"The 'D' Word": El-Erian Warns 'Twin Deleveraging' Could Spark A Global Depression

Jim,

This is the latest forecast from Mohammad El-Erian at Allianz (PIMCO).

Regards
James

“The ‘D’ Word”: El-Erian Warns ‘Twin Deleveraging’ Could Spark A Global Depression

by Tyler Durden
Thu, 03/19/2020

Some readers might accuse us of being alarmist and rattling the cages unnecessarily at a time of public panic, but we’ve always felt that investors should hear a range of perspectives, especially if some of it is uncomfortable. Those who don’t like having their assumptions questions - like, for example the ‘assumption’ that economic growth will come ‘roaring back’ after this is all over, like Mnuchin promised on Wednesday - should probably turn back now.

As many analysts have argued, a recession is looking virtually inevitable at this point as the global economy shuts down to fight the novel coronavirus.

Only a handful have dared to invoke “the ‘D’ word” in their projections. But their ranks include Allianz Chief Economist Mohammad El-Erian, who has warned that a depression could swiftly ensue due to the twin “economic deleveraging” and “financial deleveraging” caused by the crisis.

That is, not only is economic activity falling off a cliff, forcing many businesses around the world to temporarily close or dramatically cut back their hours, risking a string of destabilizing main street bankruptcies. But the pressure on financial markets risks creating a ‘cascading’ selloff in the corporate debt market as America’s seriously overlevered companies finally face their reckoning.

During an interview on CNBC early Wednesday morning, El-Erian - who has correctly called the moves in the market so far - said that “when economic deleveraging and financial delveraging” happen in unison, the possibilities are endless, and almost hopelessly dire.

“It makes its own dynamics,” he said.

Looking ahead, El-Erian believes the market will lead the real economy (as zero interest rates appear to be a permanent fixture of monetary policy now) down, but he predicted that stocks would likely bounce back before the market does.

[i]“Once again, financial markets will turn before the real economy…when that turn happens, it will be very sharp…you will get a ‘v’ like tendencies in stocks…while the economy will be a ‘u’ that feels more like an ‘l’.”

"Yes the financial markets will turn first, but will do so in a violent[/i]

As El-Erian has been saying for weeks, “investors should be careful what happens when you get a global economic sudden stop.” Looking ahead, El-Erian said, not only might be face a “very sharp” recession, but things could get so bad that a full-blown depression might ensue.

“Not only are we looking at a very sharp recession…we may have a depression…it’s very important to understand what happens when economic and financial deleveraging come together,” El-Erian said.

Of course, El-Erian isn’t alone in cautioning about the risk of a depression the likes of which haven’t been in nearly a century. He’s joined by Joachim Fels, PIMCO’s global economic advisor (PIMCO is majority owned by Allianz).

And even more notoriously, hedge fund investor Bill Ackman warned about ‘hell to come’ (also during a conversation with CNBC) that the risk of a depression, adding that “the US Treasury doesn’t have enough money to bailout every company…you can’t borrow your way out of this…you have to kill the virus.”

Circling back to Fels, PIMCO’s global economic advisor, said in a written commentary that central banks and governments must step up to the task of making sure this recession “stays relatively short-lived and doesn’t morph into an economic depression."

Fels loosely defined a depression as “a combination of a prolonged slump of activity that last longer than just a few quarters, a very significantly rise in unemployment, and mass business bankruptcies and bank failures."

James ,

ZeroHedge is negative ALL the time. Simply redistributing ZeroHedge articles, w/o a single comment from you, is just spreading their nihilistic view. Not to mention it is also a copyright infringement because you are copying the entire article. See the bottom of their article “Copyright ©2009-2020”. We had this issue before. Snippets with a link is fine.

We know you are 100% short now. That’s fine. How about detailing your positions as well , or how you plan to play the information you are bringing to us. You know like a proper disclaimer. Otherwise it’s starting to feel a bit self serving. I happen to be long now. But I’m exposing my strategy.

We’re all in this together.

Thanks

Macro,

I am going to switch out of VIXY/RWM(50%/50%) into TLT (100%) at market opening today. That is my position for the past two days.

I don’t think zerohedge is negative all the time. I actually find their content very helpful in terms of timing the market which is the reason I post them for others to see in this forum.

Nevertheless, I understand your concern and will not post any more articles on this forum from now on.

Regards
James

I agree with Marco. Zerohedge has been spreading BS since it exists under the cover an apparent Austrian School ideology. It is a clickbait business. They are smart, and excellent at taking excerpts and reformatting information. The comments section shows at which kind or readership their site is targeted.

I read them too but sometimes it’s like watching the news during a crisis. repetitive.

Adding your strategy makes all the difference.

Thanks!

Mohamad A. El-Erian is not negative even here. He is saying the UPTURN will be violent—like an I. Or he is warning you it will be like an I if you try to time getting in.

He actually is saying what Marc and anybody who understand market says: the market is a discounting mechanism. Or in hockey you have to skate where the puck will be.

Mohamed A. El-Erian and the people who read Goldman Sac’s assessment of the economy will be in the market soon because they will be unable to time the rapid turnaround.

If you listen to Mohamed A El-Erian and Goldman Sacs you may be in the market LONG now. Many people at P123 (not James) are looking to go short still. Do not blame El-Erian, Goldman Sacs or even James if that does not work out for you.

Parker has a degree in finance and he is in general agreement with El-Erian and Goldman Sacs. I appreciate his engagement.

James has a degree in finance and he has not even be wrong on this: I am against any cencorship of James.

Me, personally, I am spending more time at CNBC.com where I can listen to El-Erian.

FWIW, I am 100% in the market now because of (not in spite of) what Mohammad A. El-Erian says.

Honestly, I do not get it. The staff at P123 all have different views. They seem to leave each other alone—which is actually good. It is just when a member has one of those views that we hear about it.

But they could at least read the whole post.

Best,

Jim

Let’s get some perspective here.
It’s been some time since I went to Medical School but I can tell you this with very high conviction:

  1. There will be a vaccine against COVID-19 relatively “soon”. Nobody knows when. But when I read between the lines of pre-publication journals it’ll be before year end.
  2. There will be medication against the virus as well. Some combinations of existing medicine seem to be working right now. Refining this approch will result in a relatively effective treatment. Specific new drugs could be experimental in a few months, ready to be tested.
  3. Regulatory issues will be streamlined and cleared to make these approaches much faster than usual.
  4. Nobody can time the bottom. I certainly can’t.
  5. Deleveraging has gone a long way. Panic buttons have been pressed.
  6. There is now record cash on the sidelines “waiting”.
  7. The coming upturn will be violent.
  8. Many will be “waiting” for the “final” bottom, risking being left behind again.
  9. I am a selective buyer at these levels.
  10. The market is a discounting forward looking machine. When everything is looking bright again, it is too late.

Jim I didn’t read it . The world feeds on headlines and tweets. The headline is spreading the D word. AI systems trade based on headlines. The media needs them to get clicks.

Article sort of obvious and not really needed. “If this goes on it could be real bad… but we’ll come out of it”. No shit. What about the next few months? Regular investors are losing their shirts bc they will sell at them bottom.

Your analysis it’s actually the best piece of info re. how GS will be buying soon bc they can’t time the market due to their size. Explains a lot about market dynamics.

Shorting is getting dicey IMHO. I will only do it after big rallies .

Jim,

Thanks for your support.

Just so that everybody knows, I am also the one who post the forecast by Goldman Sachs which is also from Zerohedge.

Jim : I will send you interesting articles in the future via email so that it won’t upset Macro.

Regards
James

James I read ZH too! Just add your take on what you share and why, it’s so much more interesting.

And only snippets. We did get letters from lawyers in the past

Thanks

Just saw this while checking price of GILD :
Two generic drugs being tested in U.S. in race to find coronavirus treatments
7:00 AM ET 3/19/20 | Reuters

March 19 (Reuters) - U.S. researchers, following the lead of scientists in other countries, have launched studies to see whether widely-available, low-cost generic drugs can be used to help treat the illness caused by the new coronavirus.

There are currently no vaccines or treatments for the highly-contagious COVID-19 respiratory illness, so patients can only receive supportive care for now.

But a 1,500-person trial, led by the University of Minnesota, began this week to see whether malaria treatment hydroxychloroquine can prevent or reduce the severity of COVID-19. Two other trials are studying the blood pressure drug losartan as a possible treatment for the disease.

The malaria drug, also being tested in China, Australia and France, was touted earlier this week by Tesla Chief Executive Elon Musk, who recovered from malaria in 2000 after taking the medication.

Besides having a direct antiviral effect, hydroxychloroquine suppresses the production and release of proteins involved in the inflammatory complications of several viral diseases.

“We are trying to leverage the science to see if we can do something in addition to minimizing contacts,” said Dr. Jakub Tolar, dean of the University of Minnesota Medical School and vice president for clinical affairs. “Results are likely in weeks, not months.”

Most people infected with the new coronavirus develop only mild flu-like symptoms, but around 20 percent can have more severe disease that can lead to pneumonia requiring hospitalization.

The fast-spreading virus, which emerged in China in December and is now in more than 150 countries, has infected more than 214,000 and killed over 8,700 people worldwide, including at least 145 in the United States. Experts say it could take a year or more to have a preventive vaccine ready, so effective treatments are desperately needed.

A French team on Tuesday said initial results from a 24-patient trial of hydroxychloroquine showed that 25% of patients given the drug still carried the coronavirus after six days, compared with 90% of patients given a placebo.

Tolar said he bought 1,500 doses of hydroxychloroquine for a “laughable” amount of money. “We don’t need a multibillion-dollar investment. It is part of the beauty of this approach,” he said.

But he and others cautioned that people should not be using any prescription drugs without medical oversight.

“These treatments should be used only in hospitals by critical care specialists,” said Dr. Russel Buhr, critical care pulmonologist at the University of California, Los Angeles.

Also this week, the University of Minnesota launched two trials testing losartan - one to measure whether the hypertension drug reduces the risk of organ failure for COVID-19 patients who have been hospitalized, and another looking at whether the drug can limit the need for hospitalizations.

Losartan is an angiotensin receptor 1 (AT1R) blocker, which researchers say could play a role in blocking an enzyme used by the virus to bind to cells.

Pharmaceutical companies are also working to develop treatments for COVID-19, including Gilead Sciences Inc’s experimental antiviral drug remdesivir, which is given to hospitalized patients via intravenous infusion over several days.

The New England Journal of Medicine earlier this month described how the drug was successfully used on the first patient infected by the novel coronavirus in the United States.

Results from a remdesivir trial in China could come early next month, while Gilead has begun two international trials of the drug that previously failed as a potential Ebola treatment. And the National Institutes of Health last month began testing it on patients in a U.S. trial.

“We are focusing on high risk patients,” said Dr. Andre Kalil, infectious disease specialist at the University of Nebraska Medical Center and the U.S. trial’s lead investigator. “Our hope is that remdesivir will show that patients will be improving faster.”

Companies including Regeneron Pharmaceuticals Inc, Eli Lilly and Co and Takeda Pharmaceutical Co have begun to develop coronavirus treatment candidates, but human testing of their drugs has not yet started.

Anti-inflammatory drugs, like Regeneron’s Kevzara and Roche Holding AG’s Actemra, have been used to treat the lung inflammation caused by COVID-19.

But in a disappointment, Chinese investigators reported this week that Kaletra, a combination HIV drug sold by AbbVie , failed to improve outcomes for seriously ill COVID-19 patients. (Reporting By Deena Beasley Editing by Bill Berkrot)

Why not just post link with your comment? And your comment matters.

100% agree

.

Just wanted to post here a nice video from Aswath Domodoran. He’s worst-case (heavy left tail of negative earnings) gets you to the intrinsic value of 1900 (or so), 10ile is at 2400. In other words, we are already navigating in very gloom and doom pricing today. Can we overshoot 1900 on the downside? Yes and chances are we probably will as we always do. However, if we get to 2000 I will likely release all my hedges and go long.

https://www.youtube.com/watch?v=hMEvkP4Y3uM

at 14:50

James has been crucial in providing information that is behind pay walls!!!

James has been giving us ETF information for now for example.

He has given us Wall Street journal articles for example.

BOOO—YAHH. Should CNBC censor Cramer? A lot of weird ideas over there too as well as weird presentations.

Like I said. CNBC has become my go-to site recently. I do not want CNBC to censor Cramer El-Erian or anyone else.

P123 users do not understand about headlines and we have to help them by controlling the content?

Do we really have to micromanage that?

And I am just going to say it, after I am done with CNBC I come here to see what Parker and James–2 people with degrees in finance that are engaged in what the market is doing—have to say.

And Tom Yani.

People should go back and look at how he was treated before he went away.

Tom’s ideas were called “platitudes” by P123 staff recently. I do not look for him to stay for long.

I bought $300,000 dollars in equities/ETFs yesterday. I do not need to have models designed for OTC micro-caps presented as the only rational models.

I like to hear from the pros. And yes, ETFS CAN HAVE A PLACE.

Best,

Jim

“El-Erian Warns ‘Twin Deleveraging’ Could Spark A Global Depression”

That reminds me . . . the way to REALLY make big time money right now is to write and quickly publish books about the coming depression. You wouldn’t have to make sense; in fact, I’m no even sure anyone who buys itwill actually read it. The key is that it be bought, and in toimes like this, many authors understand that, take advantage, and rake it in.

As to reality, that article uses the two words “monetary policy.” Right now, those may have become the two most useless words in the English language. Monetary policy has committed suicide. The Fed has rendered itself impotent by having continued to push rates down long beyond the point where changes had any impact on real economic activity. A good chunk of this crash reflects the Street’s realization that this is so.

The next chapter in our economic lives (the last one began in 1980 and ended in early 2020) will feature the return of fiscal policy but with a 21st century spin. We’re already seeing it. Now, even Trump and Mnunchin are imitating Andrew Yang who, although he dropped out of the primary, is poised to become the intellectual spark of the next chapter (Keynseian fiscal policy gave way to Friedman monetary policy which now seems poised to yield (pardon the pun) to Yang fiscal policy.

Short term, who knows what impact this will have. Most active market participants were not alive or unaware of much besides toilet training and torturing babysitters the last time we had any sort of fiscal policy front and center. So it is possible many may be traumatized by future (post covid-19) deficits, interest rates and inflation rates completely unlike anything they deemed metaphysically possible, much less probable.

Longer term though, this can be a remarkably bullish development. The forum here is not the venue to detail al of fiscal policy and the idea of universal basic income (Yang didn’t invent it – he just brought it to the US dialog – his books are quite readable). But the long and the short of it is that businesses can’t indefinitely grow profits that allow stocks to rise unless they can sell more to customers clients, and customers/clients who don’t have money because all of it is being hogged by the 1% who pumped stock prices by throwing their customers out of work or into lower paying marginal hand-to-mouth jobs can’t buy more. Sanders and Warren were right to point out the problems of income distribution. But they were completely wrong to frame it as a Marxist class war and attack owners of productive assets (believe it or not, even Ayn Rand knew better than that although you’d never guess it from the rhetoric of her groupies). The Yangian approach involves the virtuous circle: customers get more money therefore businesses get more money and by allowing employees of businesses to have more money, they then spend more money meaning businesses get more money and so on. The flaw in the 1980-2020 economic regime is that it saw employees as something different from customers. Slamming down on employees meant more profits. What they missed is that employees and customers, in an aggregate view, are one and the same. It took a while for this to reach its natural conclusion, and actually, covid-19 is brining it to a head about a decade or so earlier than would have otherwise been the case. But we’re now at the turning point . . . the big regime change.

Right now, the market is like an airliner that hit some wild turbulence . . . the stuff that causes planes to ditch 20,000 feet and passengers to panic as anybody not strapped in is tossed about the cabin. But it you watch the new critically and taking care to separate the wheat from the chaff, you’ll see the folks on the flight deck, after freaking out, are regaining control of the aircraft.

The global depression thing is just a naive extrapolation of the present, typical of quants without clues.

Good thing El-Erian, James, Parker and Tom Yani are not quants.

Best,

Jim

So,

A few article links at end, and reflections here…

It is definitely possible that we will have widespread fast and reliable testing and possibly some effective treatments using existing medicines… it’s also possible we’ll find death rate much lower.

Even in these cases, it’s likely that we’ll have to have ubiquitous widespread testing and closed / patrolled borders between states and/or countries and some level of social distancing for awhile.

There are very few global economy shaking / redefining events and they happen (thankfully) very infrequently. When a plane shakes and falls 10,000 feet — it’s usually ‘just’ turbulence and usually it doesn’t crash… but sometimes it’s a safe new Boeing plane with a failed computer system and fundamental design flaw, or Kobe Bryant and his helicopter pilot assuming they can navigate and crashing in the fog.

Sometimes planes and helicopters and economies will crash… not often, but sometimes we won’t recover. At least not quickly or easily or without a lot of pain.

We’re living in a period where EVERYONE’s just guessing… including el-erian and me. I’m trying to use data and history to make those guesses… I’m trying to read the science and make smart guesses, but I am also humble and self-aware enough to know that they are still guesses.

There is a possibility that people will be out of work for a year or more… debt markets and demand and money velocity and investment will collapse and this will be very, very bad. There’s also a possibility the worlds scientists will band together and find an effective treatment in under 3 months and with wider spread testing, and treatment we’ll find out death rate is only 0.4% or less and this can be managed with testing and a few less severe travel restrictions. And the economy will ROAR back.

And many other paths in between. We each create our scenarios and assign probabilities to them… but anyone who claims to know the economy will definitely crash or definitely recover is kidding themselves.

Within 24-36 month Recovery is the more probable outcome… maybe Somewhere between 2 to 1 - 4 to 1 odds… but far from a certainty. At least in terms of a rapid recovery.

One thing that makes sense is looking at risk and reward in all our systems and asset allocations and deciding if the risk is worth the reward given our life stage and forward looking earnings power… some private market debt categories with collateral for example, pockets I’ve invested in for 12 years now — May be frozen and locked and may now be very bad risks ,relative to the rewards… so, I’m trimming some of them. A system that is long TLT is likely not going to work all that well with interest rates near 0.

The point is, the world is changing… and it’s a healthy time to re-evaluate positioning, and risk-reward and return drivers.

A few more articles I liked today.
https://time.com/5804136/china-coronavirus-quarantine-new-normal/

https://www.thestar.com.my/news/regional/2020/03/18/china039s-hubei-cleared-of-suspected-covid-19-cases

Life in China is Sort of ‘returning to normal’ after 7-8 weeks. But, that means a lot of constant testing, closed borders and forced quarantines still. And some level of social distancing, and closed / policed borders within and between states.

Bill gates interview on this:
https://techcrunch.com/2020/03/18/bill-gates-addresses-coronavirus-fears-and-hopes-in-ama/

Talking about his take on it all.