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Allianz Chief Economic Adviser Mohamed El-Erian says, "we are in a global recession" as the coronavirus continues to spread across the world. He joins Yahoo Finance’s On The Move panel to discuss.
- Also joining us right now is Mohamed El-Erian. He is the Allianz Chief Economic Advisor. And Mohamed, it's good to have you here. You are in Southern California, where the governor has ordered 40 million people to stay at home. But before we dive into the economic numbers-- because the Dow is trading higher right now-- what is this like for you, for people who are already ordered to stay inside?
MOHAMED EL-ERIAN: So I think a lot of people had done so voluntarily before, listening to the guidance we talk about social distancing and the importance of starving the ability of this virus to spread. What everyone is trying to figure out now is, what does mandatory mean? What can I do, what can I not do?
But what it is is yet another huge, sudden stop for an economy that, on a standalone basis, would be the fifth largest economy in the world. So this is a significant economic shock, not just to Californians, but to the whole country and, I would argue, even globally. And these sort of economic sudden stops are going to continue multiplying. We have now reached critical mass.
- Mohamed, so talk to us about the implications of that. Are we already, then, in a recession in the United States, and what does that mean for the global economy also?
MOHAMED EL-ERIAN: We are in a global recession. And we are in a global recession because what economic sudden stops do. And it's important to realize that they are normally experienced by fragile states or by a community hit by a natural disaster, where everything comes to a stop. They've never been felt at a level of a country as systemically important as China, or the US, or Europe. And they've certainly never been felt at the level of the global economy, so this is unprecedented. And what they do, simply put, truly, is they destroy supply and demand at the same time.
There's a tendency to think of the airlines as being the exception. That's the one where things are the worst, where no one wants to fly and airlines have to shut down that capacity completely. But guess what? Unfortunately, airlines are a leading indicator that what's happening to restaurants, what's happening to barbershops, what's happening to a whole wide range of industry, which is both demand and supply get destroyed at the same time.
- So Mohamed, great to speak with you. I want to ask a little bit about the Federal Reserve's actions. Actually, something that just crossed the wires just now was an announcement from the Federal Reserve that it was going to expand its MMLF, what it was trying to use to address money markets, to actually add on some muni debt, some short term muni debt, as long as it's rated well and as long as it's not longer than 12 months, as part of collateral, then it will take into the market in exchange for loans. What do you think about the Fed's actions in trying to provide liquidity to all these markets that seem to be exhibiting stress, whether it's US treasuries and now muni debt?
MOHAMED EL-ERIAN: So I think these interventions, which are aimed at market failure, they're aimed at making sure that we don't get a reverse contamination from finance back to the economy. You know, this shock started in the real economy, it then contaminated finance. And the last thing we want is a reverse contamination, not because we want to protect asset prices, but because we want to avoid a simultaneous economic deleveraging and financial deleveraging. If we get that, which my hope is we don't and there's no need for it to happen, but if we get it, then we're not going to talk about the recession, we're going to be talking about something worse.
So it's good to see that the Fed moved, finally, this week to introduce very laser-like measures. And it's good to see that they are listening to the feedback they're getting, and adjusting them, and making mid-course correction. And they did a lot, earlier this morning it was the swap lines that got adjusted.
They enhanced the swap lines. So they are reacting to the information they're getting as to the effectiveness of what they've introduced. There's two more areas which there will be, I suspect, special facilities introduced with the backing of the treasury, because you don't want too much credit risk to end up with the Fed, and that is municipals and credit.
- Two questions for you Mohamed, first on that municipal bond issue. Could we see states and cities issuing new muni debt that they expect the treasury to buy and without some kind of short-term-- it would be on a long term basis-- as a way that the states that are in problems before the crisis with their public pensions to pass that crisis to the federal government? And then, at the end of this crisis, are we going to need public works projects like we saw during the Great Depression to put people back to work?
MOHAMED EL-ERIAN: So first you will see direct help to the state and local level. And for a very simple reason, that tax receipts have been delayed. So they are also facing a liquidity problem. And again, you don't want liquidity issues to become solvency issues.
So even before you get to the pension issue, just to keep services going, you will need help to state and local level. So yes on the first one. Second, we are going to need some sort of help, not just for the short-term but also for the longer-term because this is such a big shock. So the short-term is all about protecting the most vulnerable segments of our population, protecting national strategic sectors, and protecting market functioning.
Let's not make things worse. When we turn the corner, and that will be determined mainly by health advances and specifically by confidence that you, and me, and everybody listening to this show have in a containment of the virus, so identifying and containing it, B, treating the illness, and C, immunity. Of course, a vaccine gets us there very quickly.
But we're not going to have their vaccine overnight. But once we turned the corner, which we will-- this is not about a destination, this is about a very bumpy journey. Once we turn the corner, there is going to have to be all sorts of short-term fixes to transition back to a normal economy.
You cannot switch back on, an economy that has been subjected to a sudden stop. You need a transition phase. And that's where we're going to see all sorts of assistance in terms of jobs, in terms of labor retooling and labor retraining.
- Mohamed, you talked about all of the different protections that we need now to protect the most vulnerable, to protect our health, obviously. What about protecting our finances in this environment, particularly for those who are invested in the markets? Obviously, it matters a lot right now what your horizon is, how close to retirement you are. But how are you thinking about the markets at a time when we are seeing so much volatility and so much uncertainty?
MOHAMED EL-ERIAN: So you and I have talked for a while, and you've heard me warn over and over again, the underlying system is fragile, that we cannot continue with a liquidity-driven market forever. We cannot decouple asset prices from the underlying reality because it makes the system fragile, and certainly makes it vulnerable to a shock.
Of course, no one imagined this severity of a shock. It's an individual decision, person by person. There are certain companies that people hold that are going to survive this, and they're going to do fine. And you don't want to rush out and sell them. Those are the ones that have very strong balance sheet, have lots of cash on their balance sheet, don't have any debt funding to do-- because the markets are very tricky right now for new issuance-- and have good business models. You do not want to be throwing those away.
But they're other names, unfortunately, that don't have those characteristics. And they are going to have a really tough time managing what's ahead. So people have to decide, I say the principle you want to be guiding you right now is we correct minimization, because we are going through extremely uncertain and unsettling times.
No one can predict for sure what's going to happen, which means that mistakes are likely. No one wants to make a mistake, but when the environment is so uncertain and so unsettled, and there's so many moving pieces, and it's totally unprecedented, no one has a game plan to how to deal with it, you are likely to make a mistake.
So ask the question, which mistake can I afford the least? Because most mistakes are recoverable over time. But certain mistakes are not. And ironically, markets don't move in a linear fashion. There are lots of counter trends that occur. So you will have an opportunity to modify your portfolio depending on this regret minimization theme.
- Muhammad, last question, I just want to ask about what types of markets you're watching most closely. As we continue to get through this, it seems like by the day things are getting more crazy. And whether it's US treasury markets, US dollar shortages around the world, unis credits like we were just discussing, are you seeing any particular points of stress in specific markets that really worry you?
MOHAMED EL-ERIAN: Yeah, I mean, I've been seeing many. And I've been warning for the last three weeks about indications. Look, everybody has to realize that it's not just about drinking from one fire-hose, which is hard. We are currently drinking from three fire hoses hitting us from all directions.
One fire hose is what you talked about, market functioning, not just price movements, but underlying liquidity, counterparty risk, also some things that we take for granted. So there's a fire-hose of market technicals, as I call them. There's another fire-hose, which is policy. Like you said, we get policy responses every hour. And they are not the usual variety of policy responses, so we're trying to absorb that.
And then there's a third one, which is fundamentals. Sudden stops create all sorts of disruptions. So people listening should understand that this is a very, very difficult market to put your arms around. And there is no one indicator that will tell you about the health or the ill health of democracy. You've got to absorb all this information, and it is hard. I'm finding it hard. And I have, you know, 40-plus years of experience in this. So I have a lot of sympathy with people who feel so fundamentally unsettled.
- Mohamed El-Erian is the Chief Economic Advisor at Allianz. We appreciate your being here with us on Yahoo Finance as all of us try to grasp what we face, collectively, as a nation and as a world. I mean, this is an economic shock to everybody. Mohamed El-Erian, thank you.