- Tesla will dominate the EV market for years to come
- A “plug and play” solution for CBDCs
- Meet “Alpha,” the investing AI
Dear Reader,
The latest political drama over the X-date, the date at which the U.S. government can no longer pay its bills, has turned out to be anticlimactic.
Originally positioned as a June 1 deadline – today – there was always some wiggle room in the actual deadline, which was most likely sometime next week. Either way, as predicted, there was a lot of political theater and horse trading, but the U.S. House of Representatives voted for the increase in the debt ceiling 314-117 to get the deal done.
Oddly called the “Fiscal Responsibility Act,” it was nothing of the sort.
The Act suspends the debt ceiling until January 1, 2025, paving the way for the same kinds of $1 trillion-plus annual deficits that we saw in 2021 and 2022 for this year and next. Fiscal irresponsibility would be a more accurate description.
And the only tangible component related to deficit reduction is a commitment to reduce government deficits by $1.5 trillion over the next decade, none of which will happen in 2023 and 2024.
Despite the seemingly obvious outcome of some kind of deal, the political theater still impacted the markets. Many believed that there was a chance of default on U.S. debt. This naturally contributed to the rise in the stock market that we saw in May. After all, if institutional capital believes that the U.S. government may default on its own debt, large blue chip equities are ironically a safer place to park capital.
But as we discovered, there was no breadth in the buying, with almost all of the rise attributed to Apple, Amazon, Microsoft, Tesla, NVIDIA, Netflix, Meta, and Alphabet.
Behind the scenes, the U.S. Treasury was doing some horse trading of its own over the last month by buying back Treasury bills from the Federal Reserve and issuing new T-bills to do so. It was nothing but a shift from the left pocket to the right pocket, but these shenanigans kept the U.S. government technically underneath the debt ceiling, avoiding a default until a deal got done.
It’s what comes next that’s concerning.
The U.S. government is already $31.8 trillion in debt, and the debt ceiling has now been suspended. It will increase to somewhere between $34-35 trillion before the end of next year. And now that the market knows that there will be no default, capital will flow back into U.S. Treasuries which are safer than equities and offer attractive yields.
And we can expect a flood of U.S. Treasury issuance in the coming weeks. The debt ceiling shackles have been released. Now the Treasury needs to raise capital in order to meet the government’s perverse goal to exceed a $1.2 trillion deficit this year. The private markets will buy up part of what’s issued, and the Federal Reserve will sop up the rest by printing more dollars…
This continues to be a terrible setup for the equity markets, and we should expect a lot of volatility in the weeks ahead.
Debt and deficits do matter. Much in the same way as a household or a business, when debt is ignored or abused, things always end badly and almost always in the same way – gradually then suddenly. The scale might be different, but the mechanics are the same.
Tesla’s strategic supply chain move…
Big news in the electric vehicle (EV) space – Tesla just broke ground on its own lithium refinery. This is a first-of-its-kind development in the EV industry.
Tesla’s pouring $375 million into this new refinery. It’s just outside of Corpus Christi, TX. The purpose is to refine lithium hydroxide at a scale that can support the production of about 1 million EV batteries a year.
The new factory will be finished next year. And it will hit full production in 2025. Here’s what it will look like:
I can’t emphasize enough how big of a deal this is. There isn’t another car company in the world that’s done anything like this. And it’s going to be another huge competitive advantage for Tesla.
As we’ve discussed before, the availability of battery-grade lithium is the biggest challenge facing all EV makers right now. There’s just not enough lithium production happening to support the lofty EV production goals most car companies have set for themselves.
This means that the cost to produce an electric vehicle will not be on par with an internal combustion engine car anytime soon. The only exception could be automakers that have their own mining and refining capacity or have secured capacity from a third party.
That’s why this is such a big deal. Not only has Tesla secured its own supply of lithium for future production… it’s now going to refine that lithium too.
By doing so, Tesla CEO Elon Musk calculates that they can eliminate at least 30% of current production costs. This is achieved through new processing methods that remove as much as 66% of equipment costs and as much as 76% of operating costs.
The key is to enable the refining process without the use of sulfuric acid.
Right now, sulfuric acid is needed to extract the metal from lithium hydroxide. But the problem is that this produces toxic waste. It’s both tedious and expensive to deal with that waste.
So Tesla is ready to implement a better refining process. And we now know that this has been in the works for years.
Get this – two years ago Tesla acquired the key patents for this new refining process from a defunct Canadian start-up called Springpower. The cost? Three dollars… that’s it. The company was out of business, and the patents were actually patent applications that still required additional funding, which is why Tesla was able to pick them up for so cheap.
What a shrewd move.
And the big picture is this – this new process will help Tesla get the cost of its lower-end EVs down in the $25,000 range. At that point, they will largely be at price parity with traditional cars.
Plenty of people are saying that Tesla is going to face stiff competition in the years ahead as legacy automakers enter the EV space. And it’s possible that these competitors could “eat around the edges.” But I just don’t see Tesla’s dominance being threatened anytime soon.
Tesla has already achieved the best economies of scale in the industry, it has the best battery technology in the industry, and it is leagues ahead of its competition in not only securing battery metals but also in dramatically reducing the cost to refine those metals.
All of these things will enable Tesla to offer the mass market an even more affordable EV to capture even more market share. No other competitor will be able to come close.
Ripple’s new CBDC technology…
In a smart move, Ripple just came out with a new technology platform. And it’s quite timely…
As a reminder, Ripple’s original platform has enabled fast and cheap cross-border money transfers for central banks, governments, and financial institutions. Ripple’s tech slashed transaction costs and ensured near-instant settlement. The legacy financial system just can’t hold a candle to what Ripple’s technology can do.
Well, Ripple’s new platform will enable central banks to craft their own Central Bank Digital Currencies (CBDCs).
It was inevitable that a big player in the blockchain industry would launch something like this. And given Ripple’s initial focus on financial institutions and central banks, this new product offering makes perfect sense.
Ripple’s new platform allows any central bank to mint, distribute, redeem, and even burn a CBDC. And get this – the platform can also facilitate offline transactions. This solves a key problem when it comes to any digital currency.
What’s more, Ripple’s new platform gives central banks the leeway to issue CBDCs both in a wholesale and retail capacity.
Wholesale here refers to issuance to other central bank-approved financial institutions. Meanwhile, retail issuance of CBDCs is consumer-facing. They are what everybody would use for daily transactions.
Different central banks might have different preferences. Some might only want to implement a wholesale CBDC to improve inter-bank operations. Other central banks will want to launch retail CBDCs or use financial intermediaries to do so.
Ripple’s new platform enables both.
Now, I doubt Ripple’s new platform won’t be adopted by the United States. That’s obvious based on the aggressive stance regulators have taken against the company. But that doesn’t mean there isn’t a market elsewhere.
Ripple already launched a pilot program for a CBDC in Hong Kong. That project is in conjunction with the Hong Kong Monetary Authority. And Ripple also has an agreement in place with the central bank of Montenegro as well. I’m certain that more will follow.
This seems like a much more practical alternative to governments trying to engineer their own CBDC systems from scratch. It’s far easier simply to piggyback on Ripple’s technology, much in the same way that governments and corporations rely on enterprise-grade software from third parties to run their operations.
So this is certainly a smart product launch for Ripple. While I’m deeply concerned by the current direction governments are taking with CBDCs… I have to admit that this launch by Ripple seems very timely.
Public is first to market with an equity trained AI…
We’ll wrap up today with another development that was inevitable. Public.com just rolled out a generative artificial intelligence (AI) across its brokerage platform.
Last month, we had a look at “Amy” which was the first ChatGPT-based AI designed to be a resource for investors on an exchange/brokerage. Amy was developed by Crypto.com and trained on digital assets. I predicted that many more would follow after that announcement.
And Public.com just announced its own investing AI called “Alpha.” Public is a next-generation, mobile-first trading/investment brokerage. It’s very much a competitor to Robinhood, the other major name in this space.
Alpha’s mission is straightforward. It’s the AI’s job to know everything there is to know about the assets trading on its platform.
The AI can sift through years’ worth of analyst reports. It can pour over every earnings call or investor presentation over the past decade. And it can stay abreast of any public filings a company may make.
This allows Alpha to function as a personal research assistant for investors. We can ask the AI questions about the investments we’re interested in, and it will provide us with timely, comprehensive answers in a matter of seconds.
What a fantastic resource. Until now, these kinds of tools were the exclusive domain of institutional investors. Public.com has flipped the script by making Alpha available to all its customers.
And I should point out that Alpha is based on OpenAI’s GPT-4. As such, Public.com is making its equity market data available to OpenAI’s premium subscribers as well. That means that subscribers of OpenAI’s ChatGPT will have access to the same data and information provided by Public’s Alpha.
This is such a smart move by Public.com for being the first in the equity investment industry to deploy generative AI like this. It’s fantastic to see this kind of technology made available to average retail investors.
Looking forward, I have to believe that every brokerage will follow suit. This will quickly become a “need to have” feature for investors.
Regards,
Jeff Brown
Editor, The Bleeding Edge