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The 10th Man: Notes from the Asylum


 -- Published: Thursday, 22 October 2015 | Print  | Disqus 

By Jared Dillian 

First, a shameless plug. Please follow me on Twitter.

Now on to today’s topic. You probably heard that Dreamy McDreamerson is the new Canadian prime minister, opening a can of Canadian whoop-ass on Harper. Here is the crux of it.

Harper, in some ways, had an accidental 10-year reign. Canada is about 60% left-wing and 40% right-wing, but has two left-wing parties (the Liberals, who are center-left, and the NDP, who are allegedly far left) that have been splitting their votes in every election. Canada is slipping into recession, and Harper, sort of a Canadian Sean Hannity, has worn out his welcome over time with his hawkishness/paranoia.

Going into the election, people were talking about the idea of “strategic voting.” There was a dominant theme of Anybody But Harper, so it was just a matter of whether the votes would go to the Liberals’ Trudeau or the NDP’s Mulcair. Trudeau, who had been languishing throughout the campaign, had a late surge, and everyone piled on, driving him to not only victory, but a parliamentary majority.

Now what?

Trudeau, I think, is a little further left than people give him credit for, with a clear authoritarian streak. Aside from legalizing marijuana (which has everyone all revved up), Trudeau’s other concrete proposal is to intentionally run a deficit by raising taxes (on the rich) and spending even more money on infrastructure.

Classic Keynesian stuff, countercyclical fiscal policy. Theoretically, Canada is in recession, but it has been pretty mild so far, and if Trudeau wants to build a few dozen bridges between Vancouver Island and mainland B.C., I can’t imagine what’s going to happen when Canada slides into a deep depression.

Actually, I can. Canada’s budget—which is basically balanced—will, in a few years, reach a deficit of 10% of GDP.

That’s not good for the Canadian dollar, which has been in a two-plus-year bear market. And I am aggressively shorting it.

Trudeau has a reputation of being somewhat of an empty suit, a know-nothing—and these are the sorts of things that his own supporters acknowledge. Canadian investors have told me privately that they believe this outcome to be even worse than if Mulcair had been elected, which is really saying something.

The CAD has been basically unch (trader talk for “unchanged”) over the last two days, leading the FX reporters at the news bureaus to report that international capital flows don’t seem to be fazed by the Trudeau election. Maybe not in the short term, but certainly in the long term.

Model D for Done

I’m a huge Elon Musk and Tesla fan, but there is trouble afoot.

The Model X was unveiled, and it is proving to be a disappointment.

  • The base price is $80,000-$90,000, but to get the car you want, most people are going to have to pay $130,000.
     
  • It’s essentially a minivan.
     
  • Nobody is going to pay $130,000 for a minivan.
     
  • It’s a cool minivan, but it’s still a minivan, just with fancy doors.
     
  • On top of it all, they delivered it two years late.

If you’re TSLA, with a $30 billion market cap, with zero earnings as far as the eye can see, and a very fragile valuation case, you can’t do these sorts of things. This is a strategic screw-up. But with maybe a different word instead of “screw.”

Then, a week later, Consumer Reports comes out and says that Tesla cars are not especially reliable.

Down goes Frazier.

The bull case on TSLA is not that the cars are electric. Nobody cares that the cars are electric. People like Tesla because the cars are awesome and the engineering is spectacular.

But if the cars really aren’t awesome, as Consumer Reports alleges, that kind of kicks out the one remaining bullish leg of the chair.

Whenever I talk about being bearish on TSLA, people usually tell me that Tesla is worth something to someone and will get bought eventually. By whom? At what price? Can you think of a scenario in which Elon would sell? Things would have to be pretty dire.

So there is a lot more downside, potentially.

The chart looks like death, and there is a confluence of bad news. This stock was a short-murderer for years. Not anymore.

The Pace of Medical Innovation

My wife and I were watching TV last night and the Opdivo commercial came on—the lung cancer immunotherapy drug by Bristol-Myers Squibb (I am the unhappy holder of the stock, which hasn’t done much in the last 6 months).

Yes, Opdivo is the first FDA-approved immunotherapy drug. It is essentially a cure for cancer, although they can’t really say that on TV. They say that it lengthens your life… yeah, by curing cancer!

All kinds of biotech companies are working on immunotherapy treatments. There are about 300 different kinds of cancer, and each one needs an individual cure.

In my lifetime (assuming no whammies, which we will discuss in a second), getting cancer will be little more than an inconvenience. Incredible.

As you know, health care and especially biotech have taken a massive hit over the last three months. In the case of biotech, it was about a 30% drawdown.

And if you were paying attention, you know that was because there is an increased focus on drug pricing. Hillary Clinton proposed outright drug price controls on the campaign trail, and the entire health care sector took the Metamucil.

Prices are signals. The reason we are getting all these great drugs is because… prices are high! People are incentivized to find cures for stuff. Some people have this idea that cures for cancer should be developed by these Jonas Salk-type lab rats toiling in anonymity, out of pure altruism, but that isn’t how it happens.

My moral compass says that anyone who develops a cure for something that cures a bazillion people should get to be a bazillionaire.

Lots of people knock on Obamacare, but mercifully, it leaves intact (mostly) the price signals that allow the drug market to function. We go to single-payer—no more fancy drugs. The pace of medical innovation drops to zero.

I’m still bullish on health care, but you can’t put the drug price genie back in the bottle. This will be a topic of conversation throughout the campaign. Expect tape bombs galore.

Jared Dillian
Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter @dailydirtnap

The article The 10th Man: Notes from the Asylum was originally published at mauldineconomics.com.

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 -- Published: Thursday, 22 October 2015 | E-Mail  | Print  | Source: GoldSeek.com

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