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

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by Tyler Durden
Thursday, Mar 19, 2020 - 07:11 AM

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.

For more on what a financial deleveraging might look like, read this.

"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.

"Once again, financial markets will turn before the real economy...when that turn happens, it will be very 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

Watch the clip below:

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's very important to understand what happens when economic and financial deleveraging come together," El-Erian said.

Of course, the Allianz economist isn't the only one talking about the risks of a devastating economic depression the likes of which hasn't been seen in the US and the developed world for 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 can't borrow your way out of 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."

How would we define a 'Depression'? Well, Mnuchin's description was clearly enough to light a fire under the asses of intransigent GOP senators.

If Mnuchin's warnings eventually do come to pass, here's a glimpse of what we suspect a full-blown recession would look like in the US.

First, without government action, the unemployment rate would likely soar above 20%.

As history shows, things can get pretty scary during a depression.