You Won’t Believe Who’s Getting the Fed’s Free Money
Overnight the Fed released their minutes from their 9–10 June meeting. An insight into the exact thought process going on behind closed doors.
Long story short though, there were no great revelations.
The cash injections will continue, yield curve control is still on the table, and they have no idea what the economy will do next.
Just more of the same, really.
However, what was far more interesting was a new list put out by the Fed. One that detailed the nearly 800 companies which the Fed is pumping money into. A scheme that is handled via the Fed’s purchase of debt.
And let me tell you, there were a few surprise names on this list. You can check it out for yourself, right here.
The immediate standouts to me were Apple Inc [NASDAQ:AAPL] and Microsoft Corp [NASDAQ:MSFT]. Sitting at the fifth and 11th spots on the Fed’s list based on weighting.
Here’s the thing though, Apple and Microsoft are two of the most valuable public companies in the world. Both of which are currently trading at market caps of over US$1.5 trillion.
I find it hard to believe that either company is short on cash right now. Which makes the Fed’s decision to buy their debt rather strange.
But that wasn’t the only surprise…
The real story, at least in my opinion, is the Fed’s commitment to automakers.
Of the top 10 companies on the list (again, by weighting), five are car companies. And even more shockingly, only one is American…
1. Toyota Motor Credit Corp
2. Volkswagen Group America
3. Daimler Finance NA (Mercedes Benz)
8. Ford Motor Credit Co
10. BMW US Capital
Now, unlike Apple or Microsoft, these carmakers arguably could use the extra cash.
Car sales have been falling globally. Down by 43% for the month of April alone. Yet another victim of the pandemic and the lockdowns.
The difference though, is that automakers were already struggling prior to COVID-19.
Looking at Australia, we can see that new car sales have been in a bad place for quite some time. May marked the 26th continuous monthly decline for sales of new cars. Following up on the largest monthly decline (48.5%) on record, in April.
So, what’s the reason for the sluggish performance? Well according to the Federal Chamber of Automotive Industries (FCAI) chief, Tony Weber, it’s a range of factors:
‘May 2020 is the 26th consecutive month of negative growth for the market, and the causative factors are well documented — droughts, floods, bushfires, tight lending conditions, unfavourable exchange rates, and political uncertainty.’
That’s on top of the pandemic, of course.
Now to be fair to Weber, I’m sure these factors have played a part. They are certainly important events that have had an impact on a range of industries. But it clearly hasn’t affected every carmaker in the same way.
I say this because parts of the new car market are actually selling better than ever. Notably, electric and luxury vehicles.
Once again though, that doesn’t surprise me — nor the wider market, it would seem. Just take a look at the ever-polarising Tesla Inc [NASDAQ:TSLA].
Overnight Tesla officially became the world’s most valuable car company. Dethroning Toyota with its US$207 billion market cap. That’s even though the company is still not profitable…
Say what you will about that, you can’t deny the fact they’re popular.
Out with the old, in with the new
What all these indicators should tell you is that times are changing.
Electric cars, love them or hate them, are the future of the industry. Most people have known that for a while now. It is simply a matter of when it will reach a critical mass.
But changing to a different fuel source is just one part of a much bigger story.
The real innovation for cars will be more visceral than that. Transforming the very idea of what it means to ‘drive’ and indeed, the driving experience.
Part of this will certainly involve automation. Turning our cars into smarter, more intricate machines that have tangible value.
Right now, the only benefit I would get from buying a new car is probably some extra bells and whistles. The little add-ons that are nice, but hardly necessary.
If, however, a car could market itself as categorically safer, well I’d give it some serious thought. And this is what, I believe, we will see more of in the years to come. Features that aren’t simply aesthetically pleasing, but actually provide a unique or better driving experience.
Obviously though, we’re not quite there yet.
Making an autonomous or fully connected car is the ultimate goal. Something that automakers and tech companies are working on alike.
Like any innovation though, it will be a gradual and costly process.
Getting back to my original point though, that’s precisely why the Fed’s decision to prop up automakers is so fascinating. Because this might finally provide the last push they need. A little cash incentive to help them develop better, more in-demand cars for the future.
The ball is firmly in the automakers’ court. It is now up to them, whether they decide to play or not.
One way or another though, cars will change. Tesla is proof of that.
What really matters though, is whether it is coming sooner than we expected. Because right now, it certainly seems that is a distinct possibility.
Editor, Money Morning
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