Elon Musk, Tesla, pasta, and the questionable nature of stocks and the free market.

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Apropos the current startling developments with respect to Tesla and Musk (he tweeted he may have Tesla go private at $420 a share, above current prices), I have some thoughts I’ve been meaning to eventually get out there for comment and critique. I wonder, suspect, that what I’m thinking is related to the idea that Tesla going private is a good thing for the company and its customers, and for the cars themselves. The following scenario is what I suspect (but do not know) happened in relation to a well known company that I will anonymize here by using a different name. I’ll call it “Pastas.”

So, there was this food emporium called Pastas. The idea was to specialize in Pasta, since everybody loves Pasta, and to provide a range of options of pasta at a good price. You would go to a counter to order the pasta, but someone would bring the food to your table, along with a napkin-wrapped set of silverware. When you were done eating, they would bus your table for you. This placed Pastas clearly outside the normal range for fast food, yet in the same comfortable (and fast) ball park.

Over time, Pastas stock went up, as more and more stores were open. People buy the stock because it is going up. This investment fuels more franchises, advertising, other development. The value of the company goes up because its numbers look good, and that adds to the value of the stock itself, because people want to buy it.

Eventually, every strip mall and commercial zone in America that can have a Pastas, almost, has one.

When stores were being added, income streams were being added. Earnings went up because of this, plus, because an older franchise can have a higher profit margin than a brand new one. But once the market was saturated with stores, the income stream could not grow that way any longer. This caused the value of the stocks to stop going up as much as they were. Instead of always going up, a lot when the overall market went up, a little when the overall market went down, Pastas stock now went both up and down. And every time it went down, there was the stock market equivalent of a stern look. News report: “Pastas stocks have gone down for the first time since the company did yada yada” and that sort of thing.

Pastas needed to increase its own value somehow to keep stock holders happy, else they put Pastas stock in their “sell when you need the cash to buy into the Next Big Thing” category. But most of the previous increases were from opening new stores, and all the stores that could exist, pretty much already existed. There had to be other ways to increase value.

Note: At this stage, everybody loves Pastas. No stores are closing. There are no layoffs. The restaurant continues to do well, people buy lots of Pastas product (pasta), vendors and employees get paid, etc. Everything is just fine. The only thing that is off is the value of the stock, stabilizing or dropping slightly, not because of a change in inherent value of the company, but because the company had filled its space.

Everything is just fine but one thing: The stock market does not understand that the store has value, and needs to see earnings increase — not just stay the same but go up — or they don’t hold the stock.

So, what does Pastas do?

In order, roughly:

1) Stop bringing silverware and napkins to the table. One might think this would make very little difference, but it saves money because it saves a measurable bit of time. It is also one less thing for employees to get right, so one can spend less time training.

2) Stop clearing tables. This saves even more money for similar reasons.

3) Reduce quality of some of the ingredients if it saves money.

4) Reductions in pay to employees, or slowing down raises, or less training.

As these or similar steps are carried out, the earnings go up because costs go down. Not by a lot, but enough to stop the bleeding.

As this sort of thing happens, Pastas starts to decline in quality. No longer to people say,”Hey, this new place is great, try it out.” People keep going to eat there, sure, but only out of habit and because while quality has gone down, it is tolerable.

Over time, a measurable number of customers become annoyed when their local Pastas gives them a dose of extra bad service, and are less inclined to go there.

The number of customers stops increasing, which offsets the small gains from increased stinginess. The number of customers who walk away and come back less frequently or not at all goes up, which exacerbates the problem.

Earning drop. Stockholders, believing as they do in the perfection, wisdom, and sanctity of the Free Market, don’t understand that the real reason the value of the stock drops is because of their prissy irrational behavior. They blame it on — well, whatever excuse they can think of that does not incriminate themselves. More stocks sell. Value drops. Pastas starts to cut its losses any way they can. Eventually, Pastas, a good idea well done, disappears from the American landscape, cast aside by the invisible, and brainless hand of the Free Market. Pastas is gone, having died of its own success.

But the cause of death isn’t only success. What really killed Pastas is the fact that it was a publicly owned company.

Perhaps something like that is why Musk wants Tesla taken out of public ownership.


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27 thoughts on “Elon Musk, Tesla, pasta, and the questionable nature of stocks and the free market.

  1. Or he’s just making a 420 joke. While simultaneously wanting to make the shorters shit their shorts, so to speak.

    1. This:

      ‘Musk also took a swipe at short-sellers, saying that “being public means that there are large numbers of people who have the incentive to attack the company.”’

      Also discussion of how the need to hit quarterly numbers to satisfy the street warps the business (i.e. the big push to get 5,000 model 3s per week out at the end of last quarter).

    2. This big push was done by putting unfinished cars on external lots, and claim them as produced.

      The next week production dropped back to 4k.
      However, most recent week was well past 5k again.
      Overall Model 3 production is now on par with Porsche.

    3. “This big push was done by putting unfinished cars on external lots, and claim them as produced.”

      Wrong. Finished, waiting for shipping. While the push may’ve increased the number of defects in delivered cars, the claim that they were “unfinished” is utter bullshit.

      Have you looked at customer satisfaction numbers for Tesla?

  2. I love and loathe this man.

    I love and loathe the car.

    I wish him success but when he runs
    his mouth – death.

    Public or private will matter not
    only a collection of able men.

    1. So you like a president who is a failed businessman but don’t like someone who actually did the hard work to build a business.

      You are a stellar example of the irrational assholes on the right.

      There are several legitimate reasons to be unhappy with Bezos, but your stupid little “able men” rant shows you aren’t capable of coming up with any of them.

  3. Bezos D’oh!!!!!!
    Musk. Unhappy with Musk.

    It could be a simple explanation: he’s getting tired of tossing his own money into the company.

    The stock market does not understand that the store has value, and needs to see earnings increase

    Not just increase — increase at a rate the “experts” deem appropriate. Look at the huge one-day decline FB had: earnings were still up, but not where the market thought they should be. Believing in either a “free market” or the “wisdom of the market” is no better than believing garden gnomes can come to life.

    1. Well the analogy doesn’t work anyway. Tesla is far, far from having saturated the market, and it’s branching out and dropping fruit in all sorts of areas. Close to the tree – the Semi (pizza to go with the pasta!). Further – PowerWall, solar roof (starting a chain of espresso stores!). Way out there – SpaceX (vegan meat that tastes better than beef! or pasta!).

  4. “You would go to a counter to order the pasta, but someone would bring the food to your table, along with a napkin-wrapped set of silverware.”
    Why not let people get their own pasta from a central pasta pot and add garnish to taste?
    And pick up their own cutlery from a cutlery holding vessel next to the pasta pot?
    And the lazy fuckers can put their dirty plates in a bin of some kind for washing later.
    Stupid model having waiters. They are superfluous.
    In my local pub, the chefs cook a pizza or steak or whatever and put it on the counter for collection by customer. Easy. They don’t have single waiter.
    None even notices the absence of waiters because it’s normal. Don’t need to employ someone to carry food 10 metres.

    1. <blockquoteStupid model having waiters. They are superfluous.

      Well, to be honest, they do make the joke about the waiter, the efficiency expert, the diner, and the extra spoon possible.

    2. Dean, I’m not familiar with that joke.
      If you could tell it or link it somehow that would be very nice of you.

    3. Li D:

      A man entered a restaurant and sat at an open table, knocking a spoon of the table with his elbow. Before he could reach for it a nearby waiter stopped him and pulled a clean spoon out of his shirt pocket. Impressed, the man asked how the waiter happened to have a clean spoon with him.

      “Well sir,” replied the waiter, “Last year our owner hired an efficiency expert. She found that 17.34% of all diners knock a spoon off a table, but none over knocked off a knife or fork. By carrying a clean spoon we avoid many trips to the kitchen and so we’re more efficient waiting on our customers.”

      “Very impressive.” replied the diner. He gave his order, then noticed that his waiter had a long string hanging from his fly .

      “Forgive me,” he said when the waiter returned with his food, “But do you know you have a string hanging from your pants?”

      “Yes,” replied the waiter. “All the male waiters do. The
      efficiency expert also determined we spend too much time washing our hands after we use the men’s room, so she suggested we tie one end of the string to our member. That way, when I go to the bathroom, I can pull the string to prepare myself and then return to work. Since I haven’t touched myself I don’t need to wash my hands. It saves a great deal of time.”

      “But wait,” said the man, “How do you get yourself back in your pants?”

      “Well I can’t speak for the other waiters, but I use the spoon.”

    4. In America, we like servers. They are our friends and neighbors, and this is how we fund our artists and students.

  5. Anon: That was definitely not an analogy.

    I should quickly note that the usual criticism of an analogy is that the analogy is not exactly like the system being analogized. To that, I say, http://gregladen.com/blog/2018/07/24/schrodingers-lie-a-quantum-leap-in-understanding-metaphors/

    But in this case, a pasta restaurant is not given as an analogy. Rather, the Tesla moment we had yesterday prompted me to write about the public corporation problem more generally.

  6. “So you like a president who is a failed businessman but don’t like someone who actually did the hard work to build a business.

    You are a stellar example of the irrational assholes on the right.”

    dean, old bean, because we failed your metrics we are deem dean blankholes?

    The kinder and gentler dean, had a very short expiration.

  7. dean, old bean, because we failed your metrics we are deem dean blankholes?

    You’re right. It takes a masterful businessman to be given several hundred million dollars from his father, run things that perform at a lower rate than the stock market, stiff contractors out of payments, and run several casinos into the ground.

    You really should stay away from adult conversations billyR — you don’t stand a chance.

  8. Musk’s best move was to quite college. He quickly went from a
    debtor to an asset holder.

    Little d, some of our stores are self-service but most dinners
    prefer a staff of waiters and waitresses, as they become our
    lobbyists.

    I would rather avoid a kerfuffle with the cooking staff, who
    may express their displeasure with an altered meal.

  9. “You’re right. It takes a masterful businessman to be given several hundred million dollars from his father, run things that perform at a lower rate than the stock market, stiff contractors out of payments, and run several casinos into the ground.

    You really should stay away from adult conversations billyR — you don’t stand a chance.”

    The only accomplishment your fine candidates have achieved, is to suckle at
    the tits of worker bees.

  10. ““And, the wealthy Democrats tend to inherit their money. Republicans tend to earn it.”

    Yeah, reading through that crap one has to ask: you don’t have a reliable source? One that isn’t hosted by a proud and loud bigot and racist?

    No? Thought not.

    Once again — nothing you post should be taken as being reliable.

  11. To go back to the problem that Greg was talking about. I’ve known of perfectly successful companies, giving their stockholders a good reliable, but not stellar or fast rising return, and employing a couple of thousand people, that went out of business because the stockholders coud get a large payment up-front form private equity firms who bought the company, closed the business and made their money selling off all the assets. Ward Vaux would be an example, a brewer with a couple of breweries and a thousand plus pubs, most of the stockholders inherited their shares as descendants of the founders; they destroyed the livelihoods of hundreds because the shares they inherited weren’t giving them a good enough return – not a poor return, just not a stellar return.

    1. Hmmm yes.
      A similar case could be made ( although there are convolution , typically! ) about some mob called AEP cancelling a huge wind farm in USA state of Oklahoma because of some timeframe on government subsidies and they wouldn’t get em and
      the owners return wouldn’t be as big as it could be! So they just can it!
      It’s a shitty shitty optic on windfarming as a viable business and aspersions are already being made about it by cretins who hate wind power.
      I remember saying ages ago about tree farms and that if the only way to profit is by government tax law, they are hardly a viable business.
      Same with a restaurant actually.
      If ya can’t run a restaurant profitably AND pay staff a fair wage, it’s not even close to viable.

    2. “they destroyed the livelihoods of hundreds because the shares they inherited weren’t giving them a good enough return – not a poor return, just not a stellar return.”

      Poppycock. Have you ever even been a shareholder.? No one inherits stock
      share (LBO) with the economics of some business are better liquidated than held.

      Employees have the option to buy the business. Jazz, I have a 30
      year government bonds, that I will offer to you for 100 bases points, do
      you wish to buy.?

      That being said, some leverage buyouts firms are better than others.

      Some helf firms return to a competitive environment, others are simple
      rent seekers.

  12. Little d “owners return wouldn’t be as big as it could be!”

    Bloke, what in St Patrick does dat mean? Please do more weather cast
    as your outlook is nebulous.

    As for returns on bird shredders, there would be NONE (NUN <—- more
    spelling laughter for the clown passe) if it were on for state tax payouts.

  13. BillyR
    In the case of Vaux-Wards some of the business shares were inherited before the business was taken public, but others were inherited after. But since you know so much about it could you explain to me how I inherited the shares I own?

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