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Sunday, May 19, 2024

Elon Musk says US banks are sitting on huge losses, warns of ‘severe recession’

Elon Musk, the business tycoon who has taken Twitter down the path to doom, has warned that American banks are sitting on massive unrealised losses. Speaking on Sunday, Musk said severe recession will be triggered by US Federal Reserve’s further rate hikes.  He also said there are warning signs to be seen.

This was Musk’s reply to a tweet from former US Treasury Secretary Lawrence Summers, who said, “If the Fed continues to do what’s necessary to contain inflation, a slowdown is likely.” The chances of it happening in the next 12 months are pretty substantial, probably 70%.”

“Fed data has excessive latency.” A mild recession has already begun. It’s not just the canary in the coal mine (SVB) that has died; one of the most steadfast miners (Credit Suisse) has also perished, and the cemetery is quickly filling up! Further rate increases will cause a devastating recession. “Mark my words,” Musk responded to Summer on Twitter.

Musk was referring to the demise of Silicon Valley Bank and UBS’s acquisition of a historic banking firm such as Credit Suisse.

Another smaller bank, First Republic, failed last week despite receiving $30 billion in rescue funds from 11 major US banks. First Republic had $213 billion in assets at the end of the December quarter 2022, with around $167 billion in loans and $32 billion in bonds. First Republic, like Silicon Valley Bank, failed under the weight of bad loans and assets that lost value when the Federal Reserve began aggressively raising interest rates. Not only them, but many other banks in the United States, both regional and national, are sitting on large unrealized losses from such investments, because bond prices and interest rates are inversely proportionate to each other, particularly for long-term treasury bonds.

During a bank run, these unrealized losses must be realized by the banks in order for them to provide liquidity to their consumers.

Musk also implied that the Fed’s data is behind the curve of what is truly happening in the current circumstance. According to Huduser.gov, the principal source for American federal government data and information, national employment figures are provided one month late. Similarly, there are other indicators that have a perceived delay or, in Elon Musk’s words, ‘latency’ in their figures and are used by the Fed to determine rate hikes.

“Elon’s Tweet”

This is critical to grasp because, if the Fed decides to raise interest rates in May based on March data, Musk believes the Fed is far behind in terms of information about the current market scenario. “Between Tesla, Starlink, and Twitter, I may have more real-time global economic data in one head than anyone ever,” Elon Musk added in another tweet.

Markets continue to expect another 25 basis point rate hike this week, when the FOMC meets on May 2 and 3. According to the CME Fed Watch tool, the probability of another 25 basis points on May 3rd is 87.3%, with no change in rates at 12.7%.


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