Activist short-seller Carson Block, the founder of Muddy Waters Research, had an epiphany of sorts about Elon Musk and Tesla (TSLA), causing him to change his tune on the electric vehicle entrepreneur after a rather odd dream involving Social Capital CEO Chamath Palihapitiya.
In his first-ever investor letter after nearly six years of managing money, Block shared a story about a dream he had last week about a canceled meeting (not on the docket in real life) with Palihapitiya, whom he’s repeatedly called “SPAC Jesus” after the investor Tweeted his top priorities of inequality and climate change, which Block called “faux populism.”
Because of that dream, Block had a realization that in order to de-carbonize the economy, interest rates “must stay at ridiculously low levels,” which he believes will be the case for the “coming few decades,” thus spurring investment in technologies to de-carbonize.
Block also thinks it will also be the “express policy” of central banks such as the European Central Bank, Bank of Japan, and the Federal Reserve. That said, he doesn’t think government-directed spending on these sorts of technologies is the answer, but the low rate environment bodes well for Tesla.
“So much of the needed investment will be value-destructive – as Tesla (absent accounting bulls—t, subsidies, and credits) shows. And I’m no environmentalist – my two-driver household is the proud owner of 30 cylinders of ICE collectively producing almost 1,400 horsepower. But seriously, our way of life isn’t sustainable,” Block added.
While Block acknowledges that he’s publicly criticized Musk for several years for a litany of reasons, he explained that it was “only after the Prophet SPAC Jesus canceled his visit to me in my dream that I understood Elon Musk. Or at least got a far greater understanding for him than I had.”
As early as 2013, Block has said he wouldn’t short Musk because he’s “way too skilled at pulling rabbits out of the hat to short.” Block learned this first-hand after being long Tesla bonds and using the coupons to buy long-dated, deep out-of-the-money puts on Tesla that “came tantalizingly close to paying off in 2019, but Elon pulled the requisite rabbits out of the hat, the Fed loosened in response to Covid, and our puts went to Put Heaven.”
To be sure, Block’s issue with Musk has long centered around his “incessant bullsh—,” not his actual work to demonstrate with electric vehicles and rockets “that really do work innovate and work.” However, Block’s views of Musk are much “less hostile” given his “newfound wisdom about the way the world needs to work.”
According to Block, the Tesla shorts “have been right and wrong all along about Tesla’s problem.” Block explained that the short thesis has “focused on Tesla’s lack of scale to compete in EVs with GM (GM), Ford (F), VW, etc.”
“They are correct in that lack of scale would have been the death of Tesla. But they were looking at the wrong scale,” Block added. “Tesla is here not because it has scale in terms of manufacturing base or unit sales. It has scale because of its capital base. At the end of the day, for someone who can actually make the f—king car drive and the rocket fly, that is all that matters.”
The capital base scale has only been fueled by “all those years of lying (e.g., “funding secured”), wars with short sellers that we assumed were driven only by his pathological narcissism, and trampling rules [Musk] found inconvenient.” And with a market cap north of $700 billion, Tesla has “far more capital scale than any competitor,” he said.
“One could look at Tesla’s market cap and think it’s fragile – that reality will shatter it. However, Tesla should be able to raise many billions before its cap becomes sub-scale – and keep in mind that Tesla equity raises tend to push the stock higher. (Those ‘dumb money’ investors actually knew that capital base scale is what mattered all along.),” Block wrote, adding that the capital base scale only needs “Elon to continue setting his audience’s receptivity level of bull—t to Absurdly – if not Adoringly – Accepting.”
“Might he fail? Maybe. But look at the iterations of Elon’s image – from that of a humanity loving environmentalist to gladly letting Ted Cruz hang from his jock while flouting the law. The market cap, the luster, the elan of Elon, is still there.”
To be sure, Block reiterated that there are “still numerous opportunities for activist short sellers” and “most charlatans will be too charlatany to make a real car or rocket.” Block also believes “there will be a torrent of charlatans who come out of the woodwork to cheat people out of their money based on false promises of disruptive technologies,” while calling out Lordstown Motors (RIDE), Nikola (NKLA), and his short of XL Fleet Corp (XL).
“We at [MuddyWaters] have no edge when it comes to evaluating technologies, and I suspect that our short activist brethren like Hindenburg don’t either. But we excel at playing the man – not the ball. And that’s what’s needed to ferret out the shysters from the Elon Musks,” Block wrote.