- Elon Musk has blamed the Federal Reserve for the sharp decline in Tesla stock this year.
- Rising interest rates have boosted the appeal of Treasuries relative to stocks, the Tesla CEO said.
Elon Musk has blamed the massive drop in Tesla stock this year on the Federal Reserve, arguing the US central bank's interest-rate hikes have made the stock market less appealing to investors.
"Tesla is executing better than ever!" Musk tweeted on Friday, in response to a Tesla shareholder who blamed him for the roughly $600 billion decline in Tesla's market capitalization this year.
"We don't control the Federal Reserve," the CEO of Tesla, SpaceX and Twitter added. "That is the real problem here."
US inflation has surged to 40-year highs this year, spurring the Fed to hike interest rates from near zero in March to over 4% today in a bid to cool the economy and curb the pace of price increases. Higher rates encourage saving over spending and make borrowing more expensive — meaning they typically weigh on asset prices.
Musk explained in a follow-up tweet that higher rates bolster the yields from low-risk assets such as government debt, boosting their appeal relative to riskier assets such as stocks.
"As the 'risk-free' real rate of return from Treasury Bills approaches the much riskier rate of return from stocks, the value of stocks drop," Musk said. "For example, if T-bills and stocks both had a 10% rate of return, everyone would just buy the former."
Shares of fast-growing companies such as Tesla have been hit especially hard this year, as they're primarily valued based on their future cash flows. Investors find those prospective cash flows less attractive when prices are soaring, they can earn solid and safer returns elsewhere, and a recession is threatening to decimate their wealth.
However, Tesla stock has more than halved in price this year for other reasons. For example, Musk has warned the downturn in China's property market and the energy crisis in Europe may weigh on demand for the company's vehicles in the months ahead.
Moreover, several Tesla shareholders have voiced concerns that Twitter, which Musk bought for $44 billion in October, has become a costly distraction. The tech billionaire is busy overhauling the social-media company, and has sold about $8 billion of Tesla stock in recent weeks — most likely to service the billions of dollars in bank loans he used to finance the takeover.
Musk has repeatedly blasted the Fed for hiking rates too aggressively this year. He's warned it needs to cut rates immediately, as current levels are "massively amplifying the probability of a severe recession."
He's also underlined the dangers of debt when rates are rising, and accused the central bank of paying too much attention to historic economic data instead of current conditions.