'Mark my words': Elon Musk warns of a severe recession, criticises 'latency' of Fed's data

Billionaire Elon Musk said on Sunday that further rate hikes by US Federal Reserve will "trigger severe recession" and he said there are telltale signs to be seen.

He was responding to former US Treasury Secretary Lawrence Summers' tweet: "If the Fed continues to do what’s necessary to contain the inflation, slowdown is likely to come. The odds on that happening sometime in the next 12 months I think are pretty good, perhaps 70%."

"Fed data has too much latency. Mild recession is already here. It’s not like just the canary in the coal mine (SVB) died, one of the staunchest miners (Credit Suisse) died too & the cemetery is filling up fast! Further rate hikes will trigger severe recession. Mark my words," tweeted Musk in response to Summer.

Musk was referring to the collapse of Silicon Valley Bank and takeover of a storied financial institution like Credit Suisse by UBS. Last week another regional Bank, First Republic, collapsed even after getting $30 billion in rescue efforts from 11 big banks in the US. By the end of December quarter 2022, First Republic held $213 billion in Assets, of which about $167 billion were in loans and $32 billion in bonds. Just like the Silicon Valley Bank, First Republic collapsed under the weight of bad loans and investments, which lost value when the Federal Reserve started increasing interest rates rapidly. Not just them, a lot of other banks in USA, both regional and national, are sitting on huge unrealised losses from the such investments, as the bond prices and interest rates on them are inversely proportional to each other, specially the long term treasury bonds. During a bank run, these unrealised losses have to be realised by these banks to provide liquidity to their customers.

Musk also meant the data that the Fed is receiving is actually behind the curve of what is actually happening in the current scenario. For example, according Huduser.gov, the primary source for American federal government reports and information, the national employment numbers are released following a 1-month delay. Similarly, there are other statistics which have a supposed delay or in Elon Musk’s words, 'latency', in their numbers, that are used by Fed to determine the rate hikes.

“ Elon's Tweet "

This is crucial to understand because if Fed decides to hike the interest rates in May on the basis of the data coming from March, according to Musk they are way behind in the information related to the current scenario of the market. Elon Musk, in another tweet, said: “Between Tesla, Starlink & Twitter, I may have more real-time global economic data in one head than anyone ever."

The markets are still predicting another rate hike of 25 bps this week as FOMC meets on May 2, 3. According to CME Fed Watch tool, probability of another 25 bps on 3rd May is 87.3% against the no change in rates at 12.7%.