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Elon Musk recently warned of a recession that could come as soon as spring 2022. Almost every investor has been warning of an economic slowdown of some kind, but not many give a time frame as urgent as Elon’s latest prediction. This video will cover why Elon believes a recession is imminent and how investors can prepare.
As the richest person in the world and founder of several successful companies, Elon Musk has experienced firsthand the struggles of a financial crisis. He sold his first company that he co-founded with his brother, Zip2, in February 1999 for over $300 million. That’s right before the dot-com bubble popped in March 2000. Elon also experienced the 2008 recession as the CEO of Tesla and SpaceX, which both almost simultaneously went bankrupt. Now Elon believes we are about to experience a similar situation within the next few months. A tech journalist for the wall street journal tweeted, “there are 936 startups valued at more than $1 billion in the world today. What do we think this chart looks like in, say, 5 years?” Attached to the tweet is an image showing all the unicorns, which are private companies with a valuation of over $1 billion. This list of unicorns includes companies in almost every sector, with each containing tens or hundreds of companies. This is a stark difference with the 150 unicorns that existed in September 2019. That is a 6X in 2 years, a rate that is certainly not sustainable. Elon responded to this tweet by saying, “If history is any guide, not many will make it past the next recession.” After being asked when the next recession will be, Elon said, “Predicting macroeconomics is challenging, to say the least. My gut feel is maybe around spring or summer 2022, but not later than 2023.” There are many reasons to believe that a recession will come in 2022. First of all, I’m sure all of you know that consumer prices are increasing at incredibly fast rates. In response to a tweet that said 99 cent dreams, Elon said, “Now $1.25.” The main reason why prices are increasing is because of the government’s excessive expenditures, which essentially allowed the US to print its way out of the 2020 recession. This graph shows the amount of tax that the average US worker has to pay to keep the federal budget funded. The level of tax that each worker has to pay has spiked significantly in recent years to roughly $22 per hour. That is obviously a humongous amount. Elon responded to that data by saying “This chart is a big deal.” In an effort to lower the government budget, the Federal Reserve plans to raise interest rates and slow down quantitative easing, which is when the Federal Reserve purchases bonds. The Fed recently released a press statement estimating that they will need to raise interest rates to 0.9% in 2022. While 0.9% may seem like a small amount, it’s actually a substantial increase when compared to the average interest rate over the past decade. As you can see from this graph, the Fed attempted to raise interest rates to 2.4% in 2019. However, the market reacted negatively, forcing interest rates to go down to 1.5% before the pandemic even started. A rate increase to 0.9% would almost certainly negatively impact the market, especially because the financial markets have become so reliant on 0% interest rates. Speaking of economic trends, the sponsor of this video, Trends.co, is helping entrepreneurs and ambitious people learn about new business trends months before everyone else. Trends is a knowledge and networking hub where users learn from the world’s most successful executives and insiders. The company has a dynamic team of business analysts that have outlined over 1,000 vetted business ideas. That number is still growing today as they send new newsletters every week. Trends also hosts live, virtual sessions that help you kickstart an online business. Through Trends, you also get access to over 15,000 different entrepreneurs, investors, and operators, all of whom make up a really incredible community. Fans of the channel can sign up for a 7 day trial for just $1 using the first link in the description. That’s right, you can access a 7 day trial for Trends for only $1 down below. Now let’s get back to the video.
In addition to raising interest rates, the Fed also plans to taper off on bond purchases. Starting from mid-January 2021, the Fed will slow down its bond purchases by $30 billion per month. By mid-March, Fed chair Jerome Powell estimates that the Fed will no longer be buying any bonds at all.