Elon Musk sold Tesla stock this month for cash in a “worst-case scenario.”
The Tesla boss has warned that higher interest rates and a recession could hurt Tesla’s profits and share price.
Musk took on personal debt against his Tesla stock and offloaded the bank debt on Twitter.
Elon Musk sold nearly $4 billion worth of Tesla stock this month for worst-case scenario liquidity. He shared it in an email on Thursday Twitter-Spaces-Conversation with Whole Mars Catalog with. The automaker’s CEO appears concerned that if higher interest rates are combined with a severe recession, he and his companies could be affected. Musk says, “I had to sell some stock to make sure my gunpowder was dry for the worst case scenario.” But why is Musk taking these precautions?
Why is Musk worried about interest rates and a recession?
Inflation rose to a 40-year high of 9.1% in June. That prompted the US Federal Reserve to hike interest rates from virtually zero in March to over 4% today, signaling they could peak at over 5% next year.
Musk explained that higher interest rates are particularly painful for automakers because their customers mostly buy cars through loans and leases. They therefore pay close attention to their monthly payments, which usually go up with interest rates.
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Higher borrowing costs have made cars more expensive, so manufacturers have to lower prices to keep customers or attract new ones, Musk said. As a result, rate hikes tend to dampen demand and erode automakers’ profits, which could affect their stock prices.
At the same time, higher interest rates would mean people get better returns from safe investments like savings accounts and government bonds. That makes them more attractive to investors than riskier assets like stocks, Musk said.
Tech stocks like Tesla are usually valued primarily by their potential future earnings. Musk says these gains become less valuable just as prices skyrocket, yields on other assets rise, and a recession threatens to stymie companies’ growth plans.
In addition to pointing to interest rates, Musk warned that a severe recession will hit sellers who sell assets on credit. Why: In troubled times, consumers would rather stop buying these products than give up staple foods, he said she. “Things you borrow for, especially houses and cars, will be disproportionately affected,” Musk said.
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How might a recession affect Musk?
Shares of Tesla have already dropped nearly 70% this year as investors fled growth stocks and swapped the shares for safer investments. If higher interest rates continue to weigh on the market and, coupled with a recession, hurt Tesla’s earnings, the automaker’s stock price could fall further.
Musk took on private debt with Tesla stock and partially financed his $44 billion takeover of Twitter with bank loans that are now on the social media company’s balance sheet. If demand for Tesla falls, the value of his stock will continue to fall and Twitter will have to pay more interest on its debt: that could be the “worst-case scenario” it has touted.
Of course, Musk could only be taking precautions, and it’s not certain that he or his companies will get into trouble. The tech billionaire stressed that Tesla is in great shape and admitted he’s a little paranoid after enduring two really deep recessions.
This text has been translated from English by Lisa Dittrich. You can find the original here.
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