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El-Erian: We Are Going into a Global Recession

Submitted by Taps Coogan on the 13th of March 2020 to The Sounding Line.

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Allianz chief economic advisor Mohamed El-Erian recently spoke with CNBC about the ongoing Coronavirus outbreak and the intense market turmoil of the past two weeks. He states that he definitively expects a global recession to unfold, and while he expects the eventual the market recovery to be sharp, the economic recovery will be slow.

Some excerpts from Mohamed El-Erian:

“You’ve got to distinguish between the financial markets and the economy. The financial markets will react much faster. Let’s start with the economy. We are going into a global recession… After what we have seen over the last two days, we are going to see a spread of economic sudden stops and… unless you’ve worked with fragile and failed states, the Sudans of this world…, you’ve never seen an economic sudden stop… It’s not easy to restart an economy. You’ve got to get people to re-engage… So, the economic damage is going to last. That’s why I believe that we are going to get a global recession. Financial markets are going to react much faster and we are putting so much liquidity into these markets that when the green light flashes, and it will flash at some point, we are going to have such a snap back. The financial markets are going to lead the real economy. The real economy is going to struggle to get back, but it will… The key thing is right now is we are going to overshoot on the way down on asset prices and we are going to established a bottom. That is what is going to happen in financial markets… (Fear) is going to get greater…”

Since World War II, the average decline of the US stock market during a bear market is about 40%. By the close of markets on Thursday the 12th, the S&P 500 and the Dow had fallen about 30% from the February highs. Arguably, part of a modest recession has already been priced in.

The Coronavirus outbreak will eventually pass, at least as it pertains to markets. Stocks are still overvalued from a historical perspective, but less so when viewed through the lense of extreme monetary and fiscal policy. The immediate risk seems to be that the inevitable volatility over the next month or so creates a financial crisis that takes on a life of it’s own.

There is more to the interview, so enjoy it above.

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