Elon Musk Continues to Warn About a Huge Mistake

The serial entrepreneur believes that the monetary policy has caused enormous damage to the economy.

The deterioration of the economic climate has been one of the main concerns for investors for several months now. 

This is reflected in particular in the fall of nearly 33% of the Nasdaq 100 stock market index, dominated by technology companies which are mainly growth stocks.

Price increases for goods and services are at their highest in 40 years in many Western countries, forcing central banks to raise interest rates, which makes access to credit expensive.

In the United States, many economists believe that the aggressive rise in interest rates will cause the economy's so-called hard landing, aka a recession. The tech sector tends to perform well when the economy is healthy and confidence is high.

Consumers tend to spend on tech products and services when things are going well. But as soon as the economic situation deteriorates, they begin to be cautious, favoring necessary purchases, often to the detriment of tech.

The Suffering of Big Tech

To understand investor anxiety, just look at the performance of Big Tech stocks. Shares of social media giant Meta Platforms  (META) - Get Free Report have fallen 65.2% this year and shares of Tesla  (TSLA) - Get Free Report are down a steep 64.4% at the time of writing. Amazon  (AMZN) - Get Free Report shares fell 49.7%, while Alphabet  (GOOGL) - Get Free Report shares fell 39.4%. Shares of software giant Microsoft  (MSFT) - Get Free Report fell 28.2%, while shares of iPhone maker Apple  (AAPL) - Get Free Report fell 25.1%.

"My advice to people, small business owners is take some risks off the table. If you are going to make a purchase maybe slow down that purchase a little bit," Amazon founder Jeff Bezos advised last November. "If you are an individual and you are thinking about buying a new large screen TV maybe slow that down keep that cash, see what happens. Same thing with a refrigerator, a new car whatever, let’s take some risks off the table."

For many economists and business leaders the situation would never have become so desperate if the Federal Reserve had been less aggressive in raising interest rates. Elon Musk, the CEO of Tesla and SpaceX, is among the critics of the central bank. 

The tech mogul has been repeating, for several months now, that the Fed should stop raising interest rates immediately, to avoid causing lasting damage to the economy. 

He has just renewed this warning once again, and goes further in estimating that this monetary policy will be remembered as one of the most devastating for economic activity.

'Most Damaging'

"The Fed has never raised rates faster," a Twitter user posted on December 22. "We are all test subjects in a massive economic experiment."

Musk seized the opportunity to blast the Fed.

"At the risk of being repetitive, these Fed rate increases might go down in history as most damaging ever," the billionaire said. 

He was then asked what he would do if he were the Fed but did not answer.

The Federal Reserve has raised interest rates sharply in recent months, taking the benchmark rate from almost zero during the pandemic to a range between 4.25% and 4.5%, in an effort to combat inflation, which is at its highest in 40 years. This is the highest level since 2008.

The so-called Dot Plots, which illustrate the views of the Fed's eighteen member rate-setting committee, indicate a terminal Fed Funds rate of around 5.1% by the spring, a level that it plans to hold until the end of the year. 

The CEO of electric vehicle maker Tesla believes that a continued rise in rates will cause deflation, a risk already indicated by Musk last September. The consequences of deflation can be devastating for the economy because the fall in prices encourages households to postpone purchasing decisions while waiting for further price declines. 

This in turn can lead to a drop in overall consumption and an increase in inventories at companies, which can no longer sell their products. In response, they reduce production and investment.

Musk has been quick in recent weeks to attribute Tesla's stock market rout to the Fed actions despite shareholder pushback.

"I keep saying that Fed rate is insane, because data I’m seeing says we’re already in deflation. If true, then real rate of return of T-bills is roughly that of S&P500. Very smart investor I spoke to today said he’s shorting S&P…" the billionaire said as recently as December 21.

Two weeks prior, he blamed the Fed again for Tesla's woos: "Macro conditions are difficult: energy in Europe, real estate in China & crazy Fed rates in USA."