The market focus has all been on GameStop this week and the short squeeze on hedge funds. A number of high profile hedge funds were burned by the rise in Tesla’s share price at the start of 2020. By Tuesday’s close, Tesla had risen 955.4% over this period.
But Elon Musk’s company faces a raft of challengers in India and China. The price wars across EVs are intensifying. The threat of a deflation bust in this, and other sectors is real and rising.
Indeed, the list of potential bubble companies in the EV space is growing. Not all of these ventures are going to succeed. They may instead trigger a price war and a sharp adjustment in valuations. Tesla has fallen 10.1% since Tuesday. The rise since the start of 2020 has been trimmed to 848.4%.
The Philly SOX index offers a warning too (-6.4% over the last four trading days): chip demand has been strong, but that does not mean stock prices will continue to head up in a straight line.
Political risks are also rising in the US. This has not been a factor in the modern era for Treasuries or equities. But the divisions between the Democrats and Republicans are deepening following the attacks on Capitol Hill earlier this month. Democrats are now wearing bullet-proof vests in the House of Representatives. Republicans are bringing weapons on to the House floor. This is going to be a long, difficult year for equities with rising risk premia.
Summary
• GameStop: the hedge funds will win
• Tesla a warning: valuation matters
• Powell may be powerless to stop market correction
