Last night on CNBC, Catherine Wood, the CIO of ARK Invest, came out with a whopping price target on Tesla of $6,000, which, if achieved, will be the biggest stock price in history, second only to Warren Buffet’s Berkshire Hathaway.
According to ARK’s models, the catalysts that will drive Tesla’s stock into four-digit territory are the rapid expansion of the electric car market, a recent unexpected gain in market share, and an increase in efficiency due to lower part costs.
The economy, however, is telling a different story: stagnation in America’s automotive industry. Data from the U.S. Bureau of Economic Analysis shows total vehicle sales have been declining for almost two years, and survey data by the American Banker’s Association shows auto loan delinquencies are at an 8 year high.
Consequently, auto stocks continue to trend sideways, but with the exception of Tesla whose market value has doubled only in the past few months. With the automotive industry under pressure and Tesla’s competitors lacking similar stock market gains, what could be the reason behind the electric car company’s remarkable solo rally? CEO Elon Musk’s amusing antics at the Cybertruck premiere? The opening of a giga factory in China? These catalysts fail to justify a 100% increase in a large-cap company. So when you also factor in slow U.S economic growth, the meteoric rise of Tesla’s stock is completely bizarre.
That is until monetary policy comes into play.
Around the time Tesla’s stock began to skyrocket, Federal Reserve chairman Jerome Powell announced they would intervene in the repo markets — the market for short-term borrowing of repurchase agreements (repo) which consists of mostly government securities — in response to a liquidity crisis.
The crisis forced the Fed into initiating the next round of quantitative easing which Powell insisted was a short term solution. Except they failed to spur growth in the economy and the market realized daily billion-dollar injections would become the norm. As a result, Tesla became the stock to pump the excess liquidity into as shown by a chart of Tesla alongside the Fed’s balance sheet.
Although Wood’s catalysts for a $6,000 stock are valid, loose monetary policy is the main driver behind the rise of Tesla’s stock. You’re not buying into the company for stellar profitability, rapid earnings growth, or any other company-oriented fundamental reason. Instead, you’re betting on the Fed maintaining a loose monetary policy stance in the years ahead.
As market commentator Sven Henrich illustrates, while the Fed’s repo operations stay in effect there’s no stopping the equity market reaching new all-time highs every day of the week. The stock market is so high on cheap money, even a major black swan event may not be enough to bring it down — but to consider investing in these types of stocks you have to abandon fundamentals, and, instead, embrace the market’s irrationality.
Stocks that also thrive on credit are displaying similar price action, such as Apple, whose stock chart appears to be entering a parabolic stage during the biggest buyback program in its history which, of course, is possible only in a market where debt is cheap and investors are happy to take on risk.
So when you think about what the market is doing compared to what the market should be doing, Wood’s $6,000 prediction no longer seems crazy but almost inevitable. Tesla has become the poster child of this trend seen only during bubbles where assets sensitive to the supply of credit are rewarded by central bank liquidity.
For Wood to be right, the stock still has to rise a colossal 1100% over half a decade, but her ambitious price target is not only brave but also feasible as long as the Fed keeps injecting liquidity into the financial system.
Now, it’s just a matter of time.