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Rosenberg on the Economic Crisis, Part 1

In a wide-ranging interview, noted bearish economist David Rosenberg discusses why the economic crisis is far from over.

Editor's note: Following is the first installment in a three-part interview. Here is Part 2, and here is Part 3.



) -- 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


save the economy if done correctly, that he thinks the U.S. needs a jobs czar and that he sees the dollar rallying soon.

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


: 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

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and nobody cared what I thought. Then in the '90s, I was also bullish when I worked with Sherry Cooper at

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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.

I had ascertained that by 2005 the U.S. was sitting on a housing bubble of epic proportions and we all know how bubbles end. It's one thing to have bubbles in tulips and it's another thing to have it in housing. Housing is the bedrock of the household balance sheet and the cornerstone of the banking system.

Greenspan gets scapegoated most often for causing that.

It wasn't just interest rates that drove the bubble. It was the lack of oversight all around. The


had nothing to do with






and the leverage ratios they had. There was complicity throughout the system and government.

When does housing bottom?

Not for at least another three years.

Are the biggest price declines behind us?

At their worst, house prices were off 35% from their peak. I was a pariah back in 2005 when I called for a 10% price decline. So, yes, I think the worst declines are over, but there's still more to go. There's still too much excess supply. We could see at least another 10% decline from here just because of the supply before we bottom.

What do you think of the current halt on foreclosures by the big lenders?

They will be temporary, not permanent. They will put an artificial near-term floor on prices because foreclosures sell at a 25% discount to the market on average. It will also clog up home sales because there won't be any forced foreclosure sales for a while. It will distort the housing market for the next few months. There's a ton of supply that will come on the market in the years ahead. Even outside the shadow inventory, there's still a huge excess supply.

I presume you'd support no further government support for housing in the U.S.?

Yes. When push comes to shove, housing may just have to be left to its own devices to find its own equilibrium without all these distortions that are affecting price transparency.

In Canada, where you're now based, the housing market has roared ahead in the last couple of years and consumer debt has shot up. Will there be a replay of the U.S. housing crash in Canada?

There are lots of similarities and one critical difference between the two countries. The mortgage debt ratios are just as frightening now in Canada as they were back then in the U.S. in

2005 and 2006. We also did have a parabolic move up in house prices in Canada. Home ownership in Canada anecdotally got as high as it did in the U.S.: 70%. If the Canadian housing market wasn't in a bubble, it was sure a big sud. Now, it's deflating.

There was a period, post-


, where the housing market did freeze up and the government acted very forcefully to combat that. But a lot of Canadians did take out short-term, variable-rate mortgages. These folks are going to be vulnerable in the future when their mortgages roll over at higher rates. There will be a higher default rate here in the next few years, but it will have less of a financial impact because one, these mortgages are by and large insured so that the pain will fall on the Canadian taxpayers and not the banks, and two, the banks have recourse here, whereas they didn't in the U.S.

But housing was the goose that laid the golden egg in the Canadian economy recently, and now that's clearly moving in reverse. I think the Bank of Canada will be cutting its GDP forecasts going forward and moving to the sidelines indefinitely. Plus, don't forget the Canadian dollar is probably overvalued at the moment by 6 or 7 cents. That's going to act as a tourniquet on our export sector.

So the bottom line on Canadian housing?

We borrowed almost two years of housing activity into 2009 because of expiring government policies. So the housing market is certainly going to remain dormant in the next year if not longer. At best, there'll be a 10% decline in housing.

--Written by Eric Jackson.

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Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at or @ericjackson.

You can contact Eric by emailing him at