Rosenberg on the Economic Crisis, Part 3

By Eric Jackson10/16/10 - 02:55 PM EDT

Editor's note: Following is the third installment in a three-part interview. Here is Part 1, and here is Part 2.

NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

In the following, final installment of my interview with him, he discusses why the dollar is about to rally and why a global currency war is such a serious problem.

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Eric Jackson: Do you see a rally ahead for the U.S. dollar? It seems to be as hated now as the euro was earlier in the year when people were calling for parity.

Rosenberg: Yeah, the U.S. dollar is hugely oversold. It's ripe for a significant countertrend rally. It's probably as oversold now as the euro was 6 months ago.

Right now, Ireland's deficit-to-GDP ratio is the same as Canada's debt-to-GDP ratio. But the reality is that no one cares because people know the ECB will ride to the rescue of all these Club Med countries. At the margin, there are people who think the euro is not going to survive, but they figure, "If we buy German bonds, and the euro fails, we're getting exposure to future deutsche marks, so what the heck?" The ECB is the only major central bank that's not cutting rates or getting into quantitative easing.

So what you have in the rest of the world is a dysfunctional foreign exchange market. What history shows is that this will ultimately spill over into other asset classes. You've got China as the poster boy for these great problems in the foreign exchange market, but we know that the yuan is undervalued and China is going to march to its own drummer. And the one mistake they're not going to make with their own economy is to follow the footsteps of Japan and the aftermath of the Plaza accord and allow their currency to appreciate with all the unknown deflationary consequences down the road. So, as far as China's concerned, the most important thing is social stability, so it's unlikely that they're going to do anything radical in the foreign exchange market.

In the meantime, we've got the Fed embarking on what could be another round of quantitative easing, which is fascinating because the Bank of Japan just went two rounds of easing ... to no avail. The Swiss authorities did the same for the Swiss franc with the same result. The Fed is now pursuing a policy that is aimed at weakening the dollar in the name of economic stimulus. At the same time, we have other countries, who have seen their currencies surge like Brazil and Thailand, who have raised their income tax on bond income for foreigners. Capital controls probably come next. So, you've got a very unsettling situation in the foreign exchange market right now.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Rosenberg on the Economic Crisis, Part 2

y Eric Jackson10/15/10 - 09:24 AM EDT

Editor's note: Following is the second installment in a three-part interview. Here is Part 1. Part 3 will be published Saturday.

NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

In the following installment of my interview with him, he discusses why inflation is still years away, what the government should do to get the economy rolling again and whom the president should pick as jobs czar.

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Eric Jackson: When do we see real inflation in North America?

Rosenberg: A decade from now for sustained inflation. We know right now that corn, energy and cotton are experiencing price inflation, but I don't think it will be sustained. We're still in a deflationary environment. There's still far too much excess capacity in the U.S. -- for plant,commercial real estate or labor for that matter.

I think we're in year two of a six- to seven-year transition to the next bull market in the U.S. So it's going to take some time to create some meaningful inflation pressure.

Where are we in the debt deleveraging cycle?

There are two ways to delever: Pay down your debt, or stiff your lender. The fact that so many people have stiffed their lenders doesn't change the fact that we're still in this deflationary world where we're extinguishing excess debt. We've probably delevered 1 trillion dollars in household debt to assets, but we've got another 5 to 6 trillion dollars to go.

So, in terms of where are we with the whole deleveraging process, we're not at the national anthem, but, at best, we're just past the 3rd inning. We've still got a ways to go, and it's tough.

People say to me, "Where are the soup lines and bread lines if things are so bad?" I tell them, "They're in the mail, in the form of 99-week unemployment insurance checks." The U.S. government has managed to turn unemployment insurance into a quasi-welfare scheme.

When you take a look at organic real personal income, which is personal income in constant dollar terms excluding government transfers, it's still down almost 6% from where it was in 2007, so you tell me what kind of recovery we're in? That creates such a big problem. Consumers have upped their savings rate, but it's not enough to compensate.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Rosenberg on the Economic Crisis, Part 1

By Eric Jackson10/14/10 - 12:10 PM EDT

NEW YORK (TheStreet) -- Economic and market bears don't get more notable than David Rosenberg, the chief economist and strategist at Canadian investment firm Gluskin Sheff.

Rosenberg generated headlines this August when he advised clients that the "current economic malaise" is a "depression," and not "some garden-variety recession."

The former Merrill Lynch chief economist also was ahead of the pack when he raised alarms about the housing bubble in 2005 and warned of a coming recession in 2007.

Rosenberg remains pessimistic about the economy and contends that home prices could decline another 10% before they hit bottom, as you'll read in the following multipart interview I conducted with him.

You might be surprised, however, to learn that Rosenberg was an unabashed bull earlier in his career, that he believes a Keynesian approach can save the economy if done correctly, that he thinks the U.S. needs a jobs czar and that he sees the dollar rallying soon.

He's predicting gold prices will hit $3,000 an ounce in the next two years and believes a potential currency war is the biggest threat to the global economy right now.

He addressed all these topics and more when he recently sat down with me for the following wide-ranging interview.

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Eric Jackson: When was the last time you were bullish?

Rosenberg: 2000. Most people know me as a permabear. I'm not. I was bullish on equities in the '80s when I was a senior economist at Bank of Nova Scotia(BNS_) and nobody cared what I thought. Then in the '90s, I was also bullish when I worked with Sherry Cooper at Bank of Montreal(BMO_) and helped [with] her book Riding the Wave about the Internet boom. It was only when I started working at Merrill Lynch in 2000 and I saw the onset of the tech wreck that I turned bearish.

In the past 10 years, I've had different shades of bearishness. This has been the time when I've gotten notoriety, so people only associate me with bearish views. I certainly have been overall underweight equities in my recommendations. I missed two very significant peaks and two significant troughs. The reality is that nobody ever got hurt from my picks.

When did you first start to get ultrabearish about what you were seeing in the U.S.?

Since the dot-com bubble we've had a series of bubbles and policy reflation, combating recurrent market deflation, which has produced all this instability. There's no question there have been massive swings along the way. I have a nasty tendency to be early to a fault. I started getting concerned about the housing bubble in 2005 and very bearish on the economic outlook in 2007.

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[** This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.**]

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Oh, Dear, Canada!

By Eric Jackson
RealMoney Contributor
7/19/2010 1:45 PM EDT
Click here for more stories by Eric Jackson

Canada's economy has been the subject of many glowing reviews by American analysts over the last 18 months. In comparison with the U.S., the Canadians seem to have a great thing going. Unemployment is 7.9% versus 9.5% in the U.S. There has been no major failure of a Canadian bank. The country's debt-to-GDP ratio is only 70% versus more than 90% in the U.S.

The Canadian housing market has also shown remarkable resilience and even strength. Home prices, although they declined in the wake of the Lehman Brothers bankruptcy, have now recouped all their losses and are higher than they were prior to September 2008.

When the U.S. economy drove into the ditch in the fall of 2008, the Canadian government got rightly scared, as Canada's economy has often been the tail on the U.S. dog, manufacturing lots of American cars, as well as shipping oil, gas and lumber across the border. (Most Americans don't know that Canada is the largest exporter of oil to the US, far ahead of any Middle Eastern country.) The Canadian dollar -- used by traders as a proxy for a bullish bet on commodities -- went from a pre-crisis high of near parity with the U.S. dollar to 78 cents by October 2008.

The Canadian government responded to the financial crisis in much the same manner as the U.S. -- a similar level of stimulus dollars on a GDP basis (remember that Canada is 10% the size of the US economy) and a similar level of government purchases of mortgages off the balance sheets of banks on a GDP basis. Interest rates plummeted and mortgages became a lot cheaper.

In contrast to the US, Canada's housing market had not been as overheated for as long. While most U.S. house prices ramped up starting in 2002, when rates dropped after 9/11, in Canada, most housing prices didn't really start to appreciate to U.S.-type levels until 2006. Therefore, even though the Canadian housing market did freeze up after Lehman, by May 2009, with low rates and a comparatively better local economy, most Canadians started to jump back into the housing market with both feet -- especially in the two hottest markets of Vancouver and Toronto. Property bidding wars in Canada became common between May 2009 and as late as April 2010.

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Canada's Real Estate Market Bubbly

By Eric Jackson

05/19/10 - 06:00 AM EDT

Stock quotes in this article: RY , TD , CM , BMO

NEW YORK (TheStreet) -- It has been painful to watch the housing turmoil in the last few years play out in the U.S. I know friends who have been terribly affected by it. After seeing the devastating impacts on the entire economy from this housing downturn, many market observers have pointed to China as a frothy real estate bubble that will likely pop soon. However, you might be surprised to learn that -- up until very recently -- there were bidding wars going on for homes in Canada.

Canada might be America's neighbor to the north, but it has a bubbly real estate market, even as the U.S. market continues to limp along. Consider these eye-raising facts:

Canada's real estate prices have increased on average 40% in the last year while incomes have dropped.

Canadian residential real estate is now worth more today than it was pre-Lehman.

There are now more dwellings built in Canada (assuming, as the Canadian government does, that an average of 2.3 people live in each dwelling) than the population of Canada.

Canadian consumers have racked up enormous debts while interest rates have been low over the past 20 months.

Personal bankruptcies are at record levels now in Canada when interest rates are still at historical lows.

In Vancouver, people now spend 68% of their disposable income on housing. In Toronto, people spend 44% of their disposable income on housing. (Keep in mind that the China bears were complaining that it was unsustainable that some Chinese in Beijing and Shanghai were spending more than 30% of their disposable income on housing.)

Canadians have been proud that their banks have done well post-Lehman, unlike so many of their global peers. The banks have actively originated mortgages demanded by Canadians over the last year, but -- unlike U.S. banks during the housing boom -- for the most part, they've elected not to hold on to these mortgages. As quickly as they can, they pass along the mortgages to the Canada Housing and Mortgage Corporation. This is a crown corporation, meaning it's 100% owned by the federal Canadian government (i.e., the Canadian taxpayers).

Over the last five years, the CHMC's liabilities -- meaning the mortgages they hold on their books -- have gone up five times from C$80 billion to C$400 billion. Any time you see a business increase its liabilities by that amount, it's intriguing. When you consider the last two years has been the worst economic downturn since the Great Depression, it's even more head-scratching.

However, Canada's economy was going along okay pre-Lehman. Whenthe stock market dropped, Canadian housing and real estate activity stopped and prices did drop. But, with most consumers and the Canadian banks in okay shape, and with Canadian job losses not as bad (relatively) as in the U.S., Canadian consumers had quicker confidence to spend thanks to the lower interest rates.

When famous bear David Rosenberg left Merrill Lynch to move back to Canada in 2008 and join Gluskin Sheff, he spoke in glowing terms about Canada's position in the global economy. Yet, even he has begun to acknowledge the housing bubble that exists in Canada.

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[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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Hey Fed, What's Going On?

By Eric Jackson

12/30/09 - 06:05 AM EST

Stock quotes in this article: WFC , C

Last week, Canadian hedge fund manager Eric Sprott published a white paper titled, "Is it all just a Ponzi scheme?" . The document digs into who is actually purchasing the recent Federal Reserve U.S. Treasury auctions and concludes that the biggest new buyer this year vs. last year is actually the U.S. government. Hence the Ponzi scheme allusion: One arm of the federal government is running huge deficits and quantitative easing programs that are being financed in part by another arm of that government. How can this story not get more attention from others in the press, in politics, or in the market?

Sprott is an unapologetic bear. He and David Rosenberg must hang out in the same coffee shops of Toronto and share notes. Therefore, his views regularly get dismissed by some with a rosier view of life. At some point, if you're a relentless bear -- like Roubini, Rogers, Rosenberg, Abelson, and probably Whitney now -- people stop listening to your content.

"This is the 'end-of-the-world' guy again," you think, "I know what he's about and don't have to listen." Yet, Sprott is also Canada's most successful hedge fund manager and clearly someone who does his homework. Here's his argument about what's gone on with the Fed and Treasury purchases this year.

In order to fund bigger deficits, the U.S. government in 2009 has had to sell three times the amount of debt it issued in 2008. That amounts to an extra $1.89 trillion in debt sales as of December, according to the U.S. Treasury.

[This post is an excerpt of the full article, which available on TheStreet.com by clicking here.]

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