NEW YORK (
) -- 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.
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.
: 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
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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If you take a look at the latest leg up in the equity markets, it happened right as the dollar was rolling over back in late August. Usually, a weaker dollar is a signpost of accelerating global liquidity and that's usually what triggers a risk-on trade. It seems to me that if we go through a countertrend rally in the U.S. dollar, a lot of the trends we've seen in the last 6 weeks are going to reverse themselves.
And in the longer term?
As Brazil's finance minister said recently, we're in the middle of a global currency war. So you have these weak-economy countries who are doing all they can to bring their currencies lower. You have stronger economies who are worried about their strong currencies (and I'd include Canada in there). Typically, rising protectionist risk comes next and the only currency that stands to benefit from all this is gold and to a lesser extent silver. Gold is the only currency whose supply curve is -- on an intermediate basis -- inelastic. Gold is the only currency that is no government's liability. So my sense is that, in this currency war, precious metals is where you want to be situated.
I think there's going to be a tremendous buying opportunity in gold in the next few weeks because, if you assume the U.S. dollar is going to rally, a lot of the froth will come out of the gold market. I would be watching very closely as gold approaches its 200-day moving average because that will be a great buying opportunity. Bullion is in a truly secular bull market.
How high can the price of gold go in the next two years?
$3,000 an ounce.
Who's the smartest money manager you know (outside your firm)?
Paul Tudor Jones. He's super astute. Besides being extremely intelligent and market savvy, he's gifted at being intuitive. He's in a class by himself.
You're mostly known for your views on North America's economy, but how do you see the sovereign debt issue in Japan?
I'm very worried about Japan. They have some major structural problems. A lot of them come down to demographics. I'm not sure monetary policy is going to cure their secular problems.
China has really replaced Japan as the major power in the global economy. Japan's become an afterthought, even though it's still the third largest economy and it's still the largest holder of U.S. Treasuries. I wonder what Japan will do to reverse the strength of the yen because that's acting as a major source of constraint on their exports.
Japan is going to remain a very large buyer of dollars, probably dollar-denominated bonds to help weaken the yen. So that adds comfort to my view that there's not going to be a foreign buyer strike in the U.S. bond market because the Japanese are going to step up to the plate.
At the same time, the yen is just a microcosm of the instability we're seeing in the foreign exchange market.
What has been driving the yen strengthening?
Part of it has been capital repatriation, but a lot of it has been that China has been shifting its focus from buying U.S. treasuries to buying JGBs. It's been diversification of China into the Japanese market, believe it or not.
So, when you think of the next external shock, do you fear more for Japan, Europe or Dubai?
If we're going to see a spasm in the financial markets, it's going to start in the foreign exchange markets. If we truly are in the middle of a currency war, I don't see how that ends well -- except for gold. I wonder if we'll look back on that comment from the Brazilian finance minister as a warning shot. Forewarned is forearmed. Plus there's so much complacency now in the financial markets.
You think we're now back to pre-Europe debt crisis complacency levels of this past April?
Exactly right. You've got unsettling backdrop in the currency markets coupled with what the bond market is telling you. The bond market is saying that, irrespective of commodities, there is some lurking deflationary event around the corner. The fact that we're at 2.50% on the 10-year note is only partially because of the speculation of what the Fed will do.
I'll tell you that what really caught my eye in that last nonfarm payrolls report was the diffusion index falling back to the 50 level. That was what you call a shot across the bow.
We know that you're now with Gluskin Sheff, but many Americans aren't familiar with the firm.
We're Canada's preeminent wealth management firm. It's a first-class firm with a great culture. We're very entrepreneurial, team-oriented and client-focused. It's exciting for me to have the ability to have more of an impact with clients' capital than with a big bank where economists are basically marketing tools.
Will the Yankees win this year?
I sure hope so.
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 www.twitter.com/ericjackson or @ericjackson.
You can contact Eric by emailing him at firstname.lastname@example.org.