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Irrational Exuberance Case Study

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Tesla’s use of leveraged credit generates huge deformations, misallocations and speculative excesses in the financial markets. Within the short span of 33 months between early 2012 and September, Tesla’s market capitalization ramped up from 2.5 billion to a peak of 35 billion. Tesla had a 14 fold increase without the invention of any revolutionary product, this bubble fuelled fad either has a choice to face normalization or centralize risk and risk long term ruin for short term gains. Tesla’s meagre LTM sales were not accompanied by any sign of profits or positive cash flow. September 2014 LTM net income came in at a negative 200 million, and operating cash flow or 150 million was dwarfed by CapEx of 700 million. Organizations are using …show more content…

Free-Markets is an amazing mechanism only if organizations and governments are able to accept the truth and allow efficient markets to dictate prices. It is paradoxical that the efficiency in the market is what scares organizations and Budgetary Control as a communicative tool takes into account this fact. The Efficient Market Theory by Harry Markowitz, the founder of modern day portfolio theory whose Capital Asset Pricing Model (CAPM) is being adopted by financial institutions globally, argues that information is actively being priced into assets and there is no arbitrage opportunity to take advantage of. This can be attributed to technological advancement where information is actively being traded and High Frequency (HFT) exists. This is the very notion that dictates budgetary control practices via the medium of Capital Markets. Asset prices have become so sensitive to information and inferences based off policies and budgets that companies who took part in leveraged growth have to choose between honest growth where budgetary control is being used as intended and face the probability that their market capitalization will decimate, or keep the dream alive a little longer and use budgetary control as a communicative tool to paint a rosy facade. Sadly, the latter is the case because there is a vicious feedback loop centred around appeasement for profitability via communicative inference that stems from budgetary control. Therefore, budgetary control in modern socio economic era has its role in centralizing an organization and quantitatively tracking the performance and efficiency, but it has an even bigger void to fill that is communicating the desired inference or information to

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