability, deregulation, tax breaks, growing inequality, ballooning debt, and fears of trade wars, or actual wars. The stock markets tend to predict where the economy is going, and they’re getting jittery. Until now, it appears that Trump’s threats of a trade war are mostly populist rhetoric to please his supporters. Exemptions will likely continue indefinitely and the markets are reacting accordingly. But Trump is unpredictable, and if things change, the consequences will be fast. News this week is that tariffs will hit our closest allies and they’ll hit back.
The recent US tax breaks will also have a negative impact. The extra money will very slightly push inflation upwards but, more importantly, debt will balloon, as will the costs of borrowing. This will inevitably lead to cuts in government spending and a raise in interest rates. As mortgages become more expensive, the middle class will have less money to spend.
Companies with a large bet on the future will be the ones punished the most. These companies are either not yet making money, or making much less than they need to spend. And there’s no bigger example than Tesla, a company that spends cash like no other company in history with a vision on rapid near-term, mid-term, and long-term growth. High stock market valuations make it possible, as do low borrowing costs. Tesla is clearly leading the way to a bright future, building products that consumers love and technology that will have an impact in human existence for many decades to come. But stock markets are going down, and borrowing costs are going up. Under the current US administration, incentives for green tech are also being phased out. Tesla has a small window of time to show investors it can be profitable and to refinance its debt and/or issue new stock. It must do this before the tide changes.
Tesla CEO Elon Musk predicts the company will become profitable in Q3 or Q4 of this year. Whether that happens or not, how would a trade war impact Tesla’s financial position in the following year? If the overall market is struggling or even crashing, what does that mean for a future-oriented company like Tesla? We may find out sooner than we’d like to think.
About the Author: Nuno Cordeiro is a software engineer and entrepreneur. He has spent a large part of the past decade in semiconductor factories around the world, working with big names in the industry, such as Texas Instruments, ST, Philips Lumileds, and Infineon. He has a passion for sustainable technologies, especially related to clean energy and modern nuclear power.