We're interviewing some of the top minds
in economics to get a sense of
what's next for the global
economy and financial markets.
Today, we're talking
to Mohamed El-Erian.
He's the chief economic adviser at Allianz
and the former CEO of PIMCO.
Mohamed, thank you so much
for joining us today.
I want to start out with
your outlook for the economy overall.
How long is it going to take for
the global economy to get back to normal.
If we don't get specific policies that we
can talk about, it will be a long
and rather flattish recovery.
And we have to understand that we're
going to come levels that will still
be eye popping notwithstanding really horrible
not as we've seen so far.
So we are going to be
in a very deep hole.
And unless we get policy accelerator's, it
will take us quite a long time
to get out of it. Are there parts
of the economy that you think might
never return to what we
would see as normal?
So they are going to be a very
wide range of winners and losers in this
economy, not only among companies,
but also unfortunately among people
with the most vulnerable segment
being most at risk.
So let's talk about some of the policies
that are necessary then to try to
address that inequality.
You've got to address productivity.
It's about infrastructure.
It's about retooling and
retraining of labor.
You've got to address
household economic insecurity.
It's about better safety nets.
And then you've got to
do something about globalization.
It's one thing to de-globalize.
It's another thing to de-globalize
in a disorderly fashion.
What are some of the factors that
might keep the unemployment rate at that
high level? Given that we were at
3.5 percent just in February of this
year. So I think part of
it is companies not coming back.
We're going to have,
unfortunately, lots of bankruptcies.
Once a liquidity problem becomes a
solvency problem, you cannot reverse it
that quickly. Certain activities that happen
to be very labor, intensive
hospitality is very labor intensive,
are not coming back.
Then you have existing companies that
are now no longer talking about
resizing. They're talking
about wide sizing.
And most of them, unfortunately,
wide sizing means less labor.
So existing companies will
also be shedding labor.
And then the sectors that are going
to be really favored in the
next couple of years.
Other than health care are
not that labor intensive.
So I worry that what started out
as furloughs now becoming short term
unemployment may become long term
unemployment, then people dropping out
of the labor force. And that is
problematic both from the supply side and
the demand side. That's why I keep
on saying it's really important to
identify likely trends and do something
about them now because none of
this is predestined. We have the tools
to address these things, but we
have to change our mindset. So the Fed
has tried to address on the demand
side with rates at zero and
trillions of dollars in stimulus.
Is this the Fed's job to continue
trying to stimulate the economy going
forward? It is certainly
not the FED's job.
In fact, if the FED continues doing what
it's doing, it will become a big
part of the problem. All that the
FED can do is ensure financial
conditions that encourage risk taking,
encourage companies to borrow.
Why the hope that the more risk
we take, we boost up asset prices.
The more we boost up asset prices, the
better off we feel and the better
off we feel, the more
we consume the wealth effect.
And then on the other side, the
hope is by making bond financing really
cheap, it will encourage companies to
borrow in order to invest.
But what we've discovered is that
when that happens and the underlying
economy is not fixed.
Companies borrow for debt
buybacks, for stock buybacks.
They borrow for
financial engineering, basically.
And people take on too much risk.
And you don't get
to the real economy.
So you boost asset prices.
You boost debt, you
boost everything financial.
But you don't get
through to the economy.
That is I stress that is the
way that the FED is constructed.
It can only go through asset markets.
So you need entities that can
actually address underlying productivity and
underlying demand. And that would be
Congress or state governments or
where would that kind of come in
and whose job would that fall to?
So all of your above. It is
local government, it is state government.
It is the federal government.
It is also collaboration
with other countries.
Even though we've got de-globalize, it
doesn't mean we to turn linkages
with the rest of the world off
completely we're still going to have supply
and demand linkages. They'll be less
pronounced than they are now.
It's also companies role.
I think one element coming out
of this crisis is greater social
responsibility. And companies realizing that they
have a role to play in
making sure that we
have more inclusive capitalism.
You've talked about the disconnect that we've
seen in the real economy, the
financial markets.
Is that primarily because of the FED?
Are there other factors at play?
And how can the average American understand
why the stock market is booming
while there are 40 million people
who don't have jobs right now?
Yeah, I mean, it's something
that's actually hard to explain.
I get asked that
question all the time.
And the easy answer is the markets
are not the economy, but then people
press you. But aren't you investing
in companies and don't companies
operate in the economy?
And you say yes. And then the
next easy answer is, well, markets are
forward looking. They can
look through short term.
So, yes, unemployment is terrible,
but that's short term.
Markets are forward looking. And then
you get a really interesting answer.
So let me get this right.
Market analysts, confidently predict what the
future looks like when most
companies have suspended earnings.
So most companies are telling
investors we don't have visibility.
And then.
But the people who call the
market seem to have perfect visibility.
What's going on? How can that happen?
Which leads you to the third answer.
It's not about companies.
It's not about the economy.
It's about a backstop.
It's about confidence that someone with
a printing press in the basement.
Massive willingness and ability to support
financial markets, as they have
done for the last 10 years,
will continue to do so.
So if you're an investor who's willing
to embrace this moral hazard, if
you embrace it, you end up
with this win win mindset.
I win if I guessed
correctly about the economic recovery.
And I still win if I guess wrong,
because I'm going to be bailed out.
And the minute the FED went into the
high yield market and the FED said,
I'm willing to take on default risk,
I'm willing to take on capital
impairments. In the marketplace, the
difference between high yield and
equities in the capital structure
is not that big.
So the mentality of the market is,
well, if they're willing to do high
yield, they'll be willing to do
equities, because after all, the last
thing the FED wants is a financial
crisis to make the economy worse.
So the market feels very strongly that
it basically is holding the Fed
hostage. One of the effects of all of
this, of course, is record high debt
levels that we've seen growing
at a record pace.
Is this something investors should
be worried about right now?
It seems like we're kind of all
ignoring it for the time being.
Yeah, its record high debt levels with
record low risk spreads and very
high risk taking on
part of the investors.
Normally, the higher that goes, the
more the market prices the sovereign
or the company. There's a higher
risk of the complete opposite has
occurred. Now, if you are a short
term economist or investor say that's
wonderful. The Fed has secured the
loosest financial conditions on record.
And if companies can borrow, they
can ensure that liquidity problems don't
become solvency problems.
Some companies are also then taking
on a lot of debt.
And we've heard this term zombie companies,
so they have all this debt
that they won't be able to pay off.
But they continue to operate and function
sort of like a zombie, I
suppose. Is that something we
should be worried about?
Is that a issue for
the broader economy going forward?
So I think we should be worried
not just about zombie companies, but zombie
markets. Zombie markets, a market
that are completely mispriced they're
completely distorted.
Why? Because there is a policy view
that we need to subsidize everything
in markets for now.
So what happens when
you get these conditions?
The two most important roles that markets
play, and we are a market based
system and part of the success
of America is, the market system.
One, they allocate resources.
So think of the stock market.
You allocate uses of funds
with sources of funds.
And if you price that well,
you get an efficient outcome.
So the first thing you do is
you destroy the efficient allocation of
capital across the country.
So the second thing you do is,
is you destroy the price signal.
So people no longer
care about fundamentals.
Does the globalization piece fall
on the companies then?
Because companies are seemingly the ones
who are saying we're going to
move our supply chains back.
They are getting pressure from people in
Washington to do so as well.
So whose job is it to try to address
the fallout and how to make that even
happen in the first place?
So what makes this distinct is that
all three segments of society will be
pushing for de-globalization.
Governments, companies
and households.
This is very different from the
first two shocks to globalization.
The first in 2010, was
a household led shock.
If you remember, it was led by
people who felt alienated and marginalized
by globalization. The second shock
to globalization came in
2017-18. That was a
government led shock.
This one is going to involve companies,
like you just said, governments as
well. We're going to have
a massive blame game.
Governments are going to be very
keen in certain priority sector on
shoring their supply.
What you're gonna hear over and over
again is we need to localize our
supply trades. And then households.
I fear that unemployment may be 10 percent
still by the end of the year.
That is not an environment
where the household sector embraces
globalization. So what makes this different
is that every segment of
society will be a
driver of de-globalization.
And what do you see as the biggest
risk to the global economy going forward
in the next six months and then
maybe in the longer term too?
So I think the next six months
is going to be lack of synchronization.
It's hard enough
restarting an economy.
When I warned on CNBC in the
beginning of February that this is really
serious. It's because I had experience
economic sudden stop because I
worked on Sudan, a failing economy
at that time in the 80s.
And what you learn when you get
an economic sudden stop, not a financial
sudden stop, an economic sudden stop
is really hard to get out.
Believe it or not, financial sudden
stops that seem worse, are actually
easier to get out because you can
restart the financial system by using
the central bank's balance sheet,
because ultimately the financial systems
break down because
of counterparty risk.
Two banks not trusting each other.
So it's like a heart attack.
It hits you hard.
But you know exactly where to go.
And economic sudden stop is like you
having infections all over your body
and you need to address these
things in a synchronized manner.
So look at the difficulty of you
re-opening when you don't have inventory,
when you're not sure whether your
customers are coming in or not.
It is very hard. You need
it a certain amount of synchronization.
Now, imagine that you get
a global economic stop.
That degree of difficulty
becomes even higher.
So what I worry about on the economic
front over the next six months is
that we will try to reopen, but
we will reopen in this de-synchronized
fashion and then risk all
sorts of unintended consequences.
And any bright spots that you see
to end on a more optimistic note?
Oh, there's there's
many bright spots.
And that's why I told that I have
a sheet of paper here, because one of
the challenges of winning the peace is to
bottle up the good stuff we see
in. And use it.
So we are seeing, for example,
much more respectful signs, leapfrogging of
scientific inventions that are going
to help multiple generations.
We are seeing better
public private partnerships.
We are seeing industry, it's
pharma, finance, technology, come together
and try to solve societal issues.
We are seeing great acts of kindness.
We are seeing much more respect
for critical passer by economy.
So there are lots of good things
that we are seeing in this crisis.
And I think our challenge is to bottle
this up and make sure it continues
to help us because it's about, you
know, winning the war and winning the
peace. And we've got to do it. But
we can't afford a repeat of without it.
