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Mohamed El-Erian: 'We Did Not Prepare for Something As Severe As What We’re Facing’

Allianz’s chief economic advisor on how to address economic 'sudden stops,' the correct fiscal and monetary policy response to the coronavirus, and the outlook ahead.

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Our guest today is Dr. Mohamed El-Erian. Dr. El-Erian is Chief Economic Advisor at Allianz, the parent of PIMCO, where he formerly served as chief executive and co-chief investment officer, and President-Elect of Queens’ College, Cambridge University. He first joined PIMCO in 1999 and was a senior member of PIMCO’s portfolio management and investment strategy group. He rejoined the company at the end of 2007 after serving for two years as president and CEO of Harvard Management Company. 

Before coming to PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London and before that spent 15 years at the International Monetary Fund in Washington, D.C., where he served as Deputy Director. Dr. El-Erian has served on numerous boards and committees, including a stint as Chair of President Obama’s Global Development Council from Dec. 2012 to Jan. 2017. 

A much sought-after author, columnist, and speaker, Dr. El-Erian has published two best-selling and critically acclaimed books, When Markets Collide and The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. He also was named to _Foreign Policy _magazine's list of “Top 100 Global Thinkers” four years in a row, among other accolades.

Dr. El-Erian holds a master’s degree and doctorate in economics from Oxford University and received his undergraduate degree from Cambridge University.

Background
Dr. Mohamed El-Erian bio
Dr. El-Erian’s commentary
Dr. El-Erian’s tv and radio interviews
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, by Mohamed El-Erian, January 2016. 
When Markets Collide, by Mohamed El-Erian, June 2008. 
• “The FP Top 100 Global Thinkers," Foreign Policy, Nov. 26, 2012. 
• Dr. El-Erian’s Twitter handle @elerianm  

Dr. El-Erian’s Recent Comments on COVID-19

• “The Coming Coronavirus Recession: And the Uncharted Territory Beyond," Foreign Affairs, Mar. 17, 2020. 

• “The Federal Reserve Takes its Crisis Management Game Up Several Notches,” Yahoo Finance, Mar. 17, 2020, 

• “It Will Get Better But After We Feel Even More Unsettled,” Yahoo Finance, Mar. 13, 2020. 

• “Six Things Investors Should Remember Amid Extreme Stock Market Volatility,” Yahoo Finance; Mar. 8, 2020. 

• “El-Erian: We Shouldn’t Bail Out Every Industry Halted by Coronavirus Crisis,” CNBC, Mar. 19, 2020. 

• “El-Erian: Fed Should Have Been More ‘Laser-Focused’ on Market Failures,” CNBC, Mar. 16, 2020. 

• “El-Erian on Markets: ‘It’s Getting Less Scary Than It Has Been for a While," CNBC, Mar. 13, 2020. 

• “El-Erian: U.S. Stock Market Could End Up Dropping 20%-30% Before Bottom Is Finally Reached," CNBC, Mar. 9, 2020.

Shownotes (Note: We will add the interview transcript soon.)

Introduction
• Introducing Dr. El-Erian and bio (0:21)

High Level Macro
• The market and economic backdrop have changed drastically in what seems like no time. You’ve been prescient in foreseeing some of the impacts. But what has surprised you thus far? (1:48)
• We’ve heard you say that financial “sudden stops” are more addressable than economic “sudden stops”. Can you explain the difference between financial/economic “sudden stops," why the latter is harder to deal with, and how that relates to our current situation? (2:58)

Policy Response
• Public health concerns are trumping economic realities at the moment. For instance, entire states are being told to shelter in place. This is economically devastating. Do you think this is prudent policy without a stimulus package or backstop of some kind? (5:13)
• You’ve argued that interest-rate cuts and broad fiscal stimulus shouldn’t be emphasized during this initial phase of the crisis. That we should instead focus on containment and building immunity to COVID-19. That seems surprising considering the scores of those who have been abruptly laid off or seen business dry up. What are they supposed to do without a massive, immediate stimulus? (7:02)
• Can we talk about the impacts that you foresee for the private and public sectors and what you view as the correct policy response for addressing each? Let’s take them one by one: (9:29)
- The suddenly unemployed
- The small business owner
- The lender
- The airline and hospitality sectors
- The state or municipality

Capital Markets
• Turning to capital markets, we’ve obviously seen stocks enter a steep sell-off. But the bond market has also broken down. Can you describe for some of our listeners--who might not be as familiar with the inner workings or dynamics of the bond market--what has happened there, why, and what will stem it? (11:29)
• The Fed stepped in to backstop money market funds in recent days. Have you seen signs that is succeeding in stabilizing corporate funding markets like the commercial paper market? (15:05)
• What will be point of equilibrium at which fiscal and monetary policy relief overtakes fear to stabilize markets and the economy? (16:57)

Aftermath
• You wrote that one of the lasting consequences of novel coronavirus will be accelerating deglobalization and deregionalization. Global supply-chain management and trade interconnection has been the dominant trend in recent decades. Why would we retreat from that, and how will that be felt in the real economy and daily life? (19:12)
• To this point, while COVID-19 has been deemed a global pandemic, its impacts have been mostly northern hemispheric. What do you think the implications of the virus spreading to the southern hemisphere over the balance of this year will be on trade, markets, etc.? (21:18)

Outlook
• About a week ago you said you expected the stock market to decline 30% from its highs. At that time it was down around 19%, and we’ve seen the market fall another 10 percentage points since then, putting it down almost 30% from the high. Have you revised your view or do you feel the sell-off has largely played itself out? (23:40)
• Most of our listeners are individual investors or advisors who diversify their assets widely across asset classes and styles, often using index funds and ETFs. Do you think this episode warrants a re-think of how they’ve approached asset allocation and investment selection? (27:03)

Closing
• Closing, disclosures, and outro (32:03)

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)