2023-04-19 05:18:58 ET
The American economy could slip into a great depression in the coming months, according to Elon Musk, the head of Tesla (NASDAQ: TSLA), Twitter, and SpaceX. As I wrote on Tuesday, this is probably one of the top reasons why gold price is nearing its all-time high.
Elon Musk depression warning
Elon Musk, the second-richest person in the world, held an extended interview with Tucker Carlson. In the interview, the two discussed various topics, including Twitter, artificial intelligence , and the broader economy.
In the second part of the interview, Musk talked about the banking and commercial real estate sectors and why he believes they could lead to the Great Depression. On banks, while the crisis seems solved for now, he warned that the industry is at risk.
He argued that many banks had negative equity, thanks to the substantial unrealized losses. Recent data by the FDIC showed that American banks have over $620 billion in unrealized losses in their balance sheets.
At the same time, he noted that many regional banks had an exposure to the commercial real estate industry that I wrote about here . Recent data showed that these banks hold over $2.3 trillion of these commercial real estate loans.
The industry is facing a triple whammy of higher interest rates, low occupancy rates, and upcoming maturities. As a result, these banks will likely have to readjust their books in the coming months, which will have an impact in the economy.
Most importantly, Elon Musk cautioned about the Federal Reserve, which has signaled that it wants to hike interest rates. He warned that the last time that the Fed hiked into a recession was in 1929, which led to the Great Recession.
Watch here: https://www.youtube.com/embed/3Frx4IMX_Sw?feature=oembedRecession risks are elevated
In the last Fed meeting, the officials warned that the US will go through a minor recession in the fourth quarter. Signs of a recession have been around for some time now. For example, the yield curve inverted on July 7 last year. While the inversion has improved, it remains sharply below zero, meaning that short-term Treasuries have a better return than longer-dated ones.
Historically, an inverted yield curve has been one of the best predictors of a recession. Before the Covid-19 recession of 2020, the yield curve had inverted slightly in August 2019. Similarly, the yield curve inverted to -0.11in January 2007 and to -0.35 in May 2000. Recessions followed afterward in 2008 and 2001. Therefore, the scale of this inversion means that the next downturn could lead to a depression.
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